United States: Using Supreme Court Commerce Clause Doctrine To Demonstrate That A Large Punitive Award Effects Improper Extraterritorial Punishment

The Supreme Court held in BMW v. Gore that states may not use punitive damages awards to punish a defendant for the impact of its conduct in other states. BMW involved an obvious violation of that principle: The plaintiff introduced evidence of approximately 1,000 vehicles that BMW had sold around the country without disclosing pre-sale refinishing, asked the jury to punish BMW $4,000 for each vehicle, and then received a punitive award of exactly $4 million—1,000 X $4,000.

But in many other cases, the violation is more opaque. Sometimes evidence of the number of "victims" of the conduct is introduced, but the punitive award does not bear a precise or readily ascertainable relationship to that number. In other cases, the plaintiff doesn't introduce the number at all, but merely emphasizes that there are many other victims around the country and then receives an outsized punitive award.

How then is a court to know whether the award constitutes impermissible punishment for harms suffered by out-of-state victims?

The Supreme Court has confronted a similar dilemma in cases involving the question whether a state has taxed more than its fair share of a multi-state business's operations in violation of the Commerce Clause. The Court solved the dilemma by devising what it has dubbed the "internal consistency" test.

As explained by the Court in Oklahoma Tax Commission v. Jefferson Lines, the internal consistency test calls upon the reviewing court to hypothesize that each State will replicate the tax and asks whether the tax's "identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate." "A failure of internal consistency shows as a matter of law that a State is attempting to take more than its fair share of taxes from the interstate transaction, since allowing such a tax in one State would place interstate commerce at the mercy of those remaining States that might impose an identical tax."

The same kind of test can be applied to determine whether a punitive award has the impermissible effect of punishing a defendant for the impact of its conduct in other states. Assume, for example, that the plaintiff in BMW had not introduced the number of vehicles sold nationwide, but simply adverted to the fact that there were many other similar vehicles around the country. The way to determine whether the ensuing $4 million punitive award constitutes unconstitutional extraterritorial punishment is to assume that every other State imposes its own exaction of $4 million.

Putting aside D.C. and other non-States, that would mean multiplying the punitive award in BMW by 50, producing a total hypothetical aggregate punishment of $200 million. If a court applying the Supreme Court's excessiveness guideposts were to determine that $200 million would be excessive punishment for the full course of the nationwide conduct, it follows that the $4 million punishment imposed by the Alabama jury implicates the concern articulated by the Supreme Court in Philip Morris v. Williams about awards not being so large as to "impose one State's (or one jury's) 'policy choice'" "upon 'neighboring States' with different policy choices."

It is no answer to say that most other States have not, in fact, imposed punishment for the conduct at issue or have imposed lesser punishment. To the contrary, that only proves the point that the punishment imposed by Alabama has an impermissible extraterritorial effect by projecting Alabama's preference for a severe punishment on States that might choose more modest punishment or none at all for the conduct at issue.

As the Supreme Court explained in Goldberg v. Sweet, the internal-consistency test "hypothesizes a situation where other States have passed an identical [tax]" instead of looking to the actual taxes imposed by other States because otherwise "the validity of state taxes would turn solely on 'the shifting complexities of the tax codes of 49 other States.'" The same is true of the task of determining whether a State impermissibly has imposed its policy choices on other States through an award of punitive damages.

While this argument is logically sound and well-rooted in analogous precedent, it is the kind of theoretical argument that rarely holds sway in trial courts and may be more effective when raised on appeal either by the defendant or by a supporting amicus.

Tags: extraterritorial punishment

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.