Earlier this month, a California jury leveled a $2.055 billion verdict against agribusiness behemoth Monsanto, a subsidiary of Bayer (ETR:BAYN). The award arose from allegations that a married couple contracted cancer as a result of using Monsanto's Roundup weed killer. This extraordinary verdict grabbed headlines and spooked Bayer's investors, with Bayer stock down nearly 2% in the aftermath of the award. Although the verdict is bad news for Bayer (the company is potentially liable for hundreds of millions in this case, after all), the company will likely never have to pay the $2 billion damages award that has stolen all the headlines. 

The nature of punitive damages. 

The jury award against Bayer was composed of $55 million in compensatory damages and $2 billion in punitive damages. To understand why Bayer won't be paying full sticker price on the recent jury verdict against it, it's helpful to first understand a little bit about how damages work in the legal system

When someone has been injured by another's misconduct, the injured person is entitled to recover money to reimburse them for the costs of their injury. This reimbursement money is called compensatory damages. Thus, for instance, if someone driving a car negligently hits a pedestrian, the driver will have to pay the costs of the pedestrian's medical bills, physical therapy, and the like.

Sometimes, however, misconduct is so egregious and outrageous that a court will allow a jury to award punitive damages in addition to compensatory damages. Punitive damages, as the name indicates, are intended to punish and deter reprehensible behavior.  Continuing with the driver/pedestrian hypothetical, suppose that our driver was speeding and taking pulls from a bottle of bourbon when they blasted through an intersection and hit a pedestrian. What's more, the driver spit on the pedestrian, yelled at them for getting in the way, and then took off without calling for help. The driver's contemptible behavior has not increased the costs of the pedestrian's injuries, but it is appalling. Juries award punitive damages to punish and discourage this type of norm-breaking.

Big stack of $100 bills

Image Source: Getty Images

But what about mass market misconduct? To be sure, corporations often engage in outrageous conduct , but it is often not as clear-cut as our hypothetical driver's behavior. Legal scholars have noted that, in cases of corporate misbehavior, juries do not necessarily award punitive damages to redress a violation of social norms, like spitting on someone. Instead, juries tend to focus on whether the company has betrayed the public's trust by, for example, knowingly imposing a risk of harm on consumers. The punitive damages award against Bayer conforms to this betrayal-of-trust model. The jury found that the company failed to warn consumers about the health risks of Roundup's active ingredient.

Why the punitive damages award against Bayer will be reduced.

Bayer has vowed to appeal the verdict and contest its liability for both compensatory and punitive damages. In a press release reacting to the verdict, Bayer stated that the consensus among health regulators is that Roundup's active ingredient -- glyphosate -- is safe and non-carcinogenic.  In effect, Bayer argues, it has not imposed any risk on consumers and thus has not breached the public's trust. Even if Bayer loses its appeal, however, it likely will not have to pay $2 billion in punitive damages.

The US Supreme Court holds that an excessive punitive damages award arbitrarily deprives a person of their property and thus violates the Constitution's Due Process clause. The Court has opined that generally, a punitive damages award is not excessive if there is a single-digit ratio between punitive and compensatory damages. For instance, if a jury awards a plaintiff $1 million in compensatory damages, an award of punitive damages should not exceed $10 million as that would be a double-digit, 10 to 1, punitive to compensatory ratio. The Court has typically found punitive to compensatory ratios of 3 to 1 or 4 to 1 appropriate.

In this case, the jury awarded $2 billion in punitives against a $55 million award of compensatory damages. This results in a punitive to compensatory ratio of 36 to 1! Bayer will challenge the constitutionality of that ratio in a post-trial motion or on appeal, and a judge will undoubtedly reduce the award considerably. Assuming the judge applies the 4 to 1 ratio sanctioned by the Supreme Court, Bayer may only have to pay a mere $200 million in punitive damages.

Bayer is still not out of the woods.

Ultimately, however, a reduction of punitive damages will only be a victory for Bayer in a single battle of the larger war over Roundup. In addition to this case, Bayer has already lost two other multi-million dollar Roundup cases, and it potentially faces thousands of claims from other consumers who have used Roundup or other Monsanto herbicides.

The road ahead for Bayer is treacherous. Since acquiring Monsanto in 2018, Bayer's stock has plummeted by 47%, due in part to the mushrooming Monsanto litigation.  Even if Bayer negotiates a global settlement of Roundup claims, it could still be on the hook for billions. That the company's punitive damages liability is limited to a single-digit ratio is likely cold comfort at the moment.