California Punitives by Horvitz & Levy

  • California’s special pleading requirements for punitive damages claims against healthcare providers don’t apply to health care service plans (Kaiser Foundation Health Plan v. Superior Court)

    Under California law, plaintiffs seeking punitive damages from a healthcare provider must satisfy special pleading requirements. Specifically, California Code of Civil Procedure section 425.13 requires plaintiffs to submit evidence demonstrating a substantial probability of success before they can plead a claim for punitive damages in an “action for damages arising out of the professional negligence of a health care provider.”

    The question in this case is whether section 425.12 applies to a lawsuit against an HMO or other health care plan, alleging that it devised a compensation scheme that induced the participating health care providers to deny costly medical services to plan members. In a published opinion, the California Court of Appeal (Second District, Division Seven) held that a plaintiff does not have to comply with section 425.13 in an action brought against a health care service plan because such a plan “does not directly provide medical care to its subscribers.  Instead, the Health Plan contracts with other entities to deliver medical care to subscribers who enroll in its plans.”

  • Florida appellate court reverses $40 million punitive damages award in tobacco case

    Yesterday an intermediate appellate court in Florida (First District Court of Appeal) reversed $40.8 million in punitive damages awarded to a smoker’s family in a lawsuit against RJ Reynolds.  A jury award had awarded $10.8 million in compensatory damages and $80 million in punitive damages, but the trial court reduced those amounts under state law to $5.5 million and $40.8 million, to reflect the jury’s finding that the smoker was 51% responsible for his own death.  Ordinarily punitive damages awards are not reduced to reflect a finding of comparative fault, but the plaintiffs in this case consented to the trial court’s reduction of the punitive damages on that basis.  (See footnote 2 on page 2.) 

    The appellate court affirmed the compensatory award, but concluded that the punitive damages award was excessive.  When calculating the ratio between punitive damages and compensatory damages, the court compared the reduced amount of the punitive damages award ($40.8 million) to the unreduced compensatory damages ($10.8 million), resulting in a ratio of 3.7 to one.  If the court had used the reduced amount of compensatory damages (as it did in this opinion), the ratio would have been 7.58 to one.  Even though this method of calculation favored the plaintiff by generating a lower ratio, the court still concluded that the punitive damages award was unconstitutionally excessive in light of the “substantial” compensatory damages award.  Unlike the California Court of Appeal in Bullock, the court did not compare the compensatory damages award to the defendant’s wealth in order to determine whether the award was substantial.  The court simply concluded that the award was “substantial by any measure.”

    Strangely, after concluding that the award was excessive, the court remanded the case to the trial court to give the plaintiff the option of choosing a new trial on punitive damages or accepting a reduced amount of punitive damages. As many other courts have explained (including the California Supreme Court), that sort of disposition doesn’t really make sense when a court determines that a punitive damages award is constitutionally excessive.  Once a court determines the maximum award permissible, there is no reason to allow the plaintiff to reject that amount and choose a new trial, because the plaintiff would never be permitted to obtain anything more than the constitutional maximum.

  • Missouri Supreme Court upholds state cap on punitive damages

    Missouri Supreme Court Building

    State courts continue to disagree about the constitutionality of caps on punitive damages.  The Arkansas Supreme Court recently declared that state’s cap on punitive damages unconstitutional. On January 31, the Missouri Supreme Court issued a contrary opinion, rejecting constitutional challenges to that state’s statutory cap on punitive damages.  The cap limits punitive damages to five times the amount of actual damages, but permits awards up to $500,000 if the actual damages are less than $100,000.

    This case, Overbey v. Chad Franklin National Auto Sales, involved a cause of action created by statute, namely, the Missouri Merchandising Practices Act (MMPA).  The court ruled that, because the Missouri legislature created the MMPA cause of action, the legislature had authority to set limits on the remedies permitted under statute. The court expressly declined to address the constitutionality of the statute as applied to common law causes of action.  (See footnote 3 on page 16.)   Two justices dissented, taking the position that any cap on punitive damages violates the constitutional right to a jury trial.

  • Unpublished opinion vacates $1 million punitive damages award because plaintiff failed to introduce meaingful evidence of defendant’s financial condition (Nesbitt v. Emmanuel)

    Here’s yet another unpublished opinion in which the California Court of Appeal (Second District, Division Four) reversed a punitive damages award because the plaintiff failed to introduce meaningful evidence of the defendant’s financial condition.

    The defendant in this case did not file a new trial motion in the trial court challenging the damages award.  Ordinarily, defendants must file a new trial motion in order to preserve the right to attack the amount of damages on appeal.  But the Court of Appeal permitted the defendant to challenge the punitive damages for the first time on appeal, citing footnote five of Adams v. Murakami, which held that defendants cannot waive a challenge to the sufficiency of the evidence regarding their financial condition, because such arguments are rooted in public policy.

    Turning to the merits, the court described the evidence of the defendant’s financial condition as follows:

    • he had an annual income of $201,600
    • he had a tenant, but there was no evidence of the amount of his rental income
    • he was licensed as a real estate agent, but there was no evidence regarding his ability to operate a profitable real estate practice
    • he owned a condominium, but there was no evidence of his equity
    • he had recently purchased several pieces of real property, but there was no evidence of whether he still owned these properties at the time of trial and, if so, whether they were encumbered by debts
    • his liabilities were unknown

    The court concluded this evidence was not sufficient to establish that he could pay a $1 million punitive damages award without being financially destroyed.  Accordingly, the court vacated the punitive damages award.

  • Punitive damages in bad faith cases

    The Shernoff Bidart law firm, which specializes in suing insurance companies, has posted an essay on their website about punitive damages in cases of institutional bad faith.

    The essay, originally published in the Daily Journal, argues that courts should not apply the U.S. Supreme Court’s analysis in State Farm v. Campbell to cases of institutional bad faith.  In particular, the essay contends that lower courts should not follow State Farm‘s statements about ratio (“few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process”) in bad faith cases, and that much higher ratios should be permitted in cases where the defendant’s misconduct arises from a “bad corporate culture.”

    The essay seems to overlook the fact that State Farm itself was a bad faith case.  If anything, State Farm‘s principles should apply with more force in bad faith cases than in other types of cases.  State Farm expressly rejected the notion of punishing a defendant for a bad corporate culture:  “a defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business.”

    The Shernoff essay correctly observes that State Farm did not prohibit ratios in excess of 9 to 1 in all situations.  But State Farm recognized only a limited exception where larger ratios may be permitted: where “a particularly egregious act has resulted in only a small amount of economic damages.”  Nothing in State Farm remotely suggests that an additional exception exists for bad faith cases. To the contrary, State Farm holds that the permissible ratio in a particular case depends upon the nature of the conduct, and that conduct involving violence or physical harm should be punished more harshly than purely economic torts like bad faith.   

  • Assembly rejects proposal to eliminate tax deductions for punitive damages

    The California State Assembly has rejected AB 1276, the proposal to prohibit taxpayers from deducting punitive damages as a business expense.  (See our prior post.)  The vote tally was 50 Ayes and 26 Noes, with 4 members not voting, which means the proposal failed under Prop 26, which requires a two-thirds supermajority vote to approve a tax increase.

  • Two unpublished opinions address the relationship between compensatory damages and punitive damages, with different results (Romero v. Leon Max; Starrh and Starrh v. Aera Energy)

    The California Court of Appeal issued two unpublished opinions this week discussing the rule that punitive damages cannot be awarded without an award of compensatory damages.  Both cases involve a little twist on that rule, and both arguably should be published.

    In Romero v. Leon Max, an employment case, a jury rendered the following verdict for the plaintiff:

    • $0 in compensatory damages and $50,000 in punitive damages on her claim for intentional infliction of emotional distress
    • $6,349.10 in compensatory damages and $0 in punitive damages on her claims for wrongful discharge and retaliation

    The jury expressly found that the defendant acted with malice in connection with the intentional infliction of emotional distress claim, but did not act with malice in connection with the wrongful discharge and retaliation claims.

    The trial court tossed the punitive damages award on the ground that it was not supported by any compensatory damages award, and the Court of Appeal (Second Appellate District, Division One) affirmed.  The court held that, because the plaintiff’s only “actual damages” were awarded on claims that did not involve malice, the plaintiff could not recover any punitive damages:  “no punitive damages are appropriate based on ‘actual damages’ awarded on any cause of action in which this finding [of malice, oppression, or fraud] was not made.”

    It’s worth noting that the defendant was able to make this argument only because the special verdict form was drafted in such a way that the jury had to decide the issue of malice separately for each cause of action.  If the verdict form had contained only one catch-all question about malice at the end of the form (as is often the case), the defendant would not have been able to demonstrate that the jury awarded punitive damages only on the claim for which it did not award any actual damages.  So kudos to defense counsel at Towle Denison for some nice lawyering.

    In Starrh and Starrh Cotton Growers v. Aera Energy, the Court of Appeal (Fifth Appellate District) held that the plaintiff was entitled to pursue a punitive damages claim even though the jury did not make a finding that the plaintiff suffered any actual harm.  The plaintiff, who claimed that the defendant’s oil extraction operations contaminated the plaintiff’s groundwater, obtained an $8.5 million damages award on a disgorgement theory.  In other words, the jury awarded damages based on the benefits the defendant obtained through its misconduct, not based on any actual losses suffered by the plaintiff.

    After the jury returned the $8.5 million award, the trial court concluded, based on certain findings that the jury made about the timing of the defendant’s conduct, that the jury could not possibly find that the defendant acted with malice.  Accordingly, the trial court did not submit the issue of malice to the jury.

    The Court of Appeal reversed, holding that the trial court should have submitted the question of punitive damages to the jury, and should have allowed both parties to present evidence and argument on the issue, because the evidence would have supported a finding that the defendant acted with malice.  The defendant argued on appeal that imposing punitive damages in the case would violate the Due Process Clause because the jury did not find any “actual harm.”  The court rejected that argument, stating that punitive damages are not limited “to cases in which the underlying damages verdict is measured by reference to the plaintiff’s loss rather than the defendant’s gain.”  The court noted that California law has permitted punitive damages where the compensatory award is only nominal, and therefore doesn’t represent any actual harm to the plaintiff.

    The end result is that, in Romero the plaintiff proved actual harm but was not entitled to punitive damages, and in Starrh the plaintiff did not prove any actual harm but was entitled to punitive damages.  Both cases may be consistent with existing law, but the results aren’t exactly intuitive.

  • Assemblyman revives proposal to eliminate tax deduction for punitive damages

    Last year we blogged about Assemblyman Mike Feuer‘s proposal to prevent California taxpayers from taking a tax deduction for payments of punitive damages.  The bill, Assembly Bill 1276, got through the appropriations committee by a vote of 12-5, but failed in a floor vote and was moved to the “inactive” file last June.  The issue appeared to be dead, but it has recently come back to life.

    At Feuer’s request, the bill was removed from the inactive file and will come up for another vote on the floor.  Feuer is trying to drum up support for the bill on Twitter: 

    When courts punish corporations for egregious misconduct, we expect they’ll pay. But a tax loophole lets them to [sic] deduct punitive damages! 

    My AB 1276 prevents corporations from writing off punitive damages as “business expenses.” Contact your member and urge support today.

    The bill needs a 2/3 vote to pass.  Our sources in Sacramento tell us there’s no chance of that happening.

  • “Economic Analysis of Punitive Damages”

    Prof. Catherine M. Sharkey at NYU Law has posted a chapter entitled Economic Analysis of Punitive Damages: Theory, Empirics, and Doctrine, from the forthcoming Research Handbook on the Economics of Torts.  Here’s the abstract:

    This chapter — to be included in Research Handbook on the Economics of Torts (Arlen ed., Kluwer, forthcoming 2012) — assesses economic rationales for punitive damages in light of contemporary empirics and doctrine. The primary economic rationale for supra-compensatory damages is optimal deterrence (or loss internalization): when compensatory damages alone will not induce an actor to take cost-justified safety precautions, then supra-compensatory damages are necessary to force the actor to internalize the full scope of the harms caused by his actions. Alternative economic rationales — disgorgement of ill-gotten gains and enforcement of property rights — have been proposed to align the theory with the historical and conventional focus of punitive damages on intentionally wrongful behavior.

    Notwithstanding its academic prominence, the economic deterrence rationale has not dominated doctrine. In fact, the U.S. Supreme Court has all but rejected economic deterrence, by instead placing increasing emphasis on a competing retributive punishment rationale. But, since punitive damages lie squarely within the purview of state law, state legislatures and courts possess a degree of freedom to articulate state-based goals of punitive damages — such as economic deterrence — even in the face of heavy-handed federal constitutional review imposed by the U.S. Supreme Court.

    Hat tip: TortsProf Blog.

  • Garth Brooks wins $500,000 punitive damages award

    According to this report, a jury in Oklahoma has awarded Garth Brooks $500,000 in compensatory damages and $500,000 in punitive damages, in a lawsuit against a hospital that accepted a donation from Brooks and then reneged on its promise to name a women’s clinic after his late mother.