Tuesday, December 10, 2019
Page 1
Court of Appeal:
No Jurisdiction to Decide Who Must Pay $19.4 Million Punitive-Damage Award
Majority: Indemnity Clause Doesn’t ‘Arise From’ or ‘Relate to’ Defendant’s Contact With California; Dissent: It ‘Relates to’ Judgment by Court Here
By a MetNews Staff Writer
Div. Seven of the Court of Appeal for this district has declared, over a dissent, that California lacks jurisdiction to decide the enforceability of an agreement under which one out-of-state company agreed to indemnify another out-of-state company for any damages incurred in an action in the U.S. District Court for the Central District of California.
The majority says the indemnity agreement does not “arise from” or “relate to” California; the dissent says that the controversy “relates to” a judgment rendered by a federal court in California, and that suffices.
Halyard Health brought a declaratory relief action in the Los Angeles Superior Court on May 1, 2017 seeking a determination that the indemnity agreement does not extend to a $350 million punitive-damage award which a jury on April 8 imposed on Kimberly-Clark, best known for its products Kleenex, Scott tissues, and Huggies diapers. U.S. District Court Judge Dolly Gee in 2018 slashed the punitive-damage award to $19,446,635.
The federal court litigation began when Kimberley-Clark was sued on Oct. 29 2014, in what was later certified as a class action, over its sales, through its healthcare division, of Microcool surgical gowns. It represented the gowns to be impermeable, protecting against infectious diseases such as Ebola; the plaintiffs contended in their fraud action that the gowns were defective.
That action was Bahamas Surgery Center, LLC v. Kimberly-Clark Corp.
Kimberley-Clark spun off the healthcare division into a new standalone entity, Halyard Health, which agreed to indemnify its progenitor against liability in various actions, including Bahamas. It now contends, in an action for declaratory relief, that indemnity cannot extend to punitive damages.
Jones’s Opinion
The legal effect of the indemnity agreement was not decided by Div. Seven. Friday’s majority opinion, which was not certified for publication, affirms Los Angeles Superior Court Judge Ann Jones’s order quashing the service of summons for lack of personal jurisdiction.
Jones recited that there is a three-part inquiry as to the existence of specific jurisdiction (which stems from a connection with a particular controversy) over an out of state defendant. She related that it was undisputed by Kimberley-Clark that the first prong—that it had availed itself of benefits in California—was met.
She said the final prong, reasonableness of exercising jurisdiction, need not be addressed because the second prong was not satisfied.
That second prong, Jones explained, was whether the action arises out of, or relates to, the defendant’s contact with the forum. She wrote, in her order:
“[T]here is no connection between the forum and the specific claim at issue, and thus, it is irrelevant that Defendant sold ‘millions’ of surgical gowns in California and earned ‘millions’ in sales revenues.”
The dispute did not affect denizens of California, she observed, saying it was a tiff between two Delaware corporations, over obligations under a contract (labeled a “Distribution Agreement”), “negotiated and signed in Dallas, Texas,” to be “governed by and construed and enforced” under Delaware law, with Delaware selected as the forum.
Majority Opinion
Justice Lamar Baker wrote the majority opinion for Div. Seven, with Justice Dorothy C. Kim joining. Presiding Justice Laurence D. Rubin dissented.
Baker wrote, with respect to the second prong:
“[T]here is room for reasonable disagreement about what it means for one thing to arise out of or relate to another.
“Ultimately, we are convinced Kimberly-Clark has the better view of the limits of due process….Halyard identifies two respects in which, it says, Kimberly-Clark purposefully availed itself of California as a forum: first, by selling surgical gowns in this state, and second, by executing the Distribution Agreement, which Halyard characterizes as a ‘California-directed contract.’ These theories of purposeful availment define the universe of relevant contacts with California, which are insufficient to confer jurisdiction here.”
He continued:
“As to the former, Kimberly-Clark’s gown sales are not sufficiently connected to the gist of this declaratory relief action, namely, the meaning and enforceability of the Distribution Agreement. The connection is too attenuated because we cannot presume, when undertaking our jurisdictional analysis, that California substantive law (e.g., the asserted rule against indemnification of punitive damages) will apply when resolving the merits of the dispute….Second, listing the California action in the Distribution Agreement as one among a number of others to be indemnified does not suffice to make the agreement ‘California-directed’ in any meaningful sense.”
Rubin’s Dissent
The presiding justice wrote:
“Does a cause of action for declaratory relief regarding contractual indemnification solely arise from or relate to the contract itself, or does it also arise from or relate to the underlying injury-producing conduct for which indemnification is sought? The answer, I believe, is ‘Yes.’ “
The day after Halyard filed its action in Los Angeles, Kimberly-Clark filed its own action for declaratory relief in the Delaware Court of Chancery. That action was stayed pending resolution here of the jurisdictional issue based on the Los Angeles action having been filed first.
Delaware Chancellor Quoted
Rubin quoted Chancellor Andre G. Bouchard as saying:
“The California federal court clearly was willing to exercise personal jurisdiction over Kimberly-Clark in the Bahamas action. The jury award in that action was based on Kimberly-Clark’s sales of nearly 3 million surgical gowns...resulting in nearly $18 million of revenue. The underlying disputes here arise over the indemnification obligations triggered by the Bahamas action….When Kimberly-Clark and Halyard entered into the distribution agreement, it was certainly foreseeable that Halyard would have to indemnify Kimberly-Clark for events occurring in California, as Kimberly-Clark purposely availed itself of that state’s jurisdiction.
“For these reasons,...I have significant doubts that Kimberly-Clark will be able to prevail on a personal jurisdiction defense in the California indemnity action.”
‘Better Argument’
Rubin had this to say:
“My parting of ways with the majority is founded on my view that the current litigation—seeking declaratory relief regarding indemnification for the punitive damages in the Bahamas case—arises out of, or is related to, the sale of the defective medical gowns. Halyard takes the position that the relation is clear; Kimberly-Clark argues that the sale of medical gowns is irrelevant to this action, which arises only from the Distribution Agreement between Kimberly-Clark and Halyard. I believe Halyard has the better argument.”
The jurist noted that the U.S. Supreme Court’s latest utterance on specific jurisdiction is the 2017 case of Bristol-Myers Squibb Co. v. Superior Court.
“Nothing in Bristol-Myers suggests the high court has narrowed or otherwise changed the ‘arise out of or relate to’ standard,” he observed.
‘Relates to’ Test
Rubin went on to say:
“Applying the Bristol-Myers arise out of/relate to test, I focus on ‘relate to,’ which in my view, is significantly broader than ‘arising out of.’ In one sense, it is difficult to imagine a more ‘related to’ action than an indemnification claim between the two defendants in the very action that gave rise to the indemnification claim.”
He added:
“Under this test, I have no difficulty concluding that the complaint—seeking a resolution of the dispute over which party is responsible for the punitive damages awarded against Kimberly-Clark in the Bahamas action—is related to the California conduct for which punitive damages were awarded against Kimberly-Clark in the first place.”
Issue of Reasonableness
Rubin also addressed the third prong of the test: whether the exercise of personal jurisdiction would be reasonable. Answering in the affirmative, he said:
“While Kimberly-Clark argues that the costs of litigating the coverage dispute in California is great, it is difficult to perceive how this is so when the issue presented by this declaratory relief action is not particularly fact-dependent, but is largely an issue of law as to whether indemnification for punitive damages is legally permissible. It certainly is less burdensome than the underlying action in which Kimberly-Clark unsuccessfully defended itself from costly class action products liability claims. The interest of the forum state, California, is strong, in that California has a public policy interest in determining whether punitive damage awards imposed for reprehensible tortious conduct in California can be passed off onto other entities.”
The case is Halyard Health, Inc. v. Kimberly-Clark Corp., B294567.
The attorneys on appeal were George M. Garvey, Mark R. Yohalem, Jordan D. Segall, and Lauren C. Barnett of Munger, Tolles & Olson for Halyard and Theodore J. Boutrous Jr., Julian W. Poon, Theane Evangelis, and William F. Cole of Gibson, Dunn & Crutcher for Kimberly-Clark.
Represented by Avenatti
The lead counsel for the class in the District Court was Michael Avenatti, now facing trial in California and New York federal courts on charges of tax evasion, extortion, fraud, and embezzlement and is the subject of State Bar disciplinary proceedings.
Halyard is only contesting its obligation to indemnify Kimberly Clark in connection with punitive damages. The jury also assessed $3,889,327 in compensatory damages and $1,062,391.75 in prejudgment interest against Kimberly-Clark, as well as awarding $261,445 in compensatory damages against Halyard, along with $43,788.99 in prejudgment interest.
Gee reduced the jury’s punitive-damage award against Halyard from $100 million to $1.3 million.
The judgment in favor of the class is on appeal to the Ninth U.S. Circuit Court of Appeals.
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