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Two companion punitive damages decisions issued in June by the California Supreme Court are particularly important because they are that court’s first decisions to apply the U.S. Supreme Court’s landmark decision State Farm Mut. Ins. v. Campbell, 538 U.S. 408 (2003). Like Campbell, these California Supreme Court decisions provide fodder both for extending, and for limiting, punitive damages. Simon v. San Paolo U.S. Holding, 05 C.D.O.S. 5207, was designated by the court as the lead opinion and was perhaps the more widely anticipated of the two. But Simon says little that is new: It rather predictably reversed a punitive award that was 340 times the compensatory damages. The rationale — that in determining the proper ratio between punitive awards and compensatory awards, only harms actually resulting or intended from the defendant’s conduct should be considered — is not surprising. The companion decision, by contrast, may in the long run be considered more significant. Johnson v. Ford Motor, 05 C.D.O.S. 5215, affirmed that the punitive “multiplier” may be higher in a given case depending on the wealth of the defendant and whether the harm to the plaintiff was an “isolated incident” or a “repeated corporate practice.” Johnson was also, most unusually, remanded for the purpose of considering whether the punitive award should be increased, rather than decreased. Plaintiffs will argue that Johnson is in line with an increasing number of state court decisions pushing the Campbell envelope in favor of higher punitive damages. Campbell limited punitive damages to a “reasonable and proportionate” award pursuant to three “guideposts”: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or 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 imposed in comparable cases” (citing BMW of North America v. Gore, 517 U.S. 560, 575 (1996)). Campbell recommended punitive damages in an amount “at or near” the compensatory damages in the case before it, and no more than a “single-digit multiple” generally; higher awards are constitutionally suspect. As the California Supreme Court said in Simon, “If, in BMW, the high court threw a lasso around the problem of what it had previously identified as ‘punitive damage awards’ ‘run wild,’ in State Farm it tightened the noose considerably.” Simon‘s most significant holding is its least controversial: that a punitive award must be based on harm that defendant’s tortious acts actually did or were intended to cause. Simon attempted to purchase a building from San Paolo. San Paolo’s representatives made various fraudulent misrepresentations about negotiating exclusively and sold the building to someone else. Simon spent $5,000 to open escrow in reliance on San Paolo’s false promises and was awarded that amount in actual damages. Simon claimed that he also suffered “potential harm” of $400,000, the difference between the appraised value of the property and what he was to pay for it. The 2nd District Court of Appeal agreed and upheld a $1.7 million punitive award on the rationale that it was just over four times the total “harm.” But the jury found that Simon had no enforceable agreement to buy the building, and only an agreement to negotiate. The California Supreme Court held that Simon therefore had no right to the building that could be lost because of the misrepresentations, and consequently no claim to the $400,000. “Had San Paolo � never promised to negotiate exclusively with Simon � Simon would still not have obtained the property.” While in other cases “potential harm” might be a factor in awarding punitive damages, Simon’s damages did not even qualify as “reasonably likely” to result from, or “a goal” of, “the tortfeasor’s conduct.” Simon suggests such intended damages could, in the right circumstances, be properly considered under TXO Production v. Alliance Resources, 509 U.S. 443 (1993). This distinction, between speculative damages and intended damages, will no doubt be the subject of future legal skirmishes. Simon reduced the punitive award to 10 times compensatory damages, $50,000. Simon considered this enough of a deterrent: “Even a prosperous company would ordinarily take measures to prevent the recurrence of a $50,000 net loss.” Simon held that “the presumption of unconstitutionality applies only to awards exceeding the single-digit level ‘to a significant degree.’” Plaintiffs will cite this statement in Simon to urge approval of punitive damage ratios exceeding single digits. Defendants will argue that the 10-1 award approved in Simon represents the high end of appropriate multipliers and does not justify the huge multipliers condemned by Campbell. The difference between a 9-1 award and a 10-1 award is also less significant than most other aspects of punitive damage law. Johnson, by contrast, offers zealous plaintiffs arguments that may significantly expand the law in favor of higher punitive damages, particularly in consumer cases. The Johnson plaintiffs won an $18,000 compensatory award where Ford had concealed the repair and “lemon return” history of their car. The jury awarded $10 million in punitive damages upon plaintiffs’ evidence that Ford had a corporate practice of engaging in this kind of fraud, and that $10 million represented disgorgement of profits from California consumers victimized by the same practices. The 5th District reduced punitives to $53,435, about three times the compensatory damages, on the rationale that Ford could constitutionally be punished only for its fraud on plaintiffs — “the conduct that injured the present plaintiffs” and not for other acts or defendant’s “overall course of conduct.” The Supreme Court agreed that $10 million was too high (both as a constitutional matter and under disgorgement law), but remanded because the 5th District’s focus was too narrow. The 5th District was directed to consider that Ford’s fraud was more reprehensible because it was part of a “repeated corporate practice rather than an isolated incident,” and that “the scale and profitability of Ford’s repeated conduct reflects on its reprehensibility.” The Supreme Court explained that “a defendant [that] has repeatedly engaged in profitable but wrongful conducts tends to show that ‘strong medicine is required’ to deter the conduct’s further repetition.” Johnson contrasted this with the wrongdoing that the U.S. Supreme Court found irrelevant in Campbell, because the Campbell conduct involved “bad acts” that were not like those that harmed the Campbell plaintiffs. Thus, as some anticipated, wealth or profitability continues to be a permissible factor in determining punitive damage awards. Not, as Campbell pointed out, that wealth will justify an otherwise unconstitutional award. But wealth obtained from the repeated tortious conduct at issue can determine how large a constitutional award is permissible. Wealth may never justify a 145-1 ratio where substantial compensatory damages were awarded. But it may allow a 9-1 or 10-1 ratio rather than 2-1. This is consistent with the law developing in other states. For example, after remand in Campbell itself, the Utah Supreme Court ignored the U.S. Supreme Court’s suggestion that proper punitive damages should be “at or near” the compensatory award and awarded nine times compensatory damages, arguably the upper limit before arousing constitutional suspicions. Campbell v. State Farm Mut. Ins., 98 P.3d 409 (Utah 2004). Decisions from other states similarly eschew the suggested 1-1 ratio. See, e.g., Bocci v. Key Pharm., 78 P.3d 908 (Or. Ct. App. 2003) (7-1); Hudson v. Cook, 105 S.W.2d 821 (Ark. Ct. App. 2003) (same); Boyd v. Goffoli, 608 S.E.2d 169 (W. Va. 2004) (3.3-1). Plaintiffs will likely argue that Johnson entitles them to wide-ranging and expensive discovery of national corporate practices, in search of finding some similar, egregious and profitable conduct from which to argue that the defendant needs a dose of “strong medicine.” Defendants will likely counter by arguing that Johnson permits consideration — and therefore discovery — only of conduct that is similar, and only of wealth that is from that similar conduct. Johnson also gave a victory to defendants. Johnson rejected “plaintiffs’ aggregate disgorgement theory of punitive damages.” Such a theory would potentially “overpunish” defendants by using the same conduct to justify high awards to multiple plaintiffs and result in “disproportionate” awards to each plaintiff as well. The plaintiffs in Johnson, for example, had recovered profits allegedly obtained by Ford on thousands of transactions without any evidence that Ford had actually committed the same wrongdoing on each transaction. Defendants can argue that this means discovery should only be permitted to determine if the specific conduct at issue was part of an ongoing and repeated pattern, but not to estimate and disgorge the profits obtained. In sum, plaintiffs will argue the following from these decisions: � Despite “lore” that has built up around Campbell‘s so-called single-digit rule, punitive damages may exceed a single-digit ratio to compensatory damages as long as they do not exceed “to a significant degree.” � Repeated conduct — recidivism — may justify a higher award. Because this is more likely in a consumer setting than in one-off business transactions, punitive damages may be more frequent in the former than the latter. � “Scale and profitability” may justify a higher award. � Discovery into recidivism, scale and profitability may be permitted. Defendants may be pressured into settlement to avoid this discovery. � A punitive award may be high enough to function as a deterrent. On the other hand, defendants may cite Simon and Johnson to support the following positions: � Disgorgement of profit from similar conduct is not a proper basis for punitive awards. � The damages of which punitive damages are a multiple may be only those damages actually caused by, or the goal of, the defendant’s acts. � Punitives may be lower or nonexistent in a case not involving a “repeated practice,” and so lower and less likely in single transactions than in consumer-type actions (though Simon, involving a single transaction, awarded punitive damages 10 times compensatory damages). � $50,000 may be a sufficient deterrent for “even a prosperous company.” The only “wealth” relevant to a punitive damage analysis is the profitability of similar, repeated, tortious conduct, if any, and not wealth unrelated to the acts that caused the plaintiff harm. Discovery ought to be limited accordingly. Because Johnson was remanded, it is possible that it will reappear at the California Supreme Court, and maybe even go to the U.S. Supreme Court. This is not the last word on these cases or these issues. Don Willenburg’s practice focuses on appeals, punitive damages, insurance coverage and expert witnesses. He is vice-chair of the Appellate Practice Section of the Bar Association of San Francisco. He can be reached at [email protected]. Raymond Tittman focuses on insurance coverage matters. Both practice in Carroll, Burdick & McDonough’s San Francisco office. He can be reached at [email protected].

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