Thursday, July 14, 2005
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Court Tosses Punitive Damage Award Against State Official
Ninth Circuit Says $60 Million Verdict ‘Cannot Survive Constitutional Scrutiny,’ Even if Defendant Impeded ‘Search for Truth’
By KENNETH OFGANG, Staff Writer/Appellate Courts
A $60 million punitive damage award against an Arizona elected official who allegedly interfered in a business merger so that an attorney friend could collect huge fees from another company was tossed out yesterday by the Ninth U.S. Circuit Court of Appeals.
The judges upheld a jury verdict holding James M. Irvin, a former member of the state Corporations Commission, liable for interference with the failed merger agreement between Southern Union Company and Southwest Gas Corporation. But the court said the punitive damage award was excessive, even though Irvin’s wrongdoing—including an effort to falsify trial evidence—was substantial.
Jurors found that Irvin deliberately set out to torpedo the Southern Union-Southwest Gas deal, which would have created the largest natural gas utility in the United States.
Southern Union’s bid came after Las Vegas-based Southwest Gas agreed to merge with ONEOK, Inc., an Oklahoma firm. ONEOK was to pay $1.8 billion for the company, but the 1998 agreement provided that Southwest Gas did not have to go through with the merger if it received a better offer.
Superior Bid
Southern Union then bid $108 million more than ONEOK was offering. Southwest’s directors voted unanimously to pursue the Southern Union deal, but eventually nixed it—citing the potential for protracted delay in obtaining regulatory approvals—and gave ONEOK the go-ahead to complete the original deal.
Southern Union then sued Southwest Gas along with Irvin, ONEOK, Irvin’s friend Jack Rose, and others. ONEOK eventually pulled out of the merger and paid Southern Union $3 million to settle; Southern Union also settled with the other defendants, the largest payment being $17.5 million by Southwest Gas.
Rose apologized to Southern Union and paid the company $75,000, which it donated to a Phoenix hospital, but pled the Fifth Amendment to avoid answering questions at trial. The Justice Department eventually declined to file criminal charges.
At trial, Southern Union presented evidence that Rose, after resigning as executive secretary of the Corporations Commission—which must approve utility mergers, among other duties—worked to undermine the Southern-Southwest deal, then made an agreement with a securities underwriter that would have produced millions of dealers in fees for Rose if Southern finally merged with ONEOK.
Evidence was presented that Rose and Irvin then contacted regulators in other states—including Nevada Gov. Kenny Guinn, a former chairman of Southwest Gas—as part of their efforts to derail the Southern-Southwest agreement.
The trial resulted in a judgment against Irvin for $390,000 in compensatory damages and $60 million in punitives.
In denying the defendant’s 2003 motion for a new trial, U.S. District Judge Roslyn O. Silver of the District of Arizona distinguished the then-recent Supreme Court ruling in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408. That case, which held that punitive damages should generally be limited to nine times compensatory damages, or less, depending on the facts of a specific case, did not involve a corrupt scheme by a public official, Silver noted.
The judge also cited an effort by Irvin “to impede the jury’s search for truth at trial” by having his wife fabricate notes of a telephone call between herself and Rose in which Rose allegedly said cleared Irwin of involvement in his effort to collect fees from the underwriter.
Legal Bill
Irwin subsequently resigned from the Corporations Commission under threat of impeachment, although he has continued to deny wrongdoing and has been engaged in litigation with the state over liability for the judgment, as well as for his legal bill, which stood at about $600,000 as of last year.
He is represented by Barry Richard of the Tallahassee, Fla. office of Greenberg Traurig, best known for his representation of President Bush in Bush v. Gore.
Senior Judge John T. Noonan, writing for the court, said the concerns cited by Silver were properly considered, but the judgment was still excessive.
“The ratio of over 153 to 1...cannot survive the constitutional scrutiny required by the Supreme Court,” Noonan wrote.
The case was sent back to Silver for a remittitur or a new trial on punitive damages. But the panel did not set parameters, meaning the plaintiff might still be awarded punitive damages in excess of the 9-1 guideline.
On another issue, the judge agreed that Silver erred by not having the jury decide whether Irvin was acting within the scope of his office. A finding that he was so acting would have rendered him immune from punitive damages, and in this case would have also precluded recovery of compensatory damages because the plaintiff did not comply with Arizona’s government tort claims statute, which is similar to California’s.
But the error was harmless, Noonan said, because it was clear from the verdict that the jury believed that Irwin was engaged in a corrupt scheme for his own benefit, rather than the state’s.
Judge Stephen Reinhardt concurred in the opinion.
Fernandez Dissents
Senior Judge Ferdinand Fernandez dissented as to the harmless-error holding, arguing that under Arizona law, an official may be engaged in improper conduct and still be within the scope of his office for purposes of tort liability.
Saying there was no evidence to contradict Irvin’s testimony that he was ever promised anything of value for his efforts, the judge wrote:
“I do not intend this opinion to be an elogium; I do not say that Irvin’s behavior deserves encomiums, but, whatever his failings, the evidence does not require the
conclusion that he is a rapscallion....If Irvin thought he was fulfilling the purposes of his position and acted for that reason, he surely would not be the first governmental official, even in recent times, who thought he was acting to benefit the public but did so in ways that were unacceptable, improper, and even frightening. I will leave examples of the always renascent challenges to good government in a truly free society to the memory, knowledge and intelligence of the reader.”
The case is Southern Union Company v. Irvin, 03-16649.
Copyright 2005, Metropolitan News Company