In a little noticed ruling, the Supreme Court curbed juries’ ability to punish corporate misdeeds.

Dollars and Sense Magazine

Issue #252, March/April 2004

Punitive damages are designed to punish wrongdoers for intentional malicious conduct. Awarded over and above compensatory damages, they’re meant to teach a defendant a lesson and deter others from similar behavior.

Traditionally, punitive damages have served as juries’ big stick against those corporations that place human life and safety at risk in pursuit of profits. But juries no longer wield much of a stick. In a widely overlooked decision, the U.S. Supreme Court recently reversed the long-standing practice of allowing juries to make independent decisions about how to punish corporate wrongdoing. The ruling will have far-reaching repercussions and may fundamentally shift the balance of power between individuals and corporations in society.

In Campbell v. State Farm (2003), the court overturned $145 million in punitive damages against the insurance giant. It ruled, 6-to-3, that punitive damages must be proportionate to the actual losses suffered by individual plaintiffs. The court did not set an outright cap on such damages, but noted that a ratio of more than 4-to-1 “might be close to the line of constitutional impropriety.” In other words, if a wrongful injury or death results in lost wages and other losses totaling $500,000, then, under this ruling, punitive damages should not generally exceed $2 million.

In the past, juries have been free to consider how much profit a corporate defendant had made at the cost of human life and suffering. Some juries chose to correlate punitive damage awards to the size of the defendant’s ill-gotten gains, and in doing so taught corporations important lessons.

‘ In 1999, a Los Angeles jury issued the biggest punitive damage verdict ever–$4 billion–against General Motors (GM). The plaintiffs had been trapped and burned when their automobile gas tanks exploded. In court it was revealed that GM had chosen not to warn the public about the gas-line defect because it judged it would be cheaper to pay out individual lawsuits than to recall the defective automobiles. Central to the case was an internal company memo by a GM engineer who calculated that the automaker would have to pay $2.40 per car in lawsuits, as compared to $8.59 per car to fix the problem. The victims’ lawyers argued that installing a safer fuel system would have prevented 300 to 500 injuries each year.

‘ The Dalkon Shield IUD, a birth control device used during the 1970s, had a tendency to trap bacteria in the uterus–causing infections, spontaneous abortions, infertility and death. Despite receiving dozens of reports of spontaneous abortions, the manufacturer, A.H. Robbins Co., defended the product, and continued to do so even after the Food and Drug Administration banned the device in June 1974. Only after it incurred 11 punitive damage awards in the 1980s, totaling more than $24.8 million, did the corporation urge doctors and women to remove the device.

Product liability lawsuits like these, in which individuals recover damages against corporations for dangerous and defective products, are the legal cases that most commonly result in punitive damages. And they work: the suits change corporate decision making about product safety. A major 1987 Conference Board study of 232 risk managers at large American corporations found:

Where product liability has had a notable impact–where it has most significantly affected management decision-making–has been in the quality of the products themselves. Managers say products have become safer, manufacturing procedures have been improved, and labels and use instructions have become more explicit.

Corporations are driven by the bottom line. The stick that deters them the best is the one that can hurt them the most: costly monetary damages. Under this new ruling, not only will punitive damages do less damage to a corporation’s bottom line, but big business will be better able to anticipate the size of potential damages and treat them as a predictable cost of doing business.

The jury foreman in the GM case, Coleman Thorton, noted: “GM has no regard for the people in their cars, and they should be held responsible for it.” Yet with the U.S. Supreme Court’s new verdict, corporations that knowingly decide to maim or kill can rest assured they’ll likely keep most of the profits they reap. Juries will no longer have the power to do what the jury in the GM case successfully did–punish a corporate defendant in a way that ensures it truly pays a price for its crimes.
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Jamie Court, author of Corporateering: How Corporate Power Steals Your Personal Freedom and What You Can Do About It (Tarcher/Putnam), is president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights – http://www.corporateering.org