Amicus Curiae Brief — Ford Motor Co. v. Ramon Romo

Supreme Court, Ts.

~ FILED

»® |

7,

: Nos. 02-1096, 02-1097 APR? 28S

| OFFICE OF THA CLERK |

IN THE

Supreme Court of the United States

FORD MOTOR COMPANY,

Petitioner,

v.

THE ESTATE OF TOMMY SMITH, et al.,

Respondents.

FORD MOTOR COMPANY,

: Petitioner,

v.

JUAN RAMON ROMO, et al.,

Respondents.

On PETITIONS FOR WRITS OF CERTIORARI TO THE

SUPREME CourT OF KENTUCKY &

CourT OF APPEAL OF CALIFORNIA,

FIFTH APPELLATE DisTRICT

BriEF OF Amici CurIAE NATIONAL ASSOCIATION OF

INDEPENDENT INSURERS AND STATE FARM MUTUAL

AUTOMOBILE INSURANCE COMPANY

In Support OF PETITIONERS

SHEILA L. BIRNBAUM*

DoucLas W. DUNHAM

ELLEN P. QUACKENBOS -

MeELIssa A. RULE

SKADDEN, Arps, SLATE,

MEAGHER & FLOM LLP

Attorneys fer Amici Curiae

Four Times Square

7 New York, New York 10036

* Counsel of Record (212) 735-3000

1

TABLE OF CONTENTS

Page

TAR UE BA TEED on os be et cesses eo uens il

INTEREST OF AMICI CURIAE Ree rere arene se Pra ]

SUMMARY OF ARGUMENT ee eo ar ey eee 2

PE 5. 5 ENO KE GES EES TES REMERON EES 4

I. WHERE THERE IS REASONABLE DISAGREE-

MENT AS TO THE PROPRIETY OF THE DE-

FENDANT'S CONDUCT, THE IMPOSITION OF

PUNITIVE DAMAGES RAISES SIGNIFICANT

ee By ek ES os, are a marae ree 4

Il. THE "REASONABLE DISAGREEMENT" STAN-

DARD SHOULD BE APPLIED IN ASSESSING

REPREHENSIBILITY UNDER BMW ..:.......... 7

Ill. UNDER THE "REASONABLE DISAGREE-

MENT" STANDARD, A DEFENDANT'S AD-

HERENCE TO GOVERNMENT AND INDUS-

TRY STANDARDS SHOULD WEIGH HEAVILY

AGAINST PUNITIVE DAMAGES ............. 1]

ll

IV. USING TRADITIONAL FACTORS TO ASSESS

THE REPREHENSIBILITY OF LARGE INSTITU-

TIONAL OR CORPORATE DEFENDANTS PRO-

DUCES SKEWED RESULTS AND ARBITRARY

PUEEV ES AWARD 6 ooo. bck nc akon vin. 14

CARTAN 2 550s s pees can eee eee 20

iil

TABLE OF AUTHORITIES

Cases Page(s)

Alley v. Gubser Development Co., 785 F.2d 849

go LGV G kas tasks Kade a ede 80 13

BMW of North America, Inc. v. Gore,

517 U.S. 559 (1996) .... 2,3, 4, 5, 7, 10, 11, 14, 15, 20

Barber v. Nabors Drilling, U.S.A., Inc.,

we ga ee) 7

Burke v. Deere & Co., 6 F.3d 497 (8th Cir. 1993) ...... 10

Chrysler Corp. v. Wolmer, 499 So. 2d 823

a aa ie a’ ie www eb 0s 12, 19, 20

Drabik v. Stanley-Bostich, Inc.,

OPT Foe 990 (OEM. 1993)... nec cece reece 13

Erie Insurance Co. v. Hickman,

ee EO, LOPS) cece carves ervessens 6

iV

Ford Motor Co. v. Estate of Tommy Smith,

Nos. 1999-SC-1028-DG, 1999-SC-1029-DG,

2000-SC-0444-DG, (Ky. May 16, 2002)

(petition for certiorari

pending) ........ 2,3, 4, 7, 11, 14, 15, 16, 17, 19, 20

Geier v. America Honda Motor Co.,

Pa re SC 6 Ke Sond danke cawebus 12

Hibler v. Conseco, 744 N.E.2d 1012

eS er ae ea 13

Hillrichs v. Avco Corp., 514 N.W.2d 94

PUD Ga bocce vee er een rake barec ee 10

Hoskins v. Aetna Life Insurance C. 0.,

452 N.E.26 1315 (Ohio 1963) . 2... ec cesses 7

In re Exxon Valdez,

£70 F.36 1215 Gi Cw. 2001) cee scses 17, 18

Jackson National Life Insurance Co. v. Receconi,

Oe? 6 RO, COED cs Kon ke hee veesaces 6

Jenkins v. Ohio Casualty Insurance Co.,

TPO TO, BO ZAR COIR: BOOED gv vc vc nv ccncviscccces 6

Vv

Johns-Manville Sales Corp. v. Janssens,

463 So. 2d 242 (Fla. Dist. Ct. App. 1984) ......... 19

Jones v. Hutchinson Manufacturing, Inc.,

502 S.W.2d 66 (Ky. App. 1973) ........-.2+.505- 20

Loitz v. Remington Arms Co.,

563 N.E.2d 397 (Ill. 1990) ..........-.008- 9, 10,17

Mack & Co. v. Lancashire Insurance Co.,

&E. SOC. Mie. WORD ce nosso cc ecc nce eae sances 5

Manis v. Hartford Fire Insurance Co.,

681 P.2d 760 (Okla. 1984) .......... 2c eee eee eees 6

Mercer v. Pittway Corp.,

616 N.W.2d 602 (Iowa 2000) ............--0-0-. 13

Moffet v. Kansas City Fire & Marine Insurance Co.,

244 P.2d 228 (Kam. 19SZ) « «oe cc cave vc csennenss 6

Quackenbush y. Allstate Insurance Co.,

SITUS. PUGET oa vee hea oa ta wn earns 14

Richards v. Michelin Tire Corp.,

21 F.36 1068 C1 TC, 19D) oc cs cc ev rec cesce ss 12

vi

Romo v. Ford Motor Co., No. F034241,

(Cal. App. June 28, 2002),

(petition for certiorari

pending) .......... 2, 3, 4, 7,9, 11, 14, 15, 16, 19, 20

Satcher v. Honda Motor Co.,

FET oe FEEL LOG SEPEE 6 do's nkn beets cewenas 8,9

Sloman v. Tambrands, Inc.,

841 F. Supp. 699 (D. Md. 1993) ............005- 12

Southwestern Telegraph & Telephone Co. v. Danaher,

yo gtk Oe | Brrr 4,5,7,14

The T.J. Hooper, 60 F.2d 737 (2d Cir.),

cert. denied, 287 U.S. 662 (1932) .............46. 13

Travelers Insurance Co. v. Savio,

FOO Fae 1250 (OO. FFRS). onc cscccccousecs 13,17

Welch v. General Motors Corp.,

949 F. Supp. 843 (N.D. Ga. 1996) .............. 12

Statutes Page(s)

Ohio Rev. Code Ann. § 2307.80(C) ...............055 12

See, Pes Ns OAT, 6. ccd 0 4005 0ebeaeeeceaweueeres 12

a Hien tte al

Vii

Other Authorities Page(s)

Richard C. Ausness, Retribution and Deterrence:

The Role of Punitive Damages in Products

Liability Litigation, 74 Ky. L.J. 1 (1985) ....----. 17

Dorsey D. Ellis, Jr., Fairness & Efficiency in the

Law of Punitive Damages,

56 S. Cal. L. Rev. 1 (1982) .......esceeee: 5, 16,17

James M. Fischer, Should Advice of Counsel

Constitute a Defense for Insurer Bad Faith?,

72 Tex. L. Rev. 1447 (1994) ......... cece ee eeee 18

W. Page Keeton, et al., Prosser and Keaton

on the Law of Torts, (Sth ed. 1984) .......-..+-+-- 12

David G. Owen, Problems in Assessing

Punitive Damages against Manufacturers

of Defective Products, 49 U. Chi.

L. Rev. 1(19GZ) ....... pe eeeees 1, 12, 13, 16, 18, 19

Cass R. Sunstein, et al., Punitive Damages:

How Juries Decide, (2002) ......... 00 eee eee eees 18

Alan O. Sykes, "Bad Faith" Breach of Contract

by First-Party Insurers, |

25 J. Legal Stud. 405 (1996) .......----+eeeeee 17

W. Kip Viscusi, Corporate Risk Analysis:

A Reckless Act?, 52 Stan.

Le, Se GE oa becksetece seuss 15, 16, 17, 18

viii

l

INTEREST OF AMICI CURIAE'

Amicus curiae National Association of Independent In-

surers ("NAII") is a national trade association of over 700

member companies dedicated to expanding the choices avail-

able to the insurance-buying public, reducing the costs of in-

surance to its policyholders, and promoting competition. For

over 50 years, NAII has represented the interests of property

and casualty insurance companies and their customers

throughout the United States. Amicus curiae State Farm Mu-

tual Automobile Insurance Company is one of the largest au-

tomobile insurance companies in the United States and does

business nationwide.

Amici believe that this brief will assist the Court by pro-

viding perspective on special issues regarding punitive dam-

ages that confront national businesses that engage in con-

sumer transactions. Claims for punitive damages against

insurance companies, manufacturers of mass produced goods,

and other such consumer-oriented businesses tend to produce

arbitrary and often excessive punitive damages awards. The

imposition of punitive damages against such corporate defen-

dants raises special concerns that do not arise in the context

of litigation over single transactions between individuals.

This is at least partly because punitive damages law has

historically developed in the context of common law tort ac-

tions between individuals. Punitive damages, as one com-

mentator put it, developed "largely as a punishment and de-

terrent for trespassers, oxen thieves and other such human

malefactors."2 As a result, when the principles of common

law punitive damages are applied to the conduct and

decision-making processes of a large modern business, puni-

tive damages may be awarded that are excessive as a matter

of due process or where due process forbids any punishment

' Counsel for a party did not author this brief in whole or in part, and no

person or entity other than amici curiae or their counsel has made a mon-

etary contribution to the preparation or submission of the brief. The par-

ties have consented to the filing of this brief, and copies of those consents

have been lodged with the Court.

David G. Owen, Problems in Assessing Punitive Damages against

Manufacturers of Defective Products, 49 U. Chi. L. Rev. 1, 15 (1982).

2

at all. The problem is compounded, in some cases, by juror

bias against large out-of-state businesses and manufacturers.

In particular, the assessment of reprehensibility — the

most important of the constitutional guideposts set forth by

this Court for determining whether a punitive award is exces-

sive — presents difficulties in both products liability and in-

surance litigation. For example, the complex decision-mak-

ing that results in the final design of a product may reflect a

series of necessary and reasonable risk-utility determinations

that, in subsequent evaluations, juries and judges find all too

easy to characterize as "reprehensible." The affirmance of the

massive punitive damages awards in Romo and Smith illus-

trates the arbitrary nature of punitive awards against large

corporate defendants and the lack of coherent standards for

measuring the "reprehensibility" of corporate conduct.

The Romo and Smith cases raise constitutional punitive

damages issues that are of substantial importance not only to

manufacturers, but also to insurance companies and other

companies that deal with consumers. In this brief, amici ad-

dress an issue of particular concern to the insurance industry,

namely, the constitutionality of a punitive damages award

where (as in Romo and Smith) a corporate defendant has com-

plied with industry standards and government regulations and

where there is ground for reasonable disagreement concern-

ing the propriety of the corporate conduct at issue.

SUMMARY OF ARGUMENT -

In BMW of North America, Inc. v. Gore, 517 U.S. 559

(1996), this Court held that the Due Process Clause of the

United States Constitution imposes constraints on punitive

damage awards. The Court identified the degree of

reprehensibility of the defendant's conduct as "[p]Jerhaps the

most important indicium of the reasonableness of a punitive

damages award.” BMW, 517 U.S. at 575. Accordingly, it is

necessary as a constitutional matter that the determination of

the degree of reprehensibility of a defendant's conduct be

based on an analysis that produces fair and accurate results.

The analyses of reprehensibility by the California appel-

late court in Romo and by the Kentucky Supreme Court in

Smith fall far short of the constitutionally required level of

3

fairness and accuracy. Both courts improperly discounted

defendant Ford Motor Company's compliance with govern-

ment regulations and industry standards and ignored the reali-

ties of complex corporate decision-making. In particular, in

making product design decisions, manufacturers such as Ford

necessarily and properly consider not only a variety of poten-

tial safety issues, but also other design concems such as mar-

ketability, ease of operation, durability, and cost.

In many cases where punitive damages are imposed, in-

cluding Romo and Smith, the corporate defendant had an ar-

guable basis for believing that its chosen course of conduct

was reasonable and conformed to its legal obligations to-

wards consumers — even if a particular corporate decision

turned out after the fact to have been wrong or unwise such

that compensatory damages were in order for the affected

consumer. Most importantly, where a corporation — whether a

product manufacturer, an insurance company or other institu-

tional defendant — has complied with government regulations

or industry standards, that compliance should generally be

found to establish a basis for "reasonable disagreement” as to

the propriety of the defendant's conduct. "Reasonable dis-

agreement" should negate or at least substantially lessen

reprehensibility and thus weigh heavily against the imposi-

tion of punitive damages.

In the context of insurance litigation, some courts have

applied the "reasonable disagreement” standard to bar puni-

tive damages in cases where, despite the fact that a jury deter-

mines that an insurance company was incorrect in denying a

claim or in interpreting the insurance contract, there was a

genuine dispute or reasonable disagreement about the propri-

ety of the insurance company's conduct. The "reasonable dis-

agreement" standard provides a fairer and more accurate ana-

lytical basis for determining a corporate defendant's

"reprehensibility" under BMW than the factors used in tradi-

tional punitive damages law to assess individual conduct. The

use of the traditional factors with regard to corporate conduct

often merely encourages anti-corporate biases on the part of

judges and juries and results in arbitrary, excessive and un-

constitutional punishment of corporate defendants by judges

and juries in civil cases.

4

Amici respectfully submit that application of the "reason-

able disagreement” standard in assessing the nature of a cor-

porate defendant's conduct would help alleviate the constitu- |

tional problems raised by punitive awards such as those in |

Romo and Smith. Certiorari should therefore be granted to |

clarify the due process constraints on punitive damages and

the application of the BMW reprehensibility guidepost where

a corporate defendant's compliance with government regula-

tions or industry standards creates "reasonable disagreement"

as to the propriety of the defendant's conduct.

ARGUMENT

I. Where There Is Reasonable Disagreement as to

the Propriety of the Defendant's Conduct, the

Imposition of Punitive Damages Raises Signifi-

cant Due Process Concerns

In Southwestern Telegraph & Telephone Co. v. Danaher,

238 U.S. 482, 490 (1915), this Court set forth the basic prin-

ciple that where a corporate defendant is justified in believing

that a certain course of business conduct is reasonable, the

infliction of punishment for that conduct "depart[s] from the

fundamental principles of justice embraced in the recognized

conception of due process of law." In Danaher, this Court set

aside a $6,300 statutory penalty awarded to a telephone cus-

tomer against a telephone company that had disconnected the

customer's phone service pursuant to an impartially enforced

regulation adopted by the company. The Court determined

that because the company's regulation could have been de-

clared unreasonable by the Arkansas legislature, but had not

been, the company was "well justified in regarding the regu-

lation as reasonable and in acting on that belief" and that im-

position of penalties of $6,300 was "so plainly arbitrary and

oppressive as to be nothing short of a taking of [the com-

pany's] property without due process of law." Jd. at 490-91.

Although Danaher involved a statutory penalty, the rele-

vance of the due process principle set forth in Danaher to

punitive damages and the continuing vitality of that principle

are demonstrated by this Court's decision in BMW. In over-

turning the punitive damages imposed on defendant BMW,

this Court emphasized that BMW had a good faith basis to

believe that it was complying with its legal cbligations and

a a

5

that its conduct was not tortious, let alone punishable:

This [requirement that fraud requires a material

misrepresentation or omission] invites line-drawing

of just the sort engaged in by States with disclosure

statutes and by BMW. We do not think it can be

disputed that there may exist minor imperfections in

the finish of a new car that can be repaired (or in-

deed, left unrepair:d) without materially affecting

the car's value. Tere is no evidence that BMW

acted in bad faith when it sought to establish the ap-

propriate line between presumptively minor damage

and damage requiring disclosure to purchasers. For

this purpose, BMW could reasonably rely on state

disclosure statutes for guidance. 517 U.S. at 579.

The due process principle recognized in Danaher nas

been formulated by some courts and commentators as the

"reasonable disagreement” principle, or the "genuine dispute"

principle. See, e.g., Dorsey D. Ellis, Jr., Fairness & Effi-

ciency in the Law of Punitive Damages, 56 S. Cal. L. Rev. I,

22-23 (1982) (for purposes of punitive damages, reckless

conduct should be "narrowly defined to exclude reasonable

disagreement over the relative danger and utility of an act").

In insurance claims litigation, there was early judicial recog-

nition that where an insurance company has an arguable basis

for denying a claim or for other challenged conduct, no puni-

tive damages are warranted as a matter of law, even if a jury

later disagrees with the insurance company's assessment of its

obligations under the insurance policy. See, e.g., Mack & Co.

v. Lancashire Ins. Co., 4 F. 59, 63 (D. Mo. 1880) (to recover

damages beyond the value of their destroyed property for

vexatious delay in the payment of a policy, plaintiffs must

establish that defendants had no reasonable ground for con-

testing either the validity or the amount of the claim).

Some more recent decisions in insurance cases have also

applied the "reasonable disagreement" standard to constrain

the imposition of punitive damages for corporate conduct that

is determined after-the-fact to be tortious, where, as in

Danaher, the company was "justified in regarding [its con-

duct] as reasonable." Danaher, 238 US. at 490. While these

insurance cases apply the "reasonable disagreement" standard

6

as a matter of state common law, their analysis has constitu-

tional relevance to the due process limits on punitive dam-

ages. For example, in Erie Insurance Co. v. Hickman, 622

N.E.2d 515, 520-523 (Ind. 1993), the Indiana Supreme Court

determined that an award of punitive damages against the

defendant insurance company could not be supported where

there was probative evidence that the insurance adjuster had

based her denial of the plaintiff's uninsured motorist claim on

police reports and other "sources of information upon which

the adjuster had a night to rely." The court explained that

"Just as a jury's determination that a claim was, in retrospect,

incorrectly denied is not sufficient to establish a breach of the

duty to exercise good faith, proof that a tort [breach of the

duty of good faith] was committed is not sufficient to estab-

lish the nght to punitive damages." Jd. at 520.

The Mississippi Supreme Court has established a similar

rule for distinguishing a denial of an insurance claim that was

later determined to breach the insurance contract. from the

denial of an insurance claim that also merited punitive dam-

ages. See Jenkins v. Ohio Cas. Ins. Co., 794 So. 2d 228, 232-

33 (Miss. 2001). In Jenkins, the court held that punitive dam-

ages-are improper unless the insurer both lacked an arguable

basis for denying the claim, and committed a wilful or mali-

cious wrong or acted with gross and reckless disregard. Id.

The court concluded that these questions are in the first in-

stance questions of law to be decided by the trial judge. /d. at

233; see also Manis v. Hartford Fire Ins. Co., 681 P.2d 760,

762 (Okla. 1984) (insurer's withholding of payment of claim

could not lead to imposition of punitive damages where there

was a "legitimate dispute” regarding evidence of arson).°

> See also Moffet v. Kansas City Fire & Marine Ins. Co., 244 P.2d 228,

233 (Kan. 1952) (holding that the "[mJere refusal to pay insurance cannot

constitute wanton or malicious conduct when, as here, an actual contro-

versy exists with respect to liability on the policy. If this were not the

rule, punitive or exemplary damages could be recovered in every action

involving a refusal to pay an insurance policy."); Jackson Nat'l Life Ins.

Co. v. Receconi, 827 P.2d 118, 134 (N.M. 1992) (finding insufficient

support for punitive damages where refusal to pay on a claim for failure

of condition precedent in the application was not frivolous or unfounded;

"unfounded" interpreted to mean "an utter or total lack of foundation for

(continued...)

j

The "reasonable disagreement" standard has also been

used in products liability and other types of cases in drawing

the line between compensatory damages and punitive dam-

ages, and ensuring that punitive damages are not the auto-

matic consequence of liability in tort. See, e.g., Barber v.

Nabors Drilling, U.S.A., Inc., 130 F.3d 702, 710 (Sth Cir.

1997) (in ADA case, reversing punitive award where there

was a "good faith dispute" as to propriety of employer's con-

duct). As shown below, the reasonable disagreement stan-

dard helps to prevent arbitrary awards of punitive damages

and awards of punitive damages that punish socially useful

behavior on the part of corporate defendants.

II. The "Reasonable Disagreement" Standard

Should Be Applied in Assessing Reprehensibility

under BMW

In BMW, as in Danaher, the defendant was faced with

the need to determine ex ante whether a specific course of

conduct would conform to its legal obligations, in the ab-

sence of a particular statute or judicial decision addressing

that conduct. As noted above, in BMW, 517 U.S. at 579, the

defendant car manufacturer in deciding upon a course of con-

duct in Alabama looked to regulations and statutes in other

states and concluded that it would be reasonable to conform

its conduct to the strictest of those statutes. Many other com-

panies, including product manufacturers and insurance com-

panies, are confronted by the same need to determine ex ante

whether a course of conduct will conform to their legal obli-

gations. As Romo and Smith illustrate, makers of potentially

dangerous, yet necessary and useful products, such as auto-

mobiles and trucks, are confronted with this problem in a par-

* (...continued)

an assertion of nonliability — an arbitrary or baseless refusal to pay, lack-

ing any arguabie support in the wording of the insurance policy or the

circumstances surrounding the claim."); Hoskins v. Aetna Life Ins. Co.,

452 N.E.2d 1315, 1320 (Ohio 1983) ("[MlJere refusal to pay insurance is

not, in itself, conclusive of bad faith. But when an insurer insists that it

was justified in refusing to pay a claim of its insured because it believed

there was no coverage of the claim, . . . such belief may not be an arbi-

trary or capricious one. The conduct of the insurer must be based on cir-

cumstances that furnish reasonable justification therefor" (omission in

original) (citation omitted)). :

8

ticularly acute form. Such manufacturers make product de-

sign decisions facing limits of knowledge, the necessity of

trade offs in safety, the need to measure the cost of safety fea-

tures or redesign of a product against the level of nsk, and the

need to produce a product that people can afford to buy. To

ensure some level of accuracy, the assessment of the level of

a defendant's reprehensibility in manufacturing a product

should be based upon principles that take into account the

realities of designing and marketing a product.

An assessment of reprehensibility that takes into account

the "reasonable disagreement" standard leads to more reliable

results in the determination of the amount, if any, of punitive

damages that should be awarded. In assessing the behavior of

corporate defendants under the "reasonable disagreement"

principle, courts should look to whether the company's con-

duct complies with government standards or regulations and

industry standards. In particular, where government regula-

tions or standards govern a defendant's conduct, as 1s very

often the case both with insurance companies and with car

and truck manufacturers such as Ford, a defendant's compli-

ance with such standards and regulations should be held (at a

minimum) to create a presumption that there are grounds for

reasonable disagreement as to whether the defendant acted

reprehensibly in adopting that course of conduct. See Point

III infra. In the case of manufacturers, courts should also

look to whether there is room for reasonable disagreement as

to the propriety of the design decisions, safety trade-offs and

risk-utility calculations made by the company, such that the

company may have reasonably believed that its conduct com-

plied with its legal obligations toward consumers.

Some courts have persuasively applied such principles.

For example, in Satcher v. Honda Motor Co., 52 F.3d 1311,

1317 (Sth Cir. 1995}; the court vacated a $2 million punitive

award that was based upon Honda's failure to incorporate leg

guards on its motorcycles. The court held that Honda's "mar-

keting its products in the same design of every motorcycle

marketed in the world to the general public” was not as a mat-

ter of law so extreme or outrageous as to justify punitive

damages. /d. at 1316. The court also noted that "[a]lthough

certain studies indicate that leg guards are effective, no gov-

ernment in the world has ever required them," id., and that

9

there was "a genuine dispute in the scientific community" as

to the efficacy and desirability of leg guards. /d. at 1317.

In Loitz v. Remington Arms Co., 563 N.E.2d 397 (Ill.

1990), in which the plaintiff was injured when the barrel of

his gun exploded, the Illinois Supreme Court reversed a $1.6

million punitive award against the gun manufacturer. In con-

trast to the California court in Romo, the Illinois Supreme

Court took a reasoned view of the role of prior accidents and

litigation in showing the manufacturer's purported knowledge

of dangers posed by its product. The Illinois court rejected

the appellate court's view that the "detailed testimony about

prior, similar occurrences which were made known to defen-

dant before plaintiff's gun exploded" supported the punitive

award, explaining:

The 94 prior accidents represent about 0.003% of

Remington's production of more than 3 million

Model 1100 barrels during the span of time in ques-

tion. The prior accidents must be considered not

only in relation to the number of barrels produced by

Remington during that period, but also in relation to

the estimated number of times those guns would

have been used. Although the latter number cannot

be known with any precision, the plaintiff's trial tes-

timony demonstrates that he had used his own

Model 1100 shotgun literally thousands of times.

Loitz, 563 N.E.2d at 404.

The Illinois Supreme Court in Loitz also rejected the ap-

pellate court's reliance upon the manufacturer's "inaction in

the face of [an] earlier adverse decision" as an aggravating

circumstance meriting punitive damages, stating:

While it is true that Remington was made aware of

[plaintiff's expert's] opinion during the course of the

prior case, it cannot be said that Remington was au-

tomatically required to embrace Dr. Levinson's view

as its own. The evidence presented at trial indicated

that Remington began producing the Model 1100

shotgun in 1963 following extensive research into

its design. Remington employs its own engineers

and metallurgists and relies on their expertise. Vari-

ous tests are performed at different stages of the

10

manufacturing process to ensure the safety and qual-

ity of its shotguns. Remington's evidence demon-

strated, however, that its manufacturing and testing

procedures are not able to prevent every barrel ex-

plosion or rupture .... /d. at 405.

In Hillrichs v. Avco Corp., 514 N.W.2d 94, 100 (Iowa

1994), the Iowa Supreme Court invoked the reasonable dis-

agreement principle in upholding a directed verdict for the

defendant on punitive damages. In Hillrichs, the plaintiff

attempted to clear a plugged compicker while the machine

was running and caught his hand in\the rollers. Jd. at 96. The

plaintiff put on evidence that the defendant "knew, at the time

it manufactured the husking bed, that farmers often attempted

to unplug the husking rollers while they were operating" and

that the defendant "could have installed an emergency stop

device for less than $50." Jd. at97. The defendant's evidence

showed that when its

engineers decided not to install emergency stop de-

vices on the . . . husker apparatus, they based their

decision on the so called ‘dependency hypothesis,’

the theory that the product as designed would dis-

courage farmers from making contact with the roller

bed and that the plaintiff's proposed device would

invite farmers to unreasonably depend on it despite

the dangerousness of the husking roller bed.

Id. at 100. In upholding a directed verdict for the defendant

on the issue of punitive damages, the Iowa court stated that

"an award of punitive damages is inappropriate when room

exists for reasonable disagreement over the relative risks and

utilities of the conduct and device at issue." /d. (citing Burke

v. Deere & Co., 6 F.3d 497, 511 (8th Cir. 1993)).

In the decisions discussed above, certain recurring

themes emerge from the courts’ detailed examination of the

corporate conduct in question. Those themes — including

compliance with government regulations and the recognition

of the multiple competing considerations that go into corpo-

rate decision-making — can be brought together under the

general rubric of the "reasonable disagreement” standard. As

shown more fully below, use of that standard in assessing a

corporation's conduct under the BMW reprehensibility guide-

11

post is critical to reaching a reasonably accurate assessment

of whether, as a matter of due process, punitive damages are

warranted at all, and, if so, in what amount.

III. Under the "Reasonable Disagreement" Stan-

dard, a Defendant's Adherence to Government

and Industry Standards Should Weigh Heavily

Against Punitive Damages

In both Romo and Smith, the courts improperly dis-

counted the fact that Ford had complied with industry and

government standards. In Romo, as the California court ac-

knowledged, the evidence showed that the roof strength of

plaintiffs’ vehicle, a 1978 Bronco, "far exceeded the passen-

ger car standard that existed” at the time the Bronco was man-

ufactured. (Romo Pet. App. at 28a.) The court acknowledged

that the Bronco's roof even exceeded the "current standard"

for SUVs, but dismissed this as "merely coincidental." (/d. at

28a-29a.) Likewise, the court gave no weight to the fact that

"other auto manufacturers also used fiberglass roofs on con-

temporaneous fiberglass utility vehicles." (/d. at 36a.) In

Smith, the plaintiffs expert admitted that "all four major

American automobile manufacturers equipped their vehicles

with automatic transmissions having the same design as the

transmission installed by Ford" in the seventeen-year-old

truck used by Tommy Smith. (Smith Pet. App..41a (Cooper,

J., dissenting)). Moreover, the NHTSA had concluded after

an extensive investigation that "vehicles equipped with a

transmission of the type installed in [the] Ford F-250 pickup

truck [used by Smith] were not sufficiently unsafe to warrant

recall." Jd. at 53a.

Contrary to the decisions in Smith and Romo, compliance

by a corporate defendant with government and industry stan-

dards creates a ground for "reasonable disagreement" and

should weigh heavily against the imposition of punitive dam-

ages. When government agencies or an entire industry have

reached the same conclusion as the defendant, it is apparent

that reasonable people could reach that conclusion, and the

degree of reprehensibility under BMW — if reprehensibility

exists at all — is necessarily very low. Thus, for example,

where a manufacturer defendant has made a product in com-

pliance with government standards, such compliance "would

12

be admissible evidence tending to negate charges of negligent

and defective design" and should "presumably weigh against

an award of punitive damages." Geier v. Am. Honda Motor

Co., 529 U.S. 861, 893 (2000) (Stevens, J., dissenting). In-

deed, Professors Prosser and Keeton have stated that "com-

pliance with a statutory standard should bar liability for puni-

tive damages." W. Page Keeton, ef al., PROSSER AND

KEETON ON THE LAW OF TORTS § 36, at 233 & n.41 (5th ed.

1984). See also Richards v. Michelin Tire Corp., 21 F.3d

1048 (11th Cir. 1994) (punitive damages prohibited where

defendant complied with federal safety standards).*

As Professor David Owen has explained:

Many government standards . . . are adopted with

studied care, and some are placed close to the line of

feasible technology; others are set in a wide gray

area where the difficulties of defining defectiveness

(the 'proper' mix of safety and its tradeoffs) are espe-

cially great. In theses circumstances, particularly if

many in the industry have come to treat the provi-

sion as the proper safety norm, proof of compliance

with the regulation or statute ordinarily should be

deemed to be conclusive proof of good faith and

hence a conclusive defense to a punitive damages

claim.

Owen, supra, at 41-42. See also Welch v. Gen Motors Corp.,

949 F. Supp. 843 (N.D. Ga. 1996) (punitive damages not

warranted where automobile's braking system and instrument

panel met applicable federal regulations); Sloman vy.

Tambrands, Inc., 841 F. Supp. 699 (D. Md. 1993) (defendant

who complied with federal regulation regarding product alert

did not act with malice and therefore was not liable for puni-

tive damages); Chrysler Corp. v. Wolmer, 499 So. 2d 823

(Fla. 1986) (award of punitive damages is unjust where de-

* Some states, by statute, bar punitive damages where the alleged wrong-

doer has complied with existing government regulations. See, e.g., Ohio

Rev. Code Ann. § 2307.80(C) (the manufacturer of a drug will not be

liable for punitive damages in a product liability claim if the drug that

allegedly caused the harm was manufactured and labeled in relevant and

material respects in accordance with the terms of an approval or license

issued by the FDA); Or. Rey. Stat. § 30.927.

13

fendant had complied with requirements of National Traffic

Motor Safety Act regarding fuel system integrity).

Likewise, while adherence to industry standards is not

always a defense to liability in a negligence action, see, e.g.,

The T.J. Hooper, 60 F.2d 737, 740 (2d Cir.), cert. denied, 287

U.S. 662 (1932), it constitutes powerful evidence that the

conduct at issue is not so universally condemnable as to war-

rant punitive damages. In the insurance context, compliance

with industry standards has been held to negate the culpable

state of mind required for punitive damages. See Hibler v.

Conseco, 744 N.E.2d 1012, 1022 (Ind. Ct. App. 2001) (con-

duct understood by insurer to be "an accepted practice within

the industry" did not support "culpable state of mind" war-

ranting punitive damages); cf Travelers Ins. Co. v. Savio,

706 P.2d 1258, 1275 (Colo. 1985) (bad faith claim against

insurer requires "proof of the standards of conduct in the in-

dustry"). In products liability cases, compliance with industry

standards has been held to "show[] a reasonable disagreement

over the relative risks and utilities" of a defendant's conduct

in designing and manufacturing a product. See Mercer v.

Pittway Corp., 616 N.W.2d 602, 618 (lowa 2000) (reversing

punitive damages; defendant manufacturer's adoption of Un-

derwriters Laboratory standard for testing and performance of

smoke detectors showed that there existed grounds for "rea-

sonable disagreement"). As one commentator has stated,

"(rjarely will an entire industry act with flagrant impropriety

against the health and safety of the consuming public, and

running with the pack in general should shield a manufacturer

from later punishment for conforming to the norm." Owen,

supra, at 40-41. Accordingly, compliance with industry cus-

tom “has been accorded substantial weight in the punitive

damages context." /d. at 40. See also, e.g., Drabik v.

Stanley-Bostich, Inc., 997 F.2d 496, 510 (8th Cir. 1993)

("[c]ompliance with industry standard and custom serves to

negate conscious disregard and to show that the defendant

acted with a nonculpable state of mind"); Alley v. Gubser

Dev. Co., 785 F.2d 849, 856 (10th Cir. 1986) (reversing de-

nial of directed verdict on punitive damages where defen-

dant's conduct was consistent with industry practice).

Issues regarding compliance with governmental and in-

dustry standards repeatedly arise in the insurance context. In

14

each of the fifty states, insurance companies are subject to

comprehensive laws and regulations that govern their obliga-

tions to policyholders. See Quackenbush v. Allstate Ins. Co.,

517 U.S. 706, 733 (1996) (Kennedy, J., concurring) ("States,

as a matter of tradition and express federal consent, . . . main-

tain{] precise and detailed regulatory schemes for the insur-

ance industry."). Accordingly, amici urge that under

Danaher and BMW a defendant's compliance with govern-

ment regulations and industry standards should, as a matter of

due process and fundamental faimess, weigh strongly against

the imposition of punitive damages and should certainly pre-

clude a punitive award of millions of dollars, such as the

awards upheld in Smith and Romo.

Such compliance, whether by a manufacturer or insur-

ance company or other corporate defendant, provides a clear

marker for distinguishing between conduct that is merely

tortious and conduct that merits punitive damages. By dis-

counting evidence of compliance with government and indus-

try standards, the courts in Smith and Romo contravened the

"{e]lementary notions of fairness enshrined in our constitu-

tional jurisprudence” that "dictate that a person receive fair

notice not only of the conduct that will subject him to punish-

ment, but also of the severity of the penalty that a State may

impose." BMW, 517 U.S. at 574. Certiorari should be

granted to clarify the due process constraints on punitive

damages and the application of the BMW reprehensibility

guidepost where a corporate defendant's compliance with reg-

ulations or industry standards creates "reasonable disagree-

ment" as to the propriety of the defendant's conduct.

IV..Using Traditional Factors To Assess the

Reprehensibility of Large Institutional or Corpo-

rate Defendants Produces Skewed Results and

Arbitrary Punitive Awards

The need for this Court's guidance in the application of

the BMW reprehensibility guidepost to conduct by businesses

and manufacturers is demonstrated by the manifest shortcom-

ings of the analysis provided by the courts in Smith and

Romo. Those courts attempted to analyze reprehensibility by

reference to traditional factors such as knowledge, reckless-

ness, repeated conduct, physical injury and profit motivation.

15

Such factors, having been developed in tort cases between

individuals, often do not produce constitutionally acceptable

assessments of the conduct of corporate defendants. Rather,

the traditional analysis does nothing to curb biases against

large out-of-state corporations, encourages misunderstanding

and punishment of socially beneficial behavior and produces

punitive awards that are unfair, arbitrary and excessive.

The traditional reprehensibility factors are, almost by

definition, present in products liability cases such as Romo

and Smith. For example, the traditional "scale" of reprehen-

sibility finds conduct that results in physical injury or death

more reprehensible than conduct that results merely in eco-

nomic injury. See BMW, 517 U.S. at 576. In products liabil-

ity cases, the use of this factor automatically puts the defen-

dant high on the reprehensibility scale. Likewise, a corpora-

tion that manufactures cars or other products whose use car-

ries some inherent danger will likely have knowledge of the

statistical likelihood (or certainty) that injuries or deaths will

result from the use of its product. In litigation, such knowl-

edge will inevitably be characterized by plaintiff's counsel as

a knowing or reckless indifference to the safety of a plaintiff

who is later injured by the product, again automatically plac-

ing the defendant corporation high on the reprehensibility

scale. See W. Kip Viscusi, Corporate Risk Analysis: A Reck-

less Act?, 52 Stanford L. Rev. 547, 574 (2000). Moreover,

because corporations are in business to make money, the al-

leged motive of the corporate defendant will always be greed.

See id. at 566. In products liability cases, these factors will

likely be present even where "reasonable disagreement” ex-

isted regarding the risks and utilities of the defendant's con-

duct. Therefore, in assessing reprehensibility in products lia-

bility cases, it is important to give substantial weight to the

"reasonable disagreement" principle.

The analysis provided by the California Court of Appeal

in Romo exemplifies the problems with _ traditional

reprehensibility assessment in products liability cases. The

court began its constitutional reprehensibility analysis with

the proposition that because deaths had occurred in the auto-

mobile accident at issue, "the award here cannot be compared

to cases ‘involving a business fraud resulting only in eco-

nomic harm." (Romo Pet. App. 38a.) The court determined

16

that Ford's conduct involving "mass production and market-

ng" of a product "purely for defendant's economic better-

ment" (Romo Pet. App. 38a) was "despicable" and, thus,

grossly reprehensible because Ford marketed a product that

"could kill people." (Romo Pet. App. 25a-26a.) In Smith,

likewise, the Supreme Court of Kentucky found Ford's con-

duct to be substantially reprehensible because Ford continued

to market its trucks "after Ford knew of the dangerous pro-

pensity of its transmission" (Smith Pet. App. 17a) — despite

the fact that the NHTSA had decided not to recall the vehicles

and that all four major American manufacturers used the

same transmission design.

Jurors’ sympathies and cognitive biases compound the

risk that punitive awards in products liability cases will be

skewed. Where injuries are severe, juries may be reluctant to

blame the injured, preferring in the case of a car accident, for

example, to blame the car rather than the driver. Further-

more, it is easy for plaintiff's lawyers to demonize large, out-

of-state corporations, and jurors’ "natural sympathy for a sen-

ously injured person” may be "reinforced when the defendant

is a manufacturer, for many persons are hostile toward major

institutions in general and ‘big business’ in particular." Owen,

supra, at 12.° Thus, it is not surprising that, as jury research

has shown, juries tend to punish corporations simply for hav-

ig conducted a risk analysis. See Viscusi, supra, at 559

(mock jury research showed that "[u]ndertaking a benefit-cost

analysis of risk does not help the company, but instead boosts

the punitive damages awarded by 47%."). In addition, what a

jury may view as a significant number of prior, repeated inci-

dents evidencing knowledge and recklessness warranting a

* See also Ellis, supra, at 42 ("In the einotionally charged context of a

civil trial, which lacks the procedural safeguards of a criminal proceed-

ing, where the jury 1s invited to assess punitive damages with little guid-

ance and less constraint. decisions will be affected by latent biases or

redistributional inclinations. If juries dislike or do not understand cost-

benefit analyses, [or] distrust corporations, . . . those factors are likely to

bias their decisions."). Notably, in his dissenting opinion in Smith, Jus-

tice Cooper of the Kentucky Supreme Court characterized the punitive

award in that case as "an outrageous verdict" by a "runaway jury” that

would "redistribute the wealth of an out-of-state corporation with requi-

site deep pockets." (Smith Pet. App. 32a.)

17

large punitive award, may in fact involve only a tiny percent-

age of the numbers of products sold and being used unevent-

fully by millions of consumers. See, e.g., Loitz, 563 N.E.2d

at 404 (vacating punitive award; stating that 94 prior acci-

dents represented only 0.003% of 3 million gun barrels).

The weighing of costs and benefits or nsk and utility by a

manufacturer in making design decisions is desirable, so-

cially beneficial conduct that should be encouraged, not pun-

ished. Viscusi, supra, at 550 ("we want corporations to think

about risks in a systematic manner."). Basing punitive dam-

ages liability on the defendant's knowledge through cost-ben-

efit analysis of the risk of injury has a "perverse effect on in-

centives,”" reducing the "resources committed to ascertaining

the relative harm that would result from alternate-product de-

signs and to exploring means of reducing expected loss,"

thus, "deter[ring ] the very activities that efficient liability

rules promote." Ellis, supra, at 50.° See also In re Exxon

Valdez, 270 F.3d 1215, 1244 (9th Cir. 2001) (noting danger

of deterring "good conduct that risks being misunderstood as

bad, or that will look bad in retrospect").

Many competing factors are considered in designing a

product, and while safety is important, manufacturers- of

products "must also consider elements such as marketability,

appearance, ease of operation, durability, freedom from main-

tenance or repair, ease of manufacture, and economics of ma-

terials and labor." Richard C. Ausness, Retribution and De-

terrence: The Role of Punitive Damages in Prod. Liab.

Litig., 74 Ky. L.J. 1, 88-89 (1985). Ultimate safety is not eco-

nomically feasible, either from the manufacturer's viewpoint

or from the viewpoint of the consuming public. Cars cannot

be manufactured like tanks, and safety trade-offs, although

° Likewise, in the insurance context, the too ready imposition of punitive

damages may result in deterring reasonable investigation of invalid or

fraudulent claims. See, e.g., Savio, 706 P.2d at 1275; Alan O. Sykes,

"Bad Faith" Breach of Contract by First-Party Insurers, 25 J. Legal

Stud. 405, 434-35 (1996) (noting "rampant" insurance fraud and stating:

"fijf reasonable efforts to reduce fraud can become 'bad faith’ down the

road, . . . insurers may simply give up on them"). The "reasonable dis-

agreement" standard helps strike a balance between competing social

considerations in both the products liability and the insurance contexts.

18

not palatable to juries, are necessary. The costs of avoiding all

risk of harm are "potentially infinite," and requiring a manu-

facturer to bear them or face a huge punitive award will sim-

ply mean that "society would lose the benefit of the produc-

tive activity." Exxon Valdez, 270 F.3d at 1244.

Problems of hindsight create a further potential for ex-

cessive punitive awards, when juries and courts examine a

manufacturer's risk-utility decisions. Juries and courts, as-

sessing a defendant's reprehensibility after the fact of an acci-

dent, do not necessarily "compare expected benefits and costs

based on the state of information before the accident."

Viscusi, supra, at 563.’ Rather, "jurors may compare the

enormous cost to the victim with the relatively negligible cost

of the safety improvement." /d. However, although the cost

of a single "fix" for each car or other product may seem low,

"at the time of design, the fix was merely one of a great many

options considered for inclusion in the total design mix, and .

.. human injury from any one was at most at that time only a

foreseeable nsk." Owen, supra, at 35. With respect to car

design in particular, there are "hundreds of design changes

that can be made to enhance the safety of [a] vehicle. . . rang-

ing in cost per unit from pennies to hundreds of dollars. Al-

though the cost of any one change may be sinall in isolation,

all [that can be] fairly ask[ed] of management and its engi-

neers in the punitive damages context is that safety consider-

ations not be deliberately excluded or shunted far to the rear

in deciding on the total design mix involved." /d. at 34.

Moreover, cost-benefit analysis, by its very nature, pro-

duces "bad" documents — that is, documents that acknowl-

edge the existence of safety nsks. In fact, "the more a manu-

facturer is truly concerned about its product's safety, the more

” Empirical jury research confirms the serious effect of hindsight bias on

jury determinations of punitive damages. See Cass R. Sunstein, et al.,

Punitive Damages: How Juries Decide 96-107; 211, 222 (2002). Hind-

sight bias exists in insurance litigation as well. See, e.g., James M.

Fischer, Should Advice of Counsel Constitute a Defense for Insurer Bad

Faith?, 72 Tex. L. Rev. 1447, 1485 n.90 (1994) ("Hindsight bias reflects

the tendency of decisionmakers to find that what did occur should have

been foreseen. ... In an insurance bad faith case involving an excess

verdict, the fact of the verdict influences the decisionmaker's perception

of the probability of the excess verdict.").

- 19

it will encourage self-criticism and ‘negative’ analyses of the

product within the company.” Owen, supra, at 17." Thus, "in

the documentary background of most inherently dangerous

products will be some fair number expressing concern over

many of the significant choices in the design process." Jd.

The result in later litigation is that "{a] skillful plaintiff's law-

yer will often be able to find and string together a series of

such documents, plucked from context among the thousands

or millions in the company's files, that may make the manu-

facturer look particularly insensitive to consumer safety and

more concerned about cutting costs." /d. at 19.

Accordingly, in evaluating such documents for purposes

of punitive damages, it is important that courts be aware of

the realities of the design process and, in particular, the reality

that manufacturers of products such as automobiles "must

design them in many different ways they know with virtual

certainty will result in harm or death at some time to a certain

number of unfortunate, statistical persons." /d. at 15. In

Chrysler Corp. v. Wolmer, 499 So. 2d 823, 825 (Fla. 1986),

the Florida Supreme Court distinguished such knowledge

from the knowledge of an asbestos manufacturer. In assess-

ing the "reprehensibility" of a car maker's design and place-

ment of a fuel tank, the court emphatically rejected the propo-

sition that the car manufacturer could be equated to an asbes-

tos manufacturer who had been "shown to have knowledge

that its product is inherently dangerous to persons or property

and that its continued use is likely to cause injury or death,

but nevertheless continues to market the product... ." Jd.

(refusing to follow Johns-Manville Sales Corp. v. Janssens,

463 So. 2d 242 (Fla. Dist. Ct. App. 1984)). The Florida Su-

preme Court held that the Johns-Manville "standard [was]

8 In Smith, in assessing reprehensibility, the Kentucky court stressed a

document by a Ford engineer that identified the purported defect in the

transmission and purportedly "recommended an alternative." (Smith Pet.

App. at 14a, but see id. at 37a-42a (opining that Ford was entitled to di-

rected verdict on issues of causation and defect) (Cooper, J., dissenting)).

Notably, that document recommended not an existing alternative but that

"design and development be directed toward" an alternative. (/d. at 14a

n.24.) Likewise. the California court relied upon various corporate docu-

ments, including a “corporate memo" apparently advocating consider-

ation of a stronger roof strength standard. (Romo Pet. App. at 26a.)

20

clearly erroneous when applied to a claim that a motor vehi-

cle was insufficiently crashworthy when precautions had been

taken to insure its crashworthiness." /d. at 826.

The Florida Supreme Court's opinion in Wolmer stands

in stark contrast to the opinions of the courts in Smith and

Romo. Indeed, in upholding punitive damages against Ford

in the Smith case, the Kentucky Supreme Court chose to fol-

low a case in which punitive damages were assessed against

an asbestos manufacturer and in which the Kentucky Su-

preme Court had held that asbestos defendants were not insu-

lated from liability by industry practice "just because every

member of that industry was manufacturing and distributing a

product known to be inherently dangerous." (Smith Pet. App.

at 17a & n.38.) The Kentucky court ignored Kentucky prece-

dent holding the manufacturer of an auger not liable even for

compensatory damages where the auger "conformed to the

design as to safety developed by the industry," despite the

"occurrence of other injuries." See Jones v. Hutchinson Mfg.

Inc., 502 S.W.2d 66, 70-71 (Ky. App. 1973). The Florida

Supreme Court in Wolmer was correct, and the Kentucky Su-

preme Court in Smith was wrong. The manufacture of a car

or truck conforming to government and/or industry standards

cannot rationally be equated to the manufacture of asbestos.

Under the "reasonable disagreement" standard, the fact

that a manufacturer has based its design decisions on a nsk

analysis should weigh against punitive damages, even if a

particular design decision turns out to have been wrong or

unwise such that compensatory damages for the injured

product-user are in order. That conclusion is mandated not

only by the "reasonable disagreement" standard, but also by

the considerations of due process and fundamental fairness

upon which this Court's decision in BMW is based. This

Court should grant certiorari to clanfy the contours of the due

process limitations on punitive damages in products liability,

insurance, and other cases against corporate defendants.

CONCLUSION

The petitions for certiorari should be granted.

Respectfully Submitted,

Sheila L. Birmbaum*

Douglas W. Dunham

Ellen P. Quackenbos

Melissa A. Rule

* Counsel of Record

Skadden, Arps, Slate

Meagher & Flom LLP ~

Four Times Square

New York, NY 10036

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