Texas Supreme Court Announces New Rule for Exemplary Damages

Clark Hill PLC

The Due Process Clause of the Fourteenth Amendment prohibits the imposition of excessive exemplary damages.  Whether an award comports with due process is measured by three guideposts:

(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.

The degree of reprehensibility of a defendant’s conduct is the most important indicium of the reasonableness of a punitive damages award. Courts determine the reprehensibility of a defendant’s conduct by considering whether:

(1) the harm caused was physical as opposed to economic;

(2) the tortious conduct demonstrated an indifference to or a reckless disregard of the health or safety of others;

(3) the target of the conduct had financial vulnerability;

(4) the conduct involved repeated actions or was an isolated incident; and

(5) the harm was the result of intentional malice, trickery, or deceit, or mere accident.

The Court applied those rules in Horizon Health Corp. v. Acadia Healthcare Co., No. 15-0819, 2017 Tex. LEXIS 480 (Tex. May 26, 2017). That case arose when Horizon’s former managers allegedly took trade secrets from their employer and used them to establish a competitor in violation of their non-competes.  The jury found that the defendants stole trade secrets and awarded compensatory and punitive damages against each individual defendant as follows:

The Supreme Court concluded that the court of appeals’ suggested remittitur resulted in an award that violated due process because a 4:1 ratio of exemplary to compensatory damages was not appropriate given the purely economic nature of the harm, the fact that the individual defendants’ misconduct was not “repeated,” the lack of any reckless disregard for the health or safety of others, and Horizon’s financial status.

The more interesting and complicated question, said the Court, was how the constitutional excessiveness of an exemplary damages award should be assessed when multiple defendants face joint and several liability for compensatory damages but are individually liable for exemplary damages.

In the Court’s view, the court of appeals’ analysis was flawed because the court failed to analyze exemplary damages as to each individual defendant and instead grouped them together. According to the Court, the excessiveness of exemplary damages must be evaluated on a per-defendant basis. Moreover, said the Court, the proper denominator for calculating the ratio of compensatory to exemplary damages is not the joint-and-several award but instead is the compensable harm caused by each defendant:

Exemplary damages per individual defendant
Actual damages per individual defendant

Employing an approach that bases the ratio’s calculation on the harm caused by each defendant, as found by the jury, the court of appeals’ suggested remittitur resulted in ratios of compensatory to exemplary damages against each individual defendant as follows:

In light of these ratios, coupled with the Court’s conclusion that only one of the five reprehensibility factors was present, the Court held that the exemplary damages awards remained unconstitutionally excessive despite the court of appeals’ suggested remittitur.

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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