Opinion ID: 2570318
Heading Depth: 2
Heading Rank: 2

Heading: Evaluation of the Award Under State Farm and BMW

Text: We now consider in sequence the three guideposts prescribed by the high court: (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, 123 S.Ct. 1513; see BMW, supra, 517 U.S. at p. 575, 116 S.Ct. 1589.)
The high court in both BMW and State Farm recognized that the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct. ( State Farm, supra, 538 U.S. at p. 419, 123 S.Ct. 1513; BMW, supra, 517 U.S. at p. 575, 116 S.Ct. 1589.) In State Farm, the court summarized the subsidiary factual circumstances it believed particularly relevant to assessing reprehensibility: We have instructed courts to determine the reprehensibility of a defendant by considering whether: the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident. ( State Farm, supra, at p. 419, 123 S.Ct. 1513.) Here, defendant's tortious acts caused only economic harm and did not show disregard of others' health or safety. The first two subfactors are clearly inapplicable. The parties dispute whether Simon was financially vulnerable, but we assess this factor as essentially neutral. While San Paolo Holding had financial resources vastly superior to Simon's, the transaction was an arm's-length one upon which neither party depended for economic survival or security; Simon wanted to buy the office building and San Paolo Holding wanted to sell it (albeit seemingly not to Simon), but neither needed for the transaction to go through. This limited the leverage San Paolo Holding's superior financial position might otherwise have given it over Simon. Similarly, although San Paolo Holding's conduct could be characterized as more than a single isolated incident, as the evidence showed deceptive conduct by King spanning several weeks, the tortious act on which liability was based was a single false promise (or set of promises) made in the letter of intent, and no evidence indicated King had acted similarly toward other potential buyers. Unlike, for example, the defendant in our companion case of Johnson v. Ford Motor Co. (June 16, 2005, S121723) 35 Cal.4th 1191, 29 Cal.Rptr.3d 82, 113 P.3d 401, 2005 WL 1404423 San Paolo Holding cannot be characterized as a repeat offender. This subfactor, too, fails to support a high assessment of reprehensibility. Finally, San Paolo Holding concedes King's making of one or more intentionally false promises, as the jury found he did, constitutes intentional ... deceit ( State Farm, supra, 538 U.S. at p. 419, 123 S.Ct. 1513) rather than a mere accident ( ibid. ). We agree this subfactor applies. True, a comparison to accidentally caused harm is of little value in assessing a California punitive damages award, as accidentally harmful conduct cannot provide the basis for punitive damages under our law. At a minimum, California law requires conduct done with willful and conscious disregard of the rights or safety of others or despicable conduct done in conscious disregard of a person's rights. (Civ.Code, § 3294, subd. (c)(1), (2); see Taylor v. Superior Court (1979) 24 Cal.3d 890, 895-896, 157 Cal.Rptr. 693, 598 P.2d 854 [conscious disregard means that the defendant was aware of the probable dangerous consequences of his conduct, and that he wilfully and deliberately failed to avoid those consequences].) The jury's finding that King made false promises with the intent to defraud Simon shows he was not merely indifferent to, but actively sought an injury to, Simon's rights. He did so, moreover, through affirmative misrepresentation, not merely nondisclosure. (See BMW, supra, 517 U.S. at p. 580, 116 S.Ct. 1589[[T]he omission of a material fact may be less reprehensible than a deliberate false statement].) The final reprehensibility subfactor, then, does weigh on the plus side of the scale. In sum, of the five subfactors relevant to reprehensibility, only one applies. In the universe of cases warranting punitive damages under California law, the fraudulent promise or promises that led to San Paolo Holding's liability have to be regarded as of relatively low culpability.
While the high court had in BMW and earlier decisions already demanded that punitive damages bear a `reasonable relationship' to compensatory damages ( BMW, supra, 517 U.S. at p. 580, 116 S.Ct. 1589) and had in BMW made that relationship one of the three guideposts for due process evaluation ( id. at pp. 574-575, 580-581, 116 S.Ct. 1589), the decision in State Farm addressed this guidepost with markedly greater emphasis and more constraining language. If, in [ BMW ], the high court threw a lasso around the problem of what it had previously identified as `punitive damages awards `run wild'' [citation], in [ State Farm ] it tightened the noose considerably. ( Bardis v. Oates (2004) 119 Cal.App.4th 1, 19, 14 Cal. Rptr.3d 89.) In BMW, the court not only abjured drawing `a mathematical bright line,' but also observed that [i]n most cases, the ratio will be within a constitutionally acceptable range, disapproving only the breathtaking 500 to 1 ratio in the case before it. ( BMW, supra, 517 U.S. at p. 583, 116 S.Ct. 1589.) In State Farm, while still declin[ing] ... to impose a bright-line ratio which a punitive damages award cannot exceed, the court went on to hold that few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process. ( State Farm, supra, 538 U.S. at p. 425, 123 S.Ct. 1513.) The court also explained that past decisions and statutory penalties approving ratios of 3 or 4 to 1 were instructive as to the due process norm, and that while relatively high ratios could be justified when `a particularly egregious act has resulted in only a small amount of economic damages' [citation] ... [t]he converse is also true.... 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. ( Ibid. ) We understand the court's statement in State Farm that few awards significantly exceeding a single-digit ratio will satisfy due process to establish a type of presumption: ratios between the punitive damages award and the plaintiff's actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification (by, for example, extreme reprehensibility or unusually small, hard-to-detect or hard-to-measure compensatory damages), cannot survive appellate scrutiny under the due process clause. [7] As stated in Williams v. Conagra Poultry Company (8th Cir.2004) 378 F.3d 790, 799, a ratio significantly greater than single digits alerts the court to the need for special justification. (See also Bardis v. Oates, supra, 119 Cal.App.4th at p. 22, 14 Cal. Rptr.3d 89 [42-to-1 ratio cannot stand unless extraordinary factors are present]; McClain v. Metabolife International, Inc., supra, 259 F.Supp.2d at p. 1231 [red flag goes up when ratio exceeds single digit].) Multipliers less than nine or 10 are not, however, presumptively valid under State Farm. Especially when the compensatory damages are substantial or already contain a punitive element, lesser ratios can reach the outermost limit of the due process guarantee. ( State Farm, supra, 538 U.S. at p. 425, 123 S.Ct. 1513.) But we do not agree with the court in Diamond Woodworks, Inc. v. Argonaut Insurance Company (2003) 109 Cal.App.4th 1020, 1057, 135 Cal.Rptr.2d 736, that in the usual case the high court's decisions establish an outer constitutional limit of approximately four times the compensatory damages. Reviewing the history of double, triple and quadruple damages, the court in State Farm warned that these ratios are not binding,  but only instructive. ( State Farm, supra, at p. 425, 123 S.Ct. 1513 italics added.) Moreover, their instruction, what [t]hey demonstrate, is simply that [ s ] ingle digit multipliers are more likely to comport with due process than ratios of 500 to 1, as in BMW, or 145 to 1, as in State Farm. ( Ibid., italics added.) Measurement of damages is, of course, far from exact, a fact reflected in the high court's qualification of its single-digit presumption: only awards exceeding that level to a significant degree are constitutionally suspect. ( State Farm, supra, 538 U.S. at p. 425, 123 S.Ct. 1513.) As due process does not entitle a tortfeasor to notice of the precise amount the state may penalize him or her, [t]he judicial function is to police a range, not a point ( Mathias v. Accor Economy Lodging, Inc., supra, 347 F.3d at p. 678). The disputed $1.7 million punitive damages award to Simon was 340 times his $5,000 award of compensatory damages. This qualifies as a breathtaking multiplier ( BMW, supra, 517 U.S. at p. 583, 116 S.Ct. 1589), far outside the single-digit neighborhood ( Bocci v. Key Pharmaceuticals, Inc. (2003) 189 Or.App. 349, 76 P.3d 669, 675, mod. on other grounds and adhered to as mod., 190 Or.App. 407, 79 P.3d 908) suggested by the high court in State Farm. As we have already determined, moreover, the $5,000 compensatory award accurately measures the actual harm done to Simon, and Simon failed to demonstrate that San Paolo Holding's fraud threatened to cause him substantial additional harm. (See pt. I., ante. ) Nor can the 340-to-1 ratio here be justified on the ground that `a particularly egregious act has resulted in only a small amount of economic damages' ( State Farm, supra, 538 U.S. at p. 425, 123 S.Ct. 1513 italics added), for while San Paolo Holding's fraud qualified for punitive damages under California law, compared to conduct in other punitive damages cases it was not highly reprehensible. (See pt. II.A., ante; accord, Atkinson v. Orkin Exterminating Co., Inc. (2004) 361 S.C. 156, 604 S.E.2d 385, 393 [despite particularly low compensatory damages of $6,191, ratio of 127 to 1 not justified because conduct not sufficiently egregious].) Measured against the second BMW/State Farm guidepost, therefore, the punitive damages award is grossly excessive.
The third guidepost is less useful in a case like this one, where plaintiff prevailed only on a cause of action involving common law tort duties that do not lend themselves to a comparison with statutory penalties ( Continental Trend Resources v. OXY USA, Inc., supra, 101 F.3d at p. 641), than in a case where the tort duty closely parallels a statutory duty for breach of which a penalty is provided. The parties have not drawn our attention to any specific statutory civil penalties for promissory fraud in a business transaction, though defendant cites Business and Professions Code section 17206, allowing a $2,500 penalty for unfair competition (which, as the lower court noted, does not necessarily involve fraudulent acts). The Court of Appeal, in turn, cited provisions providing for treble fines or damages for fraudulent or deceptive acts in other contexts (e.g., Civ.Code, §§ 3345 [deceptive practices causing economic injury to disabled or senior persons], 1947.10 [fraudulent eviction in municipality with rent controls]), as well as statutes criminalizing theft by fraud (Pen.Code, §§ 182, subd. (a)(4), 484, subd. (a); see also id., § 672 [fine of $1,000 for misdemeanor and $10,000 for felony]). [8] While comparison to these statutory penalties cannot tell us precisely how large an award would be constitutional, it clearly does not tend to support the present award of $1.7 million dollars in punitive damages, a sum 340 times the financial harm defendant's fraud caused plaintiff.
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]