Friday, April 8, 2005
State Supreme Court Justices Told:
Disgorgement Is a Constitutional Measure of Punitive Damages
By DAVID WATSON, Staff Writer
Punitive damages greater than nine times compensatory damages are constitutional if they do not exceed the amount of a defendant’s gain from wrongful conduct, the state Supreme Court was told yesterday.
Erwin Chemerinsky, a Duke University law professor and constitutional scholar who until recently taught at USC, argued in Los Angeles that the Fifth District Court of Appeal erred in cutting a $10 million judgment against Ford Motor Co. down to $53,435. The appellate court found the reduction, to triple the compensatory damages awarded in the case, was required by the U.S. Supreme Court’s 2003 decision in State Farm Mutual Automobile Insurance Company v. Campbell, 538 U.S. 408.
The Fifth District’s unpublished decision in Johnson v. Ford Motor Company was filed in November of 2003, and the state high court granted review in March of 2004. Greg and Jo Ann Johnson won the award after buying a used Ford Taurus from a Ford dealership in 1998.
After experiencing repeated transmission problems, the original buyer sought a replacement vehicle under California’s Lemon Law, but eventually agreed to trade the Taurus in on a new car and accept a $1,500 “owner appreciation certificate” from Ford.
The Johnsons argued that Ford violated the Lemon Law by failing to disclose the vehicle’s repair history. The titles of vehicles repurchased under the law must be “branded” as Lemon Law buybacks and future purchasers are entitled to notification of the prior problems.
Chemerinsky faced skeptical questioning from several justices, who pointed out that the U.S. high court in State Farm suggested that punitive damage awards in greater than single-digit ratios to compensatory awards will rarely be constitutional.
But Chemerinsky called the Fifth District’s application of the three-to-one ratio “arbitrary,” contending that disgorgement of ill-gotten gains was “ideally suited” to serve the goals of deterrence and punishment of conduct found to be fraudulent, malicious or oppressive.
The Fifth District panel, Chemerinsky noted, said punitive damages were justified because evidence at trial showed Ford’s policy on handing out OACs to dissatisfied customers “was structured precisely to short-circuit lemon law claims whenever defendant plausibly could.” The attorney estimated that Ford used the technique to save $18 million over a two-year period.
When Justice Marvin Baxter queried him about the fairness of permitting a particular defendant to recover a huge sum based on a defendant’s mistreatment of other individuals who are not involved in the lawsuit, Chemerinsky conceded that punitive damages “are always in the nature of a windfall.” But California courts, he said, have never rejected awards on that basis.
The professor also rejected suggestions that using disgorgement as a measure of punitive damages would subject a defendant to duplicative multiple recoveries from a succession of individual plaintiffs. Juries would be required to consider previous punitive damages awards in subsequent cases under existing precedent, Chemerinsky contended.
Baxter asked why it would be “too much of a burden” for plaintiffs to file class actions, so that recovery could be rationally apportioned.
“Class actions are one method, but punitive damages are another” for redressing such wrongs, Chemerinsky said. He noted that while a class action filed against Ford was settled and required a $500 payment to each class member, “very few of the injured consumers know and very few come forward.”
The kind of misconduct at issue is often difficult to discover, he explained.
The attorney also challenged Baxter’s suggestion that permitting the first plaintiff to get a case to trial to recover punitive damages based on disgorgement would result in a “race to the courthouse.”
“Experience shows that race to the courthouse doesn’t happen.”
Striking a note at odds with his contention that disgorgement is a good measure of the amount necessary to punish and deter misconduct, Chemerinsky also argued that Ford “really hasn’t been punished” by the $10 million award, since the award would do no more than to put the defendant in the same position it would have been in had the misconduct not occurred.
Arguing on behalf of Ford, attorney Theodore J. Boutrous Jr. of the Los Angeles office of Gibson, Dunn & Crutcher said State Farm stands for the proposition that the “heartland of ratios” for punitive to compensatory damages is two-to-one or three-to-one.
“No California court has endorsed disgorgement” as a measure of punitive damages in an individual action, Boutrous declared.
He noted that the jury vote on the punitive damages award was 9-3.
Boutrous said the disgorgement measure urged by Chemerinsky had been “rejected” by the U.S. Supreme Court in State Farm, but Justice Kathryn M. Werdeger responded:
“I wish State Farm were that clear, but I don’t see it as that clear.”
When Baxter queried him on whether, under State Farm, wealth is “still an independent factor to be considered” in calculating punitive damages, Boutrous conceded that it is. But he said an award that exceeds the “guideposts” established by State Farm and other high court decisions is unconstitutional, no matter how rich the defendant may be.
Baxter pressed him on whether an award of only a few thousand dollars in punitive damages could be meaningful against a large corporation.
“Is that an oxymoron?” the justice asked.
Boutrous responded that to “throw the wealth of a big company into the mix is toxic.”
Johnson was the second of two punitive damages cases argued before the justices yesterday afternoon. The first, Simon v. San Paolo U.S. Holding Company, Inc., involved a property dispute between a millionaire and a bank.
In that case, Lionel Simon won a punitive damages award of $1.7 million but only $5,000 in compensatory damages. The award was affirmed by this district’s Div. Four, and after the U.S. Supreme Court ordered reconsideration in light of State Farm, the appellate court affirmed again.
Writing for the court, Justice J. Gary Hastings pointed out that the compensatory damages award represented only out-of-pocket expenses. In determining whether the ratio of the punitive damages to the harm Simon suffered was reasonable, Hastings said, the jury was also entitled to consider the benefit he lost when the land transaction fell through.
By that standard, Simon’s lawyers argued yesterday, the ratio was less than four to one.
In agreeing to review the case, the Supreme Court said it posed the issue of whether “uncompensated or potential” harm to the plaintiff could be considered in determining the constitutional scope of punitive damages.
Attorney Daniel Smith, representing the Consumer Attorneys of California, said it could, and argued that State Farm adopted an “elastic concept” of punitive damages “large enough to support the awardÖin this case.”
Smith warned that there is a “trend” in the appellate courts to treat State Farm as establishing an upper limit of four times compensatory damages for punitive damages awards. He called that interpretation mistaken and an “urban legend,” and asked the state high court not to fuel it.
State Farm provides no “bright line test” and only cautions that “few” punitive damages awards will be constitutional if they exceed single-digit ratios “to a significant degree,” Smith said.
Copyright 2005, Metropolitan News Company