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John F. Grannis: New guidance on California punitive damage awards

It’s the Law

Posted: December 17, 2009 10:10 p.m.
Updated: December 18, 2009 4:55 a.m.
 
While the Washington health care debate has focused attention on the need for medical tort reform, the need for broader tort reform continues. In several recent cases, the U.S. Supreme Court has held that, under the U.S. Constitution, there are due process limits on state court punitive damage awards.

In one such case, the Supreme Court ruled that the 14th Amendment prohibits punitive damage awards that are "grossly excessive or arbitrary" (State Farm Mutual Auto Ins. Co. v. Campbell), but left open the question of how that standard should be applied. Now the California Supreme Court has further addressed this issue.

The recent case of Roby v. McKesson Corp. applied the State Farm holding in a California case involving claims of alleged harassment, employment discrimination and wrongful termination.

The Roby case was brought by a former McKesson employee, whose panic attacks had interfered with her work attendance and performance, and eventually had led to her termination.

The jury found for Roby, and awarded her actual damages of $3,511,000 plus punitive damages of $15 million against McKesson.

The jury also awarded Roby actual damages of $500,000 plus additional punitive damages of $3,000 against the responsible McKesson employee.

In post-trial motions and on appeal the actual damages awarded against McKesson were reduced to $1,405,000, and the punitive damages against McKesson were reduced to $2,000,000.

In the Supreme Court, McKesson did not challenge the finding of liability for punitive damages, but it continued to insist that even the reduced punitive damage award was too high. Meanwhile, Roby urged the Supreme Court to fully reinstate the original $15 million punitive damage award.

The Supreme Court refused to do so.

Instead, it focused on the "three guideposts" articulated in the State Farm case:

* The degree of reprehensibility of the defendant's misconduct.

* The disparity between the degree of the plaintiff's actual harm and the amount of the punitive damages.

* The difference between the punitive damages and any applicable civil penalties in comparable cases.

Of these, the Supreme Court identified the degree of reprehensibility as the most important factor.

The court found Roby was a financially vulnerable low-level employee, who had suffered physical, emotional and financial harm due to McKesson's reckless disregard for her health and safety.

However, there was no evidence of repeated corporate misconduct and no evidence of willful or deliberate corporate malice. In addition, the court found Roby's compensatory damages to be "substantial" in comparison to the harm she had suffered, and further noted the maximum civil penalty for which McKesson could have been liable was $150,000.

In light of these factors, the Supreme Court held McKesson could not be liable for punitive damages exceeding an amount equal to Roby's actual damages award.

After revising that award upward for other reasons to $1,905,000, the court reduced the punitive damage award against McKesson to that same amount.

The Roby decision resulted in a net increase of McKesson's aggregate liability to Roby, from $3,405,000 to $3,810,000, which doubtless made McKesson unhappy.

However, in rendering its decision, the Supreme Court explicitly affirmed a one-to-one ratio between compensatory damages and punitive damages "marks the constitutional limit" in a case where a relatively low degree of reprehensible misconduct results in a substantial compensatory award.

This decision thus provides new guidance regarding the calculation of punitive damage awards in other California cases, while also affirming a "runaway" award of punitive damages against a company may be prevented, even in a case of egregious behavior by a company employee, where the company has not encouraged or ratified that behavior.

That is a positive development in the continuing effort to reform our civil tort system.

John F. Grannis is a partner with Poole & Shaffery, LLP, a law firm which provides general counsel and litigation services to businesses, community associations and management personnel. His column reflects his own views and not necessarily those of The Signal. "It's The Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association. Nothing contained herein shall be or is intended to be construed as providing legal advice.

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