This unpublished opinion addresses a significant recurring issue in California punitive damages litigation, and should be published. 

A jury awarded $15 million in compensatory damages and $15 million in punitive damages against J-M Manufacturing, a company that sold asbestos-containing pipes in the early 1980s.  The jury found that the plaintiff was exposed to dust from the pipes while he was overseeing construction sites and watching other workers cut those pipes.  

The plaintiffs’ claim for punitive damages was not based on the conduct of any particular corporate officer, director, or managing agent.  Instead, they treated the defendant as a monolithic entity.  They argued that  “they” engaged in despicable conduct, without specifying exactly who “they” were.

On appeal, when the defendant pointed out the absence of evidence of wrongdoing by an officer, director, or managing agent, as required by Civil Code section 3294, the plaintiffs argued that they did not need to present such evidence under the circumstances of this case.  Citing Romo v. Ford Motor, they argued they could obtain punitive damages by proving that the entire organization acted with malice, without identifying any particular individual who did so.  

We have seen this argument repeatedly from plaintiffs in California products liability cases. The Court of Appeal here (Second District Division One) rejected it, correctly recognized that what Romo actually held is that a plaintiff can satisfy the managing agent requirement “through evidence showing the information in possession of the corporation and the structure of management decisionmaking that permits an inference that the information in fact moved upward to a point where corporate policy was formulated.  These inferences cannot be based merely on speculation, but they may be established by circumstantial evidence, in accordance with ordinary standards of proof.”

Because the plaintiffs here had presented no evidence about the “structure of management decisionmaking” they could not take advantage of this aspect of Romo.  Accordingly, due to a total lack of evidence to satisfy the managing agent requirement, the Court of Appeal vacated the punitive damages award.

UPDATE (2/19/21):  This opinion has now been certified for publication.  

This unpublished opinion is worth a read for anyone litigating a California punitive damages case involving a “managing agent” issue under Civil Code section 3294.

The facts are complicated but here’s a simplified recap:  Plaintiff was an online merchant who accepted credit card payments. Plaintiff sent its credit card transactions to the defendant, a bank.  The transactions were processed by an intermediary, who was secretly pocketing a percentage of the transactions.  The plaintiff caught on and sued the bank for fraud, claiming the intermediary was the bank’s agent.  The bank argued that the intermediary was actually the plaintiff‘s agent.  A jury sided with the plaintiff, awarding $1.5 million in compensatory damages and $7.5 million in punitive damages.

The trial judge, Michael J. Raphael (who is now a Court of Appeal justice), granted the defendant’s JNOV motion and vacated the punitive damages.  He ruled that the bank could not be liable for punitive damages because the intermediary was not a managing agent of the bank. In so doing, he correctly anticipated the Supreme Court’s holding in Conservatorship of O.B., and took the clear-and-convincing evidence standard into account when evaluating the sufficiency of the evidence.

The plaintiff appealed, arguing that the trial court applied the wrong standard in its JNOV order because it focused too much on the small number of accounts that the intermediary handled, in comparison to the bank’s overall business.  The Court of Appeal (Second District, Division Four) rejected that argument because the trial court’s analysis was squarely in line with the Supreme Court’s decision in White v. Ultramar, which held that a managing agent must have the ability to affect a “substantial portion” of the defendant’s business.    

The plaintiff also argued that the trial court, when it ruled on the JNOV, should not have applied the holding in Roby v. McKesson that a managing agent must be in a position to create “formal policies that affect a substantial portion of the company.”  The plaintiff argued that standard was inapplicable because the jury was not instructed on it.  That argument was actually adopted by a different Court of Appeal last year in a published opinion. (See Colucci v. T-Mobile [refusing to follow the Roby standard because it was not set forth in jury instructions].)  In this case, however, the Court of Appeal didn’t buy it.  The court held that nothing about the holding of Roby is inconsistent with the standard CACI jury instruction that tells jurors to consider whether a managing agent has the power to determine corporate policy.  Therefore, the court was correct to consider Roby‘s guidance when evaluating the sufficiency of the evidence under that standard.

The Third Appellate District issued this published opinion on July 2.  I’ve been delayed in writing about it, but it is one of the more interesting California punitive damages decisions in recent memory.

The Court of Appeal granted writ relief, reversing the denial of the defendant’s motion for summary adjudication on punitive damages.  That alone is pretty rare in California.  In the ten years of this blog’s existence, we have seen only a handful of writs granted on that basis.

The case arose out of the 2015 wildfire known as the Butte Fire, which caused widespread damage in Northern California.  Contractors working for PG&E removed two trees that were too close to a power line.  Removal of those trees left a third tree exposed and unsupported, causing it to lean towards the path of the sun until it eventually toppled and hit the power lines, sparking the fire.

The plaintiffs, who suffered personal injuries and property loss in the fire, sued PG&E for negligence, trespass, nuisance, and various other claims.  They sought punitive damages on the theory that PG&E acted in conscious disregard of the risks of wildfires.  The plaintiffs acknowledged that PG&E had a wildfire management program that involved inspecting and removing trees, but the plaintiffs argued that PG&E failed to ensure that the contractors’ employees were properly trained.

PG&E moved for summary adjudication on the issue of punitive damages, presenting evidence of its extensive wildfire management efforts.  The trial court denied the motion, ruling that a reasonable jury could conclude that PG&E’s program was inadequate and that PG&E deliberately failed to adopt a more robust program.  PG&E petitioned the Court of Appeal for writ relief.

The Third District granted PG&E’s petition and directed the trial court to dismiss the punitive damages claim.  The court said PG&E met its initial burden by presenting evidence of its extensive efforts to mitigate the risk of wildfires, at a cost of more than $190 million per year.

The burden then shifted to the plaintiffs to present sufficient evidence to demonstrate a triable issue of fact on whether PG&E acted with malice.  The court concluded that, even viewing the evidence in the light most favorable to the plaintiffs, no reasonable factfinder could find that the plaintiffs had presented clear and convincing evidence of malice.

First, the court found that many of plaintiffs’ criticisms of PG&E’s fire management efforts could not support an award of punitive damages because many of the asserted defects in PG&E’s programs had no connection to the fire in this case.  That’s an important holding.  Although California law already provides that punitive damages must be based on the same conduct that gave rise to liability in the case, this requirement is often overlooked.

Second, the court rejected plaintiffs’ reliance on a case known as Romo I.  (Romo v. Ford Motor Co. (2002) 99 Cal.App.4th 1115.)  California plaintiffs often argue that, under Romo I, they need not show that any particular managing agent of a defendant corporation acted with malice, if they can show that the company as a whole acted with malice by adopting a flawed policy.  The Court of Appeal in this case agreed that a finding of malice can be based on the existence of a company policy that willfully, consciously, and despicably disregards the rights of others.  But the court refused to extrapolate the reasoning of Romo I into a rule that malice can be inferred from the existence of any company policy that fails to protect against a known risk:

Plaintiffs would have us conclude that an unsuccessful risk management policy necessarily reflects a conscious and and will decision to ignore or disregard the risk.  This we decline to do.

(The court did not address whether Romo I is even citeable precedent.  Another court recently held, in an unpublished discussion, that Romo I cannot be cited in California courts because it was vacated by the United States Supreme Court.  See footnote 16 of this opinion.)

Third, the court rejected the plaintiffs’ argument that PG&E acted with malice by outsourcing its wildfire prevention program to contractors and then failing to ensure they properly trained their employees. The court noted that PG&E required contractors to hire qualified employees and train them in accordance with industry standards.  “No reasonable jury could find by clear and convincing evidence that PG&E acted with malice in failing to ensure that contractors complied with these requirements.”

Finally, the court determined that PG&E’s nondelegable duty to maintain its power lines in a safe condition had no bearing on the punitive damages analysis.  The court explained that the nondelegable duty rule means that PG&E may be vicariously liable for compensatory  damages arising from the contractors’ negligence.  But the nondelegable duty rule does not alter the rules for imposing punitive damages.  Plaintiffs must still prove that an officer, director, or managing agent acted with malice, which they failed to do.

The Third Appellate District issued this published opinion on July 2.  I’ve been delayed in writing about it, but it is one of the more interesting California punitive damages decisions in recent memory.

The Court of Appeal granted writ relief, reversing the denial of the defendant’s motion for summary adjudication on punitive damages.  That alone is pretty rare in California.  In the ten years of this blog’s existence, we have seen only a handful of writs granted on that basis.

The case arose out of the 2015 wildfire known as the Butte Fire, which caused widespread damage in Northern California.  Contractors working for PG&E removed two trees that were too close to a power line.  Removal of those trees left a third tree exposed and unsupported, causing it to lean towards the path of the sun until it eventually toppled and hit the power lines, sparking the fire.

The plaintiffs, who suffered personal injuries and property loss in the fire, sued PG&E for negligence, trespass, nuisance, and various other claims.  They sought punitive damages on the theory that PG&E acted in conscious disregard of the risks of wildfires.  The plaintiffs acknowledged that PG&E had a wildfire management program that involved inspecting and removing trees, but the plaintiffs argued that PG&E failed to ensure that the contractors’ employees were properly trained.

PG&E moved for summary adjudication on the issue of punitive damages, presenting evidence of its extensive wildfire management efforts.  The trial court denied the motion, ruling that a reasonable jury could conclude that PG&E’s program was inadequate and that PG&E deliberately failed to adopt a more robust program.  PG&E petitioned the Court of Appeal for writ relief.

The Third District granted PG&E’s petition and directed the trial court to dismiss the punitive damages claim.  The court said PG&E met its initial burden by presenting evidence of its extensive efforts to mitigate the risk of wildfires, at a cost of more than $190 million per year.

The burden then shifted to the plaintiffs to present sufficient evidence to demonstrate a triable issue of fact on whether PG&E acted with malice.  The court concluded that, even viewing the evidence in the light most favorable to the plaintiffs, no reasonable factfinder could find that the plaintiffs had presented clear and convincing evidence of malice.

First, the court found that many of plaintiffs’ criticisms of PG&E’s fire management efforts could not support an award of punitive damages because many of the asserted defects in PG&E’s programs had no connection to the fire in this case.  That’s an important holding.  Although California law already provides that punitive damages must be based on the same conduct that gave rise to liability in the case, this requirement is often overlooked.

Second, the court rejected plaintiffs’ reliance on a case known as Romo I.  (Romo v. Ford Motor Co. (2002) 99 Cal.App.4th 1115.)  California plaintiffs often argue that, under Romo I, they need not show that any particular managing agent of a defendant corporation acted with malice, if they can show that the company as a whole acted with malice by adopting a flawed policy.  The Court of Appeal in this case agreed that a finding of malice can be based on the existence of a company policy that willfully, consciously, and despicably disregards the rights of others.  But the court refused to extrapolate the reasoning of Romo I into a rule that malice can be inferred from the existence of any company policy that fails to protect against a known risk:

Plaintiffs would have us conclude that an unsuccessful risk management policy necessarily reflects a conscious and and will decision to ignore or disregard the risk.  This we decline to do.

(The court did not address whether Romo I is even citeable precedent.  Another court recently held, in an unpublished discussion, that Romo I cannot be cited in California courts because it was vacated by the United States Supreme Court.  See footnote 16 of this opinion.)

Third, the court rejected the plaintiffs’ argument that PG&E acted with malice by outsourcing its wildfire prevention program to contractors and then failing to ensure they properly trained their employees. The court noted that PG&E required contractors to hire qualified employees and train them in accordance with industry standards.  “No reasonable jury could find by clear and convincing evidence that PG&E acted with malice in failing to ensure that contractors complied with these requirements.”

Finally, the court determined that PG&E’s nondelegable duty to maintain its power lines in a safe condition had no bearing on the punitive damages analysis.  The court explained that the nondelegable duty rule means that PG&E may be vicariously liable for compensatory  damages arising from the contractors’ negligence.  But the nondelegable duty rule does not alter the rules for imposing punitive damages.  Plaintiffs must still prove that an officer, director, or managing agent acted with malice, which they failed to do.

In this unpublished opinion issued today, the California Court of Appeal reversed a $5 million punitive damages award in an employment discrimination case.  Or at least two of the justices did.  A third justice indicated that she plans to dissent.  More about that later.  First, the facts of the case.

The plaintiff, a former a Rite Aid store manager, sued Rite Aid for harassment and discrimination based on race and disability.  A jury awarded him $3.7 million in compensatory damages and $5 million in punitive damages.

Rite Aid appealed, challenging both the compensatory and punitive damages.  The Court of Appeal (Second Appellate District, Division One) affirmed the compensatory damages award but vacated the punitive damages award in its entirety, on the ground that the plaintiff failed to satisfy the “managing agent” requirement of Civil Code section 3294.

Section 3294 provides that punitive damages cannot be awarded against a corporation based on the misconduct of a low-level employee.  The plaintiff must show that an officer, director, or managing agent of the corporation was involved.  Here, the plaintiff claimed he was harassed and discriminated against by two district managers, whom he argued were managing agents within the meaning of section 3294 because they oversaw 10 to 15 stores.  But merely managing a large number of stores does not make someone a managing agent.  The Supreme Court has explained that corporate employees do not qualify as managing agents unless they exercise substantial discretionary authority over vital aspects of the company’s business, and therefore have the power to create company policies that will govern the business in the future.

In this case, the plaintiff presented no evidence that the Rite Aid district managers had that sort of discretionary authority to set company policy.  To the contrary, the record showed that the managers had no discretion to deviate from Rite Aid policies and were obligated to follow them strictly.

A couple of low-level Rite Aid employees testified that they thought the managers had authority to set policies, but the Court of Appeal concluded that testimony did not satisfy plaintiff’s burden of proof.  The court observed that their testimony lacked any indication that they knew anything about how Rite Aid formed its corporate policies.

The end of the opinion indicates that Justice Chaney wrote the opinion, Justice Johnson concurred, and Justice Rothschild dissented.  But no actual dissenting opinion appears.  Instead, there is a statement by Justice Rothschild that “I will be filing a dissent.”  I’ve read a lot of California Court of Appeal opinions and I’ve never seen that before.

Even more odd, the opinion contains footnotes that refer to the content of the non-existent dissent.  See for example footnote 3 on page 39 (“The dissent suggests . . . “).  I’m not sure exactly what happened here, but there are sure to be further developments.  Stay tuned.

UPDATE (11/15):  The Court of Appeal reposted the opinion, this time with Justice Rothschild’s concurring and dissenting opinion attached.  Justice Rothschild agreed with the majority’s analysis on punitive damages, but in her view Rite Aid is entitled to a complete new trial on all issues because the trial court wrongly excluded evidence that supported the reasonableness of Rite Aid’s employment decisions.

There isn’t much to say about this unpublished decision, but we try to report all California appellate decisions involving significant amounts of punitive damages.

A construction contractor sued the San Diego Zoo for fraud and recovered $222,741 in compensatory damages and $371,250 in punitive damages.  The zoo appealed, arguing that the punitive damages should be reversed because it was based on the conduct of a zoo employee who was not a managing agent within the meaning of Civil Code section 3294.

The Court of Appeal (Fourth Appellate District, Division One) disagreed, finding that the employee originated the idea for the construction project and made a number of discretionary decisions that influenced the scope and tenor of the project: “There can be no serious dispute he ‘exercise[d] substantial discretionary authority over decisions that ultimately determine[d] corporate policy.’ ”

The court also rejected the zoo’s argument that the ratio of 1.667-to-1 between the punitive damages and compensatory damages was constitutionally excessive.

This published opinion addresses two recurring issues in California punitive damages law. Both issues involve the assessment of punitive damages against an employer for the misconduct of an employee.

Before getting into the issues, here’s a little background on the case: The defendant CRST, Inc. is a trucking company. One of its employees, Hector Contreras, was driving a CRST truck when he collided with plaintiffs Matthew and Michael Lennig. They sued Contreras and CRST, seeking compensatory and punitive damages. They based their punitive damages claim against CRST on the theory that CRST knew Contreras was an unfit employee and employed him anyway. California Civil Code section 3294 authorizes punitive damages against an employer who has advance knowledge of the unfitness of an employee and employs him with a conscious disregard of the rights or safety of others. CRST moved for summary adjudication on the punitive damages claim. When the trial court denied that motion, CRST petitioned the Court of Appeal (Second Appellate District, Division Four) for writ relief, raising the following two issues.

Issue #1: Can an employer defeat a punitive damages claim by stipulating that it is responsible for an employee’s negligence?
The California Supreme Court held in Diaz v. Carcamo that evidence of an employer’s alleged failure to train/supervise is not relevant in an action arising out of an employee’s conduct, where the employer admits the employee was in course and scope of employment. The Diaz court reasoned that once an employer has admitted responsibility for any negligence by its employee, there would be no point in allowing introduction of evidence about negligent supervision or training, because even without that evidence the employer will be fully responsible for whatever fault the jury may assign to the employee.

But what about the situation presented here, where the plaintiff is seeking punitive damages based on a failure to supervise? If the defendant admits that the employee was acting in the scope of the employment, does Diaz require the trial court to exclude all evidence of the employer’s training and supervision of the employee, thereby prohibiting the plaintiff from making its case for punitive damages? The Court of Appeal answered that question “no.” Thus, CRST could not defeat the punitive damages claim by agreeing that Contreras was acting in the course and scope of his employment at the time of the accident.

That holding effectively creates a punitive damages exception to Diaz. Evidence normally excluded under Diaz can be admitted to prove punitive damages. In such cases, the trial should probably be divided into three phases. In the first phase, the jury would decide the issues of liability and compensatory damages, without considering the evidence that is normally excluded under Diaz. In the second phase, the jury could hear that evidence and decide whether the employer acted with the requisite knowledge and conscious disregard of safety to support a punitive damages claim. In the third phase the jury would decide the amount of punitive damages, if any.

Issue #2: Does a supervisor who implements corporate policy, but does not create corporate policy, qualify as a managing agent?
We have blogged many times about California’s managing agent rule: Civil Code section 3294 provides that an employer cannot be liable for punitive damages based on the acts of a rogue employee; there must be evidence that an officer, director, or managing agent of the employer authorized or ratified the misconduct.

In this case, the court concluded that plaintiffs had created a triable issue of fact as to whether a supervisor at CRST had advance knowledge that Contreras was an unsafe driver. But the court concluded there was not a triable issue of fact as to whether that supervisor was a managing agent. The Court of Appeal emphasized that the title of “supervisor” does not make someone a managing agent. Nor does the fact that the supervisor manages a large number of employees and implements company policy. To qualify as a managing agent, a corporate employee has to have discretionary authority to create company policy.  Those principles are all consistent with prior case law, but this opinion nicely synthesizes the rule.

Looking at the evidence in this case, the court concluded that the plaintiffs failed to present evidence that Contreras’ supervisor had any authority to create a company policy that contributed to the accident. Accordingly, the Court of Appeal concluded that the trial court should have granted CRST’s motion for summary adjudication on the issue of punitive damages.