Written By Attorneys Craig A. Cohen, Darren L. Harrison and Mark H. Rosenberg

Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

The California Supreme Court recently issued two decisions that will inform how courts throughout America’s largest state review punitive damage awards following the United States Supreme Court’s landmark decision in State Farm Mut. Auto. Ins. Co. v. Campbell. As discussed below, the California Supreme Court affirmed a double-digit punitive damages award, and held that punitive damage awards could exceed the single-digit limitation strongly recommended by Campbell. Additionally, the California Supreme Court held that evidence showing a defendant has a practice of engaging in, and profiting from, wrongful conduct similar to that which injured the plaintiff may be considered in the analysis of whether a punitive damages award is unconstitutionally excessive. Although the true impact of these cases is yet to be determined, the plaintiffs’ bar in California and other states will undoubtedly use these cases as a basis for seeking double-digit punitive damages awards, and for placing an insurer’s corporate practices and internal guidelines at the forefront of the punitive damages analysis.

Johnson v. Ford Motor Co., --- P.3d ---, 2005 WL 1404423 ( Cal. Jun. 16, 2005), concerned allegations that Ford concealed a vehicle’s history of transmission repairs and replacements when reselling the vehicle. A jury awarded the Johnsons $17,811.60 in compensatory damages and $10 million in punitive damages. The Court of Appeal reduced the punitive damages award to $53,435.00 (roughly a 3:1 ratio). The California Supreme Court granted review.

In Simon v. San Paolo U.S. Holding Company, Inc., --- P.3d ---, 2005 WL 1404425 (Cal. 2005), the prospective buyer of an office building brought suit against the seller for specific performance of the contract, and also sought damages for breach of contract and fraud. The jury awarded the prospective buyer $5000 in compensatory damages and $1.5 million in punitive damages. The seller appealed, and the prospective buyer cross-appealed. The Court of Appeal affirmed and, as was the case in Johnson, the California Supreme Court granted review.

In both these cases, the California Supreme Court based its analysis upon the United States Supreme Court’s landmark decisions in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003) and BMW of North America v. Gore, 517 U.S. 559 (1996).

I. Johnson v. Ford Motor Co.

While the Johnson court agreed that the trial court’s award of punitive damages was clearly excessive and violative of the standards set forth in Campbell, the Court criticized the Court of Appeal’s failure to consider evidence of Ford’s corporate practices and procedures. The Court emphasized that a civil defendant’s recidivism remains pertinent to an assessment of culpability. The Court noted that due process does not prohibit state courts, in awarding or reviewing punitive damages, from considering the defendant’s illegal or wrongful conduct toward others that was similar to the tortious conduct that injured the plaintiff or plaintiffs. While acknowledging that Campbell requires reasonable proportionality between the amount of punitive damages and the actual or potential harm to the plaintiff, the Court observed that the reasonableness of this ratio necessarily depends on the reprehensibility of the conduct, which in turn is influenced by the frequency and profitability of the defendant’s prior or contemporaneous similar conduct. Quoting from the United States Supreme Court’s opinion in BMW, the Johnson court held that evidence that a defendant that has repeatedly engaged in profitable but wrongful conduct may demonstrate that “strong medicine is required” to deter the conduct’s further repetition.

While recognizing that the scale and profitability of a course of wrongful conduct by the defendant cannot justify an award that is grossly excessive in relation to the harm done or threatened, the Johnson court held that scale and profitability nevertheless remain relevant to reprehensibility, and therefore may be considered in the determination of an award of punitive damages. The Court interpreted BMW and State Farm as limiting the size of individual awards, but leaving undisturbed the states’ “discretion” to apply their own standards with regard to punitive damages. The Court noted that California law has long endorsed the use of punitive damages to deter the continuation or imitation of a corporation’s course of wrongful conduct, and hence allowed consideration of that conduct’s scale and profitability in determining the size of award that will vindicate the state’s legitimate interests. The Court concluded that BMW and Campbell did not place any limitations on the ability of California courts to take corporate profitability into account in the analysis of a punitive damages award.

While concluding that the profitability of a defendant corporation is relevant to the determination of punitive damages, the Court rejected the plaintiff’s argument that the purpose of such an award should be the disgorgement of all profits from a group of transactions similar to that which harmed the plaintiff. The Court held that the use of this theory will likely result in an award that is disproportionate to the individual plaintiff’s compensatory award, while also noting that the theory would allow plaintiffs to seek recover on “hypothetical claims” without having to establish these claims through the mechanism of a class action proceeding.

Given the failure of the lower court to consider evidence of Ford’s policies, practices, and profitability, the California Supreme Court remanded for a new determination of the maximum constitutional award.

II. Simon v. San Paolo U.S. Holding Company, Inc.

In Simon, the California Supreme Court offered its interpretation of the United States Supreme Court’s statement in Campbell that “few awards” significantly exceeding a single-digit ratio will satisfy due process. The Court opined that the Campbell holding created a type of presumption in which ratios between the punitive damages award and the plaintiff’s actual or potential compensatory damages that are significantly greater than nine or 10 to one are deemed suspect and, absent special justification (by, for example, extreme reprehensibility or unusually small, hard-to-detect or hard-to-measure compensatory damages), cannot survive appellate scrutiny under the due process clause. However, the California Supreme Court noted that multipliers less than nine or 10 to one are not presumptively valid under Campbell.

The Simon Court disagreed with the California Court of Appeal’s holding in Diamond Woodworks, Inc. v. Argonaut Insurance Company, 109 Cal.App.4th 1020, 135 Cal.Rptr.2d 736 (2003), that “in the usual case” Campbell establishes an “outer constitutional limit” in which punitive damages may not exceed compensatory damages by a ratio greater than 4:1. Thus, courts in California will likely uphold punitive damages awards exceeding four times the compensatory damages in “usual cases” provided such awards are otherwise consistent with due process.

Additionally, the California Supreme Court asserted that a court can consider the defendant’s financial condition in the consideration of punitive damages, noting that in certain cases a defendant’s financial condition, when combined with the reprehensibility of the underlying conduct and a low compensatory award, may support an “extraordinary ratio between compensatory and punitive damages.”

The Simon court ultimately concluded that the appropriate punitive damages award was $50,000, or 10 times the compensatory award. Although the Court did not find the defendant’s conduct to be reprehensible, the Court found that the comparatively small size of the compensatory award warrants an award of punitive damages at the top of, but “not significantly beyond,” the single-digit range established in Campbell.

The California Supreme Court’s decisions in Johnson and Simon may provide the plaintiffs’ bar with significant ammunition to use against insurers and other corporations in the effort to obtain substantial punitive damages awards in the post-Campbell era. Although the impact of these cases outside of California is yet to be determined, the plaintiffs’ bar will no doubt use the cases to support arguments for double-digit punitive damages awards, as well as intrusive discovery into an insurer’s corporate practices, internal guidelines, and handling of similar claims. By appearing to place the conduct of a corporation at the forefront of the determination of punitive damages in many cases, the decisions of the California Supreme Court threaten to contravene the Campbell court’s warning that “[a]defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business.”