Supreme Court Decision Sends Corporate America Sigh of Relief

By Kate Prouty

On April 7, the Supreme Court ruled 6-3 in the State Farm v. Campbell case that a punitive damage award was unconstitutionally excessive and violated the Due Process Clause of the Fourteenth Amendment. For accountants and large businesses that are vulnerable to grossly disproportionate punitive and compensatory damage liability, this decision offers a potential sigh of relief. Written by Justice Anthony Kennedy, the pro-business decision appears to indicate the path the Court will most likely take in future punitive damage rulings.

In Campbell, plaintiffs insureds Curtis Campbell (now deceased) and his wife Inez Preece Campbell brought suit against their auto insurance carrier, State Farm, alleging bad faith in handling a claim that had been filed against them. Curtis Campbell was involved in a car accident killing one person, whose family sued Campbell, and injuring another man, whose family also sued Campbell. Although evidence suggests State Farm knew Campbell was at fault in the accident and would not be successful in trial, it refused to settle the case for a pretrial award of $50,000 (Campbell’s policy limit).

Eventually found liable for the injuries incurred in the accident, Curtis Campbell was charged with $136,000 in damages, $50,000 of which State Farm offered to cover, suggesting the Campbells sell their home to make up the remainder. Because State Farm refused to take the initial settlement offer and did not handle their case in a prompt or serious manner, the Campbells claimed they suffered emotional distress.

Claiming these dissatisfactions with their insurance company, the Campbells sued State Farm and won a huge reward of $145 million in punitive damages, tied to a much smaller compensatory damages award of $1 million. Compensatory damages are intended to redress a plaintiff’s concrete monetary loss, while punitive damages are awarded in excess of actual damages to address the purposes of deterrence and retribution.

Although the Utah Supreme Court endorsed the awards, State Farm brought the case to the U.S Supreme Court for review. It was there that the Court responded to the $145-million-to-$1-million ruling and found in State Farm’s favor, strongly suggesting that punitive damages awarded beyond a single-digit ratio to compensatory damages (in this case, $1 million) would be grossly excessive. Industry experts draw the conclusion that the Court will expect a single-digit ratio in future cases unless a particularly egregious act has resulted in only a small amount of compensatory damages.

Similar to the impetus for the Campbell case, CPAs are sometimes faced with unsatisfied customers. In both cases, lawsuits can occur when a client is expecting more than the firm is offering.

“When clients expect more from a CPA firm than the firm can provide, an ‘expectation gap’ develops, leading to situations in which claims occur and client-CPA relationships deteriorate,” Suzanne Holl, director of loss prevention services with CPA liability insurer Camico, states.

Because many of the Supreme Court’s pronouncements in Campbell apply broadly to all kinds of cases, lower courts should now have access to the doctrinal equipment to control punitive damages. Sources in the profession consider this to be an especially significant ruling for those who previously, and often unsuccessfully, approached tort reform through legislation. They feel the Supreme Court has greatly advanced their cause.