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Diversity Case Analysis

The decision suffers from several defects: poor math, misrepresentation of Seventh Circuit precedent, and ignorance of Wisconsin law.

First, the court states that, in order to meet the jurisdictional requirement, the jury’s punitive damage award would have to be "more than ten times" the amount of compensatory damages, when the U.S. Supreme Court has said that "few" awards exceeding that multiple "to a significant degree" will satisfy due process.

In fact, if the jury actually awarded exactly 10 times the amount of compensatory damages as punitive damages, the total award would be $79,365. Thus, the award needed to reach $75,000, does not need to exceed 10 to 1 at all, much less "to a significant degree," but need only be 9.4 to 1. There is no presumption in State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003) against such an award.

In addition, the Seventh Circuit disavows its own reasoning in Mathias v. Accor Lodging, Inc., 347 F.3d 672 (7th Cir. 2003). The court in the case at bar stated that nothing in Mathias supports a double-digit multiple for punitive damages, unless "a defendant’s acts inflict small losses on hundreds of people."

However, the court in Mathias set no such limitation. Instead, the court cited the example of a defendant spitting in a plaintiff’s face, and noted that punitive damages must be much greater than compensatory damages, "because in the spitting case they would be too slight to give the victim an incentive to sue … and because to limit the plaintiff to compensatory damages would enable the defendant to commit the offensive act with impunity."

Thus, the reasoning in Mathias permitting comparatively large punitive damages is not limited to cases involving small losses inflicted on hundreds of people, but can apply whenever compensatory damages are low.

That is the rule in Wisconsin, too. Thus, the court’s failure to discuss the Wisconsin Supreme Court’s decision in Jacque v. Steenberg Homes, Inc., 209 Wis.2d 605, 563 N.W.2d 154 (1997), is glaring.

In Jacque, a seller of a mobile home trespassed over the plaintiff’s property, despite being denied permission, in order to deliver a mobile home to a buyer. The jury awarded $1 in nominal damages, and $100,000 in punitive damages.

The Wisconsin Supreme Court unanimously upheld the award, notwithstanding the great disproportion between punitive and nominal damages, because, when an intentional tort causes little actual harm, large punitive damages are necessary, lest there be no incentive for wrongdoers to refrain from their actions. Jacque, 563 N.W.2d at 159.

The same reasoning is equally applicable here, where the actual damage are relatively minor — barely exceeding the minimum threshold for a large claims action in Wisconsin state court rather than going to small claims court.

An even more glaring misstatement of Wisconsin law, however, is when the court notes that Munro never actually paid the disputed bill, and concludes that, therefore, compensatory damages were actually zero. The court wrote, "Neither side cites a decision for the proposition that Wisconsin state law authorizes punitive damages when the insurer delays in payment and the insured suffers no loss."

However, such a decision is easily found in Trinity Evangelical Lutheran Church v. Tower Insurance Company, 2003 WI 46, 261 Wis.2d 333, 661 N.W.2d 789, the leading Wisconsin case governing punitive damages against insurance companies for bad faith. Actually, the insurer did not delay payment in Trinity, but did something less egregious — contest whether it was responsible, as the insured’s automotive insurance company, or whether the errors and omissions insurer for its agent was responsible.

Not only did the Wisconsin Supreme Court uphold an award of punitive damages even though the insured suffered no loss from the insurer’s actions (save attorney fees, which are also present in the case at bar), the court upheld punitive damages in the amount of $3.5 million.

Thus, it cannot reasonably be doubted, in light of the decision in Trinity, that if this case goes to trial in state court after the remand, and the jury awards $75,000 in punitive damages, the award will be upheld against any constitutional attack in Wisconsin state court, and any challenge on constitutional grounds would probably be found frivolous.

Related Links

7th Circuit Court of Appeals

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Possible punitives insufficient for diversity jurisdiction

Regardless of how self-evident that conclusion is to anyone familiar with Wisconsin law, however, it doesn’t apply in the Seventh Circuit, and will not be sufficient to support diversity jurisdiction in federal court.

The holding thus places parties in a difficult position. Given that the Seventh Circuit would find a mere $75,000 punitive damage award unconstitutional in a case like this, any plaintiff’s attorney seeking bad faith damages would likely prefer to be in state court.

If the insurer removes a case to federal court, however, the plaintiff must argue that such an award would be unconstitutional, in order to get back into state court.

And any insurer who wants to keep the case in federal court will be in the corollary bind. To keep the potential for punitive
damages limited by the Seventh Circuit’s jurisprudence, it must argue that an award of $75,000 would be constitutional.

– David Ziemer

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David Ziemer can be reached by email.

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