BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2007-2008 Regular Session
SB 423 S
Senator Harman B
As Introduced
Hearing Date: January 15, 2008 4
Civil Code 2
GWW:rm 3
SUBJECT
Cap on Punitive Damages: Three Times Compensatory Damages
DESCRIPTION
This bill would limit the maximum awardable amount of
punitive damages to three times the amount of compensatory
damages.
BACKGROUND
"Punitive damages," also referred to as "exemplary
damages," are awarded for the sake of example and to punish
a defendant who has been found guilty of outrageous conduct
(malice, fraud, or oppression). In California, an award
of punitive damages may be made only upon a showing of
clear and convincing evidence. Punitive damages are
required to bear a reasonable relationship to the damage
actually sustained by the plaintiff.
In contrast, "compensatory damages" are intended to
compensate a plaintiff for an injury caused by the
defendant's wrongful conduct. Thus, any punitive damages
award is in addition to any compensatory damages award.
In California, an award of compensatory damages may be made
upon proof by a preponderance of the evidence.
The original punitive damages statute was enacted in
California in 1872. In the last twenty years, there have
been a series of procedural and substantive modifications
to the statute, the most significant being SB 241 (Lockyer,
(more)
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Chapter 1498, Statutes of 1987), which requires proof of
malice, fraud, or oppression by clear and convincing
evidence, instead of by a mere preponderance of the
evidence, for an award of punitive damages. That bill also
clarified that "despicable conduct" was necessary to find
malice or oppression.
A series of United States Supreme Court cases have also
limited the amount of punitive damages awardable under the
federal Constitution. In general, as enunciated by the
nation's Supreme Court in State Farm Mutual Automobile
Insurance v. Campbell (2003) 538 U.S. 408, 425: "few
punitive damage awards exceeding a single digit ratio
between punitive and compensatory damages ? will satisfy
due process." (See also Comment 2 for further discussion
of Campbell and the other Supreme Court cases.)
While an award of punitive damages is initially determined
by the trier of fact, the trial court or appellate court
has the authority to reduce any award deemed to be
excessive.
CHANGES TO EXISTING LAW
Under existing law , Civil Code (CC) Section 3294(a),
punitive damages may be awarded in addition to actual
damages in cases not arising in contract (i.e., tort cases)
for the sake of example and by way of punishing the
defendant where the defendant is guilty of oppression,
fraud, or malice, and that conduct is proven by clear and
convincing evidence.
CC Section 3294(c) defines "malice" as conduct which is
intended to cause injury or despicable conduct with a
willful and conscious disregard of the rights or safety of
others. "Oppression" is despicable conduct that subjects a
person to cruel and unjust hardship in conscious disregard
of that person's rights. "Fraud" is an intentional
misrepresentation, deceit, or concealment of a material
fact
known to the defendant with the intention of depriving a
person of property or legal rights or otherwise causing
injury.
CC Section 3295(a) authorizes courts to grant a defendant a
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protective order requiring the plaintiff to produce
evidence of a prima facie case of liability for punitive
damages prior to introducing evidence of the defendant's
profits or
financial condition.
CC Section 3295(c) further precludes the plaintiff from
pretrial discovery of evidence of defendant's profits or
financial condition, unless the court determines that the
plaintiff has established that there is a substantial
probability that the plaintiff will prevail on the claim
for punitive damages.
CC Section 3295(d) prohibits the admission of evidence of a
defendant's profits or financial condition until after the
trier of fact returns a verdict for the plaintiff awarding
actual damages and finds that a defendant is guilty of
malice, fraud, or oppression entitling the plaintiff to
punitive damages.
This bill would limit the maximum awardable amount of
punitive damages to three times the amount of compensatory
damages.
COMMENT
1. Stated need for bill
The California Chamber of Commerce, sponsor of SB 423,
writes in support:
SB 423 "would provide a clear standard for reasonable
punitive damages awards by limiting them to no more than
three times compensatory damages. Improving the clarity
and objectivity of California's punitive damages system
will safeguard against excessive, runaway punitive
damages awards.
"Many state legislatures have already adopted limits to
prevent excessive punitive damages amounts: Five states
prohibit punitive damages altogether in civil actions.
Twenty-two states impose some form of cap or formula,
thirteen of which have a cap of a 3-to-1 or smaller ratio
to compensatory damages that applies to some or all
cases. For example, our competitor neighboring state
Nevada has a 3-to-1 cap in all cases with compensatory
damages of $100,000 or more, and a fixed limit of
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$300,000 if less.
"SB 423 (Harman) will help improve California's legal
climate reputation, which continues to register near
bottom nationally for fairness and reasonableness - 42nd
out of 44 in the 2007 US Chamber/Harris legal climate
survey of in-house counsel and senior attorneys across
the nation representing businesses. In the same survey,
punitive damages reform was the top-requested state-level
policy reform for the past two years. Additionally, in
2007, California's punitive damages system ranked 3rd
worst [of those states providing for punitive damages].
Only Mississippi and West Virginia ranked worse.
"The absence of any limits on punitive damages amounts,
combined with California's growing reputation as a
high-risk legal forum negatively distinguishes California
as one of the highest risk states for runaway punitive
damages awards. Economists have determined that a state's
legal climate ranking bears a direct relationship to its
gross product and worker productivity. Thus, California's
dismal legal reputation has a detrimental impact on the
state's economy."
The Civil Justice Association of California, also in
support, writes that SB 423 is consistent with punitive
damages limits in other states, is reasonable, and in
line with federal law.
The sponsor and supporters of SB 423 assert that the
State of California should take a proactive step to
improve California's legal climate by adopting the
proposed common sense punitive damages reform.
2. Recent United States Supreme Court cases place limits on
punitive damages awards
In the seminal case of State Farm Mut. Automobile Ins.
Co. v. Campbell (2003) 538 U.S. 408, 425, the United
States Supreme Court held that the Due Process Clause of
the Fourteenth Amendment to the U.S. Constitution
prohibits punitive damage awards that impose "grossly
excessive or arbitrary punishments" on defendants. The
Court reiterated its rule announced earlier in BMW of
North America, Inc. v. Gore (1996) 517 U.S. 559, that a
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court reviewing a jury's award of punitive damages must
consider the following three "guideposts" in determining
whether the award was grossly excessive: (1) the degree
of reprehensibility of the defendant's misconduct; (2)
the disparity between the punitive damages award and the
actual or potential harm suffered by the plaintiff; and
(3) the difference between the punitive damages awarded
by the jury and the civil penalties authorized or imposed
in comparable cases. In finding that a 145 - 1 ratio
between punitive damages and compensatory damages was
excessive and in violation of the Due Process Clause, the
court stated that "few punitive damage awards exceeding a
single digit ratio between punitive and compensatory
damages ? will satisfy due process."
In Campbell, the Court partially addressed the question
that it had left unanswered six years earlier in BMW of
North America, Inc. v. Gore, supra, in which the Supreme
Court had held that a $2 million punitive damages award
in light of a $4,000 compensatory damages award (500 - 1
ratio) was grossly excessive in relation to a state's
legitimate interest in punishing unlawful conduct and
deterring its repetition, and therefore exceeded
constitutional limits in violation of substantive due
process, but declined to draw a mathematical bright line
between a constitutionally acceptable and
constitutionally unacceptable formula that will fit every
case. Reiterating its concerns in Gore about a bright
line test, the Campbell court noted that "[T]he precise
award in any case, of course, must be based upon the
facts and circumstances of the defendant's conduct and
harm to the plaintiff."
Prior to Gore, in Pacific Mutual Life Insurance Company
v. Haslip (1991) 499 U S. 1, and TXO Production Corp. v.
Alliance Resources Corp. (1994) 509 U.S. 443, the Supreme
Court had endorsed the principle that exemplary damages
must bear a "reasonable relationship" to compensatory
damages. In TXO, the Court stated that the proper
inquiry is "whether there is a reasonable relationship
between the punitive damages award and the harm likely to
result from the defendant's conduct as well as the harm
that actually has occurred." (TXO, 509 U.S. at 460.) In
that case, the Court upheld a $10 million dollar punitive
damages award which had a ratio of 10 to 1.
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Subsequent to Gore, but before Campbell, the Court
overturned a punitive damage award that was 90 times the
amount of compensatory damages and ruled that appellate
courts must review punitive damages awards de novo,
without deference to the trial court's ruling. It also
reiterated Gore's three factors for assessing punitive
damages.
More recently, in Philip Morris USA v. Williams, 2007
U.S. LEXIS 1332 (2007), a 5 - 4 U.S. Supreme Court
overturned a $79.5 million punitive damage award against
tobacco company Philip Morris. The court held that the
U.S. Constitution's Due Process Clause prohibited the
assessment of a punitive damage award that punished
Philip Morris for harming victims who were not parties to
the lawsuit. It however did not address the question of
whether a $79.5 million punitive damage award was
"grossly excessive" in relation to a compensatory damages
award of $821,000, which had been affirmed by the Oregon
Supreme Court, in light of the defendant's
extraordinarily reprehensible conduct. (Williams v.
Philip Morris USA, Inc. (2006) 340 Ore. 35, 6364.)
3. Proposed cap of 3x compensatory damages would be more
restrictive than U.S. Supreme Court rulings and would
even limit punitive damages in cases of extraordinarily
reprehensible conduct
Even as the U. S. Supreme Court has moved to limit the
amount of awardable punitive damages under the federal
Constitution, the Court has consistently refrained from
establishing a "a mathematical bright line between a
constitutionally acceptable and constitutionally
unacceptable formula that will fit every case."
Here, in SB 423, proponents seek to establish as a state
policy a mathematical bright line that would limit
punitive damages awards to three times the amount of
compensatory damages. While committee staff appreciates
the difference between a policy determination, which is
properly the province of this Legislature, and a
constitutional proscription, which is the province of the
courts, a policy determination that is far more
restrictive than that which is permitted under the
Constitution deserves high scrutiny in view of its impact
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on the rights and obligations affected.
Said the BMW Court in rejecting a bright line
mathematical formula: "Of course, we have consistently
rejected the notion that the constitutional line is
marked by a simple mathematical formula, even one that
compares actual and potential damages to the punitive
award. Indeed, low awards of compensatory damages may
properly support a higher ratio than high compensatory
awards, if, for example, a particularly egregious act has
resulted in only a small amount of economic damages. A
higher ratio may also be justified in cases in which the
injury is hard to detect or the monetary value of
noneconomic harm might have been difficult to determine.
It is appropriate, therefore, to reiterate our rejection
of a categorical approach." (TXO, 509 U.S. at 458.)
While the Court later in Campbell announced a general
rule that "few punitive damage awards exceeding a single
digit ratio between punitive and compensatory damages ?
will satisfy due process," the Court clearly recognized
that there may be a particularly egregious act or
circumstance that justifies a higher ratio and therefore
refrained from setting a bright line test, even at 9 to
1. That rationale for determining constitutional limits
seems equally applicable when determining policy limits.
SB 423's proposed cap of three times compensatory damages
would establish a maximum three times less than even the
Court's restrictive general rule. Indeed, the Court's
own cautionary words in Gore about establishing a bright
line test may be all the more compelling here.
WOULD A CAP ON PUNITIVE DAMAGES OF THREE TIMES
COMPENSATORY DAMAGES POORLY SERVE THE STATE'S INTEREST IN
DETERRING EGREGIOUS CONDUCT WHERE THE AMOUNT OF ECONOMIC
DAMAGES IS SMALL OR THE MONETARY VALUE OF HARM DIFFICULT
TO DETECT?
WOULD NOT ANY EXCESSIVE AWARD BE REVIEWED DE NOVO BY THE
APPELLATE COURTS AND REDUCED OR TOSSED?
4. Opposition to proposed cap
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The Consumer Attorneys of California (CAOC) opposes SB
423's proposal to impose a "one size fits all" barrier on
exemplary damages that would work to frustrate the
deterrent and punishment prongs of punitive damages.
CAOC extensively writes:
"The proponents of SB 423 rely on a bogus study released
by the Chamber of Commerce claiming to rank so-called
'anti-business' state legal systems. This study is
another baseless attack on the nation's civil justice
system in the Chamber's ongoing campaign to eliminate
corporate accountability for wrongdoing and negligence.
This latest propaganda is a made-up survey primarily of
corporate lawyers who earn millions of dollars by
defending their CEOs from being held accountable."
(According to materials provided by the sponsor, "The
2007 State Liability Systems Ranking Study" was conducted
for the U.S. Chamber Institute for Legal Reform among a
national sample of in-house general counsel or other
senior litigators at public corporations.)
CAOC further asserts in opposition:
"In contrast to the unreliable and biased 'study' paid
for by the tobacco, insurance and oil industries, a bevy
of independent studies confirms that punitive damages are
rarely imposed, and are assessed by juries in only the
most egregious circumstances.
Noted scholars from Cornell University confirm that
the size of damage awards has not increased over time.
In a paper published in November of 2007, the authors
assess the relation between punitive and compensatory
damages by combining two data sets of extreme awards
with state court data from the National Center for
State Courts (NCSC) for 1992, 1996, and 2001. The
report states that they find no increase in punitive
nor in compensatory awards over time after reviewing
data sets of extreme awards: punitive damages awards
in excess of $100 million from 1985 through 2003 by
authors Hersch and Viscusi. A second data set from the
National Law Journal (NLJ) annual reports of the 100
largest trial verdicts from 2001-2004 states "the
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integration of these data sets provides the most
comprehensive picture of punitive damages in American
civil trials to date." (Theodore Eisenberg, Valerie P.
Hans, and Martin T. Wells, The Relation Between
Punitive and Compensatory Awards: Combining Extreme
Data With the Mass of Awards, Cornell Legal Studies
Research Paper No. 06-026.)
A recent article from the University of Iowa Law
Review finds 'that punitive damage awards are rare.'
Judges and juries awarded punitive damages
infrequently in the recent past; and, there is no
evidence that this frequency increased at some point
beginning in the 1980s; nor is there any evidence
that, absent tort reform, they would have made such
awards with increasing frequency in the near future.
Six major surveys reviewing punitive damages since
1985 reveal that, on an absolute basis, fact finders
have awarded punitive damages in 2%-9% of all cases
where plaintiffs won, and an average of the studies
suggests a rate on the low end of the range. Since
plaintiffs typically win 50% of all cases that go to
verdict, these statistics suggest that in the recent
past plaintiffs received punitive-damages awards in 4%
-5% of all trials."
The Consumer Federation of California offers
collaborating information, citing a 2001 U.S. Department
of Justice, Bureau of Justice Statistics survey of
punitive damages awards in the 75 most populous counties
in the United States where punitive damages were awarded
in only six percent of civil trials in which the
plaintiff won, a frequency rate that was unchanged from
an earlier 1992 survey.
CAOC and other opponents, the Consumer Federation of
California, Consumers for Auto Reliability and Safety
(CARS), and the Sierra Club, additionally assert that the
threat of punitive damages keeps Californians safer from
defective products and fraudulent, malicious, or
oppressive business practices. CAOC writes:
"Juries assess punitive damages in order to punish
egregious conduct and to discourage bad actors. As a
result, the civil justice system does its job by making
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consumers' products safer. If a corporation knows that
its exposure will be limited to a fixed ratio, it can
cynically factor punitive damages as a line-item under
the cost of doing business. Here are examples of a few
products made safer by the proper assessment of punitive
damages:
Children were severely burned by highly flammable
pajamas.
The manufacturer was aware of the hazard and the jury
assessed a $1 million punitive damages award, forcing
the unsafe product off the market.
Women were dying from Toxic Shock Syndrome after
using super-absorbent tampons.
Playtex willfully disregarded studies and medical
reports linking product to Toxic Shock. The deadly
product was removed from the market after a jury
imposed $10 million in punitive damages.
Consumers were injured when poorly designed Pinto[s]
burst into flames upon impact.
Ford Motor Co. knew how to design [a] car safely, but
chose profit over American lives. The vehicle was
redesigned only after Ford was hit with a $125 million
punitive damages award.
Arthritis pain-relief drug caused fatal kidney-liver
ailment.
Eli Lilly knew of the hazard, but failed to inform
doctors, patients, and the FDA. A $6 million punitive
damages award forced the company to remove the drug
from the world market.
Defective Dalkon Shield intrauterine device caused
pelvic disease and septic abortions.
A. H. Robins misled doctors about the product's safety
by concealing poor test results. A $7.5 million
punitive award forced the manufacturer to recall the
dangerous device."
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Opponents also point out that the threat of excessive
punitive damages awards have been addressed by the line
of United States Supreme Court cases placing
constitutional restrictions on punitive damages. CAOC
cites several cases in which punitive damages awards have
been reduced by the courts.
The Ninth Circuit Court of Appeal recently cut the
punitive damages in half in the long-running Exxon
Valdez oil spill case stemming from the disastrous oil
spill which devastated the Alaskan coastal environment
for years from $5 billion to $2.5 billion. Defendants
are reportedly seeking a further reduction. (In re:
The Exxon Valdez v. Exxon Mobil Corp. (2006) 472. F.
3d. 600.)
The California Supreme Court in Simon v. San Paolo U
S Holdings Co. Inc. (2005) 35 Cal 4th 1159 reduced the
$2.5 million punitive damage award in a commercial
real-estate contract fraud case to $50,000.
The California 4th District, Div. 1 Court of Appeal
in Buell-Wilson v. Ford (2006) 141 Cal App 4th 525
reduced the punitive damage award against Ford Motor
Co. in a design defect case where a defect in the Ford
Explorer caused the plaintiff serious permanent injury.
The punitive award was reduced from $246 million to $55
million (the California Supreme Court subsequently
denied a Petition for Review.)
CAOC asserts that these cases demonstrate that courts
already provide a check on jury awards, leaving SB 423
not only ill-advised, but unnecessary.
Lastly, opponents assert that egregious conduct requires
the deterrent of punitive damages that is meaningful and
not something that can be factored in as a predicable
cost of doing business. Willful corporate egregious
misconduct which knowingly defrauds consumers, which
injure unsuspecting consumers with defective products,
which contaminates the community with toxics, should
warrant a substantial punitive damages award to deter and
punish such conduct in order to make California safer.
CARS asserts that by arbitrarily capping exemplary
damages, regardless how egregious the scofflaw's conduct
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is, or how many victims who have not been compensated
have nevertheless suffered harm, SB 423 would eliminate
one of the only remaining effective means for
Californians to curb acts of oppression, fraud, and
malice. Opponents contend that SB 423 would effectively
preclude California from punishing actors who act
maliciously, fraudulently, or oppressively to injure
Californians for, as in one case, a "half-century trail
of deceit which has decimated millions of Americans."
(Closing argument, plaintiff attorney Florida class
action reported at Big Tobacco Ordered to Pay $145
Billion In Punitive Damages, July 14, 2000, CNN.)
Support: Association of California Insurance Companies;
Civil Justice Association of California; Milpitas
Chamber of Commerce; Redondo Beach Chamber of
Commerce; Southwest California Legislative
Council; South Bay Association of Chambers of
Commerce
Opposition:Californians for Auto Reliability and Safety;
Consumer Attorneys of California; Consumer
Federation of California; Sierra Club
HISTORY
Source:California Chamber of Commerce
Related Pending Legislation:None Known
Prior Legislation:AB 1862 (Morrow) of 1995. Held in this
committee.
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