Accident, Health and Life Insurance Committee

(IADC member Steven M. Kohn is a member of Crosby, Heafey, Roach & May in San Francisco. He thanks Suzanne Raymond and Nora Levine for their assistance in the preparation of this material.) ONE OF the most anticipated and notorious cases addressed by the U.S. Supreme Court in recent years was the infamous paint job case-BMW of North America v. Gore, 517 U.S. 559 (1996). Dr. Gore sued BMW in state court for its failure to disclose that the automobile he Gore purchased had been repainted. At trial, the jury awarded him $4,000 in compensatory damages and $4 million in punitive damages. BMW appealed. The Alabama Supreme Court conditionally affirmed the punitive damages award, remitting the award to $1 million. Thereafter, the U.S. Supreme Court granted certiorari. Three In a lengthy opinion, the Supreme Court reversed the Alabama Supreme Court, finding the $1 million punitive damage award as grossly excessive and violative of the due process clause of the 14th Amendment of the U.S. Constitution. The Court determined that, under the due process clause, a defendant has the right to fair notice not only of the conduct that may subject him to punishment, but also of the severity of the penalty that a state may impose for such conduct. The Court set out three guideposts by which a reviewing court could determine whether a punitive damages award is constitutionally excessive: (1) the degree of of the defendant's conduct; (2) the ratio between the plaintiff's award of compensatory damages and the amount of punitive damages; and, (3) the difference between the punitive damages award and the civil or criminal sanctions that could be imposed for comparable misconduct. Using these guideposts, the Court found that BMW's conduct was not reprehensible. It could have incurred only a mere $2,000 fine under Alabama's consumer fraud statutes for its conduct. The Court similarly noted that the plaintiff was a successful doctor who was not financially vulnerable and that he had suffered only $4,000 in purely economic damages. Under these facts, the Court concluded that BMW could not have reasonably anticipated that its conduct could incur a punitive damages of $4 million or even a reduced award of $1 million. The Court accordingly held the award violated BMW's due process rights. On remand, the Alabama Supreme Court applied the three factors and reduced the punitive damages award to $50,000. Happenings since Gore Since Gore, the Alabama Supreme Court has analyzed punitive damages awarded by Alabama juries as follows: * First Commercial Bank v. Spivey, 694 So.2d 1316 (Ala. 1997). Borrowers sued the bank, alleging breach of contract, breach of fiduciary duty, and fraud in connection with a promissory note and mortgage. The bank appealed from a judgment entered on a $1 million jury verdict ($500,000 in compensatory damages and $500,000 in punitive damages). In affirming the judgment, the Alabama Supreme Court reviewed the punitive damage award based on the factors set out in Green Oil Co. v. Hornsby, 539 So.2d 218 (Ala. 1989), and Gore. The court stated, Given the overall of [the bank's] actions and the effect those actions had on [the plaintiff] and her family, we cannot conclude that the oneto-one ratio of compensatory damages ($500,000) to punitive damages ($500,000) presented in this case is unconstitutionally excessive. * Hillcrest Center Inc. v. Rowe, 1997 WL 707069 (Ala. 1997). (Not released for publication as of June 1, 1998.) Commercial lessees sued a lessor and building manager for fraudulent inducement and rescission of lease. The trial court entered a judgment on a jury verdict in favor of the plaintiff for $47,000 in compensatory damages and $200,000 in punitive damages. Later the trial court remitted the punitive damages award to $130,000. Applying the three from Gore, the Alabama Supreme Court found that the reprehensibility of the defendants' conduct is of a degree that supports the jury's punitive damages award. …