'Special justification' and punitive damages [MCLE]

Litigation

March 2017

By Rex Heeseman

With reference to an award of punitive damages, the blockbuster opinions of BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), and State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003), stressed the "reprehensibility" of the defendant's conduct, and the comparison between the actual or compensatory damages and the punitive damages (aka the "ratio" or the "multiplier"). Over the past 10 years in this key area of law, almost all appellate activity in California has taken place before the state Courts of Appeal. The California Supreme Court, though, has promulgated: Simon v. San Paolo U.S. Holding Co., Inc., 35 Cal. 4th 1159 (2005) (due to jury's assessment of $5,000 in "economic compensatory damages," "maximum award constitutionally permissible in the circumstances of this case is $50,000 in punitive damages"); Johnson v. Ford Motor Co., 35 Cal. 4th 1191 (2005) (recidivism "may justify greater punishment"); and Roby v. McKesson, 47 Cal.4th 686 (2009) (as compensatory and punitive damages each total slightly over $1.9 million, 1:1 ratio appropriate).

Now, Nickerson v. Stonebridge Life Ins. Co., 63 Cal. 4th 363 (2016), has entered this arena. Citing Gore, the initial sentence observed "the due process clause of the Fourteenth Amendment to the United States Constitution prohibits its states from imposing 'grossly excessive punitive damages awards.'" Citing Simon, the California Supreme Court later remarked "ratios between the punitive damages award and the plaintiff's actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification, cannot survive appellate scrutiny under the due process clause."

After making other but similar remarks about punitive damages, the court turned to the issue at hand: "In determining whether a punitive damages award is unconstitutionally excessive, Brandt fees may be included in the calculation of the ratio of punitive to compensatory damages, regardless of whether the fees are awarded by the trier of fact as a part of its verdict or are determined by the trial court after the verdict has been rendered." This will be important in some trials because, for purposes of the "ratio," plaintiffs' attorneys obviously want to increase the amount of compensatory damages.

On remand, the Court of Appeal recently again considered this lawsuit. Nickerson v. Stonebridge Life Ins. Co., 5 Cal. App. 5th 1 (2016). The evidence reflected that, after purchasing a policy which paid $350 each day of hospital confinement, Nickerson submitted a claim for 109 days at a VA hospital. The insurer allowed only 18 days on the ground he suffered no injury requiring "inpatient acute care" after Feb. 29. However, it seemed clear the policy did not so limit the hospitalization coverage; and, according to the treating physician, Nickerson could not have been safely discharged at that time.

At the trial, as a matter of law the judge assessed $31,500 in unpaid policy benefits. The jury then awarded $35,000 in emotional distress damages and, after finding the "fraud" requirement of Civil Code Section 3294, $19 million in punitive damages. The parties stipulated to Brandt fees of $12,500. The trial judge reduced the punitives to $350,000.

At the remand, Nickerson challenged the trial judge's reduction to a 10-to-1 ratio. The insurer replied that ratio was too high, as he suffered only noneconomic damages and insufficient evidence supported the fraud verdict. The court disagreed. Instead, now adding in the Brandt fees of $12,500, which raised the compensatories total to $47,500 ($35,000 plus $12,500), the court concluded the punitives should total $475,000, again a 10-to-1 ratio.

Nickerson asserted the trial judge's assessment of more policy benefits should also be part of the "ratio" analysis. The court disagreed, observing the judge "properly declined to include the policy benefits in its ratio calculation as punitive damages are not authorized in contract actions." Still, plaintiff attorneys have sometimes pushed this tack and will do so in the future, contending such benefits are part of the insured's compensatories claim with respect to the tortious breach of the implied covenant (in place of a breach of the policy).

Additionally, Nickerson contended that, as the compensatories were of a "small size," this insurer would simply consider that a cost of "doing business." The ratio should therefore be higher to achieve a more effective deterrent. The court responded that, while the insurer "may fold this award into its costs of doing business, we also agree with the trial court that we are constrained by case law and the Constitution .... We have considered these facts in our analysis. We conclude that 10:1 is the maximum constitutionally defensible ratio."

For purposes of illustration, the past handful of years has witnessed at least the appellate blessing of two large punitive damages awards and/or ratios: a mesothelioma case, Izell v. Union Carbide Corp., 231 Cal. App. 4th 962 (2014) ($18 million in punitives) and, a smoking case, Bullock v. Philip Morris USA, 198 Cal. App. 4th 543 (2011) (Bullock III) ($13.8 million in punitives, with 16:1 ratio).

In a 2-1 vote, Izell affirmed the judge's court's ruling (after a remittitur) awarding $6 million in compensatory damages and $18 million in punitive damages. The dissenter agreed on "all issues except the affirmance of the $18 million punitive damages award."

On appeal, Union Carbide contended the compensatories "consisted entirely of noneconomic damages," which mandated a lesser, even a 1:1, ratio. And, after taking into account Union Carbide's comparative fault, the ratio was not 3:1, but actually 4.62 to 1. Yet, that ratio increase and related arguments did not bother the majority because Union Carbide's "long-standing culpability" was "so reprehensible." Moreover, Union Carbide's "net worth of $4.2 billion" was "a permissible consideration under the due process clause in determining the amount of punitive damages necessary to further the state's legitimate interest in punishment and deterrence." So, leaving the punitives alone was the correct path.

Interestingly, Bullock III was also decided in a 2-1 vote by the same court, Division Three of the 2nd District Court of Appeal. That decision declared "the extreme reprehensibility of Philip Morris's misconduct including the vast scale and profitability of its course of misconduct, and its financial condition justify the $13.8 million punitive damages award .... We do not meant to suggest that 16 to one would be an appropriate ratio in another case."

(Parenthetically, in Bullock I, the compensatories totaled $850,000, and the majority affirmed the trial judge's 33:1 ratio. The California Supreme Court later vacated Bullock I. (Obviously, that Court of Appeal decision, reported at 138 Cal. App. 4th 1029, is no longer viable.) Bullock II, 159 Cal. App. 4th 655 (2008), reversed and remanded for a new trial solely "limited to the amount of punitive damages." That lead to the jury's $13.8 million award, which the trial judge upheld and the majority affirmed in Bullock III. (The dissenter throughout the Bullock litigation consistently urged a 9:1 ratio.))

Should any punitive damages decision involving a cigarette or an asbestos manufacturer be placed in a separate category or satisfy the "special justification" standard? Such trials often focus upon "cover ups" and huge profits over years. Furthermore, in contrast to many recent decisions about punitive damages (e.g., an office building's sale in Simon), smoking and asbestos echo "physical harm" and "reckless disregard," two of the five reprehensibility standards.

The California Supreme Court has addressed "physical harm" in other areas. In an employment case, Roby said the harm "was physical in the sense that it affected [the plaintiff's] emotional and mental health, rather than being a purely economic harm." But as "there is no indication of repeated wrongdoing," that conduct was at "the low end" of the reprehensibility range. A point also made by the Izell majority.

The court has used the phrase "special justification" a handful of occasions, but what does it mean? As plaintiffs' counsel like to note, Campbell said the "precise award in any case, of course, must be based upon the facts and circumstances of the defendant's conduct and the harm to the plaintiff." And, that opinion added "there are no rigid benchmarks that a punitive damages award may not surpass, and ratios greater than those we have previously upheld may comport with due process where 'a particularly egregious act'" has taken place.

More clamor for larger awards of punitive damages? The "battle" may turn on the presence (or not) of a "particularly egregious act" or "extreme reprehensibility." (If so, the key may be what do these terms mean?) Although the future is difficult to predict, let alone fathom, such contentions are quite probable.

It seems that plaintiffs and defendants are essentially free in many lawsuits to advance a variety of contentions in the punitive damages arena. Stay tuned.

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