The Supreme Court case of Exxon Shipping, et al v. Baker, 128 S. Ct. 2605, (2008), concerned the grounding of the Exxon Valdez super tanker in Alaska in 1989, and the oil spill damages resulting from that event. The Supreme Court reduced the punitive damages awarded by the jury based upon the application of federal maritime law, utilizing a one to one ratio to actual damages. Although the case involved maritime law, the author asserts that the Supreme Court intended the decision to be applicable to other federal court suits where punitive damages are awarded, including cases brought pursuant to Title 42 U.S.C.§ 1983 (Section 1983 cases). The author contends that examining the net worth of the defendant or defendants is required in Section 1983 cases before punitive damages can be awarded, and the procedure suggested by Judge Higginbotham in his partial dissent in Keenan v. The City of Philadelphia, 983 F.2d 459 (3rd Cir. 1992) is the proper procedure for doing so.
The Exxon Court observed that its prior decisions regarding punitive damages had “thus far” been confined to the application of due process standards to awards rendered under state law (citing State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416-17 (2003); BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 562, 574-75 (1996)). The Court announced it was reviewing the punitive damages award in Exxon utilizing the federal common law standard.
In Exxon, the Court first reviewed the history of punitive damages and noted that “punitives are aimed not at compensation but principally at retribution and deterring harmful conduct.” The Court then considered various studies analyzing punitive damages awards in the United States. While finding that the data showed “overall restraint” with a median ratio of punitive to compensatory damages that was less than 1:1, the Court explained that the “real problem” with punitive damages awards is their “stark unpredictability.” Specifically, the Court noted “the outlier cases subject defendants to punitive damages that dwarf corresponding compensatories,” and awards in similar cases were often inconsistent. The Court found that this unpredictability undermines the “commonly held notion of law [that] rests on a sense of fairness in dealing with one another.” Accordingly, “a penalty should be reasonably predictable in its severity,” so the individual can anticipate the stakes in choosing one course of action or another.”
After extensively surveying literature and studies of punitive damages, the Exxon Court found “the median ratio of punitive to compensatory awards has remained less than 1:1” and “a high ratio of punitive to compensatory damages is substantially greater than necessary to punish or deter.” The Court subsequently determined that the most effective way to limit punitive damages awards would be to “peg punitive to compensatory damages using a ratio or maximum multiple.” The Court specifically rejected both federal statutory and state-adopted ratios of 3:1 and 2:1 for punitive damages. The Court observed that the purpose of similar multiple ratios included in federal statutory schemes such as the antitrust statutes was to encourage private litigation that may not otherwise occur if only compensatory damages were available.
Instead of adopting federal statutory or state ratios, the Exxon Court crafted a ratio based on the median ratio of punitive to compensatory damages awards in civil cases across many jurisdictions. The Court concluded that a 0.65:1 median ratio “reflect[s] what juries and judges have considered reasonable across many hundreds of punitive awards.” Accordingly, the Court held that “given the need to protect against the possibility (and the disruptive cost to the legal system) of awards that are unpredictable and unnecessary, either for deterrence or for measured retribution, we consider that a 1:1 ratio, which is above the median award, is a fair upper limit in such maritime cases.”
Although Exxon is a maritime case, it is clear that the Court’s decision is not limited to maritime cases. The Court extensively examined studies and state law damages that did not involve claims under maritime law to determine the proper ratio between liquidated and compensatory damages in Exxon. Nowhere in the decision does the Court suggest that its decision turns on anything unique to maritime law. Judge Gibson of the Western District of Pennsylvania recently acknowledged in dicta that “[a]lthough Exxon is a maritime case, it is clear that the Supreme Court intends that its holding have a much broader application.” Hayduk v. City of Johnstown, et al., No. 05-294, 2008 U.S. Dist. LEXIS 50463, *137 (W.D. Pa. June 30, 2008). Various courts have applied Exxon in non-maritime cases, acknowledging the necessity of an appropriate ratio between compensatory and punitive damages, but not necessarily 1:1 in cases involving malicious or egregious circumstances [Exxon involved a reckless standard]. See, PSG Poker, et al. v. Tony DeRosa-Ground et al., 2008 U.S. Dist. LEXIS 59214 (S.D.N.Y.) (breach of contract); Leavey v. Unum Provident Corporation, et al., 2008 U.S. App. LEXIS 21144 (9th Cir.) (insurance bad faith); Kunz v. DeFelice, 538 F.3d 667 (7th Cir. 2008) (Section 1983 case); Bernardi v. Village of Sauget, Illinois, 2008 U.S. Dist. LEXIS 54863 (S.D.Ill.) (Section 1983 case). Ellis v. LaVeccia, 567 F. Supp. 2d 6001 (S.D.N.Y. 2008) (Section 1983 case). The applicability of Exxon to Section 1983 cases is clear because punitive damages in both civil rights and maritime cases are governed by federal common law. In Smith v. Wade, the Supreme Court noted that punitive damages claims under 42 U.S.C. § 1983 are governed by federal common law, stating “we look[] first to the common law of torts . . . with such modification or adaptation as might be necessary to carry out the purpose and policy of the statute.” Smith v. Wade, 461 U.S. 30, 34 (1983), (citing Carey v. Piphus, 435 U.S. 247, 253-64 (1978)). The Third Circuit in Basista v. Weir, 340 F.2d 74, 86-87 (3d Cir. 1965) has held that federal common law must govern damages, including punitive damages, under the Civil Rights Act in order to “effect uniformity”. The Supreme Court has often looked to common law principles to define and limit damages. See e.g., City of Newport v. Fact Concerts, 453 U.S. 247 (1981).
The Court determined that an average ratio of 1:1 was the maximum ratio appropriate in the “reckless” conduct at issue in Exxon and, further, that in all cases the starting point of an evaluation of punitives is the appropriate level of compensatory damages and the reasonable proportional ratio of punitive damages. The Exxon Court acknowledged that heavier punitive awards may be justified if a particularly egregious act has resulted in only a small amount of compensatory damages. See, Kunz v. DeFelice, 538 F.3d 667 (7th Cir. 2008) where the Court applied Exxon in approving a $10,000 compensatory damage award to a $90,000 punitive damage award involving an egregious physical attack by police during an interrogation. It remains to be seen how this ratio will be adjusted in a case involving malicious behavior, or where there was physical injury or death to the plaintiff. The Court’s admonition that there must be a qualified relationship between compensatory and punitive damages will nonetheless control to avoid the “stark unpredictability”. See, Leavey v. Unum Provident Corporation, et al., 2008 U.S. App. LEXIS 21144 (9th Cir.).
Moreover, in Exxon, the Court said it has long held that punitive damages are not intended to compensate the injured party, but to punish the tortfeasor and to deter him and others from similar extreme conduct (citing City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 266-67 (1981)). Since punitive damages are meant to be a punishment and deterrent, consideration must be given to the person being punished or deterred. See Eden Elec., LTD v. Amana Co., 258 F. Supp. 2d 958, 974 (N.D. Iowa 2003).
In determining a punitive damages award, the financial means of the defendant is a necessary consideration. In City of Newport v. Fact Concerts, Inc., the Supreme Court said:
By allowing juries and courts to assess punitive damages in appropriate circumstances against the offending official, based upon his personal financial resources, the statute directly advances the public’s interest in preventing repeated constitutional deprivations. (Emphasis supplied.)
City of Newport, 453 U.S. at 269.
The Third Circuit has stated the wealth of the defendant is a factor which should be taken into account in assessing punitive damages. Acosta v. Honda Motor Co., 717 F.2d 828, 839 (3rd Cir. 1983). In this regard, the partial dissent of Judge Higginbotham in Keenan v. City of Philadelphia, 983 F.2d 459 (3rd Cir. 1992) (a Section 1983 case) is now very relevant in light of the language of Exxon that there must be a quantified approach to the award of punitive damages.
Judge Higginbotham pointed out the absolute necessity of presenting evidence of the financial worth of the defendant in determining punitive damages, especially where the defendant is a public servant and there is a possibility of indemnification by a public entity. Without such evidence, the jury will have no guidance as to the calculation of punitive damages, and the juries (and the reviewing courts) will be left in unchartered waters so criticized by the Court in Exxon.
Judge Higginbotham reasoned that the burden of proof for establishing the net worth of the defendant should be on plaintiff. Judge Higginbotham said:
I would hold that if such evidence is required at trial and upon appellate review, then the burden must be placed on the plaintiff … Moreover, in light of the realities of trial practice, it will simply be unfair to place this burden on the defendant, subjecting that party to an inference of admitted liability.
Keenan, 983 F.2d at 483-484 (Higginbotham, J., dissenting).
This is especially true of individual defendants in a Section 1983 case, where the jury may improperly be lead to believe it is the government entity it is punishing and the entity may be responsible for the award of punitive damages.
