Last month we blogged about a proposed bill to cap punitive damages in California at three times the amount of compensatory damages (AB X8 40). According to the state legislature’s bill tracking website, the current status of that bill is: “Died at Desk.”
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“Taxing Punitive Damages”
Professors Gregg Polsky & Dan Markel of Florida State College of Law have posted an article on SSRN entitled Taxing Punitive Damages. Here’s the abstract:
There is a curious anomaly in the law of punitive damages. Jurors assess punitive damages in an amount that they believe will best “punish” the defendant. But, in fact, defendants are not always punished to the degree that the jury intends. Under the Internal Revenue Code, punitive damages paid by business defendants are tax deductible and, as a result, these defendants often pay (in real dollars) far less than the jury believed they deserved to pay.
To solve this problem of under-punishment, many scholars and policymakers, including President Obama, have proposed making punitive damages nondeductible in all cases. In our view, however, such a blanket nondeductibility rule would, notwithstanding its theoretical elegance, be ineffective in solving the under-punishment problem. In particular, defendants could easily circumvent the nondeductibility rule by disguising punitive damages as compensatory damages in pre-trial settlements.
Instead, the under-punishment problem is best addressed at the state level by making juries “tax aware.” Tax-aware juries would adjust the amount of punitive damages to impose the desired after-tax cost to the defendant. As we explain, the effect of tax awareness cannot be circumvented by defendants through pre-trial settlements. For this and a number of other reasons, tax awareness would best solve the under-punishment problem even though it does come at the cost of enlarging plaintiff windfalls. Given the defendant-focused features of current punitive damages doctrine, this cost is not particularly troubling. Nonetheless, a related paper of ours furnishes a strategy for overcoming this tradeoff through some basic reforms to punitive damages law.
Hat tip: TortsProfBlog
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Federal Judge Tosses $100 Million Punitive Damages Award Against BP
In December of last year we reported on a jury’s award of $100 million in punitive damages to ten workers who claimed they were exposed to toxic fumes at a BP plant in Galveston. We noted that the award was not likely to hold up because of the absurdly high ratio of punitive damages to compensatory damages.
As it turns out, we were correct that the award wouldn’t hold up, but the ratio issue never came into play. The Associated Press is reporting that the trial judge (U.S. District Judge Kenneth M. Hoyt) has ruled that the plaintiffs are not entitled to any punitive damages in this case. According to the story, Judge Hoyt has issued a posttrial ruling stating that the plaintiffs failed to present clear and convincing evidence that BP acted with intent to harm or engaged in gross negligence, and plaintiffs are therefore entitled to no punitive damages.
I have no evidence to back this up, but my sense is that judges are more inclined to do this sort of thing (toss out a punitive damages award altogether) when the amount of the award is obviously excessive. Thus, even if they don’t reach the issue of excessiveness, they are influenced by the size of the award. Maybe it’s just because an obviously excessive award is a clear indication that something went awry during the jury’s deliberative process.
UPDATE: California appellate specialist Donna Bader has posted some commentary about this story on her Appeal to Reason Blog. She writes:
Some will celebrate this reduction as a victory for companies. Those
who do so may believe that individual plaintiffs should not be entitled to
punitive damages at all or that the award just seems like a lot of money. Others
will despair, as this case is just one of many where judges have reduced
punitive damages – ignoring the jury’s verdict – until they do nothing to punish
wrongdoers. As stated by plaintiff’s attorney, the decision gives BP a “free pass” to
continue hurting its workers.Personally, I don’t see this case a victory for companies. Nor do I see it as a cause for despair because a trial judge has ignored a jury’s verdict. Instead, I presume that the judge honestly concluded that the plaintiffs in this particular case had failed to introduce evidence to satisfy the legal standard for imposing punitive damages. That type of post-verdict review is an integral part of our justice system; trial and appellate judges are not supposed to reflexively accept any result reached by a jury, even if that result is unsupported by the evidence. In particular, judicial review of punitive damages awards has existed as a safeguard for as long as punitive damages have been awarded. (See, e.g., Huckle v. Money (C.P. 1763) 2 Wils. 205, 95 Eng. Rep. 768.) Sometimes that review works in favor of a defendant (corporate or otherwise), and sometimes it doesn’t.
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California Jury Awards $50 Million in Punitive Damages Against Shell Subsidiary
This case has already gone up on appeal once, and is likely headed that way again.
In 2008 we blogged about this case, which involves a plaintiff who purchased a gas station from Shell subsidiary Equilon Enterprises and claims Equilon defrauded him by withholding material information. He claims that Equilon failed to tell him that the site of the gas station was about to become the target of state regulatory agencies, a fact that ultimately prevented him from being able to operate a gas station on the site.
When the case went to trial in 2006, the jury awarded the plaintiff $1.65 million in compensatory damages and found that Equilon acted with malice, oppression, or fraud. But the trial court dismissed the plaintiff’s punitive damages claim because he failed to present meaningful evidence of the defendant’s financial condition. The California Court of Appeal (Second Appellate District, Division Eight) reversed, concluding that the trial court should have given the plaintiff more time to marshal his financial condition evidence.
According to the plaintiff’s attorney’s press release, a new jury has awarded $50 million in punitive damages. That makes for a ratio in excess of 30 to 1, a ratio that should not withstand posttrial and appellate scrutiny. Even assuming the defendant’s conduct was extremely egregious, the defendant seems to have a strong argument that the maximum ratio cannot exceed one to one, given the size of the compensatory damages award and the purely economic nature of the plaintiff’s injuries.
The appeal may also raise some interesting issues about the proper procedures for a trial like this, in which one jury decided the issues of liability and malice, and another jury awarded punitive damages. In such situations, it is difficult if not impossible to ensure that the second jury bases its punitive damages award solely on the same conduct that the first jury found to be tortious and malicious. If the plaintiff made multiple arguments in the first trial, the first jury may have accepted some of those arguments and rejected others. Unless the jury made very specific findings, however, there would be no way for anyone to know the precise basis for the first jury’s findings, and therefore no way to comply with the requirement of California law that punitive damages must be based on malice, oppression or fraud in the conduct that gave rise to liability.
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L.A. Times Story Mangles the Facts on Punitive Damages
This L.A. Times story (“Toyota Just the Latest Automaker To Face Auto Safety Litigation“) is not really about punitive damages. But it does touch on the topic, and in the process it gets the facts all wrong.
The author of the story argues that products defect litigation has made cars safer. As an example of a case that spurred safety innovations, the story reports that in the 1975 case Grimshaw v. Ford Motor Co., “a California appeals court ordered the carmaker to pay $125 million in punitive damages to the victims of one of the Ford Pinto’s fiery explosions.”
Umm, no. The Court of Appeal ordered Ford to pay $3.5 million in punitive damages, not $125 million. The jury awarded $125 million in punitive damages, but the trial court reduced that amount to $3.5 million (by ordering a conditional new trial subject to a remittitur), and the Court of Appeal affirmed that ruling.
The story comes a little closer to the truth when it says a couple of sentences later that “[t]he award was reduced to $3.5 million in a post-verdict negotiation . . . .” But that’s not right either. As noted, the punitive damages award was reduced to $3.5 million by the trial court, not as a result of a post-verdict negotiation. The post-verdict negotiations reduced the compensatory damages award from $3.5 million to a little over $3 million (see footnote 1 in the opinion), but the parties did not agree to a reduction of the punitive damages. If the parties had agreed to a post-verdict of reduction of punitive damages, there wouldn’t have been an appeal on the punitive damages, and so the Court of Appeal couldn’t possibly have ordered Ford to pay the full amount of the jury’s award, as the story reports. In short, the article is not only wrong on the facts, but it reports facts that are just plain nonsensical.
As I said, the Times article isn’t really about punitive damages, so perhaps I’m being unfair by zeroing in on that part of the article for criticism. But in my view, this article is an example of a recurring pattern; when reporters in the mainstream media start talking about punitive damages, they often mangle the facts.
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Boothby v. Parker: $350,000 in Punitive Damages Affirmed, Despite Reduction of Compensatory Damages
There seems to be a growing split in the California Court of Appeals on the question of what should happen to a punitive damages award when a court slashes the compensatory damages award. In SEIU v. Colcord, the First Appellate District, Division One, ordered a reduction in the compensatory damages and then sent the case back to the trial court to reconsider the amount of the punitive damages in light of the reduction. But in McGee v. Tucoemas, both the trial court and the Court of Appeal refused to reevaluate the amount of punitive damages after a reduction of the punitive damages award.
In this unpublished opinion, the Second Appellate District, Division Two, affirms a $350,000 punitive damages award, even though the court reduced the compensatory damages from $725,000 to $325,000. The court relies on McGee but does not discuss SEIU or any other similar authority. (E.g., Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1254 [reducing compensatory damages and reducing punitive damages to preserve the ratio awarded by the jury].)
This is an issue that could eventually end up before the California Supreme Court.
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Brunskill Associates v. Rapid Payroll: $11 Million in Punitive Damages Affirmed
I mention this unpublished opinion only because we report on all California appellate decisions on punitive damages. There doesn’t appear to be anything particularly interesting here.
The California Court of Appeal (Second District, Division Two) concludes that the defendants’ conduct warranted punitive damages because they made intentional misrepresentations with the goal of destroying the plaintiff’s business. And the court affirms the amount of the award (in excess of $11 million), which was less than the amount of compensatory damages ($15 million). If there’s an interesting legal angle in there somewhere, I’m not seeing it, even though it’s a pretty big award.
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Smoker’s Widow Wins $12.5 Million in Punitive Damages
The Gainesville Sun reports that a jury has awarded $12.5 million in punitive damages (on top of $5 million in compensatory damages) against RJ Reynolds in the latest installment of the ongoing series of lawsuits by Florida smokers.
Related posts:
Florida Trial Judge Cuts $244 Million Punitive Damages Award
Florida Jury Awards $25 Million in Punitive Damages to Smoker’s Widow
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West Virginia Supreme Court Justice Writes Punitive Damages Article
We often post about law review articles on punitive damages, but we’ve never before posted about an article written by a sitting state supreme court justice. Justice Robin Jean Davis of the West Virginia Supreme Court has written an article entitled Punitive Damages Law in West Virginia. The 75-page long article covers not only West Virginia state law, but also discusses the U.S. Supreme Court’s punitive damages opinions.
Hat tip: the West Virginia Record
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Montoya v. Shaw: Another Punitive Damages Award Reversed Because the Plaintiff Failed to Prove the Defendant’s Financial Condition
This unpublished opinion illustrates yet again the consequences of failing to comply with California’s unique rule that a plaintiff cannot obtain punitive damages unless the plaintiff presents meaningful evidence of the defendant’s ability to pay.
The plaintiff here won a $20,000 punitive damages award at trial. But the only evidence he presented regarding the defendant’s financial condition was the fact that the defendant owned several businesses. The plaintiff did not establish the value of those businesses, the income the defendant derived from them, or the liabilities associated with them. Accordingly, the California Court of Appeal (Fourth Appellate District, Division One) vacated the punitive damages award. And because the plaintiff had a full an fair opportunity to present his evidence the first time around, he doesn’t get to go back to the trial court and try again.