The Italian Supreme Court’s revirement.
On July 5th, 2017, the Joint Divisions of the Italian Court of Cassation ruled in favor of the enforceability in Italy of foreign decisions[1] awarding punitive damages.[2]
Punitive damages have long been considered alien to, and incompatible with, the Italian legal system. Hence, foreign judgements awarding such damages were denied enforceability on grounds of public policy. In fact, it was held that, under Italian law, damages shall be limited to compensation for the actual loss suffered by the injured party by reason of the harmful conduct of the wrongdoer.[3]
In an obiter dictum of the judgement at hand, the Italian Supreme Court states that punitive damages are, even though alien, compatible with the Italian legal system.
The Court acknowledges that under Italian law, civil liability may serve different functions. Although its primarily purpose is to compensate the injured party, in line with its original function of restoring patrimonial loss, nowadays it may also ensure deterrence and retribution.[4]
However, the Court states that four prerequisites must be present in order to rule in favor of enforceability of judgements awarding punitive damages: (i) the foreign judges who delivered the award must have been granted such power by means of foreign legislative provisions (or equivalent sources) in similar and predictable circumstances (legality); (ii) the foreign legal system must provide a quantitative limit to the imposable amount, which cannot be entirely left to the discretion of the Court (or of a jury); (iii) proportionality between the amount of compensatory and punitive damages; and (iv) proportionality between the amount of punitive damages and the level of recklessness or malice characterizing the conduct of the wrongdoer. In other words, the ruling sets general requirements of legality, predictability and proportionality that must be met by the legal system of the award’s country of origin, in order to be granted recognition and enforceability in Italy.
As a result, punitive damages that are considered “grossly excessive” would not be in line with Italian public policy, presenting an arbitrary character and not preserving any proportionality between the loss suffered and the compensation received.
The Court then examines the recent development that took place in the U.S. in relation to punitive damages, pointing out that the US legal system now expressly repeal “grossly excessive”.
According to the Court, both the evolution in the Italian and in the U.S. now make the recognition and the enforcement of a US judgement awarding punitive damages no longer a mere theoretical possibility.
How to avoid excessive, unpredictable and inconsistent punitive damages awards: the possible approaches.
If the Court is right in acknowledging that significant progress has been made in the U.S. in an attempt to avoid excessiveness and unpredictability of these awards, it must be specified that, contrary to what the Court seems to affirm, the 1:1 ratio, allegedly set forth by the Exxon[5] case, is far from being a constitutional limitation binding all US courts.
State regulation of punitive damages varies, as states may exercise significant discretion in determining how and when to impose punitive damages. Many states have imposed statutory limits on punitive awards: some of them in the form of absolute monetary caps[6]; others in the form of a maximum ratio of punitive to compensatory damages[7]; while others still have opted for a combination of the two[8]. Particularly, those states that rely on a multiplier have adopted a variety of ratios, ranging from 5:1 to 1:1[9].
In Exxon v. Baker, the US Supreme Court reaffirmed that to effectively serve the same purpose as criminal penalties, that is, to deter misconduct, punitive damages awards must be both “reasonably predictable in severity” and consistent in amount between similar cases.[10]
In an attempt to avoid unpredictable and inconsistent awards, the Court affirmed that three approaches are possible: (i) settling on criteria for judicial review of punitive damages; (ii) setting a hard dollar cap: (iii) pegging punitive to compensatory damages using a ratio or maximum multiple.[11]
The Court determined that linking punitive awards to compensatory damages would best serve such a desire. In establishing the proper ratio, the Court sought numerical reasonableness looking at studies examining the ratio of punitive to compensatory verdicts. These studies implied what judges and juries have deemed reasonable financial penalties in cases ranging from recklessness to malice. Such studies place the median ratio at less than 1:1, which means that, for the most part, punitive awards do not surpass compensatory awards. Therefore, the Court held a 1:1 ratio of punitive damages to compensatory damages as a “fair upper limit” under federal maritime law, which properly accomplishes the dual aims of punishment and deterrence.[12]
As mentioned earlier, the holding of this judgment has a limited scope. In Exxon, the Court examined the verdict of the lower court in the exercise of federal maritime common law authority[13], hence reviewing the award for conformity with maritime law rather than its conformity with the outer limit allowed by due process.[14]
Due process cases have all involved awards subject in the first instance to state law, thus providing the occasion to consider a “common-law standard of excessiveness”.[15]
The leading case in this latter category is BMW v. Gore, which the Italian Supreme Court also referred to. In that occasion, the US Supreme Court did not fix any rigid cap but, instead, set out legal standards[16] that courts should apply when reviewing punitive damages to determine whether an award is grossly excessive and consequently unconstitutional. Those standards are: (1) the degree of reprehensibility[17] of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.[18]
The Supreme Court stated that it has “consistently rejected the notion that the constitutional line is marked by a simple mathematical formula”.[19]
The same position was reaffirmed in State Farm v. Campbell, not referred to by the Italian Supreme Court, where the Court again declined to impose a bright-line ratio which a punitive damages award cannot exceed.[20] In fact, the Court observed that punitive damages of double, triple, or quadruple the amount of compensatory damages have been upheld by the Court on different occasions, stating that “although not binding, [these ratios] are instructive”. They demonstrate that “single-digit ratios are more likely to comport with due process”. Nonetheless, because there are no rigid benchmarks that a punitive damages award may not surpass, ratios greater than those previously upheld may comport with due process. What counts is that the precise award must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff.[21]
No more “if” but… at what conditions.
After having clarified the content of the precedents quoted in the relevant judgement, it is now time to address the issue set forth by it: did the Court intend to affirm that a quantitative limitation exists under Italian law, thus binding Italian courts asked to recognize and enforce foreign judgments?[22] In other words, must a foreign judgement award punitive damages in the limit of the 1:1 ratio in order to be granted recognition and enforcement in Italy?
It is the writer’s opinion that further judgements are needed in order to clarify this blurred question. Particularly, further considerations are needed to answer the question whether setting a quantitative limitation, in the form of an absolute fixed ratio, is in fact the most effective solution to achieve predictability.
On both sides of the Atlantic, the Courts agree on the need, grounded in the rule of law itself, to ensure that punitive damages are “awarded according to meaningful standards that will provide notice of how harshly certain acts will be punished and that will help to ensure the uniform treatment of similarly situated persons”. [23] The question is then whether legal standards can secure these objectives without the rigidity that an absolute fixed numerical ratio demands.
In setting forth constitutional due process limits on the size of punitive damages awards, the US Supreme Court stated that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process” [24], thus, clearly “fores[eeing] exceptions to the numerical constraint”.[25]
According to the writer, if a need for foreseeability is undeniable and required by the rule of law, a need for flexibility is likewise undeniable.
As stated, ratios higher than single-digit ones may comport with the due process clause when particularly egregious acts resulted in a small amount of pecuniary damages, for example, where the injury is hard to detect or the monetary value of non-pecuniary damages may be difficult to determine.[26]
In Exxon, the dissenting opinion by Judge Breyer endorses the jury’s reasonable belief that Exxon knowingly allowed a relapsed alcoholic to repeatedly steer a vessel filled with millions of gallons of oil through waters that provided the livelihood for the many plaintiffs in this case. In considering such conduct, Judge Breyer observed that it was only a matter of time before a crash and spill like the one in Exxon occurred. Pointing out that “the damage easily could have been much worse”, and the “egregious” nature of Exxon’s conduct, Judge Breyer reached the conclusion that the case was “a special case, justifying an exception to the strict application of the majority’s numerical rule”.[27]
In conclusion, the conditions set forth by the Italian Supreme Court judgement at hand appear difficult to be met in the majority of the cases. Consequently, the possibility for US judgements awarding punitive damages to obtain enforcement in Italy still appears, at this stage, a theoretical one.
Federica Fainelli
Federica Fainelli is an LL.M. candidate in the International Business Regulation, Litigation & Arbitration program at the NYU School of Law.
[1] I.e., judgment issued by courts outside of Italy and the European Union.
[2] Cass. 16601/2017.
[3] See, inter alia: Cass. 1781/2012.
[4] This statement is made mostly on a twofold basis: a number of recently introduced Italian legal provisions that now clearly provide the right to recover damages aiming at deterring and sanctioning; some recent findings by the Constitutional Court.
[5] Exxon Shipping Co. v. Baker, 554 U.S. 471 (2008).
[6] See, e.g., Va. Code Ann. § 8.01-38.1 (Lexis 2007) ($ 350,000 cap).
[7] See, e.g., Ohio Rev. Code Ann. § 2315.21(D)(2)(a) (Lexis 2005) (2:1 ratio in most tort cases).
[8] See, e.g., Alaska Stat. § 09.17.020(f) (2006) (greater of 3:1 ratio or $ 500,000 in most actions).
[9] Exxon, 554 U.S. at 490-497.
[10] Exxon, 554 U.S. at 502.
[11] Exxon, 554 U.S. at 503-508.
[12] Exxon, 554 U.S. at 503-508.
[13] Area in which the Supreme Court of the United States has given original jurisdiction by the US Constitution.
[14] Ibidem. Due Process Clause is the Fourteenth Amendment of the US Constitution and sets for principles of fairness and notice.
[15] Exxon, 554 U.S. at 501-502.
[16] Three guideposts, the so called “Gore factors”.
[17] Reprehensibility of the harmful conduct should be determined considering whether: the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard for the health or safety of others; the target of the conduct was financially vulnerable; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, deceit, or mere accident. BMW v. Gore, 517 U.S. 559, 576-577 (1996).
[18] BMW v. Gore, 517 U.S. 559, 575 (1996).
[19] BMW, 517 U.S. at 582.
[20] State Farm v. Campbell, 538 U.S. 408, 424-425 (2003).
[21] State Farm, 538 U.S. at 424-425.
[22] See Franco Ferrari, Il riconoscimento delle sentenze straniere sui danni punitivi. Brevi cenni comparatistici all’indomani della pronunzia italiana del 5 luglio 2017, 1 Rivista di Diritto Civile [R.D.C.] 280 (2018) (It.).
[23] Exxon, 554 U.S. at 525-526 (Breyer, J., concurring).
[24] State Farm, 538 U.S. at 425.
[25] Exxon, 554 U.S. at 525-526 (Breyer, J., concurring).
[26] State Farm, 538 U.S. at 424-425.
[27] Exxon, 554 U.S. at 525-526 (Breyer, J., concurring).