California Punitives by Horvitz & Levy

  • Court of Appeal affirms $1 million punitive damages award in fraud case (Melvin v. Harkey)

    In this unpublished opinion the Fourth Appellate District, Division Three, rejects a defendant’s argument that a jury award of $1 million in punitive damages should be reversed because the plaintiffs failed to prove malice, oppression, or fraud.  The court finds sufficient evidence in the record that the defendant, the owner of an investment firm, engaged in a Ponzi scheme and maliciously disregarded the rights of his investors.

    In the process, the Court of Appeal makes some unfortunate comments about the role of the clear and convincing evidence standard of proof in punitive damages cases, and how it impacts appellate review.

    As we have noted in the past, published opinions have repeatedly held that the clear and convincing evidence standard applies both on appeal and in the trial court, and requires appellate courts to decide whether a reasonable jury could find that the plaintiff’s evidence met the clear and convincing standard.  (See, for example, this recent opinion and this one.)  This opinion, however, perpetuates the contrary (and outdated) view that the clear and convincing standard applies solely to the trier of fact, and does not play any role on appeal.

  • Court of Appeal affirms $1 million punitive damages award in fraud case (Melvin v. Harkey)

    In this unpublished opinion the Fourth Appellate District, Division Three, rejects a defendant’s argument that a jury award of $1 million in punitive damages should be reversed because the plaintiffs failed to prove malice, oppression, or fraud.  The court finds sufficient evidence in the record that the defendant, the owner of an investment firm, engaged in a Ponzi scheme and maliciously disregarded the rights of his investors.

    In the process, the Court of Appeal makes some unfortunate comments about the role of the clear and convincing evidence standard of proof in punitive damages cases, and how it impacts appellate review.

    As we have noted in the past, published opinions have repeatedly held that the clear and convincing evidence standard applies both on appeal and in the trial court, and requires appellate courts to decide whether a reasonable jury could find that the plaintiff’s evidence met the clear and convincing standard.  (See, for example, this recent opinion and this one.)  This opinion, however, perpetuates the contrary (and outdated) view that the clear and convincing standard applies solely to the trier of fact, and does not play any role on appeal.

  • Court of Appeal vacates punitive damages in case where jury awarded $75 million (City of Modesto v. Dow)

    This partially published opinion issued yesterday contains an interesting discussion of California’s “managing agent” requirement.  As we have discussed in prior posts, California law does not permit punishment of corporations for the acts of non-managerial employees.  Civil Code section 3294 requires plaintiffs seeking punitive damages to prove that the misconduct at issue was committed (or authorized or ratified) by an officer, director, or managing agent of the corporation.

    The California Supreme Court has set a fairly high bar for proving that a corporate employee qualifies as a managing agent within the meaning of section 3294.  The employee must have authority to create “formal policies that affect a substantial portion of the company and that are the type likely to come to the attention of corporate leadership.”  (See Roby v. McKesson.)

    Recent cases have applied this standard inconsistently.  One decision last summer found that an employee who merely applied company policy qualified as a managing agent. Another decision a few months ago ruled that employees who applied corporate policy were not managing agents because they did not have the discretion to create company policy.

    Yesterday’s decision arises from a long and complex procedural history, most of which is not relevant to the subject of this blog.  What’s important for our purposes is that a jury in a groundwater contamination case, the City of Modesto won a jury award of $3.1 million in compensatory damages against various defendants, and $75 million in punitive damages against one defendant (Dow).

    The City’s punitive damages claim against Dow rested on the premise that Dow sold dry cleaning chemicals and knowingly provided inadequate instructions regarding the proper use and disposal of the chemicals, which ultimately led to the contamination of groundwater supplies in Modesto.

    The trial court reduced the punitive damages awards during the posttrial proceedings, ruling that any amount in excess of $5,444, 221 (four times compensatory damages) would violate due process.

    The City and Dow both appealed.  The City sought reinstatement of the jury’s $75 million punitive damages award, and Dow argued that it was entitled to judgment in its favor on the issue of punitive damages because the City failed to satisfy the managing agent requirement.

    The Court of Appeal (First Appellate District, Division Four) agreed with Dow and vacated the punitive damages award in its entirety.  The court rejected the City’s argument that Dow’s “product stewards” qualified as managing agents. Product stewards were responsible for knowing and understanding the health, safety, and environmental effects of Dow’s chemical products. They were involved in the preparation of Dow’s communications with its customers, including instructions on how users could properly dispose of chemicals.  But the Court of Appeal found no evidence that the product stewards had “broad discretion” or “ultimate authority” regarding Dow’s communications, as the City contended.

    Having concluded that the product stewards did not qualify as managing agents, and finding no other evidence of any culpable officer, director, or managing agent, the Court of Appeal vacated the jury’s award of punitive damages against Dow.

    Notably, the Court of Appeal took the clear and convincing standard of proof into account when evaluating the sufficiency of the evidence on the managing agent issue.  That approach is well grounded in California case law, but not every Court of Appeal has adhered to it, as we have noted.

    Unfortunately, the entire punitive damages discussion in this opinion has been designated “not for publication.”

    Disclosure: Horvitz & Levy LLP represented Dow as consulting counsel on appeal.

  • Court of Appeal affirms directed verdict on punitive damages in insurance dispute (Vardanyan v. AMCO Insurance)

    This unpublished opinion by the California Court of Appeal concludes that the plaintiff presented some evidence that his insurer made mistakes, but the mistakes were not egregious enough to support punitive damages.

    The plaintiff owned a rental home that had some serious problems.  Parts of the house were sinking, water damage and termite damage were popping up throughout, every room was moldy, and the front door would not open.  The plaintiff’s insurer declined to provide coverage for the needed repairs, on the ground that the damage was caused in party by non-covered hazards.

    When the plaintiff sued for breach of contract and bad faith, the trial court granted a directed verdict for the defense.  The Court of Appeal (Fifth Appellate District) reversed and ordered a new trial, ruling that the plaintiff should have been allowed to argue to the jury that he was entitled to coverage if the damage was predominately caused by a covered hazard.

    The Court of Appeal also ruled, however, that the plaintiff could not seek punitive damages in the retrial.  The court concluded that the plaintiff failed to make a case for punitive damages during the first trial and was not entitled to a do-over on that issue.  According to the court, the plaintiff’s evidence “may be consistent with some improprieties in claims handling, but it does not rise to the level of reprehensibility necessary to support an award of punitive damages.”

    Notably, the Court of Appeal stated it analyzed the plaintiff’s evidence while keeping in mind the “clear and convincing” standard of proof.  Contrast that statement to this recent unpublished opinion, which said that the clear and convincing evidence standard does not apply on appeal.  So far, the docket in that case does not indicate that the defendant has asked the California Supreme Court to review that issue.

  • 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.

  • Court of Appeal reissues opinion approving jury instruction on clear and convincing evidence (Nevarrez v. San Marino Skilled Nursing)

    In June we reported on this case, in which the defendant challenged the wording of CACI 201, the pattern jury instruction that defines “clear and convincing evidence.”  After our initial post, the Court of Appeal granted rehearing to reexamine a different aspect of the case.

    The court has now reissued its published opinion. It contains the same analysis of CACI 201, i.e., the opinion once again holds that CACI 201 is correct as written and should not be augmented to reflect the definition of clear and convincing evidence set forth by the California Supreme Court in In re Angelia P.

  • Court of Appeal affirms $14.5M punitive damages award in asbestos case (Pfeifer v. John Crane)

    The California Court of Appeal issued this 68-page published opinion today, affirming a $14.5 million punitive damages award.

    The opinion might not remain on the books for long, for reasons having nothing to do with the court’s punitive damages analysis.  The opinion addresses an issue that’s already before the California Supreme Court in another matter, Webb v. Special Electric.  Both cases raise the following question: when a supplier sells a product to a purchaser who is already aware of dangers of the product, can the supplier still be liable for failure to warn?  Because that issue is already before the court in Webb, there is a strong chance the court will grant John Crane’s petition for review (assuming it files one) and hold this case pending the disposition in Webb.

    Aside from that “sophisticated purchaser” issue, there is a lot of interesting stuff in this opinion. I won’t attempt to summarize all 68 pages, but here are some highlights of the punitive damages analysis:

    1.  The opinion states that reviewing courts should take the “clear and convincing” evidence standard into account when deciding whether a plaintiff presented substantial evidence of malice, oppression, or fraud.  As we have noted in prior posts, other recent published cases have said the same thing, but some recent unpublished opinions have disagreed.

    2.   The opinion concludes that the record in this case supports the jury’s finding of malice, because the plaintiffs presented evidence that John Crane knew its customers used its products in ways capable of generating dangerous levels of asbestos dust. 

    3.  The opinion rejects John Crane’s argument that the trial court erred by ordering John Crane to disclose information about its financial condition during trial, after the jury found that John Crane acted with malice.  John Crane argued that the plaintiffs were not entitled to that information because they failed to follow the procedure spelled out in Civil Code section 3295(c) for requesting pretrial discovery of financial condition information.  The opinion follows the holding of Mike Davidov Co. v. Issod, which said that a court can order the defendant to produce its financial condition evidence during trial, after a finding of malice, so long as the trial court allows the defendant sufficient time to gather its records.

    4.  The opinion rejects John Crane’s argument that its financial condition was insufficient to support the punitive damages award.  According to the plaintiffs’ expert, John Crane had $403 million in assets and nearly $16 million in cash on hand, but had a negative net worth of $125 million.  The opinion observes, however, that John Crane’s net worth would be a positive $98 million if not for its  asbestos-litigation liabilities.  And the opinion observes that the jury’s award of $14.5 million is only six percent of the funds John Crane set aside for payment of asbestos litigation.  Based on these observations, the opinion concludes that John Crane could afford to pay the award without being destroyed.  

    5.  The opinion rejects John Crane’s argument that California’s punitive damages statute, Civil Code section 3294, is unconstitutionally vague as applied to this case.

    6.  The opinion holds that the jury’s $14.5 million award was not excessive.  The opinion compares that amount to the $6.2 million compensatory damages owed by John Crane (after reduction to reflect the jury’s allocation of fault), and concludes that the resulting ratio of 2.3 to one is not excessive, considering the highly reprehensible nature of John Crane’s conduct.

    We will keep tabs on this one to see if the Supreme Court grants review.

  • Court of Appeal approves pattern jury instruction on “clear and convincing” evidence (Nevarrez v. San Marino Skilled Nursing)

    This is not a punitive damages case. But it merits discussion here because it addresses the adequacy of the official California jury instruction on the clear and convincing evidence standard of proof, which applies in all punitive damages cases.

    This is not the first time the California Court of Appeal has considered how courts should explain the clear and convincing evidence standard to jurors. Far from it. Back in the early 1990’s, the Second Appellate District, Division Three, criticized the definition of clear and convincing evidence set forth in BAJI No. 2.62, the pattern instruction in use at the time. That instruction defined clear and convincing evidence as “evidence of such convincing force that it demonstrates, in contrast to opposing evidence, a high probability of the truth of the fact[s] for which it is offered as proof.”

    In a case called Mock v. Michigan Millers Mutual, Division Three said the BAJI No. 2.62 definition was too weak, because it did not reflect the stringent standard established by the California Supreme Court in In re Angelia P.: “so clear as to leave no substantial doubt”; “sufficiently strong to command the unhesitating assent of every reasonable mind.”

    A few years later, however, Division Three backed away from that criticism in a 2-1 decision. In that case, Mattco Forge v. Arthur Young & Co., the court said that the In re Angelia P. formula was too close to the “reasonable doubt” standard used in criminal cases.

    In 2003, the Judicial Council approved the CACI instructions as the official preferred jury instructions for use in California. The CACI instructions contained a definition of clear and convincing evidence that was even weaker than the BAJI formulation that Division Three criticized in Mock.  CACI No. 201 says that clear and convincing evidence means “that the party must persuade you that it is highly probable that the fact is true.” By watering down the definition of clear and convincing evidence, the CACI instructions arguably opened the door to revisiting the Mock/Mattco Forge debate. Indeed, we are aware of several cases in which trial courts agreed to give special instructions on this issue because they concluded that the standard set forth in CACI No. 201 is inadequate.

    Today, however, the Court of Appeal (Second Appellate District, Division Four) gave CACI No. 201 its blessing in this published opinion. The opinion acknowledges the history on this issue, but declines to embrace the Mock rationale. Instead, the opinion follows the reasoning of Mattco Forge and holds that the trial court properly rejected the defendants’ proposed special instruction, which incorporated the In re Angelia P. definition of clear and convincing evidence.

    We decline to hold that CACI No. 201 should be augmented to require that “the evidence must be ‘so clear as to leave no substantial doubt‘ and ‘sufficiently strong as to command the unhesitating assent of every reasonable mind.’ ” Neither In re Angelia P., supra, 28 Cal.3d 908, nor any more recent authority mandates that augmentation, and the proposed additional language is dangerously similar to that describing the burden of proof in criminal cases. (Mattco Forge, supra, 52 Cal.App.4th at p. 849.) The trial court did not err in rejecting it.

    We wouldn’t be surprised to see this case end up in the California Supreme Court.

  • Does the “clear and convincing evidence” standard of proof for punitive damages make any difference?

    In California and many other U.S. jurisdictions, plaintiffs seeking punitive damages must meet a higher burden of proof than the usual “preponderance of the evidence” standard that applies to civil cases.  Plaintiffs must prove by clear and convincing evidence that the defendant engaged in punishable misconduct.  That higher standard of proof is thought to provide defendants with a significant procedural protection against unwarranted punitive damages.

    But how does this play out in practice?  Does empirical data confirm that juries are less likely to award punitive damages when the plaintiff is saddled with a higher burden of proof?  The answer is “no,” according a recent study entitled Jurors’ Use of Standards of Proof in Decisions about Punitive Damages, published in Behavioral Sciences and the Law.  Here’s the abstract of the article:

    Standards of proof define the degree to which jurors must be satisfied that a fact is true, and plaintiffs in civil lawsuits assume the burden of proving their claims to the requisite standard of proof. Three standards—preponderance of evidence, clear and convincing evidence, and beyond a reasonable doubt—are used by different jurisdictions in trials involving liability for punitive damages. We investigated whether individual mock jurors apply these standards appropriately by instructing them to read two personal injury trial summaries and to use one of three standards in either qualitative or quantitative format when deciding punitive liability. Results showed that jurors tended not to incorporate the standard into their judgments: defendants were just as likely to be found liable when the plaintiff’s burden was high (“beyond a reasonable doubt”) as when the burden was low (“preponderance of evidence”). The format of the instruction also had a negligible effect. We suggest that nonuse of the standard of proof is related to jurors’ preferences for less effortful or experiential processing in situations involving complicated or ambiguous material.

    That’s sobering stuff for defendants facing punitive damages in California.  Worse yet, some of our appellate courts have held that the clear and convincing evidence standard is irrelevant in appeal challenging the sufficiency of the plaintiffs’ evidence of malice, oppression, or fraud.  In other words, according to those courts, if the plaintiff fails to meet its higher burden at trial but the jury awards punitive damages anyway, there is absolutely nothing the defendant can do about it.  Some of our appellate courts, however, have rejected that notion and held that the sufficiency of the evidence must be measured through the prism of the clear and convincing standard.  Our Supreme Court granted review to resolve that split a few years ago but dismissed review when the parties settled the case.  We assume they’ll take the issue up again when the right vehicle comes along.  

    Hat tip: Robert Richards on Twitter

  • Unpublished opinion addresses standard of review issue that has divided California appellate courts (Romandia v. Engineered Polymer Solutions, Inc.)

    California appellate courts disagree about whether the “clear and convincing” evidence standard, which normally applies to punitive damages determinations, should apply to judicial review of the sufficiency of the evidence to support a punitive damages award.

    Some courts have said yes.  (See, e.g. Shade Foods [“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’”]; Hoch v. Allied Signal [“a nonsuit on the issue of punitive damages is proper when no reasonable jury could find the plaintiff’s evidence to be clear and convincing proof of malice”].)

    Other courts have said no.  (E.g, Lopez v. Bimbo Bakeries [clear and convincing standard “does not alter our standard of review”].)

    The California Supreme Court has said both yes and no, in different cases.  (Compare Converatorship of Wendland [discussing the clear and convincing evidence standard and stating, “[a]pplying that standard here, we ask whether the evidence . . . has that degree of clarity . . .”] with In re Marriage of Saslow [heightened standard exists “‘for the edification of and guidance of the trial court,’ not as a standard for appellate review”].)

    This unpublished opinion from the Third Appellate District says no, and says that a trial court erred when it took the “clear and convincing” standard into account when granting JNOV for the defense. 

    The requirement that Romandia meet that higher burden of proof . . . was relevant only to the jury’s determination of the case. Once the jury decided that Romandia had proven by clear and convincing evidence that Valspar acted with oppression, fraud, or malice, that higher burden of proof “disappear[ed]” . . . and had no bearing on the trial court’s review of the jury’s decision on a motion for JNOV.

    The court did not cite any of the authorities going the other way on this issue.

    If the defendant asks the California Supreme Court to resolve this split, there’s a decent chance the Supreme Court will grant review.  It granted review on this same issue a few years ago, but dismissed review when the parties settled that case.

    Related posts:

    Review Dismissed in Harvey v. Sybase

    Predicting the Outcome in Harvey v. Sybase Based on California  Supreme Court Precedent

    Harvey v. Sybase: California Supreme Court Grants Review In Case With Punitive  Damages Issue