Does California Make A Good Neighbor For State Farm? Or Are California Courts Misapplying The Supreme Court's Punitive Damages Analysis?

By Paul G. Crist and Matthew P. Vandall

California Courts are struggling to apply the punitive damages analysis mandated by the United States Supreme Court in State Farm Mutual Auto. Ins. Co. v. Campbell, 123 S. Ct. 1513 (April 7, 2003). State Farm represents a paradigm shift in punitive damages analysis. Since State Farm, four California appellate courts have been faced with applying this new paradigm to punitive damages awards. Though deferential to State Farm to a greater or lesser extent, these decisions reflect what might be considered as an understandable resistance to abandoning traditional analytic constructs, rationalizations, and subjective viewpoints. It is the thesis of this Commentaries that at least some of these decisions violate the letter and spirit of State Farm, and that punitive damages awards in California will continue to be overturned until California trial and appellate courts adopt and implement a meaningful State Farm analysis.

The four recent California appellate decisions that have sought to apply State Farm are: (1) Diamond Woodworks, Inc. v. Argonaut Ins. Co., 109 Cal. App. 4th 1020 (June 13, 2003); (2) Henley v. Philip Morris, 112 Cal. App. 4th 198 (Sept. 25, 2003), rev. granted and cause transferred (Dec. 23, 2003); Romo v. Ford Motor Company, 113 Cal. App. 4th 738 (Nov. 25, 2003); and (4) Simon v. San Paolo U.S. Holding Company, 2003 WL 22847318 (Dec. 2, 2003). Diamond Woodworks and Romo are, in significant respects, fair applications of State Farm, though they fall short in other respects. The same cannot be said of Henley and Simon. These latter decisions misapplied State Farm by placing undue emphasis of the "reprehensibility" of the defendants' conduct, while ignoring State Farm by (1) relying on evidence unrelated to plaintiff's injury, including evidence of "injuries" to non-parties; (2) authorizing constitutionally excessive ratios; (3) evaluating the wealth or financial condition of defendants; and/or (4) relying upon out-of-state conduct.

Punitive Damages Analysis in the Post-State Farm Era

The Supreme Court's April 7, 2003 decision in State Farm held that a $145 million punitive damages award violated the Due Process Clause of the 14th Amendment where compensatory damages were $1 million. State Farm is the most recent pronouncement by a Court clearly troubled by the litigation lottery called punitive damages. See, e.g., Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001); BMW North America, Inc. v. Gore, 517 U.S. 559 (1996); Honda Motor Co. v. Oberg, 512 U.S. 415 (1994).

In State Farm, the Supreme Court reaffirmed the bedrock principle that: "Elementary notions of fairness enshrined in our constitutional jurisprudence dictate that a person receive fair notice not only of the conduct that will subject him to punishment, but also of the severity of the penalty that a State may impose." State Farm, 123 S. Ct. at 1520 (quoting Gore, 517 U.S. at 574). The problem is that punitive damages cases are like Monday morning quarterbacking. Typically jury and judicial (including appellate) consideration of punitive damages awards involves post hoc evaluations of conduct that, though characterized as reprehensible in the crucible of litigation, is not something of which the defendant had fair notice would subject it to punitive damages. And, some jury awards, both before and after judicial review, far exceed anything approaching fair notice of "the severity of the penalty that a state may impose."

State Farm also extended, amplified, and clarified Gore's guideposts for analyzing the constitutionality of punitive damage awards. Under the Gore guideposts, lower courts must consider: "(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, 123 S. Ct. at 1520.

In State Farm, the Supreme Court curtailed runaway punitive damage awards in several respects. Among the primary lessons to be drawn from the decision are: (1) "A defendant should be punished for conduct that harmed the plaintiff, not for being an unsavory individual or business" (id. at 1523); (2) States cannot punish defendants for "conduct that may have been lawful where it occurred" (id. at 1522); and States do not, "as a general rule," have a legitimate interest in imposing punitive damages even for "unlawful acts committed outside of the State's jurisdiction" (id. at 1522); (3) "in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process," and "[w]hen compensatory damages are substantial, a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee" (id. at 1524); and (4) "the presentation of evidence of a defendant's net worth creates the potential that juries will use their verdicts to express biases against big businesses, particularly those without strong local presences" (id. at 1520, quoting Honda Motor Co. v. Oberg, 512 U.S. 415, 432 (1994)).

The Direct Relationship or Nexus Requirement

The most important lesson of State Farm is the Supreme Court's reaffirmation of the requirement that there must be a direct relationship or nexus between the conduct for which punitive damages are imposed and the injury to the plaintiff. In...