Previous Challenge Entry (Level 3 - Advanced)
Topic: Writing a Letter (handwritten correspondence) (10/21/10)
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TITLE: ADVISING RE PUNITIVE DAMAGES | Previous Challenge Entry
By KEN ALEXANDER
10/27/10 -
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Dear Sir:
In response to your recent question regarding how vulnerable your business is to punitive damage awards, please consider the following recent information.
The Supreme Court provided a significant victory to the Bush administration’s policy of removing inhibiting factors from businesses by nullifying a $145 million punitive damage award against an insurance company. State Farm...Ins. Co. v Campbell, April 7, 2003. The court found the award excessive, and for the first time applied new rules for courts to follow in reviewing the reasonableness of punitive damage awards in future cases.
Punitive damages are damages awarded by a jury or court to punish a defendant for malicious and/or oppressive conduct, or conduct against public policy. This is inapposite to actual damages, which are damages intended to compensate the plaintiff for what he lost as a result of the defendant’s conduct; to make the plaintiff whole again. The court decided that the Fourteenth Amendment of the United States Constitution protected business from punitive damage awards that were excessive when compared to the amount of actual damages awarded, or to the “bad” conduct in the case at hand.
The facts and background of the State Farm case were ideal for your pertinent consideration of the punitive damage abuse issue, which has become prominent of late, most notably in cases involving defective automobiles and the tobacco industry, but applicable to your business as well.
In the case, Plaintiff’s lawyers had been frustrated for years by State Farm’s hardball tactics in handling insurance claims by their clients throughout the country. Around the mid-1980's, State Farm instituted a “Performance, Planning & Review" policy, where it used a variety of alleged underhanded and unsavory schemes to pay less on its claims, to the extent that, by the 1990s, State Farm had the worst reputation of any major insurance carrier for fairly paying claims. Among other schemes, State Farm would use its vast resources to avoid settlement and take cases to trial, knowing that by doing so the injured party would become discouraged and settle for much less than the claim was worth. So the plaintiff's bar waited, albeit impatiently, for the right case to come along so they could legally force the insurer to back off on their policies. This case was ideal for them to make their point.
The plaintiff’s trial strategy included introduction of evidence, including expert witness testimony, of State Farm's improper business practices throughout the country. In a real way State Farm was "put on trial" or as the Supreme Court put it: "...this case was used as a platform to expose, and punish, the perceived deficiencies of State Farm’s operations throughout the country". The strategy worked as the jury was obviously so inflamed by the evidence that they decided on a punitive damage award 145 times the amount of the actual (compensatory) damages awarded.
However, the Supreme Court decided that a defendant could not necessarily be excessively punished beyond the facts of the case before the court, no matter how egregious the conduct. The court also noted that punitive damage awards, if warranted, should normally not exceed 10-20 times the amount of the actual damages awarded. The case was sent back to the trial court for reconsideration of the punitive damages awarded. Controversy still rages on this issue, however, with consumer groups on the one hand arguing that business should be severely punished if their “product” causes significant harm, while business leaders say such punishment has a chilling effect on innovation and profits in the marketplace, harming the economy.
This case reflects the current trend of limiting business tort liability in general. Should your company become involved in a claim or lawsuit involving some of alleged bad conduct you must be aware of this current limiting trend and not be as hesitant in defending your company’s conduct aggressively. The trend lessens your downside considerably which allows you to take greater risks without as much consideration of risk of an excessive award.
Should you require more information, or if you have a specific situation in mind do not hesitate to contact me.
Very truly yours,
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Kenneth A.
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I noticed that you mentioned that you'd written it 'recently'--just a reminder that challenge entries are supposed to be all new, once the prompt is announced. It's not a huge deal, just something to remember.
You're a really good writer--I'd love to see you write something a bit more accessible for the Challenge readers. This may have sailed over our heads.