In the case of City of Newport, Kentucky v. Iacobucci, DBA Talk of the Town (1986), a nightclub owner sued the city and its officials for damages under 42 U.S.C § 1983 after they revoked his business license without due process. The Supreme Court held that municipalities are not immune from punitive damages under § 1983 when their agents act in bad faith or with malice. However, it also ruled that municipal liability cannot be based on respondeat superior but must instead rest on an official policy or custom causing constitutional injury. In this instance, since there was no evidence to suggest that revoking licenses without due process was a widespread practice or sanctioned by city policymakers, Newport could not be held liable for punitive damages.

In the dissenting opinion for City of Newport, Kentucky v. Iacobucci, Justice Brennan argued that municipalities should not be granted absolute immunity from punitive damages under Section 1983. He contended that such a blanket protection contradicts Congress's intent when it enacted this civil rights statute and undermines its purpose to deter state actors from violating individuals' constitutional rights. Additionally, he pointed out that there is no historical precedent supporting municipal immunity in similar contexts and warned against creating new forms of immunity without clear legislative guidance or compelling reasons grounded in public policy considerations. In his view, allowing cities to escape punishment for egregious misconduct would only encourage further abuses while leaving victims without adequate remedies.