Opinion ID: 2570318
Heading Depth: 3
Heading Rank: 4

Heading: The Role Played by the Defendant's Financial Condition

Text: Plaintiff contends a substantial reduction will make the punitive damages so small as to be written off as a cost of doing business, negating the state's interest in deterring repetition or imitation of defendant's conduct. Defendant counters that after BMW and State Farm, the small size of an award in comparison to the defendant's financial condition is no longer a factor to consider in assessing excessiveness. We briefly address the question of a defendant's wealth or financial condition in relation to the state's interests in punishing and deterring a defendant's wrongful conduct. Where the defendant's oppression, fraud or malice has been proven by clear and convincing evidence, California law permits the recovery of punitive damages for the sake of example and by way of punishing the defendant. (Civ.Code, § 3294, subd. (a).) As we explained in Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at page 928, 148 Cal.Rptr. 389, 582 P.2d 980, and Adams v. Murakami, supra, 54 Cal.3d at pages 110-112, 284 Cal.Rptr. 318, 813 P.2d 1348, the defendant's financial condition is an essential factor in fixing an amount that is sufficient to serve these goals without exceeding the necessary level of punishment. [O]bviously, the function of deterrence ... will not be served if the wealth of the defendant allows him to absorb the award with little or no discomfort. ( Neal v. Farmers Ins. Exchange, supra, at p. 928, 148 Cal. Rptr. 389, 582 P.2d 980.) [P]unitive damage awards should not be a routine cost of doing business that an industry can simply pass on to its customers through price increases, while continuing the conduct the law proscribes. ( Lane v. Hughes Aircraft Co. (2000) 22 Cal.4th 405, 427, 93 Cal. Rptr.2d 60, 993 P.2d 388 (conc. opn. of Brown, J.).) On the other hand, the purpose of punitive damages is not served by financially destroying a defendant. ( Adams v. Murakami, supra, at p. 112, 284 Cal.Rptr. 318, 813 P.2d 1348.) Due process does not preclude a state from using punitive damages for the purposes of deterrence. As the high court stated in State Farm, supra, 538 U.S. at page 416, 123 S.Ct. 1513 `Punitive damages may properly be imposed to further a State's legitimate interests in punishing unlawful conduct and deterring its repetition.' Indeed, in BMW the high court made clear that a court reviewing the jury's award for due process compliance, under its guideposts, should consider whether the level of punishment imposed is necessary to vindicate the state's legitimate interests in deterring conduct harmful to state residents. Acknowledging the state's interests in punishment and deterrence, the court continued: Only when an award can fairly be categorized as `grossly excessive' in relation to these interests does it enter the zone of arbitrariness that violates the Due Process Clause of the Fourteenth Amendment. ( BMW, supra, 517 U.S. at p. 568, 116 S.Ct. 1589.) After reviewing the three guideposts, the court held the award in BMW was excessive in light of the guideposts, even considering the state's interest in deterrence, because the record did not show whether less drastic remedies could be expected to achieve that goal, that is, whether a lesser deterrent would have adequately protected the interests of Alabama consumers. ( Id. at p. 584, 116 S.Ct. 1589.) Finally, the court indicated that on remand the Alabama Supreme Court was either to order a new trial or itself determine what award was necessary to vindicate the economic interests of Alabama consumers. ( Id. at p. 586, 116 S.Ct. 1589.) Because a court reviewing the jury's award for due process compliance may consider what level of punishment is necessary to vindicate the state's legitimate interests in deterring conduct harmful to state residents, the defendant's financial condition remains a legitimate consideration in setting punitive damages. (See State Farm, supra, 538 U.S. at p. 428, 123 S.Ct. 1513 [use of wealth as a factor not `unlawful or inappropriate'].) The State Farm court, however, also emphasized that wealthy defendants are equally entitled to due process and that [t]he wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award. ( Id. at p. 427, 123 S.Ct. 1513.) Quoting from Justice Breyer's concurring opinion in BMW, the court disapproved using wealth as `an open ended basis for inflating awards' and warned that wealth cannot replace reprehensibility as a constraining principle. ( State Farm, supra, at pp. 427-428, 123 S.Ct. 1513.) Reading the high court's decisions as a whole, we agree with the Eleventh Circuit Court of Appeals that while wealth cannot substitute for the high court's guideposts in limiting awards, and cannot alone justify a high award, the guideposts were not intended to prevent juries from levying awards that serve important state interests and provide a meaningful deterrent against corporate misconduct. ( Kemp v. American Telephone Telegraph Co. (11th Cir.2004) 393 F.3d 1354, 1365.) The BMW/State Farm guideposts cannot be abandoned or ignored, but in determining whether a lesser award could have satisfied the State's legitimate objectives ( State Farm, supra, 538 U.S. at p. 420, 123 S.Ct. 1513), a reviewing court may nonetheless give some consideration to the defendant's financial condition. [9] We need not in this case attempt to delineate the relationship between wealth and the BMW/State Farm guideposts under all circumstances. In some cases, the defendant's financial condition may combine with high reprehensibility and a low compensatory award to justify an extraordinary ratio between compensatory and punitive damages. (See, e.g., Kemp v. American Telephone Telegraph Co., supra, 393 F.3d at pp. 1357, 1365 [where defendant played a critical role in conduct of illegal gambling scheme, punitive damages of $250,000 on only $115 in compensatory damages were justified in part by need for meaningful deterrent to illegal conduct by large corporation].) In other cases, especially those involving substantial compensatory awards, the level of deterrence may be limited, after State Farm, to that provided as a natural result of imposing damages over and above traditional compensatory damages, not from the imposition of sanctions in an individual case that are actually disabling to the defendant ( Romo v. Ford Motor Co., supra, 113 Cal.App.4th at p. 750, 6 Cal.Rptr.3d 793); the state may have to partly yield its goals of punishment and deterrence to the federal requirement that an award stay within the limits of due process. But when, as in the present case, the reprehensibility of the defendant's conduct is relatively low, the state's interest in punishing it and deterring its repetition is correspondingly slight. Here, neither the interest in deterrence nor San Paolo Holding's substantial wealth can conceivably justify enforcing the jury's award of $1.7 million for a false promise that caused only a $5,000 injury. [10]