In late December, the Second Circuit released a significant and interesting decision on excessiveness of punitive damages—and we say that not just because we represented the defendants in the case.

Turley v. ISG Lackawanna, Inc. involved racial harassment of a steel worker by his fellow employees.  The plaintiff alleged that his employer and its parent did not respond adequately to the harassment.  A jury agreed and awarded the plaintiff a total of $1.25 million in compensatory damages—all for emotional distress—and $24 million in punitive damages against the corporate defendants.  The district court determined that the punitive damages were excessive and ordered a remittitur to approximately $5 million.

Although rejecting the defendants’ other arguments, the Second Circuit agreed with defendants that the punitive damages as remitted remained excessive.  The court began by pointing out that before even considering constitutional excessiveness it was obliged to review the amount of punitive damages “under federal common law, pursuant to the federal appellate courts’ supervisory authority over trial courts.”

That is significant, the court explained, because although the three excessiveness guideposts identified in BMW “apply irrespective of whether our review is constitutional or supervisory in nature,” under the court’s supervisory authority “a degree of excessiveness less extreme than ‘grossly excessive’ will support remanding for a new trial or remittitur of damages.”  The Second Circuit further explained that review of the size of punitive awards under the supervisory power is “relatively stringent * * * in order to ensure that such damages are fair, reasonable, predictable, and proportionate, to avoid extensive and burdensome social costs, and to reflect the fact that punitive awards are imposed without the protections of criminal trials.”

The court then articulated the standard of review it employs under its supervisory power, stating that although the district court’s decision to allow a particular amount of punitive damages is reviewable for an abuse of discretion, “the degree of discretion enjoyed by trial courts in these matters is relatively narrow.”

Turning to its common-law review, the court of appeals held that the evidence was sufficient to support the district court’s conclusion that the conduct at issue was “egregious in the extreme” (a conclusion with which we needless to say disagree).  The court continued, however, that “[t]he disparity between the punitive damages award and the already sizable compensation * * * gives us pause.”

Employing language that is apt to be precedential in all future cases within the Second Circuit, the court held:

Where the compensatory award is particularly high, as the one in this case assuredly was, a four-to-one ratio of punishment to compensation * * * serves neither predictability nor proportionality.  [T]his is particularly so where the underlying compensation is, as it is in this case, for intangible—and therefore immeasurable—emotional damages.  Imposing extensive punitive damages on top of such an award stacks one attempt to monetize highly offensive behavior, which effort is necessarily to some extent visceral, upon another.

The court continued that its “commitment to reducing arbitrariness in damages awards, reining in excessiveness, and ensuring some degree of proportionality * * * weighs in favor of enforcing a tighter relationship between the harm suffered and the punishment imposed.”

It further explained that “[a] lower award also is necessary to bring the punitive damages in this case into alignment with comparable awards in other cases.”  Noting that “punitive awards for workplace discrimination rarely exceed $1.5 million,” the court stated that “[a] $5 million punitive damages award that is four times higher than the underlying compensation * * * appears to us to be excessive by comparison.”

The court concluded that “a roughly 2:1 ratio of punitive damages to what, by its nature, is necessarily a largely arbitrary compensatory award, constitutes the maximum allowable in these circumstances.”  Anything beyond that, the court explained, would “undermine systemic goals of predictability and proportionality.”

The decision thus draws a very clear line for future cases.  When the conduct is “egregious in the extreme” and the compensatory damages are high, a ratio of 2:1 is likely to be the maximum sustainable.  And if the conduct is not as egregious, even a 2:1 ratio is likely to be too high.