517 U.S. 559 (1996), argued 11 Oct. 1995, decided 20 May 1996 by vote of 5 to 4; Stevens for the Court, Breyer concurring, Scalia, Thomas, Ginsburg, and Rehnquist in dissent. One of the sharpest areas of controversy in American law concerns the duties owed by product manufacturers to consumers. For people injured by a defective product or negligent behavior by a producer, a big court award is often the best hope for compensation. Such awards, however, can also have devastating consequences for a business, especially when it must pay punitive damages. These are damages paid to punish a business for past conduct and to prevent similar conduct in the future. They stand apart from compensatory damages, which are designed to compensate an individual for an actual loss. Since the early 1980s state legislatures had wrestled with the question of how to reform the tort system generally and the role of punitive damages in particular. It was in this context that BMW reached the Supreme Court.
The case involved a Birmingham, Alabama, oncologist, Dr. Ira Gore, Jr. He had paid $40,750 for a black BMW 535si only to discover nine months later that his supposedly “new” car had been damaged in transit and then repainted by BMW. The company had never disclosed to Gore that the car had been repainted, a practice common in the automobile business and one regulated in many states by a provision that only if the repair amounted to more than 3 percent of the value of the car did the company have a duty to disclose. The cost of the paint job was $601. Gore, however, claimed that BMW had breached its contract with him and committed a fraud in the process. A trial court agreed and awarded Gore $4,000 in compensatory damages and $4 million in punitive damages. The jury set the punitive damage figure based on evidence that BMW had sold nearly 1,000 such refinished cars in the United States. The Alabama Supreme Court heard the case on appeal, upheld the verdict, but cut the punitive damage award in half, to $2 million.
A divided United States Supreme Court found in favor of BMW. The company had argued before the justices that the Due Process Clause of the Fourteenth Amendment rendered such punitive damage awards unconstitutional as “grossly excessive” in relation to the state of Alabama's legitimate interests in punishing unlawful conduct and preventing a repetition of it. Justice John Paul Stevens, writing for the majority, agreed. Stevens and the majority were reacting to skyrocketing punitive damage awards and the windfalls they brought to plaintiffs who had not suffered serious injury. Stevens cited not only the Due Process Clause but also what he termed elementary notions of fairness that formed the fabric of the Constitution in siding with the company. Stevens also concluded that it was inappropriate for the Alabama courts to take account of conduct by BMW elsewhere in the country as a basis upon which to calculate punitive damages. Hence, Alabama courts could consider only the economic interests of Alabama consumers in making decisions about damages. Stevens also observed that the three most important indicators of the appropriateness of a punitive damage award were not met. In this instance, BMW's conduct was not reprehensible, the punitive damages and compensatory damages were entirely out of balance, and there was a huge gap between how BMW would have been punished for comparable conduct under criminal law. Stevens, however, refused to draw a bright line designating the point at which such damages became excessive, and he remanded the case back to Alabama. In essence, the Court had set a standard not unlike that associated with obscenity: they knew it when they saw it.