Does California Make A Good Neighbor For State Farm? Or Are California Courts Misapplying The Supreme Court's Punitive Damages Analysis? - Part II

Thursday, April 1, 2004 - 01:00

Punitive Damages Based Upon Out-of-State Conduct Does Not Further Any Legitimate State Interest

No state may punish a defendant for engaging in lawful conduct. "To punish a person because he has done what the law plainly allows him to do is a due process violation of the most basic sort." Gore, 517 U.S. at 573 n. 19 (quoting Bordenkircher v Hayes, 434 U.S. 357, 363 (1978)). State Farm reaffirms that principle. State Farm, 123 S. Ct. at 1522 ("A State cannot punish a defendant for conduct that may have been lawful where it occurred."). Thus, even where such conduct would violate the forum state's law, punitive damages cannot be imposed based on identical or similar conduct permitted in a sister state. Gore, 517 U.S. at 585 ("While each State has ample power to protect its own consumers, none may use the punitive damages deterrent as a means of imposing its regulatory policies on the entire Nation.")

The Supreme Court explained that evidence of lawful out-of-state conduct is admissible only for a limited purpose and only when it has a nexus to the specific harm to the plaintiff - i.e., where the lawful out-of-state conduct "demonstrates the deliberateness and culpability of the defendant's action in the State where it is tortious, but that conduct must have a nexus to the specific harm suffered by the plaintiff." State Farm, 123 S. Ct. at 1522. Moreover, such conduct cannot be used as a basis for punitive damages. Id. at 1522.

Whether a forum state could punish conduct that is illegal in a sister state was arguably left open by Gore, though many courts held that out-of-state conduct was simply irrelevant.1 No longer is there any doubt: "Nor, as a general rule, does a State have a legitimate interest in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State's jurisdiction." State Farm, 123 S. Ct. at 1522.

Diamond Woodworks and Simon were essentially local disputes and did not present out-of-state conduct issues, which typically arise in cases involving products or services marketed and sold on a nationwide basis. Romo and Henley did involve out-of-state conduct issues, and both fail the State Farm test. It is not necessary to plumb the evidentiary record from the trial courts, since the appellate decisions themselves reflect consideration, and condemnation, of out-of-state conduct. In Romo, for example, the Court justified its result at least in part on its finding that the same conduct that injured the plaintiffs' family members "also put at risk all who drove or rode in this model Bronco." 113 Cal. App. 4th at 755.

Similarly, in Henley the Court punished Philip Morris for conduct that allegedly affected the general public (and thus plaintiff, because of her membership in that class), including evidence that the tobacco giant allegedly caused "millions of children" to smoke both within and outside the state, and at times when plaintiff was not even a minor. 112 Cal. App. 4th at 247 (the defendant's conduct was "directed at the entire public . . . an entire category of persons to which plaintiff squarely belongs."). If this is a sufficient basis to punish a defendant for out-of-state conduct, then State Farm's limitations on out-of-state conduct - as well as its requirement of a nexus between the conduct and the individual plaintiffs' injuries - is meaningless. In other words, the logic of Henley effectively but improperly presupposes that any and all conduct by a national manufacturer is amenable to punishment.

The lesson from State Farm is clear: Neither legal nor illegal out-of-state conduct can provide a basis for the imposition of punitive damages. Though some evidence might be admitted for a limited purpose, doing so is fraught with risks of reversal.
The Proportionality Factor: No More Than A One-to-One Ratio Should Be Used In Cases Involving Substantial Compensatory Awards

Under State Farm, (1) "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process;" (2) a 4-to-1 ratio might be "close to the line of constitutional impropriety;" (3) "[w]hen compensatory damages are substantial, a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee;" and finally, (4) punitive damages awards must be "both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered." 123 S. Ct. at 1524.

Thus, under State Farm, due process plainly limits punitive damages in all but exceptional cases to a single-digit ratio, and requires a no more than one-to-one multiplier where "compensatory damages are substantial." Id. at 1524. And, the Supreme Court specifically noted that the $1 million compensatory award was "substantial." Id.

Diamond Woodworks is arguably most faithful to State Farm's proportionality test.2 In that case, the Fourth Appellate District held: "With regard to the ratio of punitive damages to compensatory damages, we have no doubt that anything exceeding four-to-one would not comport with due process under State Farm." Diamond Woodworks, 109 Cal. App. 4th at 1055; see id. at 1057 ("in the usual case . . . the outer constitutional limit on the amount of punitive damages is approximately four times the amount of compensatory damages."). Specifically, the court found that a $5.5 million punitive damages award (which represented a 13-to-1 ratio of punitive to compensatory damages) was constitutionally impermissible. Id. at 1050. Accordingly, it awarded a new trial, unless plaintiff accepted a remittitur to $1 million in punitive damages (approximately 3.8 times the compensatory damages award for fraud as remitted by the court). Id. at 1057.

The other three appellate decisions are less faithful to State Farm's proportionality requirements. And, none of those three cases applied Diamond Woodworks' conclusion that due process limits punitive damages to a 4-to-1 ratio.

In Romo, the court approved $23.7 million in punitive damages, a ratio of nearly 5-to-1 times the substantial compensatory damages award. 113 Cal. App. 4th at 763. The court both questioned the logic of (Romo, 113 Cal. App. 4th at 751), and later rejected (Romo, 113 Cal. App. 4th at 761 ("we do not believe that the deathly harm component of the punitive damages award in the present case is strictly constrained by the single-digit multiplier set forth in State Farm")), State Farm's proportionality requirement, because, it wrote, Gore's "proportionality factor has less weight" in cases involving death. Romo, 113 Cal. App. 4th at 761. The Romo court rationalized that a higher ratio was justified because a "state has an extremely strong interest" in being able to impose punitive damages in a wrongful death case. Id. at 763. This explanation is remarkable since, by statute, punitive damages are rarely if ever available in wrongful death cases in California.

In Henley, the Court gutted its own months-earlier approval of a $25 million punitive damages award (a 17-to-1 ratio) because it was now constitutionally impermissible, but awarded $9 million in punitive damages (a 6-to-1 ratio). It did so despite its recognition that, under State Farm, given the "ample" compensatory award, any ratio over 4-to-1 was close to the line of a due process violation. Henley, 112 Cal. App. 4th at 248. It justified the result by citing what it called "extraordinarily reprehensible conduct," evidence of which, as noted above, violated State Farm's nexus requirement. Id.

In Simon, the Court upheld a punitive damages award of $1.7 million where the compensatory damages were only $5,000! That is a 340-to-1 ratio. The Court justified this result by claiming that if California law permitted (which it does not) compensatory damages to include plaintiffs' lost profits ($400,000) - the ratio would become approximately 4-to-1.3

Each of Romo, Henley, and Simon demonstrate at a minimum a reluctance to abide by the proportionality requirements of State Farm. The rhetoric of these decisions is entirely reminiscent of Grimshaw and reflects an eagerness to punish defendants whose conduct is viewed as really, really reprehensible. This approach impermissibly allows courts to substitute their own views for the constitutional mandates of fair notice and no arbitrary deprivation of property.
After State Farm, Evidence Of The Financial Condition Of The Defendant Is Irrelevant, Prejudicial, And Probably Unconstitutional

State Farm limits the relevance of evidence of a defendant's financial condition, and it may eliminate it altogether unless offered by the defense in mitigation. The Supreme Court made it crystal clear that (1) a defendant's wealth "cannot justify an otherwise unconstitutional punitive damages award" (State Farm, 123 S. Ct. at 1525), and (2) a punitive damages award must be "proportionate to the wrong committed" (Id. 123 S. Ct. at 1526). The twin concerns of due process articulated by the Supreme Court Ñ fair notice and no arbitrary deprivation Ñ are not dependent on or functions of a defendant's financial condition. The financial condition of a defendant has nothing to do with proportionality of wrong to the plaintiff. Nor does the financial condition of a defendant have anything to do with fair notice and avoidance of arbitrary punishment.

In Romo, the court appropriately held that State Farm invalidated BAJI 14.71, which provides that juries in arriving at an award of punitive damages are to consider "the amount of punitive damages which will have a deterrent effect on the defendant in light of defendant's financial condition." Romo, 113 Cal. at 805. The Court explained that "while clearly supported by California law under Grimshaw, [BAJI 14.71] fails to restrict the jury to punishment and deterrence based solely on the harm to the plaintiffs, as apparently required by federal due process." Ibid.

Simon reaches a diametrically opposite result. It interpreted State Farm to be consistent with California authority. Citing Grimshaw, the court wrote: "California authority hold[s] that a punitive damage award should not be so small 'that it can be simply written off as a part of doing business.'" Simon, 2003 WL 22847318, at 389. The court continued: "Calculating an amount that would be punitive necessarily involves a consideration of the defendant's wealth." Id. at 389, n. 12. This Grimshaw-type rationale, explicitly repudiated in Romo, was used by the Simon court to justify a $1.7 million punitive damages award - which represented a 340 multiple of compensatory damages.

In Henley, the court acknowledged that State Farm rendered "uncertain" the constitutional soundness of a traditional criterion of California punitive damages law: "The wealthier the wrongdoer, the larger the punitive damage award must be to meet the goals of punishment and deterrence." Henley, 112 Cal. App. 4th at 249 (quotation and citation deleted). It then dispensed with further analysis because of its view that its reduction of the punitive damages award cured any and all problems in the trial court.

There are also other flaws in the Grimshaw - Henley - Simon logic. Perhaps most importantly, no defendant can order its conduct by post-hoc, inconsistent, and/or arbitrary jury verdicts (or even appellate decisions). Second, corporate defendants are punished by the opprobrium of punitive damages verdicts, the self-flagellation required by SEC disclosures, and the displeasure of their shareholders. Third, most punitive damages verdicts arise from dated, cherry-picked documents written by isolated and typically long-departed employees. Fourth, punitive damages analyses, especially "reprehensibility" analyses, are rarely more than Monday-morning quarterbacking.

In any event, State Farm now mandates a more disciplined and less subjective analysis, and there is little or no place for financial condition in that equation.4
Conclusion

The struggle of California's appellate courts to apply State Farm is understandable given California's long-standing, but now repudiated, "broad view" of punitive damages. Until California appellate and trial courts accept and implement the lessons of State Farm, however, jackpot justice remains a possibility, if not a reality, for defendants forced to litigate in California. Until the courts do so, there remains ample room for runaway punitive damages awards.

1 White v. Ford Motor Co., 312 F.3d 998, 1017 (2002), opinion amended on denial of reh'g by 335 F.3d 833 (the "logic and language of BMW" mean that a single State cannot not properly punish a defendant even for conduct that was unlawful in the other state(s) where it occurred.); Johansen v. Combustion Eng'g Inc., 170 F.3d 1320, 1333 (11th Cir.) (applying BMW) (In order to be constitutional "[p]unitive damages must be based upon conduct in a single state - the state where the tortious conduct occurred - and reflect a legitimate state interest in punishing and deterring that conduct."); Cont'l Trend Res., Inc. v. OXY USA Inc., 101 F.3d 634, 636-37 (10th Cir. 1996) (stating that BMW applies even in cases where the defendant's conduct would be tortious in any state); Geressy v. Digital Equip. Corp., 950 F. Supp. 519, 521 (E.D.N.Y. 1997) ("punitive damages cannot be awarded to punish or deter acts in other states which do not affect the forum state").

2 Whether Diamond Woodworks makes a case for a "near the maximum ratio" of punitive damages is doubtful. The fact pattern of Diamond Woodworks appears far less egregious than the fact pattern in State Farm, particularly as revealed in Justice Ginsburg's dissenting opinion in State Farm.

3 The Simon court drew comfort from pre-State Farm decisions in which the Supreme Court approved high multiples. E.g., TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993).

4 Beyond citing State Farm, Diamond Woodworks pays only passing attention to the issue. 109 Cal. App. 4th at 1056.

Paul G. Crist is a Litigation Partner in Jones Day's San Francisco Office. He has represented clients in complex product liability matters in state and federal trial and appellate courts throughout the United States. Matthew P. Vandall is an Associate in San Francisco and a member of the General Litigation Practice. The opinions expressed herein are solely those of the authors, not of the firm.

Please e-mail the authors at pgcrist@jonesday.com or mpvandall@jonesday.com with questions about this article.