John J. Tollefsen Complex Litigation Law Blog on Lawyers.com

Strawn v. Farmers Ins. Co. of Oregon, --- P.3d ----, 2009 WL 1409471 (Or.App. May 20, 2009) (NO. A131605, 009809080)

A class action was filed complaining of defendants' claims handling of personal injury protection (PIP) benefits payments to their insureds. They used cost-containment software to evaluate their insureds' medical expenses in relation to other bills for the same procedure in a given region. If the charge submitted by an insured's provider exceeded a certain percentage of the range of the charges in those other bills, Farmers Insurance refused to pay the excess on the ground that it was “unreasonable.” Plaintiff alleged that Farmers' review process set an arbitrarily low percentage (initially, 80 percent) that resulted in the denial of claims for reasonable medical expenses, thereby increasing Farmers' profits at the expense of PIP claimants and medical providers.

On behalf of the class, plaintiff brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and declaratory relief. The first three of those claims were tried to a jury, which found in plaintiffs' favor and awarded $1.5 million in compensatory damages and prejudgment interest, and $8 million in punitive damages on the fraud claim. Based on the jury's answer to a special interrogatory, the court ruled in plaintiffs' favor on the request for declaratory relief. After a post-verdict claims administration process, the court entered judgment for plaintiffs in the amount of $898,323.80 for compensatory damages and prejudgment interest, $8 million in punitive damages, and more than $2.6 million in attorney fees. Farmers appealed that judgment and a supplemental judgment that awarded additional attorney fees.

“Punitive damages awards that are ‘grossly excessive’ violate the Due Process Clause of the Fourteenth Amendment to the United States Constitution, because excessive punitive damages serve no legitimate purpose and constitute arbitrary deprivations of property. BMW of North America, Inc. v. Gore, 517 U.S. 559, 568, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996). Excessive punitive damages also implicate the requirement of fair notice that is enshrined in the Due Process Clause: Due process dictates that ‘a person receive fair notice not only of the conduct that will subject him to punishment, but also of the severity of the penalty that a state may impose.’”

The court held that the methodology for reviewing a punitive damages award under the Due Process Clause involves three steps. First, the court must determine whether there is a factual predicate for a punitive damages award, reviewing the relevant evidence in the light most favorable to the party who obtained the award.

Second, the court must examine the predicate facts in light of the three “guideposts” originally set out by the United States Supreme Court in Gore for determining whether an award comports with the strictures of due process. Those guideposts are

“ ‘(1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.’ ”

Third, if that examination leads the court to conclude that the award is grossly excessive, the court must apply those same guideposts to determine the maximum punitive damages award that due process will permit.

 “[A]s a very general rule of thumb, the federal constitution prohibits any punitive damages award that significantly exceeds four times the amount of the injured party's compensatory damages, as long as the injuries caused by the defendant were economic, not physical.” A higher ratio of punitive damages to actual or potential harm may be permitted under certain “narrow circumstances,” such as “(1) when a particularly egregious act causes only a small amount of economic injury; (2) when the injury is hard to detect; (3) when it is difficult to place a monetary value on noneconomic harms; and (4) when ‘extraordinarily reprehensible’ conduct * is involved.”

The court held that this case involved only economic harm and none of the “narrow circumstances” was present. Punitive damages were limited to four times the compensatory damages.