Just when we thought there would be no more punitive damages news this year, the U.S. Court of Appeals for the Third Circuit issued this published non-precedential opinion today.
The jury in this insurance bad faith case awarded $1.66 million in compensatory damages and $6.25 million in punitive damages, for a roughly four-to-one ratio (more like a three-to-one ratio if you include attorney’s fees and costs as part of the compensatory damages award, which the Third Circuit did). The Third Circuit rejected the defendant’s argument that punitive damages were not warranted in this case, but agreed that the amount of the punitive award was excessive under the three BMW v. Gore “guideposts” (reprehensibility, ratio, and comparable penalties).
First, the court observed that the defendant’s conduct implicated only two of the five “reprehensibility factors” identified in State Farm v. Campbell. The plaintiff had argued that a third factor – recidivism – was also present, based on the fact that the defendant’s wrongful behavior consisted of a course of conduct, rather than a single act. The Third Circuit, citing the Sixth Circuit’s decision in Bridgeport Music, Inc. v. Justin Combs Publ’g (6th Cir. 2007) (“The repeated conduct factor requires that the similar reprehensible conduct be committed against various different parties rather than repeated reprehensible acts within the single transaction with the plaintiff”), discounted the recidivism factor because there was no evidence that the defendant insurer had previously engaged in similar misconduct towards other policyholders.
Second, the court concluded that the ratio awarded by the jury was excessive in light of the substantial compensatory damages. The court cited Campbell‘s statement that the ratio should be low, perhaps only one-to-one, in cases involving substantial punitive damages. The court also cited a number of other federal cases that have recently implemented that statement and adopted one-to-one ratios. The court also referred to the Supreme Court’s recent decision in Exxon Shipping, which although it did not directly address constitutional limits on punitive damages, did reiterate that 1-to-1 ratios are appropriate in cases involving substantial compensatory damages.
Third, the court compared the punitive damages award to penalties authorized by statute for similar misconduct. Because this was a diversity case, the court looked to Pennsylvania law, which provides a $5,000 penalty for unfair practices by insurers. The court noted that the jury’s punitive damages award was 1250 times higher than the comparable statutory penalty. Accordingly, the third guidepost also weighed in favor of a reduction of the award.
The court’s adoption of a one-to-one ratio in this case follows a trend we have observed in California and elsewhere. After the Supreme Court issued its opinion in Campbell in 2004, very few courts followed the Supreme Court’s statement that one-to-one ratios are appropriate in cases with substantial punitive damages. But in the past two years, even before the Exxon Shipping decision, many courts have begun to follow Campbell and reduce punitive damages down to one-to-one ratios, even in cases like this where the ratio was already in the single-digit range.
Hat tip: The Legal Intelligencer (via Law.com).
[UPDATE: I originally described this as a “published” opinion, but a reader pointed out to me that the opinion is designed as non-precedential. In other words, it’s the sort of opinion that would have been unpublished and unciteable prior to the enactment of FRAP 32.1. Technically it is “published” in the sense that all federal appellate decisions are publicly available and citeable now, but I should have noted in my original post that the opinion is designated as non-precedential, so I have made a correction above.]