This is the final installment of my six-part series on defenses that every inside counsel should know (Part 1, Part 2, Part 3, Part 4 and Part 5). This column focuses on the defenses now available to dismiss or limit claims for punitive damages. Claims for punitive damages often can be disposed of by summary judgment or a motion to dismiss based upon restrictions on the award of punitive damages provided by the statutes of many states, or a lack of evidence necessary to meet the high evidentiary standards for an award of punitive damages that many states now require. Further, if punitive damages ultimately are awarded, then the amount may be capped or reduced under the laws of many states or based upon recent decisions of the U.S. Supreme Court.
Currently, approximately 45 states either prohibit the award of punitive damages or have enacted some limitations on their recovery. More than 30 states require that a plaintiff prove entitlement to punitive damages by an evidentiary standard that is higher than the usual “preponderance of the evidence” standard. Typically, these states require “clear and convincing” evidence of conduct such as gross negligence, fraud or malice in order to support an award of punitive damages. Many states now allow a defendant to request a bifurcated trial in which evidence of the entitlement to punitive damages or the amount of punitive damages is held over to a second trial phase. Using this method, evidence that is relevant only to the award or amount of punitive damages, such as evidence of the defendant’s net worth, is not revealed to the jury during their deliberations on liability and actual damages. More than 25 states now cap or limit by statute the amount of punitive damages that can be awarded. Approximately 10 states now require that any award of punitive damages be shared with the state or some state entity.
Several recent U.S. Supreme Court decisions also provide useful due process arguments to limit awards of punitive damages. In particular, the 2003 decision in State Farm Mutual Auto Insurance Co. v. Campbell reversed an award of $145 million in punitive damages as excessive and a violation of due process when only $1 million in compensatory damages had been awarded. The U.S. Supreme Court noted in that decision that few punitive awards exceeding a single digit ratio between punitive and compensatory damages will satisfy due process.
Texas provides a good example of the statutory limitations on punitive damages that now exist in many states. Under Texas law, punitive damages may be awarded only if the claimant proves by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of punitive damages results from fraud, malice, or gross negligence. Further, a jury finding of liability for punitive damages and the amount of punitive damages to be awarded must be unanimous. This burden can be contrasted to the typical burden of proof in a civil case in Texas, which requires that the claimant convince only 10 of the 12 jurors of the claimant’s position “by the greater degree and preponderance of the credible evidence.”
Texas also allows a defendant to request a bifurcated trial on the amount of punitive damages to be awarded. In the first phase, the jury hears evidence on liability and actual damages, which would not include evidence of net worth and other evidence that is relevant only to the amount of punitive damages that might be awarded. If and only if the jury decides in the first phase that punitive damages should be awarded, then the same jury proceeds to a second phase of the trial in which evidence of the defendant’s net worth and other evidence relevant to the amount of punitive damages is then admitted and heard by the jury.
Texas also limits by statute the amount of punitive damages that may be awarded. Punitive damages awarded against a defendant may not exceed an amount equal to the greater of (1) two times the amount of actual damages awarded, plus either an amount equal to the noneconomic damages awarded by the jury, not to exceed $750,000, or (2) $200,000. Thus, in a case in which significant compensatory damages are awarded, the maximum amount of punitive damages is capped at no more than two times the amount of economic damages awarded plus $750,000.
Claims for punitive damages can be aggressively defended using the statutory limitations now available in most states. These claims can be dismissed, or at least subjected to a much higher evidentiary standard than claims for compensatory damages. If punitive damages are awarded, then they must meet statutory limitations on an amount set forth by the laws of most states and due process limitations established by recent decisions of the U.S. Supreme Court.
I hope you have enjoyed this series on the 6 defenses every inside counsel should know. These are the defenses that I have found in more than 30 years of litigation practice to provide the best opportunities for a dismissal or early case resolution, and here’s hoping that these defenses will provide your company or client with the same success.