Recently the Third Circuit Court of Appeals reduced an award of punitive damages by over two-thirds, holding that a 1:1 ratio between punitives and compensatory damages is the appropriate limit where the harm is purely economic and the compensatory damages award is substantial. Jurinko v. Medical Protective Co., Nos. 06-3519 & 06-3666 (3rd Cir., December 24, 2008). The court reduced the award from $6.25 million to just under $2 million.

The case from which appeal was taken, tried in the Eastern District of Pennsylvania, derived from an earlier lawsuit in which a cancer patient and his wife sued a number of treatment providers for failing to diagnose the husband’s cancer. After receiving a favorable verdict in that case, the two plaintiffs, as assignees of one of the defendant doctors, sued the doctor’s malpractice insurer for bad faith refusal to settle. The jury awarded the plaintiffs approximately $1.66 million in compensatory damages and $6.25 million in punitives.

On appeal, the Third Circuit declined to overturn the verdict, finding there was sufficient evidence for a jury to make a finding of outrageous conduct on the part of the insurer. However, the court agreed to reduce the punitive damages award on the basis that “grossly excessive” punitive damages awards violate the 14th Amendment’s Due Process Clause. The court cited the U.S. Supreme Court case of State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003), which sets forth the standard for determining the constitutionality of punitives awards. Under State Farm, a court analyzing whether a punitives award is “grossly excessive” must consider three factors: the degree of reprehensibility of the defendant’s conduct; the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and the difference between the punitives awarded and civil penalties authorized or imposed in comparable cases.

The court explained that reprehensibility, perhaps the “most important indicium” of the reasonableness of the punitives award, was determined by analyzing whether “the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident.” Applying these factors, the court found evidence of financial vulnerability of the target doctor; intent on the part of the insurer; and “minimal” evidence of repeated actions.

The court then reviewed decisions of other circuit courts regarding the reasonableness of ratios for punitives, as well as dicta from the Supreme Court’s decision in State Farm to the effect that “when compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” Citing the substantial economic award, the purely economic nature of the harm, and the “moderate degree of reprehensibility,” the court reasoned that under the guidelines provided by State Farm, punitive damages should be reduced to a 1:1 ratio with compensatory damages. (While compensatory damages were approximately $1.66 million, the court took attorneys fees and costs into account in calculating the basis for the ratio.)

Click here to read a copy of the decision and click here to read a later-filed amendment to the court’s decision addressing a relevant footnote.