Louisiana Supreme Court Wades Into Punitive Damages In Maritime Context

by Mayer Brown - Punitive Damages Blog
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Louisiana generally does not permit punitive damages. But if an accident happens on navigable waters, and the plaintiff brings a claim under federal maritime law, a Louisiana jury can award punitive damages, and Louisiana courts then must decide the full panoply of issues that arise in punitive damages cases.  That’s what happened in Warren v. Shelter Mutual Insurance Co.

Don’t let the name of the case fool you. It’s a product-liability, failure-to-warn case against the manufacturer of the hydraulic steering system in a speedboat.  The case has a complicated procedural history that I will omit, but the underlying facts are relatively straightforward.

The plaintiff’s son was a passenger in a speedboat operated by a friend. While the boat was travelling at a high speed, the hydraulic steering system failed, the boat went into a J-hook, the plaintiff’s son was ejected from the boat, the boat spun, and its propeller struck the plaintiff’s son multiple times, resulting in his death.

The plaintiff sued the manufacturer of the steering system under state tort law and maritime law, alleging that the defendant failed to warn that a loss of hydraulic fluid could cause the steering system to fail. A jury awarded compensatory damages of $125,000 and punitive damages of $23 million.  The trial court upheld the verdict in full, and the Louisiana Court of Appeal affirmed.  The Louisiana Supreme Court granted review.

Of relevance here, the court held that the trial court did not abuse its discretion in refusing to bifurcate the trial, that there was sufficient evidence to support the jury’s finding of liability for punitive damages, that the $23 million punitive award was excessive, and that a punitive award of $4,250,000 “more appropriately furthers the goal of punitive damages, that is, to punish and to deter future conduct, while protecting the defendant’s right to due process.”

Along the way, the court addressed numerous issues that arise with regularity in punitive damages cases—getting several right, but a greater number wrong. I will discuss the good, the bad, and the ugly in this post.

Bifurcation

The vast majority of states require bifurcation in punitive damages cases upon the defendant’s request. But as with so many other aspects of its legal system, Louisiana does things differently.  Perhaps because Louisiana does not allow punitive damages at all, except when authorized by statute, the Louisiana Code of Civil Procedure authorizes bifurcation only “with the consent of all parties.”  Because the plaintiff did not consent, the trial court refused to bifurcate the punitive damages issues from the underlying liability and damages issues.  Applying the abuse-of-discretion standard of review, the Louisiana Supreme Court declined to overturn that ruling.

Although recognizing elsewhere in the opinion that punitive damages were in the case solely because of the maritime-law claim, the court failed to consider whether the protection afforded by bifurcation is so fundamental as to be treated as substantive and hence a matter of federal maritime law rather than state procedural law. The court likewise failed to consider—possibly because the argument may not have been raised—whether due process requires bifurcation.  As Andy Frey and I wrote in this post, there are compelling arguments that defendants have a due process right to a bifurcated trial.

Liability for Punitive Damages

Recognizing that punitive damages are available under Louisiana law only when authorized by statute, the Louisiana Supreme Court held that a jury may award punitive damages under maritime law upon proof that “a defendant’s intention or wanton and reckless conduct amounted to a conscious disregard for the rights of others.” The court proceeded to affirm the finding of liability for punitive damages, stating that “the record contains evidence on which the jury could have reasonably found the defendant had acted recklessly in not placing on the steering system a visible sticker warning that loss of fluid could result in sudden loss of steering, ejection, and even death.”

The Louisiana Supreme Court emphasized that there was evidence that the defendant “knew about the potential consequences on the loss of steering from a small amount of fluid loss some nine years before the system was sold and sixteen years prior to the accident.” The court also held that the testimony of the system’s designer that a warning would have caused “mass hysteria” was evidence of “callous disregard for the safety of others.”

In deeming this evidence sufficient to justify the imposition of punitive damages, the court acknowledged, but gave no weight to, the fact that “for fifteen years, with more than a million SeaStar systems in use world-wide, the record reveals no prior accidents of this type.” In contrast, many courts have held that when the number of prior incidents is low in relation to the number of units of a product in commerce, punitive damages should not be imposed because the defendant cannot be said to have been on notice that its product created a high risk of harm.

Perhaps the Louisiana Supreme Court’s failure to take this evidence into account can be explained by its application of the preponderance-of-the-evidence standard in reviewing the sufficiency of the evidence. If so, it serves to highlight the importance of the higher clear-and-convincing-standard that has been adopted by many states.  It thus would behoove defendants in maritime cases to ask the trial court to apply the clear-and-convincing standard, and, if it refuses, to seek appellate review on that basis.

The choice of the standard would be a matter of federal common law that the Supreme Court could ultimately weigh in on. Although the Court held in Pacific Mutual Life Insurance Co. v. Haslip that this standard is not constitutionally required, it acknowledged that “[t]here is much to be said in favor of a State’s requiring” it. Sitting as a common-law court, as it did in Exxon Shipping Co. v. Baker, therefore, the Supreme Court could well be persuaded to adopt the clear-and-convincing-evidence standard for maritime cases.

Excessiveness

Although concluding that the $23 million punitive award was excessive, the analysis by which the Louisiana Supreme Court arrived at what it considered “a constitutionally appropriate exemplary damage award” was flawed in multiple respects, resulting in a reduced award of $4,250,000 that was still grossly excessive.

Because the punitive award was imposed under maritime law, the excessiveness inquiry should have been governed by federal common law, and in particular the Supreme Court’s decision in Exxon Shipping Co. v. Baker, rather than the three due process guideposts articulated by the Supreme Court in BMW.  To be sure, the Court mentioned Exxon several times, but by not focusing directly on Exxon, it failed to give sufficient heed to the 1:1 cap that the Supreme Court established in that case.  Moreover, the way in which it applied the BMW factors, and in particular the ratio guidepost, reflected a number of conceptual errors that skewed the outcome.

Reprehensibility

In general, courts have a tendency to apply the reprehensibility factors identified in BMW and State Farm too mechanistically, and the Louisiana Supreme Court’s opinion was no exception.  Still, in evaluating the factors, the court got more right than wrong.

As you would expect, the court found the first and second factors—physical as opposed to economic harm, and reckless disregard for the health or safety of others—to be present. They are both always present by definition in any product-liability case warranting punitive damages, so that merely identifying their presence says very little about the degree of reprehensibility of the conduct.

Recognizing that there was no evidence that the defendant “had ‘targeted its conduct’ upon its less-experienced customers because of their financial vulnerability,” the court found the third factor to be absent. In so doing, the Louisiana Supreme Court joined the growing number of courts that have recognized that the third factor requires not just that the injured party be financially vulnerable (which is often happenstance), but that the defendant have targeted the party because of that vulnerability (which goes to the defendant’s state of mind).

The court deemed the fourth factor—whether the conduct involved repeated actions or was an isolated incident—to be “a closer call,” even though one case in millions of units sold would appear to be the paradigm of an isolated instance. Despite this, the court ultimately concluded that the fourth factor was present because the defendant “possessed knowledge of the risk to its customers * * * and either chose not to act or failed to do so despite opportunities.”

This conclusion boils down to double counting the second factor. The court instead should have recognized that this factor is about recidivism; because there was no evidence that the defendant had engaged in a pattern of failing to warn about the dangers of its products, the court should have found this factor to be absent.

Finally, the court correctly determined that the fifth factor—whether the conduct involved intentional malice, trickery, or deceit—was absent, rejecting the notion that the designer’s testimony that a warning risked causing “mass hysteria” could be fairly equated with “a conscious decision to further a profit motive.”

The court accordingly concluded that, though reprehensible, the conduct was not “on the extreme end of ‘malicious behavior and dangerous activity carried on for the purpose of increasing a tortfeasor’s financial gain’” (quoting Exxon Shipping).

Ratio

As I have foreshadowed, the Louisiana Supreme Court’s treatment of the ratio guidepost is problematic. And the problems all stem from the court’s analysis of the denominator of the ratio.  Recall that the compensatory damages themselves were only $125,000 and that the ratio of punitive to compensatory damages therefore was an enormous 184:1.

The Louisiana Court of Appeal had reasoned that the denominator of the ratio should be “the harm or potential harm suffered by the plaintiff had he lived and suffered amputation or severe disability” and then estimated that figure at $8 million based on an analysis of compensatory damages awarded to plaintiffs who suffered traumatic leg amputations. The Court of Appeal held that the ensuing 2.8:1 ratio was not impermissible under Exxon Shipping.

This analysis is manifestly wrong for reasons discussed in this post, but the defendant argued more broadly that potential harm can never be considered in a maritime case. The Louisiana Supreme Court declined “to try to anticipate how [the U.S. Supreme] Court might rule” on that issue.  So it instead made a major error of its own.

Stating the undeniable premise that “actual harm is certainly a relevant consideration,” the court reasoned that “[t]he mother of [the deceased passenger] settled her claims prior to trial, thus the compensatory damages she received could logically be added to the denominator in the ratio analysis as included in the actual harm caused by the defendant’s conduct.”

Then, noting that the Louisiana Court of Appeal had recently affirmed damages of $2 million to each parent of a deceased child in a products-liability case, the court held that “relevant compensatory damages in this case could reasonably total $2,125,000, which when compared to the punitive damages awarded by the jury, would result in a ratio of 10.8:1.”

This analysis overlooks the U.S. Supreme Court’s holding in Philip Morris USA v. Williams that the Due Process Clause forbids punishing a defendant for harms to non-parties—which is what the mother of the deceased in this case was.

One of the concerns underlying Williams is that punishing for harm to non-parties can result in repeated punishment for the same injury.  That is very much a possibility here.  There is no way to know—because no evidence on the issue was introduced at trial—whether the settlement paid to the mother already contained a punitive component.  But even the possibility that it could have is why the Supreme Court categorically barred punishment for harm to non-parties.

Moreover, the fact that there was no evidence of the amount of the mother’s settlement and that the Louisiana Supreme Court was therefore forced to borrow the damages awarded in another, unrelated case is an independent reason why it was error to include the mother’s injury in the denominator. Because the jury was the finder of fact, its award should not be sustained even in part on the basis of evidence that it never considered.

The Louisiana Supreme Court relied on the fact that the U.S. Supreme Court considered settlements in determining the denominator in Exxon Shipping.  But there was no issue in that case about the amount of the denominator.  Accordingly, the Supreme Court indicated that it would “take for granted the District Court’s calculation of the total relevant compensatory damages.”  In addition, the amounts of the settlements were part of the record in Exxon Shipping, so there was no need to speculate.

Legislatively Established Penalties for Comparable Conduct

The Louisiana Supreme Court recognized that there is “no codal authority that would impose monetary civil or criminal penalties for the conduct of [the defendant] in this case.”  But instead of treating that as a reason to be skeptical of a multi-million-dollar punitive award, the court—like so many others—simply treated this guidepost as irrelevant.

This would be problematic if the case truly were governed by the three guideposts, but the 1:1 ratio rule set forth in Exxon Shipping makes this error largely beside the point in maritime cases.

Wealth

Citing cases decided under Louisiana law, the Louisiana Supreme Court held that the defendant’s net worth is relevant to determining whether an award of punitive damages is excessive because “[w]hat may be awesome punishment for an impecunious individual defendant may be wholly insufficient to influence the behavior of a prosperous corporation” (internal quotation marks and brackets omitted). This premise is wrong, for the reasons Andy Frey explained in this post.

But punitive damages theory aside, the Louisiana Supreme Court overlooked the fact that this case is governed by federal maritime law, not Louisiana law. And the U.S. Supreme Court has given no hint that a corporate defendant’s wealth should be considered in reviewing punitive awards imposed under maritime law.

Indeed, if wealth were relevant in maritime cases, the Court surely would have mentioned Exxon’s enormous net worth in Exxon Shipping.  Instead, by holding that a 1:1 ratio is “a fair upper limit” in most maritime cases, it effectively made net worth irrelevant.

Despite holding that wealth is effectively a fourth guidepost, the Louisiana Supreme Court mitigated that holding by announcing that “wealth should not be a driving factor behind a punitive damage award in the absence of a showing that the defendant’s conduct was motivated by malice or greed.” Because the court did not deem the evidence sufficient to show that the defendant’s failure to warn was motivated by greed, the court’s limitation on the use of corporate wealth—and its application of that limitation in this case—should be useful to defendants in future punitive damages cases.

The “constitutionally appropriate exemplary damage award”

After considering the guideposts, the Louisiana Supreme Court held that “the award of punitive damages in the amount of $23,000,000 was higher than reasonably required to serve the objective of punitive damages awards: punishment, general deterrence, and specific deterrence.” As discussed in this post, the “higher than reasonably necessary” standard is the correct one for constitutional excessiveness, so in this respect the court established a good precedent. But as I have already noted, because this case is governed by federal common law, there should have been no need to apply the constitutional standard.

Be that as it may, the court determined that the punitive damages were unconstitutionally excessive and therefore turned to setting a “constitutionally appropriate” punitive award. Reasoning that “the harm caused was great—physical injury resulting in the violent death of a young man—while the defendant’s conduct was not the most egregious on the spectrum of punishable cases, and the compensatory damages actually awarded were relatively small,” the court settled on a 2:1 multiple of the hypothetical combined compensatory damages of the two parents.

But the U.S. Supreme Court deemed the defendant’s conduct in State Farm to be “reprehensible,” yet nonetheless indicated that a ratio of 1:1 likely marked the constitutional line because the damages in that case—approximately $1 million—were “substantial.”

Many courts have held that damages exceeding $100,000—as they were in this case—are substantial for purposes of the State Farm ratio guidance.  But even if the $125,000 is not regarded as substantial, given the injury suffered, the court’s decision to include in the denominator the hypothetical damages to the mother—$2 million—should make it beyond question that the denominator is substantial.  The Louisiana Supreme Court offered no reason why a punitive award equal to its hypothesized $2,125,000 denominator would have been inadequate to accomplish the goals of retribution and deterrence.

So the bottom line is that the decision is a compromise that is likely to be cited by both plaintiffs and defendants in future punitive damages litigation. Because the court’s errors are obvious and not likely to be repeated by other courts, my take is that the favorable aspects of the ruling are more helpful than the unfavorable aspects are harmful.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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