Wednesday, December 2, 2009

California Supreme Court Speaks Yet Again on Punitive Damage Limitations

The California Supreme Court has just spoken again on the issue of punitive damages. On Monday, November 30, 2009, the California high court handed down in its decision in Roby vs. McKesson Corporation. (The preceding link is to the official web site of the California Supreme Court and will only be current for 120 days.)

In Roby, the Supreme Court ruled that the maximum punitive damages award allowed under the federal constitution in the context of the facts of this case were no higher than a 1 to 1 ratio of punitive damages to compensatory damages. Purporting to apply the tests of State Farm Mut. Auto Ins. Co. v. Campbell (2003) 538 U.S. 408, 416-418 (State Farm) and BMW of North America v. Gore (1996) 517 U.S. 559, 568 (BMW), the Court ruled that the facts of this case fell within what it characterized as a low level of reprensibility and was coupled with what it characterized as a substantial award for non-economic damages (i.e., emotional distress). The conclusion that the wrongdoing was only "sort-of" reprehensible seemed to be driven by the stated and unstated evaluation of the fact that only a mid-level manager of a large and wealthy corporation was involved in the wrong-doing, even though his acts were repeated (frequency being the supposed test for evaluating wrongdoing). The opinion reads as if the Court were almost siding with the company because it was being stuck with liability by one of its supposedly rogue mid-level managers.

The concurring and dissenting opinion, however, felt that the maximum cap for a punitive award could be larger than a 1 to 1 ratio. However, even that opinion would allow no more than a 2 to 1 ratio.

If you work for or are the risk manager of a company, you might be very pleased with this decision as it shows a court's hostility towards charachterizing conduct as "really" bad (read the concurring/dissenting opinion to see why those justices would call the conduct "moderately" reprehensible). The decision also demonstrates the importance of the litigation strategy of characterizing the conduct.

If, however, you or your company are involved in litigation with an insurance company over their bad faith treatment of your company, you might find this decision certainly troubling. At no point does the Court deal in any meaningful way with the wealth of the corporation, although it does pay lip service to the fact that wealth has survived as an evaluative criterion even after the hostile U.S. Supreme Court decisions in State Farm and BMW. Yet, without assessing that impact, the California Supreme Court lets stand a reduced award that may (as far as one can tell from reading this decision) be a mere pin-prick in the operations and revenues of the defendant.

Applied to insurance bad faith litigation, this decision shows the need for the policyholder to perservere in demonstrating that the conduct complained of was sanctioned on high within the insurance company, was part of or a component of (if true) a general course of dealing or set of practices, and was more than the conduct of a mere rogue actor. Proving these fact, however, ought often to be fairly easy, given that many insurance company decisions -- at least with respect to sizeable claims -- are made by several people at varying levels of authority and reviewed by lawyers who are often involved to try to cloak the decision making process with privilege protection.

This decision makes highly relevant the practices of the defendant even when the acts complained were undertaken by a single individual so the plaintiff (policyholder in an insurance suit or plaintiff in the liability suit) can demonstrate facts pertaining to "who knew" and "how common". I believe that we will see this decision cited in numerous discovery battles over the scope of potentially relevant discovery.

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