Punitive Damage Reform in Financial Injury Cases Requires Federal Action

By Congressman Bob Barr 

With increasing and troubling frequency, an article will appear in the newspaper about a judgment for punitive damages in a financial dispute that is completely out of proportion to the actual dollars at stake in the underlying dispute. Perhaps it will trigger a casual shake of the head in amazement and disbelief over the essential arbitrariness of courts and juries in such cases. For me, however, as a member of the House Judiciary Committee, these stories are further proof of the need for the Congress to take action to bring a sense of balance and proportion to an important component of the nation’s civil justice system.

One of the most recent, and most infamous, cases in point is the United States Supreme Court case concerning a $600 car repair dispute that turned into a $4 million punitive damage award. Last year’s rejection of the award in BMW v. Gore, 116 S.Ct. 1589 (1996), as contrary to due process, sent an important signal about the need to rein in the disturbing trend toward “roulette wheel” justice in financial injury cases. As no less an organ of the liberal establishment, The Washington Post, editorialized in February of last year, “[w]e have a long record of uneasiness with punitive damages . . . . [T]he system of justice . . . ought to be perceived as deliberate and measured, not as a crapshoot.”

During the first session of this 105th Congress, proponents of civil justice reform concentrated their efforts on a longstanding campaign to change product liability law. There is a clear need for remedial attention in this area, and because of the easily demonstrable link between the flow of products from one state to another and Congress’s authority to regulate interstate commerce, the basis for federal action in product liability cannot be seriously challenged. But notwithstanding a long-time effort going back two decades to produce meaningful product liability law reform, progress has been slow and limited to very few products.

Now is the time to open up a new and important front in the campaign to achieve civil justice reform. Unlike product liability, where physical injury — especially when it is severe or results in death — can create strong policy disincentives to strict limits on liability, financial injury cases more clearly pit parties against one another on an economic playing field. These cases, which often involve commercial or employment practices, real estate, securities or insurance disputes, are of such a contractual nature as to rarely, in the past, have implicated punitive damage relief, let alone massive judgments out of proportion to the alleged financial injury. Yet, in an era in which civil litigation is advanced as just another means to exact economic redistribution from deeper to shallower pockets, jury verdicts for punitive damage claims in financial injury cases have soared.

This past spring, the RAND Institute for Civil Justice issued a report on jury verdicts for punitive damage claims in financial injury cases. The study documented in startling detail the enormous increase in punitive damage awards in such cases in this decade — from $1.2 billion in 1985-89 to $2.3 billion in 1990-94; and the increasing percentage of total damages awarded in such cases that punitive damages represent — from 44 percent earlier to 60 percent more recently.

The study, which already has generated a hearing before the Senate Judiciary Committee, now gives the Congress a new and much-needed window into the burdens this problem poses for the national economy. As objective, academic studies have noted, high punitive damages in these categories of cases drive settlement costs up; hurt low-income consumers by forcing up prices on those who rarely are the beneficiaries of such claims; and redirect precious capital from productive investment to nonproductive transactional costs.

The study also documents the wide variation in the frequency of such punitive damage verdicts from one jurisdiction to another. For example, while punitive damage awards are relatively infrequent in New York and St. Louis, they are awarded in one-seventh of all financial injury verdicts in Texas, in one-fifth of all such verdicts in California, and up to one-third of financial injury cases in America’s modern Mecca of punitive damage awards — Alabama.

As a result of the Supreme Court’s BMW decision, financial injury cases that trigger outrageous punitive damage awards have been identified as constitutional due process violations. It should be equally clear, however — especially when the dramatic variations in the results of such cases among the states are considered — that such verdicts also place a palpable burden upon interstate

“Yet, in an era in which civil litigation is advanced as just another means to exact economic redistribution from deeper to shallower pockets, jury verdicts for punitive damage claims in financial injury cases have soared.”

commerce. Enterprises that do business regionally or nationally face a bewildering array of legal approaches to financial injury liability that invite the kind of parochial banditry the interstate commerce clause was designed to prevent.

To be sure, some conservatives, urged on by a plaintiff’s trial bar that seeks to cloak itself in the mantle of states’ rights, have cautioned against legislating on this issue. They harbor concern that as a matter of states’ rights, it is inappropriate under our federal system to have Congress legislate so as to curb what an Alabama or California state court and jury may do in one instance or another. This is a serious distortion of the constitutional principles of federalism.

There are many areas of public life that the Constitution reserves to the states and the people, not the least among them the education of our nation’s youth and the enforcement of law and order. Yet, huge bureaucracies to advance a national education agenda and to usurp the traditional police powers of the states have been established in Washington, D.C. over the past 30 years. Those who truly subscribe to restoring the Founding Father’s vision of that which should remain within the scope of state and local control and discretion should first be heard on these matters.

Civil justice reform has been an important priority of the Congress for the past several years. It can become a reality if reformers not only work to change what happens at the state level, but focus their efforts on the significant federal issues at stake. The nation’s ability to ensure that business can be conducted so that all Americans can prosper hangs, in part, on a fair, reasonable and sensible system of dispute resolution. As the RAND study documents, key components of such a system are sorely lacking. And make no mistake about it, the Congress is an appropriate and necessary part of the solution. Together, we can achieve meaningful civil justice reform for the benefit of all Americans.

 Click here to read Congressman Barr’s December 1997 Leadership Breakfast address.

Congressman Bob Barr represents the 7th District of Georgia. This article first appeared in The Georgia Policy Review.

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