Amicus Curiae Brief — Shell Oil Co. v. Hebble

MOTION FILED

SEP 30 200 (2)

V2

No. 10-349

In The

Supreme Court of the GAnited States

Shell Oil Company, and SWEPI LP (as successor-in-

interest to Shell Western E & P, Inc.),

Petitioners,

Vv.

Nancy Fuller Hebble, et al.,

Respondenis.

On Petition for Writ of Certiorari

to the Court of Civil Appeals

for the State of Oklahoma

MOTION OF THE INTERNATIONAL

ASSOCIATION OF DEFENSE COUNSEL AND

THE NATIONAL ASSOCIATION OF

MANUFACTURERS FOR LEAVE TO FILE BRIEF

AS AMICI CURIAE AND BRIEF IN SUPPORT OF

PETITION FOR WRIT OF CERTIORARI

Robert M, (Randy) Roach, Jr.

Counsel of Record

Amy J. Schumacher*

Daniel W. Davis*

ROACH & NEWTON, L.L.P.

1111 Bagby Street, Suite 2650

Houston, Texas 77002

(713) 652-2032

rroach@roachnewton.com

* Admission pending: supervised

by principals of the firm

Counsel for Amici Curiae

TS Sen /NeAeSNTeeTNelritirsereintacsen mee eit

WILSON-EPES PRINTING CO , INC. — (202) 789-0096 — WASHINGTON, D C. 20002

U

MOTION FOR LEAVE TO FILE BRIEF

AS AMICI CURIAE

Pursuant to Rule 37.2 of the Rules of this

Court, Amici Curiae International Association of

Defense Counsel (“the I[ADC”) and the National

Association of Manufacturers (“the NAM”) move for

leave to file the accompanying brief as amici curiae

in support of the petition for a writ of certiorari.

Counsel for petitioner has consented to the filing of

this brief, but counsel for the respondents has

refused Amici’s request for consent.

The IADC is an association of insurance and

corporate attorneys whose practice is concentrated

on the defense of civil lawsuits. The IADC

membership is comprised of the world’s leading

corporate and insurance lawyers. They are partners

in large and small law firms, senior counsel in

corporate law departments, and corporate and

insurance executives. Members represent the largest

corporations around the world, including’ the

majority of companies listed in the FORTUNE 500.

Since 1920, the [ADC has been dedicated to the just

and efficient administration of civil justice and the

continual improvement of the civil justice system.

The IADC supports a justice system in which

plaintiffs are fairly compensated for genuine injuries,

responsible defendants are held liable only for

appropriate damages, and non-responsible

defendants are exonerated without unreasonable

cost: The LADC’s activities benefit the approximately

2,500 invitation-only, peer-reviewed members and

their clients as well as the civil justice system and

the legal profession. The IADC regularly files briefs

ll

in pending cases throughout the United States on

civil justice issues of broad application.

The National Association of Manufacturers

(‘the NAM”) represents the _ interests. of

manufacturers in court. The NAM is the nation’s

largest industrial trade association, representing

small and large manufacturers in every industrial

section and in all fifty states. The NAM’s mission is

to enhance the competitiveness of manufacturers by

shaping a legislative and regulatory environment

conducive to United States economic growth and to

increase understanding among policymakers, the

media, and the general public about the vital role of

manufacturing to America’s economic future and

living standards. The NAM monitors legal trends

and developments affecting the ability of

manufacturers to be treated fairly by the legal

system. The NAM is actively involved in tracking

major lawsuits impacting manufacturers and in

related activities to promote a fair and balanced legal

system for resolving disputes. With manufacturers

facing legal costs of some $865 billion annually, the

efforts of the NAM have a direct effect on the

competitive position of American manufacturers and

complement the NAM’s legal’ reform policy

endeavors.

Amici curiae are particularly interested in this

case because it demonstrates how the Court's

punitive damage jurisprudence is unable to provide

civil defendants with fair notice of the magnitude of

their exposure to punitive damages and how the

resulting unpredictability in evaluating punitive

exposure produces practical problems for all parties

and their counsel in settlement evaluation. This case

thus presents this Court with an opportunity clarify

iii

that punitive damage awards must bear a reasonable

relationship to the damages compensating the

plaintiff for the actual harm suffered—and that other

types of “additional damages” should not be

permitted to skew the ratio between actual damages

and punitive damages.

The LADC and the NAM’s motion for leave to

file the accompanying brief as amici curiae should be

granted.

Respectfully submitted,

Robert M. (Randy) Roach, Jr.

Counsel of Record

Amy J. Schumacher”

Daniel W. Davis*

ROACH & NEWTON, L.L.P.

1111 Bagby Street, Suite 2650

Houston, Texas 77002

(713) 652-2032

rroach@roachnewton.com

* Admission pendings supervised

by principals of the firm

Counsel for Amici Curiae

September 2010

iv

TABLE OF CONTENTS

Motion for Leave to File Brief as Amici Curiae a

ee Oe Ce vaicacdetiesvakess canvetceeeact an iV

Table of Authorities................. Vil

Interest of the Amici Curiae.................0............ eae

Background and Introduction ...............6c.ccccccccceeeeceeee I

PRIMED, sosccnssnnsescnuchaseonusdsuissslunecccasanissassatiene ‘adcavunlel 3

1. Amici agree with Shell that the absence of

clear guidance on how to calculate the

punitive damage ratio frustrates due

RTOs vocncavecuéscecdodesccnsoncedescubsnscadseatbeacevssedeuseos: 3

A. The current jurisprudence

regarding how the punitive damage

ratio is calculated frustrates due

process because it leads to

unpredictable punitive damage

Ic aves cdcvccunauskeccaarsatdbadtaseusecasaaseniease: 3

B. The absence of clear guidance from

this Court invites state legislatures

and courts to skew the ratio.................. 6

C. The absence of clear guidance on

how to consistently calculate the

punitive damage ratio leads to a

result that violates procedural due

DRO OGG, caccacctscteces jdiabn des oediuessebheoks dudasenen 3

IT, The absence of clear guidance on how to

consistently calculate the punitive damage

ratio and the resulting absence of

procedural due process. notice is of

particular concern to Amici | 9

7)

A. The absence of clear guidance on

how to calculate the punitive

damage ratio frustrates the ability

of counsel and the clients they

advise to make informed settlement

recommendations and decisions. ........

13. The absence of clear guidance on

how to calculate the punitive

damage ratio is especially

troublesome because the

insurability of punitive damages is

constantly questioned by insurers. .....

Shell's petition provides this Court with

the opportunity to clarify that the relevant

ratio 1s the relationship between only the

amount of punitive damages and_ the

amount of actual damages. .................cccccec ees

A. This Court’s punitive damage

jurisprudence has long and correctly

focused on the relationship between

the damages awarded Lo

compensate ae plaintiff for the

“actual harm inflicted” relative to

the punitive damage award. ............. |

B. The lower courts’ inconsistent

inclusion of additional types of

compensatory damages as part of

the punitive damage ratio reveals

that those types of damages differ

from the “actual harm inflicted” on

the plaintiff. .......

10

12

13

Conclusion

vu

A ratio comparing punitive damages

only to damages that compensate a

plaintiff for the “actual harm

inflicted” would provide much

needed guidance to the lower courts

and is consistent with this Court’:

jurisprudence

VIL

TABLE OF AUTHORITIES

Cases

Ala. Dep't of Conservation & Natural Res. v.

Exxon Mobil Corp.,

£2 Bo. Sa B04 Ala. BOOB) once ccc ccccssesessccnsesss 7

Blount v. Stroud,

914 N.E.2d 925 (Ill. App. Ct. 2009) «2.0.0.0... 5, 7

BMW of N. Aim., Inc. v. Gore,

517 U.S. SES (1996) .........<0-..ese.ccs00s: 4, 12, 13, 16

Boyd v. Goffolt,

608 S.E.2d 169 (W. Va. 2004) ..00.. eee 5

Bridgeport Music, Inc. v. Justin Combs Publ g,

BOT OS 470 GU Cie, BOOT) ooo isin sccsececccsseness 5

Clark v. Chrysler Corp.,

O96 FS G8 Gr Cie, DOG) ooo ceccecdss ck. 5

Cooper Indus., Inc. v. Leatherman Tool Group,

Inc.,

UE RE 2) | Ee a ae ean eRe en 14

Daka, Inc. v. McCrae,

839 A.2d 682 (D.C. Ct. App. 2003).................. 5

Exxon Shipping Co. v. Baker,

bP ae 1. | cr 4

Flannery v. Baltimore & Ohio R.R. Co.,

BA se Fe hy | Rete en een enn einen 13

Grant v. McDonogh,

F he I ire setecsesperseccienes 13

Groth v. Hvundat Precision & Indus. Co.,

149 P.3d 333 (Or. Ct. App. 2006)..................... 5

Hayes Sight & Sound, Inc. v. ONEOK, Inc.,

156 F.3d 426 Cham. DO0G) ono. cic.cccccnceserscsssecdsas 5

Houston & McCarthy v. Niskern,

DS WERT. DO CTT il vcs sics cs cinetasacaxseensevensevs is

VILL

Jurinko v. Med. Protective Co.,

305 F: Appx 13 Gd Cir. 2008) «.....0.5..00605.5.55. 5

Lawnwood Med. Ctr., Inc. v. Sadow,

__ So.3d , No. 4D08-1968, 2010 WL

1066833 (Fla. Ct. App. Mar. 24, 2010)............ 7

Phelps v. Loutsville Water Co.,

103 S.W.30 46 URy. 2008) ..5 oie, 5

Rhone-Poulene Agro, S.A. v. DeKalb Genetics

Corp.,

2i2 F.3d 1335 (Fed. Gir. 20010) sncic..cccactscesccss. 5

Roby v. McKesson Corp.,

101 Cal. Rptr. 773 (Cal. Ct. App. 2010).......... 5

Saunders v. Mullen,

66 Iowa 728, 24 N.W. 529 (1885).....00000.0000... 13

State Farm Mut. Ins. Co. v. Campbell

SSG U.S. 406 (R008) onsen cccccccccresevsscs 2, 4, 14, 16

Tony Gullo Motors I, L.P. v. Chapa,

212 S.W.3d 299 (Tex. 2006) ........0.. cece. 5

USA Truck, Inc. v. West,

189 S.W.3d 904 (Tex. Ct. App. 2006)............... 5

Wallace v. DTG Operations, Inc.,

563 F.3d 357 (8th Cir. 2009)...................ccccce08 5

Willow Inn, Inc. v. Pub. Serv. Mut. Ins. Co.,

399 F.3d 224 (3d Cir. 2005) .......................0000 §

Constitutional Provisions

Fs FE i ei oes vss endeseninwteuelevazspelass 8

INTEREST OF THE AMICI CURIAE!

The interest of the amici curiae is described in

the accompanying motion for leave to file this brief.

BACKGROUND AND INTRODUCTION

The two issues presented in Shell's petition

raise a fundamental question in desperate need of

this Court's guidance—7Z7o what types of actual

damages must a punitive damage award reasonably

relate? Because courts in different states categorize

different types of damages as “compensatory” for

comparison to the punitive damage award, this

Court’s ratio analysis is untethered to any

predictable guidepost. As applied by various lower

courts, this Court’s ratio guideline essentially

involves two open variables—if the types of

additional damages that may be considered

“compensatory” are changeable and uncertain, then

so too is the range of constitutionally permitted

punitive damages. ”

1 Pursuant to this Court’s Rule 37.6, amici curiae the IADC and

the NAM certify that no counsel for a party to this case

authored any part of this brief, nor did any party, or counsel to

any party, make any monetary contribution to fund the

preparation or submission of this brief. Pursuant to this

Court's Rule 37.2(a), amici curiae file this brief on September

29, 2010, ten days before its due date of October 13, 2010.

2 Shell’s petition also presents an opportunity for the Court to

clarify its jurisprudence on what has become another source of

unpredictability in punitive damage awards: the maximum

constitutionally permissible ratio when compensatory damages

are “substantial.” The state and federal courts’ inconsistent

application of this Court’s statement that “[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,” has left businesses lke those

represented by amici curiae rudderless in evaluating punitive

2

This case exemplifies the necessity for a

predictable starting point in actual damages for

calculating the punitive damage ratio. Often, the

denominator of the punitive damage ratio depends

more on the particular state in which the issue

happens to arise and less on the character of the

award or the extent of the injury to the plaintiff.

Here, because the injury occurred in Oklahoma, the

Oklahoma court included a special 12% compounded

prejudgment interest in the denominater and

thereby determined that a $53 million punitive

damage award was reasonably related to an

underpayment of $750,000 in oil and gas contractual

net profit payments. Such creative manipulation of

the punitive damage ratio is common and recurring.

Amici cannot overstress the importance of

having a consistent rule. This case provides this

Court with the opportunity to provide a rule that

would:

e Provide consistent constitutional protections

for defendants across the country,

e Incentivize settlement by equipping plaintiffs

and defendants with consistent case valuation

parameters,

e Conserve judicial resources by eliminating the

case-by-case categorization of continually

changing statutory damage schemes, and

e Preserve legislative flexibihty to craft

remedies.

damage exposure. State Farm Mut. Ins. Co. v. Campbell, 538

U.S. 408, 429 (2003). Although this brief does not focus on the

havoc caused by the lower courts’ inconsistent rulings on this

issue, the same kind of damaging unpredictability described in

this brief accompanies both issues raised in Shell's petition, and

both are of real and ongoing concern to amici curiae.

3

By granting certiorari, the Court can answer

the broad question of what effect—if any—damages

that have both compensatory and punitive qualities

should have on the constitutional ratio between the

actual harm suffered by the plaintiff and punitive

damages awarded based on the reprehensibility of a

defendant’s conduct.

ARGUMENT

& Amici agree with Sheil that the absence of

clear guidance on how to calculate the punitive

damage ratio frustrates due process.

Amici agree with Shell that the lack of clear

guidance on how to calculate the punitive damage

ratio requires clarification from this Court. /. ©* »ugh

the Court has weighed in on the constitutio: ity of

various punitive damage ratios, the Court has not

squarely confronted the issue here. The issue here

illustrates that the calculation of the ratio itself, by

including additional variable damage components,

threatens the due process rights of defendants.

A. The current jurisprudence regarding

how the punitive damage ratio is

calculated frustrates due process

because it leads to unpredictable

punitive damage awards.

This case illustrates the unpredictability of

punitive damage awards in the absence of clear

guidance on how the punitive damage ratio should be

calculated. The plaintiffs suffered actual harm of

approximately $750,000 from the underpayment of

oil and gas contractual net profit payments. Based

on this Court’s guidance on the permissible punitive

damage ratio in £xxon and State Farm, Shell would

have been on notice that it could likely face exposure

d

te punitive damages in a 1°:1 ratio, or $750,000.

Exxon Shipping Co. v. Baker, 128 S. Ct. 2605, 2633

(2008); State Farm Mut. Ins. Co. v. Campbell, 538

U.S. 408, 429 (2003). Some courts, also relying on

State Farm, have issued decisions suggesting

possible notice that punitive damages could reach a

4:1 ratio, or $3 million. See State Farm, 538 U.S. at

425. Shell had no notice, however, that an award of

$53 million in punitive damages would be upheld as

constitutional. See BMW of N. Am., Inc. v. Gore, 517

U.S. 559, 574 (1996).

The Okiahoma _ court’s justification for

upholding that $53 million punitive damage award

illustrates the jurisprudential gap. The Oklahoma

court relied on ae_=e special interest rate—12%

compound pre-judgment interest—to increase the

amount of “compensatory” damages even though the

Oklahoma legislature candidly described it as a

“penalty” in previous iterations of the statute. The

dramatic increase in the amount of purported

“compensatory” damages moved the ratio to punitive

damages from a clearly unconstitutional 70:1 to 4:1.

Thus, the ad hoc modification of the punitive damage

calculation dramatically altered Shell’s punitive

damage exposure without regard to procedural due

process concerns regarding adequate notice.

If the Oklahoma court’s ad hoc modification of

the punitive damage ratio was an outlier, this case

would not warrant special attention. Unfortunately,

the lack of guidance from this Court on how to

determine whether additional recoveries beyond the

actual harm inflicted should be included as part of

the “harm to the plaintiff’ has produced conflicts in a

variety of contexts, for example:

5

Emotional distress with a partially punitive

aspect. Compare Roby v. McKesson Corp., 101

Cal. Rptr. 773, 797-99 (Cal. Ct. App. 2010);

Tony Gullo Motors I, L.P. v. Chapa, 212

S.W.3d 299, 308-10 (Tex. 2006); Daka, Inc. v.

McCrae, 839 A.2d 682, 697-701 (D.C. Ct. App.

2003); with Boyd v. Goeffoli, 608 S.E.2d 169,

182-84 (W. Va. 2004).

Lost profits. Compare Bridgeport Music, Inc.

v. Justin Combs Publ’zg, 507 F.3d 470, 489 (6th

Cir. 2007), with Rhone-Poulenc Agro, S.A. Vv.

DeKalb Genetics Corp., 272 F.3d 1335 (Fed.

Cir. 2001).

Attorneys’ fees. Compare Willow Inn, Inc. v.

Pub. Serv. Mut. Ins. Co., 399 F.3d 224, 235 (Sd

Cir. 2005); Jurinko v. Med. Protective Co., 305

F. App’x 13, 28 n.16 (3d Cir. 2008), with

Wallace v. DTG Operations, Inc., 563 F.3d 357

(8th Cir. 2009). The inconsistent use of

attorneys’ fees to dilute the punitive damage

ratio is currently before this Court in Stroud v.

Blount, No. 09-1572, on petition for writ of

certiorari from Blount v. Stroud, 914 N.E.2d

925 (Ill. App. Ct. 2009).

Capped or reduced awards. Compare Hayes

Sight & Sound, Inc. v. ONEOK, Inc., 136 P.3d

428, 447-48 (Kan. 2006); USA Truck, Inc. v.

West, 189 S.W.3d 904, 906, 911 (Tex. Ct. App.

2006), with Phelps v. Louisville Water Co., 103

S.W.3d 46, 54 (Ky. 2003). See also Clark v.

Chrysler Corp., 436 F.3d 594 (6th Cir. 2006)

(splintering on how to calculate the ratio);

Groth v. .{vundai Precision & Indus. Co.. 149

P.3d 333, 340-41 (Or. Ct. App. 2006)

(discussing complexity of computing ratio

when award was limited by statute).

6

Clear guidance from the Court on how the

punitive damage ratio should properly be calculated

we d provide defendants with the constitutionally

required notice and greatly enhance the ability to

accurately predict the maximum size of a punitive

damage award.

B. The absence of clear guidance from this

Court invites state legislatures and

courts to skew the ratio.

Absent clear guidance from this Court, state

legislatures and state courts are able to perform ad

hoc calculations of the ratio that dramatically alter

defendants’ potential punitive damage liability. As

the law now. stands, a_= state legislature’s

characterization of a monetary award = as

compensation or as a penalty—whether the impact

on the punitive damage ratio is intentional or not—

can dramatically change a defendant’s punitive

damage exposure from state-to-state and from year-

to-year. Here, the Oklahoma legislature’s 1985

deletion of the descriptive term “penalty” from the

interest statute was all that the Oklahoma court

needed to dramatically alter the result of this case,

even though:

1) The legislature did not substantively change

the pre-judgment interest calculation from the

pre-1985 punitive statute.

2) The pre-judgment interest does not bear any

relation to the actual harm suffered by the

defendant, even when the time value of money

is taken into account. In terms of 2010

dollars, the 1973 underpayments would still

only be $3.3 million.

3) The statute singled out a particular class of

disfavored oil and gas defendants for

7

especially high pre-judgment interest. Rather

than 12% compound interest, other defendants

are only subject to 6% simple interest.

The ability of state legislatures and courts to

skew the punitive damage ratio and sidestep this

Court’s punitive damage jurisprudence 1S

demonstrated by the fact that when faced with the

same situation—deletion of the word “penalty” from

an oil and gas payment statute—the Alabama

Supreme Court reached the opposite conclusion. See

Ala. Dep't of Conservation & Natural Res. v. Exxon

Mobil Corp., 11 So. 3d 194, 200-01 (Ala. 2008).

Leaving the issue to state law makes the federal

Constitution not merely disuniform but also

infinitely manipulable.

Unfortunately, the creative minds_ of

attorneys, and the state legislatures and courts in

which they ply their trade, will never run dry trying

to find such ways to manipulate this Court’s punitive

damage ratio. Currently on writ of certiorari to this

Court are examples of that creativity—Stroud v.

Blount, No. 09-1572, where the Illinois court used

attorneys’ fees to push the punitive damage ratio

from 10:1 down to 2:1, and Lawnwood Medical

Center, Inc. v. Sadow, No. 10-371,where the Florida

court permitted an infinite ratio of $5 million in

punitive damages to zero compensatory damages.

See Blount, 914 N.E.2d at 943; Lawnwood Med. Ctr.,

Inc. v. Sadow, ___ So.38d __, No. 4D08-1968, 2010

WL 1066833, at *13 (Fla. Ct. App. Mar. 24, 2010) .

The financial stakes are too high, the pot of gold at

the end of the punitive damage lottery too big, for the

creative juices not to flow toward finding new ways

to characterize legislatively and judicially created

additional damages as “compensatory” damages to

8

dilute the punitive damage ratio. Without clear

guidance from this Court, state-by-state

determinations will continue to threaten the due

process notice rights of companies represented by

Amici.

C. The absence of clear guidance on how to

consistently calculate the punitive

damage ratio leads to a result that

violates procedural due process.

Amici do not suggest that a// remedies should

be consistent across all states—doing so would

intrude upon the state’s rights. Amici merely

suggest that this Court provide guidance on how the

punitive damage ratio governed by the Fourteenth

Amendment should be calculated. U.S. CONST.

amend. XIV, § 1.

Inconsistency in calculations defeats the

purpose of the punitive damage ratio—providing

notice and predictability for what constitutes a

constitutionally impermissible punitive damage

award. Amici acknowledge the difficulty of crafting a

ratio that can apply to every situation—whether 4°1,

1:1, or some form of sliding scale based on the nature

of the harm or conduct. However, flexibility

regarding the ratio cannot be compounded by

vagueness regarding the definition of compensatory

damages. Providing guidelines in the form of a

numeric ratio, without any guidance on how to

calculate that ratio in practical application, is no

guidance at all. Given the inclusion of the clearly

penal pre-judgment interest in the compensatory

side of the punitive damage ratio, this case provides

the perfect opportunity for the Court to provide

additional guidance.

9

II. The absence of clear guidance on how to

consistently calculate the punitive damage

ratio and the resulting absence of procedural

due process notice is of particular concern to

The Court has long recognized that excessive

punitive damages bearing no reasonable relationship

to the actual harm suffered threaten constitutional

protections. Amici, its members, and clients of its

members must rely on these protections. Therefore,

Amici focus on the procedural due process problem

inherent with the current jurisprudence

unpredictability. In the absence of clear guidance on

the calculation of the punitive damage ratio, clients

and their counsel, such as Amici, cannot accurately

assess the true magnitude of a defendant’s punitive

damage exposure.

Unpredictability also hinders settlement. The

absence of clear guidance on the method of

calculating the punitive damage ratio prevents

plaintiffs and their counsel from accurately (and

reasonably) assessing possible verdict value. Thus,

the absence of this clear guidance prevents plaintiffs

and defendants from collectively assessing

settlement value and frustrates the agreed resolution

of disputes. This uncertainty is compounded by the

possible exposure for uninsured punitive damages

coercing settlements with plaintiffs and defendants’

own insurers.

10

A. The absence of clear guidance on how to

calculate the punitive damage ratio

frustrates the ability of counsel and the

clients they advise to make informed

settlement recommendations and

decisions.

In the absence of a state statutory cap on

punitive damage awards, the ratio guidance provided

by this Court is the only vehicle available to

attorneys and clients for predicting the eventual

amount of a potential punitive damage award. For

example, a defendant would expect that if it is facing

actual harm exposure of $1 million, the Constitution

and this Court's jurisprudence would suggest that

the punitive damage exposure would also be $1

million, a 1:1 ratio.

However, absent further clarification from this

Court, the defendant cannot accurately estimate the

effect of statutory and common-law “add-ons.” The

possibility that state legislatures or state courts

might arbitrarily define add-ons as “compensatory

damages” leads to unpredictable dilution of the

punitive damage ratio. Who could have predicted

that an underpayment of $750,000 in oil and gas

contractual net profit payments would produce a

purportedly constitutional $53 million punitive

damage award?

For a _ defense attorney, evaluating a

defendant’s punitive damage exposure is a key part

of evaluating the potential verdict and settlement

ranges confronting the client. For our system of

justice to work in practice, the client’s decision

regarding whether to try or settle a case must be

based on a more predictable accounting for maximum

Il

punitive damage exposure than is_ currently

permitted.

For a plaintiffs attorney, the absence of clear

guidance in calculating the ratio turns punitive

damage claims into a lottery where the rewards are

uncertain but possibly immense. The uncertainty

encourages gaming the system by forum-shopping in

an attempt to avoid states that faithfully adhere to

the Constitution. Absent clear guidance, that

behavior will only continue.

B. The absence of clear guidance on how to

calculate the punitive damage ratio is

especially troublesome because’ the

insurability of punitive damages is

constantly questioned by insurers.

The unpredictability in evaluating’ the

maximum range of punitive damages exposure takes

on even greater importance because insurers usually

take the position that punitive damages potentially

are not covered by their insurance policy. The

prospect of a massive amount of potentially

uninsured punitive damages creates a financial

nightmare for any business. How many businesses

could survive a $53 million uninsured punitive

damage award as a result of losing a lawsuit worth

$750,000 in actual damages?

This is not a Chicken Little scenario. In

practice:

e Insurers routinely reserve their rights to later

deny coverage in a case presenting the

potential for an award of punitive damages.

e Insurers who have previously negotiated an

express exclusion of coverage for punitive

damages in their policy will deny coverage

outright.

12

e Even when their insurance policies do not

expressly exclude coverage’ for punitive

damages, insurers frequently invoke their

insurance policies’ exclusions for intentional

acts in order to” reserve their right to

ultimately deny insurance coverage — for

punitive damages.

Faced with providing coverage for a substantial

punitive damage award, insurers predictably try to

shift the risk of the punitive damages onto the

insured. Some form of this scenario plays out in

almost all cases involving punitive damages and

compounds the many practical problems that Amici

face because of the current uncertainty inherent in

calculating the punitive damage ratio.

Ill. Shell's petition provides this Court with the

opportunity to clarify that the relevant ratio

is the relationship between only the amount of

punitive damages and the amount of actual

damages.

Shell's petition exemplifies the need for

guidance that provides clear notice of the proper

method of calculating the punitive damage ratio, For

example, Amici believe that it would be possible (and

appropriate) to articulate a bright line rule that

establishes which types of damages should be

included in which side of the ratio. Consistent with

this Court’s punitive damages jurisprudence, the

damages that represent the actual or potential “harm

inflicted” on the plaintiff should be compared to the

punitive damage award. See Gore, 517 U.S. at 575.

Amici would suggest that other types of damages,

whether created by state statute or by state common

law, should be excluded from calculation of the ratio.

Adopting this rule would provide invaluable

13

clarification on how the components of the ratio

should be calculated, resolve current confusion and

disagreement among the lower’ courts, and

substantially advance the Court’s punitive damages

jurisprudence.

A. This Court’s punitive damage

jurisprudence has long and correctly

focused on the relationship between the

damages awarded to compensate a

plaintiff for the “actual harm inflicted”

relative to the punitive damage award.

“The principle that exemplary damages must

bear a ‘reasonable relationship’ to compensatory

damages has a long pedigree.” Gore, 517 U.S at 581.

However, for purposes of evaluating this

relationship, the Court has recognized that it is not

the label used to describe the damages designed to

compensate a plaintiff for the actual harm suffered

that matters, but rather the substance of those

damages. See Gore, 517 U.S. at 581 n.32 (citing

Grant v. McDonogh, 7 La. Ann. 447, 448 (1852)

(“[E]lxemplary damages allowed should bear some

proportion to the real damage sustained’) (emphasis

added); Saunders v. Mullen, 66 Iowa 728, 729, 24

N.W. 529 (1885) (“When the actual damages are so

small, the amount allowed as exemplary damages

should not be so large”) (emphasis added); Flannery

v. Baltimore & Ohio R.R. Co., 15 D.C. 111, 125 (1885)

(when punitive damage award “is out of all

proportion to the znyuries received, we feel it our duty

to interfere”) (emphasis added); Houston &

McCarthy v. Niskern, 22 Minn. 90, 91-92 (1875)

(punitive damages “enormously in excess of what

may justly be regarded as compensation” for the

*

14

injury must be set aside “to prevent injustice”)

(emphasis added)).

In distinguishing the purposes served hv

compensatory and punitive damages, the Court has

characterized compensatory damages as “intended to

redress the concrete loss that the plaintiff has

suffered by reason of the defendant’s wrongful

conduct.” State Farm, 538 U.S. at 416 (quoting

Cooper Indus., Inc. v. Leatherman Tool Group, Inc.,

532 U.S. 424, 432 (2001)). This is in contrast to

punitive damages, which are “aimed at deterrence

and retribution.” State Farm, 538 U.S. at 416.

Although the Court has at times used different

terminology to describe what type of damages should

be compared to a punitive damage award for

constitutional purposes, the Court’s meaning—in

part demonstrated by its interchangeable use of the

terms “actual damages” and “compensatory

damages’—has remained focused on the harm

inflicted on or suffered by the plaintiff.

B. The lower courts’ inconsistent inclusion

of additional types of compensatory

damages as part of the punitive damage

ratio reveals that those types of

damages differ from the “actual harm

inflicted” on the plaintiff.

The types of compensatory damages that the

lower courts sometimes include in their calculation of

the punitive damage ratio run the gamut. Courts

across the nation vary widely in their treatment of

“add-on” damages like pre-judgment interest, special

interest, post-yjudgment interest, attorney’s fees,

costs, and penalty interest for purposes of calculating

the punitive damage ratio. This is not surprising,

given that the schemes of different states depend on

15

the imponderable vagaries and development of the

law by state supreme courts as well as by state

legislatures. Nevertheless, the differences in those

state schemes should not become an unconstitutional

obstacle to what should be a uniform calculation for

deciding whether a punitive damage award complies

with constitutional requirements. The differences in

those schemes should instead become the impetus to

adopting a uniform calculation of that ratio that

provides the notice needed for defendants to evaluate

their maximum potential punitive exposure and then

to modify their conduct accordingly.

C. A ratio comparing punitive damages

only to damages that compensate a

plaintiff for the “actual harm inflicted”

would provide much-needed guidance to

the lower courts and is consistent with

this Court’s jurisprudence.

Amici suggest that this Court clarify that the

ratio should compare only the harm suffered by

plaintiff against the punitive damage award. This

rule would provide both the clear direction needed by

the lower courts and the adequate notice to

defendants required under procedural due process.

Further, the rule flows directly from this Court’s

original formulation of the _ ratio. Instead of

determining what additional types of damages

should be included in the ratio on a case-by-case

basis or state-by-state basis, the Court can resolve

the question with a simple calculation that is

consistent with the Court’s historic description of the

relevant inquiry.

By limiting the punitive damage ratio to the

harm suffered by the plaintiff, and stripping away

the varying and continually changing legislative

16

enhancements to “compensatory damages,” this

Court. would adopt a more easily administered rule.

That rule would allow parties, counsel, and the lower

courts real predictability in applying this Court’s

jurisprudence under the punitive damage _ ratio

guidepost. It would eliminate the problem presented

by this case and so many others encountered by |

Amici across the country where different state courts

interpret the add-on as compensatory damages in

order to dilute the ratio. It would make unnecessary

this Court adjudicating, on a case-by-case basis, all of

the state legislative intent issues and state supreme

court rulings that might justify the classification of a

particular type of “compensatory” damage as “actual

damages” under this Court’s punitive damage ratio.

Although this Court has “consistently rejected

the notion that ...a simple mathematical formula”

‘an determine a bright line between a constitutional

punitive damage award and an unconstitutional one,

the Court’s jurisprudence does not preclude the

creation of a bright line to determine what types of

damages should be considered when evaluating

whether the measure of punishment is “reasonable

and proportionate” to the harm suffered by the

plaintiff. State Farm, 538 U.S. at 424-25, 426

(quoting Gore, 517 U.S. at 582). Adopting a bright-

line rule here would provide a predictable foundation

for evaluating punitive damage award, and therefore

make meaningful the flexibility built into the Court’s

punitive damage jurisprudence.

CONCLUSION

For the foregoing reasons, and for the reasons

stated by petitioner, the petition for a writ of

certiorari should be granted.

17

Respectfully submitted,

Robert M. (Randy) Roach, Jr

Counsel of Record

Amy J. Schumacher*

Daniel W. Davis*

ROACH & NEWTON, L.L.P.

1111 Bagby Street, Suite 2650

Houston, Texas 77002

(713) 652-2032

rroach@roachnewton.com

* Admission pending; supervised

by principals of the firm

Counsel for Amici Curiae

September 2010