Opinion ID: 2629580
Heading Depth: 1
Heading Rank: 4

Heading: Did the Jury's Award of Punitive Damages Against McKesson Exceed the Amount Permitted Under the Federal Constitution?

Text: (14) In a civil case not arising from the breach of a contractual obligation, the jury may award punitive damages where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice. (Civ. Code, § 3294, subd. (a).) Malice is defined as intentional injury or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others. ( Id., § 3294, subd. (c)(1).) Oppression is defined as despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights. ( Id., § 3294, subd. (c)(2).) Employer McKesson did not petition this court for review of the Court of Appeal's decision, and therefore it has effectively conceded that the evidence here supports an award against it of punitive damages. The question remains, however, whether the $15 million award against McKesson is consistent with federal constitutional constraints. The Court of Appeal held that in this case $2 million marked the uppermost constitutional limit for punitive damages. Roby asserts on review that the jury's entire $15 million award falls within the constitutional limit and therefore should be reinstated. We agree with the Court of Appeal that the $15 million award exceeds the federal constitutional limit, but we disagree with the Court of Appeal that in this case the appropriate limit is $2 million. (15) The due process clause of the Fourteenth Amendment to the United States Constitution places constraints on state court awards of punitive damages. (See State Farm Mut. Automobile Ins. Co. v. Campbell (2003) 538 U.S. 408, 416-418 [155 L.Ed.2d 585, 123 S.Ct. 1513] ( State Farm ); BMW of North America, Inc. v. Gore (1996) 517 U.S. 559, 568 [134 L.Ed.2d 809, 116 S.Ct. 1589] ( BMW ).) We recently explained the basis of these constraints: The imposition of `grossly excessive or arbitrary' awards is constitutionally prohibited, for due process entitles a tortfeasor to `fair notice not only of the conduct that will subject him to punishment, but also of the severity of the penalty that a State may impose.' [Citation.] ( Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1171 [29 Cal.Rptr.3d 379, 113 P.3d 63] ( Simon ).) (16) In State Farm, the high court articulated three guideposts for courts reviewing punitive damages: (1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. ( State Farm, supra, 538 U.S. at p. 418; see also BMW, supra, 517 U.S. at p. 575.) We discuss each below. 1. Degree of reprehensibility (17) Of the three guideposts that the high court outlined in State Farm, supra, 538 U.S. at page 418, the most important is the degree of reprehensibility of the defendant's conduct. On this question, the high court instructed courts to consider whether [1] the harm caused was physical as opposed to economic; [2] the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; [3] the target of the conduct had financial vulnerability; [4] the conduct involved repeated actions or was an isolated incident; and [5] the harm was the result of intentional malice, trickery, or deceit, or mere accident. ( Id. at p. 419.) With respect to the first of these reprehensibility factors, the harm to Roby was physical in the sense that it affected her emotional and mental health, rather than being a purely economic harm. ( State Farm, supra, 538 U.S. at p. 419.) With respect to the second reprehensibility factor, it was objectively reasonable to assume that employer McKesson's acts of discrimination and harassment toward Roby would affect her emotional well-being, and therefore McKesson's conduct evinced an indifference to or a reckless disregard of the health or safety of others. ( Ibid. ) The third reprehensibility factor is likewise present here: Roby was a relatively low-level employee who quickly depleted her savings and lost her medical insurance as a result of her termination, and therefore it appears that she had financial vulnerability. ( Ibid. ) The fourth reprehensibility factor of the high court's State Farm test, however, is not present here. Supervisor Schoener's wrongful conduct was certainly repeated, as she subjected Roby to a series of discriminatory disciplinary actions and harassed Roby on an almost daily basis. But there is no indication of repeated wrongdoing by employer McKesson, as discussed below. With respect to the discrimination claim, employer McKesson's wrongdoing was limited to its one-time decision to adopt a strict attendance policy that, in requiring 24-hour advance notice before an absence, did not reasonably accommodate employees who had disabilities or medical conditions that might require several unexpected absences in close succession. McKesson's act of discharging Roby (including the perfunctory investigation that accompanied it) was simply an application of this attendance policy in accordance with its terms. The jury found that McKesson's adoption of this flawed attendance policy constituted oppression or malice, justifying an award of punitive damages. [11] (Civ. Code, § 3294, subd. (a).) Nevertheless, McKesson's adoption of this attendance policy was a single corporate decision. (18) With respect to the harassment claim, McKesson's corporate wrongdoing was also a single event. In considering this issue, it is important to keep in mind that a corporate defendant cannot be punished for harassment merely because one of its employees has harassed another employee in the workplace; rather, the focus of the punitive damages inquiry must be on the corporation's institutional responsibility, if any, for that harassment. This principle is codified in Civil Code section 3294, subdivision (b), which provides: An employer shall not be liable for [punitive] damages . . ., based upon acts of an employee of the employer, unless the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct. . . . With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, [or] ratification . . . must be on the part of an officer, director, or managing agent of the corporation. (Italics added.) (19) In White v. Ultramar, Inc. (1999) 21 Cal.4th 563 [88 Cal.Rptr.2d 19, 981 P.2d 944] ( White ), we construed the latter statement as requiring the officer, director, or managing agent to be someone who exercise[s] substantial discretionary authority over decisions that ultimately determine corporate policy. ( Id. at p. 577.) In this case, the Court of Appeal concluded that the jury could reasonably have found supervisor Schoener to be a managing agent of employer McKesson. On that basis, the court concluded that the jury's award of punitive damages could be justified based on Schoener's actions alone, regardless of whether more senior managers at McKesson were informed of Schoener's actions. We disagree. At the time of Roby's termination, McKesson had over 20,000 employees; Schoener worked at a local distribution center supervising four of them. When we spoke in White about persons having discretionary authority over . . . corporate policy ( White, supra, 21 Cal.4th at p. 577), we were referring to formal policies that affect a substantial portion of the company and that are the type likely to come to the attention of corporate leadership. It is this sort of broad authority that justifies punishing an entire company for an otherwise isolated act of oppression, fraud, or malice. The record here does not support the conclusion that Schoener exercised that sort of broad authority or that she was a managing agent for purposes of awarding punitive damages under Civil Code section 3294, subdivision (b). Therefore, in assessing the reprehensibility of employer McKesson's conduct, we must look to what McKesson's more senior managers knew and did. The record only weakly supports the jury's finding that a managing agent of employer McKesson was informed of Schoener's unlawful harassment of Roby and ratified it, either expressly or by inaction. It is true that Roby complained more than once to the manager of her distribution center about her ongoing conflicts with Schoener, but personality clashes in the workplace are not uncommon, and Roby's complaints did not link these conflicts to her medical condition and therefore did not put McKesson on specific notice that Schoener was violating Roby's FEHA rights. Nevertheless, the evidence indicates that Roby once met with two midlevel managers (the head of Roby's distribution center and the regional human resources director) and told them of Schoener's ongoing harassment, expressly linking that harassment to her medical condition. Roby testified as follows about this meeting: I told them that, yes; that I was being harassed once again by . . . Schoener . . . . She had made derogatory remarks that day that was upsetting, and it was public. [¶] . . . [¶] . . . [I]t had to do with the head sweats that I had, and I was digging at my arms again. McKesson does not argue that the mid-level managers at this meeting were not managing agent[s] for purposes of awarding punitive damages under Civil Code section 3294, subdivision (b), and therefore we will assume for purposes of this appeal that at least one of them was a managing agent. Hence, Roby's statement at this meeting, combined with the more general complaints that Roby made, constituted sufficient evidence to support the jury's inference that a McKesson managing agent eventually became aware of Schoener's unlawful harassment of Roby. That McKesson thereafter continued to employ Schoener as Roby's supervisor without taking any corrective measures indicates conscious disregard of the rights or safety of others (Civ. Code, § 3294, subd. (b)), thus warranting punitive damages. Nevertheless, the evidence establishing corporate wrongdoing in regard to supervisor Schoener's unlawful harassment of Roby does not indicate any repeated corporate misconduct. There is no evidence, for example, that Schoener's actions toward Roby were the product of a corporate culture that encouraged similar supervisorial conduct. Rather, they appear to be the isolated actions of a single supervisor, combined with the one-time failure on the part of employer McKesson to take prompt responsive action when these events came to its attention. With respect to the fifth reprehensibility factor listed in the high court's State Farm decision, in awarding punitive damages against McKesson the jury here necessarily determined that McKesson acted with conscious disregard of the rights of others (Civ. Code, § 3294, subd. (c)(1), (2)); therefore, the conduct at issue was certainly not mere accident ( State Farm, supra, 538 U.S. at p. 419). Nevertheless, the corporate conduct falls short of intentional malice. ( Ibid. ) The evidence does not suggest that employer McKesson adopted the attendance policy in questionand in particular the requirement of 24-hour advance notice for all absenceswith a purpose or motive to discriminate. Rather, McKesson's apparent purpose in requiring 24-hour advance notice was to enable advance planning by its supervisors and thus ensure adequate staffing levels on a daily basis. McKesson's wrongdoing was more a failure to prevent the foreseeable discriminatory consequences flowing from its otherwise appropriate attendance policy than it was an act rooted in intentional malice. We focus here on McKesson's adoption of the attendance policy and not on the conduct of McKesson's mid-level managers who applied the policy in reviewing Roby's grievance and determining to uphold her termination. For reasons stated above (see p. 715, ante ), we will assume for purposes of this appeal that at least one of these mid-level managers was a managing agent under Civil Code section 3294, subdivision (b). But there is no evidence that they were empowered, when reviewing Roby's grievance, to make an on-the-spot accommodation in abrogation of the terms of McKesson's attendance policy. To the contrary, the evidence indicated that they were required to enforce the policy strictly. At most, they could have retroactively reclassified some of Roby's occasions as protected medical leave under the FMLA (29 U.S.C. § 2601 et seq.), but Roby failed to submit adequate documentation to support such a reclassification, even after being told that this was necessary. We need not decide whether McKesson's managers were required to do more than they did to assist Roby in establishing FMLA eligibility, because in any case their conduct was not so despicable (Civ. Code, § 3294, subd. (c)) as to support a finding that they acted with oppression, fraud, or malice ( id., § 3294, subd. (a)), warranting an award of punitive damages. Roby had missed work without notice 11 times in a period of about 15 months, and these abrupt absences had continued despite progressive disciplinary warnings. During these months, Roby had never asked that her absences be treated as FMLA leave, although she had taken FMLA leave for other absences. In addition, although Roby's supervisors were generally aware of her panic attacks, Roby's own understanding of her medical condition evolved over time, and therefore her reports about this condition to her supervisors lacked specificity regarding the accommodations she might need. She never submitted a medical report relating her absences to her panic disorder, and the only medical documents in her personnel file that even mentioned the panic disorder stated that it was not contagious and that it was stabilized with medication. These brief medical notes nowhere suggested that the panic disorder interfered with Roby's ability to work or constituted a `serious health condition' (29 U.S.C. § 2611(11)) justifying FMLA leave. For these reasons, the conduct of the mid-level managers who reviewed and approved Roby's termination does not provide an independent basis for awarding punitive damages against McKesson. In regard to employer McKesson's failure to take responsive action once it learned of supervisor Schoener's unlawful harassment of Roby, we again see no indication of a corporate purpose to cause injury to Roby. Rather, McKesson's failure to take appropriate action is better characterized as managerial malfeasance. This failure is not excusable, but it is partly explainable by the somewhat vague nature of Roby's complaints. As noted earlier, the record indicates only a single instance when Roby's complaint to mid-level managers linked the ongoing harassment to a medical condition. This complaint should have alerted McKesson to respond, and hence the jury's punitive damages award against McKesson finds sufficient support in the evidence. But McKesson's conduct, although wrongful, does not rise to the kind of oppressive, fraudulent, or malicious conduct that has in the past justified large punitive damages awards. (See, e.g., Romo v. Ford Motor Co. (2003) 113 Cal.App.4th 738 [6 Cal.Rptr.3d 793] [the defendant mass-produced and sold a vehicle it knew to be designed in a way that was inherently dangerous to human life; three people died; three others were injured; punitive damages: $23,723,287]; Rufo v. Simpson (2001) 86 Cal.App.4th 573 [103 Cal.Rptr.2d 492] [the defendant maliciously stabbed and killed two people; punitive damages: $25 million]; Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128 [74 Cal.Rptr.2d 510] [a partner of the defendant law firm put his hand in the breast pocket of his secretary's blouse, made a grabbing gesture toward her breasts, touched her buttocks, and made sexually harassing statements; the defendant law firm was aware of numerous prior incidents of severe sexual harassment involving the same partner; punitive damages: $3.5 million].) Taking into account all five reprehensibility factors that the high court set forth in State Farm, supra, 538 U.S. at page 419, we conclude that employer McKesson acted wrongfully and in a manner warranting civil penalties; nevertheless, the reprehensibility of McKesson's conduct was at the low end of the range of wrongdoing that can support an award of punitive damages under California law, notwithstanding the seriousness of Roby's emotional injury and her financial vulnerability. 2. Disparity between actual harm and punitive damages (20) The second guidepost that the United States Supreme Court articulated in State Farm for assessing the constitutionality of a punitive damages award is the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award. ( State Farm, supra, 538 U.S. at p. 418.) Here, the trial court reduced the jury's award of $3,511,000 in compensatory damages against employer McKesson to $2,805,000. The Court of Appeal further reduced this figure to $1,405,000. But our conclusion in part IIB, ante, requires reinstatement of the jury's $500,000 harassment award against supervisor Schoener, for which employer McKesson is also liable (see p. 711, ante ), resulting in a total compensatory damages award of $1,905,000. Only $605,000 of this sum was for Roby's economic losses; the remaining $1.3 million in compensatory damages was awarded solely for Roby's physical and emotional distress and may have reflected the jury's indignation at McKesson's conduct, thus including a punitive component. Pertinent here is this statement from our decision in Simon, supra, 35 Cal.4th at page 1189: [D]ue process permits a higher ratio between punitive damages and a small compensatory award for purely economic damages containing no punitive element than [it does] between punitive damages and a substantial compensatory award for emotional distress; the latter may be based in part on indignation at the defendant's act and may be so large as to serve, itself, as a deterrent. In State Farm, the high court suggested that a ratio of one to one might be the federal constitutional maximum in a case involving, as here, relatively low reprehensibility and a substantial award of noneconomic damages: When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. ( State Farm, supra, 538 U.S. at p. 425, italics added.) 3. Civil penalties authorized in comparable cases Finally, we consider the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases, the last of the three guideposts the high court set forth in State Farm, supra, 538 U.S. at page 418, to assess the constitutionality of punitive damages awards. If in this case Roby had pursued her FEHA claims administratively before California's Fair Employment and Housing Commission, the commission could have assessed a fine against employer McKesson in addition to awarding compensatory damages. (§ 12970, subds. (a), (c), (d).) This administrative fine cannot exceed $150,000 (§ 12970, subd. (a)(3)), which of course is tiny by comparison to the jury's punitive damages award here of $15 million against employer McKesson. Obviously, this guidepost weighs in favor of a lower constitutional limit in this case. 4. Summary After applying the test that the high court articulated in State Farm, supra, 538 U.S. at page 418, we conclude that a one-to-one ratio between compensatory and punitive damages is the federal constitutional limit here. We base this conclusion on the specific facts of this case. We note in particular the relatively low degree of reprehensibility on the part of employer McKesson and the substantial compensatory damages verdict, which included a substantial award of noneconomic damages. (21) The concurring and dissenting opinion asserts that a higher ratio two to oneis appropriate here because of McKesson's wealth, among other things. (See conc. & dis. opn. of Werdegar, J., post, at p. 723.) It is certainly relevant for a reviewing court to consider the wealth of a defendant when applying federal constitutional limits to an award of punitive damages, thereby ensuring that the award has the appropriate deterrent effect, but the punitive damages award must not punish the defendant simply for being wealthy. ( Simon, supra, 35 Cal.4th at pp. 1185-1186.) As the high court said in State Farm, wealth `provides an open-ended basis for inflating awards' ( State Farm, supra, 538 U.S. at pp. 427-428, quoting BMW, supra, 517 U.S. at p. 591 (conc. opn. of Breyer, J.)) and cannot justify an otherwise unconstitutional punitive damages award' ( id. at p. 427). In applying the federal Constitution here, we have taken McKesson's wealth into consideration, and more to the point we have taken into consideration the deterrent effect that is appropriate in light of McKesson's wrongdoing. We nevertheless conclude that punitive damages in an amount equal to compensatory damages marks the constitutional limit in this case and still provides the appropriate deterrence. The concurring and dissenting opinion concedes that the jury's award of $15 million in punitive damages against McKesson far exceeds what the federal Constitution permits. (See conc. & dis. opn. of Werdegar, J., post, at p. 720.) The only disagreement is whether the constitutional limit in this case is equal to the compensatory damages award of $1,905,000, as we hold, or whether it is double that amount, as the concurring and dissenting opinion contends. Based on the relatively low degree of reprehensibility and the substantial award of noneconomic damages, we conclude that $1,905,000 is the maximum punitive damages that may be awarded against employer McKesson in this case in light of the constraints imposed by the federal Constitution. Instead of ordering a retrial on the question of punitive damages, we simply direct a reduction of those damages to the $1,905,000 maximum. (See Simon, supra, 35 Cal.4th at pp. 1187-1188.)