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April 13, 2016Client Alert

Federal Appeals Court Slashes Jury’s Punitive Damages Award from $22.5M to $1.95M Citing Constitutional Concerns

On April 1, 2016, the United States Court of Appeals for the Tenth Circuit issued a decision in Lompe v. Sunridge Partners, LLC, in which it struck down as unconstitutional a jury’s award of $22.5M in punitive damages against a defendant who had also been assessed with about $2M in compensatory damages. The case arose in 2011 when the 21-year-old plaintiff, Amber Nicole Lompe, suffered carbon monoxide (CO) poisoning from a failing furnace in her Wyoming apartment. Lompe sued the owner and manager of the apartment community, seeking both compensatory and punitive damages. The jury returned a verdict in Lompe’s favor, awarding her total compensatory damages of $3M. $1.95M of the award was assessed against the property manager, Apartment Management Consultants, LLC (AMC).

The jury then considered punitive damages and, after hearing evidence of AMC’s wealth, returned a punitive damages award of $22.5M against AMC. AMC appealed to the Tenth Circuit, which not only reversed the jury’s punitive damages award, but also ordered that the damages award be reduced to $1.95M—equal to the compensatory damages assessed against AMC. In a 2-1 decision, the Tenth Circuit held that “the evidence presented at trial is sufficient to support the jury’s finding that AMC’s conduct met the Wyoming threshold for an award of punitive damages,” which was conduct that was “willful and wanton” and, by implication, “reprehensible.” However, the appellate court engaged in an independent assessment of “the degree of AMC’s reprehensibility in reviewing the constitutionality of the jury’s punitive damages award” and ultimately reached a very different conclusion.

This decision represents a substantial departure from the conventional wisdom that punitive damages with a low single digit multiplier of compensatory damages will likely withstand constitutional scrutiny. As the dissenting judge noted, the decision also reflects a willingness of appellate judges to substitute their judgment, including the effect of mitigating factors on the ultimate punitive damages award, for that of the jury. Among other things, the jury received evidence that “three prior CO leaks, including one in which [another individual] was poisoned” had occurred on the property at issue, which “put AMC on notice that the furnaces needed regular substantive safety inspections to prevent future releases of CO.” Although the court acknowledged that “[f]ailing to perform such inspections recklessly endangered not only Ms. Lompe, but also all the tenants at the apartment complex, and the risk included death,” the court concluded that AMC’s conduct was not “particularly reprehensible” and thus could not support a punitive damages award that exceeded the already “substantial” compensatory damages award.

The dissenting judge also would have reduced the punitive damages award, but only to $7.8M, reasoning that “four times the amount of compensatory damages” was likely the constitutional limit in this case.

The case is noteworthy principally to companies doing business in states within the Tenth Circuit—Utah, Colorado, Wyoming, New Mexico and Oklahoma—but could have implications in other jurisdictions as well. While further appellate options remain, including a possible appeal to the United States Supreme Court, for the time being the decision will create significant doubt about the constitutionality of punitive damages awards that exceed the amount awarded for compensatory damages, particularly where the compensatory amount is “substantial”—that is, in excess of $400,000. Moreover, one of the most likely and most immediate effects of the ruling in Lompe will likely be on the manner in which district court judges instruct jurors regarding the constitutional limits on punitive damages awards.

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