Punitive-Damages Reform Is Essential for Future of California Business
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JANUARY 7, 2008
FORUM COLUMN

By Kyla Christoffersen

The results of recent national surveys of state legal systems confirm that states have failed to convince businesses that their punitive-damages systems are fair and reasonable. For the past two years, punitive-damages reform was the No. 1 requested state-level policy reform in the annual U.S. Chamber/Harris 50-state legal-climate survey of in-house counsel and senior attorneys representing businesses. In the same survey, California's punitive-damages system ranked near bottom: third-worst in the nation in 2007, behind Mississippi and West Virginia.

Landmark federal- and state-court decisions intended to provide guidelines to prevent excessive punitive-damages awards have provided little reassurance. The complexity and mixed messages in some of these decisions appear to have spurred controversy and litigation rather than resolving what constitutes excessive awards.

These developments indicate the time is ripe for California to adopt statutory standards providing greater clarity and objectivity in its punitive-damages system. This month, the California Legislature will have the opportunity to advance legislation, SB 423, sponsored by the California Chamber of Commerce. If enacted, it will provide a clear standard for reasonable punitive-damages awards - a cap that limits them to no more than three times compensatory damages.

The U.S. Supreme Court in BMW of North America Inc. v. Gore, 517 U.S. 559 (1996) provided several guideposts for ensuring punitive-damages awards are reasonable and proportionate to the wrong committed. One of these is that punitive-damages awards should bear a reasonable relationship to the actual or potential harm suffered by the plaintiff.

The court built on this in State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003), by establishing a presumption that punitive-damages awards larger than nine times compensatory damages violate due process; even a 1-to-1 ratio might be unconstitutional if compensatory damages are high. Conversely, higher ratios might be permissible if compensatory damages are low. The court, nonetheless, explicitly refrained from providing a specific ratio or cap. In so doing, the court left the states broad discretion to establish punitive-damages standards.

Many state legislatures have adopted punitive-damages standards that are more protective than the federal standards. Five states prohibit punitive damages in civil actions. Twenty-two states impose some form of cap or formula. Thirteen states have a cap of a 3-1 or smaller ratio to compensatory damages that applies to some or all cases.

Nevada has a 3-to-1 cap in all cases with compensatory damages of $100,000 or more and a fixed limit of $300,000 if less. New Jersey has a cap of the greater of five times or $350,000. Some states are more strict: Connecticut confines punitive damages to litigation costs including reasonable attorney fees, and Michigan does not allow them if compensatory damages have made the plaintiff whole.

By contrast, California has no limits. Juries are instructed on constitutional guideposts, but they may award any amount - from zero to millions or billions. Absent a trial judge's reducing an excessive award, a defendant's only recourse is expensive and lengthy appeals, which sometimes last years.

Critics of punitive-damages reform often cite a small 4 percent to 6 percent of cases in which punitive damages are awarded. A study by Cornell Law School professor Theodore Eisenberg suggests, however, that, nationally, California has the greatest percentage of punitive-damages awards. The study, which examined punitive-damages awards in 22 states from 1992 to 2001, shows that California accounted for a full 28.9 percent of the punitive-damages awards among all the states in the study, including New York, Michigan, Illinois and Texas. Texas ranked second-highest, at 20 percent. All of the other states each accounted for less than 6 percent of punitive-damages awarded.

This data supports the view that the punitive-damages threat is more significant in California than in most other states. Additionally, Jury Verdict Research numbers confirm that California awards are large. From 1999 to 2004, the latest available data, the median punitive-damages award in California was $290,500, and the probability range $58,000 to $4 million (even excluding a $3 billion award in a 2001 case).

California's reputation as a state with an overall legal climate that is litigious, costly and hostile to business - consistently ranking in bottom tiers for fairness and reasonableness in national studies - further distinguishes its position as one of the highest-risk states for runaway punitive-damages awards.

The threat of large awards drives up already-high litigation costs and gives unfair settlement leverage to plaintiffs' attorneys. When 50 percent of California compensatory damage awards are at least $100,000 and 20 percent are at least $1 million, the possibility of additional large punitive-damages awards can make trial too risky, especially for smaller companies. Even those with defensible, meritorious cases feel compelled to settle.

Unfortunately, recent federal- and state-court rulings have provided little assistance. In post-State Farm cases, the U.S. Supreme Court has sent mixed messages about excessive ratios by declining opportunities to enforce or address the 9-to-1 presumption, instead choosing to focus on other issues. And the California Supreme Court has provided little instruction on federal standards. In Simon v. San Paolo U.S. Holding Co. Inc., 35 Cal.4th 1159 (2005), the court confirmed the 9-to-1 State Farm presumption and agreed that a single-digit multiplier is not presumptively valid, but the court was reluctant to provide any more definitive benchmark or standard.
Insufficient guidance from the courts and a growing reputation as a high-risk legal forum confirms the time is right for the California Legislature to act. The last significant statutory reforms to punitive damages took place two decades ago. Although SB 423 is only one of a number of needed reforms, it will be a positive step toward improving the clarity and objectivity of California's punitive-damages system.

Injured plaintiffs should be made completely whole through compensatory damages; but a penalty system that provides plaintiffs and their attorneys with additional monetary sums in amounts hundreds of times greater is arbitrary and counterproductive and results in a questionable windfall.

Under SB 423, juries will have the ability to take into account the reprehensibility of the defendant's actions and the wealth of the defendant in choosing an appropriate punitive-damages award amount but will do so simply within a range of zero to three times the compensatory damages, rather than a limitless range.

Kyla Christoffersen is a policy advocate on legal reform for the California Chamber of Commerce in Sacramento. She is also an attorney.

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