California Punitives by Horvitz & Levy

  • Gullwing Int’l v. Ostermeier: $1 Million in Punitive Damages Affirmed

    I have some doubts about the analysis in this unpublished opinion issued yesterday by the California Court of Appeal (Second Appellate District, Division Two).

    The jury in this fraud case awarded $17.1 million in punitive compensatory damages and $1 million in punitive damages. Obviously that’s not the sort of ratio that raises eyebrows. Nevertheless, the defendant argued that the Court of Appeal should reverse the punitive damages award because the plaintiff failed to present evidence of the defendant’s net worth. As readers of this blog are aware, California punitive damages awards are commonly reversed on that basis.

    The Court of Appeal’s opinion here acknowledges that “‘[n]et worth’ has become the guidepost of punitive damages” in California. The opinion then goes on to say that the plaintiff sufficiently proved the defendant’s net worth by presenting evidence that the defendant received several million dollars in cash from the plaintiff, owned several airplanes, and sold a piece of commercial property for $2.1 million.

    The opinion makes no mention of any evidence regarding the defendant’s liabilities or expenses. It is well established under California law that evidence of income and assets alone, without evidence of liabilities and expenses, is not sufficient to prove net worth. (See Kelly v. Haag (2006) 145 Cal.App.4th 910, 917 [reversing punitive damage award with directions when plaintiff introduced evidence of the defendant’s assets, but “there was no evidence of any encumbrances on the [defendant’s] properties at the time of trial, or of other liabilities [defendant] may have had”].)

    Since we launched this blog in 2008, three other opinions have reversed punitive damages awards because the plaintiff’s evidentiary presentation did not include evidence of the defendant’s liabilities and expenses. This opinion stands alone in affirming an award without such evidence. Perhaps the plaintiff presented such evidence and the court simply didn’t mention it in the opinion. But if the plaintiff presented no such evidence, the opinion’s analysis is inconsistent with existing law.

    Also, the opinion seems to overlook the effect of the $17.1 million compensatory damages award on the defendant’s financial condition. Other California courts have said that the effect of the jury’s verdict should be considered when evaluating the defendant’s ability to pay punitive damages. (See Washington v. Farlice (1991) 1 Cal.App.4th 766, 776.) The size of the compensatory verdict in this case dwarfs all the other evidence of the defendant’s assets discussed by the Court of Appeal, but the opinion does not seem to take that into account.

    Fortunately, this opinion is unpublished, so the aspects of the opinion that seem to depart from existing law will not have any precedential effect.

  • Hur v. Lee: Employer Not Vicariously Liable for Punitive Damages

    Many of the cases we blog about raise unresolved issues on the margins of the law. Not this one. Here, the trial court seems to have overlooked one of the most basic principles of punitive damages law.

    California law has long provided that employers are not vicariously liable for punitive damages based on the acts of their employees. Punitive damages can be imposed against an employer only upon a finding that (1) an officer, director, or managing agent authorized or ratified the misconduct, or (2) the employer knowingly retained an unfit employee. (See Civil Code section 3294.)

    The trial court in this case found that a corporation failed to supervise one of its agents, who committed fraud. The trial court made no findings that any officer or managing agent personally participated in, authorized, or ratified the fraud, or that the corporation employed the agent with knowledge of his unfitness. Nevertheless, the court awarded $100,000 in punitive damages against the corporation.

    The Court of Appeal (Second Appellate District, Division Four) reversed the punitive damages in an unpublished opinion. The court correctly held that the trial court’s findings were sufficient to find the corporation liable for compensatory damages (under a theory of respondeat superior) but not punitive damages. This seems like such a straightforward and obvious result, I’m amazed the issue didn’t get resolved earlier in the litigation process.

  • Fisher v. Wells Fargo: $750k Punitive Damages Award is Excessive

    The California Court of Appeal (Fourth District, Division Two) issued this unpublished opinion last week, reducing a punitive damages award from $750,000 to $150,000 in a case involving $15,000 in compensatory damages.

    The opinion is not particularly noteworthy, although it does illustrate that in cases involving small compensatory damages, California appellate courts will often allow a higher than normal ratio of punitive damages to compensatory damages, but not as high as 50 to 1.

    This case involves the Fair Credit Reporting Act, which authorizes punitive damages for willful violations of the act. The jury found that the defendant, Wells Fargo, willfully violated the act by providing false information to TransUnion about plaintiff’s credit and failing to conduct a complete investigation when plaintiff complained.

    Wells Fargo appealed and the Court of Appeal rejected its argument that the record contained no evidence of a willful violation. But the court agreed with Wells Fargo that punitive damages award was excessive. The court said the defendant’s conduct was low on the “hierarchy of reprehensibleness” because it involved purely economic harm, did not reflect an indifference to health or safety, did not involve repeat offenses, and did not involve intentional malice, trickery, or deceit. The court also noted that the plaintiff failed to present evidence that it was financially vulnerable. I can’t think of any other opinions off the top of my head which have squarely held that plaintiffs have the burden of establishing their financial vulnerability for purposes of analyzing the reprehensibility of the defendant’s conduct.

    Discussing the issue of ratio, the court held that the 50-to-1 ratio in this case, like any ratio in excess of single digits, is presumptively suspect. The court stated that ratios in excess of single digits are sometimes permissible when the compensatory damages are unusually small, but the court did not view the $15,000 award in this case as small enough to warrant a larger ratio. The court nevertheless concluded that a 10-to-1 ratio would be permissible. Ordinarily such a high ratio would be reserved for only the most extremely reprehensible conduct, but the court allowed the high ratio presumably because of the relatively small amount of punitive damages.

  • Walmach v. Foster Wheeler: California May Punish for Out-of-State Conduct

    The California Court of Appeal (Second District, Division Three) issued this unpublished opinion today, affirming a $2 million punitive damages award. The court ruled that the trial court did not violate the Due Process Clause by imposing punitive damages for conduct that occurred outside of California.

    The defendant’s alleged misconduct in this case occurred in Washington, a state which does not allow punitive damages. On appeal, the defendant argued that California cannot impose punitive damages for conduct that occurred in another state. The defendant cited the statement in BMW v. Gore that “a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasors’ lawful conduct in other States.” The defendant also cited these statements in State Farm v. Campbell:

    A State may not punish a defendant for conduct that may have been lawful where it occurred . . . Nor, as a general rule, does a State have a legitimate interest in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State’s jurisdiction.

    The Court of Appeal rejected these arguments for multiple reasons.

    First, the court observed that the defendant’s conduct (manufacturing a defective product) was not in fact lawful in Washington. In Washington, as in California, selling a defectively designed product is a tort. In my view, that analysis is insufficient to resolve the issue, because it fails to address Campbell’scomment that a state generally has no legitimate interest in punishing lawful or unlawful out-of-state conduct.

    Second, the court held that California may legitimately punish a defendant for out-of-state conduct that causes injury in California. In this case, the plaintiff was a resident of California when he was injured by the defendant’s product. This seems like a more legitimate response to the BMW/Campbell extraterritoriality problem. In essence, the court is saying the conduct was not truly out-of-state conduct, because the plaintiff’s exposure and injury occurred in California.

    Third, the court observed that the defendant had not challenged the trial court’s jurisdiction, and had not argued that Washington law should govern this case. According to the court, because defendant did not challenge the application of California law, the comity and due process considerations discussed in BMW and Campbell did not prohibit the trial court from awarding punitive damages under California law. I am not quite sure about the validity of this argument. BMW and Campbell are based upon the principle of fair notice; a defendant cannot be punished unless it had fair notice that its conduct would be punishable. I don’t know how a court can say that a defendant operating in a state that does not allow punitive damages has fair notice that it might be subjected to punitive damages in another state decades later. If the defendant knowingly sold its product in California, that might provide a basis for concluding that the defendant had fair notice of potential liability for punitive damages under California law. But on a different set of facts, where the defendant does not intend or expect that its product will be used in another state, the imposition of punitive damages would seem to be a Due Process problem, even if that state may have personal jurisdiction over the dispute.

    In any event, this opinion is not likely to be the last word on these issues. Given the growing number of lawsuits being filed in California for conduct that occurred in other states, or even other countries, these issues are bound to recur.

  • Martin v. Harpaz: $6.6 Million in Punitive Damages Reversed Because of Insufficient Financial Condition Evidence

    The California Court of Appeal (Second Appellate District, Division One) issued this unpublished opinion yesterday, reversing a punitive damages award because the plaintiff failed to introduce sufficient evidence of the defendants’ financial condition. The punitive damages awards, against 5 different defendants, totaled $6.6 million.

    The plaintiff, apparently aware of California’s rule requiring plaintiffs to present meaningful evidence of the defendant’s financial condition, introduced some evidence of the defendants’ finances. The evidence showed the defendants had some large cash receipts for their business operations, but it also showed that the defendants’ had massive debts, and that some of the defendants had declared bankruptcy. Apparently, the plaintiffs offered no forensic accountant or other expert to estimate the defendants’ net worth.

    After a bench trial, the trial court awarded punitive damages awards based on its conclusion that none of the defendants’ testimony regarding their net worth was worthy of belief. Thus, the trial court seemed to mistakenly believe that the defendants, rather than the plaintiffs, had the burden of proof on this issue.

    The Court of Appeal reversed. It ordered all the punitive damages awards stricken from the judgment because the plaintiffs had failed to present evidence of the defendants’ net worth. By my quick count, this is the seventh unpublished California opinion this year reversing a punitive damages award because of the plaintiffs’ failure to present meaningful financial condition evidence.

  • Leonin v. Salapare: $25,000 Punitive Damages Award Reversed

    Here’s yet another unpublished opinion from the California Court of Appeal (Fourth Appellate District, Division Two) reversing a punitive damages award because the plaintiff failed to meet its burden of introducing sufficient evidence of the defendant’s financial condition. This seems to happen about once a month.

  • Yanes v. Orea: Punitive Damages Portion of Default Judgment Reversed

    The California Court of Appeal (Fourth Appellate District, Division Two) issued an unpublished opinion reversing the portion of a default judgment that awarded $411,688.79 in punitive damages. The plaintiff failed to serve a statement requesting a specific amount of punitive damages, which is a prerequisite to obtaining punitive damages by default. We have seen this before. (See our prior posts here and here.)

  • Griffin Dewatering v. Northern Ins.: $10 Million Punitive Damages Award Reversed

    The California Court of Appeal (Fourth District, Division Three) issued a published opinion on Friday, reversing an $11.1 million judgment, including $10 million in punitive damages.

    The court didn’t reach any punitive damages because it reversed the liability finding and directed entry of judgment for the defendant on all issues. I mention it here only because it was one of the largest punitive damages verdicts in California in 2005. (And because my firm represented the defendant).

  • Berry v. Taggart: Trial Court Properly Denied Motion to Strike

    The California Court of Appeal (First District, Division 1) issued this unpublished opinion, affirming a trial court order denying a defendant’s special motion to strike the plaintiff’s complaint under Code of Civil Procedure section 425.16 (the “anti-SLAPP” statute).

    I won’t delve into the anti-SLAPP aspects of this opinion, which are beyond the scope of this blog. For our purposes, its important to note only that an appellate court reviewing the denial of an anti-SLAPP motion must consider whether the plaintiff established a probability of prevailing on the complaint. With respect to the punitive damages allegation in the complaint, the defendant argued that the plaintiff could not prevail on its fifth cause of action for punitive damages because California law does not recognize a “cause of action” for punitive damages.

    The Court of Appeal agreed that there is no separate cause of action or tort for punitive damages under California law. But the court nevertheless concluded that the fifth cause of action in plaintiff’s complaint, although styled as a cause of action for punitive damages, actually stated facts sufficient to support a cause of action for malicious prosecution. The court went on to say that, because punitive damages are unquestionably recoverable in a malicious prosecution action, plaintiff had established a likelihood of obtaining punitive damages sufficient to defeat the defendant’s special motion to strike.

  • Superior Dispatch, Inc. v. Insurance Corp of New York: Trial Court Erred in Striking Punitive Damages Claim in Insurance Bad Faith Case

    The California Court of Appeal (Second District, Division 3) issued this published opinion yesterday, reversing a trial court’s grant of summary judgment to an insurer in an insurance bad faith suit.

    Among other things, the opinion states that the trial court erred in striking the plaintiff’s punitive damages claim because the facts alleged in the complaint would be sufficient to support a finding of “oppression,” one of the predicates to awarding punitive damages under Civil Code 3294.

    The punitive damages portion of the opinion is not particularly noteworthy. We mention it only in connection with our ongoing efforts to develop a complete picture of all the punitive damages decisions coming out of the California Court of Appeal.