Opinion ID: 159309
Heading Depth: 2
Heading Rank: 4

Heading: Constitutionality of Punitive Damages

Text: 27 The jury determined the imposition of punitive damages against Mr. Fox was warranted by finding he acted in a willful, wanton, or malicious manner. Meticulously applying Kansas law, the district court awarded United the statutory maximum of $653,217 in punitive damages for Mr. Fox's fraudulent conduct. 4 This award amounts to a 9.65:1 punitive to compensatory damages ratio when compared to the $67,694.03 judgment entered against Mr. Fox on the fraud claim. 5 Midland appeals the award as unconstitutionally excessive. We review the constitutionality of a punitive damage award de novo. FDIC v. Hamilton, 122 F.3d 854, 857 (10th Cir. 1997). 28 When reviewing the constitutionality of a punitive damage award, we are guided by the United States Supreme Court decision in BMW of N. Am. v. Gore, 517 U.S. 559 (1996), and our subsequent interpretation of that decision in Continental Trend Resources, Inc. v. OXY USA, Inc., 101 F.3d 634 (10th Cir. 1996), cert. denied, 520 U.S. 1241 (1997). Midland argues the current award must be reduced because it violates the requirement that a defendant must receive 'fair notice ... of the severity of the penalty that a State may impose.' OXY, 101 F.3d at 638 (quoting BMW, 517 U.S. at 574). 29 It is with respect to this requirement that the Supreme Court set forth its three 'guideposts:' (1) the degree of reprehensibility of the defendant's conduct, (2) the ratio of the punitive award to the actual harm inflicted on the plaintiff, and (3) the comparison between the punitive award and the civil or criminal penalties that could be imposed for comparable misconduct. 30 Id.
31 Reprehensibility is the most important guidepost for determining the reasonableness of a punitive damage award. See BMW, 517 U.S. at 575. [I]n assessing the reprehensibility of a defendant's conduct, we ask whether the conduct: 'causes economic harm rather than physical harm; would be considered unlawful in all states; involves repeated acts rather than a single one; is intentional; involves deliberate false statements rather than omissions; and is aimed at a vulnerable target.' Hamilton, 122 F.3d at 861 (quoting OXY, 101 F.3d at 638). 32 While Mr. Fox's conduct caused economic harm and was not directed at a particularly vulnerable target in United, the other factors tend to support the imposition of a large award. The jury found Mr. Fox committed fraud, an activity surely considered unlawful in every state. In addition, the evidence presented at trial conclusively showed Mr. Fox repeatedly made deliberate false statements to United, as well as the district court. After settling United's trademark infringement suit in 1991, Mr. Fox instructed his attorney to write a letter to United claiming all the Quick-Phos product had either been disposed of or relabeled with an appropriate mark, when in fact he had a significant inventory of product improperly labeled with the Quick-Phos mark. Despite evidence to the contrary, Mr. Fox maintained in a letter to United's attorney that Midland did not possess a single invoice showing the name Quick-Phos after January 25, 1992. In order to further conceal his fraudulent statements, Mr. Fox instructed a Midland employee to state the same information in an affidavit accompanying Midland's response to United's motion to set aside the 1991 settlement; Mr. Fox submitted falsified invoices to the court suggesting Midland had not sold mislabeled Quick-Phos product after May 22, 1992. All this in addition to his fraudulent activity in procuring the trademark registration and years of deliberately selling inferior aluminum phosphide under the Quick-Phos mark. We have no reservations about characterizing Mr. Fox's conduct as particularly reprehensible.
33 In OXY, we surmise[d] that in economic injury cases if the damages are significant and the injury not hard to detect, the ratio of punitive damages to the harm generally cannot exceed a ten to one ratio. OXY, 101 F.3d at 639. Midland points to the 9.65:1 ratio in this case and argues its conduct was not reprehensible enough to warrant a punitive award approaching the OXY limit. We disagree for several reasons. First, we have already rejected Midland's characterization of the reprehensibility of its conduct as relatively minor. Second, the 10:1 ratio is not a sacred line in the sand, across which no punitive award may venture without feeling the wrath of an appellate court's constitutional sword. The Supreme Court was very careful to reject such a categorical approach in BMW. See BMW, 517 U.S. at 582-83. We see nothing in the ratio itself that requires us to hold the award at issue here is unconstitutionally excessive. Nor are we persuaded by Midland's more detailed arguments that a reduction of this award is constitutionally compelled. 34 Midland argues a modest award is appropriate here because the economic injury arises out of a contractual relationship, and the parties should have protected themselves through explicit remedies for breach in the settlement agreement. See Hamilton, 122 F.3d at 862. We might agree with Midland had a district court not determined Midland's conduct was so objectionable as to justify the rare remedy of completely setting aside the 1991 settlement agreement. Any explicit remedies for a breach contained in the settlement agreement conceivably would have been set aside along with the agreement itself. 35 In addition, Midland's objection to the ratio is based on a comparison of the $67,694.03 in compensatory damages with the $653,217 in punitive damages. However, when determining the ratio of punitive damages to the harm caused, both actual and potential damages may be used to determine the harm. OXY, 101 F.3d at 639-40; see generally BMW, 517 U.S. at 581-82. The district court awarded the $67,694.03 in damages to compensate United for the costs of bringing its motion to set aside the 1991 settlement agreement. 6 The district court ruled further damages caused by Fox's fraud such as lost income to United and damage to United's name and reputation in the marketplace were subsumed in the damages awarded on the trademark infringement, unfair competition, and fraudulent registration claims. Reducing a damage award to avoid a double recovery is entirely different than reducing an award due to a lack of evidence supporting the level of damages. A fundamental truth lies at the core of this once-settled case: Had Mr. Fox succeeded in masking Midland's activity through his fraudulent conduct, none of the damages awarded in this case would have been discovered or ultimately recovered. And, arguably, the damages suffered after the settlement in 1991 could have been prevented entirely but for Mr. Fox's fraud. Clearly the actual and potential damages caused by Mr. Fox's fraud substantially exceeded the $67,694.03 awarded. That those damages were subsumed in the jury's $761,866 award on the other counts does not prevent us from recognizing that fact. United's damages expert testified Mr. Fox's scheme cost United $74,215 in lost profits in 1992 alone. Adding this one small measure of the additional damages caused by Mr. Fox's fraud to our original calculation brings the punitive to harm ratio down to less than 6:1.
36 The final guideline whether comparable civil or criminal penalties alert a defendant to the possibility of substantial punitive damages in the wake of his illegal conduct does lean in Midland's favor. A finding of common law fraud does not lend itself to comparison with statutory penalties. See OXY, 101 F.3d at 641 (violation of common-law tort duties). In addition, United fails to specifically cite one statute or case that can be read to put Midland on notice its conduct could result in a large punitive award of over half a million dollars. While large punitive awards are not unusual in trademark infringement cases, cf. Big O Tire Dealers, Inc. v. Goodyear Tire & Rubber Co., 561 F.2d 1365, 1376 (10th Cir. 1977) ($4 million award, 6:1 ratio), cert. dism'd, 434 U.S. 1052 (1978), we did not find any comparable Kansas cases. Therefore, this guidepost lends credence to a smaller punitive award. 37 Weighing all the factors relevant to our determination, we hold the punitive damage award in this case is not unconstitutionally excessive. Even assuming the total amount of actual and potential harm in this case is $67,649.03, as Midland suggests, the punitive to actual damage ratio is less than 10:1. We held the maximum constitutionally permissible ratio in Hamilton and OXY was 6:1. Midland's activity is much more reprehensible than was the defendant's in Hamilton, where the court determined the fraudulent conduct did not involve repeated acts. In addition, the fraud here involved documents submitted to the courts, and it entailed a complete refusal to make a good-faith effort to comply with a settlement agreement. Surely the State of Kansas has a strong interest in deterring this type of conduct, and Fox's continued efforts to disguise his abhorrent behavior with further lies warrants a stiff punitive award. Finally, we note this award was not the product of an emotionally-driven jury run amok, but a district court thoughtfully applying a strict state statute regulating the process to be followed and amounts allowed for punitive damages. Given the specific facts of this case, we hold the punitive award is constitutional.