We have reported on many cases in which the California Court of Appeal reversed a punitive damages award because the plaintiff failed to present meaningful evidence of the defendant’s ability to pay.  In this case, however, the court rejected that type of challenge to a sizable punitive damages award.

The plaintiff claimed that an art dealer misrepresented the value of works he sold to the plaintiff.  The jury awarded the plaintiff over $6 million in compensatory damages and another $5.65 million in punitive damages. The defendant argued on appeal that the punitive damages award should be reversed in its entirety because the plaintiff presented insufficient evidence of the defendant’s financial condition, but the Court of Appeal (Second Appellate District, Division Three) concluded in a five-page unpublished opinion that it could not evaluate that issue because the appellate record was inadequate.  The court said that the defendant failed to provide a reporter’s transcript of the trial proceedings, thereby preventing the court from determining whether the testimony provided by the plaintiff, if any, was sufficient.

The $7.5 million punitive damages verdict in this case was #10 on our list of the biggest punitive damages verdicts in California in 2012.  Four years later, only $150,000 of that award survived appeal.

The plaintiff brought a personal injury action against a medical device manufacturer (Breg) and the doctor (Chao) who recommended and sold the device.  The jury awarded roughly $5.8 million in compensatory damages, plus $7 million in punitive damages against Breg and $500,000 against Chao. Both defendants appealed.

In a partially published opinion, the California Court of Appeal (Fourth Appellate District, Division One) reversed.

It tossed the entire punitive damages award against Breg, because the plaintiff’s intentional concealment against Breg was not supported by substantial evidence. The jury’s malice finding against Breg was based solely on that claim, so without it there could be no punitive damages as to Breg.

As for Chao, the court found that both the compensatory damages and the punitive damages were excessive.  California courts rarely reverse non-economic damages as excessive, but the court concluded that $5.1 million awarded by the jury for plaintiff’s pain and suffering was simply too much.  Although plaintiff sustained an injury that required multiple surgeries, by the time of trial she was suffering only “minimal physical discomfort, intermittent curtailment of daily activities, and some anxiety over the condition of her scar.”  The court ordered a new trial, subject to the plaintiff’s agreement to accept a reduction of the compensatory damages to $1.3 million.

We have previously observed that California courts are divided on whether an appellate court should automatically reverse a punitive damages award after making a substantial reduction to the compensatory damages award.  In our view, the better reasoned answer is “yes.”  Punitive damages are supposed to bear a reasonable relationship to the plaintiff’s actual harm.  Juries are instructed to make that determination in every case, and the defendant is entitled to have the jury decide that issue in the first instance.

This court, however, took the alternative approach, and held that the Chao was not entitled to have a jury decide the reasonable relationship question in the first instance.  In other words, no automatic reversal of the punitive damages.  Instead, the court held Chao would be entitled to a reversal only if the court determined that the punitive damages were excessive, taking into account the reduced compensatory award.  Fortunately for him, the court answered that question in the affirmative.  The court held that the $500,000 punitive damages award against Chao was excessive as a matter of state law.  The court noted that the award exceeded 14% of Chao’s net worth, and that California courts have held that anything over 10% is presumptively excessive.  The court ordered a new trial, subject to plaintiff’s acceptance of a reduction of the punitive damages to $150,000, which is roughly 5 percent of Chao’s net worth.

Having found the punitive damages excessive under state law, the court did not consider Chao’s alternative argument that the award was also excessive as a matter of federal due process.

This unpublished opinion reverses a punitive damages award because the plaintiff failed to present meaningful evidence of the defendant’s financial condition at the time of trial.  That holding is nothing unusual.  What is unusual, however, is that the Court of Appeal (Fourth Appellate District, Division Three) gave the plaintiff a do-over on that element of proof.

Under longstanding California law, plaintiffs who fail to carry their burden of proof are not entitled to a “second bite at the apple.”  (Kelly v. Haag (2006) 145 Cal.App.4th 910, 919-920; see also these four unpublished opinions.)  If the plaintiff had a full and fair opportunity to prove the defendant’s financial condition and failed to do so, there is no reason to give the plaintiff a second chance.  The Court of Appeal should reverse the punitive damages award and direct the trial court to enter judgment for the defendant on that issue.

In this case, however, the Court of Appeal sends the case back to the trial court to allow the plaintiff to conduct further discovery in order to present the evidence she neglected to present the first time around.  The opinion does not explain why the court departed from the usual rule, which raises the question whether anyone briefed this issue, and whether the Court of Appeal was made aware of the usual rule.  The defendant may want to consider a petition for rehearing.

This unpublished opinion from the California Court of Appeal (Second Appellate District, Division Two) affirms a $125,000 punitive damages award. In the process, the court makes a peculiar statement that seems contrary to published authority.

The defendant argued on appeal that the award was excessive under state law because it was disproportionate to his ability to pay.  According to the defendant, the $427,926 compensatory damages award completely wiped out his net worth, leaving him with no ability to pay an additional award of punitive damages.

The court refused to consider the compensatory damages award when evaluating the defendant’s financial condition.  The court cited cases stating that the defendant’s financial condition should be measured “at the time of trial.”  Thus, the court concluded that a judgment entered after trial cannot be considered.

That doesn’t seem quite right.  Under California law, the purpose of considering the defendant’s financial condition is to ensure that a punitive damages award does not destroy the defendant financially.  To figure out whether the defendant will be destroyed, the court needs to consider the impact of the entire judgment.  For example, the Court of Appeal in Washington v. Farlice, in deciding whether a $125,000 punitive damages award was excessive, evaluated the defendant’s financial condition by taking into account the value of the defendant’s interest in real property after the jury found during the first phase of trial that the defendant’s interest should be cut in half.

The court here was correct to consider the finances “at the time of trial,” but there is no reason why that should not include the verdict that was rendered during the trial.  In any event, this opinion is unpublished and unciteable, leaving Washington v. Farlice as the law of the land on this issue.

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.

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.”

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.

This unpublished opinion is the latest example of the California Court of Appeal vacating a punitive damages award because the plaintiff failed to present meaningful evidence of the defendant’s financial condition.

The defendant testified that she owned a home and paid cash for it.  But the Court of Appeal (Fourth District, Division Two) said that evidence was not nearly sufficient to support a punitive damages award; the plaintiff presented no evidence of the value of the house, the defendant’s other assets or liabilities, or her income and expenses.  As a result, the court vacated $50,000 in punitive damages.