May 2007

California’s Fourth Appellate District certified for publication a significant decision addressing the constitutionality of punitive damages awards. In a decision that will apply to the majority of business tort cases, the Court ruled when:

“… the conduct in question only involves economic damage to a single plaintiff who is not particularly vulnerable, an award which exceeds the compensatory damages awarded is not consistent with due process.”

The case is Jet Source Charter vs. Doherty, Cal. Ct. App. No. D044779 (Feb. 28, 2007). At the trial court, plaintiffs received $6.5 million in compensatory damages, and $26 million in punitive damages. On appeal, defendants argued that the four-to-one punitive damage ratio was unconstitutional under the United States Supreme Court’s decision in State Farm Mutual Automobile Insurance Company v. Campbell, 538 U.S. 408 (2003). The Court of Appeal agreed, reversing the punitive damages award “with instructions that the trial court limit them on a pro rata basis to an amount which in total does not exceed the compensatory damages awarded.”

Since the United States Supreme Court decided the Campbell matter in 2003, there have been several decisions issued by the California Supreme and appellate courts. These other decisions affirmed punitive damage awards as large as ten times the size of the compensatory damages awarded. (For example, see “California Supreme Court Clarifies Permissible Punitive Damages.”)

Nevertheless, citing a portion of the Campbell ruling, the Doherty Court contended that the precedents in cases where larger ratios were upheld occurred when the economic damages were smaller. Under this thinking, a higher ratio of punitive damages was justified. However, where the compensatory damages are in the millions, and the harm is economic only (i.e., no one was hurt or injured), then the Doherty Court instructed that the punitive damages award should be limited to the compensatory damages award.

The Doherty case had facts that would generally be viewed as favorable to upholding a large punitive damage award. The Defendants were adjudicated as fiduciaries that willfully misled the plaintiff, and stole $6.5 million. The Appellate Court acknowledged that “The amounts awarded in compensatory damages were largely in the way of restitution to [plaintiff] for funds which had been improperly taken from it.”

Under the Doherty Court’s ruling, it makes economic sense to lie and steal as long as there is less than a 50% chance of being caught and no criminal time is expected. This is actually normal in a business setting where no one gets physically hurt. Punitive damages on more than a one-to-one ratio reduce such motivations.

Under the Doherty ruling, it is even more important for parties to focus on compensatory damages, since these directly and significantly affect the punitive award.

Fulcrum Inquiry performs both compensatory and punitive damages calculations in commercial disputes.