Opinion ID: 2570320
Heading Depth: 2
Heading Rank: 1

Heading: Repeated Wrongful Conduct, Profitability, and Reprehensibility

Text: Neither BMW, supra, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809, which first drew the contours of the required substantive due process review, nor State Farm, supra, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585, which elaborated on the reprehensibility and relationship-to-harm criteria (see Simon, supra, 35 Cal.4th at pp. 1180, 1181-1183, 29 Cal.Rptr.3d 379, 113 P.3d 63), states precisely what role evidence of the defendant's similar wrongful conduct to others plays in the analysis. As both decisions are nonetheless instructive on this question, we begin by reviewing them. BMW involved an automobile distributor's nationwide policy of not advising dealers or their customers of predelivery damage to new vehicles when the cost of repair was less than 3 percent of the retail price. ( BMW, supra, 517 U.S. at pp. 563-564, 116 S.Ct. 1589.) The individual Alabama plaintiff, whose new car had been repainted without his knowledge before he bought it, proved compensatory damages of only $4,000 but, on evidence that nationwide the defendant had sold about 1,000 refinished automobiles without disclosure, was awarded $4 million in punitive damages. ( Id. at pp. 564-565, 116 S.Ct. 1589.) The Alabama Supreme Court reduced that award to $2 million, in part based on its conclusion that conduct in other jurisdictions should not be considered. ( Id. at p. 567, 116 S.Ct. 1589.) The United States Supreme Court reversed and remanded for a new due process analysis by the state court, without itself determining the maximum constitutional award. ( BMW, supra, 517 U.S. at pp. 585-586, 116 S.Ct. 1589.) The high court's legal analysis, however, is instructive on the role of the defendant's practices toward those other than the plaintiff. The court's central holding in this regard is that instances of the defendant's similar conduct in states other than Alabama were not properly considered in assessing punitive damages because the conduct was not illegal in all the other states, and a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasors' lawful conduct in other States. ( Id. at p. 572, 116 S.Ct. 1589.) At the same time, the court made clear it regarded similar conduct by the defendant as potentially relevant to the reprehensibility of the conduct, and hence to the permissible size of an award. To its holding that the state court correctly ignored BMW's out-of-state conduct in assessing the award, the high court added this footnote: Of course, the fact that the Alabama Supreme Court correctly concluded that it was error for the jury to use the number of sales in other States as a multiplier in computing the amount of its punitive sanction does not mean that evidence describing out-of-state transactions is irrelevant in a case of this kind. To the contrary, as we stated in TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443, 462, n. 28, 113 S.Ct. 2711, 2722, n. 28, 125 L.Ed.2d 366 (1993), such evidence may be relevant to the determination of the degree of reprehensibility of the defendant's conduct. ( BMW, supra, 517 U.S. at p. 574, 116 S.Ct. 1589, fn. 21.) [4] The court expanded on this point in its discussion of reprehensibility, the first and [p]erhaps the most important of the constitutional guideposts. ( BMW, supra, 517 U.S. at p. 575, 116 S.Ct. 1589.) Though it ultimately rejected the plaintiff's contention that the defendant's nondisclosure of the minor repairs to his car was particularly reprehensible because it was part of a nationwide pattern of tortious conduct (the point was rejected for lack of a showing the practice was generally tortious), the court acknowledged that recidivism increases the wrongfulness of a defendant's conduct and may justify greater punishment: Certainly, evidence that a defendant has repeatedly engaged in prohibited conduct while knowing or suspecting that it was unlawful would provide relevant support for an argument that strong medicine is required to cure the defendant's disrespect for the law. [Citation.] Our holdings that a recidivist may be punished more severely than a first offender recognize that repeated misconduct is more reprehensible than an individual instance of malfeasance. ( Id. at pp 576-577, 116 S.Ct. 1589.) Seven years later, in State Farm, supra, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585, the high court again considered the role of a corporation's practices and policies in an individual lawsuit seeking punitive damages. The court reiterated that tortious conduct toward others could be relevant to the reprehensibility of an individual tort and that conduct in other states where it might not be illegal should not be considered, but additionally distinguished between courses of conduct that were similar to the individual tort and those that were dissimilar. ( Id. at pp. 420-424, 123 S.Ct. 1513.) The defendant insurer's wrongful conduct toward the individual State Farm plaintiffs was its bad faith refusal to settle a third party tort suit against the plaintiffs, its insureds. ( State Farm, supra, 538 U.S. at p. 413, 123 S.Ct. 1513.) The plaintiffs, however, introduced evidence of other assertedly fraudulent State Farm business practices encompassing many years and many states, most of which bore no relation to third-party automobile insurance claims. ( Id. at p. 415, 123 S.Ct. 1513.) Consequently, the high court complained, the case was used as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country. ( Id. at p. 420, 123 S.Ct. 1513.) This evidence of wide-ranging business practices could not, consistent with due process, be used to show reprehensibility that would support a large ($145 million) punitive damages award for two reasons: First, [a] State cannot punish a defendant for conduct that may have been lawful where it occurred. ( State Farm, supra, 538 U.S. at p. 421, 123 S.Ct. 1513 [citing BMW ].) Second, and more fundamental[ly], [a] defendant's dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. ( Id. at pp. 422-423, 123 S.Ct. 1513.) The punitive damages award in State Farm therefore could not be justified on grounds of recidivism. Quoting BMW's statement that `[o]ur holdings that a recidivist may be punished more severely than a first offender recognize that repeated misconduct is more reprehensible than an individual instance of malfeasance,' the high court in State Farm added the qualification that in the context of civil actions courts must ensure the conduct in question replicates the prior transgressions. ( State Farm, supra, 538 U.S. at p. 423, 123 S.Ct. 1513.) The State Farm plaintiffs had produced scant evidence of repeated misconduct of the sort that injured them, and while evidence of other acts need not be identical to have relevance in the calculation of punitive damages, conduct toward others that had nothing to do with the tortious conduct toward the plaintiffs could not constitutionally be considered. ( Id. at pp. 423-424, 123 S.Ct. 1513.) While both BMW and State Farm were cases in which the evidence state courts had considered of conduct toward others was impermissibly broad, the United States Supreme Court's analysis in both cases makes clear that due process does not prohibit state courts, in awarding or reviewing punitive damages, from considering the defendant's illegal or wrongful conduct toward others that was similar to the tortious conduct that injured the plaintiff or plaintiffs. We therefore join the numerous courts holding that a civil defendant's recidivism remains pertinent to an assessment of culpability. [5] The appellate court below, however, opined that punitive damages may not be used to punish and deter defendant's overall course of conduct, seemingly ruling out consideration of the scale and profitability of Ford's fraudulent conduct toward California consumers. In lieu of further explanation, the lower court referred readers to its contemporaneous decision in Romo v. Ford Motor Co., supra, 113 Cal.App.4th 738, 6 Cal.Rptr.3d 793 ( Romo ). We therefore briefly examine the Romo decision to see if the due process principles discussed there compel the Court of Appeal's conclusion here. Although involving the same defendant, Romo was not factually similar to this case; it was a defective product suit arising from a fatal vehicle rollover, in which the jury awarded the plaintiffs $5 million in compensatory and $290 million in punitive damages. ( Romo, supra, 113 Cal. App.4th at p. 744, 6 Cal.Rptr.3d 793.) On remand from the United States Supreme Court for reconsideration in light of State Farm, the Court of Appeal reduced the punitive damages award to around $23.7 million. ( Romo, supra, at p. 763, 6 Cal. Rptr.3d 793.) Pertinent to our inquiry is the court's general theoretical discussion of punitive damages after State Farm. Drawing heavily on a law review article (Colby, Beyond the Multiple Punishment Problem: Punitive Damages as Punishment for Individual, Private Wrongs (2003) 87 Minn. L.Rev. 583 (hereafter Beyond the Multiple Punishment Problem )), the Romo court distinguished between a narrow historically based view of punitive damages and the broad view the court believed had recently prevailed in California and other jurisdictions ( Romo, supra, 113 Cal.App.4th at pp. 748-749, 6 Cal.Rptr.3d 793) and concluded that the United States Supreme Court had adopted the narrow view as a matter of constitutional doctrine ( id. at 749, 6 Cal.Rptr.3d 793). Under the narrow historical approach, the Romo court opined, the punishment imposed was for the particular affront to the plaintiff, not a broader sanction for an affront to society at large ( id. at p. 747, 6 Cal.Rptr.3d 793), while the broad modern theory, developed in an era of products liability and other consumer actions, held that punitive damages served to punish and deter the affront to all affected by the goods or services or, given the reach of the misconduct, the affront ... to society as a whole ( ibid. ). Under the narrow view, as Romo explains it, the size of a permissible award was limited by the need for a reasonable relationship to the harm caused the individual plaintiff ( Romo, supra, 113 Cal. App.4th at p. 747, 6 Cal.Rptr.3d 793), regardless of whether such an award would actually deter repetition or imitation of the defendant's conduct ( id. at pp. 750-751, 6 Cal.Rptr.3d 793). In contrast, under the broad view, punitive damages awards needed to be based on the overall scope of the wrong in order to punish and deter the mass torts ( id. at p. 747, 6 Cal.Rptr.3d 793), leading to awards calculated to actually deter a corporate course of action, given the corporation's profits and financial condition ( id. at pp. 748-749, 6 Cal. Rptr.3d 793). The Romo court's analysis does not convince us that the United States Supreme Court, in State Farm, adopted wholesale the historical view of punitive damages outlined in the Colby article ( Beyond the Multiple Punishment Problem, supra, 87 Minn. L.Rev. 583) as a constitutional rule binding on the states. The article is not cited in the high court's decision; nor does the decision contain any explicit references to broad and narrow, or modern and historical, theories of punitive damages. The high court does discuss the history of single-digit ratios between compensatory damages and civil penalties ( State Farm, supra, 538 U.S. at p. 425, 123 S.Ct. 1513), but does not relate its presumptive preference for single-digit ratios (see Simon, supra, 35 Cal.4th at p. 1182, 29 Cal. Rptr.3d 379, 113 P.3d 63) to a requirement that the states adopt a restrictive historical view of the purposes of punitive damages. More important, we are not convinced the high court's precedents dictate that states take such a narrow view as to what is to be deterred through punitive damages ( Romo, supra, 113 Cal.App.4th at p. 747, 6 Cal.Rptr.3d 793) as to blind state juries and courts to the state's public interest in deterring a wrongful course of conduct. Indeed, the court's analysis in BMW, supra, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809, expressly affirms a state's constitutional freedom to use punitive damages as a tool to protect the consuming public, not merely to punish a private wrong. Alabama, the BMW court explained, could legitimately use punitive damages to punish and deter the defendant's unlawful conduct, thereby furthering its interest in protect[ing] its citizens [from] deceptive trade practices. ( Id. at p. 568, 116 S.Ct. 1589.) To that end, a proper award of punitive damages would be one supported by the State's interest in protecting its own consumers and its own economy. ( Id. at p. 572, 116 S.Ct. 1589.) State Farm, in turn, did not bar deterrence of future public injuries as a goal of punitive damages. The court reiterated its statement in BMW that `[p]unitive damages may properly be imposed to further a State's legitimate interests in punishing unlawful conduct and deterring its repetition' ( State Farm, supra, 538 U.S. at p. 416, 123 S.Ct. 1513) and did not limit the concept to punishment and deterrence purely on behalf of the plaintiff. In elaborating on BMW's reprehensibility guidepost, the court in State Farm noted that conduct involving repeated actions was worse than, and could be punished more severely than, conduct limited to an isolated incident. ( State Farm, supra, at p. 419, 123 S.Ct. 1513.) [6] To be sure, State Farm requires reasonable proportionality between punitive damages and actual or potential harm to the plaintiff. But what ratio is reasonable necessarily depends on the reprehensibility of the conduct, the most important indicium of the reasonableness of the award ( State Farm, supra, 538 U.S. at p. 419, 123 S.Ct. 1513), which in turn is influenced by the frequency and profitability of the defendant's prior or contemporaneous similar conduct. As the high court has recognized, that a defendant has repeatedly engaged in profitable but wrongful conduct tends to show that strong medicine is required to deter the conduct's further repetition. ( BMW, supra, 517 U.S. at p. 577, 116 S.Ct. 1589; see Kemp v. American Telephone & Telegraph Company (11th Cir.2004) 393 F.3d 1354, 1363 [large-scale corporate malfeasance, involving collection of almost $300,000 in illegal gambling debts, merited a substantial penalty under high court's guideposts].) In certain cases, as we explain in Simon, supra, 35 Cal.4th at page 1187, 29 Cal.Rptr.3d 379, 113 P.3d 63, 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. The scale and profitability of a course of wrongful conduct by the defendant cannot justify an award that is grossly excessive in relation to the harm done or threatened, but scale and profitability nevertheless remain relevant to reprehensibility and hence to the size of award warranted, under the guideposts, to meet the state's interest in deterrence. BMW and State Farm limit the size of individual awards but leave undisturbed the states'discretion ( State Farm, supra, 538 U.S. at p. 416, 123 S.Ct. 1513) in use of punitive damages generally. Nothing the high court has said about due process review requires that California juries and courts ignore evidence of corporate policies and practices and evaluate the defendant's harm to the plaintiff in isolation. California law has long endorsed the use of punitive damages to deter continuation or imitation of a corporation's course of wrongful conduct, and hence allowed consideration of that conduct's scale and profitability in determining the size of award that will vindicate the state's legitimate interests. [7] We do not read the high court's decisions, which specifically acknowledge that states may use punitive damages for punishment and deterrence, as mandating the abandonment of that principle.