Some of the most important unanswered questions in the law of punitive damages relate to the procedures governing the imposition of punitive damages in a class action. Last week, the Second Circuit addressed one such question in Johnson v. Nextel Communications Inc.

The facts of the case and the case’s principal holding decertifying the class—though interesting—are unnecessary for understanding the holding (actually, dictum) regarding punitive damages, so I won’t burden readers by summarizing them.

For present purposes, what you need to know is that after certifying the class, the district court adopted a three-phase trial plan. In Phase I, a jury would decide the ostensibly common liability issues. In Phase II, the same jury would set the compensatory damages for the named plaintiffs, determine whether the defendant was liable for punitive damages, and, if so, “determine a punitive-to-compensatory damages ‘ratio’ based on defendants’ conduct toward the entire class.” And in Phase III, mini-trials would be held before multiple juries to determine compensatory damages for each class member and resolve any individualized defenses. The court would then mechanically apply the ratio established in Phase II to the damages awarded in Phase III to determine the amount of punitive damages to be received by each class member, “while retaining the discretion to make an independent assessment of whether the total award was inappropriate for any particular class member.”

The defendant argued on appeal that setting a punitive damages ratio before the amount of compensatory damages is known would violate the Due Process Clause. The Second Circuit declared that it was unnecessary to reach the constitutional issue because “under the specific facts of this case and the trial plan proposed here, determining a punitive damages ratio without any grounding in a compensatory damages award is impracticable and fails to give the jury an adequate basis for determining what measure of punitive damages is appropriate.”

The court explained that under State Farm,

the propriety of the ratio can be meaningfully assessed only when comparing the ratio to the amount of compensatory damages awarded.  A larger punitive-to-compensatory ratio may be appropriate where ‘a particularly egregious act has resulted in only a small amount of economic damages,’ and similarly, ‘[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.’

Under the trial plan adopted by the district court, however, the Phase II jury would be tasked with “determin[ing] a punitive damages ratio based on an amalgam of the actual damages to only the named plaintiffs and defendants’ conduct toward the entire class. Whatever considerations would go into developing the punitive damages ratio in [the] trial plan, the Phase II jury would lack any conception of the actual damages to the members of the class to whom the ratio would subsequently be applied.”

This ruling effectively ends—in the courts of the Second Circuit, at least—the threat presented by trial plans that seek to obtain a once-and-for-all ratio of punitive to compensatory damages before the total amount of compensatory damages is known. That is a real benefit for defendants because a ratio that may seem reasonable in the abstract in the context of a single case—say, 4:1—may turn out to be grossly excessive when the entire amount of compensatory damages owed to the class is taken into account. This is especially so considering that the compensatory damages alone may provide sufficient deterrence, and the Supreme Court has stated that punitive damages should be awarded only when the compensatory damages fail to satisfy the state’s interest in deterrence and punishment.