In this unpublished opinion, the Fourth Appellate District, Division One, upheld an order granting a new trial on the issue of punitive damages. The plaintiffs, movie theater employees, claimed they were subjected to a hostile work environment and discrimination because of their gender. The jury agreed and awarded a total of $1.4 million in compensatory damages to the four plaintiffs, plus a total of $6 million in punitive damages.

The trial court granted a new trial on the punitive damages, on the ground that the award was excessive in light of the defendant’s financial condition. The Court of Appeal agreed. Although the plaintiffs pointed to the defendant’s annual revenues of over $20 million, the Court of Appeal said that was only “half the equation,” because it ignored the defendant’s expenses and liabilities. Taking everything into account, the defendant had a negative net worth (-$300,000) and a negative annual income. Thus, the Court of Appeal concluded that “the $6 million punitive damages total far exceeded UltraStar’s ability to pay and the jury clearly should have reached a different verdict.”

Incidentally, the plaintiffs made an unsuccesful argument that illustrates a pattern in cases like this. The plaintiffs, citing Mike Davidov Co. v. Issod (2000) 78 Cal.App.4th 597, argued that the defendant forfeited its right to challenge the award as excessive in relation to its net worth. In the Mike Davidov case, the court found a waiver because the defendant refused to comply with a court order directing it to turn over evidence of its financial condition. Plaintiffs who fail to present sufficient evidence of the defendant’s financial condition (as required by a unique rule of California procedure that plaintiffs frequently overlook), often attempt to save their punitive damages claim by citing the Mike Davidov case and arguing forfeiture, even where, as here, they never obtained any court order requiring the defendant to turn over financial condition information. In keeping with the pattern, the Court of Appeal rejected the plaintiffs’ argument because of there was no evidence the defendant violated any court order: “this contention is not supported by any references to the record showing that UltraStar failed to respond to a valid court order to produce financial records.”

In this unpublished decision, the California Court of Appeal (Second Appellate District, Division Four) reversed two $40,000 punitive damages awards because the plaintiffs failed to present evidence of the defendants’ financial condition. As we observed in a previous post, California has a unique requirement that a plaintiff must introduce evidence of the defendant’s financial condition in order to recover punitive damages. The California Supreme Court announced this rule in 1991, but as we said in our prior post, “every year there are a few appellate decisions reversing a punitive damages award on this basis.” Perhaps we underestimated, since this is already the second such decision this year.

The Stahl opinion also illustrates the operation of procedural forfeiture rules that may be surprising to those who are unfamiliar with this area of litigation. The plaintiffs argued that the defendants forfeited their objection to the lack of financial condition evidence by not raising that point in the trial court. The court rejected the plaintiff’s forfeiture argument because this particular issue need not be raised in the trial court to preserve it for appeal. On the other hand, the court agreed with the defendants’ argument that the plaintiffs had forfeited their counter-argument that their failure to present financial condition evidence was due to the defendant’s noncompliance with subpoenas for the information. In other words, the defendants did not need to raise their argument in the trial court, but the plaintiffs needed to anticipate the argument and make their counter-arguments in the trial court.

While these forfeiture rules may seem counterintuitive at first, they flow logically from the rule that the plaintiff has the burden of introducing financial condition evidence, and the rule that a defendant can always challenge a plaintiff’s failure to present substantial evidence, even if that issue wasn’t raised below. On appeal, the plaintiff is not in a position to complain about the belated challenge to the sufficiency of the evidence, since the plaintiff was on notice all along that it had to prove the elements of its claim. Nevertheless, this is an area of the law where the forfeiture rules can present a trap for the unwary plaintiff.

This opinion is unpublished, but notable for a few reasons.

First, the punitive damages verdict was a big one – $20 million. Compared to roughly $750,000 in compensatory damages, that’s a ratio of about 27 to one. The trial court reduced the punitive damages to $3.5 million (a ratio of 4.7 to one) and both sides appealed.

Second, the Court of Appeal vacated the punitive damages award in its entirety because the plaintiff failed to meet his burden of proving the defendant’s financial condition. California has a unique requirement that a plaintiff must introduce evidence of the defendant’s financial condition in order to recover punitives. The evidence must provide meaningful insight on the defendant’s ability to pay, as of the time of trial. Evidence of earnings or assets, without evidence of liabilities, is not enough. The California Supreme Court announced this rule in 1991, but every year there are a few appellate decisions reversing a punitive damages award on this basis. Here, plaintiff introduced evidence of the defendant’s income a few years before trial, but did not prove the defendant’s net worth at the time of trial. Because of that, the plaintiff is out $3.5 million.

Incidentally, this case featured two prominent California appellate lawyers: professor Erwin Chemerinsky for the plaintiff and former appellate justice Dan Kolkey for the defense.