Wednesday, November 21, 2007

A billion dollars in punitive damages!

Even huge punitive damages awards in favor of a multinational corporation raise constitutional questions. If the award is too large, it violates constitutional due process. That was the argument in Motorola Credit Corp. v. Uzan, decided by the Court of Appeals on November 21.

The opening paragraph sets the stage for international intrigue, lies and money:

In this appeal, the Uzan family of Turkey challenges the district court’s award of $1 billion in punitive damages against it. The court based the punitive damages award on its findings that appellants “engaged in a coordinated campaign of lies and misrepresentations in order to swindle Motorola of more than $2 billion” and that, “threatened with exposure, [appellants] resorted not only to further lies and corporate manipulations but even to obstruction of justice and, ultimately, misrepresentations to this Court.”

The case grew out of a business relationship between Motorola/Nokia and one of the world's wealthiest families, situated in the country of Turkey, which controls over 100 companies. As explained by the Second Circuit, "the district court concluded that defendants fraudulently obtained loans from Motorola for more than $2 billion and from Nokia for approximately $800 million, purportedly to finance the development of the Uzans’ telecommunications business in the Telsim company."

The case was tried in the Southern District of New York, but the court applied Illinois law. After finding that punitive damages award was appropriate under Illinois law, the Second Circuit analyzed it under the Due Process Clause. While the Clause does not speak to punitive damages, the Supreme Court has repeatedly held that grossly-excessive punitive damages awards can violate due process. The standard, under BMW of N. Am., Inc. v. Gore, 517 U.S. 559,
(1996) contains the following guideposts:

(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damage award; and (3) the difference between the punitive damages awarded by the [fact-finder] and the civil penalties authorized or imposed in comparable cases.

After trial, the district court awarded $2,132,896,905.66 in compensatory damages. It awarded another $2 billion in punitive damages. The Second Circuit remanded the punitive damages award because it was too high. So the district court cut it in half. Hence this appeal.

To say the least, a billion dollar punitive damages award would be excessive for most defendants. Not here. In this case, the Court of Appeals focused on the reprehensibility of defendants' misconduct. That Motorola did not suffer physical harm did not matter. In upholding the $1 billion award, the Court of Appeals credited the district court's findings: "[I]n the broader sense, it is hard to imagine financial misconduct that was more reprehensible than that of the defendants here, perpetrating at an international level an immensely complicated fraud that inflicted severe economic injury and sought to make a mockery of the judicial proceedings in several different countries."

No comments: