Covering the Front and Back Pages of the Newspaper
April 16, 2003
LAW: Federalism's Edge
On Monday, April 7, the United States Supreme Court handed down a decision, captioned State Farm Mutual Automobile Insurance Company v. Campbell, that struck down a $145 million punitive damage award premised heavily upon the defendant insurance company’s nationwide conduct and operations. The Court’s 6-3 opinion, authored by Justice Kennedy, set out one of the strongest statements yet in favor of a constitutional principle that has increasingly underlay any number of controversies over the past 10 or 15 years: Federalism’s Edge.
At least since the issue of slavery came to dominate the national debate in the mid-19th century, one of the great structural controversies of American government and politics has been the question of “States’ Rights” in the context of a federal system; put more simply, the tug of war between the increasing authority of the federal government and the traditional roles of state and local government. In this century, federal power was ascendant from the New Deal through the civil rights movement and the Great Society, promising efficiency and freedom from local prejudices. The corresponding reaction, noting the distance and unresponsiveness of centralized policies made in Washington, came to a head during the Reagan years, and echoes down to this day in conservative politics.
As a result, when you mention “federalism,” many on the Left and Right alike assume that you mean only “States Rights,” defined as local autonomy in opposition to federal power. But in recent times, the greater threat to political diversity and responsiveness in self-government has come instead from states overstepping their boundaries to the point that they make policies for the whole Union. That is what I define as Federalism’s Edge: the point at which an exercise of state power (by a state or group of states) infringes on the right to self-government of the citizens of the other states. If a national government is overweening, intrusive and unresponsive when it is housed inside the Beltway, it is no less so – in fact, even more so – if it sits in a legislature in Sacramento, a jury room in a small town in Alabama, or a law office in Hartford. After all, at least the average citizen sometimes gets to vote in a contested election for representatives in Washington.
The subtext of Federalism’s Edge can be seen in many controversies. The issue of same-sex marriages is a classic example: opponents in other regions of the country get so exercised over the drive to recognize same-sex marriages in places like Vermont or Hawaii not because they are horrified at the effect on Vermonters but because they fear that even a single jurisdiction allowing gay marriage will, through the Full Faith and Credit Clause of the Constitution, allow people in their own state to enter into same-sex unions in Vermont, thus rendering completely irrelevant the policy preferences of the state’s own residents. State attorneys general have been criticized in some quarters for reportedly holding up settlement of nationwide litigation brought by the Department of Justice, and have been on the move elsewhere as well, acting alone or in small groups, targeting tobacco, the gun industry, more recently the securities industry. California operates under an exemption from federal preemption that enables it to set its own vehicle emission standards, standards that – due to the sheer size of the California economy – wind up effectively setting standards for the entire nation (including the states that, unlike California, include a lot of auto workers). Last year, Jonathan Chait of The New Republic kicked up a storm with a full-throated attack on the influence of the state of Delaware, principally through the incorporation of so many major corporations in Delaware, a trend that results in nationwide reach for the corporate law of one of the nation’s smallest states.
An early example of how a violation of Federalism’s Edge in civil litigation provided the subtext for a major movement in constitutional law came in the Court’s famous 1964 decision in New York Times Co. v. Sullivan, in which an Alabama court handed down a libel judgment against the New York Times (for publishing an advertisement about the civil rights movement that supposedly defamed a Montgomery, Alabama City Commissioner) for $500,000, even though sales in Alabama amounted to just 394 of the 650,000 copies of that issue of the Times. Although the Court’s decision revolutionized the relationship between the First Amendment and the law of defamation, the Court’s consideration of the issue was surely influenced by the specter of a national newspaper being brought to heel by a local jury in a jurisdiction where it barely did business.
One of the more subtle violations of Federalism’s Edge came in the Supreme Court’s decision last spring in Atkins v. Virginia, in which the Court pointed to a “national consensus” consisting of less than half of the states as evidence that the Court should overrule its 13-year-old decision concluding that the Eighth Amendment does not prohibit execution of the mentally retarded. The problem with that conclusion, regardless of one’s feelings about the merits of the death penalty argument at issue, should be obvious: Article V of the Constitution provides a method by which the people of a certain percentage of the states can amend the Constitution, and for the Court to allow the meaning applied to a constitutional provision to be changed by action of a lesser number! of state legislatures severely undermines the intent of the Framers that Article V should be a bulwark against easy abrogation of the national compromises struck in the Constitution.
The policing of Federalism’s Edge can likewise be seen as a critical subtext of the Court’s endlessly controversial decision in Bush v. Gore. The standard line criticizing the decision was easy to understand: the case involved a garden-variety dispute between a state statute and its interpretation by the state executive, on the one hand, and the state supreme court on the other. With the exception of a period of activism centered around the civil rights movement, the Supreme Court has rarely intervened in such disputes, giving great deference to state courts and leaving to the political branches the task of disciplining overreaching state judiciaries. In that light, the sudden solicitousness for the proper application of state law may look hypocritical. But the Court surely understood the reason why greater, and less deferential, scrutiny was required: because the rest of the nation would have to live with the Florida court’s choices. (The concurring Justices argued that this greater scrutiny was explicit in the terms of Article II dealing with selection of electors for president and vice president).
In ordinary litigation, the principal bulwark against encroachments on Federalism’s Edge has been the Commerce Clause, and a body of law has grown up (dating back as far as Chief Justice Marshall’s opinion in Gibbons v. Ogden) limiting the “extraterritorial” reach of state laws or the imposition of state law forms of liability directly on interstate commerce. In the 1990s, the Court also began scrutinizing punitive damage awards – long the bane of nationwide businesses in unfriendly state court venues – for “excessiveness” under the Due Process Clause. The Court’s decision in BMW, Inc. v. Gore – a notorious case in which a doctor was awarded $4 million in punitive damages after discovering that the paint on his BMW had been retouched – explicitly grounded authority for its Due Process review in this line of authority. The Court noted that BMW’s conduct had not been previously found unlawful in other states, and that in fact the existing laws provided “a patchwork of rules representing the diverse policy judgments of lawmakers in 50 States.” Thus, speaking of a court judgment that would effectively subject nationwide conduct to liability under a single standard, the Court held:
[W]hile we do not doubt that Congress has ample authority to enact such a policy for the entire Nation, it is clear that no single State could do so, or even impose its own policy choice on neighboring States. . . . one State's power to impose burdens on the interstate market for automobiles is not only subordinate to the federal power over interstate commerce, . . .but is also constrained by the need to respect the interests of other States. . . . We think it follows from these principles of state sovereignty and comity that a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasors' lawful conduct in other States. . . by attempting to alter BMW's nationwide policy, Alabama would be infringing on the policy choices of other States. . . . Alabama does not have the power . . . to punish BMW for conduct that was lawful where it occurred and that h! ad no impact on Alabama or its residents.
The Gore decision attracted its share of critics; Justices Scalia, Thomas, Ginsburg and Chief Justice Rehnquist all dissented, arguing that constitutional regulation of punitive damages was a break with the traditional role of state law and an unwarranted expansion of “substantive Due Process.” In the years since, the case has spawned much litigation and a developing body of law on the limits of punitive damage awards.
Campbell provided the Court with an opportunity to expand on the federalism aspects of Gore, and the Court’s opinion provides ample grounds for encouragement for an active role in the policing of Federalism’s Edge. The facts of the case were unsympathetic for the plaintiffs (the Campbells); according to the Court’s recitation of the facts, Mr. Campbell had recklessly caused a fatal auto accident and insisted that he was not at fault, then sued his insurer for taking the case to trial and temporarily refusing to cover the ensuing judgment. The Campbells alleged bad faith refusal to provide coverage and won $1 million in damages, principally for emotional distress.
Much of the evidence on which the Utah Supreme Court based the $145 million punitive damage award involved conduct outside of Utah:
[T]he Campbells introduced evidence that State Farm's decision to take the case to trial was a result of a national scheme to meet corporate fiscal goals by capping payouts on claims company wide. This scheme was referred to as State Farm's 'Performance, Planning and Review,' or PP & R, policy. To prove the existence of this scheme, the trial court allowed the Campbells to introduce extensive expert testimony regarding fraudulent practices by State Farm in its nation-wide operations. . . Evidence pertaining to the PP&R policy concerned State Farm's business practices for over 20 years in numerous States. Most of these practices bore no relation to third-party automobile insurance claims, the type of claim underlying the Campbells' complaint against the company.
Reviewing whether the conduct at issue was sufficiently “reprehensible” to warrant a punitive damage award 145 times the size of the actual damages, the Court the chastised the Utah Supreme Court for permitting the case to be “used as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country.” Explaining why this was wrong, the Court provided a ringing endorsement of the limits on the power of a single state's law to punish nationwide conduct:
A State cannot punish a defendant for conduct that may have been lawful where it occurred. . . . Nor, as a general rule, does a State have a legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State's jurisdiction. Any proper adjudication of conduct that occurred outside Utah to other persons would require their inclusion, and, to those parties, the Utah courts, in the usual case, would need to apply the laws of their relevant jurisdiction. . . . A basic principle of federalism is that each State may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each State alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction.
The Court further noted the unique dangers in allowing juries to adjudicate punitive damage claims based on conduct that was different from the conduct for which compensatory damages were awarded:
A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties' hypothetical claims against a defendant under the guise of the reprehensibility analysis . . . Punishment on these bases creates the possibility of multiple punitive damages awards for the same conduct; for in the usual case nonparties are not bound by the judgment some other plaintiff obtains. . . ."Larger damages might also 'double count' by including in the punitive damages award some of the compensatory, or punitive, damages that subsequent plaintiffs would also recover".
The Court observed that such measures raised the danger of crossing the line between the civil and criminal justice systems: “Great care must be taken to avoid use of the civil process to assess criminal penalties that can be imposed only after the heightened protections of a criminal trial have been observed, including, of course, its higher standards of proof.”
The practical significance of Campbell is principally in its explicit rulings on the use of evidence and jury instructions regarding out-of-state conduct under standards that were applied more generally in Gore. Lawyers, of course, will argue for years to come over how broadly Campbell can be read outside of its fact situation, and advocates of judicial restraint may continue (as Justices Scalia, Thomas and Ginsburg did in dissenting in Campbell) to argue that the entire enterprise is an excess of judicial activism. But for now, when Federalism’s Edge is overrun by judges and juries in plaintiff-friendly jurisdictions, the Supreme Court is on the case.