Kenneth D. Klein of the Los Angeles office of Hogan & Hartson recently hosted a brain trust of legal professionals to analyze punitive damages issues in the post-Campbell era. Issues included effectively arguing for and against punitive damages, evidentiary considerations, and the overall effect of the decision on the administration of justice. Participants included retired jurists, plaintiff-side and defense counsel.
I. Arguing Punitive Damages
MR. KLEIN: I represented a merchant that had many, many stores throughout California, and the other side got hold of their annual report, which has the subject "Cash on Hand." This is a big, company, revenues in the billions and billions of dollars. It has hundreds of millions of dollars of "Cash on Hand." The plaintiffs took the "Cash on Hand" number and they made it sound like this company has petty cash of hundreds of millions of dollars. How do I deal with that? Campbell certainly doesn't mention it. Both sides would say net worth should not be allowed. But if I have a company that doesn't have the net worth everybody thinks it does, and we don't allow net worth, under Campbell I might be in worse shape than if the jury were to learn the net worth of my client.
MR. SCHWARTZ: In California, the Murakami decision makes the plaintiff put the wealth of the defendant in the jury instructions. In Romo, the court clearly says that wealth is relevant to whether you're punished sufficiently. Campbell says that punitive damages are about deterrence, but you're going to be punished in line with your wealth. How do you punish somebody who doesn't have money? Wealth is clearly relevant.
JUDGE YOUNGER: Campbell is about 14th Amendment due process-oriented restrictions, over and above state law on punitive damages. It only changes state law where it's in conflict. Nothing about California law or jury instructions on punitive damages is airbrushed out. I would be astonished if anybody would hold that net worth isn't still a factor.
MR. SCHWARTZ: Campbell says wealth provides an open-ended basis for inflating awards against wealthy defendants. That does not make its use unlawful or inappropriate. Wealth is relevant to determine how to punish.
MS. WILSON: The relationship of compensatory damages to punitive damages is the context for considering a corporation's wealth. I do a lot of pharmaceutical litigation, and dealing with very large corporations with a lot of wealth, that cuts both ways.
MR. DESAI: You focus on what the compensatory award range is going to be. Then a defendant can stipulate that they have the wherewithal to satisfy punitive damages that falls within the parameters of Campbell, on a 9-1 ratio. If a company wants to step in and say okay, it's a million bucks, I've got nine million, I can satisfy that and post a bond, that should be enough. After the defendant has stipulated that they can cover that, if the jury feels that's necessary, then you bring in a net worth of $2 billion, I think you're inviting a runaway.
MR. SCHWARTZ: The unanswered question is how big an award will the court in absolute terms let stand. Campbell wants to punish and deter but not confiscate. So when will confiscation occur? We've seen multiples of four to nine, and the highest absolute number is $23 million in Romo. Nobody got exercised about that. But what about the new Medtronic award? $400 million in punitive damages to $100 million in compensatories, all 4-1, no big deal. Is $400 million going to stay?
JUDGE YOUNGER: Medtronic illustrates an area that Campbell didn't talk about. Campbell talks about ratios, but $400 million is still big money. That's a lot more dough than in Campbell. The Supreme Court opinion didn't go into mega-bucks patent infringement matters. In this case, an inventor had his invention stolen. The amount of actual damages are so big that you can put up a ratio of less than 4-1, but it's still the national budget of Spain. I have the impression that the court might say $400 million is too much, even if the ratio was really tiny.
MR. SCHWARTZ: You did see a hint of that in Campbell when they dealt with emotional-distress damages. They got a million dollars in emotional distress. In a way, emotional distress is like too much underlying damage. It almost is punitive in a certain sense. Something like that in an insurance bad faith case might be a 1-1 kind of thing, which is what they let stand. So there is a hint that if your damages are large and they are of a certain type, we're going to watch that multiple. Maybe it's getting to the issue of how big we want to let this go. I keep seeing this twin problem, the punishment, but we don't want you to confiscate. The balance is trying to be worked out in this equation of the multiplier, actual potential harm and the punitives.
MS. WILSON: One of the factors that the courts particularly look at is reprehensibility, [especially] length of conduct. In the tobacco litigation, they talk about knowledge of bad acts for 40 years. That has been used as an argument for a higher multiplier on punitive damages.
MR. DESAI: When you get these fraud or physical harm cases and you've got people dying, as opposed to economic harm, then you can argue that higher multiplier. California is thought to be the liberal state, but a case just came down the other day, Textron. It reduced to a 4-1, $360,000. But if you look at states like Idaho, they have cases that are 37-1. Missouri, 170-1. Advise your clients we're not the crazy place anymore.
MR. SCHWARTZ: We got a 9-1 on a breach of fiduciary duty case. I look at the reprehensibility, a set of conduct that is threshold anyway in getting punitive damages. It's got to be conscious disregard of someone's rights. In the product liability field, it's fraud and trickery and deceitful and purposeful and intentional. Once you have it, where that multiple sits is anybody's guess. Cases that are giving us punitive damage jurisprudence are like that. What is constitutionally permissible as a multiple in any given case? I don't see a court saying, "Four isn't right. Seven is better." You had a 7-1 ratio in Zann, a race discrimination case in the Ninth Circuit. 4-1 in Diamond Woodworks on insurance bad faith. 9-1 on Bartis, a five or 6-1 on Romo. It's a moving target.
MR. KLEIN: Getting back to the net worth issues, if you have a case where the plaintiff's compensatory damages are a million dollars, what possible rationale can you have to put in the fact that company's net worth is nine billion? What is that doing other than saying to this jury, "You can give some huge multiple."?
MR. SCHWARTZ: If the purpose of punitive damages is to punish and deter, then you have to hit somebody with a lot of money with an adequate award that makes them think.
JUDGE YOUNGER: You're leaving out an element. Restrictions on punitive damages are really mandates to judges. That's been true for at least a couple of decades. Judges cap punitives post-verdict all the time. Post-first-phase verdict settlements are by far the rule, not the exception. The cases where a jury found the necessary factors under the civil code to impose punitives where we actually had the second phase of the trial couldn't have been a fifth of the cases. So the jurisprudence of how the limits really happen is composed of settlements and judicial decisions, not really verdicts.
MS. WILSON: In the real world, you're dealing with national companies. You're going to have multiple punitive damage verdicts across the nation. They're going to be punished multiple times for essentially the same conduct.
MR. DESAI: Maybe an unintended benefit of Campbell is when you have that first phase, where they found malice, now you've got a case of 1-1 or 9-1. You've got a scale as opposed to 20-1 or 25-1.
MR. SCHWARTZ: How does a judge know what multiple to apply? If you look at Diamond Woodworks, they think 4-1 is about it. How could you ever have more than 4-1 in an insurance bad faith case, or an economic harm case?
JUDGE YOUNGER: This Simon vs. San Pablo case [Court of Appeal, December 22, 2003], points out the other end of the spectrum. In that case, the amount of the actual damages is very small relative to the evil. Somebody got caught in mid-tort and there isn't a heck of a lot of damage in this real property transaction. The California Court of Appeal said those ratios don't make much sense because the actual damages are bupkis but the contact was terrible.
MR. SCHWARTZ: That case is unique because [the judge] thought the effect of the conduct was really critical. Even though they couldn't claim the lost fair market value increase in the property, the judge thought that was relevant to the multiple and then found the 4-1 multiplier. It's true in a case called Mathias, out of the Seventh Circuit, the bedbug case. It was a hotel, there was a lot of bedbugs in the room and this couple got something like $5,000 each in emotional distress. Then a conservative judge awarded 37 times the multiple, $186,000 in punitive damages for each one, for the reason that the conduct resulted in small damages, but how do you punish it without increasing the multiple, although the absolute sum is a small amount.
JUDGE YOUNGER: In 1992 I tried Childcraft, the second largest verdict in the state that year. There were two plaintiffs, Kirk Pasich represented one. Their interests were ultimately equal, according to the jury. Kirk's argument took exactly six minutes and he got $20 million. And the argument was so amazingly simple. He said, "I have a three-year-old child at home and he gets an allowance. When he does something bad, what do you do with a three-year-old? You can't take away the car. There is only so much you can do to punish him. We take away his allowance and it's 25 cents a week." He said, "Look at the net worth of the company here and their stream of profits, and I'm not asking you to do anything to the defendant here that I don't do to my own son, whom I love very much." I'm guessing he got more than he ever expected.
MR. SCHWARTZ: You can compare how individuals get punished. For example, the typical diamond lane fine of $271. The average person earns $55,000 a year. Then take $271 for getting into that diamond lane. It's maybe one, two, three, four, five percent of your annual salary. You can start to see the analogy.
MS. WILSON: From the defense perspective, sometimes what you're really trying to do is preserve your record on appeal. I'm thinking of a case that we tried years ago in Texas. The judge had decided to let in evidence of the wrongdoing of a prior corporate entity. The evidence on behalf of our client was different board of directors, different corporate entity. They found witnesses from the old corporate entity to come and talk about what they did with respect to this particular drug in terms of reporting to the Federal Drug Administration and things like that. And the record was made well. The punitive damage was award, about $30 million, stood up at the Court of Appeal level. At the state Supreme Court level, the whole thing went on a downward analysis on causation.
MR. SCHWARTZ: I had a finding of malicious conduct in a constructive termination case involving a young woman in a title insurance company. She was a salesperson. After a three-week trial, we got a finding and the judge initially brought the parent company in and held them tight. The parent company was a billion-dollar company. The local company through which she sold the insurance was losing money and had very little. I put testimony in, I preserved the record nicely, and as the jury instructions were being formulated, another quick from –the-hip motion was made by the defense counsel. The judge said, "I'm going to knock out the parent company." I settled the case. What am I going to say? "This company will make money in the future?"
MS. WILSON: [In the pharmaceutical context,] we are always prepared to put regulatory evidence on, usually through an outside expert and someone from the company, that the company complied with all the reporting requirements, that it reported all of the studies as they were known, that it changed labeling as was appropriate. That kind of evidence can be very helpful. It is usually well-received and it's educational for the jury. You will have put some of that on in your underlying case. If you have a bifurcated case, you're kind of getting a second bite at the apple to say it again, and that can be helpful. If you have some defense-oriented jurors that did not prevail on the compensatory damage verdict, but they are kind of rooting for you, they hear that again and that helps on the punitive damages.
MR. SCHWARTZ: You hear that argument in auto products cases, that they have complied with all the Nation Highway and Transportation Safety Administration standards and governmental regulations. The counter to that is whether you deceived the public or could you have fixed the product and it would have saved lives.
II. Defense Strategies After a Finding of Malicious Conduct
MR. KLEIN: The best thing is, "We've cleaned up our act." I don't want to alienate this jury. I don't want to make them think that I disagree with what they've said. At the same time, I don't want to say I agree with it. So I sidestep it. Even after the case is filed, I might say, "Let's do some things right now, because if we are going to have to argue against punitive damages, I want to say that we did A, B and C. We got rid of this person; we got rid of that person." We did some things that the jury will at least look favorably upon. But it's tough.
MR. DESAI: If I find myself in a position where the jury has found malicious conduct, I better have done my investigation before we started that case and made sure the proper steps were taken, so that I can then say that this was a rogue employee or branch, but nationwide, this is what we do. If there has been some past violations or some past hand-slapping and all they've done is changed the name of the procedure to something else, they are still doing it, by the time I'm there and I'm telling the jury that I'm sorry, I better be able to prove it. Otherwise, good-bye 9-1 ratio.
JUDGE YOUNGER: We can't have a discussion without talking about client counseling on settlement opportunities at that point. A difficulty is that we are talking about large institutional defendants the great majority of the time. Large institutions are slow and dumb with respect to the courtroom. Were I defense counsel, the first thing I would tell my client is have a check cut for the full amount of the underlying damage award and the cost and have somebody sign it so it is in my breast pocket when we talk. There is nothing more poisonous than trying to talk a plaintiff's attorney into the risks attendant on appeal from punitive damages and then plaintiff's counsel says, "Are you really going to pay the underlying?" And having to say, "I'm going to have to get back to you." The judge wants to start the next phase of the trial in an hour. You want to say, "Oh, by the way, here's the check that you and your client can think about." You've got to be prepared to move with some gusto and some decisiveness. Lacking decisiveness tends to be a feature of the kind of defendant that may be there.
MRS. WILSON: From the defense perspective, a lot of times I deal with mass tort litigation. The company is making a philosophical stand and they are going to try a number of cases before they decide that they should be settling these, regardless of whether there is a punitive damage verdict. But if you have a single case, if you don't knock out your punitive damage claim at the demurrer or motion to strike phase, then you need to do everything you can to get rid of it. If it's still there at trial, you need to be thinking about it in terms of jury selection and everything else you're doing during the course of the trial and post trial.
MR. DESAI: You advise your client what you're going to try to get these punitives out of the case. They're going to fix this problem that led to the punitive allegations. Ideally, we'll meet again and I'll say, "There is no punitive damage allegation in the case anymore." And the client will say, "I fixed it all." You have to do that at the beginning. Especially if it's a large corporation and you're dealing with a particular branch, and they are telling you, "Oh, no. This doesn't happen. This is a rogue." And then you find out later that in Idaho they were doing it for 20 years.
MR. KLEIN: I'm always worried when clients come to court and say, "We don't do this anymore." I know that the other side is doing anything and everything to come back and say, "Oh, yeah? We found this place in Des Moines and guess what?"
MR. SCHWARTZ: From a plaintiff's point of view, you love to hear the unrepentant client. A question in an insurance bad faith case, "If you had it to do all over again and you knew all these facts, would you make the same decision?" Answer, "Absolutely." They never make an apology to anybody. Those are the ones that explode the case. It's amazing how many institutional defendants find it difficult to say anything else. They think that if they start to apologize or they admit something, they are going to open the flood gates to punitive damages.
MR. WILSON: One of the things that I look at early on is: Do I have a parent company? How many affiliates? What is your net worth? What can I get off your Web site in your annual report? I go to in-house counsel about what this could mean. As you go through the discovery process, once you get the real answers to interrogatories that are verified, you want to be really certain that those are accurate and that you're not going to be impeached with that branch in Iowa. It's a risk assessment for the client to the extent that any of us can assess what any given jury is going to do. I have two or three of these cases around the country, and I'm willing to take a shot because factually this is my best case to test. Or do I have 2,000 of these with more coming because plaintiff's counsel is on the television every night with the 800 number?
MR. SCHWARTZ: Campbell puts parameters around punitive damages. It lets both sides calculate what the courts of appeal are going to sustain. A jurisprudence is beginning. We're beginning to see what is going to be allowed in a given case just as if it were tort damage. Now you can value these cases. The guesswork is being taken out. The leverage is just certainly with the unknown taken away. But the defendant can either say, "I am going to calculate this risk and make a rational settlement offer." Or, I'm going to calculate it as a cost of doing business."
MR. DESAI: The downside of working for a large corporation is you don't know what everyone is doing. But the plus side is if somebody is moving very slowly, and not reacting to the danger, and you've told them every horror story about a bad faith jury in the area, you can go over their head. You have to scare the hell out of them and bring somebody to the table who is rational.
MR. KLEIN: The significance of Campbell is that if we do think we have a viable defense, we can go for it and not have to worry that we're betting the company. You have a ballpark understanding of the worst-case scenario. Over the years, in a number of cases, we would have gone to trial if we had a feeling that we could make some reasonable prediction as to what the worst-case scenario was. Not knowing the worst-case scenario made us settle, no question.
MR. SCHWARTZ: The implications of Campbell is like the medical malpractice statutes that put caps on general damages to $250,000. You discourage smaller suits. There is just no economic gain, especially when fees are limited. In the post-Campbell era you're talking about smaller damages in normal multiples. The upside for the effort is gone. There were cases in the past where we made a social point of a company, to stop hurting somebody for $15,000, in an uninsured motorist claim worth a million dollars in punitive damages. We would settle those cases for $500,000, a million dollars on a $15,000 policy and bad insurance conduct. You can't take those cases anymore. Smaller cases are probably not going to be judicially dealt with. The Supreme Court has decided it's not worth it. The courts are saying the litigation game is a high stakes game. Unless you're high stakes, don't bother playing here.
MS. WILSON: California could become a haven for defendants when the California Supreme Court implements Campbell.
MR. SCHWARTZ: Governor Arnold Schwarzenegger signed legislation recently where 75 percent of the punitive damages awards now goes to the state on a final verdict. It has a sunset in two years. Any case that settles before final verdict, nothing goes to the state. Even California is taking away all that incentive to bring a punitive damage case when he can only get 25 percent less the fee. What's the point?
MR. DESAI: The best argument a plaintiff's lawyer can make in front of the jury is to say, "You found malicious conduct, give us millions and millions of dollars, help fix the streets."
MR. SCHWARTZ: Can you make that argument to a jury? It's undecided. You can't tell the juries in medical malpractice cases that the general damages have been capped.
III. Campbell's Impact on the Administration of Justice
JUDGE YOUNGER: I'm not sure how big a deal Campbell is in terms of jury instructions or jury behavior.
MR. SCHWARTZ: It's clearly going to impact value.
MR. DESAI: You're going to see fewer bad faith cases. After Campbell came down, within two or three months, word spread that all you had to do was say "Campbell" and then offer a reasonable settlement. And it ended. A lot of it was cost of defense. We'll see only the best of the best from the plaintiff's bad faith side.
IV. Wrap-Up
JUDGE YOUNGER: We don't know the scope of what kind of small case exception or distinction there may be under Campbell. But Campbell really doesn't speak to the case with a very modest amount of actual damages but plenty of reprehensibility. That's probably got to be the subject of some other doctrine, perhaps including a Supreme Court decision.
MR. KLEIN: It's painful to have to tell your client we have a good case but we can't take it to trial. We can't get our day in court because we can't take the chance that we're going to bet the company—and lose. Anything that helps to remedy that situation is a positive development.
MR. DESAI: Certainty, or at least the glimpse of certainty sometime in the future, is the Campbell legacy. I think it's a good thing. All industries are happy to see that. Particularly mine, the insurance industry, where a huge hit of mammoth proportions could drive somebody under, including policyholders.
MRS. WILSON: It brought much-needed relief from the defense perspective. It's unfortunate that people aren't sticking to the single-digit ratios. But hopefully, with some of the cases that are pending currently, we won't go too far off of that mark, so the cost of a punitive damage award is not going to be company-threatening.
MR. SCHWARTZ: Campbell recognizes in our civil justice system that punitive damages have a place. I don't like the notion that smaller harms might not be heard in the judicial system. Has Campbell struck a balanced public policy conclusion to that issue? In the end, I hope we don't have all the bad corporate conduct all over the place. That's the legacy of Campbell.
Participants:
Arnold W. Schwartz
Partner, Mazursky & Schwartz
Plaintiff-side employment discrimination, major personal injury, product
liability, insurance bad faith, business litigation and professional
liability.
Asim K. Desai
Managing partner, Los Angeles, Carlson, Calladine & Peterson
Representation of property and casualty insurers in bad faith litigation, and commercial disputes for small and large businesses.
Keith D. Klein
Partner, Hogan & Hartson
Complex business litigation.
Hon. Eric E. Younger (ret.)
Neutral, Alternative Resolution Centers
All phases of dispute resolution.
Roxanne M. Wilson
Partner, Reed Smith
Litigation, products liability group, including prescription pharmaceuticals,
medical devices and consumer products, unfair competition and class actions.
Lisa Miller
Principal, Miller Consulting
Full-service business development services in the legal industry.