Constitutionality of Punitive Damages in Excess of Compensatory Damages
The Bert Company v. Turk, 257 A.3d 93 (Pa. Super. 2021), allocatur granted March 29, 2022, appeal dockets 13 & 14 WAP 2021
In this case, the Supreme Court will consider (1) whether a punitive damage award that is 11.2 times greater than a compensatory damages award presumptively violates substantive due process; (2) whether in cases involving joint and several liability where compensatory damages are awarded cumulatively against all defendants, the constitutionally permissible ratio of punitive-to compensatory damages should be calculated on a per-defendant basis; and (3) as a matter of first impression, whether in reviewing the constitutionality of a punitive damages award, a court can consider speculative potential harm to the plaintiff where evidence of potential harm was not presented to the jury.
Matthew Turk, an insurance broker, was an employee of the Bert Company d/b/a Northwest Insurance (NWI). Turk left NWI to join NWI’s competitor, First National Family (comprised of First National Insurance Agency, First National Bank, and FNB Corporation), as part of a strategic “lift out” – where a group of individuals from the same employer is hired by another employer in a short time period. Mr. Muchnok, President of First National Insurance Agency, referred to this as a plan to “initiate a hostile takeover” of NWI. Slip op. at 7. Superior Court summarized the facts as follows:
In 2016, insurance broker Matthew Turk divided his loyalty between two masters. One was his then-employer, the Bert Company, d.b.a. Northwest Insurance Services (NWI). The other was the self-styled “First National Family,” who, through months of meetings and strategizing, offered Mr. Turk a new position and made him its undercover servant to destroy NWI’s relationship with its customers and other employees. As the evidence showed, the First National Family plotted to “lift out” Mr. Turk and his colleagues, en masse, and transplant them into its own corporate structure. The Family hoped these new hires would bring their NWI clients with them and, thereby, hollow out NWI. This, in turn, would potentially force NWI to sell its entire clientele to the First National Family.
Slip op. at 2-3. NWI filed breach of contract and tort against First National Family and former employees that were “lifted out,” including Turk. At trial, NWI presented evidence that First National Family intended to inflict as much economic harm to it as possible in order to force NWI into sacrificing its entire staff and business to First National Family, and that Turk was an active and willing participant in the scheme. Following a trial, the jury found Turk liable for breach of contract, breach of fiduciary duty, and civil conspiracy and the First National Family liable for civil conspiracy and unfair competition, and awarded $250,000 in compensatory damages. The jury also awarded $2.8 million in punitive damages against Turk and First National Family (collectively, the Defendants), allotted as follows:
First National Insurance Agency, LLC: $1.5 million;
First National Bank: $500,000; and
FNB Corporation: $500,000.
The trial court entered judgment in accordance with the jury’s verdict. In determining whether the punitive damage award was excessive, the trial court looked to the punitive-to-compensatory damages ratios for each individual defendant (1.8:1 for Turk; 6:1 for First National Insurance Agency; 2:1 for First National Bank; and 2:1 for FNB Corporation) rather than the 11:1 ratio for the aggregate $2.8 million award. Relying on the individual ratios, the trial court concluded that the punitive damage award was not unconstitutional and that “[g]iven the facts and circumstances in this case, the punitive damages are not so outrageous as to shock [the trial court’s] conscience.” Slip op. at 40.
The Defendants appealed to Superior Court, arguing that the aggregate punitive damages award 11 times greater than the compensatory damages award violated the Due Process Clause of the United States Constitution. In support, the Defendants relied on the U.S. Supreme Court’s decision in BMW of N.A., Inc. v. Gore, 517 U.S. 449 (1996), in which the 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.” Slip op. at 45-46. As additional support, the Defendants pointed to State Farm Mutual Automobile, Ins. Co. v. Campbell, 538 U.S. 408 (2003) in which the U.S. Supreme Court observed that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Slip op. at 47. Defendants further argued that whether punitive damages are excessive should be considered on an aggregate basis, not a per-defendant basis.
Superior Court held that the total amount of punitive damages awarded was not per se excessive in violation of substantive due process because excessiveness of a punitive damage award is a fact-intensive inquiry and there is no bright-line amount a punitive damages award could not exceed. Superior Court agreed with the trial court’s computation of punitive-to-compensatory damages ratios on a per-defendant basis, rather than by aggregating all of the compensatory and punitive damages on a per-judgment basis. In so holding, Superior Court relied on cases decided by the Ninth Circuit and Texas state appellate courts, in which those courts reasoned that calculating damages ratios on a per-judgment basis does not account for situations where defendants act with varying degrees of culpability, and that where a jury imposes punitive damages on a per-defendant basis according to each defendant’s culpability, the alleged excessiveness of the resulting damages should also be evaluated on a per-defendant basis.
Superior Court further found that in considering whether punitive damages are excessive in violation of substantive due process, the court can also consider the potential harm the plaintiff could have suffered due to a defendant’s misconduct. Thus, considered on a per-defendant basis, Superior Court found that the punitive damages awarded here were not excessive compared to the actual and potential harm that the Defendants sought to cause to NWI in its scheme to steal NWI’s assets, employees, and book of business for an entire region. Superior Court concluded:
… the record abounds with evidence from which the jury could conclude that this raid was exactly what Mr. Muchnok called it, an attempted “hostile takeover” of NWI from top to bottom. The jury could further infer that the First National Family wanted to beat NWI into a financially distraught position and then force it to sell most or all of its business to the First National Family at whatever price the First National Family deigned to pay.
Immediately after the raid, numerous clients began fleeing from NWI to FNIA, so NWI obtained an injunction against its ex-employees and FNIA. If it had not done so, the actual damages to NWI could have been far worse than the jury found. Thus, the potential harm that the tortfeasors desired to inflict on NWI far exceeded the $250,000 in compensatory damages that the jury found NWI actually suffered. The tortfeasors sought to inflict potential harm upon NWI equal to the total value of that company.
Under Gore, the jury had every right to punish the tortfeasors’ attempt to steal a corporation that Mr. Bert estimated was worth at least $9,400,000. As such, the actual harm they inflicted ($250,000) and the remaining value of the company ($9,150,000) combine for a punitive-damage denominator of $9,400,000.
The jury imposed punitive damages of $300,000 against Mr. Turk, $1,500,000 against FNIA, $500,000 against First National Bank, and $500,000 against F.N.B. Corp. These defendant-specific numerators pale in comparison to the staggering, potential harm that they all wanted to inflict on NWI. Thus, the punitive-damages-to-potential-harm ratios, per defendant, are significantly less than even a one-to-one ratio. They are as follows: a one-to-31.333 ratio for Mr. Turk, a one-to-6.266 ratio for FNIA, and a one-to-18.8 ratio for First National Bank and F.N.B. Corp. Again, those figures come nowhere near a one-to-one ratio of the actual-plus-potential harm that Mr. Turk and the First National Family desired to cause.
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. Considering the potential harm that Mr. Turk and the First National Family attempted to inflict, the punitive damages that the jury actually awarded in no way implicate a federal, constitutional violation. Their claim that this award of punitive damages violated the Fourteenth Amendment is frivolous.
Slip op. at 69-70 (emphasis in original).
While dissenting as to the majority’s conclusion that First National Bank and FNB Corporation could be held liable, Judge Colins concurred with the majority’s conclusions as to the compensatory and punitive damages awards against FNIA and Turk, but would affirm the punitive damages awards on different grounds than the majority. Specifically, Judge Colins opined that:
In light of my conclusion that FN Bank and FNB are entitled to JNOV on all claims and that only the $300,000 punitive damage award against Turk and $1.5 million punitive damage award against FNIA should remain, the ratio of the total legally valid punitive damages awards, $1.8 million, to the $250,000 in compensatory damages is 7.2 to 1, significantly less than 10 times the compensatory award. I therefore do not find it necessary to consider the validity of a $2.8 million punitive damages award in this case or to address the majority’s analysis of whether the punitive damages awards may be separately analyzed for each defendant without considering their cumulative effect and do not join in the majority’s conclusions on these issues.
Concur/Dissent slip op. at 19-20. Judge Colins further found the argument that any ratio of punitive to compensatory damages above 2 to 1 is constitutionally excessive without merit, reasoning that:
In State Farm, the Supreme Court stated that “an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety” and concluded that where the compensatory award was $1 million and contained a noneconomic, punitive element, analysis of the due process considerations “likely would justify a punitive damages award at or near the amount of compensatory damages.” 538 U.S. at 425, 429, 123 S.Ct. 1513. The Court, however, declined to impose a specific ratio that punitive damages cannot exceed and held that “because there are no rigid benchmarks that a punitive damages award may not surpass, ratios greater than those we have previously upheld may comport with due process where ‘a particularly egregious act has resulted in only a small amount of economic damages.’ ” Id. at 425, 123 S.Ct. 1513 (quoting BMW of North America, Inc. v. Gore, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996)).
Here, the compensatory award consisted of solely economic damages with no punitive component. Moreover, the compensatory damages that the jury found that Plaintiff suffered were low in proportion to the harm that Plaintiff showed that FNIA and Turk sought to inflict on Plaintiff. While Plaintiff ultimately suffered only $250,000 in damages, the amount of business that FNIA and Turk sought to make Plaintiff lose was at least $1.3 million. N.T. Trial, 12/11/18, at 51. The amount of the total punitive award, $1.8 million, while high in comparison to Plaintiff’s actual loss, is not extraordinary in comparison to the harm and gain that FNIA and Turk sought from their conduct. Given these facts, a 7.2 to 1 ratio of punitive damages to compensatory damages is not unconstitutional under the decisions of the United States Supreme Court or our courts. See Empire Trucking Co. v. Reading Anthracite Coal Co., 71 A.3d 923, 938-39 & n.3 (Pa. Super. 2013) ($1.5 million award in business tort case was not unconstitutionally disproportionate to $271,000 compensatory damages award).
Concur/Dissent slip op. at 20-21.
The Pennsylvania Supreme Court granted allocatur, limited to the following 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?