In the 1996 case of BMW of North America, Inc. v. Gore, the United States Supreme Court established the constitutional guidelines for imposing punitive damages on tortfeasors.
Punitive damages are damages awarded against a defendant to punish him or her for some reprehensible act. The hope is that if the damages are sufficiently high, they will make the defendant think twice before engaging in the same or similar behavior in the future.
In 1990, Doctor Ira Gore, Jr. went to a BMW dealer and purchased what he believed was a brand new BMW sports car. Gore spent $40,750.88 on the vehicle.
9 months later, he took the car to a detailer. His hope was to make the car look "snazzier than it normally would" have. After looking at the car, the detailer realized that the it had been repainted.
Furious, Gore filed suit against BMW. During the course of the proceedings, BMW revealed that it had a policy requiring employees to make an assessment any time a new vehicle was damaged. If the cost to repair the damage was less than 3 percent of the sale price, then the car was repaired and sold as new. Any time such a repair was made, BMW said nothing to the dealers. The dealers in turn, could not tell prospective buyers about the damage to their new vehicles.
In the case of Gore's car, BMW caused damage to the vehicle in transit. Repairs cost $601.37. As that amount was approximately 1.5 percent of the retail price, it was fixed and no one said anything to the dealer or to Dr. Gore.
At trial, Gore was able to prove that BMW sold 983 damaged and repaired cars, representing that each was new. 14 of those occurred in Alabama.
At trial, Gore sought an award that would include $4 million in punitive damages. He reasoned that his repainted car was worth $4,000 less than it would have been, had the car been undamaged. He then proposed that BMW be forced to pay $4,000 for the approximately 1,000 damaged cars they had sold as new, thereby totaling $4 million.
BMW countered that it had no obligation to disclose minor damage to vehicles. Accordingly, it believed that it should not be punished to the tune of $4 million when it established a policy in good faith.
The jury agreed with Gore, and awarded $4,000 in compensatory damages, and $4 million in punitive damages.
After the jury verdict was issued, BMW filed a motion to set aside the punitive damage award. It presented evidence that its policies were in compliance with the laws of 25 states regarding automobile disclosures. Because its policy was lawful, reasoned BMW, it couldn't be held liable for a punitive damages award.
The trial judge denied the motion, believing that the damages award was appropriate.
BMW appealed to the Alabama Supreme Court. That court largely affirmed the verdict, with some variation. It reduced the punitive damages award to $2 million.
BMW then appealed to the United States Supreme Court. The Court agreed to hear the case.
The law that existed at the time of this opinion, and that was most relevant to its outcome, was the Due Process Clause of the Fourteenth Amendment of the United State Constitution.
Case law interpreting the Due Process Clause said, amongst other things, that a state could not impose a punishment on a tortfeasor that is "grossly excessive."
Other case law at the time authorized punitive damages, but gave little guidance in what the constitutional limits were in imposing a punishment that was not "grossly excessive."
The novel question in this case, therefore, was about where exactly those limits were.
The Court focused on two major issues in its analysis of this case. The first was whether or not it was proper for the court to impose punitive damages with the intent of altering BMW's behavior in other states. The Court said to do so would be to infringe on the sovereignty of other states. Because the damages award against BMW was based on its nationwide policy, not just on the events that took place in Alabama, the Court believed that the trial court had erred in its award.
Second, the Court established guidelines as to how a court should constitutionally impose a punitive damage award. The Court said that trial courts should look at (1) the degree of reprehensibility of the conduct, (2) the ratio of actual harm to the damages award, and (3) the comparison of punitive damages in other cases for similar misconduct.
After analyzing these factors, the Court came to the conclusion that the punitive award in this case was grossly excessive.
Accordingly, the Court reversed the judgment and remanded the case for determination of appropriate damages.