No. 10-349

IN THE

uvreme eurt ef the nite tatee

SHELL OIL COMPANY, and SWEPI LP(As Successor-in-Interest to SHELL

WESTERN E & P, INC.),Petitioners,

V.

NANCY FULLER HEBBLE, et al.,

Respondents.

On Petition for Writ of Certiorari to theCourt of Civil Appeals

for the State of Oklahoma

BRIEF OF PRODUCT LIABILITY ADVISORYCOUNCIL, INC. AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

Of Counsel:

HUGH F. YOUNG, JR.PRODUCT LIABILITY

ADVISORY COUNCIL, INC.1850 Centennial Park DriveReston, Virginia 20191(703) 264-5300

November 12, 2010

TERRI S. REISKINCounsel of Record

WALLACE KING DOMIKE& REISKIN, PLLC

2900 K Street, NWSuite 500Washington, DC 20007(202) 204-1000treiskin@wallaceking.com

Attorneys for Amicus Curiae

WILSON-EPES PRINTING CO., INC. - (202) 789-0096 - WASHINGTON, D. C. 20002

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................................ iii

INTEREST OF THE AMICUS CURIAE ............ 1

SUMMARY OF ARGUMENT ............................. 3

ARGUMENT ........................................................ 5

I. IN THE WAKE OF STATE FARM,PUNITIVE DAMAGES AWARDS CON-TINUE TO BE UNPREDICTABLE ANDARBITRARY IN VIOLATION OF DUEPROCESS .................................................. 5

A. In Small Compensatory DamagesCases, Reprehensibility is Used asthe Rationale for Grossly ExcessivePunitive Damages ...............................8

B. The Use of Potential Harm in Placeof Actual Damages EncouragesSpeculation and Subverts the Role ofthe Jury ................................................12

C. Courts Improperly Exceed the 1:1Ratio Even when CompensatoryDamages are Substantial ....................14

D. Geographic and Jurisdictional Varia-bility in Application of the RatioGuidepost Adversely Affects theQuality of Justice .................................16

II. THE PROBLEM OF UNPREDICTABLEAPPLICATION OF THE GUIDEPOSTSIS COMPOUNDED BY INCONSIS-TENT DEFINITIONS OF "COMPEN-SATORY" DAMAGES ............................... 19

(i)

ii

TABLE OF CONTENTS--Continued

III. PRODUCT MANUFACTURERS AREADVERSELY AFFECTED BY UNPRE-DICTABLE AND ARBITRARY PUNI-TIVE DAMAGES AWARDS .....................

CONCLUSION ....................................................

APPENDIX A: Corporate Members of theProduct Liability Advisory Council, Inc. as of11/09/2010 ........................................................

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20

24

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iii

TABLE OF AUTHORITIES

CASES

Austin v. Stokes-Craven Holding Corp.,691 S.E.2d 135 (S.C. 2010) .......................

Bains LLC v. Arco Products Co., 405 F.3d764 (9th Cir. 2005) ....................................

Bennett v. Reynolds, 315 S.W.3d 867 (Tex.2010) ..........................................................

BMW N. Am., Inc. v. Gore, 517 U.S. 559(1996) ........................................................passim

Bronakowski v. Lindhurst, S.W.3d__, 2009 Ark. App. 513 (2009) ............... 6

Campbell v. State Farm Mut. Auto. Ins.Co, 98 P.3d 409 (Utah 2004) .....................14

Craig Outdoor Adver., Inc. v. ViacomOutdoor, Inc., 528 F.3d 1001 (8th Cir.2008) ..........................................................14

Exxon Shipping Co. v. Baker, 128 S. Ct.2605 (2008) ................................................ 5

Flax v. DaimlerChrysler Corp., 272 S.W.3d521 (Tenn. 2008) .................................... 7, 15, 18

Gober v. Ralphs Grocery Co., 137 Cal. App.4th 204 (2006) ...........................................15, 17

Hangarter v. Provident Life & AccidentIns. Co., 373 F.3d 998 (9th Cir. 2004) ......7, 17

Honda Motor Co. v. Oberg, 512 U.S. 415(1994) .........................................................24

Kemp v. Am. Tel. & Tel. Co., 393 F.3d 1354(11th Cir. 2004) .........................................6, 10

Krysa v. Payne, 176 S.W.3d 150 (Mo. App.2005) ..........................................................6, 10

Mathias v. Accor Economy Lodging, Inc.,347 F.3d 672 (7th Cir. 2003) .....................6, 11

Modern Management Co. v. Wilson, 997A.2d 37 (D.C. 2010) ...................................20

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16

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iv

TABLE OF AUTHORITIES--Continued

Page

Pacific Mut. Life Ins. Co. v. Haslip, 499U.S. 1 (1991) ..............................................15

Roby v. McKesson Corp., 101 Cal. Rptr. 3d773 (Cal. Ct. App. 2010) ............................20

Seltzer v. Morton, 154 P.3d 561 (Mont.2007) ..........................................................14, 17

State Farm Mut. Auto Ins. Co. v.Campbell, 538 U.S. 408 (2003) .................passim

Superior Fed. Bank v. Jones & MackeyConst. Co., LLC, 219 S.W.3d 643 (Ark.Ct. App. 2005) ...........................................11

Trinity Evangelical Lutheran Church andSchool-Freistadt v. Tower Ins. Co., 661N.W.2d 789 (Wis. 2003) ..................... 8, 9, 11, 13

TXO Prod. Corp. v. Alliance ResourcesCorp., 509 U.S. 443 (1993) ........................12

Vasquez-Lopez v. Beneficial Oregon, Inc.,152 P.3d 940 (Or. Ct. App. 2007) ...........13

Williams v. Conagra Poultry Co., 378 F.3d790 (8th Cir. 2004) .................................... 6

Willow Inn, Inc. v. Public Service Mut. Ins.Co., 399 F.3d 224 (3d Cir. 2005) ...............20

Zhang v. Am. Gem Seafoods, Inc., 339 F.3d1020 (9th Cir. 2003) ..................................15, 17

MISCELLANEOUS

Alison F. Del Rossi and W. Kip Viscusi,The Changing Landscape of BlockbusterPunitive Damages Awards, 12 Am. L. &Econ. Rev. 116 (2010) ...............................16, 22

Royal Furgeson, Civil Jury Trials R.I.P. ?Can it Actually Happen in America?, 40St. Mary’s L.J. 795 (2009) .........................23

V

TABLE OF AUTHORITIES--Continued

Marc Galanter, The Hundred-Year Declineof Trials and the Thirty Years War, 57Stan. L. Rev. 1255 (2005) .........................

Richard L. Manning, Changing Rules inTort Law and the Market for ChildhoodVaccines, 37 J.L. & Econ. 247 (1994) .......

David G. Owen, Problems in AssessingPunitive Damages Against Manufac-turers of Defective Products, 49 U. Chi.L. Rev. 1 (1982) .........................................

Hon. Sam Sparks and George Butts,Disappearing Juries and Jury Verdicts,39 Tex. Tech L. Rev. 289 (2007) ...............

U.S. GEN. ACCOUNTING OFFICE, GAO/AIMD-95, MEDICAL LIABILITY: IM-PACT ON HOSPITAL AND PHYSI-CIAN COSTS EXTENDS BEYONDINSURANCE 16 (1995) ............................

W. Kip Viscusi, Corporate Risk Analysis: AReckless Act?, 52 Stan. L. Rev. 547(2000) .........................................................

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IN THE

reme Eourt of the tate

No. 10-349

SHELL OIL COMPANY, and SWEPI LP(As Successor-in-Interest to SHELL

WESTERN E & P, INC.),Petitioners,

V.

NANCY FULLER HEBBLE, et al.,Respondents.

On Petition for Writ of Certiorari to theCourt of Civil Appeals

for the State of Oklahoma

BRIEF OF PRODUCT LIABILITY ADVISORYCOUNCIL, INC. AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

INTEREST OF AMICUS CURIAE

The Product Liability Advisory Council, Inc.(PLAC) is a non-profit association with 100 corporatemembers representing a broad cross-section ofAmerican and international product manufacturers.

1 Pursuant to Rule 37.6, amicus states that no counsel for aparty has authored this brief in whole or in part, and no personor entity other than amicus, its members and their counsel hasmade a monetary contribution to fund the preparation orsubmission of this brief. Pursuant to Rule 37.2(a), all partiesreceived timely notice and have consented to the filing of thisbrief.

2

These companies seek to contribute to the improve-ment and reform of law in the United States andelsewhere, with emphasis on the law governing theliability of manufacturers of products. PLAC’sperspective is derived from the experiences of acorporate membership that spans a diverse group ofindustries in various facets of the manufacturingsector. In addition, several hundred of the leadingproduct liability defense attorneys in the country aresustaining (non-voting) members of PLAC. Since1983, PLAC has filed over 900 briefs as amicus curiaein both state and federal courts, including this Court,presenting the broad perspective of product manufac-turers seeking fairness and balance in the applicationand development of the law as it affects productliability. A list of PLAC’s corporate members isattached as Appendix A.

PLAC is particularly interested in the issues raisedby this case, because product manufacturers aredisproportionately affected by punitive damagesawards. The due process protections afforded by theUnited States Constitution are essential to ensurethat punitive damages awards are rendered in amanner that is scrupulously fair to the defendant.State and federal courts have interpreted the puni-tive damages guideposts set out by this Court in awildly inconsistent fashion. Whether this is theresult of confusion or a willful attempt to circumventthe Court’s dictates, product manufacturers andothers are routinely subject to arbitrary and grosslyexcessive punitive damages awards. PLAC believesits viewpoint will assist in the Court in achieving abetter understanding of the nature of the problemand the reasons why it is critical for the Court toprovide additional clarification regarding the rela-tionship among the guideposts and the proper appli-

3

cation of the ratios between compensatory and puni-tive damages.

SUMMARY OF ARGUMENT

In the more than seven years since this Courtdecided State Farm Mut. Auto Ins. Co. v. Campbell,538 U.S. 408 (2003), the punitive damages guidepostsand the ratios between compensatory and punitivedamages set out by the Court have proven to be oflittle use in ensuring a system of justice in whichdefendants can be reasonably apprised of the penal-ties they may face. The relationship among theguideposts is unclear, allowing courts to use thereprehensibility guidepost to trump the others.Courts are also confused about application of theratios, and have defaulted to the position that a 9:1or lower ratio will always pass muster, despite thisCourt’s holding that in cases with substantialcompensatory damages, a ratio of 1:1, and in almostall other cases, a ratio of 4:1, approaches the outerlimits of due process.

Since State Farm, courts have applied ratios from1:1 to 2172:1, and all levels in between. In somecourts, the perceived reprehensibility of the conductis used to justify extremely high ratios. In others, the"potential harm"--often loosely defined--is substi-tuted for the jury’s actual damages award, so as totransform a very large ratio into a much smaller one.Courts routinely exceed a 1:1 ratio between compen-satory and punitive damages, although the compen-satory award is unquestionably substantial. Evenmore troubling is the fact that courts in differentCircuits have interpreted State Farm in differentways. In short, the outer limits of due process differgreatly depending on the fortuity of where and inwhat court a case happens to be decided. This is

4

inconsistent with our constitutional guarantees,which should be applied similarly regardless of whatcourt is meting out justice.

Even when ratios are applied in a manner gener-ally consistent with State Farm’s ruling, courts haveapplied different approaches to determining thecomponents of "compensatory" damages. In this case,the court included pre-judgment interest at a punitiverate, while other courts have included various othercomponents, including attorneys’ fees and lost profits.A ratio whose numerator and denominator cannot bereadily and consistently determined is of little use tocourts attempting to ensure that punitive damageawards comport with due process, or to defendantsassessing potential liability should they go to trial.The problem of inconsistent application of the StateFarm ratios, while significant in itself, is magnifiedwhen the ratio itself is malleable depending on whata court includes as compensatory.

These problems are perhaps more keenly felt byproduct manufacturers than by other litigants,because of the fact that product liability cases moreoften involve physical injuries or deaths. Aside fromthe obvious emotional component of these cases,which can result in higher jury verdicts, they oftenlead to punitive damages awards. The inability ofmanufacturers and sellers to assess their level of riskresults in forced settlements, higher prices, lessinnovation and a marketplace where some productsare simply not economical to design and sell becauseof the risk of unfettered and unpredictable liability.

The Court should grant certiorari in this case toclarify the application of the ratios set forth in StateFarm and the relationship among the guideposts, andto make clear that compensatory damages do not

5

include pre-judgment interest and other "add-ons", sothat due process guarantees are applied similarlyregardless of the court or jurisdiction in which adefendant may find itself.

ARGUMENT

Despite this Court’s efforts to lend consistency tothe process by which punitive damages are awardedand reviewed, defendants in state and federal courtscontinue to experience wide variations in how theguideposts and ratios are applied. The "stark unpre-dictability’’2 of punitive awards violates due processbecause defendants are deprived of"fair notice.., ofthe severity of the penalty that a State may impose."BMW N. Am., Inc. v. Gore, 517 U.S. 559, 574 (1996).The decision of the Oklahoma Court of Civil Appealsis only one of many state and federal cases in whichthe guideposts have been twisted beyond recognition.Review is necessary in order to clarify therelationship among the guideposts and the properapplication of the ratios between compensatory andpunitive damages.

I. IN THE WAKE OF STATE FARM, PUNI-TIVE DAMAGES AWARDS CONTINUE TOBE UNPREDICTABLE AND ARBITRARYIN VIOLATION OF DUE PROCESS

In State Farm, this Court elaborated on the guide-posts set forth in Gore in an effort to preventarbitrary and constitutionally excessive punitivedamages awards. While declining to provide "rigidbenchmarks", 538 U.S. at 425, the Court made clearthat all three guideposts should be considered, andgave guidance as to the ratios to be used in evaluato

Exxon Shipping Co. v. Baker, 128 S. Ct. 2605, 2625 (2008).

6

ing punitive damages awards. Specifically, the Courtexplained that "few awards exceeding a single-digitratio between punitive and compensatory damages,to a significant degree, will satisfy due process" andthat "an award of more than four times the amount ofcompensatory damages might be close to the line ofconstitutional impropriety." Id. The Court furtherheld that, "When compensatory damages aresubstantial, then a lesser ratio, perhaps only equal tocompensatory damages, can reach the outermostlimit of the due process guarantee." Id. The $1million awarded to the plaintiffs in State Farm wasrecognized to be "substantial", and, accordingly, theCourt held that it "likely would justify a punitivedamages award at or near the amount of compensa~tory damages." Id. at 429.

Despite the Gore and State Farm framework,courts continue to reach results that are flatly incon-sistent with it and wildly divergent. Ratios from 1:1all the way to 2174:1 have been approved as purpor-tedly consistent with due process constraints. See,e.g., Williams v. Conagra Poultry Co., 378 F.3d790 (8th Cir. 2004) (1:1 ratio applied in Title VIIemployment discrimination case); Kemp v. Am. Tel. &Tel. Co., 393 F.3d 1354 (11th Cir. 2004) (2174:1 ratioin RICO case involving gambling charges included inlong distance bills). Despite State Farm’s directionthat "few awards exceeding a single-digit ratio . . .will satisfy due process," 538 U.S. at 425, numerouscourts have found reasons to exceed single digits,often by a large margin. See, e.g., Mathias v. AccorEconomy Lodging, Inc., 347 F.3d 672 (7th Cir. 2003)(37:1 ratio in bedbug infestation case); Krysa v.Payne, 176 S.W.3d 150 (Mo. App. 2005) (27:1 ratio infraud case involving vehicle sale); Bronakowski v.Lindhurst, __S.W.3d__, 2009 Ark. App. 513 (2009)

7

(42:1 ratio in case involving trees cleared from plain-tiffs’ property without permission resulting ineconomic harm of $592.85).

Courts seem most inclined to permit hugelylopsided ratios when the amount of compensatorydamages is small, using as justification such factorsas perceived reprehensibility or potential damages.Indeed, although it is to some extent a subjectiveindicator, a high degree of reprehensibility isroutinely cited in support of grossly excessive puni-tive damages awards. In such cases, the reprehensi-bility guidepost effectively becomes the only guide-post. Other courts have applied ratios exceeding 1:1even where compensatory damages are unquestiona-bly substantial. See, e.g., Hangarter v. Provident Life& Accident Ins. Co., 373 F.3d 998 (9th Cir. 2004) (incase involving denial of disability benefits wherecompensatory damages were over $1.9 million, courtapproved punitive damages of $5 million, a ratio of2.6:1); Flax v. DaimlerChrysler Corp., 272 S.W.3d 521(Tenn. 2008) (ratio of 5.35:1 approved in automobiledefect case involving death of child where compensa-tory damages were $2.5 million).

If this Court had "concerns over the imprecisemanner in which punitive damages systems areadministered’’3 when State Farm was decided in2003, the way in which its holdings have beenapplied by lower courts since that time should giverise to nothing short of extreme consternation, if notoutright alarm.

State Farm, 538 U.S. at 417.

8

A. In Small Compensatory Damages Cases,Reprehensibility is Used as the Ration-ale for Grossly Excessive PunitiveDamages

Many of the highest ratios are applied in caseswhere compensatory damages are small. Courts inthis situation seem to struggle with how to justifylarge punitive damages awards, often citing thereprehensibility of the conduct. This scenario wascontemplated in State Farm, 538 U.S. at 425 ("ratiosgreater than those we have previously upheld maycomport with due process where ’a particularly egre-gious act has resulted in only a small amount ofeconomic damages’") (quoting Gore, 517 U.S. at 582).But permitting unfettered discretion in such circums-tances to use any ratio imaginable belies the notionthat there are any "outermost limits" to the dueprocess guarantee. Moreover, permitting the repre-hensibility guidepost to trump the ratio guidepostmeans that, for many courts, the analysis is over oncereprehensibility is determined. In this way, a subjec-tive determination of reprehensibility is used to obli-terate due process guarantees.

A case in point is Trinity Evangelical LutheranChurch and School-Freistadt v. Tower Ins. Co., 661N.W.2d 789 (Wis. 2003). The Trinity case arose outof an insurance policy that erroneously omittedcertain coverage due to the agent’s mistake in writingthe application. The error was discovered after anaccident resulted in litigation against the insuredchurch, but the insurer declined to reform the policy.The trial judge granted summary judgment tothe policyholder on the bad faith claim, awarding$17,500 in compensatory damages, and a juryreturned a punitive damages award of $3.5 million--

9a ratio of more than 200:1. Notwithstanding thisratio, the court affirmed the award, citing theinsurance company’s reprehensible conduct, inclu-ding its status as a "recidivist" because it was thedefendant in a case more than 30 years earlier inwhich the court held that an insurer has a duty toreform an insurance policyupon discovery of amutual mistake. Id. at 801.The court never evenmentioned the 200:1 ratiobetween actual andpunitive damages, but, instead, recast the ratio as 7:1on the basis of plaintiffs evidence that its potentialexposure in the underlying litigation was $490,000.Id. at 8034

As a dissenting judge noted, the comparison betweenthe facts of Trinity and the State Farm case isstriking, yet in State Farm, this Court compared theactual compensatory damages in the bad faith claim(not the potential verdict in the underlying action)with the punitive damages award and found the ratioof 145:1 unconstitutional. Id. at 811 (Sykes, J., dissent-ing). The judge continued, "The majority’s position[using the $490,000 potential award as the denomi-nator] . .. amounts to nothing more than a manipula-tion of the ratio for purposes of due process scrutiny."Id. The dissent also exposed the absurdity of themajority’s reprehensibility analysis, noting that: thiswas a case that arose from a mistake; it involvedeconomic injury only; Trinity was never at risk in theunderlying action; no one’s health or safety was atrisk; there was no financial vulnerability; and the 30-

4 A dissenting judge made clear that Trinity would neverhave been exposed to liability in the auto accident case, becauseeven if Tower did not provide coverage under its policy, theinsurance agent’s errors and omission policy would providecoverage. Id. at 810-11 (Sykes, J., dissenting).

10

year old contract case in no way supported a"recidivist" label. Id. at 810.

Similarly, Shell’s conduct in this case resulted inonly economic injuries, posed no risk to anyone’shealth or safety, did not involve repeated similarinstances, and was not directed at a financially vul-nerable plaintiff. Yet the court found Shell’s conductto be so reprehensible as to support a ratio as high as87:1, depending on how "compensatory" damages arecounted.5 Thus, even though the Court has laid outthe elements of reprehensibility with relative clarity,the interpretation is subjective and leads to dissimi-lar outcomes for similar conduct. Compare Krysa v.Payne, 176 S.W.3d 150 (Mo. App. 2005) (27:1 ratio incase involving fraud and breach of warranty wherevehicle was sold without disclosure that it wasactually two damaged vehicles welded together) withAustin v. Stokes-Craven Holding Corp., 691 S.E.2d135 (S.C. 2010) (8:1 ratio in fraud case involving saleof automobile without disclosure of prior accident).

Other courts have allowed perceived reprehensi-bility to run roughshod over the other guideposts.See, e.g., Kemp, 393 F.3d at 1363 (affirming 2174:1ratio in case where defendant’s inclusion of chargesfor telephone gambling game in long-distance chargeswas characterized as "large-scale corporate malfeas-ance"). In cases where there is a confluence of badconduct, an unsympathetic (or simply large corpo-rate) defendant and an innocent victim, disproportio-nate punitive damages awards are allowed to stand

5 When the same case can be characterized as involvingmultiple ratios depending on what is counted as "compensatory",it is apparent that the State Farm ratios are toothless as a meansto combat grossly excessive punitive damages awards.

11

because "a particularly egregious act has resulted inonly a small amount of economic damages." Gore,517 U.S. at 582. As one of the dissenters in Trinityobserved, "The plaintiff was a church, the defendantwas an insurance company, and the judge was mak-ing official pronouncements about the defendant’sbad faith. Is there any wonder that the jury awarded$3,500,000 in punitive damages?" 661 N.W.2d. at 806(Prosser, J., dissenting). See also Mathias, 347 F.3dat 677 ($5000 compensatory damages and $186,000in punitive damages, a 37:1 ratio, affirmed in bedbugcase where the defendant’s conduct was judged"outrageous"); Superior Fed. Bank v. Jones & MackeyConst. Co., LLC, 219 S.W.3d 643 (Ark. Ct. App. 2005)(17.6 to 1 ratio is not constitutionally excessive or"breathtaking" due to substantial degree ofreprehensibility). 6

As the Texas Supreme Court stated in reversing anaward of $1.25 million in punitive damages in a caseinvolving actual damages of $5327.11 as a result ofthe conversion of 13 head of cattle:

If courts fail to diligently police the "particularlyegregious" exception, they insulate from due-process review precisely those cases where judi-cial review matters most: those involvingunsympathetic defendants where juries are mostlikely to grant arbitrary and excessive awards.Allowing a freewheeling reprehensibility excep-tion would subvert the constraining power of theratio guidepost.

~ The court stated, "Our research indicates that this factor[the ratio] seems to engender great confusion and controversy incomparison with the other factors. We believe this is due in nosmall part to the U.S. Supreme Court’s rather conflicting state-ments on the matter." Superior Fed., 219 S.W.3d at 651.

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Bennett v. Reynolds, 315 S.W.3d 867, 879 (Tex. 2010)(emphasis added; footnote omitted). Yet this isexactly what is happening in courts across thecountry.

B. The Use of Potential Harm in Place ofActual Damages Encourages Specula-tion and Subverts the Role of the Jury

Courts have also permitted ratios greatly in excessof 4:1, or even single digits, in cases where the poten-tial harm, rather than actual harm, is judged to bethe appropriate denominator. In TXO Prod. Corp. v.Alliance Resources Corp., 509 U.S. 443 (1993), aplurality of the Court said, "It is appropriate toconsider the magnitude of the potential harm thatthe defendant’s conduct would have caused to itsintended victim if the wrongful plan had succeeded,as well as the possible harm to other victims thatmight have resulted if similar future behavior werenot deterred." Id. at 460. The plurality affirmed a$10 million punitive damages award with a ratio of526:1, citing potential harm and reprehensibility ofthe conduct. Writing separately, Justice O’Connortook issue with the plurality’s approach, stating, "Ibelieve it likely, if not inescapable, that the jury wasinfluenced unduly by TXO’s out-of-state status andits large resources." Id. at 495.7

7 Justice O’Connor was also critical of the state appellatecourt’s application of "cavalier standards in the course of acursory examination of the case." Id. at 496. The same could besaid of the Oklahoma Court of Civil Appeals in this case, whosetwo-paragraph treatment of the punitive damages award isunquestionably "cursory" and arguably "cavalier".

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The outcome in TXO would seem to be in questionin light of the Court’s more recent punitive damagesjurisprudence. But the use of often speculativeassessments of "potential harm" in order to justifyratios that are in evident conflict with the guidepostscontinues to be a problem. For example, in Vasquez-Lopez v. Beneficial Oregon, Inc., 152 P.3d 940 (Or. Ct.App. 2007), which involved a predatory lendingclaim, the appellate court reinstated the jury’s origi-nal $500,000 punitive damages award, recharacte-rizing what had been a 7.5:1 ratio as a 1.53:1 ratio.In lieu of the actual compensatory award of justunder $32,000, the appellate court estimated thepotential harm of the defendant’s conduct as theinterest that would have been paid over the life of theloan, which came to over $326,000. Id. at 958; seealso Trinity, 661 N.W.2d at 803 (200:1 ratioconverted to 7:1 by insertion of $490,000 in potentialharm in place of actual $17,500 compensatoryaward).

Not only are assessments of potential harm oftenspeculative, but use of potential harm, rather thanactual damages, subverts the role of the jury. "Thejury system long has been a guarantor of fairness, abulwark against tyranny, and a source of civicvalues." TXO, 509 U.S. at 473 (O’Connor, J.). Thewillingness of some courts to ignore the compensa-tory damages as found by the jury constitutes patentmanipulation in order to justify the punitive damagesaward. See Trinity, 661 N.W.2d at 811 (Sykes, J.,dissenting). Ironically, the inviolability of the jury’sdetermination of the appropriate amount of punitivedamages necessary to punish and achieve retributionis cited by the very courts that so eagerly push asidethe jury’s compensatory damages decision. Whilethere may be a rare case in which consideration of

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potential harm is justified, in most cases deferenceshould be given to the jury’s decision on compensa-tory damages,s

C. Courts Improperly Exceed the 1:1Ratio Even When Compensatory Dam-ages Are Substantial

Many state and federal courts have departedconsiderably from a 1:1 ratio even in cases wherecompensatory damages are substantial. Perhaps themost egregious example is the decision of the UtahSupreme Court on remand in Campbell v. State FarmMut. Auto. Ins. Co., 98 P.3d 409 (Utah 2004), wherethe court reduced the punitive damages award to aratio of 9:1, despite the fact that the compensatoryaward of over $1 million was unquestionably sub-stantial.9 Notwithstanding this Court’s instructionthat, in such cases, "a lesser ratio, perhaps only equalto compensatory damages, can reach the outermostlimit of the due process guarantee," State Farm, 538U.S. at 425, the Utah court considered the 9:1 ratiojustified in light of State Farm’s highly reprehensibleconduct.

Similar results have obtained in other cases. See,e.g., Seltzer v. Morton, 154 P.3d 561 (Mont. 2007) (9:1ratio affirmed in case involving $1.4 million incompensatory damages for malicious prosecution andabuse of process arising out of art authenticator’sopinion); Craig Outdoor Adver., Inc. v. ViacomOutdoor, Inc., 528 F.3d 1001 (8th Cir. 2008) (8.36:1

s The exception would be a case such as this one where thejury was directed to include pre-judgment interest in its"compensatory" award.

9 The definition of "substantial" is, of course, subject to inter-pretation, lending additional uncertainty to the proper appli-cation of the ratio.

15

ratio in commercial fraud case with $125,000 incompensatory damages); Zhang v. Am. Gem Seafoods,Inc., 339 F.3d 1020 (9th Cir. 2003) (7.2:1 ratio appliedin employment discrimination and retaliatory dis-charge case in which $360,000 in compensatorydamages were awarded); Flax, 272 S.W.3d 521(5.35:1 ratio in automobile products liability casewhere jury awarded $2.5 million for death of child).

What these courts have in common is a willingnessto read State Farm to permit a high single-digit ratio,regardless of whether the compensatory damages are"substantial" or even whether the conduct at issue isobjectively reprehensible. See, e.g., Gober v. RalphsGrocery Co., 137 Cal.App.4th 204, 222-23 (2006) (6:1ratio approved despite "modest degree of reprehensi-bility" and substantial compensatory damages). In theprocess, courts disregard completely this Court’s rulingin Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 23-24 (1991), that a four-to-one ratio "may be close to theline" of constitutional impropriety. See also Gore, 517U.S. at 581; State Farm, 538 U.S. at 425.

While the Court in State Farm evidently wantedto leave room for a very small number of cases inwhich individual factors might make a larger ratiopermissible, appellate courts around the countryhave driven a proverbial truck through this opening.If the Constitution requires a 1:1 ratio in almost allcases with substantial compensatory damage awards,it is apparent that courts across the country either donot understand this or are acting in disregard ofconstitutional requirements. In either event, it isapparent that this Court needs to clarify the relation-ship among the three Gore guideposts, so that subjec-tive assessments of reprehensibility are not permit-ted to trump the ratio guidepost entirely, and to

16

elucidate the proper application of the ratios set outin State Farm. lo

D. Geographic and Jurisdictional Varia-bility in Application of the RatioGuidepost Adversely Affects the Qual-ity of Justice

The problem of inconsistency in use of the ratioguidepost is worse in some courts and jurisdictionsthan others. A similar case involving similar partiesin two different parts of the country can result instarkly different punitive damages awards dependingon the approach of the reviewing courts. While someappellate courts have taken to heart the State Farmratio of 1:1 in cases involving substantial compensa-tory damages, others view 4:1 as a starting point, andsome courts take the laissez-faire view that as long asthe ratio is in single digits, due process is assured.

For example, in Bains LLC v. Arco Products Co.,405 F.3d 764 (9th Cir. 2005), the Ninth Circuitmentioned the putative 1:1 ratio established by StateFarm only in passing, despite finding that thecompensatory damages of $50,000 were substantial.Bains involved claims for breach of contract andviolation of § 1981 brought by a trucking companythat alleged it suffered economic damages as a resultof discrimination. Explaining that this was not the

10 In a recent study of punitive damages awards exceeding$100 million, the authors concluded that, "If strictly applied,limiting the ratio of punitive damages to compensatory damagesto 1:1 would eliminate about two-thirds of the cases from the$100 million blockbuster category." Alison F. Del Rossi andW. Kip Viscusi, The Changing Landscape of BlockbusterPunitive Damages Awards, 12 Am. L. & Econ. Rev. 116, 155(2010).

17rare case that would justify punitive damages inexcess of a single-digit ratio, the court ruled that the"controlling Supreme court authority . . . implies apunitive damages ceiling in this case of, at most,$450,000 (nine times the compensatory damages)."Id. at 776.

Other Ninth Circuit cases similarly take 4:1 orhigher as the appropriate starting point in the analy-sis. In Zhang, another § 1981 race discriminationcase, the court affirmed a 7:1 ratio, saying, "We areaware of no Supreme Court or Ninth Circuit casedisapproving of a single-digit ratio between punitiveand compensatory damages, and we decline to extendthe law in this case." 339 F.3d at 1044. See alsoHangarter, 373 F.3d at 1014 (rejecting defendant’sargument that punitive damages should not exceed a1:1 ratio because State Farm’s ruling is "not binding,no matter how factually similar the cases may be").

Some state appellate courts have similarlyexplored only the upper boundaries of the State Farmratios while ignoring the lower ones. In Seltzer, theMontana Supreme Court rejected the notion that "a9:1 ratio is in almost all cases the constitutionallimit." 154 P.3d at 611. Citing Hangarter, the courtsaid, "[T]he Ninth Circuit Court of Appeals has recog-nized that Campbell’s reference to a 1:1 ratio does notestablish a categorical rule in favor of a 1:1 ratiowhere compensatory damages are substantial." Id. at612. The Montana court held that a ratio of 18:1complies with State Farm’s ruling because it does notexceed single digits "to a significant degree." Id.; seealso Gober, 137 Cal.App.4th at 222 (affirming 6:1ratio in case involving substantial compensatorydamages and "a modest degree of reprehensibility").

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In Flax, the Supreme Court of Tennessee, in a caseinvolving an alleged design defect in a seat back,found that an award of $2.5 million is not "so large asto require a ratio of 1:1." 272 S.W.3d at 539. Nor didthe Flax court think that it needed to adhere to aratio of 4:1. Id. at 540. Flax is also notable becausethe court expressed confusion about the relationshipamong the three guideposts. Noting that the thirdguidepost "seems to compel a dramatically differentconclusion" than the other two--i.e., a much lowerpunitive damages award--the court confessed it was"unfortunately left with little guidance as to how toresolve this discrepancy because both Gore andCampbell are cases in which all of the guidepostssuggest the same result." Id. Accordingly, it simplyignored the discrepant third guidepost and approveda 5:35.1 ratio.

The picture that emerges is one of confusion, bothfor the courts who have to apply the guideposts andfor litigants who need to understand their potentialliability if punitive damages are imposed. Faced withuncertainty, it appears many courts have concludedthat the constitutionally "safe" course is to approvepunitive damages awards with a 9:1 or lower ratio,regardless of the degree of reprehensibility orwhether the compensatory damages are substantial.If this Court takes only the most outrageous orshocking cases, it leaves the lower courts free to runroughshod over the Court’s dictates that 1:1, or atmost 4:1, is at the outer limits of due processrequirements. The Court should grant review inorder to put teeth into the ruling that a 1:1 ratio isthe outer limit of due process in a case with substan-tial compensatory damages, that all the guidepostsmust align for a punitive damages award in excess of

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1:1, and that it is the exceedingly rare case thatwould justify a ratio in excess of 4:1.

II. THE PROBLEM OF UNPREDICTABLEAPPLICATION OF THE GUIDEPOSTS ISCOMPOUNDED BY INCONSISTENTDEFINITIONS OF "COMPENSATORY"DAMAGES

Due process limitations are required to lendpredictability to the amount of punitive damages thatmay be awarded in a given case. Facing litigation, adefendant can arguably apply the reprehensibilityfactors to its own conduct to assess the likelihoodthat reprehensibility will be found and to whatextent. Similarly, potential compensatory damagescan be estimated. If a consistent, or, at least,predictable, ratio were applied between punitive andactual damages, the defendant would have a reason-ably good sense of the outer limits of its exposure inany given case. However, there is no consistency orpredictability to the ratios, which is problem enough.When combined with fluid concepts of what can beincluded in the definition of "compensatory" damages,the problem is magnified to the point of unconstitu-tionality.

A ratio is only useful if the defendant can predictthe likely numerator and denominator. Not only issuch predictability sorely lacking at the beginning ofa case, but the fact that, after the jury’s verdict, thesame set of facts can be manipulated to support avariety of different ratios reveals that the guidelinesare, indeed, illusory and insubstantial. Here, theinclusion of pre-judgment interest as part of thecompensatory award inflated the actual damages of$750,000 to a whopping $13.2 million after applica-tion of the 12% interest rate evidently intended by

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the legislature as penal. This resulted in what wouldhave been a ratio of 86:1 being reduced to only 4:1, aresult the Oklahoma court found in its cursoryfashion to pass constitutional muster. In doing so,the court did not even give lip service to any reasonfor its departure from the 1:1 State Farm ratio forcases involving substantial compensatory damages.

The inclusion of pre-judgment interest is only oneexample of the types of"add-ons" used by some courtsto deflate the ratio from one that seems excessive toone that is at least facially constitutional. Theserange from attorneys’ fees to statutory penalties tocases in which emotional distress is a component ofthe compensatory award. See, e.g., Willow Inn, Inc. v.Public Service Mut. Ins. Co., 399 F.3d 224 (3d Cir.2005) (attorneys’ fees); Modern Management Co. v.Wilson, 997 A.2d 37 (D.C. 2010) (statutory trebledamages); Roby v. McKesson Corp., 101 Cal. Rptr. 3d773 (Cal. Ct. App. 2010) (emotional distress partiallypunitive). As in this case, other courts have includedas "compensatory" elements of damages that farexceed the actual harm caused to the plaintiff,resulting in unconstitutional punitive damagesawards. This Court should grant certiorari to rectifythe injustice done to Petitioners and to provide clearguidance to other courts regarding the proper compo-nents of "compensatory" damages for purposes of thedue process ratios.

III. PRODUCT MANUFACTURERS AREADVERSELY AFFECTED BY UNPRE-DICTABLE AND ARBITRARY PUNITIVEDAMAGES AWARDS

Product manufacturers are among the defendantswho are often adversely affected by unpredictableand grossly excessive punitive damages awards. It is

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not difficult to see why, as the elements of reprehen-sibility--"the most important indicium of the reason-ableness of a punitive damages award"ll--arepresent in many product liability cases. These casesoften involve physical, as opposed to economic harm.Design defect cases always involve intentionaldecisions regarding costs and benefits of the product’sdesign, and manufacturers are thus more likely to beconsidered to be in reckless disregard of health orsafety. See, e.g., David G. Owen, Problems in Assess-ing Punitive Damages Against Manufacturers ofDefective Products, 49 U. Chi. L. Rev. 1, 24-26 (1982)("[A] manufacturer’s choices involving necessarysafety trade-offs and statistically inevitable risksalways can be viewed in a sense as intentionalwrongs to consumers hurt by such products .... ").The defendant is often a large corporation (likelyfrom another state) while the plaintiff is an injuredindividual (sometimes a child or elderly person), whois by definition more vulnerable, both financially andotherwise. The design decisions at issue affectmillions of identical products, so juries are oftenaware of other similar incidents and injuries, makingthe conduct seem even more reprehensible. Id. at 28-30. And juries are subject to hindsight bias, whichcomes into play in cases involving cost-benefit analy-sis with disturbing frequency. See, e.g., W. KipViscusi, Corporate Risk Analysis: A Reckless Act?, 52Stan. L. Rev. 547, 563 (2000) ("Instead of comparingexpected benefits and costs, jurors may compare theenormous cost to the victim with the relativelynegligible cost of the safety improvement.")

Gore, 517 U.S. at 575.

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Since, in practice, the reprehensibility guideposttrumps the ratio guidepost, product manufacturersare likely to be inordinately affected by grossly exces-sive punitive damages awards. In a recent study ofso-called "blockbuster" punitive damages awards(those of $100 million or more) issued since 1985, theauthors concluded that a disproportionate number ofsuch awards involved the automobile, cigarette,pharmaceutical/health care and energy/chemicalindustries. Alison F. Del Rossi and W. Kip Viscusi,The Changing Landscape of Blockbuster PunitiveDamages Awards, 12 Am. L. & Econ. Rev. 116, 126& Table 2 (2010). The mean ratio of punitive tocompensatory damages ranged from 19:1 for theautomobile industry to 11,125:1 for the cigaretteindustry. Id. 12

The effect of such disproportionality directed atproduct manufacturers strikes at the heart of oureconomy. The threat of unlimited liability results inhigher prices for consumer goods, less innovation andself-imposed restrictions on the products thatare developed and brought to market. See, e.g., U.S.GEN. ACCOUNTING OFFICE, GAO/AIMD-95, MEDICALLIABILITY: IMPACT ON HOSPITAL AND PHYSICIAN COSTS

EXTENDS BEYOND INSURANCE 16 (1995) ("Manufac-turers pass on their liability costs to hospitals andphysicians in their products’ prices."); Richard L.Manning, Changing Rules in Tort Law and theMarket for Childhood Vaccines, 37 J.L. & Econ. 247,273 (1994) ("liability costs have caused dramaticincreases in vaccine prices").

12 The latter ratio is even more alarming than it appears,because a Florida jury’s $145 billion punitive damages award ina tobacco class action was excluded. Id.

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In addition, the inability to predict and manageliability risks has a tendency to force settlementsbecause proceeding to trial is simply too dangerous.Much has been written about the decline of the jurytrial, particularly in federal courts. See, e.g., MarcGalanter, The Hundred-Year Decline of Trials andthe Thirty Years War, 57 Stan. L. Rev. 1255 (2005);Hon. Sam Sparks and George Butts, DisappearingJuries and Jury Verdicts, 39 Tex. Tech L. Rev. 289(2007). Certainly, one factor that has influenced thistrend is the threat of large punitive damages awards.See, e.g., Royal Furgeson, Civil Jury Trials R.I.P.?Can it Actually Happen in America?, 40 St. Mary’sL.J. 795, at 861 (2009) ("One of the major criticismsof juries is the unpredictability of their decisions onpunitive damages.") If defendants are unwilling totry cases because of the risk of runaway punitivedamages awards, jury trials will continue to die aslow death, and our system of justice will be furthereroded.

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CONCLUSION

As in Gore, "a review of this case would help toilluminate ’the character of the standard that willidentify unconstitutionally excessive awards’ of puni-tive damages." 517 U.S. at 568 (quoting HondaMotor Co. v. Oberg, 512 U.S. 415, 420 (1994)). TheCourt should grant the petition for a writ of certiorariin order to clarify the limits on punitive damagesawards imposed by due process, to establish theproper relationship among the Gore guideposts, andto end continuing uncertainty about the propercomponents of "compensatory" damages.

Respectfully submitted,

Of Counsel:HUGH F. YOUNG, JR.PRODUCT LIABILITY

ADVISORY COUNCIL, INC.1850 Centennial Park DriveReston, Virginia 20191(703) 264-5300

November 12, 2010

TERRI S. REISKINCounsel of Record

WALLACE KING DOMIKE& REISKIN, PLLC

2900 K Street, NWSuite 500Washington, DC 20007(202) 204-1000treiskin@wallaceking.com

Attorneys for Arnicus Curiae