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 had 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.

3 thoughts on “Federalism’s Edge”

  1. Another area in which this issue arises is in the “full faith and credit” clause. In a case currently before the Court, Franchise Tax Board v. Hyatt, California argues that the clause requires Nevada courts to apply a California law immunizing its tax agents from lawsuits, even in Nevada courts. Hyatt sued the Board in Nevada court because agents entered Nevada and committed acts which are torts under Nevada law. California argues that even though Nevada law does not immunize tax agents from lawsuits, California law does, and the full faith and credit clause requires Nevada to apply the law even if they don’t want to.
    Briefs in the case, including the Pacific Legal Foundation’s amicus brief, are available at https://supreme.lp.findlaw.com/supreme_court/docket/2002/february.html#02-42.

  2. The Gore decision attracted its share of critics; Justices Scalia, Thomas, Ginsburg and Chief Justice Rehnquist all dissented
    Interestingly, Rehnquist was in the majority in Campbell. I haven’t read the opinion. Perhaps he provides an explanation for how the two cases can be distinguished.
    Personally, I think the Court’s decision was great as a matter of policy, but I agree with Scalia & Thomas & Ginsberg that it was wrong as a matter of constitutional law. “Substantive” due process is a tenuous enough matter as it is without extending it to the damages a jury awards.

  3. re: Federalist, federalist society & state’s rights
    Given my philosophy background, a clarification of language and a brief review of US history shows that the clarification of terms will enhance this debate.
    In 1789-1796, the Federalist Party emerged under Washington, advocating the primacy of the Presidency and enhanced powers under Article II. This reached a crescendo under President Adams with the enactment during a potential wartime situation with France (the “XYZ Affair”) of the Alien & Sedition Acts. Jefferson led the opposition to the Federalists and he and others posted the Kentucky and Virginia Resolutions in 1798, which articulated a theory of states rights and state nullification of federal law if the states thought their sovereignty was being infringed. When Jefferson became President, the Republican Party view the 1800 election as a refutation of the Federalist view, and they moved quickly to abolish the 13 circuit courts and federalist judges installed by Adams, forbade the federal supreme court under Marshall from sitting for almost two years, impeached and convicted one judge, and almost inmpeached and comvicted another. They also made substantial reductions in the military and other changes.
    Fast forwarding to the war of 1812, the last gasp of the Federalist movement was the Essex Junto, the secessionist movement of New England during the War with the English. This was a failure and the Federalists after this virtually disintegrated, though Tocquevilled notes in his Democracy in America that there remained “an aristocratic party” in America waiting for democracy to fail.
    After this poin, the Democratic-Republicans split into two factions, one that was for limited national power, the other for expanded national power, and this later group became the Whigs.
    Notably, in 1832, John Calhoun, the Vice-President of the US, split with Andrew Jackson over the Tariff, and exposited the South Carolina Nullification doctrine, which paralleled the Kentucky and Virginia Resolutions in every respect. Jackson requested permision to carry out federal law by armed force if necessary, but instead the tariff was adjusted and nothing resulted.
    The controversy over state’s rights as articulated by Jefferson and Calhoun arises from the question of whether the sovereignty of the fedederal government is derived directly from the people of the United States, or arises from the covenant of the various states which agreed to enter into the Union and adopt the Constitution. If the latter, then the Federal Government is limited in its powers to those enumerated in the Constitution over state citizens and the remainder of all powers are reserved to the states, as is articulated in Amendments 9 and 10 of the Constitution. This basically in a nutshell was the argument used by both Calhoun and Jefferson against the Federalist/Nationalists.
    At the time of the Civil War, the same argument was trotted out by the secessionists, that they had a right as states to secede, since in the start of the union, they had acceded as states.
    While history and accumulations of Supreme Court cases, along with the 13th, 14th and 15th amendments seem to have buried the idea of states rights, it was again resurrected during the 1950s and 1960s to resist integration and involvement from the federal government in areas as diverse as busing, school integration, civil rights and a host of other areas.
    Returning to the original problem of 1798, the Alien & Sedition Acts were legislated on a point of national security. It seems to me that on this point, the national goverment has its strongest grount for overriding states’ rights, since this goes to the national defense.
    In fact, if you look at the Patriot Act, and then look at the Alien & Sedition Acts, the provisions are remarkably similar in scope and even in detail.
    Proving, great minds think alike.
    –Art Kyriazis, Philadelphia

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