Civil Procedure Class Notes 11/10/03


It’s miscellaneous stuff continued!


Finishing up punitive damages!


What have we learned so far?  When you have compensatory damages of $1 million and punitive damages of $5 million and no process to review those damages, that’s no good and it violates due process.  We learn that from Honda.


From BMW, we got the substantive due process part of the equation.  Can a fine simply be too big because it’s just too damn big?  In BMW, a dentist complained about the paint job on his BMW.  He was awarded $4,000 compensatory damages and $4 million punitive damages (damn!).  Alabama had a remittitur procedure, and it actually used it to reduce the punitive damages from $4 million to $2 million.


The fairness and notice elements of the substantive Due Process Clause limit the size of verdicts.  We get a three part test: (1) reprehensibility, (2) ratio, and (3) comparables.


Degree of reprehensibility


In BMW, the conduct wasn’t all that bad.  The damages, as measured by Gore’s compensatory damages, were not severe.  BMW basically didn’t act all that badly.  In fact, some people think there should not be punitive damages attached to any purely economic damages.  The argument is that you can always be made whole for the economic loss by compensatory damages.


Ratio between actual damages and punitive damages


What is an acceptable ratio between the two types of damages?  The Supreme Court has refused to set down any particular number.  How come?  It would vary a lot between, for example, torts and contract breaches.


However, 500 to 1 is at least suspect.  500 to 1 is too much.  What about 200 to 1?  We don’t know.  We’re not told.  The Court decides a case that’s easy because it’s at an extreme: it’s clearly over the line.  But the Court doesn’t tell us where the line is.


Comparable sanctions


The Court also looks at civil or criminal penalties that might be imposed for similar conduct.  In this case, the punitive damages were grossly more than penalties prescribed by statute.


Does this create a constitutional question in every state court punitive damage award?


Cooper Industries v. Leatherman Tool Group, Inc.


This is a case about trademark infringement of “Swiss Army Knives”.  The plaintiff gets $50,000 in actual damages and $4.5 million punitive damages.  This case gets argued not on Fourteenth Amendment grounds, but on Eighth Amendment “excessive fine” grounds.


Stevens says that states must not impose grossly excessive punishments under the Eighth Amendment.  Also, on review, you don’t assume the trial court got it right.  This gives the appellate courts a different way of checking the amount of damages.  Doing it like this, de novo, will overturn more verdicts than review merely for abuse of discretion.


State Farm v. Campbell


This case was about failing to settle claims within policy limits.  The plaintiffs got $1 million in compensatory damages and $145 million in punitive damages.  That’s a hella lot of damages.  The Utah Supreme Court reduced the punitive damages award to $25 million.  The United States held the award unconstitutional by substantive due process according to Gore.  Although the Utah Supreme Court applied the three-prong Gore test, the Supreme Court says that the Utah Supreme Court applied the test wrong.


In this case, the Supreme Court hints at a number: single-digit punitive damage multipliers are probably okay, but ten and above will raise the proverbial eyebrow.


Financing litigation


Recall Hatahley.  How did the Indian tribe pay its lawyers to help get back their damages for the horses and burros?  This was a lengthy and costly suit!  We must assume that the tribe couldn’t pay up front.  They had to find some other way to do it.  They might have used contingency fees.


What about the plaintiffs in Honda and BMW?  What if Gore was the sole victim of BMW’s repainting?  That wouldn’t look so attractive to a lawyer.


There are all different methods of financing litigation.  In practice, this question becomes increasingly important.  How are we going to be paid?


The American Rule v. the English Rule


Under the American Rule, everybody pays their own lawyer.  Under the English Rule, the loser pays!  What incentives do these rules provide to litigants?


Let’s say Fairman has a frivolous lawsuit.  He wants to file a lawsuit in the United States.  Would I want to take his case on contingency?  No way, because the case has no merit.  The potential recover is zero.  If I take the cost on contingency, the client bears no costs at all.  The attorney bears all the costs.  We could try to shift some of the costs by making Fairman pay hourly.  Under either of these formulations, is there an incentive to file the frivolous lawsuit?  No way.


What about under the English Rule?  Not only is there no recovery for the plaintiff, but the plaintiff will also have to pay the costs of the defendant.  Which system is more likely to have a deterrent effect?  The marginal case is dropped in the English system, because it’s not worth the risk of incurring both your own costs and the defendant’s costs.


Characteristics of the American Rule


·        Both sides are undercompensated, insofar as winning plaintiffs must pay part of their compensation to the lawyer.  If the defendant wins and has to pay zero to the plaintiff, they still have to bear their part of the cost of litigation.

·        This system is hospitable to “marginal cases”.

·        This system has the problem of creating financing difficulties for marginal plaintiffs with low potential for recovery.


Say Andy has a $1,000 claim.  It’s a simple case that can be done in 20 hours.  Say you only have to pay $100/hour.  You can tell Andy that you’d love to take the case, but that he’ll lose more money than he’ll gain.  You’re not going to take the case on contingency either.  This case will not be litigated.


Say Irma owns a store.  There’s a manifestly fraudulent slip ‘n’ fall.  Irma comes to me and I tell her it will cost $7,000 to defend the case.  On the other hand, the con artist who isn’t really hurt offers to settle for $1500.  The incentive here is to settle, even though the claim has zero merit.  It would be very costly to defend on principle.


There are some exceptions: WalMart will never settle slip ‘n’ falls.  They will always go to trial.  The reason for this is that they don’t want to become a “serial defendant” of slip ‘n’ fall cases.


But Irma is a small time, small beans kind of store owner.  She has the incentive to settle.


There are two more ways to finance litigation in the American system: insurance and contingency fees.




For example: Baseman sues Fairman for personal injuries and property damage.  How would Fairman defend himself when he gets sued for a car accident?  You start out by calling your insurance company.  Why?  Because car insurance usually has coverage for legal representation when you get sued.  So who becomes one of the parties in interest?  The insurance company takes an interest in the outcome of the suit.


Baseman claimed all kinds of crazy injuries.  There were no physical injuries that doctors could find.  Baseman sued for policy limits, which was, at the time, a $1 million policy.  Baseman made an offer to settle for $35,000.  Fairman says, “Don’t give her a dime!”  But the insurance company says, “Who do we make the check out to?”  Insurance companies bear a lot of litigation costs and therefore want to settle even frivolous claims.


Contingency fees


The lawyer agrees to provide legal services with fees to be paid out of a percentage of the proceeds of the litigation.  This is the chief way that plaintiffs are able to finance meritorious litigation.  That’s because the costs per hour for attorney’s fees are simply too great for most individuals to bear except in certain contexts.


Yeazell describes contingency fees as being like insurance policies for potential plaintiffs.  A system with a combination of contingency fees and insurance basically provides a way that most people can get representation on both sides in most litigation.


Legal aid and pro bono


There are agencies at all levels of government that provide legal assistance to indigent plaintiffs.  Pro bono work is free work that regular old lawyers would do for indigent plaintiffs.  The ABA suggests you do 50 hours of pro bono work a year.


The bottom line is that there are many ways to finance.  These are all parts of the American Rule.


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