The threat of large punitive damages awards is particularly acute for businesses, large and small.  Like many of its counterparts in other states, the Montana legislature sought to relieve businesses of the unpredictability and hydraulic pressure to settle created by the risk of uncabined punitive awards by imposing a cap on such awards: the lesser of $10 million or 3% of a defendant’s net worth.

615px-Flag_of_Montana.svgThough similar restrictions have generally, but not always, withstood state constitutional challenge, a Montana state trial court judge struck down the cap as unconstitutional a little over three months ago.  The defendant, with support from the Montana Attorney General as intervenor and two Montana business organizations as amici, has urged the Montana Supreme Court to reverse the lower court and uphold the constitutionality of the cap.  (For copies of their briefs, click here and search for case DA 14-0113). 

The case is Masters Group International, Inc. v. Comerica.  The suit started as one by a third party against Masters, a manufacturer of office supplies, for repayment of a loan.  Masters claimed not to have the money to repay the loan because Comerica, a bank, had improperly seized Masters’ funds.  Masters impleaded Comerica as a third-party defendant, alleging that the bank reneged on its agreement to delay collection on a line of credit, thereby preventing Masters from acquiring another line of credit with a different bank and effectively putting Masters out of business.  After a ten-day trial, the jury awarded Masters $41.5 million in compensatory damages and another $10.5 million in punitive damages.  In reviewing the verdict, the trial court concluded that punitive damages were justified because Comerica had swept Masters’ accounts without notice or cause and then misled Masters regarding its reasons for doing so.

The $10.5 million exceeded Montana’s statutory cap.  Masters, however, challenged application of the statutory cap on waiver and constitutional grounds.  Masters argued that Comerica’s failure to produce evidence of its net worth precluded invocation of the cap.  Though such a failure would presumably waive a defendant’s right to rely on the alternative 3%-of-net-worth ground for application of the cap, it logically should have no bearing whatever on the $10 million alternative limit.  Nonetheless, the trial court agreed with Masters and concluded that Comerica had waived its entitlement to rely on either part of the punitive damages cap.

Despite having found a waiver, the trial court proceeded to consider the constitutional issue.  The trial court concluded that the statutory cap violated the provision in Montana’s constitution guaranteeing the right to a jury trial, which the court found to be inviolate and fundamental, “deserving of the highest level of court scrutiny and protection.”  Montana’s cap on punitive damages, it reasoned, too greatly interferes with the right because it arbitrarily reduces a jury’s verdict without regard for the facts of the particular case.

The Montana Attorney General and the business amici make a full-throated and persuasive case for the cap’s constitutionality.  To start, they take issue with the trial court’s application of exacting scrutiny; they rightly argue that because plaintiffs have no constitutional right to punitive damages, the statute need have only a rational basis to withstand constitutional challenge.  For that reason, the Montana Supreme Court itself has previously recognized the authority of legislatures to restrict the availability of punitive damages.  In Meech v. Hillhaven West, Inc., for example, the court upheld the constitutionality of restrictions on punitive damages for wrongful discharge, declaring them “rationally related to a legitimate state interest”: promoting the financial interests of employers by reducing the threat of large judgments for certain conduct.

The Montana cap has more than just a rational basis, the AG and amici argue, because it enables parties, particularly businesses, to assess litigation risks more accurately and also encourages more reasonable settlements.  The role of the jury is simply to decide factual issues, and, if its decision entitles the plaintiff to a remedy, to select among legally available remedies.  It is for the legislature to decide what remedies are legally available.  The cap, a restriction on the legally available remedies, therefore does not violate the Montana Constitution’s guarantee of the right to a jury trial.

Unlike compensatory damages, punitive damages are not meant to vindicate any personal right of a plaintiff.  Instead, they serve broader societal interests in punishing wrongdoers and deterring future misconduct.  It is perfectly sensible, then, for legislatures to have the freedom to regulate punitive damages to ensure the right balance between societal interests.  And indeed, many legislatures outside of Montana have thought it prudent to do so, and courts in those states have more often than not upheld the restrictions against constitutional challenge.  (Many of these cases are collected in Kristine Cordier Karnezis, Validity of State Statutory Caps on Punitive Damages, in 103 A.L.R. 5th 379 (2002).).

We will have to wait and see whether the Montana Supreme Court continues along the path foreshadowed by its prior decisions.  It should.  And needless to say, whether or not the cap is upheld, it is no substitute for separate state-law or constitutional excessiveness analysis when there is a colorable claim that a $10 million punitive award is itself excessive.  We will have a post on that topic in the near future.