Inevitably, when conscientious judges delve into the multi-dimensional issue of excessive punitive damages, they get some things right and other things wrong. Such is the case with the Fourth Circuit’s recent decision in Daugherty v. Ocwen Loan Servicing, LLC. Unfortunately, as a doctrinal matter at least, the erroneous aspects of the decision predominate.

In Daugherty, Ocwen—a so-called furnisher of information to credit reporting agencies—was held liable for $6,128.39 in compensatory damages and $2.5 million in punitive damages for willfully violating the Fair Credit Reporting Act (“FCRA”) by failing to correct inaccurate information about the plaintiff in response to verification requests sent by Equifax, a credit reporting agency. The Fourth Circuit upheld the liability finding, but held that the punitive damages were unconstitutionally excessive and ordered a new trial unless the plaintiff agrees to accept a reduced award of $600,000.

On reading the opinion, I have some doubts about whether Ocwen’s failure to correct the inaccurate information—which appears to have been the result of an innocent mistake—really can be said to rise to the level of “willfulness.” But this is not a FCRA blog, so I am going to focus solely on the court’s discussion of the amount of punitive damages.

At the outset, the Fourth Circuit overlooked the significance of the fact that the case involves punitive damages imposed under a federal statute in federal court. As my colleague Miriam Nemetz and I reported in this post, the Second Circuit held in Turley v. ISG Lackawanna, Inc.—correctly, we think—that in such situations the court should review the award for excessiveness as a matter of federal common law under its supervisory power.

Under the federal supervisory power, the Second Circuit ruled, “a degree of excessiveness less extreme than ‘grossly excessive’ will support remanding for a new trial or remittitur of damages.” As the court further explained, 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.”

In Daugherty, in contrast, the Fourth Circuit overlooked its supervisory authority and instead reviewed the punitive damages solely under the Due Process Clause. Given some of the other errors in the decision discussed below, it’s not clear whether reviewing the punitive award under the supervisory power, rather than under the Due Process Clause, would have made a difference. But doctrinally, that seems to be the right starting point.

The biggest error in the decision—which appears to be the product of an earlier Fourth Circuit decision cited by the court, Saunders v. Branch Banking & Trust Co.—is the notion that simply because Congress authorized punitive damages in FCRA cases, the standards articulated in BMW and State Farm do not apply with the same rigor as they do in cases involving common-law awards of punitive damages.

For instance, the Fourth Circuit asserted that “the absence of physical harm or danger to health or safety [does] not weigh strongly against a finding of reprehensibility in FCRA cases.” And notwithstanding the Supreme Court’s statement to the contrary in State Farm, it asserted that “willful violations of the FCRA can support substantial punitive damages even though only one reprehensibility factor, financial vulnerability, is met.”

This understanding of the law is flatly wrong. The concerns underlying the due process limits on punitive damages—that the defendant have fair notice of the extent to which it can be punished for its conduct and that the punishment not be arbitrary—are implicated every bit as much by a punitive award imposed under a federal statute as by one imposed in connection with a common-law tort. The fact that Congress may have authorized punitive damages as part of the federal remedy hardly means that it made a legislative judgment that the conduct is especially reprehensible such that the factors ordinarily consulted in evaluating reprehensibility can be disregarded.

As a result of this conceptual error, the Fourth Circuit felt free to disregard two of the five reprehensibility factors identified in State Farm—whether the harm was physical or only economic and whether the conduct involved a reckless disregard for safety or health. The court also erred in evaluating two other reprehensibility factors—whether the target of the conduct was financially vulnerable and whether the conduct involved repeated actions or was an isolated incident.

With respect to the financial vulnerability factor, the court mistakenly focused solely on whether the plaintiff was financially vulnerable. But as the Supreme Court suggested in BMW, and as several lower courts have recognized, this factor requires intentional targeting of the plaintiff because of his or her vulnerability—for example, schemes to defraud the elderly or uneducated. In Daugherty, the defendant did not “target” the plaintiff at all; it simply was negligent—or, in the view of the Fourth Circuit, “reckless”—in failing to correct inaccurate information in response to verification requests sent by a credit reporting agency.

The Fourth Circuit held that the repeated conduct factor was satisfied because the defendant “repeatedly failed to correct Daugherty’s erroneous account information over a 17-month period,” despite multiple requests and inquiries from Daugherty, the CFPB, and the reporting agency. However, many courts—including the Sixth Circuit in a FCRA case in which Miriam Nemetz and I represented the defendant—have held that this factor “require[s] that the similar reprehensible conduct be committed against various different parties rather than repeated reprehensible acts within the single transaction with the plaintiff.” From all appearances, the failure to correct Daugherty’s inaccurate information was an isolated incident resulting from the reporting agency’s (not the defendant furnisher’s) erroneous creation of two separate “tradelines” for the same account.

The court did correctly apply the final State Farm factor, concluding that “there is no evidence that [the defendant] intentionally reported credit information it knew to be misleading.”

Notwithstanding its conclusion that only two of the five State Farm factors were present, the Fourth Circuit held that the defendant’s “conduct was more reprehensible than the actions at issue in Saunders.” This too reflects a conceptual error.

The relevant universe is not just FCRA cases (and definitely not just FCRA cases decided by the Fourth Circuit), but all cases in which punitive damages may be imposed. Manifestly, a non-intentional violation of the statutory duty to correct inaccurate credit information in response to a verification request is on the far low end of the spectrum of reprehensible conduct. It distorts the inquiry to compare the conduct only to other FCRA violations and not to more egregious conduct—such as malicious assaults or intentional frauds.

Indeed, it is only because the court considered the conduct to be more reprehensible than that in one other FCRA case that it could justify allowing $600,000 in punitive damages—representing a punitive-to-compensatory ratio of 98:1. That takes me to the next conceptual problem with the court’s decision.

The Fourth Circuit observed that “[s]mall awards of actual damages may justify comparatively larger punitive damages, whereas large awards of actual damages ordinarily will require application of a lesser ratio.” That is true so far as it goes. But it hardly means that a close-to-three-digit ratio is warranted when the compensatory damages are small, but not nominal. After all, the compensatory damages in BMW were only $4,000, yet the Supreme Court gave no inkling in that case that the small size of the compensatory damages could justify anything close to a 100:1 ratio.

That a nearly three-digit ratio is constitutionally impermissible is all the more true in a case like this one. As the Fourth Circuit correctly observed, “the act of misreporting credit information”—or, in this case, failing to correct inaccurate information reported by others—“provides no direct financial benefit to a defendant, so multimillion dollar [punitive] awards are rarely necessary to achieve punishment and deterrence.” But the same is true of a $600,000 exaction that is close to 100 times the compensatory damages.

The court’s next conceptual error was in concluding that a 98:1 ratio of punitive to compensatory damages was permissible because the Fourth Circuit had upheld an 80:1 ratio in Saunders. The court reasoned that “our decision [in Saunders] provided fair notice to defendants that punitive damage awards in FCRA cases appropriately may reflect high, double-digit multipliers of the statutory or compensatory damages awarded.”

First, the court inappropriately focused solely on the ratio and ignored the absolute amount of punitive damages. Although an increase in the ratio from 80:1 to 98:1 might seem incremental, the jump from the $80,000 award affirmed in Saunders to the $600,000 allowed by the Fourth Circuit in Daugherty is startling and casts doubt on whether Saunders gave Ocwen adequate notice of its potential liability.

Second, as the Second Circuit recognized in a case involving excessive compensatory damages, “[w]hen courts fail to exercise the responsibility to curb excessive verdicts, the effects are uncertainty and an upward spiral. One excessive verdict, permitted to stand, becomes precedent for another still larger one. Unbridled, spiraling, excessive judgments predictably impose huge costs on society.”

That observation applies with even greater force in the context of punitive damages. To say that a high ratio in one case provides constitutionally adequate notice of the possibility of an even higher ratio in the next case—ignoring all other cases involving smaller ratios—is to create the very kind of “upward spiral” about which the Second Circuit warned.

One final error that permeates the decision merits mention. Like many other courts, the Fourth Circuit assumed that “adequate deterrence may require consideration of a defendant’s financial worth when determining the amount of a punitive award” and accordingly explained that “we look beyond a simple analysis of the mathematical ratio to ensure that the punitive damages award still serves the goals of punishment and deterrence, particularly against wealthy defendants” (emphasis added).

But as my colleague Andy Frey explained in this seminal post, that is a fallacy. Not only is corporate wealth irrelevant to deterrence, but the Supreme Court has never embraced wealth as a factor in any of its punitive damages cases. Indeed, in State Farm the Court indicated that corporate financial condition “bear[s] no relation to [a punitive] award’s reasonableness or proportionality to the harm” and that reliance on corporate wealth would work “a departure from well-established constraints on punitive damages.”