WASHINGTON — In a major victory for American corporations, the Supreme Court on Monday sharply limited the power of juries to punish companies with huge damage awards, a decision that could spare the tobacco industry, insurers and automakers from paying the pending verdicts.
The 6-3 ruling sends a stern warning to state judges and juries to rein in excessive awards. In general, they may not seek to punish an entire industry or an "unsavory business" in the guise of doing justice in a single case, the court said.
Moreover, big companies should not be hit with enormous verdicts just because they are large and wealthy, the justices added.
Juries in civil cases are intended to compensate victims for their actual losses, not to mete out punishment, said Justice Anthony M. Kennedy for the court.
"Great care must be taken to avoid the use of the civil process to assess" society's punishment, he said. "Punitive damages are not a substitute for the criminal process."
Monday's opinion goes further than ever before in restricting what the court called "irrational and arbitrary" verdicts against business.
Tobacco companies hope to use the ruling to reverse or lower punitive damage awards. Cigarette makers including Philip Morris USA and R.J. Reynolds are appealing nine punitive damage awards, ranging from $15 million to $144.8 billion, made to smokers who suffered from lung cancer or other illnesses.
The ruling also could lead to reversals in two record-setting California cases involving auto accidents.
In one, a jury in Stanislaus County handed down a $290-million punitive verdict against Ford Motor Co. four years ago in a fatal accident involving a Ford Bronco.
"This is an extremely strong opinion, and it demonstrates why the $290-million award cannot stand," said Los Angeles lawyer Theodore J. Boutrous, who represents Ford.
In the other, General Motors Corp. is appealing a Los Angeles jury's $4.8-billion punitive verdict -- later reduced to $1.2 billion -- in a case involving a fiery crash of a Chevrolet Malibu.
Business leaders hailed the court's decision.
Robin Conrad, an attorney for the U.S. Chamber of Commerce, said the ruling cracked down on "unfair and unrealistic" damage awards. The decision makes clear "punitive damages should only be awarded in extraordinary circumstances," she said.
Philip K. Howard, a Washington lawyer and head of Common Good, a group that promotes legal reform, said the decision "takes an important step toward restoring reliability to American justice." The mere possibility of "ruinous verdicts" forces many companies to agree to pay very large settlements, he said.
Although the Bush administration favors limiting lawsuits, it has not proposed a measure to cap damages across the board. Instead, its current proposal is focused on limiting awards in medical malpractice cases.
For nearly 20 years, the Supreme Court has been troubled by the increasing number of very large verdicts for punitive damages.
In civil cases, juries that rule for a plaintiff and find a company guilty of wrongdoing are called upon to compensate the victim for the loss. This may include money for actual losses, such as medical bills, and other losses such as emotional distress.
Punitive damages are different. They are not assessed based on the victim's loss, but instead are supposed to punish the wrongdoer separately. Because there is no clear standard, these verdicts are especially unpredictable. The victim receives the extra award as a windfall.
One of the biggest pressures on businesses to settle lawsuits is the inability to predict the potential for punitive damages, even when the value of the underlying injury is relatively easy to estimate, said Fred Main, vice president and general counsel for the California Chamber of Commerce.
"If you had a $50,000 case and you wind up with $500 million to $1 billion in punitive damages, there's something disproportionate there," he said.
In California and many other states, businesses cannot purchase insurance against punitive damage awards the way they can for compensatory and contractual damages, Main said.
In the late 1980s, the court saw a series of decisions from Alabama and Mississippi in which insurance companies failed to pay claims ranging from $5,000 to $10,000 that resulted in million-dollar punitive verdicts. In nearly every case, jurors had been urged to "send a message" to the big insurance company based far away in Chicago, New York or Los Angeles.
In 1996, the Supreme Court for the first time struck down a punitive verdict as unconstitutional. In that case, an Alabama jury had awarded a doctor who bought a BMW with a hidden scratch $4 million in punitive damages, supposedly to punish the German automaker for failing to disclose its policy of repainting scratched bumpers.
The Constitution says states may not deny people "property without due process of law," and a jury verdict based on no standards is lawless, the court said.