It wasn’t enough to balance California’s budget, but the $700 million punitive damages jury verdict in favor of the California Department of Insurance (DOI) would have been a welcome addition to state coffers. A 9th Circuit Court of Appeals opinion in Poizner v. Artemis S.A., however, put the kibosh on that, affirming a trial court order vacating the jury’s verdict.

The federal appellate court reviewed a judgment arising out of the 1991 insolvency and subsequent rehabilitation of the Executive Life Insurance Company following what the court characterized as the largest insurance failure in California history. The DOI sued a variety of entities that had bid for the right to assume the insolvent insurer’s assets and preside over the rehabilitation, which was deemed a resounding success both for the former Executive Life policyholders as well as for the defendant entities, which reportedly made hundreds of millions of dollars from appreciation of Executive Life’s junk bond portfolio. The basis for the DOI suit was the claim that purchasing entities had engaged in an unlawful conspiracy that improperly wrested the winning bid from another contender. The jury agreed, but awarded $0 in compensatory damages (because misrepresentations by the defendants had not actually harmed Executive Life)—but then awarded $700 million in punitive damages. The trial court struck the punitive award, but awarded $241 million on an equitable restitution claim. On appeal, the court rejected the DOI’s effort to reinstate the punitive damages award, and disappointed the DOI further by reversing the $241 million, remanding the case for further proceedings. (At least the DOI collected $680 million in pretrial settlements.)

Ordinarily, an order striking a punitive damages award where there are no compensatory damages would seem unremarkable, but as the 9th Circuit noted, the figures at stake in this case are enough to make one look very, very closely, even if ultimately the result remains the same. As the court put it:

Although the numbers in this case are breathtaking, California law is well-established and quite clear. Where the jury here explicitly found “$0” of compensatory damages, the general rule precludes punitive damages. [Citation.] The $0 figure assessed by the jury is striking because the district court clearly instructed the jury on the availability of nominal damages: “If you find for the plaintiff but you find that the plaintiff has failed to prove damages as defined in these instructions, you must award nominal damages.” The jury explicitly declined to award nominal damages, instead awarding “$0” compensatory damages as urged by counsel for Artemis. The California rule that might authorize $700 million in punitive damages if the jury awards $1, but no punitive damages if the jury awards nothing, may seem harsh. But the rule is no less a rule when it prohibits large punitive awards than when it prohibits much smaller punitive awards.

In arriving at this result, the court distinguished Gagnon v. Cont’l Cas. Co., 211 Cal. App. 3d 1598, 1603 n.5 (1989), in which a California appellate court held “an actual award of compensatory damages is not necessary; rather the plaintiff need only prove that he or she suffered damages or injury.” The 9th Circuit noted that Gagnon addressed a situation where harm was shown but damages were barred by statute. Here, the court explained, “The Commissioner has not persuaded us that the reasoning of Gagnon should extend to this case where compensatory damages, even nominal damages, were legally available and explicitly sought by the Commissioner.” The court also rejected the DOI’s argument, based on Ward v. Taggart, 51 Cal. 2d 736, 743 (1959), that the district court’s restitution award could serve as the anchor for the punitive damages verdict:

Ward is distinguishable on two grounds. First, Ward, like Gagnon, is a case where the compensatory damages sought by the plaintiff were legally unavailable. Here, lost profit compensatory damages were legally available and explicitly sought by the Commissioner, yet the jury declined to award even nominal compensatory damages. Second, the jury in Ward found that all of the elements of fraud, including harm, were proven against the defendant. Here, . . . [defendant Artemis] had no legal liability for its own misrepresentation or concealment. The Commissioner sought restitution based on the same record evidence of Artemis’ intentional misrepresentation and concealment. The district court ultimately awarded restitution calculated to disgorge only a portion of the profit that the Commissioner sought as compensatory damages. Permitting the restitution award in this case to serve as a predicate for the jury’s punitive damages award would cast doubt on the equity in the district court’s award and would potentially result in a windfall to the Commissioner. [fn. omitted] We conclude that California courts would not extend the reasoning of Ward to permit restitution to serve as the predicate for punitive damages where a defendant is not legally liable for fraud and a jury has expressly awarded “$0” in compensatory damages.

The DOI won’t be giving up yet, however. Because the district court erroneously precluded the DOI from putting on one part of its case, the 9th Circuit remanded the matter for further proceedings at which punitive damages could again be awarded: “We reverse the Post-Verdict Order and remand for a new damages phase trial limited to proffer of the NOLHGA Premise and a determination of damages (including punitive damages), if any, on that theory.”

Back in 2005 when the jury’s verdict came down, my co-blogger Curt Cutting was quoted as questioning whether the punitive damages award would pass muster. The appellate court’s treatment of the award is discussed in a Mercury News article and in a Business Insurance news piece, which offer more details about the history of the protracted litigation.