Although these are issues of first impression for the Supreme Court of Pennsylvania, it is not the first court to grapple with the presumptive unconstitutionality of punitive-to-compensatory double-digit ratios.

The Supreme Court of Pennsylvania recently granted review in The Bert Company d/b/a Northwest Insurance Services v. Matthew Turk, et al., 14 WAP 2022, which presents important and unresolved questions regarding the constitutionality of excessive punitive damages. Although the Supreme Court of the United States has stated that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process,”[1] this case involves a punitive damages award over 11 times greater than the compensatory damages award. A major question that the Supreme Court of Pennsylvania will resolve is how to determine the ratio when there are multiple defendants: per defendant or per judgment?

Defendant-petitioner Matthew Turk was an employee of plaintiff-respondent Northwest Insurance (NWI, aka the Bert Company) until 2017, when he joined NWI’s competitor, defendant-petitioner First National Family (comprised of First National Insurance Agency LLC, First National Bank and FNB Corporation). Turk joined First National Family through a “lift out,” the practice of hiring a group of individuals from the same employer in a short time period. NWI sued Turk, First National Family and four former employees of NWI who also left for First National Family. Although the claims against the four former employees were dismissed, NWI won a verdict against Turk and First National Family of $250,000 in compensatory damages on claims of breach of contract and tort. NWI was also awarded $2.8 million in punitive damages against Turk and First National Family, broken down by defendant as follows:

Matthew Turk: $300,000 (and $361,093.74 for NWI’s attorney fees);

First National Insurance Agency, LLC: $1.5 million;

First National Bank: $500,000;

FNB Corporation: $500,000.

On appeal to the Superior Court of Pennsylvania, Turk and the First National Family challenged the constitutionality of the excessive punitive damages, citing the U.S. Supreme Court’s decisions in BMW of N.A., Inc. v. Gore, 517 U.S. 449 (1996) and State Farm Mutual Automobile, Ins. Co. v. Campbell, 538 U.S. 408(2003). In Gore, the Supreme Court recognized three factors for courts to consider when determining whether a punitive damages award is grossly excessive: “(1) the degree of reprehensibility of defendant’s conduct, (2) the relationship of the punitive verdict to the harm or potential harm suffered by the victim, and (3) any sanctions for comparable misconduct in statutory or decisional law.”[2] Although the U.S. Supreme Court has never created “a bright-line ratio” for punitive damages,[3] it recognized in State Farm that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.”[4] Turk and the First National Family argued that the punitive damages award violated the Due Process Clause of the 14th Amendment of the United States Constitution because the aggregate punitive damages award is 11 times greater than the compensatory damages award.

The Superior Court affirmed the punitive damages award. Instead of aggregating the punitive damages, the Superior Court calculated a ratio of compensatory to punitive damages for each defendant. When calculated on a per-defendant basis, each defendant’s punitive damages fell within a single-digit ratio. The Superior Court also concluded that the punitive damages award is reasonable when the “potential harm” Turk and the First National Family could have caused to NWI is factored into the calculation of punitive damages.[5] The Superior Court stated, “Given the total disregard for the rule of law that these four tortfeasors displayed, the punitive damages that the jury awarded are light years away from the outer limits of the Due Process Clause.”[6]

The Supreme Court of Pennsylvania granted Turk and the First National Family’s petition for review on three issues:

1. Whether, in cases where the compensatory damages award is substantial, a punitive-to-compensatory damages ratio exceeding 9:1 is presumptively unconstitutional under U.S. Supreme Court precedent?
2. Whether in cases involving joint and several liability—where compensatory damages are awarded, cumulatively, against all defendants and not on an individualized basis—the constitutionally permissible ratio of punitive-to-compensatory damages is calculated on a per-judgment basis and not a per-defendant basis?
3. Whether, in reviewing the constitutionality of a punitive damages award, a court cannot consider the speculative potential harm that the plaintiff could have suffered and introduce it as a post hoc justification for the award, especially when the plaintiff did not present evidence of potential harm to the jury?

Although these are issues of first impression for the Supreme Court of Pennsylvania, it is not the first court to grapple with the presumptive unconstitutionality of punitive-to-compensatory double-digit ratios.

In Simon v. San Paolo U.S. Holding Co., 113 P.3d 63, 77 (Cal. 2005), for example, the Supreme Court of California struck down a punitive damages award with a triple-digit damages ratio. The court interpreted the Supreme Court’s statement in State Farm to create a “presumption: ratios… significantly greater than 9 or 10 to 1 are suspect and, absent special justification (by, for example, extreme reprehensibility or unusually small, hard-to-detect or hard-to-measure compensatory damages), cannot survive appellate scrutiny under the due process clause.” The District Court for the Northern District of Alabama similarly concluded that “if the ratio of punitive to compensatory damages exceeds 9 (the highest possible single digit), a red flag goes up.”[7]

Other courts, however, have upheld double-digit ratios. The Supreme Court of Virginia, for example, upheld a punitive damages award in a driving-while-intoxicated case.[8] Although recognizing that the ratio should “generally be within single digits” the court concluded that “higher ratios may be constitutional where a defendant’s actions are exceptionally reprehensible but result in small economic damage.”[9]

As the Supreme Court seeks to provide guidance to lower courts to fairly and reasonably administer punitive damages awards consistent with U.S. Supreme Court precedent, Pennsylvania businesses should watch closely.

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Notes

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