Justices Reject Size of Punitive Damage Verdict

In a long-awaited victory for big business, the Supreme Court for the first time Monday struck down a punitive damage verdict as so “grossly excessive” as to be unconstitutional.

On a 5-4 vote, the justices threw out a $2-million verdict won by an Alabama doctor who was unhappy with the paint job on his new BMW.

It violates “elementary notions of fairness” to punish the German auto maker with such an exorbitant civil penalty, especially since the company did nothing wrong, the high court said.

The ruling comes three weeks after President Clinton vetoed a modest product liability bill that would have limited punitive damage verdicts to no more than twice the amount of compensatory damages.

Business lawyers hailed Monday’s decision as a breakthrough that will rein in a jury system many believe is out of control, while trial lawyers denounced it as a devastating setback for injured persons.

But the court’s opinion is tentative in its tone and makes clear that it will not affect most punitive damage verdicts. “We are not prepared to draw a bright line” or set a mathematical limit on punitive damages, said Justice John Paul Stevens for the court.

The BMW verdict went too far, however, because it did not arise from “reprehensible” conduct by a callous company, Stevens said. Moreover, the “multimillion-dollar penalty” is at least 500 times greater than the supposed loss suffered by the plaintiff and is vastly greater than the civil penalties for corporate fraud.

Judges should take these factors into account when reviewing punitive verdicts, he said.

For more than a decade, the justices have been struggling with the question of what to do with the occasional exorbitant punitive verdict handed down by an angry jury.

*

In most civil lawsuits, whether involving an auto accident, a business fraud or a defective product, the losing defendant can be forced to compensate the victim for his or her losses. This may include both actual losses, such as money to pay hospital bills, and compensation for pain and suffering or emotional distress.

In cases of deliberate and malicious wrongdoing, juries in most states can assess extra damages solely to punish wrongdoers. These awards can be a wild card in litigation because they are not tied to actual damages. A dispute over a $5,000 insurance policy could result in a punitive verdict of $1 million or more, for instance.

For that reason, corporate lawyers say that they sometimes offer generous settlements to avoid the possibility of punitive verdicts.

In the past, several members of the high court have denounced skyrocketing punitive damages as unjustified windfalls for plaintiffs and in theory they have said that such state jury verdicts might be so high that they violated the U.S. Constitution.

But until Monday, a majority had never agreed to strike down such an award.

The BMW case from Alabama has been cited often as a prime example of what is wrong with the civil court system.

Dr. Ira Gore of Birmingham, Ala., bought a black BMW sports sedan for $40,750 in 1990 and drove it happily for nine months. However, when he took it to “Slick Finish” in search of a “snazzier” appearance, the proprietor told him that panels on the car had been repainted, probably to repair shipping damage incurred during the voyage from Germany.

Outraged, Gore sued, contending that he had been deceived and sold a defective product. The company noted in its standard contract that minor shipping damage amounting to less than 3% of a car’s value would be repaired on arrival in the United States. But it did not say that such damage would be disclosed to buyers. The repairs to Gore’s car cost $601, the company said.

The jury sided with Gore and awarded him $4,000 in compensation. Then, after his lawyer pointed out that BMW had sold nearly 1,000 such refinished cars in the United States since 1983, the jurors multiplied their verdict by the total number of cars and awarded him $4 million in punitive damages. The Alabama Supreme Court upheld the verdict but cut the amount in half to $2 million.

As Justice Stevens read the facts of the case Monday morning, there were chuckles throughout the courtroom.

His opinion sends the case (BMW vs. Gore, 94-896) back to Alabama to be reconsidered. Joining him were Justices Sandra Day O’Connor, Anthony M. Kennedy, David H. Souter and Stephen G. Breyer.

In separate dissents, Justices Antonin Scalia and Ruth Bader Ginsburg said that the court’s ruling tramples on traditional states’ rights. They were joined by Chief Justice William H. Rehnquist and Justice Clarence Thomas.

“This is the victory business has been waiting for,” said Steve Bokat, general counsel for the U.S. Chamber of Commerce. “The court has said, ‘enough is enough’ to trial lawyers.”

Arthur H. Bryant, head of the Trial Lawyers for Public Justice, called it “a sad ruling for justice. The Supreme Court has opened the door to every wrongdoer held liable [to claim] they’ve been punished too severely.”

Joan Claybrook of Public Citizen, a consumer organization, said that the outcome both preserves punitive damages as a means of “deterring corporate misconduct” and shows that no federal legislation is needed. “Judicial review works to oversee jury decisions” that may go too far, she said.