From 17 Corporate Crime Reporter 15 April 14, 2003

MICHAEL RUSTAD, THOMAS F. LAMBERT JR. PROFESSOR OF LAW, SUFFOLK UNIVERSITY LAW SCHOOL, BOSTON, MASSACHUSETTS

In a crippling blow to punitive damages, the U.S. Supreme Court last week overturned a $145 million punitive damages award imposed in a case in which the jury assessed $1 million in compensatory damages.

In State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289, slip op. (U.S. Apr. 7, 2003), a 6-3 majority of the Supreme Court held that the punitive damage award violated the Due Process Clause of the Fourteenth Amendment because it was "neither reasonable nor proportionate to the wrong committed," and was an "irrational and arbitrary deprivation" of the defendant's property.

In a chilling threat to injured victims of defective products and consumers robbed blind by insurance companies, the Court ruled that the wealth of a defendant "cannot justify an otherwise unconstitutional punitive damages award."

The Court ruled that any punitive damages award more than 10 times the actual damages for the injury sustained should be presumed excessive -- a violation of substantive due process.

Business lobbyists hailed the ruling a victory for corporations.

But tort law scholars said that Campbell represented a bleak day for tort law's historic leveling effect.

Michael Rustad has written extensively on the development of tort law and has documented the corporate counterattack, which culminated last week in the Supreme Court.

Rustad is the Thomas F. Lambert Jr. Professor of Law at Suffolk University Law School.

We interviewed Rustad on April 9, 2003.

CCR: What is your current position?
RUSTAD: I'm the Thomas F. Lambert Jr. Professor of Law and the Co-Director of the Intellectual Property Law Program at Suffolk University Law Program.

CCR: Who was Thomas Lambert?
RUSTAD: Tom Lambert was a legendary torts teacher whose scholarship was supportive of the expansion of tort rights and remedies in the tradition of Fleming James and William Prosser. Tom was the first Rhodes Scholar from UCLA.

After graduation from Oxford, he completed a fellowship at Yale. After finishing his graduate work at Yale, he taught at Stetson University Law School becoming the youngest law dean in American history at age 26.

Tom was a member of Justice Robert Jackson's team that prosecuted Nazi war criminals at the International Military Tribunal at Nuremberg.

After the war, he taught torts at Boston University Law School. He was chosen by Roscoe Pound, former dean of the Harvard Law School, to edit a journal for trial lawyers. Professor Lambert's column Tom on Torts and his lectures to bar associations and trial lawyer groups in 50 states, made him an important figure in American tort law.

Tom Lambert joined the Suffolk University Law School faculty in 1972 and held the endowed Lambert chair until his death in 1999.

I studied with Professor Lambert in the mid-1980s. I was most impressed by his view that tort law must reconcile the conflict between harsh doctrines and humanistic morality in favor of the interests of the victimized individual.

The assurance that the victims of corporate wrongdoers receive full compensation was a cardinal principle of Tom Lambert's jurisprudential hope that the tort law could create an increasingly just society.

I am inspired by Tom's view that tort law is a central institution in American society because it protects ordinary Americans from powerful habitual defendants.

CCR: What do you teach at the law school?
RUSTAD: I teach the first year course in torts as well as advanced torts. I also continue to teach Sales, Leases, and Licenses, Commercial Law, and Internet Law.

My scholarship is mostly in the fields of tort law, cybertorts, Internet Law, and cybercrime.

I am the author, with Thomas Koenig, of In Defense of Tort Law (New York University Press, 2002).

That book is dedicated to the memory of Professor Lambert and examines the role of tort law in American society: its past, present, and future.

CCR: What is your defense of tort law?
RUSTAD: The hidden face of tort law is its public role of addressing corporate misconduct in a flexible and ever-changing manner without requiring a rigid government bureaucracy at great public expense. Private tort litigants serve the public interest by uncovering dangerous products and practices.

The public law purpose of torts is rarely recognized in law school classes, court decisions or even by tort litigants. Tort law not only performs the manifest function of alleviating "the plight of the injured," but it also fulfills the cause of social justice. The remedy of punitive damages plays a public policy role awarded to the injured person for the public service of uncovering wrongdoing. The film Erin Brockovich depicts the true story of a young woman who helped to launch a toxic torts lawsuit that ultimately resulted in a multi-million dollar settlement against a California utility for polluting the local water supply.

Legal crusaders like Erin Brockovich, Karen Silkwood, and other ordinary Americans have helped to protect the public by uncovering corporate misconduct threatening the public welfare. Our book discusses how tort law protects core American values. A defense of tort law is needed to counter the relentless attacks on our civil litigation system. The corporate-insurance establishment uses carefully crafted language and horror stories to portray corporations as the victims of a litigious society rather than focusing on the plight of the true victims -- those who have suffered because of defective products, negligent medicine, or unreasonably dangerous practices. Our book dispels tort reform myths in the hopes that evolutionary tort law can continue to protect the public from the hazards that Americans will face in the twenty first century.

A recent article in the Vanderbilt University Law Review states that our book is the last vestige of the Prosser model of tort expansionism.

CCR: The hundreds of tort law professors in the United States -- where do they stand on the defense of tort law?
RUSTAD: John C. Goldberg wrote an article in the current issue of Vanderbilt Law Review . (55 Vanderbilt Law Review 1501 (2002) titled, "Unloved: Tort in the Modern Legal Academy" that sets out the reasons by tort law is less popular than other common law subjects. Professor Goldberg views our book, In Defense of Tort Law, as a contemporary example of scholarship in the Prosser/Green tradition of "public law in disguise." My impression is that tort scholars are skeptical of the role of tort law as an instrument of public policy. No empirical study exists about the views of American tort teachers. But tort scholarship seems to be dominated by scholars who believe that tort law is a source of inefficiency and unfairness. Many of the leading casebooks are now authored by professors who are either tort law agnostics or avowed "tort reformers." Law and economics has become the most influential paradigm in torts scholarship. The conservative branch of law and economics measures efficiency by how much wealth is maximized by the common law.

American tort teachers are now focusing upon efficiencies, transactions costs, redistributive motives and indeterminancies. Some tort scholars contend that tort law has an inherent inability to limit risk. Some tort scholars even predict the death of tort law. There is little by way of empirical work on whether tort teachers generally endorse tort reform. A content analysis of the leading tort casebooks demonstrates a skepticism about tort law. One of the editors of Prosser's famous casebook is the counsel for the American Tort Reform Association and the best known spokesman for tort reform.

CCR: Who was Prosser?
RUSTAD: William Prosser from the University of California wrote the leading casebook on tort law as well as the most influential treatise, Prosser on Torts.

Prosser also played a key role as a reporter for the Restatement (Second) of Torts which was enormously influential.

Prosser's perspective was that tort law need to be forward-looking. The tort reform advocated by Prosser was to eliminate draconian defenses, immunities, and other barriers to full recovery. Prosser was a grand theorist who set out the parameters of progressive tort law. My mentor and former teacher was squarely within the tradition of William Prosser, Leon Green, and Fleming James in positing a public role for tort law.

Since about 1980, tort law has been retracted and retrenched in the legal academy, the courts, and the legislatures. The new generation of tort scholars are very skeptical fo the role that tort can play in society.

So we are in a period of severe critique of the public policy role of tort law.

CCR: Is there an association of tort law professors?
RUSTAD: There is a tort law section of the American Association of Law Schools. This June, the AALS is sponsoring a torts conference for the first time in five years. The topic is on judicial control of torts. I'm speaking on the judicial control of damages.

CCR: Would your view on torts be in the minority of tort law professors?
RUSTAD: I would characterize my perspective as being in the law and society tradition. The law and society school of tort law uses empirical research to compare the law in action with the law in the books. There are a number of prominent torts scholars who are in this tradition.

I would characterize the work of Marc Galanter (Wisconsin), Ted Eisenberg (Cornell), Lucinda Finley (Buffalo), Richard Abel (UCLA) Michael Saks (Arizona State) as also following a law and society model.

My sense is that progressive tort law or law and society approaches are in the minority. Many of the prominent torts scholars are being funded by conservative think tanks or corporations.

If you follow the money, the funding for much of the anti-tort law research is from corporate America.

The John Olin Foundation gave the Federalist Society hundreds of thousands of dollars. You will find that many leading law and economic scholars get money from the John Olin Foundation. The Olin Foundation endows chairs at the nation's leading law schools. There is not a one to one association between funding and conservative thought. If you follow the dollars, you will find evidence of a movement to influence American legal scholarship. And the conservative dollars go to elite law schools -- Harvard, Columbia, Cornell, Georgetown.

When you have the top ranked law schools receiving millions of dollars from these conservative foundations, this is going to have an impact on scholarship.

Karl Mannheim's Ideology and Utopia (1936) created a field of study that he called the sociology of knowledge. I am confident that many of the ideas permeating tort scholarship are socially constructed and funded by corporate America.

CCR: In today's Wall Street Journal, there is an article titled "Megadamages Against Industry May Be History" and there is a lead editorial titled "Supremes Try to Make up for Earlier Tort Mistakes." The corporatists consider Campbell a victory. They say it will limit megadamages.

Do you agree?
RUSTAD: Yes. The Supreme Court's opinion in Campbell may be the last nail in the coffin of large punitive damage awards. The U.S. Supreme Court has again entered the arena of state tort law to forge new substantive due process rules for the awarding of punitive damages.

In Campbell, Justice Kennedy's majority opinion attacks the use of wealth in calibrating the size of punitive damages. Punitive damages, unlike the criminal law, vary the punishment depending upon the economic circumstances of the defendant. Of the forty-five states that recognize the remedy of punitive damages, thirty-seven states allow evidence of the defendant's wealth to be introduced.

Restricting punitive damages to a given ratio -- 10 to 1 or other ratios -- is a disguised attempt to restrict the use of wealth in setting punishment.

At first blush, the use of wealth in setting punishment does seem to be out of sync with the core American value of fair play. Anglo-American jurisprudence generally treats all individuals alike, at least in theory. However, despite the fact that corporations are formally and procedurally equal in the American judicial system, there are numerous instances where wealth or more often the lack of wealth, determines our qualification or standing in the court.

Wealth has long been considered a relevant and even necessary factor in setting damages. In the vast majority of states, punitive damages are based upon the wealth of the defendant as well as the actual and potential harm caused by its misdeeds. This is good public policy.

Corporations will not be deterred from externalizing large-scale risks unless punitive damages are proportional to their financial condition.

The use of fixed ratios based upon compensatory damages marginalizes wealth in the punitive damages equation. Justice Kennedy declares a per se like rule against punitive damages that are greater than compensatory damages by ten to one. Corporate America has won a large victory in the court's reconceptualization of punitive damages as a mathematic formula that takes wealth out of the picture. I am troubled by the Supreme Court's federal takeover of a purely state law remedy.

Why nationalize punitive damages at a time when the states have already enacted extensive tort reforms? The rationale for the U.S. Supreme Court forging new state tort law restricting traditional remedies is thin.

There is no empirical research showing that high-ratio punitive awards are very common or represent a significant problem for the economy. This is a radical ruling as pointed out by the dissents of Justice Scalia, Thomas and Ginsburg.

Justice Scalia points out that the U.S. Supreme Court has no institutional role in formulating punitive damages standard. In the BMW v. Gore case, Justice Scalia characterized this intrusion into state law as a highway to nowhere.

Justice Ginsburg's dissent argued that the Campbell ruling was a rather bold initiative in supplanting the work of common law courts and state legislatures.

Justice White in Silkwood v. Kerr-McGee (1984) noted that tort law is state law. The Campbell case is the latest in a series of rulings federalizing tort law.

CCR: In Browning Ferris, the Court held that excessive punitive damage awards did not violate the Constitution's excessive fines clause. What was the ruling in Campbell?
RUSTAD: Browning-Ferris was a significant case because it was the first time a U.S. Supreme Court justice warned about the possibility of a due process violation when juries target large corporations or other unpopular defendants.

Justice Sandra Day O'Connor reissued that warning in Haslip v. Pacific Mutual Life Insurance Co. (1991) only two years later. In her dissenting opinion, she argued that punitive damages permit juries to target or penalize unpopular defendants or redistribute wealth.This is a major theme in the majority's opinion in Campbell. The Court has revisited the issue of punitive damages on a number of occasions since Browning/Ferris.

In Haslip, the Court found a punitive damages award with a ratio of greater than four times actual damages close to the line of constitutional impropriety. Haslip made it quite clear that courts considered excessive punitive damage awards as violative of substantive due process.

CCR: What is substantive due process?
RUSTAD: The doctrine of substantive due process is used to invalidate state laws. Historically, substantive due process has been used to invalidate state law arbitrarily regulating economic activity. During the Warren Court, the Court extended substantive due process to apply to the constitutional rights of individuals. The Warren Court, for example, invalidated a state law prohibiting the use of contraceptive devices on substantive due process grounds (Griswold v. Connecticut).

The most famous substantive due process case is Roe v. Wade which grounded due process on the right of privacy. The argument that corporations have substantive due process rights in the imposition of punitive damages is a new twist to an old doctrine.

CCR: The majority in Campbell says that there can be a mathematical test for punitive damage awards. What's the ratio they are talking about?
RUSTAD: The court in Haslip argued that rigid mathematical formulas were not advisable in assessing the substantive due process rights of defendants.

The Court has revisited the use of ratios in determining if a punitive damage award is excessive. In TXO Productions Corp. v. Alliance Resources Corp. (1993), the Court stated that a key factor in determining substantive due process was whether there was a reasonable relationship between compensatory damages and punitive damages.

In TXO, the Court validated a punitive damages award that was 526 times greater than compensatory damages. Three years later in BMW v. Gore (1996), the court found a 500-to-1 ratio between punitive damages and compensatory damages to violate substantive due process. The court elevated ratio as one of three guideposts for post-verdict reviews for excessiveness. Now, in 2003, we have a mathematical ratio test, pretty close to a per se test, that states that punitive awards greater than 10-to-1 are presumptively unconstitutional. The Court is close to adopting a per se rule based on mathematical ratios. There is some suggestion that high ratio awards could be upheld if there are particularly egregious circumstances.

What might be one of those circumstances? Campbell was a bad faith insurance case where the losses were purely economic. The majority suggests that if the conduct was more reprehensible such as in a personal injury case, the 10-1 cap could be lifted.

So, there is a little wiggle room. But it is a very strong signal to courts everywhere that punitive damage awards greater than 10-to-1 are suspect. Campbell is a significant elaboration of the BMW guideposts.

The BMW due process test sets down three guideposts -- there is the ratio of punitive to compensatory, there is the reprehensibility index, and the third is whether legislative sanctions have been provided for comparable misconduct.

The Court's opinion in Campbell focuses only on ratio and reprehensibility. The Court did not view State Farm as a recidivist. The majority observed that State Farm did not have a nationwide pattern of misconduct comparable to the record in other high ratio cases.

By the way, Justice Ginsburg took issue with the majority's abbreviated discussion of State Farm's misconduct. Justice Ginsburg noted that State Farm's conduct could have been found to be reprehensible by a jury.

She notes that there were other bad acts, coverups, and even evidence for the spoilation of evidence. Reasonable justices differed on whether State Farm's conduct was reprehensible enough to warrant a high ratio award.

CCR: How do you explain Justice Scalia's dissent here?
RUSTAD: Justice Scalia's deference to state law is consistent with his judicial philosophy which posits a limited regulatory state.The majority's intrusion into state law is inconsistent with Justice Rehnquist's judicial philosophy of limited government. The dissent may not be united in judicial philosophy but they are in agreement that the court is venturing into an arena that has been the province of the states. If you look at the long history of punitive damages, it has been a state remedy. The Court is forging its own procedural and substantive rules for the state court remedy of punitive damages.

CCR: Do you find it ironic that the right-wing of the court is coming down against the corporate interests?
RUSTAD: I am not surprised that true conservatives would oppose judicial activism in tort law. I am concerned about the more moderate wing of the court undermining a remedy that has evolved over two hundred years to protect ordinary Americans.

CCR: The tobacco cases resulted in pretty heavy punitive damage awards.

The plaintiffs lawyers in those cases are saying that this decision in Campbell leaves open the door for large punitive awards in these kinds of extraordinary cases. And the tobacco case is extraordinary, if there is one.The Justice Department called what the tobacco companies did "a 50 year fraud."

Do you agree that tobacco can be driven through the Campbell exception?
RUSTAD: That's somewhat wishful thinking. I think it is quite unlikely that appellate courts will uphold a billion dollar punitive damages award irrespective of the reprehensibility of conduct after Campbell.

If the Court is willing to substitute its discretion for the Utah Supreme Court, it is quite unlikely that other large punitive awards will stand.

CCR: What triggered the controversy over punitive damages?
RUSTAD: The Grimshaw case in California -- that case involved the Ford Pinto. Punitive damages was a sleepy backwater of American tort law, until a California court came down in the mid-1970s with a $125 million punitive damage award against Ford. Then the insurance industry, the tort reform alliance, began to work against punitive damages.

Prior to the 1970s, punitive damage awards were largely restricted to intentional tort cases involving drunk drivers and the like. There were no product liability verdicts, there were no punitive medical malpractice verdicts. It wasn't an issue. Product liability opened up the field.

CCR: A couple of weeks ago, we interviewed Ira Robbins, a professor at American University Washington College of Law. He's calling for a homicide prosecution of the tobacco companies. If you undercut punitives, why not replace them with criminal prosecution?
RUSTAD: I'm skeptical that criminal penalties will be sought. Punitive damages are halfway between the criminal and civil law systems. There are many reasons why the criminal law is a poor candidate. Crime in the streets gets the attention over crime in the suites. The will as well as expertise of prosecutors to investigate corporate wrongdoing is questionable. Increasingly, Americans are being tracked, traced and surveilled on line. Much of this tracking might very well violate criminal statutes. But there are no prosecutions.

Why? Every time there is a virus that disables the work of millions of Americans, criminal law seems powerless. In my study of punitive damages in products liability, I found that the criminal law played almost no role in conduct that might fit the definition of manslaughter.

CCR: Professor Robbins makes the point that it appears that the tobacco industries activities over the years fit perfectly within the statutory definitions of reckless homicide, second degree homicide. It is not as if the evidence isn't there to meet the law of homicide. Why is there no prosecution?
RUSTAD: How are state prosecutors going to fund these prosecutions? The tobacco litigation is a case study in the inability of state prosecutors to take on the industry. Prosecutors are focused on crime in the streets not in the suites. In the field of cybercrime, prosecutors lack the resources to trace online stalkers, computer intruders, and those who plant viruses. Most of the enforcement is stings against pedophiles. In the field of products liability, there have been only a handful of prosecutions against defendants who knowingly endanger the consuming public.

In your book on corporate crime, most of your most dramatic examples are tort cases, not successful criminal prosecutions. I'm very skeptical about the proposals for criminalizing torts based upon history.

CCR: Given the Campbell decision, what's the future of punitive damages?
RUSTAD: Very bleak. And it reflects the reality that the tort system is under relentless attack. It is a battle that has been lost A strong tort regime ensures that not even multibillion-dollar corporations operate beyond the reach of the law. Punitive damages is a remedy that teaches corporations an impressive lesson that "tort does not pay." The Court's substituting neat mathematical formulas to replace wealth of defendant undermines the remedy of punitive damages. What's fair about punitive damages is the unpredictability of the remedy which is the deterrent. It is not unfair to include wealth in the punitive damages formula because the remedy is intended to redress inequality between the litigants. We know that the Supreme Court does not acknowledge that there are disparities in wealth but the entire purpose of punitive damages is to make punishment proportional to means of the defendant to achieve punishment and deterrence.

The Court has historically viewed the states as having a useful role in being laboratories for legal change. Campbell has not taken the teeth of the deterrent role of punitive damages, but undermines the role of the states in forging tort law. True conservatives should be alarmed by the Court's nationalization of state tort law. In the end, it will be loss for Corporate America as well as American society in general to lose the effective and efficient remedy of punitive damages.

[Contact: Michael Rustad, Professor of Law, Suffolk University Law School, 120 Tremont Street, Boston, Massachusetts 02108-4977 Phone: (617) 573-8190. E-mail: profrustad@aol.com].