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| Herman v. Sunshine Chemical Specialties Inc.
Herman v. Sunshine Chemical Specialties Inc.
SANDRA HERMAN, PLAINTIFF-APPELLANT, AND ROBERT HERMAN, HER HUSBAND, PLAINTIFF,v.SUNSHINE CHEMICAL SPECIALTIES, INC., A N.J. CORP.; CONCORD HARLEY CORP., Dì IN N.J., A/K/A CONCORD CHEMICAL CORP., A/K/A HARLEY CHEMICAL CORP., A/K/A CONCORD CHEMICAL COMPANY, INC., A/K/A HARLEY CHEMICAL CORP., A DIVISION OF CONCORD CHEMICAL COMPANY, INC., DEFENDANTS. PARKER, MCCAY & CRISCUOLO AND GENERAL ACCIDENT INSURANCE COMPANY, INTERVENORS-RESPONDENTS
On certification to Superior Court, Appellate Division, whose opinion is reported at 257 N.J. Super. 533 (1992).
[133 NJ Page 333]
Sunshine's best-selling product was Sun-Clean Concentrate (Sun-Clean), an all-purpose cleaner that generated gross sales of $1 million in 1985 and $1.2 million in 1986. The Sun-Clean label stated: "SUN CLEAN is safe to use." In larger print, the label provided that Sun-Clean "CONTAINS NO ACIDS, CAUSTICS[,] AMMONIA, ALIPHATIC OR AROMATIC SOLVENTS." The label represented that Sun-Clean met the "operating standards" of the Occupational Safety and Health Administration (OSHA). It did not warn of the dangers of inhaling Sun-Clean vapors. [133 NJ Page 334]
Sunshine did not manufacture Sun-Clean. Instead, it purchased in bulk from Harley Chemical Corp. (Harley) a product called "3-D," which Harley colored orange and transferred to one-and five-gallon containers bearing the Sun-Clean label.
Robert Feldman, the president and sole owner of Sunshine, designed the Sun-Clean label by cutting and pasting together the labels from products of other manufacturers. Although Harley had provided to Sunshine a "safety data sheet" that outlined the hazardous ingredients of its products, Feldman either did not know of the sheet or ignored it. The sheet indicated that 3-D contained sodium hydroxide, a caustic soda. In contrast, the Sun-Clean label specifically stated that the product contained no caustics. Harley placed on 3-D a label warning, "Danger . . . . Avoid breathing vapor. Keep container closed. Use with adequate ventilation." The Sun-Clean label, however, did not warn against breathing Sun-Clean vapors. Furthermore, Sunshine did not submit either the label or the product to OSHA for approval, nor did the company consult "OSHA operating standards" to determine whether the product met those standards. Feldman simply had removed the OSHA seal from another label.
While demonstrating Sun-Clean in July 1985, Mrs. Herman suffered a coughing fit. Shortly thereafter she developed a fever and breathing problems. After two weeks she consulted a doctor, who treated her for a suspected respiratory infection. Her respiratory problems continued, and she consulted a second physician and then an allergist, who were likewise unsuccessful in treating her. The doctors then placed her on steroid- and cortisone-based drugs that improved her breathing, but caused her to gain over sixty pounds. [133 NJ Page 335]
Mrs. Herman continued to work for Sunshine after she became ill. Not until October 1986 did her doctors suspect a connection between her asthma and her work. Mrs. Herman stopped working for Sunshine the next month. In August 1987 her doctors learned that Sun-Clean contained a caustic, sodium hydroxide. The doctors then diagnosed her as suffering from "occupational asthma," meaning asthma not related to allergies but caused by exposure to chemicals in the workplace.
In a supplemental brief submitted after oral argument, plaintiff asserts that the parties implicitly agreed that the common law, not the act, should govern this case. Defendants disagree. We cannot resolve the issue on the record, which contains no evidence of any such agreement. [133 NJ Page 336]
In response to specific questions, the jury returned a verdict finding that Sun-Clean was defective, that the product had harmed Mrs. Herman, that Sunshine had been negligent, and that its negligence had harmed her. The jury also found that Concord had knowingly placed in the stream of commerce the defective product, which also had harmed Mrs. Herman. Apportioning fault eighty percent to Sunshine and twenty percent to Concord, the jury awarded Mrs. Herman $410,000 in compensatory damages and $400,000 in punitive damages. It awarded nothing to Mr. Herman, who, by the time of trial, had separated from Mrs. Herman and was seeking a divorce.
Before the Appellate Division, Parker and General Accident argued that plaintiff had not presented sufficient evidence of actual malice or fraudulent or evil motives to justify an award of [133 NJ Page 337]
punitive damages. They also argued that the evidence of Sunshine's financial condition was insufficient to permit the jury to determine the amount of punitive damages. They did not, however, argue that the damages were excessive. Nor did they challenge the constitutionality of the punitive-damages award or the procedure for appellate review of such an award. The net result is that Sunshine has settled the punitive-damages award with Mrs. Herman, and the excessiveness of that award is not before us.
We have proceeded with an appreciation that at the core of punitive damages lurks a volatile dilemma: the same findings necessary for the award of punitive damages can incite a jury to act irrationally. A condition precedent to a punitive-damages award is the finding that the defendant is guilty of actual malice. The purposes of the award -- the deterrence of egregious misconduct and the punishment of the offender, Leimgruber v. Claridge Assocs., Ltd., 73 N.J. 450, 454, 375 A.2d 652 (1977) -- when mixed with a finding that the defendant is malicious, can readily inflame [133 NJ Page 338]
an otherwise-dispassionate jury. Essential to a fair and reasonable award therefore is the consideration of all relevant circumstances, including the nature of the defendant's misconduct and the harm to the plaintiff. Id. at 456, 375 A.2d 652. Stated generally, the award of punitive damages "must bear some reasonable relation to the injury inflicted and the cause of the injury." Id. at 457, 375 A.2d 652.
At a minimum, due process requires appellate review of the award for reasonableness. TXO Prod. Corp. v. Alliance Resources Corp., U.S. , , 113 S. Ct. 2711, 2720, 125 L. Ed. 2d 366 (1993); Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 18, 111 S. Ct. 1032, 1043, 113 L. Ed. 2d 1, 20 (1991). Without statutory or common-law standards for determining the amount of punitive damages, moreover, "'juries are left largely to themselves in making this important, and potentially devastating, decision.'" Haslip, supra, 499 U.S. at , 111 S. Ct. at 1039, 113 L. Ed. 2d at 15 (quoting Browning-Ferris Indus. v. Kelco Disposal, Inc., 492 U.S. 257, 281, 109 S. Ct. 2909, 2923, 106 L. Ed. 2d 219, 242 (1989) (Brennan, J., Concurring)). In the absence of adequate standards, "[a]wards of punitive damages are skyrocketing." Browning-Ferris Indus. v. Kelco Disposal, Inc., 492 U.S. 257, 282, 109 S. Ct. 2909, 2924, 106 L. Ed. 2d 219, 242 (1989) (O'Connor, J., Concurring in part and Dissenting in part).
As long as punitive-damage awards are strictly confined, they may be appropriate in a failure-to-warn, strict-products-liability action. Fischer v. Johns-Manville Corp., 103 N.J. 643, 652-60, 512 A.2d 466 (1986). Fischer identified the factors relevant to the determination of a plaintiff's entitlement to punitive damages, id. at 672-73, 512 A.2d 466, and of the appropriate amount of such damages, id. at 673, 512 A.2d 466. In addition to bearing a reasonable relationship to actual injury, the amount of punitive damages should account for the profitability of the defendant's marketing misconduct, the plaintiff's litigation expenses, the punishment the defendant will probably receive from other [133 NJ Page 339]
sources, the defendant's financial condition, and the effect on its condition of a judgment for the plaintiff. Ibid.
Our case law recognizes the defendant's financial condition as a relevant factor in all punitive-damages awards. The Appellate Division has stated in McDonough v. Jorda that "[i]n assessing exemplary damages, a jury must take into consideration the wealth of the defendants." 214 N.J. Super. 338, 349, 519 A.2d 874 (1986), certif. denied, 110 N.J. 302, 540 A.2d 1282 (1988), cert. denied, 489 U.S. 1065, 109 S. Ct. 1338, 103 L. Ed. 2d 809 (1989); see also Battista v. Western World Ins. Co., 227 N.J. Super. 135, 150-51, 545 A.2d 841 (Law Div.1988) (affirming trial court's setting aside settlement based on jury award of $1 million in punitives against police officer because award bore no relation to officer's yearly salary and total assets), aff'd in part and rev'd in part sub nom. Battista v. Olson, 250 N.J. Super. 330, 594 A.2d 260 (App.Div.), certif. denied, 127 N.J. 553, 606 A.2d 366 (1991); Comdyne I, Inc. v. Corbin, 908 F. 2d 1142, 1153 n. 14 (3d Cir.1990) (interpreting Leimgruber, supra, 73 N.J. 450, 375 A.2d 652, as holding that trier of fact must consider wealth of defendant when awarding punitive damages). In McDonough, the court stated that a defendant's financial condition must be considered "because the theory behind punitive damages is to punish for the past event and to prevent future offenses, and the degree of punishment resulting from a judgment must be, to some extent, in proportion to the means of the guilty person." 214 N.J. Super. at 349, 519 A.2d 874 (citing Restatement (Second) of Torts § 708 cmt. e (1977)). The McDonough court concluded that evidence of the ability of the wrongdoers to pay punitives is an "essential" of the plaintiff's burden of proof, the absence of which "precluded the jury from having a proper foundation to assess damages." 214 N.J. Super. at 349, 519 A.2d 874.
When adopting N.J.S.A. 2A:58C-1 to -7, the Legislature substantially codified the judicial standards for the award of punitive damages. Assembly Insurance Committee, Statement to S. 2805 (June 22, 1987); see also William A. Dreier et al., Product Liability and Toxic Tort Law in New Jersey: A Practitioner's [133 NJ Page 340]
Guide 129 (6th ed. Supp.1993) (stating that "the standards of the Act substantially codify Fischer v. Johns-Manville Corp., 103 N.J. 643, 512 A.2d 466 (1986)"). The act mandates that in determining the amount of punitive damages in product-liability actions, the trier of fact "shall consider all relevant evidence, including, but not limited to . . . [t]he financial condition of the tortfeasor." N.J.S.A. 2A:58C-5d(4); see A. 2068, 205th Leg., 1st Sess., § 1b(4) (1992) (mandating consideration of financial condition of defendant in all actions based on injuries or wrongs done to either persons or property); see also A. 2206, 205th Leg., 2d Sess. (1993) (establishing procedure for determining punitives in all civil actions).
Some scholars, however, have challenged the relevance of a defendant's wealth in determining the amount of punitive damages, especially when the defendant is a corporation. See, e.g., Bruce Chapman & Michael Trebilcock, Punitive Damages: Divergence in Search of a Rationale, 40 Ala. L.Rev. 741, 824 (1989) (stating that "in the case of economic wrongs, the conventional economic theory of deterrence . . . suggests no role for corporate wealth in structuring an optimal deterrence regime -- if the expected costs of wrongdoing exceed the expected gains, wrongdoing will normally be deterred, whatever the corporation's wealth"); Malcolm E. Wheeler, A Proposal for Further Common Law Development of the Use of Punitive Damages in Modern Product Liability Litigation, 40 Ala.L.Rev. 919, 940, 944-45 (1989) (rejecting as irrelevant and prejudicial consideration of defendant's wealth in determining amount of punitives to award); see also Zazu Designs v. L'Oreal, S.A., 979 F. 2d 499, 508 (7th Cir.1992) ("Corporations . . . are not wealthy in the sense that persons are . . . . Seeing the corporation as wealthy is an illusion, which like other mirages frequently leads people astray."). But see Adams v. Murakami, 54 Cal. 3d 105, 284 Cal.Rptr. 318, 326 n. 8, 813 P. 2d 1348, 1356 n. 8 (1991) (mandating consideration of defendant's financial condition); Nelson v. Jacobsen, 669 P. 2d 1207, 1219 (Utah 1983) (same); Adel v. Parkhurst, 681 P. 2d 886, 892 (Wyo.1984) (same). Other scholars have suggested that consideration of wealth may be unconstitutional. See Kenneth S. Abraham & John C. Jeffries, Jr., [133 NJ Page 341]
Punitive Damages and the Rule of Law: The Role of Defendant's Wealth, 18 J.Legal Stud. 415, 416, 424-25 (1989) (arguing that admitting evidence of defendant's wealth is "unwise" because "[t]he practice fails to achieve any legitimate purpose," such as deterrence, and because "[a]dmitting evidence of the defendant's wealth invites conjecture [concerning past misconduct], as well as judgments based on mere status"). But see Haslip, supra, 499 U.S. at , 111 S. Ct. at 1045, 113 L. Ed. 2d at 22 (finding constitutional Alabama's procedure for reviewing punitive-damage awards, which mandates consideration of defendant's financial position); Germanio v. Goodyear Tire & Rubber Co., 732 F. Supp. 1297 (D.N.J.1990) (finding disclosure to jury of defendant's financial condition does not violate equal protection).
Still other courts and scholars argue in favor of considering the defendant's financial condition. As the author of one law review article states, "the underlying rationale of punitive damages seems to demand consideration of a defendant's wealth, since a sum that would deter a poor person may have little or no impact on a rich person." Jerry J. Phillips, A Comment on Proposals for Determining Amounts of Punitive Awards, 40 Ala.L.Rev. 1117, 1119 (1989). Consideration of a defendant's wealth is relevant both to preventing the imposition of an especially devastating fine, see Adams, supra, 284 Cal.Rptr. at 323, 813 P. 2d at 1353 ("Absent evidence of a defendant's financial condition, a punitive damages award can financially annihilate him."), and to determining the amount that will sufficiently punish and deter, see David G. Owen, Punitive Damages in Products Liability Litigation, 74 Mich. L.Rev. 1257, 1318 & n. 295 (1976) (stating that principle that amount of punitives awarded should be tailored to defendant's wealth "is rooted in logic and Justice and is accepted by most courts").
In a products-liability action, the Legislature has resolved the issue by determining that the trier of fact "shall consider . . . [t]he financial condition of the tortfeasor." N.J.S.A. 2A:58C-5d(4). That mandate comports with prior judicial decisions. We conclude [133 NJ Page 342]
that a jury must consider evidence of a defendant's financial condition in determining the amount of punitive damages.
Although the Appellate Division concluded that the evidence supported a finding that plaintiff was entitled to an award of punitive damages, it "reversed and . . . remanded for a new trial because of plaintiff's failure to present evidence of Sunshine Chemical's wealth." 257 N.J. Super. at 543, 608 A.2d 978. General Accident and Parker did not cross-petition from the determination that Sunshine's conduct warranted a punitive-damage award. Nor did they argue in either the Appellate Division or in the briefs submitted to this Court that the award of $400,000 was excessive. The only issue therefore is whether the evidence can support an award of punitive damages. Contrary to the Appellate Division, we find that the evidence was sufficient. The informality that pervaded the trial, however, leaves some loose ends.
For whatever reason, the trial did not conform to the act. The act mandates a bifurcated proceeding in which
[t]he trier of fact shall first determine whether compensatory damages are to be awarded. Evidence relevant only to punitive damages shall not be admissible in that proceeding. After such determination has been made, the trier of fact shall, in a separate proceeding, determine whether punitive damages are to be awarded.
[ N.J.S.A. 2A:58C-5b.]
The act provides further that "[i]f the trier of fact determines that punitive damages should be awarded, the trier of fact shall then determine the amount of those damages." N.J.S.A. 2A:58C-5d. [133 NJ Page 343]
Although section 5d could be read to require a further bifurcation of the punitive-damages hearing, neither the words nor the legislative history of the statute compels that result. Unlike its treatment of the trial of compensatory and punitive damages, the Legislature did not require the bifurcation of the liability and damage phases of a punitive-damages claim. See Model Jury Charges 5.34J and 6.20 (proposing single charge on liability and damages in punitive-damages claim); Dreier et al., supra, at 130-31 (stating that section 5d requires only separate determinations, not separate proceedings, for determining entitlement and damages).
Tempering the normal rule favoring wide discovery of relevant issues is a regard for the defendant's interest in maintaining the confidentiality of information about its financial status. We have not previously considered the issue, but in a variety of [133 NJ Page 344]
contexts lower courts have prudently required that a plaintiff may not make discovery of a defendant's financial condition without first establishing a prima facie case of the right to recover punitive damages. Those courts have required the plaintiffs to establish their right to punitive damages in actions for libel, Hudak v. Fox, 215 N.J. Super. 233, 235-37, 521 A.2d 889 (App.Div.1987); Warren v. Hague, 11 N.J. Super. 311, 316, 78 A.2d 300 (App.Div.1951); Stern v. Abramson, 150 N.J. Super. 571, 575, 376 A.2d 221 (Law Div.1977); malicious prosecution, Gierman v. Toman, 77 N.J. Super. 18, 22-23, 185 A.2d 241 (Law Div.1962); and for tortious interference with prospective economic advantage, Belinski v. Goodman, 139 N.J. Super. 351, 357-58, 354 A.2d 92 (App.Div.1976). Judicial review of applications for discovery, like the bifurcation of compensatory and punitive-damage claims, should alleviate concerns about abusive or burdensome discovery. Gierman, supra, 77 N.J. Super. at 22-23, 185 A.2d 241; see R. 4:10-3 (providing for protective discovery orders). In reviewing requests for discovery of a defendant's financial condition, a trial court should balance the plaintiff's need for the information with the burden on a defendant of disclosure, Gierman, supra, 77 N.J. Super. at 25, 185 A.2d 241, and with an appreciation that a defendant's finances "are private matters which are normally jealously guarded," Rupert v. Sellers, 48 A.D. 2d 265, 368 N.Y.S. 2d 904 (1975).
Sensitive balancing by the trial court is essential to the accommodation of a plaintiff's need for discovery and the defendant's right to maintain the confidentiality of information about its financial condition. See Martin J. McMahon, Annotation, Discovery of Defendant's Sales, Earnings, or Profits on Issue of Punitive Damages in Tort Action, 54 A.L.R. 4th 998 (1987) (collecting cases). In many cases, a plaintiff can obtain the needed information through the production of documents. For publicly-held corporate defendants, discovery of annual shareholder reports or reports filed with regulatory bodies should not unreasonably invade the defendant's privacy. Certified financial statements of a privately-held corporation may also be discoverable in an appropriate [133 NJ Page 345]
case. Discovery of income tax returns, however, may go too far. Lepis v. Lepis, 83 N.J. 139, 158, 416 A.2d 45 (1980) (stating in matrimonial action "[c]ourts have recognized that discovery and inspection of income tax returns should only be permitted for good cause."). See generally Richard J. Kohlman, Trial Court Restrictions on Evidence of Defendant's Wealth, 30 Am.Jur.Trials 711, 729-30 (1983) (discussing restrictions on disclosure of tax returns). Under some circumstances, depositions or interrogatories may be appropriate. See R. 4:15; R. 4:17. If so, a trial court can accord a defendant some measure of protection by limiting the persons present at the deposition to the defendant and counsel for the parties. See R. 4:10-3; R. 4:17-6. Excluding the plaintiff and sealing the deposition or answers to interrogatories may be essential for striking the right balance of the litigants' interests. See R. 4:10-3; R. 4:17-6. We offer the foregoing possibilities merely as suggestions for the suitable resolution of a sensitive issue that we remit to the sound discretion of trial courts.
Neither the product-liability act nor judicial decisions define "financial condition." From the purposes of punitive damages -- punishment and deterrence -- we glean that "financial condition" roughly means the ability to pay. Contrary to the Appellate Division, 257 N.J. Super. at 548, 608 A.2d 978, that ability does not necessarily equate with net worth. Depending on the facts of a case, a defendant's income might be a better indicator of the ability to pay. Robert W. Hamilton, Fundamentals of Modern Business § 11.5 to .8 (1989); see also 1 James D. Ghiardi & John J. Kircher, Punitive Damages: Law and Practice § 5.36, at 50 (1985) ("Net income is the best yardstick for determining punitive damages."); Erich A. Helfert, Techniques of Financial Analysis 362-68 (7th ed. 1991) (discussing various definitions of "value"). For present purposes, we need not dwell on the subtleties of "net worth," except to note that it can be an elusive concept, Hamilton, supra, § 11.4, at 232; a potentially-puzzling indicator of current value, id. § 11.7, at 241; and of questionable utility, Helfert, supra, at 365. Notwithstanding these problems, net worth remains one of the indicia of financial condition. [133 NJ Page 346]
Although the present case arises in the context of a claim for punitive damages in a products-liability action, the requirements for bifurcation of compensatory and punitive damages, for allocation to a plaintiff of the burden of proving a defendant's financial condition, for proof of a prima facie case as a condition precedent to discovery of a defendant's financial condition, and for limitations on such discovery apply as readily to all such claims. Consequently, we expect those requirements to govern all claims for punitive damages, even those that arise outside the act.