Opinion ID: 900011
Heading Depth: 1
Heading Rank: 7

Heading: Is a punitive damage award of $750,000 clearly excessive and the result of passion and prejudice on the part of the jury wherein Schaffer I, the jury awarded $25,000 in compensatory damages?

Text: Jones argues that the $750,000 punitive damage award is excessive in light of the fact that the prior jury awarded $25,000 in compensatory damages based on an original investment by Schaffer of $15,000. [¶ 25] SDCL 21-3-2 describes the nature of the award to be for the sake of example, and by way of punishing the defendant. [8] This has been our consistent approach in examination of these types of awards since Richardson v. Huston, 10 S.D. 484, 74 N.W. 234 (1898). Punitive damage awards extend not only to act as punishment for the individual defendant for past tortious acts and deter the defendant from repetition, Bogue v. Gunderson, 30 S.D. 1, 137 N.W. 595, 596 (1912), but also to serve notice to others who would be tempted to repeat such actions in the future, that they do so at their substantial peril. Hulstein v. Meilman Food Industries, 293 N.W.2d 889, 892 (S.D.1980). To accomplish these purposes, the punitive damages must be relatively large. Id. [¶ 26] We have consistently held that the determination whether to award punitive damages and the amount rests in large part with the jury. Great latitude is allowed in this class of cases. One purpose of exemplary damages is to deter the person against whom they are awarded from repeating the offense and others from committing it. An amount sufficient to serve this purpose in one instance might be wholly inadequate in another. Each action must be governed by its own peculiar facts.... [A]ll circumstancesare to be considered. The question is not whether the trial court or this court, as triers of fact, would have awarded a less amount. Unless the verdict is so large as to clearly indicate that it must have been given under the influence of passion or prejudice, it should stand. Stene v. Hillgren, 78 S.D. 1, 98 N.W.2d 156, 159 (1959) (quoting Bogue, 30 S.D. 1, 137 N.W. at 596). This obviously creates an extremely difficult burden for anyone attempting to overturn a jury verdict on the ground of excessive damages. Wangen v. Knudson, 428 N.W.2d 242, 245 (S.D.1988). However, where we have found the verdict not to be justified under our standard of review and rather based on passion or prejudice, we have reduced, or in the alternative if the reduction was not acceptable to the plaintiff, granted a new trial to the defendant. [9] [¶ 27] Punitive damages must not be so oppressive or so large as to shock the sense of fair-minded persons. Hulstein, 293 N.W.2d at 892. [10] Cases in which punitive damages have been awarded are fact specific with an award in an individual case being considered unique to that case. Id. However, to guarantee uniformity of the law to guide the jury in its deliberations and the courts in reviewing a jury's verdict, we have adopted a five-factor test to determine whether a punitive award is appropriate or excessive. Flockhart, 467 N.W.2d at 479. Under this test, we consider (1) the amount allowed in compensatory damages, (2) the nature and enormity of the wrong, (3) the intent of the wrongdoer, (4) the wrongdoer's financial condition, and (5) all of the circumstances attendant to the wrongdoer's actions. Id. [¶ 28] The first factor to be considered is the amount of compensatory damages and its relationship or ratio to the amount of punitive damages. The amount of punitive damages must bear a reasonable relationship to the compensatory damages. Centrol, Inc. v. Morrow, 489 N.W.2d 890, 896 (S.D.1992). Here, the jury awarded Schaffer $25,000 in compensatory damages. Schaffer I, 521 N.W.2d at 925. Jones argues that the punitive award of $750,000 is thirty times the amount of compensatory damages and fifty times the investment of Schaffer. Such ratio comparisons, however, are of limited value. Were there to be some bright-line rule on ratios as Jones implies, the remaining four criteria would become irrelevant and the entire process of judicial review would be reduced to that of a turn at a calculator. We have held [t]here is no precise mathematical ratio between compensatory and punitive damages. Wangen, 428 N.W.2d at 246. [11] Therefore, while this ratio is cause for concern, we must proceed to analyze the other applicable factors to set the ratio matter in perspective. [¶ 29] The second factor to consider is the nature and enormity of the wrong committed. Jones argues that any wrongdoing is mitigated by the fact that on the totality of Schaffer's investments with Jones, Schaffer actually made money, and on the NRM investment, only lost $15,000. [¶ 30] Jones sold approximately $160 million of NRM limited partnership interests and collected about $20 million in commissions and fees. Schaffer I, 521 N.W.2d at 924. Jones was the principal and primary brokerage firm selling NRM. To increase its profits even further, Jones, through an affiliated subsidiary, purchased a one-third ownership interest in NRM Corporation. Jones' management knew early on, and prior to its sale to Schaffer, that NRM was in serious financial trouble. [12] [¶ 31] Given the fact that Schaffer was an unsophisticated investor in limited partnerships and the other facts of this case, Jones owed Schaffer a duty of properly informing Schaffer of the risks Jones knew to be involved with this investment. Yet Jones violated its duty to its customers and sold them this security as a conservative investment. [13] It also failed to advise them there was no market for the resale of the partnership interest and thus it could not be re-sold if the customer desired. The result of this? When Jones investigated NRM's status, it later bailed itself out before the crash but did not tell any of its customers who got to go down with the ship. Those customers like Schaffer who became suspicious when finally getting a prospectus after their purchase of NRM and did try to sell out, were told that their purchase was non-liquid and there was no re-sale market for their investment. [¶ 32] The third factor to be considered is the intent of the wrongdoer. From intent, we determine the degree of reprehensibility of the defendant's conduct, which is viewed as probably the most important indication of reasonableness of a punitive award. BMW, 517 U.S. at ____, 116 S.Ct. at 1599, 134 L.Ed.2d at 826. This factor reflects the principle that some wrongs are more blameworthy than others. Trickery and deceit are more reprehensible than negligence. 517 U.S. at ____, 116 S.Ct. at 1599, 134 L.Ed.2d at 826-27. Intentional malice can be the decisive element in a close and difficult case. 517 U.S. at ____, 116 S.Ct. at 1599, 134 L.Ed.2d at 827. [14] [¶ 33] In Schaffer I, we stated [i]t is clear the jury concluded that Jones' practices were less than exemplary in these transactions and... Jones has not contested that finding. 521 N.W.2d at 928. Thus, we do not review whether Jones is a wrongdoer, but review the extent of its wrongful intent in engaging in this conduct. [¶ 34] This is not a case of respondeat superior such as Haslip and Davis where management were unaware of the wrongdoing by a subordinate. Here, the opposite existed. Management was privy to the real status of NRM while it issued blue sheets to its brokers and representatives who, based on this blue sheet, assured potential and existing customers that this was a sound investment. Schaffer I, 521 N.W.2d at 922-23. The jury determined that Jones, as a principal, caused the loss not Edwards or Tebben, as agents. Id. at 928. [¶ 35] The jury was presented evidence with which to find that the intent of Jones was to use its expertise to enrich itself through lucrative sales commissions and partial ownership in NRM by selling limited partnerships it knew were non-liquid and highly speculative to small investors who trusted Jones and were told it was a safe conservative investment. In Schaffer I, we held that [t]he jury ... obviously concluded from the evidence that Jones caused injury to Plaintiffs `through oppression, fraud, malice, willful and wanton misconduct or reckless disregard of Plaintiffs' rights.' Id. at 926. Despite an instruction by the trial court in accordance with our prior holding, Jones attempted to argue to the jury that we sold it at low risk and WE WOULD DO IT AGAIN based on those factors. (emphasis added). [15] Not surprisingly, in response, Schaffer argued to the jury: Why are punitive damages necessary? You heard the testimony of the people at Edward D. Jones and every witness they brought here that said that they would do it all over again.... And they will, unless somebody tells them ... no you're not going to do this to anybody else down the road. This trial strategy by Jones allowed the jury to conclude Jones showed no remorse for its acts which had already been found to be fraudulent and that Jones intended to repeat the same conduct in the future. In Hulstein, we upheld a very substantial punitive award under the rationale that this award should be a clear signal that companies caught practicing deliberate fraud will be severely punished. This is the nature of punitive damages. 293 N.W.2d at 892. Punitive damages may properly be imposed to further a State's legitimate interests in not only punishing unlawful conduct but also to deter its repetition. BMW, 517 U.S. at ____, 116 S.Ct. at 1595, 134 L.Ed.2d at 822. [16] [¶ 36] The fourth factor under consideration is the financial condition of the wrongdoer. [17] Traditionally, the defendant's net worth (assets minus liabilities) is the guideline for assessing the amount of punitive damages. Schaffer I, 521 N.W.2d at 929. We held a defendant's financial resources, which include net income as well as its net worth, to be the appropriate yardstick for determining punitive damages. Id. [¶ 37] Schaffer claims that Jones' income for 1993 was $627,909,501. In 1991, its net income was $410,000,000. Id. The punitive damage award of $750,000 represents a minuscule amount of Jones' profit for 1993 or 1991. According to Schaffer, it represents less than what Jones would make in three hours on a working day in 1993. [18] Although we do not have Jones' net profit on its commissions from the sale of NRM, the fact that its gross profit amounted to $20 million hardly places this verdict in the confiscatory class. [19] The punitive damage award is not out of line with the ability of Jones to pay. Hoff, 492 N.W.2d at 915. It is difficult to imagine the conscience could be shocked by punitive damages that can be replaced with a few hours' work under these circumstances. Cf. Davis, 906 F.2d at 1225. [¶ 38] The final factor is the consideration of all the other relevant circumstances of this case. An obvious consideration was one of the subjects of the first appeal, that being that Schaffer made money on every other investment with Jones other than this one. This profit amounted to $39,689.84. Per our reversal of this case in Schaffer I, the jury was fully informed about the totality of Schaffer's business dealings with Jones. This was in accord with our view that Jones be permitted to present any and all relevant mitigating circumstances to the jury. Still, after weighing all the evidence, the jury imposed $750,000 in punitive damages. [¶ 39] According to BMW, consideration must also be given to other sanctions under South Dakota law for fraudulent misconduct. BMW, 517 U.S. at ____, 116 S.Ct. at 1603, 134 L.Ed.2d at 831. Although Jones has not been charged with criminal misconduct, we would note that those who engage in criminal fraud can be found to be in violation of SDCL 22-30A-3 [20] and 22-30A-17. This would be a Class 4 felony with a maximum punishment of ten years in the state penitentiary, a ten thousand dollar fine or both. See SDCL 22-6-1. Restitution could be awarded by the trial court but this is limited to pecuniary damages and specifically excludes punitive damages. See SDCL 23A-28-2(3). [¶ 40] In regards to the sale of any security, it is a violation of SDCL 47-31A-101 to (1) employ any device, scheme or artifice to defraud, (2) make any untrue statement of material fact or to omit to state a material fact, or (3) engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. Criminal penalties under this chapter are a Class 4 felony. SDCL 47-31A-409. Compensatory damages are available under SDCL 47-31A-410, as well as reasonable attorney's fees. Under SDCL 47-31A-410(j), the plaintiff is permitted to pursue any other rights or remedies that may exist in law or in equity, thus allowing punitive damages as authorized by SDCL 21-3-2. [¶ 41] Jones argues punitive damages should be considered synonymous with, and thus limited to, treble damages which is the maximum allowed under SDCL Title 37 for restraint of trade and discriminatory trade practices, SDCL 22-34-2 for intentional damage to property, SDCL 21-3-6 for forcible exclusion from property and SDCL 37-5A-85 for failure to comply with franchise laws. The problem with this argument is that these statutes do not apply to the finding of fraud against Jones in Schaffer I. [¶ 42] In BMW, we are instructed to consider whether less drastic remedies could achieve the goal of deterring future misconduct. 517 U.S. at ____, 116 S.Ct. at 1603, 134 L.Ed.2d at 832. In reviewing punitive damage awards in this state, we recognized [t]he question is not whether the trial court or this court, as triers of fact, would have awarded a less amount but whether the award is clearly the result of a jury's passion or prejudice. Stene, 78 S.D. 1, 98 N.W.2d at 159. In the first trial, Jones was assessed $500,000 in punitive damages on the basis of fraud. It did not appeal the fraud finding and yet told the jury in the second trial, we sold it at low risk and WE WOULD DO IT AGAIN based on those factors. (emphasis added). Apparently $500,000 was not sufficient deterrence. [¶ 43] When applying the facts of this case to the foregoing five factors, the award, while indeed generous, does not shock our collective conscience.