California Punitives by Horvitz & Levy

  • Another unpublished opinion departs from precedent on the clear and convincing evidence standard (Sharim v. Amin)

    This unpublished opinion from the California Court of Appeal (Second Appellate District, Division Seven) is mostly unremarkable.  It addresses the sufficiency of the evidence to support a $500,000 punitive damages award, and finds ample evidence that the defendant committed fraud within the meaning of Civil Code section 3294.

    Yet one aspect of the court’s reasoning is a bit peculiar.  In a footnote, the court states that the “clear and convincing” evidence standard, which governs California punitive damages claims, does not apply in the Court of Appeal:

    Although the heightened “clear and convincing evidence” standard of proof applied to the trial court’s findings on punitive damages (see Civil Code, § 3294), that does not affect our standard of review on appeal in determining whether there is substantial evidence to support the court’s findings.

    That statement is contrary to the holdings of published cases.  (See, e.g. Shade Foods v. Innovative Products [“since the jury’s findings were subject to a heightened burden of proof, we must review the record in support of these findings in light of that burden . . . . we must inquire whether the record contains ‘substantial evidence to support a determination by clear and convincing evidence’”]; Pfeifer v. John Crane [“we review the evidence in the light most favorable to the Pfeifers, give them the benefit of every reasonable inference, and resolve all conflicts in their favor, with due attention to the heightened standard of proof“].)

    This is not the first time we have seen this.  When another unpublished opinion did this in 2008, the Supreme Court of California granted review on the issue.  That case was later dismissed when the parties settled, and we have since seen other unpublished opinions take the same approach. Nevertheless, we continue to believe that if courts are not going to follow existing law on this issue, they should publish their opinions and explain the basis for their differing view.  It is not as if the Court of Appeal in this case was unaware of the Shade Foods decision—the court cited Shade Foods on another point.

    The court’s footnote cites a 1973 Supreme Court opinion to support the notion that the clear and convincing evidence standard disappears when a case goes up on appeal.  But that opinion no longer reflects the Supreme Court’s view. The modern Supreme Court has taken the clear and convincing evidence standard into account when reviewing factual findings subject to that standard. (See Conservatorship of Wendland (2001) [“The ‘clear and convincing evidence’ test requires a finding of high probability . . . we ask whether the evidence [on the issue before the court] has that degree of clarity”]; Estate of Ford (2004) [finding that certain testimony “was not clear and convincing evidence” on the issue of equitable adoption].)

    If the defendant in this case petitions for review on this issue, it will be interesting to see if the California Supreme Court decides to take it up once again.

  • Punitive damages vacated because senior management did not approve misconduct of lower-level employees (Bryant v. SDG&E)

    This unpublished opinion is a useful reminder of the principle that, under California law, punitive damages are not available against an employer for an employee’s misconduct unless the employer’s upper-level management authorized, ratified, or committed the misconduct.

    In this wrongful termination case, a jury awarded the plaintiff $860,000 in compensatory damages and $1.3 million in punitive damages.  The California Court of Appeal (Fourth District, Division One) vacated the punitive damages award because the plaintiff failed to prove that the employer’s management either participated in or approved the misconduct at issue. At trial, the plaintiff identified a specific member of the employer’s management team who purportedly approved the malicious and oppressive treatment of the plaintiff.  But the plaintiff apparently realized his argument on that point was weak, so on appeal he placed the blame on three additional members of the management team.

    The Court of Appeal, however, refused to consider the three new individuals.  (“We do not consider whether Aguilar, Heiner, and DaSilva were managing agents as they were not presented as such to the jury.”)  That approach is consistent with the general principle of California appellate procedure that a party cannot change its factual theory of the case on appeal.  Our courts will not affirm a jury verdict based on theories not litigated below, because that would unfairly deprive the opposing party of the opportunity to develop the evidence on that new factual issue.

    The Court of Appeal agreed that the one individual identified at trial (Boland) was indeed a managing agent within the meaning of Civil Code section 3294(b).  But the court found no evidence that Boland, who made the final decision to terminate the plaintiff’s employment, had any actual knowledge of any malicious or oppressive conduct by his subordinates who recommended firing the plaintiff.  In the absence of any awareness by the managing agent of the “outrageous character” of the actions of the lower-level employees, the punitive damages could not stand.

  • Court of Appeal reverses $32.5 million punitive damages award due to lack of financial condition evidence (Soto v. Borg-Warner)

    Over the years we have reported on a lot of California appellate opinions that reversed a punitive damages award because the plaintiff failed to present meaningful evidence of the defendant’s financial condition.  This unpublished opinionis especially notable, and not just because it involves an enormous punitive damages award.  The opinion contains a road map for how plaintiffs can conduct discovery of the defendant’s finances without risking the sort of forfeiture that occurred here.

    Readers of this blog are well aware that in California, plaintiffs have the burden of presenting evidence of the defendant’s financial condition as a prerequisite to recovering punitive damages.  But plaintiffs cannot seek pretrial discovery of the defendant’s finances without first obtaining a court order.  To obtain such an order, plaintiffs must demonstrate a substantial probability of prevailing on their punitive damages claim.  (Civil Code section 3295(c).)

    Many plaintiffs choose not to seek a court order.  Instead, they wait until the jury makes a finding that the defendant acted with malice, and then then ask the defendant to immediately produce its financial condition information.

    One problem with that approach is that the defendant, without knowing in advance what information the plaintiffs are seeking, may not be in a position to immediately produce the information that the plaintiffs are seeking.  In this case, for example, the plaintiffs asked the defendant to produce a witness who resides in Michigan and could not reasonably be expected to appear the next day in a California courtroom without any advance notice.

    Another problem is that the defendant may not possess the requested information.  For example, plaintiffs often ask for a balance sheet, but some defendants, especially individuals and closely held corporations, may not have any balance sheet.  Defendants are not required to manufacture evidence in order to respond to a discovery request.  Plaintiffs need to gather whatever documents are available, depose witnesses, and perhaps involve a forensic accountant in order to get an accurate picture of the defendant’s finances.  That is difficult to do in the middle of trial.

    So what is the alternative?  According to this opinion, if a plaintiff does not obtain a court order before trial permitting financial condition discovery, the plaintiff should at least take advantage of the subpoena process provided by Civil Code section 3295(c).  The plaintiff can issue subpoenas to the defendant requiring it to be prepared to produce financial condition information if and when it becomes necessary, and the defendant may be required to identify relevant documents and witnesses who can testify on the issue of financial condition.  Another alternative is to reach a stipulation with the defendant, who would agree to gather specific documents, bring them to trial under seal, and make them immediately available in the event the jury makes a finding of malice.  If the plaintiff sits back and does nothing to initiate financial condition discovery until after the jury’s finding of malice, the plaintiff is at the mercy of the court’s discretion whether to delay the proceedings to permit discovery.

    In this case, the plaintiffs chose the “do nothing” strategy.  They did not seek pretrial discovery of the defendant’s financial condition, did not use the statutory subpoena procedure, and did not reach a stipulation with the defendant.  When the jury found malice and the plaintiffs requested financial information that was not immediately available, the trial court declined to exercise its discretion to delay the trial to permit the plaintiffs to complete their discovery.  (The plaintiffs did not even ask for that—the court raised the idea and then rejected it.)  The best the plaintiffs could do was present an expert to testify about the financial condition of the defendant’s parent company.  That expert was able to provide only a little information about the actual defendant; the expert testified about the defendant’s revenues from one line of business, but could not shed any light on the defendant’s liabilities or expenses.

    The Court of Appeal (Second Appellate District, Division Four) found the plaintiff’s showing wholly inadequate to support an award of punitive damages: the expert’s testimony “at most demonstrated that some portion of [defendant’s] business turned a profit.  It did not provide any of the requisite current information about [defendant]’s overall financial condition outside [that product] line.”

    The Court of Appeal concluded that the plaintiffs, not the defendants, were responsible for this absence of evidence:

     [P]laintiffs erroneously believed the financial information they obtained through publicly available channels would be sufficient until [defendant] pointed out, on the eve of the punitive damages phase, that their expert had analyzed the wrong company. The court was not obligated to accommodate plaintiffs’ last-minute attempt to obtain the correct information through traditional discovery channels. There was no indication that [defendant] in any way hampered or even opposed plaintiffs’ efforts to obtain the information in a more timely fashion. To the contrary, the record reflects that plaintiffs did not undertake any effort to obtain the information at an earlier juncture, whether by issuing a subpoena, seeking a stipulation, or a making a motion pursuant to Civil Code section 3295, subdivision (c). (See Kelly, supra, 145 Cal.App.4th at pp. 919- 920.) Instead, they assumed [the defendant] would simply come forward with the information, unprompted. “Whatever merit there might be to that approach in other cases, it was an unfortunate choice in this one.” (Amoco Chemical Co. v. Certain Underwriters at Lloyd’s of London, England (1995) 34 Cal.App.4th 554, 562.) By all indications, plaintiffs had a full and fair opportunity to engage in discovery but elected to take the wait-and-see approach. They must bear the consequences of the resultant evidentiary shortfall. (See Baxter, supra, 150 Cal.App.4th at p. 681; Kelly, supra, 145 Cal.App.4th at p. 920; contra Mike Davidov Co., supra, 78 Cal.App.4th at pp. 609-610; Green v. Laibco, LLC, supra, 192 Cal.App.4th at pp. 453-454.)

    As a result, the Court of Appeal completely vacated the $32.5 million punitive damages award.  Because the plaintiffs had a chance to conduct proper discovery and failed to do so, they are not entitled to go back and try again.

  • Court of Appeal affirms reduction of punitive damages to a 1-to-1 ratio (Banks v. General Atomics)

    A few years ago, we observed a mini-trend of California courts reducing punitive damages to match the amount of the compensatory damages, at least in cases involving substantial compensatory damages awards.  That trend reached its peak in 2009 when the California Supreme Court imposed a 1-to-1 ratio in Roby v. McKesson.

    Ironically, we haven’t seen many 1-to-1 ratios from the California Court of Appeal in the years since Roby.  But in this unpublished opinion, the Court of Appeal (Fourth District, Division One) affirms a trial court’s decision that ordered a remittitur of a punitive damages award from $5.8 million to $2.9 million, resulting in a 1-to-1 ratio.

    The plaintiff argued on appeal that the trial court went too far in imposing a 1-to-1 ratio.  The plaintiff pointed to provisions in the Labor Code authorizing double damages for comparable misconduct, and cited the U.S. Supreme Court’s statements that courts should defer to legislative judgments regarding the appropriate level of punishment (see State Farm v. Campbell at p. 528). According to the plaintiff, “[Labor Code] section 972’s penalty of double damages contemplates the precise 2-to-1 ratio of punitive to compensatory damages the jury originally awarded.”

    That argument backfired.  The Court of Appeal agreed with plaintiff that Labor Code section 972 offers an appropriate analogy, but the court observed that the plaintiff’s math was wrong.  Double damages result in a 1-to-1 ratio, not a 2-to-1 ratio.  Therefore, the Court of Appeal concluded that the Labor Code only provided further support for the trial court’s imposition of a 1-to-1 ratio.

  • Breaking news: Court of Appeal reverses $21 million punitive damages award in published opinion (Doe v. The Watchtower Bible and Tract Society)

    A few years ago we reported on a $21 million punitive damages award in a sexual abuse case against a congregation of Jehovah’s Witnesses and that group’s nationwide organization.  The Court of Appeal’s online docket indicates that the court (First Appellate District, Division Three) has reversed the award in a published opinion.  The court hasn’t yet released its opinion.  Stay tuned.

    UPDATE (3:45 pm): the opinion is now available here.  More details to follow.

    APRIL 14 UPDATE:  The opinion reveals that the Court of Appeal vacated the punitive damages award because the award rested entirely on a failure-to-warn theory, and the court ruled that the defendants owed no duty to warn.  So the court never reached the question of whether the award was supported by evidence of malice, nor did the court have any occasion to address the size of the award (which had already been reduced from $21 million to $8.6 million as the result of the defendant’s post-trial motions in the trial court).

  • Court of Appeal affirms trial court order that vacated $15 million punitive damages award against Donald Sterling

    A few years ago we blogged about this case in which actress Robyn Cohen won a $17.3 million judgment against Donald Sterling, former owner of the Los Angeles Clippers.

    The plaintiff, who is best known for appearing with Bill Murray in The Life Aquatic with Steve Zissou, claimed that a fire in her Sterling-owned apartment building caused her emotional distress and derailed her acting career. As noted in our prior post, the trial court ruled that one of the plaintiff’s substantive claims was not supported by the evidence, and the court ordered a complete new trial on all the remaining claims because he could not determine the extent to which the unsupported claim influenced the jury.

    Yesterday the California Court of Appeal (Second Appellate District, Division Five) issued an unpublished opinion affirming the trial court’s order.  The opinion illustrates how difficult it is to overturn a new trial order.  The Court of Appeal explained that the plaintiff had to show that the record provided no possible basis for granting a new trial.  She could not meet that burden because the jury’s verdict did not reveal what conduct was the basis for the jury’s punitive damages award.  The trial court properly ordered a complete new trial on all issues, rather than a retrial limited to punitive damages, because a second jury could not properly assess punitive damages without knowing what specific conduct the first jury thought supported liability, or what specific conduct the first jury thought was punishable.

    Full disclosure: Horvitz & Levy represented Sterling in the post-trial motions and on appeal.

  • Court of Appeal publishes two previously unpublished opinions; topics include discovery of financial information and premature entry of judgment

    In the past two days the California Court of Appeal ordered publication of two punitive damages opinions that were previously designated as unpublished.

    We described the first case, I-CA v. Palram, in some detail here.  The opinion has a fairly lengthy discussion of the procedures that govern discovery of a defendant’s financial condition.

    We haven’t previously discussed the other case, Baker v. Castaldi.  There, the trial court purported to enter judgment after the first phase of a bifurcated trial.  The judgment awarded compensatory damages to the plaintiff but left the issue of punitive damages unresolved.  The trial court apparently intended to enter a second judgment after the second phase of trial.  The defendant appealed from the judgment but the Court of Appeal dismissed the appeal on the ground that there was no final judgment.  Under California’s “one final judgment” rule, a purported judgment that does not resolve all the issues in the case is not truly a judgment and is therefore not appealable.

    It may seem obvious that a trial court should not enter judgment until the case is over. But in our experience, the problem of premature judgments is a recurring one in California.  Some of our trial judges mistakenly believe that they should immediately enter judgment after a jury verdict, even if the final rights of the parties have not yet been decided.

    Premature entry of judgment is a big problem for defendants, because California judgments are immediately enforceable when entered.  For that reason, the defendant may be forced to file an appeal and post an appeal bond in order to stay enforcement of the so-called judgment (and incur substantial expense in the form of bond premiums and attorneys’ fees), even though the defendant fully expects the Court of Appeal to dismiss the appeal.

    Full disclosure: Horvitz & Levy LLP requested publication of both opinions.

  • California Court of Appeal affirms dismissal of punitive damages claims, clarifies rules for discovery of financial condition information (I-CA Enterprises v. Palram Americas)

    This unpublished opinion has a lot of interesting stuff and is worth discussing at some length.

    The plaintiff, a California business, contracted with the defendants, two unrelated Israeli manufacturers.  The contracts permitted the plaintiff to distribute the defendants’ products in the U.S.  For a time, the plaintiff sold the products of one company to the other.  Eventually, the two companies started doing business directly with each other, cutting the plaintiff out of the loop.  The plaintiff sued both of them, claiming that each one intentionally interfered with the other’s contract with the plaintiff.

    The trial was bifurcated.  In the first phase, the jury decided that the two defendants were both liable for $225,000 in damages for intentional interference with contractual relations. 

    The plaintiff wanted to proceed to a second phase of trial to seek punitive damages against both defendants.  But the plaintiff had no evidence regarding the financial condition of Defendant 1.  The plaintiff had asked Defendant 1 to turn over its financial condition before trial, but Defendant 1 had refused.  The plaintiff renewed its request after the conclusion of the first phase of trial, and Defendant 1 refused again.

    When the plaintiff moved to compel Defendant 1 to turn over all documents relating to its finances, the trial court denied the motion on three grounds: (1) Defendant 1 was a foreign corporation and the court lacked the power to compel nonresidents to attend trial or produce documents; (2) the plaintiff’s request failed to specify exactly what documents the plaintiff was seeking; and (3) the plaintiff had forfeited its right to conduct financial condition discovery by bringing its motion on the eve of the second phase of trial. The trial court then granted nonsuit in favor of Defendant 1 on the issue of punitive damages, because the plaintiff could not possibly satisfy its burden or presenting meaningful evidence of Defendant 1’s financial condition.

    The plaintiff proceeded with its punitive damages claim against Defendant 2 and the jury awarded $3 million.  The trial court, however, granted Defendant 2’s motion for judgment notwithstanding the verdict (JNOV), finding that the plaintiff had presented no substantial evidence of malice, oppression, or fraud.

    The plaintiff appealed, challenging the trial court’s rulings as to both defendants. The Court of Appeal (Second Appellate District, Division Two) rejected the plaintiff’s arguments.

    Discovery of financial condition evidence

    The Court of Appeal found no error in any of the trial court’s reasons for denying the plaintiff’s motion to compel Defendant 1 to produce its financial condition evidence.  The Court of Appeal held that the trial court had no power to compel a foreign defendant to produce its financial records.  More importantly, the court held that the trial court was within its discretion to deny the plaintiff’s motion as untimely.  The court noted that Civil Code section 3295, subdivision (c), permits a plaintiff to bring a motion to obtain pretrial discovery of the defendant’s financial condition evidence.  Because the plaintiff failed to exercise that right, the trial court was within its discretion to rule that the plaintiff’s discovery request on the eve of the second phase of trial was too late.

    This is a significant holding.  In our experience, plaintiffs often seek discovery of financial condition evidence after the first phase of trial, just as the plaintiff did here.  This is the first opinion we’ve seen holding that a trial court can properly deny such requests as untimely.

    The Court of Appeal also ruled that the trial court did not err in excluding a Dun & Bradstreet report that the plaintiff had offered up as evidence of Defendant 1’s financial condition evidence.  The report was hearsay. Although experts are ordinarily allowed to rely on inadmissible evidence in forming their opinions, the trial court did not abuse its discretion in holding that the plaintiff’s expert could not testify about the Dun & Bradstreet report, because the jury would be likely to place too much emphasis on that hearsay document, in the absence of any admissible evidence regarding the defendant’s finances.

    Sufficiency of the evidence

    The Court of Appeal also found no error in the trial court’s granting of JNOV to Defendant 2.  Notably, the court agreed with the plaintiff that Defendant 2 had made intentional misrepresentation (viewing the record in the light most favorable to the plaintiff).  But the court held that those misrepresentations could not support a punitive damages award because the plaintiff failed to show that it relied on them, or that they otherwise harmed the plaintiff:  “While there is a level of deceit that is evidence form [Defendant 2]’s actions . . . this pretense did no harm to [plaintiff], as required by Civil Code section 3294.”

  • California Court of Appeal vacates punitive damages awards of $3 million and $275,000 due to insufficient evidence (Wilson v. So. Cal. Edison; Union Central Cold Storage v. RDM)

    The California Court of Appeal issued two opinions this week vacating punitive damages awards based on insufficient evidence.

    In the first case, the Court of Appeal (Second District, Division Seven) issued an unpublished opinion vacating a $275,000 punitive damages award because the plaintiff failed to present meaningful evidence of the defendant’s financial condition. We have noted before that a surprising number of punitive damages awards are vacated on that basis every year.  Often a plaintiff will present evidence of the defendant’s assets or income, but fail to present any evidence of liabilities or expenses.  Amazingly, the plaintiff in this case “presented no relevant evidence” whatsoever, according to the court.

    In the second case, the Court of Appeal (Second District, Division Four) issued a published opinion vacating a $3 million punitive damages award because the plaintiff failed to prove that the defendant engaged in punishable conduct. The plaintiff claimed that Southern California Edison failed to maintain an electrical substation, causing stray electrical currents to enter her home.  Plaintiff presented evidence that Edison’s management was aware of the problem of stray electricity at the plaintiff’s property.  But their awareness arose only in the context of the company’s efforts to mitigate the problem to ensure that there was no danger to anyone on the property.  Thus, plaintiff failed to prove that the corporate management acted with malice, oppression, or fraud as Civil Code section 3294 requires.

  • California Court of Appeal reinstates $1.2 million punitive damages award in sexual harassment case (Shank v. CRST Van Expedited)

    The plaintiff in this case, a former employee of a trucking company, claimed that her supervisor repeatedly subjected her to unwanted sexual advances.  She obtained a jury verdict for $391,000 in compensatory damages, $1.17 million in punitive damages against her former employer, and $3,500 in punitive damages against her individual supervisor.

    The employer filed post-trial motions to challenge the verdict.  The trial court agreed that the plaintiff failed to prove that the employer acted with malice, oppression, or fraud.  As a result, the court granted judgment notwithstanding the verdict (JNOV) on the issue of punitive damages against the employer, wiping out the jury’s $1.17 million award.

    The plaintiff appealed, arguing that the trial court erred in granting the JNOV motion.  The California Court of Appeal (Fourth Appellate District, Division Three) agreed with the plaintiff in this unpublished opinion.

    The court began its analysis by noting that the supervisor unquestionably engaged in malice and oppression; throughout a 28-day training period, he made numerous unwanted sexual advances towards the plaintiff.

    The question then became whether the employer could be punished for ratifying the supervisor’s misconduct.  The Court of Appeal concluded that the company’s human resources a director was a managing agent within the meaning of Civil Code section 3294, and that the human resources director ratified the supervisor’s conduct by failing to investigate the plaintiff’s complaints.  That failure to investigate was directly contrary to the company’s written policies for responding to and preventing sexual harassment.

    The employer argued on appeal that the company did not need to investigate in this particular instance because because the plaintiff did not complain about the harassment until after she left the company.  The Court of Appeal rejected that argument, holding that “there is no applicable law or evidence that once an employee leaves an investigation is unnecessary.”

    The Court of Appeal then reversed the trial court’s JNOV, reinstating the full amount of the jury’s punitive damages award.  That will be a bitter pill for the corporation’s board of directors, who probably thought they had protected the company from this type of award by adopting a policy that required a thorough investigation of any harassment claims.