NU Online News Service, April 7, 2003, 5:32 p.m. EDT — Washington
A U.S. Supreme Court decision today overturning a $145 million punitive damage award against State Farm Mutual Automobile Insurance Company, Bloomington, Ill., could have implications for other litigation reform efforts.
The decision in the case, State Farm v. Campbell, holds that a $145 million punitive damage award in a Utah case in which compensatory damages were assessed at $1 million was excessive and violated the Due Process Clause of the 14th Amendment to the U.S. Constitution.
In issuing its 6-3 opinion, the court noted that the punitive damage award was calculated in part by presenting evidence of alleged misconduct by State Farm in other states, even though State Farm's actions may have been legal in the states where they occurred.
However, the Supreme Court said, a state cannot punish a defendant for conduct that is legal where it occurred.
"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," the court said in a opinion written by Justice Anthony Kennedy.
Victoria Fimea, senior counsel for litigation with the American Council of Life Insurers, Washington, which filed an amicus brief in the case, says the court made a very important statement that could apply to the controversy about class-action litigation.
In many class actions, she says, plaintiffs obtain "outrageous" punitive damage awards by bringing in evidence of extra-territorial conduct that can be used to inflame the emotions of the jury.
Defendants can look to the decision in the State Farm case for guidance on the award of punitive damages in class actions, Fimea says.
Meanwhile, she adds, the decision helps demonstrate the need for federal reform of class-action procedures. Several class-action reform bills are already pending in Congress.
A consumer started the State Farm case by suing the company over allegations of fraud and intentional infliction of emotional distress that came up in connection with an auto insurance claim.
During the trial, the plaintiff was allowed to present evidence of alleged national efforts on the part of State Farm to cap claims payments and meet corporate goals.
