Although the Supreme Court identified three guideposts for evaluating whether a punitive award is unconstitutionally excessive 23 years ago in BMW v. Gore and refined those guideposts 16 years ago in State Farm v. Campbell, lower courts continue to make conceptual errors interpreting and applying the guideposts. The Seventh Circuit will have the opportunity to address and rectify several such errors made by a district court in upholding a $3 million punitive award in Saccameno v. U.S. Bank National Association.

Saccameno involves a mortgagor who went into default before entering bankruptcy. Over several years, Saccameno satisfied all conditions of her bankruptcy, including mortgage payments to defendant Ocwen Loan Servicing, LLC. After Saccameno received her discharge, an Ocwen employee mistakenly coded her bankruptcy as “dismissed,” which meant that Saccameno’s loan was returned to the foreclosure department. Ocwen employees failed to fully remedy the error, and made a number of additional mistakes in handling the loan, over the next two years. At that point, Saccameno brought suit for breach of contract and violation of several Illinois and federal consumer-protection statutes.

The jury awarded Saccameno $500,000 for her breach-of-contract and federal statutory claims. Those claims do not support an award of punitive damages. The jury also awarded Saccameno $82,000 in compensation and $3 million in punitive damages for violation of the Illinois consumer-protection statute. In refusing to reduce the punitive award, the trial court compared the punitive damages with the entire $582,000 in compensatory damages awarded by the jury and concluded that the resulting ratio of approximately 5:1 was consistent with due process.

On behalf of the Chamber of Commerce of the United States, we filed an amicus brief addressing errors made by the district court in applying each of the three excessiveness guideposts—the degree of reprehensibility of the conduct; the ratio of punitive damages to the harm or potential harm to the plaintiff; and the disparity between the punitive damages and the legislatively established penalties for comparable conduct.

Our amicus brief first discusses a number of errors that the district court made in applying the reprehensibility guidepost. Most fundamentally, the court failed to compare the alleged conduct in Saccameno—mismanagement of a mortgage by low-level employees—with other punishable acts such as discrimination or physical assault.

The district court also erred in analyzing two of the five reprehensibility factors identified by the Supreme Court in State Farm.

The court held that the financial-vulnerability factor was present simply because Saccameno, having recently emerged from bankruptcy, was financially vulnerable. Courts have noted, however, that this factor requires evidence not just that the plaintiff happens to be financially vulnerable, but that the defendant set out to target and exploit individuals who were financially vulnerable. Otherwise, it is hard to see why the mere happenstance of the plaintiff’s financial vulnerability makes the defendant’s conduct more egregious.

The district court also mistakenly believed that the repeated-misconduct factor applied because the alleged misconduct occurred over time and involved multiple instances of wrongdoing. This factor, however, is intended to more severely punish recidivists, not defendants whose misconduct toward the plaintiff can be atomized into multiple pieces.

On both of these points, the district court’s conclusion was contrary to prevailing law interpreting the reprehensibility guidepost and inaccurately portrayed the bank’s conduct as particularly egregious when, in fact, it was on the low end of the spectrum of conduct for which punishment may be imposed.

Our brief next demonstrates that the district court made a serious error by including the entire amount of compensatory damages in the denominator of the ratio analysis. Illinois courts do not allow punitive damages for breach of contract, and Congress has not authorized punitive damages for the federal statutory violations alleged by Saccameno.

Moreover, the district court recognized that each cause of action in the case addressed different aspects of the defendant’s conduct. Thus, $500,000 of the compensatory damages was attributable to conduct that courts and legislatures have determined does not support an award of punitive damages. By including those damages in the denominator of the ratio analysis, the district court failed to ensure that the punitive damages bear a reasonable relationship to the harm caused by Ocwen’s punishable conduct.

Our brief also points out that the district 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 alleged conduct was nowhere near the high end of the spectrum of punishable conduct.

The thrust of the Supreme Court’s decision in Exxon Shipping Co. v. Baker is that courts should be allowing ratios of no more than 1:1 in almost every case in which the compensatory damages are substantial and the conduct is not exceptionally reprehensible. Many appellate decisions follow that rule, and our amicus brief urges the Seventh Circuit to reaffirm the Supreme Court’s repeated 1:1 guidance in Saccameno.

Finally, we argue that the proper comparison under the third guidepost is with the $25,000 and $50,000 fines that the Illinois legislature has imposed for misconduct in the processing of mortgages. The district court instead compared the $3 million punishment to the financial consequences that would befall Ocwen were it to lose its license to do business in the state.

As we point out in our amicus brief, the Supreme Court in State Farm expressly rejected reliance on the unlikely possibility that a company could lose its business license. The purpose of this guidepost is to tether punitive awards to amounts that the legislature has selected as appropriate punishments for the specific conduct at issue. Simply pointing out that things could theoretically be worse for the defendant does not accomplish that goal.

With all of this fodder, the Seventh Circuit’s decision promises to be an interesting one. We will report on it after it’s released.