An appeals court panel on Tuesday overturned its earlier ruling and held that Chrysler Group L.L.C. should not pay $3.5 million in punitive damages in a discrimination case filed by a pipefitter in one of its plants.

In a 2-1 ruling last year, a divided panel of the 7th U.S. Circuit Court of Appeals in Chicago reinstated the $3.5 million award to Otto May Jr., a Cuban-born pipefitter in its Auburn Hills, Mich.-based Chrysler's Belvidere, Ill., assembly plant in Otto May Jr. v. Chrysler Group L.L.C.

Mr. May was the target of racist, xenophobic, homophobic and anti-Semitic graffiti that appeared in and around the plant's paint department between 2002 and 2005, as well as the recipient of death threats.

A jury trial in U.S. District Court in Rockford, Ill., resulted in Mr. May being awarded $709,000 in compensatory damages and $3.5 million in punitive damages on his hostile work environment claim.

He accepted the reduction of the compensatory damages to $300,000, but appealed the lower court's decision to vacate the punitive damages award, according to court papers.

%%BREAK%%

After the appeals court panel reinstated the punitive damages award, Chrysler then sought a rehearing and the panel agreed to reconsider issue. After the rehearing, the panel ruled Tuesday that the district court properly granted Chrysler's motion to dismiss the punitive damages award.

Mr. May could recover punitive damages only if he presented sufficient evidence for the jury to conclude that Chrysler acted with “malice or with reckless indifference to (his) federal protected rights,” the appeals court said in quoting the federal law.

“We don't disagree with the district judge's determination that the jury's punitive damages verdict was without a legally sufficient evidentiary basis,” it said. “While Chrysler could have done more and undertaken different measures, its actions did not evince a reckless disregard for May's federally protected rights. To the contrary, Chrysler employed several strategies to stop and repent the harassment of May,” it said.

“When the harassment did not stop, Chrysler continued and even increased, to some extent, its efforts to protect May,” said the panel.

“To be sure, Chrysler could have done more to stop the harassment. But given the situation that it faced — an anonymous harasser, an assembly plant covering 4 million square feet, and a three-shift-a-day operation, Chrysler's response was enough as matter of law to avoid punitive damages liability.”