A story in today’s Hollywood Reporter describes 21st Century Fox’s efforts to avoid a $128 million punitive damages award imposed by an arbitrator.  As we described in this earlier post, an arbitrator found that Fox underpaid royalties to the stars and creator of the show Bones  Fox is now challenging the punitive damages award in superior court, arguing that the arbitration agreement expressly prohibits “punitive relief.”

A story in today’s Hollywood Reporter describes 21st Century Fox’s efforts to avoid a $128 million punitive damages award imposed by an arbitrator.  As we described in this earlier post, an arbitrator found that Fox underpaid royalties to the stars and creator of the show Bones  Fox is now challenging the punitive damages award in superior court, arguing that the arbitration agreement expressly prohibits “punitive relief.”

One of our readers sent us an email with an interesting question about whether the law permits enforcement of contractual provisions that purport to limit or eliminate punitive damages claims.  I must confess I’m not aware of any authority directly addressing this question, but here are my initial thoughts:

The issue probably doesn’t come up very often, because in most if not all U.S. jurisdictions, punitive damages are unavailable in a lawsuit for breach of contract. For that reason, parties to the contract would not ordinarily include any provisions in the contract regarding punitive damages.

Despite the unavailability of punitive damages for breach of contract, parties to a contract might want to include a provision about punitive damages, in anticipation of the possibility that one of the parties might sue the other for a tort claim independent of the contract.  In California, we have a statute that prohibits releases that are intended to “exempt” a party from responsibility for his own fraud or willful misconduct. (California Civil Code section 1668.)  Some might argue that, under section 1668, contracts purporting to eliminate liability for punitive damages would be unenforceable because punitive damages necessarily involve willful conduct.  But that argument would work only if a court construes a contractual limitation on one element of damages to be an “exemption” from responsibility. Arguably, a limitation is not the same as an exemption. I am not aware of any case addressing that question.

Arbitration contracts are one type of contract for which limits on punitive damages might be enforceable,  because arbitration contracts are subject to special deference. The California Supreme Court has held that arbitration clauses cannot eliminate “statutorily imposed remedies such as punitive damages and attorney fees.”  (Armendariz v. Foundation Health (2000) 24 Cal.4th 83, 103.)  But in Armendariz the plaintiff’s liability claim was based on a statute (the California Fair Employment and Housing Act).  What happens when a plaintiff is asserting a common law tort claim?  The plaintiff in such a case might say that the language in Armendariz, taken literally, prohibits any sort of arbitration clause eliminating punitive damages, since all punitive damages claims in California are statute-based (Civil Code 3294).  But if that’s what the California Supreme Court meant, why didn’t they just say that?  The Court’s focus on statutory-based claims suggests their analysis might be limited to that context.  Even if Armendariz applies to all types of punitive damages claims, there would still be an argument that an arbitration clause limiting (as opposed to eliminating) punitive damages would still be permissible. 

These are just my preliminary thoughts.  If any readers have thoughts or are aware of relevant authorities, I’d love to hear about them.  Thanks to professor François Xavier Licari, of the University of Metz law faculty, for raising the issue.

The Los Angeles Times reports on a recent arbitration award of $9 million in damages, of which $8.4 million was punitive damages, against Health Net for canceling plaintiff’s coverage while she was undergoing chemotherapy. Generally, an arbitration award is extremely difficult to set aside merely because of legal error. However, this case may raise an interesting issue that is percolating through courts around the country regarding whether the due process review of punitive damage awards applies to punitive damages awarded in an arbitration.

A California Court of Appeal opinion, Rifkind & Sterling, Inc. v. Rifkind (1994) 28 Cal.App.4th 1282, 1291-1292 held that the process of “confirming an arbitration award and converting it into a judicial judgment constitutes state action” which requires a “traditional measure of due process.” However, the court concluded under the then-existing punitive damages due process cases, due process did not require any heightened review of a punitive damages award in arbitration. At the time Rifkind was decided the federal due process clause merely required some review of punitive damages awards and had not yet become a significant substantive check on punitive damages awards. (See, e.g., Honda Motor Co. Ltd. v. Oberg (1994) 512 U.S. 415, 432 [114 S.Ct. 2331, 129 L.Ed.2d 336]; Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. 1, 18, 20, 21-22 [111 S.Ct. 1032, 113 L.Ed.2d 1].)

Since Rifkind was decided in 1994, there has been a sea change in the law with respect to the significant limits the due process clause places on punitive damages awards. (See, e.g., BMW of North America, Inc. v. Gore (1996) 517 U.S. 559, 574-575 [116 S.Ct. 1589, 134 L.Ed.2d 809]; Cooper Industries v. Leatherman Tool (2001) 532 U.S. 424, 436 [121 S.Ct. 1678, 149 L.Ed.2d 674]; State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408, 418 [123 S.Ct. 1513, 155 L.Ed.2d 585] Williams v. Philip Morris (2007) ___ US ___ [127 S.Ct. at p. 1062].)

Thus, there is a strong argument that since enforcing an arbitration award involves state action, subjecting it to due process review, arbitration awards of punitive damages should be evaluated the same way any other punitive damage award awarded during a trial would be. So far, three courts have considered this question in the post-BMW environment, and there is a nationwide split of authority. (See Birmingham News Co. v. Horn (Ala. 2004) 901 So.2d 27, 66 [holding that judgments confirming arbitration awards constitute state action, thus warranting “review of the awards under governing federal due-process considerations”]; but see MedValUSA Health Programs, Inc. v. MemberWorks, Inc. (2005) 273 Conn. 634, 641 [872 A.2d 423]; Davis v. Prudential Securities, Inc. (11th Cir. 1995) 59 F.3d 1186, 1192.)

At some point, the United States Supreme Court may need to resolve this split.

Full disclosure: I am currently handling an appeal, Raymond v. Flynt, in the California Court of Appeal raising this issue.