WASHINGTON(Bloomberg) — The U.S. Supreme Court will use a commercial dispute over a multipurpose pocket knife to determine how much power appeals courts have to scale back or reinstate jury awards of punitive damages. The case will be the court’s first look at punitive damages since it ruled in 1996 that a $2 million award for a BMW paint flaw was excessive. The justices now will decide to what extent a state or federal appellate court must respect a trial judge’s decision either upholding or striking down a jury verdict.
Cooper Industries Inc., which is accused of copying rival Leatherman Tool Group Inc.’s Pocket Survival Tool, wants a federal appeals court effectively to ignore a trial judge’s conclusion that a $4.5 million punitive award was reasonable.
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”Businesses should be glad the Supreme Court took this case,” said University of Southern California law professor Erwin Chemerinsky, who filed a brief urging the high court to step in. “It gives a chance for the court to endorse aggressive appellate review of punitive damage awards.”
Lower courts are divided about the “standard of review” for punitive damages. Some appellate judges have concluded they must defer to trial judges on such matters as the severity of a defendant’s wrongdoing. Other courts say they can review those issues “de novo,” or anew.
Tooled for Battle
Businesses frequently argue in favor of broad appellate court power to limit jury awards. Interstate Bakeries Corp., for example, could soon ask an appellate court to cut a $24 million award won by black workers in a discrimination suit against the maker of Wonder bread. A trial judge already has reduced that sum from the $124 million awarded by a jury.
”The solution is for federal courts to reverse where they find the magnitude of the excessive jury awards violates a corporation’s due process rights,” said Neil Goldberg, president of the Defense Research Institute, an advocate for corporate defendants.
A ruling favoring Cooper nonetheless could cut both ways, giving appellate judges more power both to reinstate jury verdicts struck down by trial judges and to void verdicts upheld by lower court judges. The high court’s decision could affect both state and federal proceedings.
The high court case pits Cooper, a Houston-based maker of tools and electrical products, against rival Leatherman of Portland, Oregon. Leatherman accuses Cooper of copying its design and confusing consumers at a 1996 hardware show.
At the time, Cooper had plans for a similar tool but hadn’t yet developed a prototype to show customers. According to the lawsuit, Cooper instead used altered photos of the Leatherman tool, representing to customers that the pictures showed the new Cooper product.
Leatherman sued, claiming trade dress infringement, false advertising, unfair competition and illegal “passing off.”
‘Collective Caprice’
A federal judge eventually barred Cooper from selling its own product, called Toolzall. A jury then awarded Leatherman $50,000 in compensatory damages and $4.5 million in punitive damages — an award upheld by the judge overseeing the trial.
At the Supreme Court, Leatherman argues the San Francisco- based 9th U.S. Circuit Court of Appeals should have given more exacting scrutiny to the punitive damage award. The company said in its appeal that appellate courts are more likely than trial judges to provide the type of “dispassionate” analysis demanded by the Constitution’s due process clause.
”Punitive awards, while cloaked as the byproduct of reasoned analysis, frequently amount to little more than the collective caprice of outraged jurors and trial judges,” Cooper argued.
In the 1996 BMW case, the Supreme Court said for the first time that a damage award was “grossly excessive” and violated the constitutional right to due process of law. The justices gave lower courts a series of factors to consider in assessing awards, including the reprehensibility of the defendant’s conduct and the amount of harm inflicted.
Leatherman argues that, in other contexts, the Supreme Court has afforded broad deference to the factual findings of trial judges. The company says a judge’s conclusions on punitive damages should survive unless they amount to an “abuse of discretion.”
The justices will hear oral arguments early next year and are scheduled to issue a decision by June.
