May 14, 2020

Punitive Damages

Punitive Damages

Punitive Damages: Covered or Not?
      Lorelie S. Masters, 55(1): 283–316 (Nov. 1999)
This Article gives an overview of the legal standards governing insurability of punitive damage awards. Because the law varies from state to state on this issue, the selection of the law applicable to the issue may determine whether a policyholder's liability insurance will apply to pay for an award of punitive damages. Even in states like New York that typically do not allow for coverage of punitive damages, however, the courts have fashioned exceptions to mitigate the harsh effects of the law in those states. The Article includes a survey of the law on the insurability of punitive damages in the fifty states and the District of Columbia.

Constitutional Constraints on Punitive Damages and Other Monetary Punishments
      George Clemon Freeman, Jr., 57(2): 587 (Feb. 2002)
The Supreme Court's recent opinion in Cooper Industries, Inc. v. Leatherman Tool Group, Inc. , 532 U.S. 424 (2001), is a new milestone in the Court's identification of meaningful constitutional constraints on punitive damages awards. The Court held that a U.S. Circuit Court of Appeals must review an appeal of a punitive damages award alleged to violate the due process clause's requirement of fair notice and its prohibition on grossly excessive punishments under a de novo standard, not an abuse of discretion standard. Cooper Industries is important for three reasons. First, it sends a signal to lower courts that the Supreme Court meant what it said in BMW of North America v. Gore , 517 U.S. 559 (1996), which held that punitive damages that were "excessive" were unconstitutional. Second, it affords new insights into how a six-justice majority views application of the Gore guidelines in determining "excessiveness." Third, the Court's reasoning in Cooper Industries and Gore as to due process requirements of fair notice and proportionality in punitive damages awards applies to all monetary punishments imposed under state or federal law because they too are subject to due process.

Further Progress in Defining Constitutional Constraints on Punitive Damages and Other Monetary Punishments
      George Clemon Freeman, Jr. and Makram B. Jaber, 61(2):517—568 (February 2006)
This article updates an earlier article by Freeman that was published in the February 2002 issue of The Business Lawyer on the status of the United States Supreme Court's rapidly evolving jurisprudence on constitutional constraints on punitive damage awards. Since then, the Court in State Farm Mutual Automobile Ins. Co. v. Campbell reinterpreted and revised the three factors set forth earlier in BMW of N. Am. Inc. v. Gore for determining whether a punitive damages award was "grossly excessive" and therefore constitutionally prohibited. This article describes State Farm's new guidance, examines how lower federal and state courts have responded to it, and suggests possible areas where further guidance by the Court may be needed. The 2002 article also discussed the potential applicability of due process constraints, particularly the requirement of fair notice and the prohibition of "grossly excessive" punishment, to other monetary punishments authorized or imposed by state or federal government. In that broader context this article discusses several opinions dealing with due process challenges to statutory or administrative prohibitions or other limitations on timely judicial review of EPA administrative orders under the Clean Air Act and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

Revisiting Consolidated Edison—A Second Look at the Case that Has Many Questioning Traditional Assumptions Regarding the Availability of Shareholder Damages in Public Company Mergers

      Ryan D. Thomas and Russell E. Stair, 64(2): 329-358 (February 2009)
In October 2005, the U.S. Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v. Northeast Utilities ("Con Ed") ruled that electric utility company Northeast Utilities ("NU") and its shareholders were not entitled to recover the $1.2 billion merger premium as damages after NU's suitor, Consolidated Edison, refused to complete an acquisition of NU. This case surprised many M&A practitioners who believed that the shareholder premium (or at least some measure of shareholder damages) would be recoverable in a suit against a buyer that wrongfully terminated or breached a merger agreement. If Con Ed proves to have established a general rule precluding the recovery of shareholder damages for a buyer's breach of a merger agreement, the potential consequences to targets in merger transactions would be substantial—shifting the balance of leverage in any MAC, renegotiation, or settlement discussions decidedly to the buyer and effectively making every deal an "option" deal. This ruling, therefore, has left some target counsel struggling to find a way to ensure that the merger agreement allows for the possibility of shareholder damages while also avoiding the adverse consequences of giving shareholders individual enforcement rights as express third-party beneficiaries of the agreement.

The Con Ed case, however, merits a second look. This Article revisits the Con Ed decision and challenges the conclusion of some observers that the court in Con Ed established a general precedent denying the availability of shareholder damages. This Article also discusses how the holding of Con Ed may very well be confined to the facts and the specific language of the merger agreement at issue in the case. Notwithstanding, the uncertainty surrounding how any particular court may approach the issues raised in Con Ed, this Article proposes model contract language that a target might employ to avoid creating a " Con Ed issue" and to minimize the risk of a result that was not intended by the parties.