Damages Update

The Supreme Court's limitation of punitive damages makes the actual-damages argument that much more significant

 In cutting down the punitive-damages verdict against Exxon Mobil from $2.5 billion to $507.5 million, the U.S. Supreme Court is continuing its decade-long effort to rein in huge awards meant to punish corporate misdeeds. The court held in Exxon v. Baker, handed down on June 25, that punitive damages should not exceed the actual damages of $507.5 million -- a ratio of 1:1.

Writing for the majority, Justice David Souter said that allowing punitive-damages awards that were vastly higher than the actual damages injected an element of unpredictability that violated defendants' rights to due process. The court has been whittling away at the bases for large punitive-damages awards since at least 1996, when it handed down BMW v. Gore, which held that punitive damages cannot be grossly excessive and that a ratio of punitive damages to actual damages of more than 10:1 suggests excessiveness.

While the decision in Exxon v. Baker is limited to federal maritime matters, many observers feel that it will have a significant impact on other types of cases, both federal and state. In fact, Justice Ruth Bader Ginsberg asked in her dissent: "On next opportunity, will the court rule, definitively, that 1:1 is the ceiling due process requires in all of the States, and for all federal claims?"

Whether or not the court places a definitive ceiling on punitive damages, the direction of the court is clear: it will not shy away from holding punitive damages up to close scrutiny. Given the court's likely tendency to impose a strict punitive-to-actual damages ratio, the determination of actual damages takes on a new significance: one of the best ways to guard against blockbuster punitive damages award may be for defendants to craft their actual-damages arguments with extreme care. The best defense against punitive damages is a good actual-damages defense.