Opinion ID: 1404112
Heading Depth: 2
Heading Rank: 1

Heading: Necessity of evidence of defendant's finances

Text: (1) When faced with a challenge to the amount of a punitive damages award, our traditional function has been to determine whether the award is excessive as a matter of law or raises a presumption that it is the product of passion or prejudice. ( Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 928 [148 Cal. Rptr. 389, 582 P.2d 980] ( Neal ).) We set forth three criteria in Neal for making that determination, all of which are grounded in the purpose and function of punitive damages. ( Id., at p. 928.) That purpose is a purely public one. The public's goal is to punish wrongdoing and thereby to protect itself from future misconduct, either by the same defendant or other potential wrongdoers. ( Id., at p. 928, fn. 13.) [1] The essential question therefore in every case must be whether the amount of damages awarded substantially serves the societal interest. In answering that question in Neal, we first explained the importance of the nature of the defendant's wrongdoing and the amount of compensatory damages. We then observed, Also to be considered is the wealth of the particular defendant; obviously, the function of deterrence (see fn. 13, ante ), will not be served if the wealth of the defendant allows him to absorb the award with little or no discomfort.... By the same token, of course, the function of punitive damages is not served by an award which, in light of the defendant's wealth and the gravity of the particular act, exceeds the level necessary to properly punish and deter. (21 Cal.3d at p. 928.) This was a reiteration of our prior observation that, It follows that the wealthier the wrongdoing defendant, the larger the award of exemplary damages need be in order to accomplish the statutory objective. ( Bertero v. National General Corp. (1974) 13 Cal.3d 43, 65 [118 Cal. Rptr. 184, 529 P.2d 608, 65 A.L.R.3d 878].) Because the quintessence of punitive damages is to deter future misconduct by the defendant, the key question before the reviewing court is whether the amount of damages exceeds the level necessary to properly punish and deter. ( Neal, supra, 21 Cal.3d at p. 928; Merlo v. Standard Life & Acc. Ins. Co. (1976) 59 Cal. App.3d 5, 18 [130 Cal. Rptr. 416].) The question cannot be answered in the abstract. The reviewing court must consider the amount of the award in light of the relevant facts. The nature of the inquiry is a comparative one. Deciding in the abstract whether an award is excessive is like deciding whether it is bigger, without asking Bigger than what? A reviewing court cannot make a fully informed determination of whether an award of punitive damages is excessive unless the record contains evidence of the defendant's financial condition. Since Neal, supra, 21 Cal.3d 910, we have repeatedly examined punitive damage awards in light of the defendant's financial condition. ( Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 790-791 [157 Cal. Rptr. 392, 598 P.2d 45]; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 823-824 [169 Cal. Rptr. 691, 620 P.2d 141].) This simple principle is well understood by the bench. The standard jury instruction on punitive damages given in this case expressly directed the jury to consider the defendant's financial condition. (BAJI No. 14.71 (7th ed. 1986 bound vol.) p. 205.) The Use Note to this instruction explained that consideration of this factor was necessary under Neal, supra, 21 Cal.3d 910. (BAJI No. 14.71, supra, at p. 207.) The principle is also axiomatic to the bar. For example, a recent practice guide for attorneys lists The Ten Essential Steps To A Proper Punitive Damage Award. (Riley, Proving Punitive Damages: The Complete Handbook (1981) p. 6.) The guide states, RULE 9: Show the defendant's wealth. ( Id., at p. 7, emphasis in original.) (2a) Plaintiff would dispense with the need for evidence of a defendant's financial condition because such evidence was only one of the three factors set forth in Neal, supra, 21 Cal.3d 910, 928. Apparently, plaintiff contends that, because the Neal court listed three criteria, less than three are sufficient. We find no logical premise for this conclusion. The effect of such approach would be to eliminate a three-pronged analysis in favor of a two-pronged analysis. The Neal court set forth three factors, explaining the importance of each. Nothing in Neal suggests that any of the three is dispensable. [2] (3) To the contrary, the most important question is whether the amount of the punitive damages award will have deterrent effect  without being excessive. Even if an award is entirely reasonable in light of the other two factors in Neal, supra, 21 Cal.3d 910 (nature of the misconduct and amount of compensatory damages), the award can be so disproportionate to the defendant's ability to pay that the award is excessive for that reason alone. For example, in Burnett v. National Enquirer, Inc. (1983) 144 Cal. App.3d 991 [193 Cal. Rptr. 206, 49 A.L.R.4th 1125], the court reiterated the Neal factors ( supra, 21 Cal.3d 910) and concluded that, although the defendant's misconduct was reprehensible, the punitive damages award had to be reduced solely because it constituted too great a portion of the defendant's net worth and income. ( Burnett v. National Enquirer, Inc., supra, 144 Cal. App.3d at p. 1012.) The court explained that it could find acceptable only that balance between the gravity of a defendant's illegal act and a penalty necessary to properly punish and deter.... ( Ibid. ) This balance cannot be made absent evidence of the defendant's financial condition. Similarly, in Zhadan v. Downtown L.A. Motors (1976) 66 Cal. App.3d 481 [136 Cal. Rptr. 132], the court concluded that substantial punitive damages were warranted in light of the defendant's serious misconduct ( id., at p. 497) and that the ratio between compensatory and punitive damages was not objectionable ( id., at p. 499), but nevertheless reversed the judgment because the punitive damages were excessive in light of the defendant's financial condition. ( Id., at p. 500 [award exceeded one-third of the defendant's net worth].) The determination of whether an award is excessive is admittedly more art than science. The channeling of just the correct quantum of bile to reach the correct level of punitive damages is, to put it mildly, an unscientific process complicated by personality differences. ( Devlin v. Kearney Mesa AMC/Jeep/Renault, Inc. (1984) 155 Cal. App.3d 381, 388 [202 Cal. Rptr. 204].) (2b) However, when provided with evidence of a defendant's financial condition, the reviewing court can at least reach a reasonably informed decision. Without such evidence, a reviewing court can only speculate as to whether the award is appropriate or excessive. Plaintiff offers no justification for imposing such a burden on reviewing courts or for encouraging ill-informed decisions. Sound judicial policy weighs in favor of fully informed decisions, especially when a public interest is at stake. One state's high court explained, Indeed the public policy nature of the award places in question the jurisdiction of the district court to award relief in the form of punitive damages in the absence of proof of the wealth or financial condition of the defendant. ( Adel v. Parkhurst (Wyo. 1984) 681 P.2d 886, 892.) An example demonstrates the wisdom of Neal, supra, 21 Cal.3d 910. Assume that no evidence of a defendant's financial condition is introduced. A jury renders an award of $2 million. The defendant's financial condition, however, is limited so as to preclude payment of punitive damages in excess of $10,000. Neal recognized that the purpose of punitive damages is not served by financially destroying a defendant. The purpose is to deter, not to destroy. Under plaintiff's approach, however, the reviewing court will be rendered unable to consider the effect of the award because the record will contain no evidence of the defendant's financial condition. Such result is contrary to the well-established rule that a punitive damages award is excessive if it is disproportionate to the defendant's ability to pay. ( Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 824 [punitive damages award reversed because it exceeded more than two and one-half months of defendant's annual net income]; Merlo v. Standard Life & Acc. Ins. Co., supra, 59 Cal. App.3d 5, 18 [award of punitive damages excessive because it was more than 30 percent of defendant's net worth]; Little v. Stuyvesant Life Ins. Co. (1977) 67 Cal. App.3d 451, 469-470 [136 Cal. Rptr. 653] [award greater than 15 percent of net worth reversed]; Zhadan v. Downtown L.A. Motors, supra, 66 Cal. App.3d 481, 500 [award excessive because it was one-third of the net worth].) [3] The principle that a punitive award must be considered in light of the defendant's financial condition is ancient. After the Norman conquest in 1066, there arose in English law a system of civil sanctions known as amercements. ( Browning-Ferris Industries v. Kelco Disposal (1989) 492 U.S. 257, 287-289 [106 L.Ed.2d 219, 246-247, 109 S.Ct. 2909, 2927] [conc. and dis. opn. of O'Connor, J.].) Because of the sometimes abusive nature of amercements, the Magna Carta prohibited those that were disproportionate to the offense or that would deprive the wrongdoer of his means of livelihood: A freeman shall only be amerced for a small offence according to the measure of that offence. And for a great offence he shall be amerced according to the magnitude of the offence, saving his contenement; and a merchant, in the same way, saving his merchandize. (4, 5)(See fn. 4.) And a villein, in the same way, if he fall under our mercy, shall be amerced saving his wainnage. (Magna Carta (1215) ch. 20, italics added.) [4] Absent evidence of a defendant's financial condition, a punitive damages award can financially annihilate the defendant. We see no reason why a modern-day civil defendant should be entitled to less consideration than one was given 800 years ago. (2c) Plaintiff attempts to justify discarding the defendant's financial condition from the analysis under Neal, supra, 21 Cal.3d 910, by claiming that a reviewing court will be able to consider the other two Neal factors  the nature of the misconduct and the amount of compensatory damages. Those two factors standing alone, however, will not enable a reviewing court to make an informed determination of whether an award is excessive. As explained above (maj. opn., ante, pp. 111-112), an award might seem to be warranted under those factors, but nevertheless be excessive in light of the defendant's financial condition. The better reasoned line of Court of Appeal decisions requires evidence of the defendant's financial condition. In Forte v. Nolfi (1972) 25 Cal. App.3d 656 [102 Cal. Rptr. 455], the court reversed a punitive damages award, primarily because the trial court entered judgment without taking any evidence of the resources of the alleged wrongdoers which it sought to punish. ( Id., at p. 689.) More recently, in Dumas v. Stocker (1989) 213 Cal. App.3d 1262 [262 Cal. Rptr. 311] ( Dumas ), the court fully considered our decision in Neal, supra, 21 Cal.3d 910, and explained that the absence of evidence as to financial condition frustrates meaningful appellate review of punitive damage awards (i.e., of whether the award was `grossly disproportionate'), since the absence of evidence of net worth precludes an appellate court from deciding whether an award might, for example, bankrupt the defendant. ( Dumas, supra, 213 Cal. App.3d at p. 1269.) The Dumas court, supra, 213 Cal. App.3d 1262, also correctly observed that, absent financial evidence, a jury will be encouraged (indeed, required) to speculate as to a defendant's net worth in seeking to return a verdict that will appropriately punish the defendant. The present case bears out that concern. At plaintiff's request, the jury was given BAJI No. 14.71 (7th ed. 1986 bound vol.), which stated, In arriving at any award of punitive damages, you are to consider the following: ... [¶] The amount of punitive damages which will have a deterrent effect on the defendant in the light of defendant's financial condition. ... (Italics added.) Plaintiff's present argument that financial evidence is not necessary rings hollow in light of her own decision to request that the jury be instructed to base its punitive damages award on defendant's financial condition. More important, the jury was told to base its award on a factor as to which there was no evidence. Faced with such a dilemma, the jury was forced to speculate as to defendant's financial condition. Sound public policy should preclude awards based on mere speculation. (6) The traditional rule is that compensatory damages must not be based on speculation. ( Dumas, supra, 213 Cal. App.3d at p. 1269.) There is no reason for a different standard for punitive damages. Dumas states the correct rule. (See also Storage Services v. Oosterbaan (1989) 214 Cal. App.3d 498, 516 [262 Cal. Rptr. 689] [expressly following Dumas rule].) (2d) The decision most commonly cited for the contrary view is Vossler v. Richards Manufacturing Co. (1983) 143 Cal. App.3d 952 [192 Cal. Rptr. 219] ( Vossler ). As the court explained, however, in Dumas, supra, 213 Cal. App.3d 1262, all of the decisions relied on by the Vossler court, supra, 143 Cal. App.3d 952, were themselves based on a single decision  Hanley v. Lund (1963) 218 Cal. App.2d 633 [32 Cal. Rptr. 733] ( Hanley ). Hanley is unpersuasive in several respects. First, the court's consideration of the issue was minimal, two short paragraphs. The court noted only that the defendant had cited no authority directly in support of his position. ( Id., at p. 645.) The court, however, cited no contrary authority. Without any support one way or the other and without any meaningful discussion of the issue, Hanley provides slender support for the subsequent cases that have relied on it. Second, as a later court put it, Hanley, supra, 218 Cal. App.2d 633, reached its conclusion on a unique rationale. ( Dumas, supra, 213 Cal. App.3d at p. 1268.) The defendant in Hanley, supra, 218 Cal. App.2d 633, did not contend, either in the trial court or here [on appeal], that in fact the award made was excessive in the light of his financial status. ( Id., at p. 646.) As the Dumas court, supra, 213 Cal. App.3d 1262, explained, In effect, Hanley held that under the circumstances of that case, and in light of the failure to raise the issue of excessiveness, the parties inferentially stipulated away the issue of [the defendant's] net worth, rendering evidence by the plaintiff unnecessary. ( Id., at p. 1268.) Petitioner in this case, however, has contended that the punitive damages are excessive. [5] Third and most important, Hanley, supra, 218 Cal. App.2d 633, was decided long before our decision in Neal, supra, 21 Cal.3d 910, in which we emphasized the importance of considering a defendant's financial condition in order to determine whether an award of punitive damages is excessive. A Court of Appeal recently faced with the conflict on this issue concluded: We have reviewed Dumas [ supra, 213 Cal. App.3d 1262,] and Vossler [ supra, 143 Cal. App.3d 952, 961-965,] and the California cases upon which they rely, and we are persuaded that Dumas states the better rule. There is no basis for meaningful appellate review of a punitive damage award without evidence of the defendant's financial condition. ( Storage Services v. Oosterbaan, supra, 214 Cal. App.3d 498, 516.) We agree. We affirm the rule stated in Dumas, supra, 213 Cal. App.3d 1262, and disapprove of Hanley, supra, 218 Cal. App.2d 633, and its progeny. (See, e.g., Fenlon v. Block (1989) 216 Cal. App.3d 1174, 1178-1183 [265 Cal. Rptr. 324]; Pat Rose Associates v. Coombe (1990) 225 Cal. App.3d 9, 23 [275 Cal. Rptr. 1]; Liberty Transport, Inc. v. Harry W. Gorst Co. (1991) 229 Cal. App.3d 417, 438 [280 Cal. Rptr. 159].) [6] Our decision in Neal, supra, 21 Cal.3d 910, reflected sound considerations of fairness and a concern for rationality in the awarding of punitive damages. We decline to eviscerate that decision by eliminating the need for evidence of the defendant's financial condition. Without such evidence, reviewing courts will be unduly restricted in their attempts to assess whether awards of punitive damages are excessive. [7]
The question before us is one of state law, but it has recently acquired a federal constitutional dimension, which although not dispositive, weighs strongly in favor of requiring evidence of a defendant's financial condition. In Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. ___ [113 L.Ed.2d 1, 111 S.Ct. 1032] ( Haslip ), the high court rejected a due process challenge to a punitive damages award under Alabama law, holding that the long-entrenched common law method for assessing punitive damages is not per se unconstitutional. ( Id., at p. ___ [113 L.Ed.2d at p. 19, 111 S.Ct. at p. 1043], italics in original.) More important for the issue before us, however, the court also made clear that, It would be just as inappropriate to say that, because punitive damages have been recognized for so long, their imposition is never unconstitutional.... We note once again our concern about punitive damages that `run wild.' ... [¶] One must concede that unlimited jury discretion  or unlimited judicial discretion for that matter  in the fixing of punitive damages may invite extreme results that jar one's constitutional sensibilities. (499 U.S. at p. ___ [113 L.Ed.2d at p. 20, 111 S.Ct. at p. 1043].) To determine if the constitutional line had been crossed in that case, the court carefully examined the Alabama law governing punitive damages. In upholding the award, the court noted the state's post-trial procedures for scrutinizing punitive awards. ( Haslip, supra, 499 U.S. at p. ___ [113 L.Ed.2d at p. 21, 111 S.Ct. at p. 1044].) The trial court was required `to reflect in the record the reasons for interfering with a jury verdict, or refusing to do so, on grounds of excessiveness of the damages.' ( Ibid. [113 L.Ed.2d at p. 21, 111 S.Ct. at p. 1044], quoting Hammond v. City of Gadsden (Ala. 1986) 493 So.2d 1374, 1379.) The factors deemed appropriate for the trial court to consider included `the impact upon the parties.' ( Haslip, supra, 499 U.S. at p. ___ [113 L.Ed.2d at p. 21, 111 S.Ct. at p. 1044].) Obviously, this factor would encompass consideration of the defendant's financial condition. Otherwise, effect on the defendant could not be considered. Most important, the high court emphasized the detailed substantive standards the Alabama Supreme Court uses in evaluating punitive awards on appeal. ( Haslip, supra, 499 U.S. at p. ___ [113 L.Ed.2d at p. 22, 111 S.Ct. at p. 1045].) The Alabama court had made clear that the defendant's financial condition is a consideration essential to a post-judgment critique of a punitive damages award. ( Green Oil Co. v. Hornsby (Ala. 1989) 539 So.2d 218, 222, italics added.) The high court explained, that The [Alabama] standards provide for a rational relationship in determining whether a particular award is greater than reasonably necessary to punish and deter. ( Haslip, supra, 499 U.S. at p. ___ [113 L.Ed.2d at p. 23, 111 S.Ct. at pp. 1045-1046].) Absent a consideration of a defendant's financial condition, a court (whether at the trial or appellate level) simply cannot make an informed decision whether, as the high court put it, a particular award is greater than reasonably necessary. ( Ibid. [113 L.Ed.2d at p. 23, 111 S.Ct. at p. 1046]) Or, as the Alabama high court phrased it, What (i.e., how much) will it take to punish this Defendant? ... [¶] The gravity of the wrong may be the same, whether the defendant is a salaried employee or a multimillion dollar corporation, but, in the case of the former, the $220,000 verdict would be far out of proportion to its intended purpose. What it takes to punish the one bears no relationship to what it takes to punish the other. ( Green Oil Co. v. Hornsby, supra, 539 So.2d 218, 223, italics in opinion, quoting Ridout's-Brown Service, Inc. v. Holloway (Ala. 1981) 397 So.2d 125, 127-128 (conc. opn. of Jones, J.).) [8] We need not decide, and do not decide, whether evidence of a defendant's financial condition is a constitutional prerequisite under Haslip, supra, 499 U.S. ___, to an award of punitive damages. (7) At a minimum, however, the high court has made clear a constitutional mandate for meaningful judicial scrutiny of punitive damages awards. This requirement weighs heavily in favor of evidence of a defendant's financial condition. Absent such evidence, a reviewing court cannot make an informed decision whether the amount of punitive damages is excessive as a matter of law. That commonsense concern is itself sufficient to require such evidence as a matter of state law. Moreover, in light of Haslip, the absence of such evidence raises doubt as to the constitutionality of a punitive damages award. [9]