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2003
POTENTIAL CONGRESSIONAL RESPONSES TO THE SUPREME COURT'S DECISION IN STATE FARM MUTUAL AUTOMOBILE INS. CO. V. CAMPBELL: CHECKING AND BALANCING PUNITIVE DAMAGES
HEARING
BEFORE THE
SUBCOMMITTEE ON THE CONSTITUTION
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
SEPTEMBER 23, 2003
Serial No. 48
Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://www.house.gov/judiciary
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
MELISSA A. HART, Pennsylvania
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
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JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
Subcommittee on the Constitution
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
WILLIAM L. JENKINS, Tennessee
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SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MELISSA A. HART, Pennsylvania
TOM FEENEY, Florida
J. RANDY FORBES, Virginia
JERROLD NADLER, New York
JOHN CONYERS, Jr., Michigan
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ADAM B. SCHIFF, California
CRYSTAL M. ROBERTS, Chief Counsel
PAUL B. TAYLOR, Counsel
MINDY BARRY, Full Committee Counsel
DAVID LACHMANN, Minority Professional Staff Member
C O N T E N T S
SEPTEMBER 23, 2003
OPENING STATEMENT
The Honorable Steve Chabot, a Representative in Congress From the State of Ohio, and Chairman, Subcommittee on the Constitution
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The Honorable Jerrold Nadler, a Representative in Congress From the State of New York, and Ranking Member, Subcommittee on the Constitution
WITNESSES
Mr. David Owen, Carolina Distinguished Professor of Law and Director of the Office of Tort Law Studies at the University of South Carolina
Oral Testimony
Prepared Statement
Mr. Robert Peck, President, Center for Constitutional Litigation
Oral Testimony
Prepared Statement
Mr. Victor Schwartz, Shook, Hardy & Bacon
Oral Testimony
Prepared Statement
APPENDIX
Statements Submitted for the Hearing Record
Statement by the Honorable Steve King, a Representative in Congress From the State of Iowa
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Statement by the Honorable John Conyers, a Representative in Congress From the State of Michigan
Material Submitted for the Hearing Record
Materials submitted by Victor Schwartz
Materials submitted by the Honorable Jerrold Nadler, a Representative in Congress From the State of New York, and Ranking Member, Subcommittee on the Constitution
POTENTIAL CONGRESSIONAL RESPONSES TO THE SUPREME COURT'S DECISION IN STATE FARM MUTUAL AUTOMOBILE INS. CO. V. CAMPBELL: CHECKING AND BALANCING PUNITIVE DAMAGES
TUESDAY, SEPTEMBER 23, 2003
House of Representatives,
Subcommittee on the Constitution,
Committee on the Judiciary,
Washington, DC
The Subcommittee met, pursuant to call, at 2:05 p.m., in Room 2141, Rayburn House Office Building, Hon. Steve Chabot [Chairman of the Subcommittee] presiding.
Mr. CHABOT. Good afternoon. This is the Subcommittee on the Constitution. I am Steve Chabot, the Chairman. This afternoon's hearing is concerning the issue of punitive damages.
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I will begin by making an opening statement. If one of our Democratic colleagues gets here, they will have an opportunity to do that as well; and then we will introduce our panel.
The United States Supreme Court noted in 1974 that, ''Juries assess punitive damages in wholly unpredictable amounts bearing no necessary relation to the actual harm caused.''
Until 1976, there were only three reported appellate court decisions upholding awards of punitive damages in product liability cases, and the punitive damages awarded in each case was modest in proportion to the compensatory damage award. Then, in the late 1970's and 1980's, the size of punitive damage awards increased dramatically. The advent of mass tort litigation led to an increase in punitive damages claims against manufactures, including the possibility of repeated imposition of punitive awards for essentially the same conduct. Along with these changes came a dramatic increase in the size and frequency of punitive awards.
Today juries have awarded punitive damages against companies in amounts exceeding a hundred billion dollars, well in excess of the gross domestic products of many industrialized nations. These enormous punitive damage awards have greatly enriched the personal injury industry, which a report released today by the Manhattan Institute Center for Legal Policy calls Trial Lawyers Inc. That report shows that Trial Lawyers Inc. rakes in almost $40 billion a year in revenues, which is one and a half times more than Microsoft or Intel and twice as much as Coca-Cola.
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On April 7th, 2003, the Supreme Court, in State Farm Mutual Automobile Insurance Company v. Campbell, held that an award of $145 million in punitive damages on a $1 million compensatory judgment violated due process.
The Court further held that the jury had been allowed unconstitutionally to award punitive damages to punish and deter conduct that occurred out of State and bore no relation to the insured's harm.
Finally, the Court stated that, for purposes of determining whether an award of punitive damages is excessive, an award that exceeds a single-digit ratio between punitive and compensatory damages may comport with due process where a particularly egregious act has resulted in only a small amount of economic damages, but that higher ratios are likely to be unconstitutional.
Even Supreme Court Justice Ruth Bader Ginsburg, who disagreed with the majority's constitutional analysis and dissented in the State Farm case, nevertheless stated that, ''Damage-capping legislation may be altogether fitting and proper.''
In light of the Supreme Court's decision, today the Constitution Subcommittee will explore the insights of the Court into the unfairness of large punitive awards in certain circumstances and steps Congress might take to alleviate that unfairness. Indeed, Federal statutory guidelines for the award of punitive damages would provide potential wrongdoers with the sort of, ''fair notice,'' regarding potential punishments the Supreme Court has held is required under the due process clause.
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Possible steps Congress might take to that end include the following:
Prohibiting the multiple imposition of punitive damages by courts in different States for the same conduct;
Requiring that punitive damages be redirected to the State, with appropriate safeguards for the abuse of punitive damages;
Providing for protections from excessive punitive damages for small businesses; and
Providing that judges decide the appropriate size of punitive damages, just as judges decide on appropriate sentences in criminal cases.
Congressional action might also be necessary to codify the due process standards the Supreme Court handed down in State Farm because some lower courts are attempting to skirt the impact of the ruling by broadly defining compensatory damages and thereby bringing large punitive awards within single-digit ratios to compensatory damages.
As the Wall Street Journal recently editorialized, ''A high point of the Supreme Court's last term was its 6–3 decision to draw the line on outrageous punitive damages awards. But a large section of the Nation's plaintiffs' bar and even some judges have been working harder since to undermine the ruling.''
I look forward to hearing from all of our witnesses here this afternoon and exploring ways Congress might enact checks and balances that deter abuses of punitive damages.
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I would now recognize the gentleman from New York, the Ranking Member, Mr. Nadler, for the purpose of making an opening statement.
Mr. NADLER. Thank you, Mr. Chairman.
This Committee has devoted a great deal of time to the question of punitive damages and Congress' role to the extent there might be appropriate and constitutional policy grounds to intervene.
While the Supreme Court has made clear that in its opinion due process rights are implicated in the awarding of punitive damages, and the Supreme Court seems to be reestablishing substantive due process, it is not entirely clear to me how much beyond the Court's own strictures we may permissibly go. I hope our witnesses will address this.
The limits on Congress' power to enforce the due process clause under section 5 of the 14th amendment is one that this very activist Court has pushed front and center. If more judicial activists like the President's ideal Justices, Scalia and Thomas, should find their way onto the Court, our power to address any such issues will likely be further diminished as the Court decreases the power of Congress under section 5 of the 14th amendment.
It is our Subcommittee's direct responsibility for reviewing such issues, and I hope we can get to this.
In addition to the constitutional limits of Congress' power, I would also hope that we would try to clarify what in fact the Court was telling us in State Farm and in BMW v. Gore. Reading some of the discussions of these cases, I can't help but sense an overriding desire on the part of some commentators to read far more into these cases than the Court wrote into its decisions.
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Punitive damages serve a number of important functions which—despite a few horror stories, which are themselves either apocryphal or overturned in the courts, the functions remain valid and in the public interest. Persons causing great harm—persons deliberately or with gross negligence causing great harm should not view paying damages as merely a cost of doing business, a cost that might fit neatly into a risk analysis of wrongdoing. That is what happened in the Ford Pinto case in which the cost of paying claims to victims of a known deadly hazard was deemed less than the cost to retool the assembly line, and thus the hazard was maintained knowing full well that further people—more people would be injured or killed.
This is the purpose of punitive damages, to punish this kind of egregious wrongdoing, and to deter, to be a deterrent to such conduct. It is not immediately clear why a deterrent—or the necessity of the deterrent should bear any great relationship to the amount of actual damages in a given case. There is nothing wrong and indeed something highly desirable in maintaining this disincentive to wrongdoing in an appropriate relationship to the harm and the conduct of the tort-feasor.
The Court has made some effort to spell out those factors without setting a bright line formula. I would hope that we can get a clear view of those factors.
Similarly, when looking at the imposition of punitive damages in multiple jurisdictions, I would ask our witnesses to consider that proposal in conjunction with the Supreme Court's restriction on the awarding of punitive damages for action jurisdictions other than the one hearing the case, as well as the extent to which such a proposal might undermine the core deterrent purposes of punitive damages.
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In other words, if you are in Michigan, deliberately making a car that is knowingly unsafe, how do you fashion punitive damages for someone who is injured in New Jersey or in New York and who doesn't suffer a heck of a lot of damages, although the next fellow might be killed in a way that would serve the deterrent function of the punitive damages and will meet the requirements of the Court with respect to multiple jurisdictions?
Finally, with respect to various other proposals, including those suggested that the Government, rather than the injured parties receive some or all of the punitive damages, how would this affect the rights of plaintiffs and whether current law allows for the appropriate use by Government of some portion of an award or settlement?
I might add here that I made a proposal a number of years ago suggesting that where a very large punitive damage award was necessary for deterrent or punishment purposes but that in a case in which this might result in unjust enrichment to a plaintiff who had suffered damages and got the damages, then you wanted to award, because it is against a very large tort-feasor, a very large award as a deterrent to further wrongdoing, that perhaps a fraction, perhaps the amount that the plaintiff received should be—have some relation to the damages, and the balance should go to Government or some charity or whatever. So you wouldn't limit the deterrent effect of the punitive damages but would do something about the sense of injustice of an unjust enrichment of a plaintiff.
I thank the Chairman for scheduling this hearing. I hope it will clear away much of the uncertainty surrounding the Court's punitive damages decisions and yield some clarity in this field, and I yield back.
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Mr. CHABOT. Thank you very much.
At this time, we will introduce the panel this afternoon.
Our first witness is David Owen. Mr. Owen is the Carolina Distinguished Professor of Law and Director of the Office of Tort Law Studies at the University of South Carolina, where he teaches courses on tort law and products liability. In addition to numerous journal articles, Professor Owen has edited and coauthored various books, including Prosser and Keaton on Tort Law, several books and a treatise on products liability law, and Philosophical Foundations of Tort Law. He is also an advisor to the American Law Institute on the Restatement (Third) of Torts, and he was the editorial advisor for the Restatement of Products Liability. We welcome you here this afternoon.
Our second witness is Robert Peck. Mr. Peck is Senior Director of Legal Affairs and Policy Administration for the Association of Trial Lawyers of America. He is also President of the Center for Constitutional Litigation. In 2001, Mr. Peck shared the Public Justice Achievement Award from Trial Lawyers for Public Justice with other members of his law firm and received the Pursuit of Justice Award from the American Bar Association's Tort and Insurance Practice Section. And we welcome you here this afternoon.
Our third witness will be Victor Schwartz. Mr. Schwartz is a member of the American Law Institute. He has served on the Advisory Committee on the Restatement of Torts, Products Liability, and he continues to sit on the Advisory Committee to the Restatement of Torts Third, General Principles. For over two decades he has been the coauthor of the most widely used torts casebook in the United States, Prosser, Wade and Schwartz Cases and Materials on Torts. He has authored hundreds of law review articles and speaks before national and international audiences interested in civil justice reform. Mr. Schwartz also co-chairs the Civil Justice Reform Committee of the American Legislative Exchange Council and chairs the American Bar Association's Legislative Subcommittee of the Product Liability Committee. He is also a partner at Shook, Hardy & Bacon. And we welcome you here this afternoon as well.
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We look forward to all of the testimony this afternoon.
You are probably familiar with our 5-minute rule. The lights in front of you will indicate—when the yellow light comes on, you have 1 minute to wrap up. When the red light comes on, your 5 minutes is up, and we would appreciate if you would conclude at approximately that time.
Mr. CHABOT. We will begin with you, Mr. Owen.
STATEMENT OF DAVID OWEN, CAROLINA DISTINGUISHED PROFESSOR OF LAW AND DIRECTOR OF THE OFFICE OF TORT LAW STUDIES AT THE UNIVERSITY OF SOUTH CAROLINA
Mr. OWEN. Thank you, Mr. Chairman, Members of the Committee. It is my great pleasure to be with you today to talk about what I have been researching, writing and teaching about for 30 years, which is punitive damages law.
My particular areas that I have emphasized in that field are products liability in particular but more broadly punitive damages in general.
In 5 minutes, I would like to summarize what I have learned in 30 years; and I understand that the purpose of the panel's meeting today is to see if there is a way to constitutionalize legislatively punitive damages in order to make them more reasonable and perhaps more effective.
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The first point I would like to make, because I think the assumption behind this hearing is that punitive damages are bad, is that in fact I believe that, on balance, they are good, that they are an important, vital, historical, ancient part of the jurisprudence of most civilizations.
In fact, the very earliest known legal code known to men and women, the Code of Hammurabi, had provisions for punitive damages for particular wrongful acts. And through Mosaic law of 1200 BC through Roman law up through the middle ages in England and from America in the 1700's, we have had this form of principle, with one foot in the criminal law and one foot in the civil law, to punish egregious acts of misconduct that are not caught by the criminal prosecutor and that do not fully compensate the victim.
So while most modern civilized countries have abandoned at a superficial level punitive damages, I think it is important to realize that it is deeply imbedded in our own jurisprudence, both in some State constitutions, in many Federal statutes, and in many State decisions and also legislation.
So that is my first point.
My second point, however, is that it is a very powerful instrument of the law, and it can be substantially abused. So I think the underlying purpose behind this hearing is vital, and that is, the State patchwork of judicial and statutory rules governing the limitations on punitive damages, and there have been a number of substantial reforms enacted by State legislators and by common law judges as well as by the Supreme Court over the last decade. Despite those substantial reforms, I think in a Nation such as ours, where manufacturers market to the 50 States, that it would be helpful to have principles that were more predictable in the way that the Supreme Court suggests is desirable.
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So my conclusion is that Federal reform appears to be a desirable path; and I make that conclusion as a tort and punitive damages specialist, not as a constitutional scholar.
Now, what I would like to do is to identify those reforms. I have studied all of the various reforms for, as I say, three decades, that I believe are the most straightforward, that might have the best potential for keeping the substance of punitive damages punishment, deterrence, and I believe retributive compensation, while harnessing them to a manageable level.
The first such reform I would propose is that the standard of proof be identified as clear and convincing evidence, as opposed to the normal preponderance of the evidence in civil actions, remembering that punitive damages are in a sense quasi-criminal, standing half-way toward the criminal law. I think that is an effective reform.
Another reform that the Supreme Court hinted at but has not yet required, is to require trial judges to issue written opinions. I think that would be a very important way that would help appellate courts then review their rationality and appropriateness.
Finally, I think the most important reform is to enact some form of cap. Although I believe in the theory that Mr. Nadler was suggesting in terms of allowing punitive damages as high as possible for individualized justice in a particular case, I like that view from a theoretical perspective, I think it is correct ideologically. I think in the real world it doesn't work and that it causes more injustice than justice and that caps such as treble damages in the antitrust area and with respect to consumer protection statutes are a particularly desirable way to go.
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So my particular recommendation would be, in that respect, to impose a principle of treble damages, either as a maximum or simply as an absolute amount in every case, plus attorneys fees and the costs of litigation to take care of the cases involving less substantial harms to be sure that the litigation costs are fully compensated.
Then, together with that, I would have a special cap for mass disaster cases, that is like asbestos, what might have happened in the Firestone/Ford Explorer situation had that litigation not been effectively controlled, and that might be that once a litigation was designated as defined somehow in the legislation as a mass disaster, thereafter the cap would be reduced from three times compensatory damages to one times compensatory damages. That would assure that every plaintiff was fully compensated for attorneys' fees, costs of litigation and something extra. And yet, as the companies perhaps march toward bankruptcy, more would be left in the corporate tills for the remaining plaintiffs.
Those are simple reforms. They are straightforward. I think they are reasonable and help from a due process perspective to tailor punitive damage assessments in a way that can be contemplated by defendants, that will be painful to defendants, but they will not give rise to the type of extraordinary awards such as we saw in State Farm.
Mr. CHABOT. Thank you very much.
[The prepared statement of Mr. Owen follows:]
PREPARED STATEMENT OF DAVID G. OWEN
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Mr. CHABOT. Mr. Peck.
STATEMENT OF ROBERT PECK
Mr. PECK. Thank you, Mr. Chairman and Members of the Subcommittee. It is a pleasure to start some remarks without having to say, ''Mr. Chief Justice and may it please the Court.''
For the past 25 years I have been a constitutional lawyer and scholar. I don't pretend to have the expertise on tort law that my colleagues on this panel have, but I do have expertise on constitutional law.
So when we look at constitutional court cases like State Farm, we begin with the empirical evidence. Clearly, the best statistics are those that have been generated by the Bureau of Justice Statistics. That Department of Justice agency has found that there are only 3 percent of cases in which plaintiffs are successful and punitive damages are awarded, and that the median award is $38,000. That is not exactly an eye-popping amount that requires this Committee's attention.
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What is remarkable is that, 4 years earlier, it showed that awards of punitive damages were at 6 percent of plaintiffs cases and $50,000. So what we are seeing is actually a downward trend rather than an upward one.
Professor Michael Rustad has done a comprehensive study of punitive damages in products liability cases. In 1992, his study indicated that there had been, in the previous 25 years, a total of 355 products liability punitive damage cases. Because of the downward trend——
Mr. NADLER. Successful cases or cases?
Mr. PECK. Total cases where punitive damages were awarded. Many of them were also in low amounts.
What we see from the trend downward in products liability litigation generally is that that is probably now a high-water mark and that there has not been an increase.
To turn to Campbell, everyone talks about the ratios because that was the headline in the newspapers, that a single-digits ratio may be the outer limit of constitutional propriety. Well, that kind of description is wishful thinking. What the Court specifically said is that we have consistently rejected the notion that the constitutional line is marked by a simple mathematical formula, even one that compares actual and potential damages to the punitive award. We decline again to impose a bright line ratio.
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Now, remember, when the Court talks about ratios, they are not talking about the amount of compensatory damages awarded. They are talking about the harm and potential harm to plaintiffs and similarly situated plaintiffs and that the State has a right to vindicate the rights of all of those citizens in that State who could have been injured by this harmful, egregious, reprehensible conduct.
They said that we are going to offer these ratios, but these ratios are not binding—this is the Supreme Court's words. This is not spin. They are instructive—and that there are no rigid benchmarks that punitive damages may not surpass.
So the Court is sending all sorts of signals that this is not a hard and fast rule. This is not something that someone is supposed to codify. They indicated that a 9 to 1 ratio, the single-digit ratio, is more likely to pass constitutional muster than 500 to 1, but more likely means that there are circumstances in which 500 to 1 does pass constitutional muster. They said the precise award in any particular case must be based on the facts and circumstances of the defendant's conduct and the harm to the plaintiff. That does not give rise to a simple mathematical formula.
What the Court found that Utah had done wrong—it is not that the jury had done it wrong. Because the Utah Supreme Court, trying to obey the strictures of the U.S. Supreme Court, engaged in de novo review. They took a $30 million punitive damage award, and they restored to it a $145 million award because they found the actions of State Farm to be so reprehensible.
Where they went wrong is that they tried to do it on the basis of nationwide conduct, which was fraudulent, wherever it might have been, but the Supreme Court, announcing a new rule, said that you cannot even punish for unlawful out-of-State conduct, making punitive damages an entirely in-State issue.
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This has bearing on the federalism issue. Because the Court has recognized that under our principles of federalism—and they say so directly in State Farm—under our principles of federalism, a State may make its own reasoned judgment about what conduct is permitted or prescribed within its borders and what measure of punishment, if any, to impose. Congress has no authority to override that. This is basic 10th amendment law.
Now, one thing that Mr. Schwartz says in his testimony is he points out that there are some rogue courts out there that are not following the strictures of the Supreme Court. He identified three.
He identifies the Utah Supreme Court for issuing its $145 million award, which under the law that existed before State Farm v. Campbell was not a violation of any order from the U.S. Supreme Court. They followed BMW v. Gore. They followed Copper v. Leatherman.
He points to the Alabama Supreme Court in the BMW v. Gore case. And again, what they did not follow, because they followed the Haslip decision which said that Alabama's procedures for awarding punitive damages met due process. So until they enunciated in BMW v. Gore the way that you evaluate excessiveness there was no problem.
And, finally, he points to an Oregon Court of Appeals case where they awarded a 7-to-1 ratio which—punitive damages to compensatory damages which still meets State Farm v. Campbell. And he seems to think that just because the Court remanded in light of Campbell that that has meaning. But the Supreme Court itself calls that a GVR order—grant, vacate and remand. It is a docket-clearing device. It has nothing to do with any substantive evaluation of the case. It simply says we have made an intervening decision. It may change your mind. It may not. We are giving you another opportunity. So that is not a substantive decision on their part.
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Finally, let me just say that there is an issue that Congress can deal with, and that is the tax issue that I raise in my testimony, where it is possible that someone who can win a punitive damage judgment will end up owing more than they have won because of the strange operation of the tax laws that also tax them for the amount that would go to the State on a State—on a sharing type of institute or on the amount that goes to their counsel, who will also still have to pay taxes on that.
Senator Hatch offered an amendment to the tax bill earlier this year to try and resolve that problem. That did not end up in the tax bill. I commend it to you to move on to other of your colleagues.
Mr. CHABOT. Thank you very much.
[The prepared statement of Mr. Peck follows:]
PREPARED STATEMENT OF ROBERT S. PECK
I. INTRODUCTION
Mr. Chairman and Members of the Subcommittee:
I thank the Subcommittee for its invitation to testify today on the topic of punitive damages. To begin, allow me provide the Committee with a little of my background. I am president of the Center for Constitutional Litigation, P.C., a Washington, D.C. law firm that limits its practice to constitutional cases in furtherance of access to justice. One of our firm's clients is the Association of Trial Lawyers of America, for whom I serve as Senior Director for Legal Affairs and Policy Administration.
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In addition to being a practitioner, I also serve as an adjunct professor of constitutional law at the law schools of both American University and George Washington University. I am as well a member of the Board of Overseers of the RAND Institute for Civil Justice, the Lawyers Committee of the National Center for State Courts, and the Council of the American Bar Association's Tort Trial and Insurance Practice Section.
Of most immediate relevance to the Subcommittee's topic today, I argued a punitive damage case, Rhyne v. K-Mart, Inc., in the North Carolina Supreme Court just two weeks ago. The case involved the constitutionality of a state statute limiting punitive damages and, alternatively, the application of State Farm Mutual Automobile Insurance Co. v. Campbell. I am also Counsel of Record in Philip Morris v. Williams, where the defendant has sought review of a punitive damage judgment in the United States Supreme Court on the issue of excessiveness. My law firm also represents the Smith family in Estate of Smith v. Ford Motor Co., which will be argued in the Kentucky Supreme Court in a few weeks on remand from the U.S. Supreme Court in light of Campbell.
The Campbell decision has also figured in other activities of mine. On Friday of last week, I participated on a panel with the two lawyers who will be arguing the remand of the Campbell case before the Utah Supreme Court in a few weeks. I have also chaired a continuing legal education program for the Practicing Law Institute on ''Punitive Damages after State Farm v. Campbell,'' and will participate in a second program of the same title for them in New York on October 7. Finally, I am the author of the upcoming American Jurisprudence Proof of Facts 3d on Punitive Damages. I come to this hearing with a close and thorough appreciation of Campbell.
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II. THE LANDSCAPE OF PUNITIVE DAMAGES
A. Legal Treatment of Punitive Damages
It is useful to begin with an understanding of the development and law of punitive damages. Punitive damages originated in the common law.(see footnote 1) In 1763, English courts firmly established the legitimacy of punitive, or exemplary, damages as a common-law device within the jury's province.(see footnote 2) In Wilkes, one of the most important and influential cases of English law to the American founders,(see footnote 3) Lord Chief Justice Pratt announced: ''[A] jury shall have it in their power to give damages for more than the injury received as a punishment to the guilty, to deter from any such proceeding for the future, and as a proof of the detestation of the jury to the action itself.''(see footnote 4)
Soon after Wilkes, American courts began to award punitive damages, with South Carolina being the first in 1784.(see footnote 5) Typical of these cases was a 1791 New Jersey case in which the jury was instructed ''not to estimate the damage by any particular proof of suffering or actual loss; but to give damages for example's sake, to prevent such offenses in [the] future.''(see footnote 6) Typically, if the jury's punitive verdict was either insufficient or excessive, the appropriate remedy was a choice between a judge-chosen number (remittitur) or a new jury trial.(see footnote 7) Given this history, the U.S. Supreme Court has observed that punitive damages ''have long been a part of traditional state tort law.''(see footnote 8)
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From those early days, the practice was not without criticism. Still, while acknowledging that ''some writers'' had questioned the ''propriety'' of punitive damages, the U.S. Supreme Court in 1851, ruled that this ''well-established principle of the common law'' was too much a part of the fabric of the law to undo.(see footnote 9) In fact, the Court said:
if repeated judicial decisions for more than a century are to question will not admit of argument. By the common law as well as by statute law, men are often punished for aggravated misconduct or lawless acts, by means of civil action, and the damages inflicted, by way of penalty or punishment, given to the party injured . . . the damages assessed depend on the circumstances, showing the degree of moral turpitude or atrocity of the defendant's conduct, and may properly be termed exemplary or vindictive rather than compensatory . . . This has been always left to the discretion of the jury, as the degree of punishment to be thus inflicted must depend on the peculiar circumstances of each case.(see footnote 10)
As the Court's opinion indicates, the jury was vested with broad discretion to determine the amount of punitive damages without limitations and respecting only the circumstances of the case. Early caselaw also recognized that the punishment of wealthy defendants often required a larger punitive amount than poorer defendants because ''a thousand dollars may be a less punishment to one man than a hundred dollars to another.''(see footnote 11) Authority to determine that a punitive award was excessive rested with the trial judge, who had ''a unique opportunity to consider the evidence in the living courtroom context'' and would only be overruled for an abuse of discretion.(see footnote 12)
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Recently, another wrinkle was added to punitive damages—constitutional considerations of due process. In Pacific Mutual Life Insurance Co. v. Haslip,(see footnote 13) the Supreme Court held that the Fourteenth Amendment's Due Process Clause applies to a punitive damage award between private litigants, but that the Alabama procedures at issue in that case satisfied due process. The Haslip Court, much like the Campbell Court, offered a ratio as guidance to the lower courts. Although not creating any hard and fast rule, it said ''an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety.''(see footnote 14)
In its next decision, the Court showed how little that ratio mattered. In TXO Production Corp. v. Alliance Resources,(see footnote 15) the Court was asked to rule that $10 million in punitive damages was unconstitutionally excessive when compared to an award of $19,000 in compensatory damages, which consisted entirely of the cost of defending a declaratory judgment action. The Court ruled that the 526:1 ratio was not excessive considering the potential loss to the plaintiff if the fraudulent scheme had succeeded, the bad faith of the defendant, the fact that the scheme was part of a ''larger pattern of fraud, trickery and deceit, and [the defendant's] wealth.''(see footnote 16)
Next, rather than consider issues of excessiveness, the Supreme Court found that judicial review of punitive damages was needed and the standard employed had to be more than whether there was evidence to support the verdict.(see footnote 17) Then, in BMW of North America, Inc. v. Gore,(see footnote 18) the Court found, for the first time, that a punitive award violated due process by being grossly excessive. To make that determination, the Court established three guideposts, the most important of which was the extent of reprehensibility of the defendant's conduct, which in turn is measured, in large part, by the presence of up to five aggravating factors.(see footnote 19) These guideposts remain the means of measuring constitutional excessiveness.
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The last of the pre-Campbell punitive damage cases is Cooper Industries, Inc. v. Leatherman Tool Group, Inc.(see footnote 20) Cooper established that punitive verdicts in federal court are subject to de novo review and that the Seventh Amendment jury trial right does not reexamine punitive damages, even though it left that subject untouched when it comes to state constitutional law in state courts.
B. Empirical Data on Punitive Damages
Before briefly reviewing the Campbell decision, it is worth reviewing the relevant empirical research on punitive damages. First, it is important that this Subcommittee understand that punitive damage awards remain the most rare of results. When awarded, the numbers are simply not eyepopping. A study conducted by the U.S. Department of Justice, using 1996 statistics from 75 of the Nation's largest counties found that only three percent of plaintiffs who won their cases were awarded punitive damages and that the median punitive damage award was $38,000.(see footnote 21) More recent empirical studies conducted by researchers at the National Center for State Courts confirm those findings.(see footnote 22) These figures represent a decline, rather than an upward trend. The previous Justice Department study, using 1992 data, showed about six percent of plaintiffs received an award and that the median award was $50,000.(see footnote 23) The trend is downwards.
Statewide studies similarly show punitive damages are insignificant. The most recent Georgia study, for example, concludes ''punitive damages currently are not a significant factor in personal injury litigation.''(see footnote 24) In Florida, the statistics show punitive damage verdicts to be ''strikingly low.''(see footnote 25) A comprehensive study by Jury Verdict Research (JVR) found that for the period 1992–97 North Carolina punitive damage awards represented only four percent of all plaintiff verdicts.(see footnote 26)
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In fact, as one researcher put it after surveying the academic literature, ''[e]very empirical study of punitive damages demonstrates that there is no nationwide punitive damages crisis.''(see footnote 27) Even an 11-state study of 25,627 civil jury verdicts concluded claims of a punitive damage crisis were ''unfounded, and perhaps manufactured.''(see footnote 28)
Punitive awards in medical malpractice and products liability also tend to be sparse. Duke law professor and sociologist Neil Vidmar reviewed 1,300 medical malpractice cases in North Carolina, finding only two cases awarded punitive damages.(see footnote 29) In demographically important Franklin County, Ohio, which is a microcosm of the entire U.S. population, researchers reviewed every verdict issued over a twelve-year period and found not a single punitive award in a medical malpractice or product liability case.(see footnote 30) The Florida researchers found that, ''with the exception of asbestos cases, punitive damages were almost never given in products liability cases.''(see footnote 31) Incidently, when punitive damages have been awarded in medical malpractice cases, a shockingly high number of the cases involved sexual assault and battery on patients by the medical provider.(see footnote 32)
Nor do the studies show a difference between awards made by judges and awards made by juries. The National Center for State Courts study found that ''[j]uries and judges award punitive damages at about the same rate, and their punitive awards bear about the same relation to their compensatory awards.''(see footnote 33) Study after study demonstrates that punitive verdicts correlate closely with the seriousness of the misconduct. One study of medical malpractice cases over a period of 30 years found ''punitive damages were awarded in only the most egregious cases involving healthcare practitioners.''(see footnote 34) Judge Richard Posner and Professor William Landes reviewed products liability cases to conclude ''the cases as a whole are generally congruent with the formal legal standard for awarding punitive damages.''(see footnote 35) Even when awards appear on their face to be disproportionate, the underlying facts often reveal them to be warranted.(see footnote 36)
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Surprisingly, while so much legislative attention is paid to these unremarkable physical harm cases, the real action appears to be in financial injury cases, where punitive awards are increasing in number and size.(see footnote 37) In fact, all of the punitive-damage excessiveness cases reviewed in the U.S. Supreme Court have involved pure economic harm, rather than physical harm. Simply put, punitive damages in personal injury matters are being handled sensibly by juries and judges. They remain infrequent, are generally modest in size, correlate closely with the severity of the misconduct, and are vigilantly reviewed by courts for excessiveness. No crisis warranting congressional attention is evident.
III. WHAT STATE FARM v. CAMPBELL Held
Critics of punitive damages engage in wishful thinking when they claim the Supreme Court's opinion in Campbell established that a ratio of punitive to compensatory damages in excess of single digits is presumptively unconstitutional. It clearly does not. Instead, Campbell reiterated:
''[W]e have consistently rejected the notion that the constitutional line is marked by a simple mathematical formula, even one that compares actual and potential damages to the punitive award.' We decline again to impose a bright-line ratio.''(see footnote 38)
In fact, the Court stated the ratios it articulated ''are not binding, [instead] they are instructive.''(see footnote 39) Still, it said, ''there are no rigid benchmarks that a punitive damages award may not surpass.''(see footnote 40) The Court did suggest that a 9 to 1 ratio was ''more likely to comport with due process . . . than awards with ratios in range of 500 to 1.''(see footnote 41) However, the Court's use of ''more likely'' signals that there will be circumstances where a 500:1 ratio would be appropriate. The ''precise award in any case, of course, must be based upon the facts and circumstances of the defendant's conduct and the harm to the plaintiff.''(see footnote 42)
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Campbell acknowledges, for example, that ''ratios greater than those we have previously upheld may comport with due process where 'a particularly egregious act has resulted in only a small amount of economic damages' ''(see footnote 43) The Court further noted that a higher ratio might be necessary where ''the injury is hard to detect or the monetary value of noneconomic harm might have been difficult to determine.''(see footnote 44)
Justice Stevens, the author of the BMW v. Gore decision, explained another of the circumstances warranting a high ratio:
It is appropriate to consider the magnitude of the potential harm that the defendant's conduct would have caused to its intended victim if the wrongful plan had succeeded, as well as the possible harm to other victims that might have resulted if similar future behavior were not deterred.(see footnote 45)
A plain reading of Campbell, contrary to the fevered accounts that imaginative advocates have penned, indicates that there is nothing magical about the ratios. Moreover, because due process is a two-edged sword, there may be a due process violation of the plaintiff's rights by the creation of a rigid ratio that is less than necessary to serve the punishment and deterrence purposes of punitive damages in relation to the harm caused by the conduct.
So, then, what did Campbell do that is new? Certainly, it did nothing new with respect to gross excessiveness. The Court found the excessiveness issue in Campbell ''neither close nor difficult'' while applying the well-established ''principles set forth in BMW of North America, Inc. v. Gore.''(see footnote 46) It did not change or further explain the guideposts established in BMW, although it could be argued that the third guidepost (comparability to civil or criminal fines or other punitive damage awards) is less relevant now.
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What it did do, however, is limit the use of out-of-state conduct to determine punitive damages. Previously, the Court prohibited punitive damages based on out-of-state conduct that was lawful in other states.(see footnote 47) In Campbell, the Court ruled that a State does not have a ''legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State's jurisdiction.''(see footnote 48) In other words, when Utah levies punitive damages against a company for acts that are also illegal in other states, it must only concern itself with the impact in Utah and leave it to other states' courts to award appropriate punitive damages for the effects in those states. By doing so, the Court endorsed the multiple punitive damage approach that Mr. Schwartz has asked this Subcommittee to prohibit by law. Thus, his proposal is not an implementation of Campbell, but a repudiation of it.
Second, while acknowledging that wealth may be offered into evidence, the Court said that it alone may not justify the size of a punitive damage verdict.(see footnote 49) Finally, to the extent evidence is introduced to demonstrate recidivism, the Court found that the prior acts must be similar on all points.(see footnote 50) Thus, the bad-faith insurance claim at issue in Campbellhad to be paired with similar bad-faith automobile insurance instances, rather than instances involving, for example, earthquake, hurricane or flood damage.
IV. FEDERALISM CONCERNS LIMIT CONGRESSIONAL AUTHORITY OVER PUNITIVE DAMAGES
Before Congress acts, it must come to terms with the very serious federalism concerns that indicate that there is a very circumscribed role for Congress in the area of punitive damages. Congressional authority is limited to federal causes of action that justify punitive damages, for punitive damages have no existence independent of the underlying cause of action, and to certain taxation issues. Federal actions in which punitive damages are authorized are largely civil rights actions. For example, the Civil Rights Act of 1991 authorizes punitive damages in Title VII cases where an employer intentionally discriminates ''with malice or with reckless indifference to the federally protected rights.''(see footnote 51) Even so, Congress has seen fit to limit the amounts of such awards on a sliding scale based on the employer's size. The limits apply to the ''sum of the amount of compensatory damages awarded . . . for future pecuniary losses, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other nonpecuniary losses, and the amount of punitive damages awarded.''(see footnote 52)
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Civil rights cases, however, are not the types of cases that have brought the proponents of legislative action before this committee. They instead have focused their attention entirely on state-based personal injury causes of action. This is curious because, as I indicated earlier, there is no punitive damage crisis in this area. It is instead in financial injury cases where there has been a growth in the number and amounts of punitive damage verdicts.(see footnote 53) Each of the excessiveness cases heard in the U.S. Supreme Court—Haslip, TXO, BMW, Cooper and Campbell—have involved economic injuries, which the Court has repeatedly indicated are less reprehensible as a rule than those that involve physical harm.
In asking for a federal regulatory overlay on punitive damage judgments, advocates for the change are asking Congress to exceed its constitutional authority and intrude into a realm that the Constitution reserves to the States. The Supreme Court warned that Congress bears a ''very heavy burden when affecting areas of traditional state concern.''(see footnote 54) To understand why that burden cannot be met here, one need look little further than the Supreme Court's punitive damage decisions. Nearly twenty years ago, the Supreme Court recognized that punitive damages ''have long been a part of traditional state tort law.''(see footnote 55) They serve the purpose of ''further[ing] a State's legitimate interests in punishing unlawful conduct and deterring its repetition.''(see footnote 56) In Campbell, the Court reiterated the connection to a State's sovereign authority:
A basic principle of federalism is that each State may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each State alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction.(see footnote 57)
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For these reasons, the CampbellCourt ruled, a State may not impose ''punitive damages to punish a defendant for unlawful acts committed outside the State's jurisdiction.''(see footnote 58) Thus, because punitive damages may be assessed only to vindicate the State's sovereign interests in punishment and deterrence, it is part of the irreducible core of a State's authority and protected by the Tenth Amendment from congressional interference. It is intimately related to the process of democratic self-government, any interference with which, the Supreme Court has said, ''would upset the usual constitutional balance of federal and state powers.''(see footnote 59)
A further complication is that some states do not permit punitive damages at all.(see footnote 60) In other states, punitive damages have a compensatory element. For example, in Alabama, punitive damages in wrongful death are compensatory; the usual rules on punitive damages do not apply.(see footnote 61) This lack of uniformity in the states is a feature of federalism that the Constitution celebrates, rather than condemns. It poses insuperable obstacles to a federal regulatory scheme.
I am confident that the Court would find congressional interference with the core state function of assessing punishment in the form of punitive damages unconstitutional. Before the Campbelldecision, multiple awards vindicating interstate interests were possible in a single State's court and logically could have provided a basis for congressional action. After Campbell, that is no longer possible. With its disappearance as an issue, whatever congressional authority may have existed also evaporated. Congress may not legislate against multiple punitive damage judgments that vindicate a State's own interests against reprehensible conduct, nor may Congress allocate how such an award is distributed when there is only a State, and not a federal, interest at stake.
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The two most likely counterarguments that proponents of such measures might raise are easily dismissed. First, I can imagine these advocates asserting that such a law would be premised on congressional authority over interstate commerce. However, a State's authority to punish and deter egregious misconduct is not a matter of commerce, but a function of their police power; it is not subject to federal preemption.
Nor can a credible argument be formulated that punitive damages place a burden on interstate commerce. A similar argument, supported by detailed legislative findings and voluminous testimony, was insufficient to save the Violence Against Women Act (VAWA) from constitutional invalidation in United States v. Morrison.(see footnote 62) Morrison said that the scope of the interstate commerce power must respect our system of dual sovereignty, including States' rights.(see footnote 63)
Punitive damages are similar in that they are ''quasi-criminal,''(see footnote 64) and thus, ''by its terms has nothing to do with 'commerce' or any sort of economic enterprise, however broadly one might define those terms.''(see footnote 65) To fall within the commerce power, the law must regulate an economic activity that substantially affects interstate commerce. Morrison, the VAWA case, involved noneconomic, criminal conduct.(see footnote 66) Punitive damages similarly involve some egregious and reprehensible acts that are quasi-criminal and not economic in nature. The Court's evaluation of the type of conduct being regulated turns on whether the underlying conduct constitutes ''some sort of economic endeavor.''(see footnote 67) Thus, the Court considered whether possession of a gun in a school zone in Lopez or the violent sexual assault on a woman in Morrison constituted an economic activity within the commerce power. Neither qualified.
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The conduct that engenders punitive damages also cannot be regarded as economic activity. There is no commercial market for willful, fraudulent or malicious acts that merit the community's moral condemnation—for that is what punitive damages punish. No one can seriously claim that encouraging such acts aids economic development or contributes to a stable national economy.
Obviously, punitive damages also affect considerable tortuous conduct utterly unconnected to any commercial enterprise, such as particularly malicious intentional torts like assault and battery or injuries that result from a drunk driver's reckless conduct. Because of that, the Supreme Court requires those laws premised on the Commerce Clause to contain jurisdictional restrictions that limit the reach of the regulation to those activities that have ''an explicit connection with or effect on interstate commerce.''(see footnote 68)
Here, as was claimed in Lopez, one can imagine proponents of legislation alleging that the costs of punitive damages are spread throughout the economy and would adversely affect national productivity and, thus, interstate commerce. The Court, however, rejected those justifications in both Lopez and Morrison, ''because they would permit Congress to 'regulate not only all violent crime, but all activities that might lead to violent crime, regardless of how tenuously they relate to interstate commerce.' ''(see footnote 69) With respect to punitive damages, the same could be said of all civil sanctions for reprehensible misconduct.
The Morrison Court then tellingly quoted the Lopez decision for its holding that ''[u]nder the[se broad aggregate-effect] theories . . . , it is difficult to perceive any limitation on federal power, even in areas such as criminal law enforcement or education where States historically have been sovereign. Thus, if we were to accept the Government's arguments, we are hard-pressed to posit any activity by an individual that Congress is without power to regulate.''(see footnote 70) The Court refused to travel down that path, as it undoubtedly would with respect to punitive damages.
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The Morrison Court's decision also overrode numerous findings by Congress. Anticipating criticism for that action, the Court said that just because Congress deems that an ''activity substantially affects interstate commerce does not necessarily make it so.''(see footnote 71) Consider the findings the Court found insufficient to sustain VAWA. Congress found gender-motivated violence affects interstate commerce
by deterring potential victims from traveling interstate, from engaging in employment in interstate business, and from transacting with business, and in places involved in interstate commerce, . . . by diminishing national productivity, increasing medical and other costs, and decreasing the supply of and demand for interstate products.(see footnote 72)
One would imagine that proponents of punitive-damage legislation would advocate quite similar findings. Yet, the findings were rejected because it would allow ''the Commerce Clause to completely obliterate the Constitution's distinction between national and local authority.''(see footnote 73) One could also easily imagine the Court concluding that the ''punishment of [egregious and reprehensible acts of wanton, reckless or willful misconduct] is not directed at the instrumentalities, channels, or goods involved in interstate commerce [but] has always been the province of the States.''(see footnote 74) Punitive damage regulation does not fall within the Commerce Power.
A second flawed argument would invoke Section 5 of the Fourteenth Amendment. That section gives Congress the authority to enforce the rights preserved through the Fourteenth Amendment by appropriate legislation. The argument in favor of legislative authority here would assert that legislation was needed to restrain States from violating the due process rights of punitive-damage defendants. However, to make such as assertion of need, proponents must bear a particularly heavy evidentiary burden, one that they simply cannot sustain. After all, VAWA was also justified on grounds that there was a ''pervasive bias in various state justice systems against victims of gender-motivated violence,'' which a ''voluminous congressional record'' set out in detail.(see footnote 75)
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The Court, however, found that it was not uniform across the country. It noted that broad remedial measures cannot pass constitutional muster when the due-process violation does not ''exist in all States or even most States.''(see footnote 76) Thus, for example, the Voting Rights Act's preclearance provisions are confined in operation to those regions of the country where voting discrimination was most flagrant. It is difficult to imagine Congress segregating out States for Section 5 punitive damage reasons for coverage in a regulatory scheme.
In fact, with respect to punitive damages, no compelling case can be made that all or most States violate a defendant's due process rights. States have enacted laws carefully delineating the necessary proof and level of misconduct to permit a valid punitive damage verdict. States have implemented special and specific jury instructions. Each state requires, should a defendant elect, mandatory appellate review, often, if not uniformly, de novo. Criminal sentencing does not receive as much scrutiny and due process. Perhaps the biggest coup de grace to allegations of widespread due-process violations comes from the Supreme Court's TXO decision:
Assuming that fair procedures were followed, a judgment that is a product of that process is entitled to a strong presumption of validity. Indeed, there are persuasive reasons for suggesting that the presumption should be irrebuttable, or virtually so.(see footnote 77)
A case for widespread and longstanding due process violations cannot be made.
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V. MULTIPLE PUNITIVE DAMAGE AWARDS
Although I have already expressed the strong constitutional reasons why Congress may not regulate when a State may require punitive damages for the same pattern of conduct that may have merited punitive damages in another State, it is worth examining somewhat further the flawed logic of the anti-multiple punitive damage position.
If a State could punish a defendant for its nationwide conduct, a result foreclosed by Campbell, there might be merit to limits on multiple awards. However, Campbell makes clear that each punitive award can only be sufficient to punish and deter for what harms the defendant visited upon that State's citizenry. Thus, if an organization that operates nationally engaged in an egregious fraud, the Illinois courts may award punitive damages based on the harm or potential harm the fraud had in Illinois, as well as the illicit Illinois-based profits generated by the fraud. The award may not consider the harms or profits generated by the same illicit fraud in Wisconsin, which alone may exact punishment for that in-state misconduct.
Still, the law of most States would allow the defendant to introduce evidence of the first punitive award, show that it has effectively caused the defendant to mend its ways, and seek to avoid or limit any subsequent punitive damages because of the earlier award.(see footnote 78) The problem of multiple damages has been effectively treated by these provisions.
Given that the Campbell Court endorsed the multiple punitive damage concept by limiting awards to in-state harms, Congress clearly cannot claim that it is implementing Campbell or responding to potential due-process violations.
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VI. REDISTRIBUTION OF AWARDS IS A STATE MATTER
I understand there is some interest on the Subcommittee in considering whether an award-splitting bill should be enacted. A number of states have adopted similar statutes that appropriate a percentage of any punitive damage judgment to the state or a public purpose. Utah was the first to enact such a law; there, 50 percent of any award goes to the State.(see footnote 79) Other states take a higher percentage. For example, Indiana takes 75 percent.(see footnote 80) Other states have similarly high percentages.(see footnote 81) In addition, one state supreme court, Ohio's, has imposed a similar regime by judicial decision.(see footnote 82) And another state supreme court has found that such a reallocation law constitutes a taking of property without just compensation.(see footnote 83)
Enacting such a law, to the extent permitted by the State's constitution, is a sovereign choice that a State alone is entitled to make. The federal government cannot require such a choice. Nor may it, outside the tax laws, seek to share in the award, which, after all, exists to vindicate an individual State's interest.
VII. TAX LAW TREATING PUNITIVE DAMAGES NEEDS TO BE CHANGED
There is one area where Congress can do something about the unfair operation of the law on punitive damages. Punitive damages are taxable. When a state claims a portion of the punitive damages, the federal government still taxes the portion that goes to the State, even though those proceeds are never seen by the plaintiff. Also, under the majority view in the courts, the lawyers' fee is not netted out against the recovery, so the plaintiff must pay taxes on that amount as well. The result, remarkably enough, is that the successful punitive-damage plaintiff may sometimes owe more in taxes than he or she receives from the judgment.
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Earlier this year, Senator Hatch offered an amendment to the tax bill to rectify this situation. It was not included in the final bill. I have attached a copy of his proposal, as well as several articles detailing the plight of plaintiffs here. This is one area where Congress does have power to remedy an injustice. I urge that it be passed along to the appropriate committee.
VIII. CONCLUSION
Congress has little authority to regulate punitive damages or enact legislation that might control State authority in the realm of punitive damages. Moreover, the empirical evidence on punitive damages strongly suggests that there is no appropriate concern to be pursued here. The Campbell decision not only presents no new reason for Congress to act, but actually forecloses areas that once might have been appropriate. The Court endorsed a multiple punitive damage approach; Congress may not change the law in the opposite direction. Still, there is one area where Congress could and should act. It should fix the tax laws, which currently hold the prospect that a punitive damage awardee will end up owing the government more than he or she receives.
Mr. CHABOT. Mr. Schwartz.
STATEMENT OF VICTOR SCHWARTZ
Mr. SCHWARTZ. Chairman Chabot, Mr. Nadler, thank you for inviting me here today. I was just out in Cincinnati, in Findlay Market, and I mentioned your name, and they like you out there, which is a nice thing.
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Mr. Nadler, I am from your neighborhood. They like you there, too. So it is nice to have people that the voters like. I have been in hearings where they don't.
Mr. CHABOT. You are doing great so far.
Mr. SCHWARTZ. On a serious note which affects our testimony, Mr. Nadler, for years you have been a defender of the Constitution, a defender of people's rights, however unpopular. That is very relevant in what we are going to talk about today—what some of us are going to talk about, anyway.
Punitive damages for years really presented no problem. They were awarded for intentional wrongdoing, for trespass, for things that we learned in the first year of law school about intentional torts.
But it changed in the 1970's, and then they started to be awarded for things that were not intentional. And then, because it was not intentional, they were awarded against product manufacturers.
I won a case in Ohio, and the 6th Circuit sustained it, where I won a punitive damage against a company. And I remember Judge McCree said to me, ''Professor Schwartz''—whenever they said Professor Schwartz, I knew that I was in trouble—how can we award punitive damages here where the Admiral Television Company makes hundreds of sets and it can be awarded again and again and again? And I said, ''Well, it is fair at least to award it in this case.''
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But there is a problem once you change the fundamental nature of punitive damages, and they are not awarded for intentional torts, and they are awarded again and again for the same conduct. And that does occur.
Another change was in the amount. Until the 1970's, you had no awards over a million dollars. Now they are commonplace. The studies that my colleagues refers to are—some are 10 years old. In one of them, the Rustad study, Professor Rustad says in his study nobody knows how many punitive damages there are and nobody ever will.
One thing that is clear, though, is that multimillion dollar awards occur; and if they occur in 6 percent of the cases—if I had a gun to my head and it would only fire 6 percent of the time, I don't think I would fire it. It is the threat of them that has actually reduced the number of cases that go to trial, because people can get whacked with very outlandish high awards.
Now the Supreme Court more than once has said that punitive damages have run wild in this country, and the Court has tried to put some constraints on punitive damages. They are sound restraints. They have put up three factors in the Gore case—reprehensibility, ratio and comparison with criminal conduct—that are good.
But I disagree, and I am going to put some stuff in the record to show that lower courts have failed to follow what the Supreme Court has said, as recently as a few weeks ago when in a case called Key Pharmaceuticals, in which we filed the principal amicus brief, was remanded to an Oregon court.
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They got it half right. They applied the 9-to-1 ratio, which the Court did say was the rule, except if you have that unusual case where there is very little compensatory damages and there is very serious wrongdoing. There the 9-to-1 doesn't fit, but in the rest of the time it does.
If you read the opinion and read it as a legislator, as a matter of policy—anyway, they remanded it. The Court said, we will follow the ratio, no more than 9-to-1, but then they didn't read the rest of the opinion and they allowed in, to inflate that award, evidence that was not directly dealing with the plaintiffs in the key case, some of it out-of-State evidence.
I would say for this Committee and in the record, there is not a doubt in the world that some lower courts are going to, some of them, thumb their nose at the Supreme Court.
If people are interested in protecting constitutional rights—and this body has done it with voter rights, civil rights, all over the place, and I am going to submit an article written by a very good professor, not moi, not anybody on the panel about this—those constitutional rights need to be protected against rogue courts that have ignored the Supreme Court.
This body can and should consider implementing the rules of State Farm and do it in a way that is easy to understand so that lower court judges understand what the rules are and higher court judges follow the rules, even though we are talking about unpopular defendants.
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The second thing this body can consider is multiple imposition of punitive damages for the same thing. And I take—and I have read very carefully my colleague's testimony, but there is no—absolutely no warranty that people will not be punished again and again for the same thing.
I found it interesting that he said, and I will conclude, that, well, you can go in front of a jury, and Mr. Peck is a litigator, and tell the jury that—you are just the jury now—I am not sure my client—they had one bad verdict against them, so I said, ladies and gentlemen—this is the way I begin my case—another jury has already punished you for punitive damages, my client, but you should just not think about that.
So you are put in this dilemma of either telling them that your client has already been punished by another jury or not telling them and letting them think that they are the sole punisher and this is the only body that really can address that problem.
I really thank you for holding hearings on this topic and for allowing me to present these remarks today.
Mr. CHABOT. Thank you very much.
[The prepared statement of Mr. Schwartz follows:]
PREPARED STATEMENT OF VICTOR E. SCHWARTZ
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Mr. Chairman, I welcome your kind invitation to participate in this oversight hearing on ''Potential Congressional Responses to State Farm Mutual Automobile Insurance Co. v. Campbell: Checking And Balancing Punitive Damages.'' You have shown wisdom and good judgment in holding this hearing. Congressional action is needed to assure that fundamental due process rights, both substantive and procedural, are respected in order to protect citizens against unconstitutional punitive damage awards.
Let me begin with a brief background about punitive damages.
BACKGROUND ON PUNITIVE DAMAGES
Punitive damages began in England with a very legitimate purpose. They were used to help supplement the actions of state law enforcement to assure that wrongdoers were punished.(see footnote 84) When punitive damages began to be utilized by some of our states, they were similar to the laws of England in their scope and purpose. They were confined to intentional wrongdoing, such as battery, assault, false imprisonment and trespass.(see footnote 85) Their amounts were limited, rarely being greater than actual damages.(see footnote 86)
Punitive damages standards remained the same for more than two centuries. Beginning in the 1970s, however, they started to change.(see footnote 87) Judges, not legislators, made these changes and because judges did so, they made their application retroactively.
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First, the fundamental concept of intentional or purposeful wrongdoing was muted. Reckless or even gross negligence was deemed enough to punish.(see footnote 88) This was a significant change, because the standards of gross negligence and recklessness are more amorphous than intentional, purposeful conduct.
Second, there was an increase in the number of cases in which punitive damages were sought and the types of conduct that might fall under their web.(see footnote 89) Damages were assessed for failure to have a correct warning, a mistake in a surgical procedure, or a failure to have discovered a particular risk before a product was put on the market. These now come within the scope of punitive damage awards.
Third, the size of the awards increased astronomically. Prior to 1970, there was no punitive damage verdict of more than one million dollars. Today, multi-million or even multi-billion dollar verdicts shock no one.(see footnote 90) This change caused the Supreme Court of the United States and its Members to ''time and again''(see footnote 91) express their concern about ''punitive damages awards that run wild'' in this country.(see footnote 92)
Finally, punitive damages for the same conduct began to be assessed a multiplicity of times. In early common law, this was virtually impossible, as punitive damages were assessed against individuals for harm they caused to one person.(see footnote 93) Once punitive damages were extended to product manufacturers or hospitals, or any entity that engaged in similar conduct with potentially multiple plaintiffs, the scepter of multiple punishment was possible and was often used. Decades ago, Henry Friendly, one of the most distinguished judges of the Twentieth Century warned against this,(see footnote 94) but his warnings were ignored.
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THE SUPREME COURT RECOGNIZES THAT PUNITIVE DAMAGE AWARDS MAY TRAMPLE ON THE CONSTITUTION
There have been many debates about punitive damages: Are they worthwhile? How should they be confined? The Supreme Court of the United States was not part of these debates. The Court only entered the fray when punitive damages trespassed on the Constitution. The Supreme Court has now visited the issue seven times, formulating rules for both procedural and substantive due process.(see footnote 95) The Court has recognized that unrestricted punitive damages violate fundamental rights of our citizens. They can be destructive of property interests, cause economic chaos, including loss of jobs, and be palpably unfair.
While the Supreme Court decisions have been welcome, a brand-new phenomenon has occurred since their decisions were rendered. In some states, lower courts either have either not grasped the meaning of these decisions or have ignored them. Those lower courts include, among others, the Supreme Court of Utah,(see footnote 96) the Court of Appeals of Oregon,(see footnote 97) and the Supreme Court of Alabama.(see footnote 98)
If this phenomenon had occurred with important Supreme Court decisions, such as Brown v. Board of Education,(see footnote 99) Miranda v. Arizona,(see footnote 100) Roe v. Wade,(see footnote 101) and perhaps most on point, New York Times v. Sullivan,(see footnote 102) the mainstream media would have been outraged. Until a recent Wall Street Journal editorial, which is appended to this testimony, the willful failure of some courts to follow Supreme Court guidelines have been ignored.(see footnote 103)
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Now, a number of state supreme courts have and will continue to assiduously follow the Supreme Court's constitutional guidelines that protect people from the imposition of excessive and unconstitutional punitive damage awards. For that reason, some have suggested that action by Congress is unnecessary. This perspective, however, misconstrues the impact that just a few maverick courts can have when they do not follow Supreme Court guidelines on the Constitution.
Consider an example with some similarities that can be especially appreciated by the media. Almost forty years ago, the Supreme Court of the United States decided New York Times v. Sullivan, which provided protection under the First Amendment of the Constitution in a defamation case brought by a public official seeking to impose liability as well as punitive damages.(see footnote 104) The Court held that the media could not be subject to a successful defamation action unless it was shown that it had engaged in actual malice. Fortunately, virtually every court in the United States followed the New York Times decision. What if some lower courts had decided not follow it, in the same way some courts have not followed the Supreme Court's mandate on punitive damages? The very policy concern of the Supreme Court in New York Times—a chilling effect on reporters writing about public figures—would still remain. This is because many newspapers and broadcast outlets are distributed throughout the United States. Many manufacturers, distributors and others operate in all fifty states. Unconstitutional punitive damage awards chill their benign actions. They could have a detrimental effect on jobs, costs, innovation and other activities that society wants. A few courts who do not follow these guidelines should not infringe upon the protections adhered to by a majority of courts.
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This phenomenon prompts the need for Congress to consider model constitutional guidelines for punitive damage awards in legislation. The case of State Farm v. Campbell makes the need for such legislation even greater, because the State Farm decision specifically spelled out outer constitutional limits on punitive damages. Unfortunately, already, at least one lower court, in a case in which we were directly involved, Key Pharmaceuticals, Inc., v. Edwards,(see footnote 105) has ignored a portion of the State Farm decision—even though the Supreme Court of the United States had vacated a very large punitive damages award in that case under the auspices of State Farm.(see footnote 106)
The American Legislative Exchange Council (ALEC) has adopted a Model Constitutional Guidelines for Punitive Damages Act, created for state legislation. The Act, which is appended to this testimony, could also serve as a model for federal legislation.(see footnote 107)
ALEC'S MODEL CONSTITUTIONAL GUIDELINES FOR PUNITIVE DAMAGES ACT
The Model Act assures procedural due process in punitive damage cases. It is not intended to establish punitive damages in any state, or supplement tort reforms that may limit when punitive damages should be awarded, or the amount of those damages. Its purpose is to incorporate the Supreme Court's decision in Cooper Industries v. Leatherman Tool Group,(see footnote 108) which required appellate courts to provide a de novo review of the constitutionality of punitive damages. This means that lower courts cannot make discretionary, subjective and non-reviewable decisions about whether punitive damages award are constitutional. It is our understanding that in some jurisdictions, the Leatherman decision has been given lip service at best.
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Perhaps of greater importance, ALEC's Model Act spells out fundamental, substantive due process guidelines for punitive damage awards. It makes clear what evidence a court may consider, as well as evidence that a court may not consider; for example, evidence of general wrongdoing on the part of a defendant. As the Supreme Court of the United States in State Farm v. Campbell made clear, ''Punishment on these bases creates the possibility of multiple punitive damage awards for the same conduct. . . .''(see footnote 109)
We also suggest that the Congress consider legislation that directly addresses the problem of multiple imposition of punitive damages.
CONGRESSIONAL ACTION TO STOP MULTIPLE IMPOSITION OF PUNITIVE DAMAGES FOR THE SAME CONDUCT
There is only one civil justice tort reform agreed to by liberal, moderate and conservative judges: to place reasonable limits on multiple imposition of punitive damages for the same or similar conduct. Respected Senior Federal District Judge William Schwarzer of California has written: ''Barring successive punitive damage awards against a defendant for the same conduct would remove the major obstacle to settlement of mass tort litigation and open the way for the prompt resolution of the damage claims of many thousands of injured plaintiffs.''(see footnote 110) Judicial scholars realize that individual states cannot resolve the problem of multiple imposition of punitive damages. While some states, for example, Georgia, have successfully tried,(see footnote 111) they can only prevent multiple imposition of punitive damages within their borders. All a plaintiff lawyer need do is to shop for another forum that is still available, and hit a company again for the same wrongdoing.
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Since a company may have injured many people, some have suggested that there would be nothing wrong with multiple hits, but there is. Multiple imposition of punitive damages for the same basic conduct has and will drive companies into bankruptcy before people receive their compensatory damages.(see footnote 112) Moreover, a jury may not appreciate that the defendant has already been punished for the same basic wrong. Some have suggested that defense lawyers can control this by telling the jury that their client has already been punished. Anyone who understands basic trial tactics knows, however, that if a lawyer tells a jury during a trial that the defendant has not only been found liable, but has already been punished by another jury, the door would be closed on his or her defense. A defense lawyer is placed in a true dilemma: if he or she does not tell a jury about a prior award, the jurors would assume that they are the only ones to punish the defendant. If the lawyer tells the jury about a prior award, he or she has conceded the case.
Senator Hatch, Senator Lieberman, and others have worked in the past on the problem of multiple imposition of punitive damages. I have attached a copy of a bill on the subject that was developed by Senator Hatch in a prior session of Congress.(see footnote 113) There has been scholarship on the issue, showing the extent of the danger of multiple imposition of punitive damages.
CONCLUSION
The Supreme Court of the United States has spoken loud and clear in State Farm Mutual Automobile Insurance Co. v. Campbell that substantive constitutional limits must be placed on punitive damages. There is a very real danger that these limits will be ignored or not understood by courts. That is why this oversight hearing is of particular importance, because this body can assure that basic, fundamental constitutional rights are protected with respect to outrageous punitive damage awards. No other body can do so. Consideration should be given to sound legislation to address this issue.
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ATTACHMENT 1
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ATTACHMENT 2
Schwartz12.eps
ATTACHMENT 3
Mr. CHABOT. Now each of the Members up here, we have an opportunity to address questions to the panel for 5 minutes; and I will begin with myself.
Mr. Owen, I will start with you first.
Given that the Supreme Court takes up an extremely small percentage of the cases it is requested to hear each year, many lower courts may not fear being overturned by the Supreme Court in any given case. Does that strengthen the argument for Congress' stepping in to at least codify the outermost constitutional boundaries of punitive awards that Congress can discern from the Supreme Court's decisions?
Mr. OWEN. Yes, Mr. Chairman, I think it most certainly does.
Following up on Mr. Schwartz's observations, enforcement of constitutional rules is very slight and expensive and takes many years and is unusual. It is really only the rarest case that ever really gets a fair, full constitutional hearing. But, if I can just change the direction on that a little bit, I think, since there are constitutional implications, very definite ones in the punitive damages area, and there are certain due process prohibitions that would be very helpful to enact by legislation, I think this Committee would be doing a disservice if it tried to limit its scope of punitive damages reform to those that are constitutionally required. I would suggest that you begin with the constitutional core but then add in other fair and appropriate reforms, whether demanded by the Constitution or not.
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Mr. CHABOT. Thank you very much.
Mr. Peck, let me go to you next, if I can. Justice Ginsburg, who did not agree with the State Farm case, nevertheless stated that—this is her quote: ''Damage capping legislation may be altogether fitting and proper.''
I would assume, based upon your testimony, that you disagree with that point of view. Why do you disagree with Judge Ginsberg on that?
Mr. PECK. Well, first of all, she was referring to State legislation. She was not at all suggesting that Congress had any authority here.
Mr. CHABOT. But we are essentially the same thing as a legislature that is at the Federal level.
Mr. PECK. No, you are not, because you have the restriction of the 10th amendment. You cannot invade something that is of State concern. And it is part of the State's interest to award punitive damages, as the Campbell case says itself, to determine what the amount of that punishment is. It is clearly outside of the Federal jurisdiction here.
Mr. CHABOT. So your allegation is, if we act upon this, it itself would be declared unconstitutional or declared as such?
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Mr. NADLER. With respect to the States. You may be thinking of Federal Courts.
Mr. PECK. To the extent that you are talking about Federal causes of action.
I argued a case this term in the Supreme Court called Jinks v. Richland County. What it validated—I was defending a congressional enactment in that particular case. This was a supplemental jurisdiction tolling provision that operated on the State statute of limitations. What saved it and what my successful argument was was that the underlying cause of action began as a Federal cause of action. If it had only been a State cause of action, the Court, which unanimously ruled in my favor, would have unanimously ruled the other way.
But let me say that, in the Cooper case, the Court noted that there were four instances in which States enacted caps on punitive damages since the BMW v. Gore case: Ohio, Alabama, North Carolina, and Alaska.
In Ohio, that cap was struck down by their State Supreme Court under their State constitution.
In Alabama, a previous cap had been struck down. That case has now been abrogated, but no one has challenged the current statute. But, as Professor Owen's testimony shows, there is a compensatory element to Alabama punitive damages, so, therefore, there is a real question about its constitutionality.
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Alaska was challenged. It was upheld by a 2–2 vote in their Supreme Court, having no precedential value as a result.
And, finally, the North Carolina cap was argued by me two weeks ago in the North Carolina Supreme Court. As I argued there, the fact is that the only branch of Government that has the authority to set aside a jury verdict or a judge's judgement as excessive is the judiciary.
Mr. CHABOT. My time is winding down. So let me ask one more question, if I can.
Mr. Schwartz, do you have any comments on the empirical research of Dr. Daniel Kahneman, who won the 2002 Nobel Prize in economics? He wrote, and I will quote, ''Judges should decide on the appropriate level of punitive damages just as they do criminal punishment, subject in both cases to guidelines laid down in advance.'' Do you have some comment?
Mr. SCHWARTZ. I think it would be constitutional to do that, because judges decide sentences in criminal cases. It is not a reform that I think will dramatically change the current situation. It will cut down on outliner verdicts, in other words very, very extreme verdicts.
I do want to suggest that your question about Justice Ginsberg was never answered. The answer is that she favors it, and there are caps on punitive damages in a number of States that have been sustained. The issues where it has been held unconstitutional are under provisions of State constitutions; and State constitutions, as you may know, are 3 or 400 pages. And if a particular judge has a particular ideological view, he has or she has a lot of room to strike down anything.
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So I just want to mention that in response to the question you asked.
Mr. CHABOT. Thank you very much.
I now recognize the gentleman from New York for 5 minutes.
Mr. NADLER. Let me ask first Mr. Peck. I was intrigued by what you were saying a moment ago. Only the judiciary can limit a jury verdict constitutionally, is that what you are saying?
Mr. PECK. The determination that a jury's verdict is excessive is one that by practice and precedent for 200 years we have said belongs within the judiciary as part of the fair administration of justice. Separation of powers prevents the legislation from overriding it.
Mr. NADLER. So you think that a congressional limit, even in a Federal case, would be unconstitutional for that reason, violation of separation of powers?
Mr. PECK. I agree that it does, and so does Justice Scalia who wrote to that point on the Plaut case.
Mr. NADLER. Certainly a—this is on punitive damages?
Mr. PECK. Regardless.
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Mr. NADLER. On compensatory damages the same?
Mr. PECK. Yes.
Mr. NADLER. So you think that all the proposals in Congress that we have been debating for the last God number of years are unconstitutional?
Mr. PECK. I do.
Mr. NADLER. Thank you. And it would be more so were we to attempt, with respect to the 10th amendment, to legislate a limit on State court punitive damages, I would assume?
Mr. PECK. Absolutely.
Mr. NADLER. Mr. Owen, you said that theoretically you want punitive damages as a deterrent to wrongdoing, as a punishment for egregious misconduct, but in real world it doesn't work. In two sentences, please, why doesn't it work in the real world? What is the problem with it?
Mr. OWEN. The problem, Congressman, is that there are the outlying verdicts.
Mr. NADLER. The problem is it is abused, is what you are saying?
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Mr. OWEN. Yes.
Mr. NADLER. Let me ask you a different question. Given—well, first of all, do you accept the propriety of the idea of punitive damages as a deterrent to egregious misconduct so that people can't say, all right, we will kill a number of people or injure them and pay damages as a cost of doing business?
Mr. OWEN. I agree that it is a deterrent. I think there is a real question of how empirically——
Mr. NADLER. Fine, you agree theoretically that that is a good purpose.
Mr. OWEN. Oh, yes.
Mr. NADLER. Let me ask you the final question. Why should there be any limitation—I shouldn't say limitation. Why should there be any connection between the amount of damages someone actually suffered, compensatory damages, actual damages, and punitive damages? If punitive damages are a deterrent, shouldn't it really be determined by the size of the pocket of the tort-feasor, so that the mom and pop that is deliberately putting something out in front that someone is going to trip over, because he just likes people to trip, $10,000 punitive damages might deter that.
But, General Motors, that has a few billion dollars in the bank, you might, in order to stop them from doing whatever it is they might have done once or might in the future do again, without casting any aspersions against General Motors or anyone else at this point, but with a large tort-feasor, you might need very large punitive damages, not because of the actual damage suffered by the guy who was injured by the car turning over but by the fact that you want them not to manufacture cars that they know are going to turn over all of the time.
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So why is that—if you are going to put a limit on—any limit on punitive damages, why shouldn't that limit have some relevance to the pocket of the tort-feasor, rather than to the actual damage of the individual plaintiff, who after all is getting compensated? But what you really want to do with punitive damages is make sure that there aren't a lot of other victims in the future.
Mr. OWEN. I do think that is one reasonable way to limit punitive damages, although not as effective as a multiplier.
Mr. NADLER. But a multiplier has no reference to how effective that is going to be. My problem with the multiplier is that you may suffer $10,000 worth of damages from your injury when your car turned over. The next guy suffers a hundred thousand. The third guy suffers a hundred thousand. The 500th guy suffers a hundred thousand. And $90,000 damage is nine times your actual damages, is a cost of doing business to the guy manufacturing the car that flips over all of the time. Whereas, if you take a look at them and you say—well, let's take someone else. Daimler-Benz has billions of dollars. We should have a very large damage to prohibit them from doing this. Isn't that a more fair and effective way of measuring it than a nonexistent connection with the actual damages by a particular plaintiff?
Mr. OWEN. Yes. In an individual case it is definitely more fair and logical. It is a question then of——
Mr. NADLER. Which is more fair and more logical?
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Mr. OWEN. Your approach, that is, unlimited punitive damages measured by wealth, reprehensibility and——
Mr. NADLER. Deterrence.
Mr. OWEN. Deterrence and also the plaintiff's harm.
Mr. NADLER. Thank you.
Would you comment on this, Mr. Peck?
Mr. PECK. Yes. Since it is supposed to vindicate the State's interests it is not supposed to be measured by what damage was to the individual plaintiff. I think it is far more logical. And most States have that in there not only for that reason but also to make sure that you don't bankrupt a defendant and to make sure that it is proportionate to their wealth.
Mr. NADLER. Most States have a relationship to——
Mr. PECK. Yes.
Mr. CHABOT. The gentleman's time has expired.
Mr. NADLER. Can I have one additional minute, please?
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Mr. CHABOT. Without objection.
Mr. NADLER. Thank you.
Given that and the fact that the Court said that in State Farm, how do you deal with the courts also talking about a relationship to multiple of actual damages for a particular plaintiff?
Mr. PECK. The fact is that they are talking about harm and potential harm, and that is only supposed to be one of the factors. So you are not looking at this individual plaintiff's compensatory damages, but you are looking at the harm to the whole.
Mr. NADLER. Thank you.
So any so-called codification which said X dollars would be against what the Supreme Court is really saying?
Mr. PECK. It would not only be against it, but the fact is due process is a two-edged sword. It is supposed to work for the plaintiff as well.
Mr. NADLER. So it would be unconstitutional in your opinion?
Mr. PECK. Yes.
Mr. CHABOT. The gentleman from Iowa, Mr. King, is recognized for 5 minutes.
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Mr. KING. Thank you, Mr. Chairman.
I thank the panel for their testimony here this afternoon. A series of things are on my mind about it, but I would initially like to go to Mr. Schwartz and ask you if you believe it would be unconstitutional for Congress to establish caps on punitive damages.
Mr. SCHWARTZ. Absolutely not. I would submit for the record our paper in the Harvard Journal of Legislation which outlines all of the case law as wide support. This body has acted to limit and restrict people's rights to sue. The General Aviation Recovery Act of 1994, which Mr. Peck's group said was unconstitutional, was upheld, has been upheld. It has been law since 1994. It has produced about 25,000 jobs.
I am not going to turn this into a legal debate, but our cases are strong, and this is absolutely valid law. This body has the right, under the commerce clause and also under the 14th amendment, to put in place restrictions on punitive damages.
Mr. KING. Thank you, Mr. Schwartz.
Mr. Peck, given that your position prevailed and the caps would be unconstitutional in your view, in the event that we had multiple punitive damages that were awarded by multiple States in a massive fashion that impacted upon our economy in such a negative way that we couldn't sustain our infrastructure, how might we then provide a solution for that problem in your view?
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Mr. PECK. There are tax laws that can provide different kinds of ways in which Congress can address the economic position of those companies.
But let's remember that in the Campbell decision, by saying that you can only punish for in-State harms, they have basically endorsed multiple punitive damage awards. They have said that you can only punish in Utah. Someone in Illinois who suffers the same thing, they can seek punitive damages for the harms that occurred in Illinois, and so they have multiple punitive damages here.
Mr. KING. Yet the judgment of the State court might be excessive to the damage within that particular State, and then your view that it's outside of the purview of the Supreme Court?
Mr. PECK. No. If it is excessive on a constitutional basis, then the U.S. Supreme Court can reverse it. In fact, the State courts take what the U.S. Supreme Court does very, very seriously. On Friday of this past week I was in Salt Lake City and served on a panel with the two people who are arguing the remand of the Campbell case. They are arguing on the basis of a 1-to-1 or 1-to-9 ratio. That is essentially what the debate is going to be before the Utah Supreme Court.
Mr. KING. Thank you. And I tend to concur with Mr. Nadler and his consideration of that ratio and the validity or lack of validity thereof.
But back to Mr. Schwartz. Do you have a sense of what litigation is costing this country as, say, a percentage of our gross domestic product?
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Mr. SCHWARTZ. There was a report called Trial Lawyers, Inc. that came out this morning; and there is also a telling House report that can give better information than I of the billions of dollars that it costs, and we will see that you have copies of the report.
Mr. KING. I look forward to seeing that report.
And then might you also have some ideas on how we could rein in the punitive damages portion of this litigation that haven't been delivered here this afternoon? What would be—if you had to put out the menu of how we might address this, what else is on the menu that we haven't spoken about this afternoon?
Mr. SCHWARTZ. Well, I think the principal menu has been covered. But I would emphasize—and since Mr. Peck has said here today—because since we need to pass legislation, not just go in the world of ideas that go nowhere, if I understand him, he has said that the Supreme Court of the United States has held that you cannot consider in State A activities that occured in another State. It will help a lot simply to have that framed in law and deal with the problem of hitting a company again and again for the same thing.
My testimony has quotes from judges all over this country calling upon this body to deal with multiple imposition of punitive damages, and I think that is something around which a consensus can be built. There are many other ideas on the punitive damages, but we want to have ones that can be enacted into law, and that one I believe can develop a consensus of people from both parties.
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Mr. KING. Do you believe that unnecessary litigation is being driven by contingency fees?
Mr. SCHWARTZ. No, I don't. I think that the unnecessary litigation is dealt with because we don't have strong rules—and Mr. Peck will disagree. But I believe that we do not have strong rules against frivolous suits. If we had strong penalties on lawyers who brought baseless litigation, they wouldn't bring them. But right now they know it is heads I win, tails you lose. If they bring a baseless lawsuit, some of them—and I respect how they figure—calculate exactly what defense's costs are going to be almost to the nearest thousand dollars, make an offer of settlement that is under that cost, and the case is settled. If you have strong, vigorous rules against baseless lawsuits where the attorney who brought that lawsuit had to pay, that is the way to go with that problem, not the contingency fee which provides a vehicle for people who may not have money to have a lawyer.
Mr. KING. Might you also provide that in print for me if it is possible?
Mr. SCHWARTZ. Yes, sir.
Mr. KING. Thank you, Mr. Schwartz and Mr. Peck; And I want to thank you, Mr. Chair.
Mr. CHABOT. Thank you very much.
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The gentleman from Alabama, Mr. Bachus, is recognized for 5 minutes.
Mr. BACHUS. I thank the Chairman, and I appreciate all of your testimony.
My first question, I guess I will start with all of you who believe that punitive damages are appropriate and serve a valid purpose in our judicial system?
Mr. PECK. Professor Owen testified to that. Let me put myself on the record believing that as well, yes.
Mr. BACHUS. All right.
Mr. SCHWARTZ. Punitive damages can deter wrongful conduct, and that is the good side. The bad side is that they are out of control. They can deter good things that they need. They can cost jobs. They can hit pension funds. They can stop work when our country needs full employment, not less employment because of excessive punitive damages.
Mr. BACHUS. So a legitimate purpose, but they can be abused?
Mr. SCHWARTZ. Yes, sir.
Mr. BACHUS. Okay. I know when this subject comes up we all hear of runaway juries. You know, you also hear of frivolous lawsuits or, you know, lawsuits are outrageous in some fact situations. What you don't hear is a practice on the other side of plaintiffs, people that have been harmed where it takes a long time to compensate them or where they are not compensated. You know, insufficient compensation. Would you agree that if the judges review cases to decrease damages, would they also be appropriate to let them increase damages?
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Mr. PECK. I would like to address that. In the courts we have concepts called remittitur and additur.
Mr. BACHUS. That is right.
Mr. PECK. The fact is that if a judge does have the authority and it is not a function of the jury to determine the amount of damages, then they have the authority for additur. But it has been the history of this country, too, that juries have the authority to determine the amount of damages, which is why when a judge orders a remittitur you have to offer a new jury trial. That is the substance of the 7th amendment, and it is the substance of the cognate right to trial by jury in every State constitution.
Mr. BACHUS. Would either——
Mr. NADLER. Excuse me. Would the gentleman yield for a moment? Would the gentleman yield for a moment to clarify something?
Mr. BACHUS. Without losing any of my time.
Mr. NADLER. With the Chairman's indulgence.
Mr. CHABOT. For an additional 1 minute.
Mr. NADLER. Were you saying that—I thought I heard you saying this. But were you saying that if a judge decreases the amount of jury award, it has got to go to another jury?
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Mr. PECK. That is what the remittitur is. Unless you accept the decreased amount, you have the right to opt for a new jury trial and have a new jury come up with a new determination, because that is the substance of the right to trial by jury. And the Supreme Court said that in 1996 in an opinion written by Clarence Thomas for the unanimous court.
Mr. NADLER. I suppose I am glad to hear that. But I always took for granted—I always thought—you read all the time about the jury awarded X dollars and the Court thought it inappropriate and reduced it to Y.
Mr. PECK. What happens is that a lawyer will often accept the reduced amount rather than go to the expense of a new trial.
Mr. BACHUS. I have accepted reduced amounts. They encourage in a lot of cases settlements of cases, which I think it is in the interest of all of us to speed justice. Now, it can be a gun to your head, but would you comment on that?
Mr. OWEN. I will comment on it, Mr. Congressman, from a more theoretical view. I am not in the courtrooms, but I have read considerably about their use in court. And, yes, I am sure, as Mr. Schwartz said—although I think he was suggesting that in a negative way—that it does encourage settlement. In cases where there is a fair argument for punitive damages there is usually fair evidence of reprehensibility, and I think then that what is likely to happen is that the case is likely to settle for full value of compensatory damages including perhaps attorney's fees, and so it serves a very, in my judgment, a positive role there.
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Mr. SCHWARTZ. I don't think they are positive in a lot of roles today, if you have and are threatened with an unlimited amount of punishment, A. B, punitive damages in most States are not covered by insurance, which is an important thing to note in this record. So that has an effect in the terms of settlement that can create irrational behavior on both the part of the insurer that worries about a case against it if it doesn't settle, by its insured, and the result may not be justice at all. If there were reasonable limits on punitive damages and it was not out of control, as the Supreme Court has said, then they would serve a proper function.
And forgive me for this one, but two of my young colleagues are here and I tell them, at every hearing I learn something; and I have—to hear Mr. Peck, who is a dear friend, quote both Justices Thomas and Scalia to Mr. Nadler is something new to me. So I just would share that with the Committee.
Mr. CHABOT. It is a new experience for all of us.
Mr. PECK. And I do it all the time in court.
Mr. BACHUS. Can I close with one question? And this is to me what my concern in all this is. These panelists, obviously you all are much more qualified than any of us. You know, you have specialized in these things, and you have come to sort of different conclusions. And this is my basic question.
You know, the problem, to the extent that there is a problem, with punitive damages, and I think we all admit that there are problems, should it be addressed by the judicial branch? And would it be more appropriate for it to be addressed there? Would it not be a less political disposition?
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Mr. SCHWARTZ. Well, the others have spoken. I will be very brief.
Mr. Peck and I have a fundamental disagreement about this. I believe the legislature has the right to make laws on damages, and they have had that right since the very beginning. Because you don't——
Mr. BACHUS. And I am not arguing. I believe I agree with you and probably disagree with Mr. Peck in that I think that we have the right. What I guess I am saying is would it be more appropriate or could the judicial branch not do a more expertise or a better job?
Mr. SCHWARTZ. That is a very good point. If the judicial branch acted in some harmony, we would be fine. I cite a number of Supreme Court opinions in my text where all courts have really followed them—Brown v. Board, Miranda. With punitive damages, I submit they haven't done that. So a few courts, five, six courts, can up-end the public policy of the whole Nation.
If you have, for example, with a Supreme Court case that dealt with first amendment rights and libel, New York Times v. Sullivan, five States that simply didn't follow it, the New York Times, I have to worry about those States.
So I think this body, with this subject, to protect this constitutional right, should act; and we cannot leave it to random action by the judiciary.
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Mr. CHABOT. The gentleman's time has expired.
Mr. BACHUS. If we might let the other two respond?
Mr. CHABOT. If you both want to respond.
Mr. PECK. Let me briefly add that if Brown v. Board of Education had been followed, we wouldn't have had Cooper v. Aaron. Where the Supreme Court forced compliance with Brown v. Board of Education, we wouldn't have had many other subsequent cases.
The judiciary is very good at policing itself, and here we are talking about something that you have to evaluate the individual evidence that has been put into that case about how reprehensible an act is. No mathematical formula can do that. That is why you have to leave it to the courts, and the courts are constantly refining those formulas.
Mr. CHABOT. Mr. Owen, did you want to respond to that?
Mr. OWEN. You know, just briefly, that here again I am in the middle, that from a theoretical perspective I would much prefer that it be left with the courts on an individualized case basis and rule basis. But as a practical matter I think treble damages will do pretty good rough justice in a complicated world. It works in anti-trust. It works in consumer protection statutes. It punishes. It gives retribution. And that would be my recommendation as a second-best solution.
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Mr. CHABOT. The gentleman's time has expired.
Mr. BACHUS. Thank all the panel.
Mr. CHABOT. The gentleman from Florida, Mr. Feeney, is recognized for 5 minutes.
Mr. FEENEY. Thank you, Mr. Chairman; and thank all of you for your testimony.
I guess I want to focus on what we are empowered to do under the Constitution. I think Mr. Owen gave us great testimony. We appreciate that. And the bottom line is, your conclusion is the old saw problem: The old saw works in theory; it just doesn't work in practice. And we can debate that, and probably Congress is the best place to have those old saw debates.
But with respect to what we are empowered to do, I am very interested, because part of Mr. Owen—I would like to hear especially from Mr. Peck and Mr. Schwartz. Part of what Mr. Owen has taught us, and of course we remember from our Prosser on Torts, is that punitive damages are quasi-criminal.
As we look at how we deal with the criminal juris prudence on Federal crimes as opposed to regulating State issues, there are some interesting differences there. But we did enact the sentencing guidelines in 1984, and we do expect increasingly judges to follow those guidelines. It will remind I think everybody, because, Mr. Peck, you didn't say what you thought we could do with respect to Federal punitive damages awards.
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But the bottom line is, we establish the courts, other than the Supreme Court, we establish their jurisdiction, and impliedly both with respect to Federal sanctions and civil sanctions, we ought to have the complete, unfettered power. Whether we ought to exercise it is a different question.
The second thing that I would like you to talk a little bit about is the 10th amendment argument, because I am very interested in the fact that the 10th amendment, as Mr. Peck suggests, may prohibit us from basically interfering with a power reserved unto the States. But it occurs to me that the 10th amendment implies equally, no greater or lesser, to both Congress and the Federal court system.
The 10th amendment is not a proscription against what Congress may or may not do, unlike other amendments. It is proscriptional to Federal Government. And to the extent that the Federal Government has told us, for example, in decisions like Campbell and Alliance Resources, that there is an absolute Federal obligation to protect people's property interests and substantive due rights interests under the 14th amendment and elsewhere, the Federal courts, the Supreme Court has already decided that there is not just a power but an obligation to limit certain things that occur in the State court realm. It seems to me that undermines Mr. Peck's argument that we are not empowered to do what the Supreme Court has insisted that they must do in spite of the 10th amendment.
I guess, finally, the question here is, what is the difference between what we may do with respect to Federal punitive damage awards and what we may do getting to practical problems like the fact that people can forum shop in multijurisdictions the repetitive nature of punitive damages? I would like you to delineate for us as best you can what parts of the Constitution and the amendments are implicated by these questions.
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Mr. Schwartz, maybe you can tell us, if we were really draconian here, how far you think we were empowered to go. Mr. Peck, you have already sort of set out the boundaries; and, Mr. Owen, I am happy—you said you were not particularly expert in the constitutional arguments, but thank you for setting up the history of all this.
Mr. SCHWARTZ. First, I would like to submit for the record an article from the Virginia Law Review by Professor Lupo, Statutes Revolving in Constitutional Orbits. With a fancy title, it shows that the 14th amendment empowers this body to enact legislation based on the Supreme Court's decision. The article is the best scholarship I have seen on point, and it makes clear that you have that power.
[The information referred to follows in the Appendix]
Mr. SCHWARTZ. Second, when you talked about guidelines, yes, most people who would be concerned about a defendant's rights would say you can't have a system where there is absolutely no guidelines. Jury, decide how bad they are, and let it go. Somehow something happens when we get over to the tort side. And——
Mr. Conyers is here. Good afternoon, sir.
When you get over to the tort side, guidelines are unnecessary. They are needed. You have unfavorable, unfavored defendants, and some guidance is needed. There is no guidance now in most of our States. Most of our States have no statutes on punitive damages.
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And, third, you talked about the impact on commerce from repetitive awards. Yes, the commerce clause is directed just that, this type of situation where no one State can pass legislation that will help and stop multiple imposition of punitive damages for the same thing. And the Supreme Court ruling cannot control that.
So your questions are very relevant to this hearing and the power of this body to act.
Mr. PECK. Let me very quickly——
Mr. FEENEY. One last thing before I lose my time, because I do want Mr. Peck to respond. But you didn't answer the 10th amendment question about why we ought to mandate States. States may not have punitive damage awards because they don't want them. Now if California wants to tax and regulate and punitive damage itself into despondency and bankruptcy, why is that the business of the Federal Government?
Mr. SCHWARTZ. Because you are empowered to act under the 10th amendment when you are considering well-grounded interests in interstate commerce. Otherwise, this body would be paralyzed. If the action of one State, California, affects the whole Nation by bankrupting a company that is providing jobs throughout this Nation, you have the power to act; and we have cases in our Harvard Journal of Legislation article that support that position.
Mr. PECK. My testimony indicates that I think that you do have power over Federal causes of action, because in the Cooper v. Leatherman case, the courts said that the reexamination clause of the seventh amendment does not apply to punitive damages. That does not mean that the right to jury trial does not apply in the States and they are free to decide that it does or doesn't, as States have come to different conclusions about it. So you do have authority within the Federal system because you are creating the cause of action.
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The causes of action that apply to punitive damages at the Federal level were statutorily created. Because they are not matters of the common law that had been committed to the jury prior to 1791, they are within your jurisdiction to do. That is the measurement that the Court does. It is enunciated in the case of Markman written by Justice Souter.
On the other hand, the argument that my friend Victor here makes about the commerce clause and section 5 of the 14th amendment was rejected by the Supreme Court in the Morrison case, United States v. Morrison, where they struck down the Violence Against Women Act. There, this Congress held voluminous hearings on the connection with commerce. They made findings that said that it deters potential victims from traveling interstate, from engaging in employment in interstate business, from transacting with business in places involved in interstate commerce, by diminishing national productivity, increasing costs, decreasing the supply and demand of interstate products. And the Court said, no, that is insufficient, because it has to be the underlying conduct, the assault on the woman that has to be commerce.
Here, the willful, wanton, malicious conduct that gives rise to punitive damages is not something that is part of a commercial enterprise. There is no market for it. That cannot be commerce.
Second, the Court said that the section 5 of the justification here also did not apply. Why didn't it apply? Because, again, there are ways. The fact is that not all or even a majority of States engage in a violation of due process. There is no finding that that is necessary, that the courts are inadequate to deal with that. And, indeed, as a result of that, they are pointing to the Voting Rights Act as an example where you focus on a particular region where there is a history and a continuing transgression of constitutional rights. Here, you can't do that. And Morrison said it is necessary.
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Moreover, this Committee should be particularly mindful of the Religious Freedom Restoration Act. This was an act passed by Congress almost unanimously to vindicate religious freedom, and the courts struck that down saying that was no right to try to vindicate rights under section 5 of the 14th amendment. This is a court that takes federalism very seriously and will not accept this kind of a judgment.
Mr. CHABOT. The gentleman's time has expired.
The gentleman from Michigan, Mr. Conyers, the distinguished Ranking Member of the full Judiciary Committee, is recognized for 5 minutes.
Mr. CONYERS. Thank you, Chairman Chabot.
I have a statement to enter into the record.
[The prepared statement of Mr. Conyers follows in the Appendix]
Mr. CONYERS. One of the things that bothers me, is this a get punitive damages beginning of a movement in the Congress? The State Farm case is not all that much of a breakthrough. As a matter of fact, the Court reiterated what I think is known, that there is no mathematical formula for determining punitive damages and there is no ratio for compensatory damages and punitive damages.
So, Mr. Owen, who recommends a rule of treble damages, I ask Mr. Schwartz if that meets with his approval.
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Mr. SCHWARTZ. Well, there are two separate things, sir. One would be what the Constitution requires. And people debate about cases, as you know, sir. The Court laid down as a general rule that nine to one was the maximum amount. And I will submit the precise language to this Committee.
The only exception that they talked about—and this is the Constitution—would be in cases where a defendant's conduct was reprehensible and the compensatory damages were very little. A person throws acid at another individual and——
Mr. CONYERS. So the answer is yes.
Mr. SCHWARTZ. But three to one is a policy issue.
Mr. CONYERS. All right. So the answer is no.
Mr. SCHWARTZ. One is constitutional; one is just a matter of policy.
Mr. CONYERS. Well, one of your answers is yes and the other is no.
Mr. SCHWARTZ. Okay.
Mr. CONYERS. Is that right?
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Mr. SCHWARTZ. If I connect with your questions, yes, sir.
Mr. CONYERS. Because, you know, of all the subjects we have got, punitive damages has been a part of the tort law for as far as all of us can recall. They punish defendants for egregious conduct. It is designed to deter others from engaging in similar conduct. They are awarded only in cases where the defendant's conduct has been willful and malicious. What is wrong with that? It is not a perfect system. There has been—I know everybody has memorized all the few instances of excessive awards. But look at the Department of Justice study. Only 3 percent of the trials won by plaintiffs involved punitive damages. Does that present a problem? Mr. Peck?
Mr. PECK. I do not believe it presents any problem at all.
Mr. CONYERS. Well, I yield my time, if there is any left, to the Ranking Member, Mr. Nadler.
Mr. NADLER. Thank you. I have two questions, one for Mr. Schwartz, to follow up on what the distinguished Ranking Member of the full Committee was asking.
Since punitive damages is a deterrent purpose, which everybody agrees to, and since you think that it can be, it is abused and we ought to limit it greatly, Mr. Owens was saying that he thought the same purpose could be served—forget constitutionally whether it is mandated, it is a matter of policy now. Mr. Owens said, well, if you got—I think, if I am not misquoting him, I hope—that, well, if you could do away with punitive damages, the standard treble damages wherever you found reprehensibility would serve the same purpose.
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My question to you is, would you support, would you think it a good idea, sir—forget about punitive damages—but wherever we find gross negligence or deliberate tortious conduct, apply across the board treble damages? Would that be a good idea?
Mr. SCHWARTZ. No.
Mr. NADLER. Why not?
Mr. SCHWARTZ. Because I think you are talking about a ceiling versus a floor. And when—you use two terms there. Gross negligence, if I heard Mr. Conyers correctly, was not the standard he used for punitive damages. He talked about willful conduct.
Mr. NADLER. How about willful conduct?
Mr. SCHWARTZ. With respect to, if you are talking about purposeful, willful conduct where somebody intends a result, I can see having that type of punishment.
Mr. NADLER. Let me specify again with the famous case. Somebody is manufacturing automobiles. They find out that the way they manufacture them is one out of every hundred is going to flip over and injure somebody, and they figure, well, the damages are cheaper than changing it, so we will let that happen, and we will pay the damages whenever they occur. That is my definition of willful: It is reasonably foreseeable that continuing in this course of conduct is going to injure people and we are going to do it anyway. Are automatic treble damages okay?
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Mr. SCHWARTZ. With due respect, sir, our definitions of willful are different.
Mr. NADLER. In such a case. Never mind the legal definition of willful. I just defined a situation. In that type of situation, would you say, all right, as a matter of policy, eliminate punitive damages and we will deter such conduct by having—if you proved this kind of conduct, that kind of mindset—automatic treble damages.
Mr. SCHWARTZ. Okay. If you did it in a limited number of times and you didn't punish people again and again for the same thing, I could subscribe to what you are saying. But if you are going to—if they make 100,000 cars and you are going to punish them three to one for every single incident that occurs, I don't agree with that. If you are talking about one particular case or two particular cases, I do agree. But I think if you do it again and again, that is not right.
Mr. NADLER. If that was in the confines of each jurisdiction, once.
Mr. SCHWARTZ. What will come in evidence is what they did nationally. You have tried cases, sir, and you know——
Mr. NADLER. No, I haven't.
Mr. SCHWARTZ. All right. Well, if you had that opportunity, the way evidence goes in front of a jury is not in neat little boxes. And the picture of what the company did on a national basis will arise. But if you had some way of limiting the incident to what Ford did or what Buick did or what any of the car companies did with a specific wrongdoing and that was the punishment, three to one, if it was adequate enough would be enough. But I wouldn't hit them again and again 50 times.
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Mr. CHABOT. The gentleman's time has expired, but he can ask one more question.
Mr. NADLER. Let me just comment before I ask Mr. Peck the question that I would think if they kept doing it they ought to be hit again and again. But that is a different—that is beside the point right now.
Mr. Peck, going back to an earlier part of this hearing, the proposal has been made that punitive damages, since you want a deterrent, it should be limited by any reference to the actual damages because, after all, the deterrence impact on a large tort feasor may have no reference to the actual damages to one particular victim who might not have a lot of damages, but the next guy might have a lot of damages, and never mind the next hundred thousand victims. So you want a big deterrent. On the other hand, that might be an unjust enrichment for a particular plaintiff.
So the proposal's been made, as you know, that perhaps we ought not to cap the damages, the punitive damages for the tort-feasor, but cap the amount that the defendant gets. Now—not the defendant, that the plaintiff gets, so as to have no unjust enrichment.
Now, an objection to that proposal has been that you have to allow adequate punitive damages so it is worthwhile for the attorney in terms of his costs of proving the egregious conduct. I mean, if he can't get a very large award, it is just not affordable to bringing in the extra evidence to prove the egregious evidence.
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What would you say to a proposal that said, all right, we will not limit the size of a—there will be no caps on size of punitive damages. The more egregious, the more hysterical the jury gets, the more they can do—the more justifiably hysterical the jury gets, I mean. And we will specifically—we will limit how much the plaintiff can get, but the contingency fee of the attorney bringing it will have some relationship to the total cost so that he will have the incentive or she will have the incentive to try to get the punitive damages where society as a matter of deterrence would want this done.
Mr. PECK. Well, let me say, a number of the States have passed laws like this. They regard punitive damages essentially as performing a private Attorney General function, encouraging the exposure of bad actors. And, you know, that means also those instances where the harm was not easily detected, which the Supreme Court, in addition to what Mr. Schwartz said, said it is a higher ratio, too. But in almost all of the statutes, as Professor Owens' testimony indicates, what they do is allow the contingency fee to be taken over out of the whole amount, and then they split up the remaining amount between the State and the plaintiff, and sometimes 75 percent of it going to the State for that function.
Now I think that when you reach a certain level in punitive damages, when you are not talking about your median award of 38,000, but when you are talking about large awards, there is some merit to this. Although I would think that the defense side would object to that, because you have now given the State an interest in the award. They may want their judges to award higher punitive damages because each of these cases get de novo review by the judges; and, therefore, they have an incentive to promote punitive damages in the State, which leads to the possible argument that this is a taking.
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Mr. CHABOT. The gentleman's time has expired.
I would like to thank the panel for very enlightening testimony here this afternoon. I think all of us that had an opportunity to hear it and question definitely gained something from this, and it will certainly enter into our consideration as to whether it is proper and appropriate for Congress to act on this or not.
Mr. Nadler.
Mr. NADLER. Thank you, Mr. Chairman. I also thank the panel.
Mr. Chairman, I ask unanimous consent that all Members have 5 legislative days to revise and extend their remarks, to submit additional materials for the record, and to submit questions in writing for the witnesses.
Mr. CHABOT. Without objection.
If there is no further business to come before the Committee, we are adjourned.
[Whereupon, at 3:25 p.m., the Subcommittee was adjourned.]
A P P E N D I X
Statements Submitted for the Hearing Record
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PREPARED STATEMENT OF CONGRESSMAN STEVE KING
Thank you, Mr. Chairman, for holding this hearing today. Runaway punitive damages are hurting our national economy. It is up to Congress to do something about this drag on our national economy. We cannot rely on the Supreme Court to step in every time a grossly excessive punitive damages award is made.
We must do something to end the danger of multiple punitive damages imposed in multiple cases for the exact same conduct. We must restore justice and equity to the system. Among other ideas, I support reducing or eliminating the contingency fees on punitive damages awards. In addition, currently, federal judges sentence criminal defendants uniformly using the U.S. Sentencing Guidelines. We should explore the option of allowing judges to set punitive damages with guidance from Congress in order to insure uniformity and reasonableness.
Thank you Mr. Chairman. I look forward to hearing from the witnesses.
PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR.
Ever since the Republicans have been in control of the House they've tried to limit or eliminate punitive damages in many different areas, including medical malpractice, products liability, and other personal injury cases—areas that have traditionally been within the province of the States. Because the title of this hearing includes the words ''Potential Congressional Responses'' to the State Farm case, I'm worried that the majority is about to embark on yet another mission to eliminate punitive damages in tort law.
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Punitive damages are an important part of tort law. They punish defendants for egregious conduct and are designed to deter others from engaging in similar conduct. They are awarded only in cases where the defendant's conduct has been wilful and malicious.
Without punitive damages in tort cases, verdicts such as those involving the Dalkon Shield would never have been rendered and corrupt defendants wouldn't have been punished for their bad acts. In fact, the Dalkon Shield IUD is an excellent example of how the system worked to protect the lives of millions of women. Eight punitive damage awards were made before A.H. Robins recalled the product. If they faced no accountability for punitive damages, manufacturers and others would have no reason to fear and would be less likely to act prudently to improve the safety of their products by better design and clear warnings about possible hazards.
While the system is not flawless, and while there have been instances of excessive awards, overall our society has achieved the right result. In fact, excessive punitive damage awards are quite rare. A new study by the Justice Department, which reviewed 10,278 tort trials in 1996 in the nation's 75 largest countries, found that punitive damages were awarded in only 162 cases, or 3.3% of the 4,879 trials won by plaintiffs. The study also found that the median award from a jury was $27,000 and that most punitive damage awards were for less than $40,000—hardly a number one could call ''excessive.''
So when we say we are holding an oversight hearing into the potential Congressional responses to the State Farm case, I get a little worried. I question whether Congress even has a role in this debate to begin with. Principles of federalism require that Congress not intrude into matters that are traditionally of state concern. Punitive damages have long been part of state tort law—they serve the state's interests in punishing unlawful conduct and deterring its repetition. Some states have limits on punitive damages and some don't have any. But the point is that it is the states, not Congress, deciding these issues.
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But even if I agreed that Congress had any kind of role following the Supreme Court's decision, I still don't see what the big deal is. Those who don't like to see plaintiffs recover punitive damages have been chomping at the bit since the State Farm decision. But the decision was hardly a breakthrough, as some tort reform advocates claim.
Rather, the Supreme Court reiterated what we all already know: there is no mathematical formula for determining punitive damages and there is no set ratio for compensatory damages and punitive damages. Lower courts must consider factors such as the reprehensibility of the defendant's conduct, the disparity between the harm suffered by the plaintiff and the punitive damages award, and the difference between the punitive damages awarded by the jury and those in other similar cases. The only thing the Court did that was new was limit the use of out-of-state conduct to determine punitive damages. Big deal.
Don't we have better things to do with our time?
Material Submitted for the Hearing Record
MATERIAL SUBMITTED BY MR. VICTOR SCHWARTZ
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(Footnote 1 return)
1 Linda L. Schlueter & Kenneth R. Redden, Punitive Damages §1.0, at 1 (4th ed. 2000) (finding that punitive damages ''evolved from the common law . . . to meet certain societal needs such as compensation for mental anguish or other intangible harms, punishment and deterrence of wrongdoers, and as a substitute for revenge''). Schlueter and Redden also note that use of multiple damages for these purposes existed at least as far back as the Code of Hammurabi in 2000 B.C. Id.
(Footnote 2 return)
Huckle v. Money, 95 Eng. Rep. 768 (C.P. 1763); Wilkes v. Wood, 98 Eng. Rep. 489 (C.P. 1763).
(Footnote 3 return)
See City of West Covina v. Perkins, 525 U.S. 234, 247 (1999).
(Footnote 4 return)
Wilkes, 98 Eng. Rep. at 498–99.
(Footnote 5 return)
See Genay v. Norris, 1 S.C.L. (1 Bay) 6 (S.C. 1784).
(Footnote 6 return)
Coryell v. Colbaugh, 1 N.J.L. 77, 77 (N.J. 1791).
(Footnote 7 return)
See, e.g., Harton v. Reavis, 4 N.C. 256 (N.C. 1815).
(Footnote 8 return)
Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 255 (1984).
(Footnote 9 return)
Day v. Woodworth, 54 U.S. (13 How.) 363, 371 (1851).
(Footnote 10 return)
Id. (emphasis added).
(Footnote 11 return)
Pendleton v. Davis, 46 N.C. 98, 1853 WL 1452, at 1 (1853).
(Footnote 12 return)
Worthington v. Bynum, 290 S.E.2d 599, 606 (N.C. 1982).
(Footnote 13 return)
499 U.S. 1 (1991).
(Footnote 14 return)
State Farm Mut. Auto. Ins. Co. v. Campbell, 123 S. Ct. 1513, 1524 (2003), characterizing Haslip, 499 U.S. at 23–24.
(Footnote 15 return)
509 U.S. 443 (1993).
(Footnote 16 return)
Id. at 18 (footnote omitted).
(Footnote 17 return)
Honda Motor Co., Ltd. v. Oberg, 512 U.S. 415 (1994).
(Footnote 18 return)
517 U.S. 559 (1996).
(Footnote 19 return)
Id. at 575–76.
(Footnote 20 return)
532 U.S. 424 (2001).
(Footnote 21 return)
U.S. Dep't of Justice, Bureau of Justice Statistics, Tort Trials and Verdicts in Large Counties, 1996 (NCJ 179769), at 1 (Aug. 2000).
(Footnote 22 return)
Theodore Eisenberg, et al., Juries, Judges, and Punitive Damages: An Empirical Study, 87 Cornell L. Rev. 743 (2002).
(Footnote 23 return)
U.S. Dep't of Justice, Bureau of Justice Statistics, Civil Justice Survey of State Courts, 1992: Civil Jury Cases and Verdicts in Large Counties, at 1 (1995).
(Footnote 24 return)
Thomas A. Eaton, et al., Another Brick in the Wall: An Empirical Look at Georgia Tort Litigation in the 1990s, 34 Ga. L. Rev. 1049, 1094 (2000).
(Footnote 25 return)
Neil Vidmar & Mary R. Rose, Punitive Damages by Juries in Florida: In Terrorem and in Reality, 38 Harv. J. Legis. 487, 487 (2001).
(Footnote 26 return)
Jury Verdict Research, 1998 North Carolina Verdict Survey 9 (1998).
(Footnote 27 return)
Michael L. Rustad, Unraveling Punitive Damages: Current Data and Further Inquiry, 1998 Wis. L. Rev. 15, 69.
(Footnote 28 return)
Stephen Daniels & Joanne Martin, Myth and Reality in Punitive Damages, 75 Minn. L. Rev. 1, 64 (1990) (footnotes omitted).
(Footnote 29 return)
Neil Vidmar, Medical Malpractice and the American Jury 254 (1995).
(Footnote 30 return)
Deborah Jones Merritt & Kathryn Ann Barry, Is the Tort System in Crisis? New Empirical Evidence, 60 Ohio St. L.J. 315, 388 (1999).
(Footnote 31 return)
Vidmar & Rose, supra note 25, 38 Harv. J. Legis. at 487.
(Footnote 32 return)
Michael Rustad & Thomas Koenig, Reconceptualizing Punitive Damages in Medical Malpractice: Targeting Amoral Corporations, Not ''Moral Monsters,'' 47 Rutgers L. Rev. 975, 1034–35 (1995).
(Footnote 33 return)
Eisenberg, supra note 22, 87 Cornell L. Rev. at 779.
(Footnote 34 return)
Rustad & Koenig, supra note 32, 47 Rutgers L. Rev. at 1027.
(Footnote 35 return)
William M. Landes & Richard A. Posner, The Economic Structure of Tort Law 185 (1987).
(Footnote 36 return)
See, e.g., Eisenberg, supra note 22, 87 Cornell L. Rev. at 756; Vidmar & Rose, supra note 25, 38 Harv. J. Legis. at 500–05.
(Footnote 37 return)
Erik Moller, et al., Punitive Damages in Financial Injury Jury Verdicts, 28 J. Legal Stud. 283 (RAND 1999).
(Footnote 38 return)
Campbell, 123 S. Ct. at 1524, quoting BMW, 517 U.S. at 582 (emphasis in original, citation omitted).
(Footnote 39 return)
Id.
(Footnote 40 return)
Id. (emphasis added).
(Footnote 41 return)
Id.
(Footnote 42 return)
Id. (there is no ''bright-line ratio which a punitive damage award cannot exceed'').
(Footnote 43 return)
Id. (citation omitted).
(Footnote 44 return)
Id. (citation omitted).
(Footnote 45 return)
TXO, 509 U.S. at 460 (emphasis added).
(Footnote 46 return)
Campbell, 123 S.Ct. at 1521.
(Footnote 47 return)
BMW, 517 U.S. at 572.
(Footnote 48 return)
Campbell, 123 S.Ct. at 1522.
(Footnote 49 return)
Id.
(Footnote 50 return)
Id.
(Footnote 51 return)
42 U.S.C. §1981a(b)(1).
(Footnote 52 return)
Id. at §1981a(b)(3).
(Footnote 53 return)
See Moller, supra note 37.
(Footnote 54 return)
United States v. Lopez, 514 U.S. 549, 577 (1995).
(Footnote 55 return)
Silkwood, supra, 464 U.S. at 255.
(Footnote 56 return)
BMW, supra, 517 U.S. at 568.
(Footnote 57 return)
Campbell, supra, 121 S.Ct. at 1523.
(Footnote 58 return)
Id. at 1522.
(Footnote 59 return)
Gregory v. Ashcroft, 501 U.S. 452, 460 (1991).
(Footnote 60 return)
See, e.g., N.H. Rev. Stat. §507:16 (outlawing punitive damages).
(Footnote 61 return)
Craig S. Bonnell, Back and Forth with the I.R.S.: Taxation of Wrongful Death Damages in Alabama, 17 Cumb. L. Rev. 53, 68 (1987).
(Footnote 62 return)
529 U.S. 598 (2000).
(Footnote 63 return)
Id. at 608 (citations omitted).
(Footnote 64 return)
Cooper, supra, 532 U.S. at 432.
(Footnote 65 return)
Lopez, supra, 514 U.S. at 561, quoted in Morrison, supra, 529 U.S. at 610.
(Footnote 66 return)
Morrison, supra, 529 U.S. at 610.
(Footnote 67 return)
Id.
(Footnote 68 return)
Lopez, supra, 514 U.S. at 562, quoted in Morrison, supra, 529 U.S. at 612.
(Footnote 69 return)
Morrison, supra, 529 U.S. at 612–13, quoting Lopez, supra, 514 U.S. at 564.
(Footnote 70 return)
Id. at 613, quoting Lopez, supra, 514 U.S. at 564.
(Footnote 71 return)
Id., quoting Lopez, supra, 514 U.S. at 577 n.2.
(Footnote 72 return)
Id. at 614 (citation omitted).
(Footnote 73 return)
Id.
(Footnote 74 return)
Id. at 618.
(Footnote 75 return)
Id. at 619–20.
(Footnote 76 return)
Id. at 626.
(Footnote 77 return)
TXO, supra, 509 U.S. at 457 (citations omitted).
(Footnote 78 return)
See, e.g., Restatement (Second) of Torts §908, Comment e (1977); Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35 (Tex. 1998); Schaffer v. Edward D. Jones & Co., 521 N.W.2d 921 (N.D. 1994); Tetuan v. A.H. Robins Co., 738 P.2d 1210 (Kan. 1987).
(Footnote 79 return)
Utah Code Ann. §78–18–1(3).
(Footnote 80 return)
See Cheatham v. Pohle, 789 N.E.2d 467 (Ind. 2003).
(Footnote 81 return)
See, e.g., Or. Rev. Stat. §18.540 (60 percent).
(Footnote 82 return)
Dardinger v. Anthem Blue Cross & Blue Shield, 781 N.E.2d 121 (Oh. 2002).
(Footnote 83 return)
Kirk v. Denver Publishing Co., 818 P.2d 262 (Colo. 1991)(statute designating one-third of punitive damage award as due to state general fund violated state and federal constitutions' taking clauses).
(Footnote 84 return)
See Huckle v. Money, 95 Eng. Rep. 768 (C.P. 1763) (first case to use the term ''exemplary damage,''); Wilkes v. Wood, 98 Eng. Rep. 489 (C.P. 1763); Dorsey D. Ellis Jr., Fairness and Efficiency in the Law of Punitive Damages, 56 S. Cal. Rev. 1, 1 (1982).
(Footnote 85 return)
See Victor E. Schwartz et al., Reining in Punitive Damages ''Run Wild'': Proposals for Reform by Courts and Legislatures, 65 Brook. L. Rev. 1003, 1007–08 (1999).
(Footnote 86 return)
See Southern Kan. Ry. v. Rice, 38 Kan. 898 (1888) ($35 costs and fees, $10 injury to feelings, $71.75 punitive); Woodman v. Town of Nottingham, 49 N.H. 387 (1870) ($578 actual, $100 exemplary). See also R. Blatt et al., Punitive Damages: A State By State Guide To Law And Practice §1.2, at 5 (1991) (''[G]enerally before 1955, even if punitive damages were awarded, the size of the punitive damage award in relation to the compensatory damage award was relatively small, as even nominal punitive damages were considered to be punishment in and of themselves''); Dorsey D. Ellis Jr., Fairness and Efficiency in the Law of Punitive Damages, 56 S. Cal. L. Rev. 1, 2 (1982) (For most of their history, punitive damages were ''rarely assessed and likely to be small in amount.'').
(Footnote 87 return)
J. Ghiardi & J. Kircher, Punitive Damages Law & Practice §21.01, at 1 (1985).
(Footnote 88 return)
See, e.g., Rubeck v. Huffman, 374 N.E.2d 411, 413 (Ohio 1978) (''caused by intentional, reckless, wanton, willful and gross acts or by malice inferred from conduct and surrounding circumstances''); Seals v. St. Regis Paper Co., 236 So. 2d 388, 392 (Miss. 1970) (gross negligence and ''reckless indifference to the consequences''). See also J. Sales & K. Cole, Punitive Damages: A Relic That has Outlived Its Origins, 37 Vill. L. Rev. 1117, 1130–38 (1984) (discussing standards of conduct giving rise to punitive damages award).
(Footnote 89 return)
J. Ghiardi & J. Kircher, Punitive Damages Law & Practice §21.01, at 1 (1985).
(Footnote 90 return)
This trend has led one commentator to suggest that ''[p]unitive damages have replaced baseball as our national sport.'' Theodore B. Olson, Rule of Law: The Dangerous National Sport of Punitive Damages, Wall St. J., Oct. 5, 1994, at A17. See also Malcolm E. Wheeler, A Proposal for Further Common Law Development of the Use of Punitive Damages in Modern Products Liability Litigation, 40 Ala. L. Rev. 919, 919 (1989) (''Today, hardly a month goes by without a multimillion-dollar punitive damages verdict in a product liability case.'').
(Footnote 91 return)
TXO Prod. Corp. v. Alliance Res. Corp., 509 U.S. 443, 475 (1993) (Kennedy, J., concurring) (citing Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 9–12, 18 (1991) and Gertz v. Robert Welch, Inc., 418 U.S. 323, 350 (1974)).
(Footnote 92 return)
Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 18 (1991).
(Footnote 93 return)
See Victor E. Schwartz et al., Reining in Punitive Damages ''Run Wild'': Proposals for Reform by Courts and Legislatures, 65 Brook. L. Rev. 1003, 1007 (1999).
(Footnote 94 return)
Roginsky v. Richardson-Merrell, Inc., 378 F.2d 832, 839 (2d Cir. 1967) (''The legal difficulties engendered by claims for punitive damages on the part of hundreds of plaintiffs are staggering. . . . We have the gravest difficulty in perceiving how claims for punitive damages in such a multiplicity of actions throughout the nation can be so administered as to avoid overkill.'').
(Footnote 95 return)
State Farm Mut. Auto. Ins. Co. v. Campbell, 123 S. Ct. 1513 (2003); Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001); BMW of N. Am. v. Gore, 517 U.S. 559 (1996); Honda Motor Co., Ltd. v. Oberg, 512 U.S. 415 (1994); TXO Prod. Corp. v. Alliance Res. Corp., 509 U.S. 443 (1993); Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991); Browning-Ferris Indus. of Vermont, Inc. v. Kelco Disposal, Inc., 492 U.S. 257 (1989).
(Footnote 96 return)
See Campbell v. State Farm Auto. Mut. Ins. Co., 65 P.3d 1134 (Utah 2001), rev'd 123 S. Ct. 1513 (2003).
(Footnote 97 return)
See Bocci v. Key Pharmaceuticals, Inc., 35 P.3d 1106 (Or. App. 2001), vacated by 123 S. Ct. 1781 (2003).
(Footnote 98 return)
See BMW of N. Am. v. Gore, 646 So. 2d 619 (1994), rev'd, 517 U.S. 559 (1996).
(Footnote 99 return)
347 U.S. 483 (1954).
(Footnote 100 return)
384 U.S. 436 (1966).
(Footnote 101 return)
410 U.S. 113 (1973).
(Footnote 102 return)
376 U.S. 254 (1964).
(Footnote 103 return)
The Sept. 10, 2003 editorial, Punitive, Schmunitive, also is available online at http://www.wsj.com (subscription only).
(Footnote 104 return)
376 U.S. at 279–280. The Court extended its rule some time later to public figures in Curtis Publishing Co. v. Butts, 388 U.S. 130 (1967).
(Footnote 105 return)
123 S. Ct 1781 (2003).
(Footnote 106 return)
On remand from the U.S. Supreme Court, the lower court allowed out-of-state lawful conduct to be considered as a basis to sustain the punitive damages award. Bocci v. Key Pharmaceuticals, Inc., 2003 WL 22097104 (Or. App. Sept. 10, 2003).
(Footnote 107 return)
The Model Act is also available online at http://www.alec.org.
(Footnote 108 return)
532 U.S. 425 (2001).
(Footnote 109 return)
123 S. Ct. at 1523.
(Footnote 110 return)
William Schwarzer, Punishment Ad Absurdum, 11 Cal. Law 116 (Oct. 1991). See also Juzwin v. Amtorg Trading Corp., 705 F. Supp. 1053, 1064 (''[T]he court holds that due process places a limit on the number of times and the extent to which a defendant may be subjected to punishment for a single course of conduct. Regardless of whether a sanction is labeled 'civil' or 'criminal' in nature, it cannot be tolerated under the requirements of due process if it amounts to unrestricted punishment''), vacated, 718 F. Supp. 1233 (D. N.J. 1989), rev'd on other grounds sub. nom. Juzwin v. Asbestos Corp., 900 F.2d 686 (3d Cir.), cert. denied, 498 U.S. 896 (1990); In re N. Dist. Of Calif. ''Dalkon Shield'' IUD Prod. Liab. Litig., 526 F. Supp. 887, 889 (N.D. Cal. 1981) (''A defendant has a due process right to be protected against unlimited multiple punishment for the same act''), vacated and remanded on other grounds, 693 F.2d 847 (9th Cir. 1982), cert. Denied, 459 U.S. 1171 (1983); Racich v. Celotex Corp., 887 F.2d 393, 398 (2d Cir. 1989) (''we agree that the multiple imposition of punitive damages for the same course of conduct may raise serious constitutional concerns, in the absence of any limiting principle''); In re Fed. Skywalk Cases, 680 F.2d 1175, 1188 (8th Cir.) (Heaney, J., dissenting) (unlimited punishment for one course of conduct ''would violate the sense of 'fundamental fairness' that is essential to constitutional due process''), cert. Denied, 459 U.S. 988 (1982); Magallanes v. Superior Ct., 167 Cal. App. 3d 878, 888 (1985) (''It is also fair to ask whether a defendant who has been punished with punitive damages when the first case is tried should be punished again when the second, or the tenth, or the hundredth case is tried.''); King v. Armstrong World Indus., Inc., 906 F.2d 1022, 1031 (''It must be said that a strong arguable basis exists for applying the due process clause . . . to a jury's award of punitive damages in a mass tort context.''), reh'g denied, 914 F.2d 251 (5th Cir. 1990), cert. Denied, 500 U.S. 942 (1991); McBride v. General Motors Corp., 737 F. Supp. 1563, 1570 (M.D. Ga. 1990) (''due process may place a limit on the number of times and the extent to which a defendant may be subjected to punishment for a single course of conduct'').
(Footnote 111 return)
Ga. Code Ann. 51–12–5.1(e)(1) (West 2003).
(Footnote 112 return)
See Edwards v. Armstrong World Indus., Inc., 911 F.2d 1151, 1155 (5th Cir. 1990) (''If no change occurs in our tort or constitutional law, the time will arrive when [defendant's] liability for punitive damages imperils its ability to pay compensatory claims and its corporate existence.'')
(Footnote 113 return)
Senate Bill No. 78 (105th Cong. (1997)) also is available online at http://www.thomas.gov.