STANDARD OF REVIEW OF PUNITIVE DAMAGES: CONSTITUTIONAL DUE PROCESS AND OTHER ISSUES
By Mike Abourezk and Alicia Garcia
Federal Constitutional Due Process
To assess appropriate punitive damages in a case, one must look at the damages proportional to the harm done.
The term "punitive damages" implies punishment, and a standard principle of penal theory is that "the punishment should fit the crime" in the sense of being proportional to the wrongfulness of the defendant's action, though the principle is modified when the probability of detection is very low. Hence, with these qualifications,... punitive damages should be proportional to the wrongfulness of the defendant's actions.
Mathias v. Accor Economy Lodging, Inc., 347 F.3d 672, 676 (7th Cir. 2003).
Traditionally, determination of "proportional punishment"' has been left to the jury. However, through a series of cases, beginning in 1991 , the United States Supreme Court has introduced a judicial review of a jury's determination of proper punishment for wrongful conduct. While continuing to recognize that states have a legitimate interest in deterring and punishing wrongful acts within its borders, the Court has adopted three guideposts to help determine whether a particular punitive damages award transgresses due process guarantees:
(1) the degree of reprehensibility of the defendant's misconduct;
(2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and
(3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.
BMW of North America, Inc. v. Gore, 517 U.S. 559, 575, 116 S. Ct. 1589, 1599,134 L. Ed. 2d 809 (1996).
The Supreme Court left intact each state's autonomy to make its own judgments about the amount of "punishment/punitive damages" for prohibited conduct. "A basic principle of federalism is that each State may make its own reasoned judgment about what conduct is permitted or proscribed within its own borders, and each State alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction." State Farm Mut. Auto. Insur. Co. v. Campbell, 538 U.S. 408, 422, 123 S.Ct. 1513, 1523 (2003) (emphasis added). "[T]he states need not, and in fact do not, provide such protection in a uniform manner." BMW v. Gore, 517 U.S. at 569. Consequently, the Supreme Court has refused to set a nationwide standard of what is reprehensible conduct and left it to each state, using its own particular values and traditions, to evaluate the degree of reprehensibility and determine the punishment needed to deter such conduct from being inflicted on its citizens. "Just as behavior may be unlawful or tortious in one state and not in another, the degree of blameworthiness assigned to conduct may also differ among the states." Campbell v. State Farm Mut. Auto Ins. Co., 98 P.3d 409, 413 17 (Utah Apr 23, 2004).
Sometimes, it is necessary to deviate from the typical standard of proportional punishment. Circumstances under which it would be proper to inflict a harsher punishment would be when the probability of detection is very low (a familiar example is the heavy fines for littering) or the crime is potentially lucrative (as in the case of trafficking illegal drugs). Mathias, 347 F.3d at 676. In addition, the US Supreme Court has held that higher ratios between compensatory damages and punitive damages might be necessary when an "injury is hard to detect or the monetary value of noneconomic harm might have been difficult to determine." Campbell, 538 U.S. at 425, 123 S.Ct. 1524, quoting BMW v Gore, 517 U.S. at 582.
South Dakota Punitive Damages Law
In Fritzmeier v. Krause Gentle Corporation, the South Dakota Supreme Court reiterated its five-factor test to determine whether punitive damages are appropriate or excessive. 669 N.W. 2d. 699,709 (S.D. 2003), citing Leisinger v. Jacobson, 651 N.W.2d 693, 696 (S.D.2002) (citing Grynberg v.Citation Oil&Gas Corp., 573 N.W.2d 493, 504 (S.D. 1997)). The Court outlined these factors in its post-Campbell decision:
(1) The amount allowed in compensatory damages,
(2) The nature and enormity of the wrong,
(3) The intent of the wrongdoer,
(4) The wrongdoer's financial condition, and
(5) All of the circumstances attendant to the wrongdoer's actions.
These five factors have been incorporated within the three guideposts outlined by the United States Supreme Court in Campbell. Roth v. Farner-Bocken Co., 667 N.W.2d 651, 666 (S.D.2003), citing Campbell, 538 U.S. at ----, 123 S. Ct. at 1520-26.
"The first factor is the amount allowed in compensatory damages." Id. Although there must be a reasonable relationship between punitive damages and compensatory damages, there is "'no precise mathematical ratio between' the two." Id., citing Leisinger v. Jacobson, 651 N.W.2d 693,700 (S.D. 2002). See also Grynberg v. Citation Oil&Gas Corp., 573 N.W.2d 493, 505 38 (S.D. 1997), citing Schaffer v. Edward D. Jones&Co.(Schaffer II)), 552 N.W.2d 801, 810-11 28 (S.D.1996)("Were there to be some bright-line rule on ratios ... the remaining four criteria [for evaluating punitive damage awards] would become irrelevant and the entire process of judicial review would be reduced to that of a turn at the calculator.") It is not enough to simply calculate the ratio between the compensatory damage award and the punitive damages award to determine if the punitive damages award is proper. The amount of the award should be based on the individual facts and circumstances of the case. Id., citing State Farm Mut. Auto. Ins. Co. v. Campbell, 123 S.Ct. 1513, 1524 (U.S. 2003).
In examining the second factor, the nature and enormity of the wrong, the South Dakota Supreme Court held that an appropriate consideration is the defendant's actions relating to the potential harm inflicted on other victims and not only the present victim if not deterred. Fritzmeier v. Krause Gentle Corp., 669 N.W.2d 699, 710 (S.D. 2003), citing Roth, 667 N.W.2d at 668 (citation omitted). Thus, the scope of punitive damages in South Dakota includes punishing the actual harm inflicted on the plaintiff and deterring and punishing the potential harm to both the plaintiff and others similarly situated. See also BMW v. Gore, 517 U.S. at 568 (a state has a legitimate interest in punishing unlawful conduct and deterring its repetition.); TXO Prod. Corp. v. Alliance Resources Corp., 509 U.S. 443, 460 (1993)(it is necessary to look at the "possible harm to other victims that might have resulted if similar future behavior were not deterred").
To evaluate the third factor, the intent of the wrong doer, the Court noted:
From intent, we determine 'the degree of reprehensibility of the defendant's conduct,' which is viewed as probably the most important indication of the reasonableness of the punitive damage award.
Id., citing Veeder v. Kennedy, 589 N.W.2d 610, 621 (S.D. 1999)(quoting Schaffer v. Edward D. Jones&Co.(Schaffer II)), 552 N.W.2d 801, 812 (S.D.1996). The Court repeated its admonition that "[t]rickery and deceit are more reprehensible than negligence." Id., quoting Veeder, 589 N.W.2d at 621.
In reviewing the fourth factor, consideration of the wrongdoer's financial condition, the Court looked at both net income and net worth. Id. Although a defendant's wealth can not justify an otherwise unconstitutional punitive damage award, South Dakota has determined that a "defendant's net worth is a guideline for assessing the amount of punitive damages. Therefore,...a defendant's financial resources are an appropriate yardstick for determining punitive damages." Roth, 667 N.W.2d at 670.
Analyzing the fifth factor, consideration of all circumstances, attendant to the wrongdoer's actions, the Court relied on Schaffer v. Edward D. Jones&Co., 552 N.W.2d. 801 (S.D.1996)(Schaffer II). In Schaffer II, the Court held that a major purpose of punitive damages is to deter future misconduct of a similar nature:
Punitive damages may properly be imposed to further a State's legitimate interests in not only punishing unlawful conduct but also to deter its repetition.
Id. at 813 (citation omitted). See also Veeder v. Kennedy, 589 N.W.2d 610, 622 55 (S.D. 1999), citing Schafer II, 552 N.W. at 813 35 (citing BMW v. Gore, 517 U.S. at 568, 116 S. Ct. at 1595, 134 L. Ed. 2d. at 882)("Punitive damages may properly be imposed to further a State's legitimate interests in not only punishing unlawful conduct but also to deter its repetition." (emphasis added); Grynberg v.Citation Oil&Gas Corp., 573 N.W.2d 493 (S.D. 1997) (proper punitive damage award must take into account not only the harm to the plaintiff, but also the harm that might result to other victims if similar misconduct is not deterred).
In Schafer II, the emphasis is on protecting South Dakota citizens from deceptive practices, especially where there is evidence to believe that the defendant will repeat the offensive conduct. In upholding the punitive damages verdict in that case (30 times the amount of compensatory damages), the South Dakota Supreme Court placed great weight on improper conduct which is repeated at the highest levels of a company; of conduct which conceals evidence of improper motive, and; of conduct which is intentional so as to enrich the wrongdoer at the expense of those in trusting positions. See generally, Schaffer II. This concern was repeated in the post-Campbell decision of Roth v. Farner-Bocken Co., although in that case there was "no evidence that the conduct reflected a company policy or practice. " Roth, 667 N.W.2d at 669. Therefore, in Roth, a 20 to 1 ratio was determined to be too high.
The Schafer II approach is consistent with the South Dakota legislature's determination that punitive damages are "for the sake of example, and by way of punishing the defendant". S.D.C.L. §21-3-2. To achieve this goal, the South Dakota Supreme Court has held that "[p]unitive damage awards extend not only to act as punishment for the individual defendant for past tortious acts and deter the defendant from repetition, but also to serve notice to others who would be tempted to repeat such actions in the future that they do so at their substantial peril. To accomplish these purposes, the punitive damages must be 'relatively large'." Schaffer II, 552 N.W.2d at 809 (citations omitted). See also Jones v. Swanson, 341 F.3d 723, 737 (8th Cir. 2003) (South Dakota allows punitive damages both to allow punishment unlawful conduct and to deter its repetition).
The laws of South Dakota also place particular importance on the total picture of the events, including relationships between the parties and the motives of the wrongdoer, which gave rise to the wrongful conduct. Schaffer v. Edward D. Jones&Co., 521 N.W.2d 921, 926 (S.D. 1994)("Schaffer I") ("[B]linders should not be placed on a jury when it is called upon to assess punishment, i.e., punitive damages.")
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