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Greg and Jo Ann Johnson were thrown for a loop 17 months ago when a Fresno appeal court tossed out almost all of their $10 million punitive damage award in a lemon lawsuit against Ford Motor Co. Exactly one week later, Lionel Simon celebrated when a Los Angeles appellate panel upheld his $1.7 million in punitive damages in a real estate fraud case against Italy’s largest commercial bank. In each case, the courts were interpreting State Farm Mutual Automobile Insurance v. Campbell, 538 U.S. 408, a 2003 ruling in which the U.S. Supreme Court said punitive damages should rarely exceed a single-digit ratio. With one California appellate court construing the ruling broadly and the other narrowly, the need for further clarification became obvious. On Thursday, the state Supreme Court, meeting in Los Angeles, hopes to do just that when it hears oral arguments in both cases. At stake are millions if not billions of dollars in future litigation. “The California Supreme Court has not looked at the question of excessive punitive damages for at least two decades,” said Theodore Boutrous Jr., a partner in Los Angeles’ Gibson, Dunn & Crutcher who will argue Ford’s position. “For a state that has for so long been a leader in tort law, it is very important that our Supreme Court look at these issues and provide clear guidelines.” Defense lawyers such as Boutrous argue that arbitrary and unlimited punitive damages have a chilling effect on state commerce, discourage innovation and increase consumer costs. Their opponents, including Duke University’s Erwin Chemerinsky, argue that large punitive awards keep companies honest and deter further wrongdoing. Chemerinsky will be arguing for the plaintiffs in the Ford case. Defense lawyers are backed by several amici curiae, including the U.S. Chamber of Commerce, the Product Liability Advisory Council Inc., the Washington Legal Foundation, and a slew of industry and insurance interests. The plaintiffs have the support of the Association of Trial Lawyers of America and the Consumer Attorneys of California. The U.S. Supreme Court in Campbell ruled that punitive damages should bear some reasonable relationship to the harm involved. Although the justices didn’t set any specific ratios, they said that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.” The 6 -3 decision was the court’s third attempt — after BMW of North America v. Gore, 517 U.S. 559, and Cooper Industries v. Leatherman Tool Group, 532 U.S. 424 — to rein in jaw-dropping punitive damage awards. “Because civil defendants are not accorded the protections afforded criminal defendants,” Justice Anthony Kennedy wrote in Campbell, “punitive damages pose an acute danger of arbitrary deprivation of property, which is heightened when the decision maker is presented with evidence having little bearing on the amount that should be awarded.” The justices instructed courts reviewing punitive damages to consider the degree of reprehensibility of the defendant’s misconduct, the disparity between the actual or potential harm suffered by the plaintiff, and the punitive damages award and the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. In Johnson v. Ford Motor, the Johnsons had claimed that the giant automobile maker had a practice of reselling defective vehicles without disclosing their repair history. Jurors awarded them nearly $18,000 in compensatory damages for their problem-plagued 1997 Ford Taurus, and $10 million in punitives based on the assumption that Ford had resold faulty cars or trucks to other consumers at least 1,200 times a year. Fresno’s Fifth District Court of Appeal, relying on Campbell, decided on Nov. 25, 2003, that the Johnsons couldn’t profit from other buyers’ woes and reduced the punitive award to $53,435, approximately three times the compensatory damages. However, seven days later on Dec. 2, L.A.’s Second District upheld a $1.7 million punitive damage award against San Paolo U.S. Holding Co., even though the plaintiff had gotten only $5,000 in compensatory damages for out-of-pocket expenses — a ratio of 340:1. The court ruled in Simon v. San Paolo U.S. Holding that in defrauding Simon out of the purchase of a small office building in downtown Los Angeles, San Paolo had actually caused him to lose $400,000 — making the ratio 4:1. In their court papers, attorneys for San Paolo call the Second District’s ruling a “tortured analysis” that “abrogates” Campbell’s limits on punitive damages. “Under the court of appeal’s rationale in this case,” wrote Lawrence Abelson, a partner in Los Angeles’ Epport, Richman & Robbins, “any punitive damage award can pass constitutional muster by searching the record and conjuring up a level of harm sufficient to bring the award within the limits established in State Farm.” Boutrous hopes the court will use the Ford and San Paolo cases to draw a bright line, “so we don’t see a return to the random and arbitrary damage awards.” Many defense lawyers have argued that the high court’s ruling in Campbell established a bright line requiring punitive damages to be no higher than a single-digit ratio — 9:1 tops. But Andre Jardini, a partner at Glendale’s Knapp, Petersen & Clarke who represents Simon, said that’s just not true. In his brief to the court, he argued that the U.S. Supreme Court never restricted punitive damages to a single-digit ratio of compensatory damages but allowed the consideration of all harm, including uncompensated or potential harm. In Simon’s case, Jardini noted, San Paolo had agreed to sell Simon a building on Figueroa Street in downtown L.A. for $1.1 million, even though it was valued at $1.5 million. The bank sold the site to another buyer, he said, even though its officers had granted him exclusive rights. The result was a $400,000 loss for Simon. “Any reduction in this [$1.7 million] award will be deemed a victory by companies like San Paolo who sanction dishonest conduct by their officers in total disregard of the rights of others,” Jardini wrote in his papers. In a phone interview, Jardini said San Paolo’s conduct was especially heinous in that its officers “went behind [Simon's] back and sold to another person, and then they lied about it. They should be punished.” Fresno attorney William Krieg, who represents the Johnsons in the Ford case, couldn’t be reached for comment. But in his court papers, the partner in William M. Krieg & Associates argued that Campbell doesn’t prevent jurors, when considering punitive damages, from taking into account a company’s profit from deceptive sales. “The courts must remain free to determine punitive damages based on the unique facts of each case,” Krieg stated, “and not be bound to a simple mathematical formula.” He said the $53,435 in punitive damages approved by the Fifth District represented less than two-tenths of 1 percent of the $9.6 million Ford gained each year from selling vehicles with undisclosed faults. “As punishment, it is insignificant,” Krieg wrote. “As a deterrent, it allows Ford to retain more than 99 percent of its year 2000 profit, and to retain 100 percent for all other years.” Both cases — Simon v. San Paolo U.S. Holding, S121933, and Johnson v. Ford Motor, S121723 are on the 1:30 p.m. calendar.

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