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California Supreme Court Clarifies Permissible Punitive Damages

July 18th, 2008

July 2005

In two rulings issued in June 2005, the California Supreme Court interpreted the U.S. Supreme Court guidance on punitive damages.  It was the first time in at least two decades that the California Supreme Court addressed punitive damages.

The rulings were as follows:

  1. Courts could consider the defendant’s conduct towards people other than the plaintiff, so long as the conduct was similar.  However, the Court rejected the notion that punitive damages should include a disgorgement of all profits from similar misconduct directed towards others. (Johnson vs. Ford Motor Company, S121723)
  2. In calculating the proper ratio between punitive and compensatory damages, Courts could consider “uncompensated” or “potential” harm to the plaintiff (in addition to compensated harm) but only if the uncompensated harm was caused by the defendant’s actionable conduct.  (Simon vs. San Paulo U.S. Holding, S121933)

These cases were not a clear victory for either plaintiffs or defendants.   Plaintiffs received (i) confirmation that they could seek awards based on others, and (ii) larger punitive damages by considering factors that might have been too speculative to result in a compensatory award.  Defendants won a near-complete rejection of the “aggregate disgorgement” approach to punitive damages.  The rulings will make both punitive damage discovery and trials more complicated.

U.S. Supreme Court Guidance

The 2003 U.S. Supreme Court ruling in State Farm Mutual Automobile Insurance vs. Campbell (538 U.S. 408) established that Courts should consider three factors in determining punitive damages:

  1. The degree of reprehensibility of the defendant’s misconduct
  2. The disparity between the actual and potential harm suffered by the plaintiff and the punitive damages award, and
  3. The difference between the punitive damages awarded by the jury and the civil penalties authorized or composed in comparable cases.

However, the U.S. Supreme Court said that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process”.

This was the U.S. Supreme Court’s third effort to reduce punitive damage awards – after (i) BMW vs. Gore (517 U.S. 559), and (ii) Cooper Industries vs. Leatherman Tool Group (532 U.S. 424).

Details of the California Cases

In Johnson, the jury awarded less than $18,000, or the cost of a defective 1997 Ford Taurus, for Ford’s practice of concealing defects in cars that should have been removed from circulation under California’s lemon law.  The jury then awarded $10 million for punitive damages.  The California Appellate Court reduced this to around $53,000, or four times the compensatory award.

In Johnson, the California Supreme Court ordered the Appellate Court to consider an increase in damages because of the inappropriateness of Ford’s repeated conduct.  In doing so, the Court instructed that the evidence should be limited to conduct similar to that causing the plaintiff’s injury, not generalized evidence that the defendant was bad.  The purpose of using other similar bad acts was not to punish the defendant for conduct towards others, but merely to place the defendant’s conduct towards the plaintiff in context.

The Court did not reject the plaintiff’s “aggregate disgorgement” theory in all cases, but would not allow its application here because an award to one plaintiff of all of a defendant’s profits (i) raised the possibility of inappropriate duplicate awards against the defendant, and (ii) deprived later plaintiffs of a punitive damage award without the protections of a class or mass action where all interested plaintiffs are represented.

In Simon, the plaintiff was thwarted from buying an office building.  The jury concluded that the plaintiff did not have the right to purchase the building, but that the defendant lied about the possibility of such a sale.  The jury awarded $5,000 reimbursement for attorneys’ fees that were unnecessarily incurred by the plaintiff.  The jury also awarded $1.7 million in punitive damages, which the California Appellate Court had upheld.  The California Supreme Court cut the punitive award to $50,000, or ten times his losses.

In ruling against Simon, the California Supreme Court did not allow other evidence of a $400,000 loss on a claim that the jury specifically rejected.    However, the Court sided with plaintiffs on the broader issue of how punitive damages can be calculated by saying:

  1. Juries can consider the defendant’s wealth in deciding whether the punitive damages are large enough to discourage future wrongdoing.  A defendant’s bad conduct can “justify an extraordinary ratio between compensatory and punitive damages.”
  2. Juries can consider “uncompensated” or “potential” harm to the plaintiff (in addition to compensated harm) but only if the uncompensated harm was caused by the defendant’s actionable conduct.  This means that damages that might exist but could not be awarded as compensatory damage because the amounts were speculative, could nevertheless be considered in awarding punitive damages.

One thing is certain.  In any case where punitive damages are a factor, parties should treat compensatory damages seriously.  The compensatory amounts will still largely control the allowable punitive award.

Fulcrum Financial Inquiry is a financial consulting firm.  We frequently assist in a broad range of damages and valuation calculations that lawyers need to support their litigation positions.