But in recent years, the courts have found that punitive damages may offend constitutional due process protections if they are “grossly excessive” in comparison to the underlying interest in punishment and deterrence.
When Are Punitive Damages Excessive?
In BMW of North America, Inc. v. Gore, the U.S. Supreme Court instructed courts to follow three “guideposts” in determining whether a particular punitive damages award is grossly excessive:
The degree of reprehensibility of the defendant’s conduct,
The disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award, and
The amount of civil penalties imposed in comparable cases.
Generally, the first factor is the most important. Courts should assess the reprehensibility of a defendant’s conduct by considering whether the harm caused was physical or economic. For instance, did it show an indifference to, or reckless disregard for, the health or safety of others—and was the harm a result of intentional malice, trickery or deceit? In addition, courts should consider whether the harmed party was financially vulnerable, and whether the conduct was repeated or was simply an isolated incident.
Even if a defendant’s conduct is reprehensible, punitive damages may be excessive if the ratio of punitive to compensatory damages is too great. There’s no magic number, but the Supreme Court has previously observed, “In practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.” In a recent California case, the court concluded that 10:1 is the “maximum constitutionally defensible ratio.”
What Defines “Excessive”?
In Nickerson v. Stonebridge Life Insurance Co., the plaintiff successfully sued his health insurer for breaching an insurance contract. The jury awarded him $35,000 in compensatory damages and, finding that the insurer’s failure to pay policy benefits was fraudulent, awarded him $19 million in punitive damages. In connection with a motion for a new trial, the trial court reduced the punitive damages award to $350,000 (10 times the compensatory damages award). The court acknowledged that this amount likely would be insufficient to deter the insurer from engaging in similar conduct, but felt constrained to reduce the punitive damages award to 10:1 “based on recent California and federal authority.”
The court of appeals agreed. Even though four of the five reprehensibility factors listed were present in this case, the court said there was no justification for awarding punitive damages beyond the “constitutional maximum.” The court also explained that, while the defendant’s financial condition is essential to an analysis of punitive damages, “it alone cannot justify exceeding what due process will allow.”
What About Compensatory Damages?
When a defendant’s egregious conduct justifies a substantial punitive damages award, it’s tempting to focus on punitive damages at the expense of compensatory damages, particularly when compensatory damages are relatively modest.
As recent case law demonstrates, however, the amount of compensatory damages serves as the starting point for establishing a ceiling on punitive damages. So it’s critical for plaintiffs’ attorneys to work with their damages experts to maximize their recovery of compensatory damages.
What Factors Support Damages Claims?
Whether you represent the plaintiff or the defendant, it’s critical to understand the factors that support punitive damages, the constitutional limits on those damages, and the relationship between punitive and compensatory damages.
Questions? Contact Rich Gordon, Lindquist LLP’s Director of Forensic Services at (925) 277-9100 or firstname.lastname@example.org. Connect with Rich on LinkedIn https://www.linkedin.com/in/gordonforensics.
Richard Gordon, CPA/CFF, CFE, CGMA, joined Lindquist LLP in 2014 as the Director of Forensic Services in the firm’s San Ramon office. In addition to being licensed as a CPA in both California and Illinois, Rich is a Certified Fraud Examiner (CFE) and is Certified in Financial Forensics (CFF) through the American Institute of Certified Public Accountants (AICPA). He is a member of the AICPA’s Forensic & Valuation Services section, the Association of Certified Fraud Examiners, and the California Society of Certified Public Accountants’ (CalCPA) Forensic Services Section. Rich possesses vast forensic experience in the areas of family law, financial statement and tax fraud, contract disputes, economic damages, bankruptcy fraud, and embezzlement cases, in which he has successfully represented both prosecution and defense. Rich graduated from Eastern Illinois University with a bachelor’s degree in Accounting. Contact him at (925) 277-9100 with questions.
Our firm provides the information in this e-newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.