US-CourtOfAppeals-10thCircuit-SealAlthough the Supreme Court’s modern due process cases have given lower courts a framework for deciding whether an award of punitive damages is excessive, some lower courts have been misapplying the Supreme Court’s guidance, refusing to disturb (or inadequately reducing) punitive awards that are much larger than necessary to accomplish the legitimate retributive and deterrent purposes of punitive damages.

Lompe v. Sunridge Partners, LLC, which is currently pending before the Tenth Circuit, is illustrative.

The case was brought by a tenant in a Wyoming apartment building who was overcome by carbon monoxide from a malfunctioning furnace.  She alleged that the defendants—the owner of the apartment building and its management company—negligently adopted a policy of repairing or replacing furnaces only as problems arose rather than engaging in regular preventative inspections and maintenance.

Even though the evidence showed that the defendants’ policy was consistent with industry practice, the plaintiff prevailed and was awarded $3 million in compensatory damages (reduced to $2.7 million to account for her comparative fault) and a total of $25.5 million in punitive damages—$3 million against the building owner and $22.5 million against the management company.  The punitive awards were equivalent to years of (already distributed) profits for the defendants, and the combined punishment was unprecedented in Wyoming for any type of conduct.  Nevertheless, concluding that the jury must have found the conduct to be particularly reprehensible because it awarded so much money, the district court refused to disturb the punitive awards.

On behalf of the Chamber of Commerce of the United States, we filed an amicus brief identifying several errors in the district court’s excessiveness analysis.

First, the district court failed to engage in the exacting review required by the Due Process Clause and improperly deferred to “phantom” factual findings not actually made by the jury.  Although it is often difficult to tell when courts are merely giving lip service to the Supreme Court’s requirement that review of punitive awards for excessiveness be “exacting,” courts that repeatedly cite precedent expressing the high deference usually given to jury awards of compensatory damages plainly are not fulfilling their mandate.  Moreover, as discussed in a prior post, courts sabotage the excessiveness review when they circularly allow the size of the award to justify itself by deferring to “phantom” factual findings that the jury did not expressly make on the assumption that the size of the award must reflect a finding of high reprehensibility.  Unless a fact is necessary to the jury’s verdict, or expressly resolved in a special interrogatory, the court must review the record and resolve factual issues related to the question of excessiveness for itself.

Second, in analyzing the ratio guidepost, the court committed at least two errors.  It failed to reduce the $3,000,000 compensatory damages to reflect the plaintiff’s negligence, thereby increasing the denominator of the ratio guidepost.  In so doing, the court undermined the purposes of the ratio guidepost by untethering the punishment from the harm caused by the defendants.  More important for purposes of this case, the district court compared the punitive award against each defendant to the full amount of compensatory damages instead of comparing each defendant’s punitive award to the share of the compensatory award for which it was held responsible.  As a result, the court deemed that the ratio for the building owner was a reasonable-sounding 1:1 ($3,000,000/$3,000,000), while the ratio for the management company was 7.5:1 ($22,500,000/$3,000,000).  Double-counting the compensatory damages in this way insulates excessive awards by artificially lowering the ratio applicable to each defendant.  Here, for example, if the district court had used each defendant’s share of the compensatory damages as the denominator (and excluded the plaintiff’s share), the ratios would have been 4:1 and 11.5:1—ratios that are much less likely to survive review.

Finally, the court deviated from the modern trend by refusing to reduce the punitive damages to the amount of compensatory damages or lower even though the compensatory damages unquestionably were substantial and the conduct was nowhere near the high end of the spectrum of punishable conduct.  For purposes of making this point, we surveyed all appellate cases involving due process review of punitive awards over the last decade in which the final compensatory damages were $2.7 million or greater (excluding only six cases involving state-funded terrorism by the Islamic Republic of Iran).  Among the 46 cases fitting that description—involving the entire spectrum of reprehensibility—the median ratio is 0.95:1 and the mean ratio is 1.33:1.  Like the Supreme Court in Exxon Shipping Co. v. Baker, we think that this empirical analysis strongly supports the view that courts should be imposing ratios of 1:1 or less in almost every case in which the compensatory damages are substantial and the conduct is not exceptionally reprehensible.