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Punitive Damages in Employment Law Cases

Stephen Danz & John C. Fowler[1]

Since this blog was published last February, we’ve had a few California cases which have continued the liberalization of ratios between compensatory damages and punitive damages. It appears the old rules of 1:10 and 1:4 are not necessarily sacrosanct. Where a California jury recently awarded only $1 actual damages, a six figure punitive damages award was allowed. We’ll be blogging about this case in the near future.

Ani Chopourian v. Catholic Healthcare West d.b.a. Mercy General Hospital and Mercy General Hospital (E.D. Cal. 2012) was a stunning recent win for this 45-year-old surgical physician’s assistant. Plaintiff claimed that for two years she was subjected to unwanted sexual advances, physical conduct and demeaning sexual comments. A number of retaliatory actions by the employer both during and after her employment were also alleged. The jury awarded $125,000,000 in punitive damages based on $43,000,000 in compensatory damages. Is the punitive award too large in comparison to the compensatory award?  Does it matter that $39 million of the compensatory award was for emotional distress and only $4 million for economic loss?  Will a 3:1 ratio between punitive and actual damages draw appellate scrutiny?  Will the award be reduced on appeal and, if so, by how much?  What role will Plaintiff’s claim of missed meals and break periods play in determining the total punitive damages award, if, in fact, Labor Code violations carry their own (relatively insignificant for this case) penalties? [1]  Stephen Danz is the principal of Stephen Danz & Associates, a state-wide employment law firm with main offices in Los Angeles.  John C. Fowler is an owner of Fowler | Helsel | Vogt in Fresno and represents SD&A in the Central Valley.

Unlike the predicate cause of action upon which the punitive damage award is based (e.g., a wrongful termination in violation of public policy tort or Government Code section 12940 violation), the party seeking punitive damages has the burden of proving by “clear and convincing evidence” requisite “advance knowledge and conscious disregard, authorization, ratification or act of oppression, malice, or fraud.”  (Civ. Code. § 3294 (a), (b).)  In the case of a corporate defendant, that party must prove the advance knowledge and conscious disregard, authorization, ratification, or oppression, fraud, or malice was done by an “officer, director or managing agent” of the company.  (Civ. Code. § 3294(b).)

An employee-plaintiff who is seeking punitive damages should introduce evidence at the liability phase of the trial of harm suffered as well as potential harm that might result to others. Following a “yes” response to the final two questions on the plaintiff’s special verdict form in Phase Two, evidence of the defendant’s financial net worth must be presented.  Defendants will oft-times try to convert Phase 2 of the trial to a showcase of defendant’s laudable (but unrelated) public service, or remorse over the events which led up to the current lawsuit, post-termination or discrimination remediation.  Plaintiffs should oppose these efforts (including through use of appropriate motions in limine) to constrain evidence in Phase Two to only that bearing on the defendant’s financial net worth.

Who is a “managing agent” for purposes of imposing punitive damages?

Plaintiffs often seek to label a corporate agent with the moniker of “managing agent” for the purpose of creating punitive damage exposure.  The question that arises is whether the agent “exercises substantial discretionary policy making authority over significant aspects of a corporation’s business.”  (White v. Ultramar, Inc. (1999) 21 Cal.4th 563, 577.)  Usual hallmarks of supervisory authority, such as responsibility for geographical oversight of the employer’s operations or a large number of employees and the power to hire and fire, do not necessarily meet the managing agent threshold

In White v. Ultramar, Inc., supra, it was relevant to finding managing agent liability that the “zone manager” had been delegated and exercised, responsibility to run eight stores and supervise at least sixty-five employees, which represented a significant aspect of the corporation’s business. (Id. at 576-77.)  The key question, however, was the extent to which the manager exercises substantial discretionary authority over decisions that ultimately determine corporate policy. (Id. at 577.)

Interpreting White, the Court in Roby v. McKesson Corp. (2009) 47 Cal.4th 686, held that Roby’s supervisor, who made repeated negative comments regarding Roby’s medical condition and symptoms, issued her discipline for attendance violations relating to her condition and ostracized her in the office, was not a managing agent for the purposes of imputing punitive damages to corporate defendant McKesson where she only supervised 4 of the defendant’s 20,000 employees at a regional distribution center.  (Id. at 714-15.)

The Roby Court explained its reference to “corporate policy” in White as “referring to formal policies that affect a substantial portion of the company and that are the type likely to come to the attention of corporate leadership. It is this sort of broad authority that justifies punishing an entire company for an otherwise isolated act of oppression, fraud, or malice.”  (Id. at 715.)  Because Roby’s supervisor did not have sufficient discretionary authority over formal corporate policies, she did not meet the managing agent test.  As a consequence, the supervisor’s repeated acts of alleged harassment could not be imputed to McKesson or considered in assessing the reprehensibility of McKesson’s conduct for the purposes of determining the constitutionality of the punitive damage award.  (Ibid.)

Evidence of managing agent liability was insufficient in Kelly-Zurian v. Wohl Shoe Co. (1994) 22 Cal. App. 4th 397, where the company administrator had little authority and lacked even the discretion to set the plaintiff’s salary or give her a raise without authorization from the corporation’s main office even though he supervised the plaintiff and had power to hire and fire those he supervised.  (Id. at 406, 422.)  Because the agent did not have discretionary authority to make decisions that would ultimately determine corporate policy or authority to change or establish corporate policy, he was not a managing agent.  (Id. at 421-422.)

Proving managing agent liability requires more than a showing of local or regional supervisory authority or the power to hire and fire; it requires proof of the agent’s discretionary decision-making authority over policies affecting a substantial portion of the company and of a type that would naturally come to the attention of corporate leadership.

Is an employer’s failure to act on advance knowledge of an employee’s propensity to engage in malicious conduct sufficient to create punitive exposure?

In Weeks v. Baker & McKenzie (1998) 63 Cal.4th 1128, the employer’s advance knowledge that its employee was likely to sexually harass others combined with its failure to take reasonable steps to prevent the conduct amounted to conscious indifference to the rights and safety of others sufficient to impose punitive damages.  Punitive liability was not derivative of the employee’s conduct, but rather a wrong committed by the employer itself.  (Id. at 1159.)

Is evidence of a written anti-discrimination policy a defense to punitive damages?

Oft-times a corporate defendant will place in evidence a written policy outlawing the very acts at issue in the trial.  An employer may rely on the existence of a written policy so long as the employer implements the written policy in good faith.  (White, supra, 21 Cal.4th at p. 568, fn. 2.)  However, the total absence of a written policy specifically forbidding harassment or discrimination by itself is not sufficient to support a finding of requisite malice to support a punitive award.  (Matthieu v. Norrell Corp. (2004) 115 Cal.App.4th 1174, 1190.) . Regardless of the existence of a written policy, punitive damages are available under federal statutes such as 42 U.S.C. Section 1981(a) (b)(1) where there is “reckless indifference” to the federally protected rights of the employee.  (Kolstad v. American Dental Ass’n, (1999) 527 U.S. 526, 536.)

What factors warrant reduction of a punitive damage award on constitutional grounds?

While no fixed standards exist as to the amount of punitive damages a jury may award, constitutional due process requires that punitive damage awards bear a reasonable relationship to actual damages awarded in a given case; “grossly excessive” awards are prohibited.  (See BMW of North America, Inc. v. Gore (1996) 517 U.S. 559, 574-75 (“BMW”); Honda Motor Co., Ltd. v. Oberg (1994) 512 U.S. 415, 420.)

In State Farm Mut. Auto Ins. Co. v. Campbell (2003) 538 U.S. 408 (“State Farm”), the Supreme Court articulated “three guideposts” for reviewing punitive damages awards for constitutional excessiveness: “(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.” (Id at 418; see also BMW, supra, 517 U.S. at 575.)

Of State Farm’s three guideposts, “the most important is the degree of reprehensibility of the defendant’s conduct.”  (State Farm, supra, 538 U.S. at. 418.)  Five factors are considered in the reprehensibility analysis: (1) the nature of the harm, whether physical (more serious) or economic (less serious); (2) the degree to which the conduct evinces indifference to or reckless disregard for the health or safety of others; (3) the financial vulnerability of the plaintiff; (4) whether the conduct was repeated or an isolated incident; and (5) whether the conduct involved actual malice, trickery, or deceit opposed to mere inadvertence.  (Id. at 419; Roby, supra, at 712-13.)

The final two State Farm factors, the frequency and profitability of the wrongful conduct and presence or absence of actual malice, are the most influential in determining the degree of reprehensibility and, correspondingly, whether reasonable proportionality exists between actual damages and punitive damages awarded in a particular case.  (Johnson v. Ford Motor Co. (2005) 35 Cal. 4th 1191, 1207.)

What type of harm must be evidenced to recover punitive damages?

The reprehensibility of the defendant’s conduct is measured, in part, with respect to the type of harm suffered by the plaintiff, with physical harm viewed as more serious than economic harm.  That is not to say, however, that purely economic harm cannot result in a substantial punitive damage award.  In Roby v. McKesson Corp., supra, for example, purely economic harm to a low-earning, financially vulnerable employee justified upholding a $2 million dollar punitive award (reduced from $15 Million on appeal).  (Id., supra, 47 Cal.4th at p. 720.)

Economic harm resulting from intentional discrimination also has been held akin to physical harm: “Freedom from discrimination on the basis of race or ethnicity is a fundamental human right . . . and the intentional deprivation of that freedom is highly reprehensible conduct.”  (Zhang v. American Gem Seafoods (9th Cir. 2003) 339 F.3d 1020, 1043.)

Emotional harm resolving in physical sickness but not “life and limb” physical injury, combined with findings of some conscious indifference to health and safety to financially vulnerable grocery store employees, supported a punitive award of about 6 times the compensatory award.  (Gober v. Ralphs Grocery Co. (2006) 137 Cal.App.4th 204, 220.)  Thus nature of harm lies upon a continuum with actual physical harm more heavily informing a finding reprehensibility.

Is the financial vulnerability of the plaintiff considered in determining reprehensibility?

Financial vulnerability of low-earning employees is often a factor identified as informing the reprehensibility analysis.  (E.g., Roby, supra, at 713; Gober, supra, at 204, 220.)  However, financial vulnerability is of lesser relevance in cases alleging only economic harm resulting from an otherwise arms-length transaction.  (Simons v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1180 (finding financial vulnerability factor essentially neutral.))

Is “repeated” bad conduct a requirement to win punitive damages?

It is unnecessary to demonstrate repeat conduct to win an award of punitive damages, though recidivism or frequent repetition of similar conduct may bear heavily toward a finding of heightened reprehensibility.  “[A] recidivist may be punished more severely than a first offender . . . .”  (BMW, supra, at 576.)  In addition to warranting more severe punishment, evidence of repeated bad acts tends to show corporate knowledge of wrongdoing.

To garner consideration, evidence of repeat conduct must be similar in kind to that which harmed the plaintiff:  “In the context of civil actions courts must ensure the conduct in question replicated the prior transgressions.”  (State Farm, supra, at. 423.)  “Thus, the concept of evaluating ‘recidivism’ in connection with punitive damages pertains to assessing the existence and frequency of similar past conduct because this may be relevant to the determination of the degree of reprehensibility of the defendant’s conduct.”  (Gober, supra, at. 221.)  In the context of employment litigation, prior misconduct should be focused on the employment-related acts, for example, prior terminations for whistle blowing or indifference to or ratification of discriminatory conduct by other managers.

Out-of-state conduct is properly considered if it has a sufficient “nexus to the specific harm suffered by the plaintiff.”  (State Farm, supra, at 421-22.)  However, the forum state generally has no legitimate interest in punishing a defendant for conduct committed outside its jurisdiction (Id. at 422) or that only affects non-residents (BMW, supra, 517 U.S. at p. 574).

Is potential harm to the plaintiff or others considered in the reprehensibility analysis?

Courts properly consider the potential harm the defendant would have caused to the plaintiff had its wrongdoing persisted unabated.  (TXO Production Corp. v. Alliance Resources Corp. (1993) 509 U.S. 443, 460.)  However such conduct must be a foreseeable result of the wrong committed.  (See Simon, supra, at. 1177-78.)  Potential harm to others, however, is not considered in the reprehensibility analysis.  “In calculating punitive damages, courts cannot adjudicate the merits of other parties’ hypothetical claims against a defendant under the guise of the reprehensibility analysis; rather, a defendant should be punished for the conduct that harmed the plaintiff.”  (Gober, supra, 137 Cal.App.4th at p. 221.)

Is a finding of sufficient malice to support a punitive award tantamount to a finding of actual malice?

“Malice” is defined as “conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Civ. Code § 3294, (c)(1).)  Within that definition, however, courts find a continuum upon which to evaluate the maliciousness of the defendant’s conduct with intentional trickery or deceit supporting higher punitive awards than mere inadvertence.

In Weeks, supra, the defendant’s awareness of the propensity for misconduct based on numerous prior incidents of severe sexual harassment involving the same partner justified upholding a $3.5 million punitive damage award (reduced by stipulation from $6.9 million).  (Id at 1165-67.)

In Roby v. McKesson Corp., supra, the sole act of wrongdoing by the company was determined to be the adoption of an attendance policy requiring 24-hour advance notice for all absences, which, when strictly applied by middle managers, did not reasonably accommodate employees whose disabilities or medical conditions might result in several unexpected absences in close succession.  (Id. at 713.)  The jury specifically found the company acted with “conscious disregard” of others’ rights sufficient to support an award of punitive damages.  (Id. at 716.)  However evidence of the company’s adoption and enforcement of the policy, reliance upon it by middle managers to discipline and uphold Roby’s termination and the company’s failure to take responsive action upon leaning of Roby’s supervisor’s harassing conduct was insufficient to show actual malice, i.e., that the company acted with “a purpose or motive to discriminate.”  (Id.)  Rather such conduct was “better characterized as managerial malfeasance” at the “low end of the range of wrongdoing that can support an award of punitive damages under California law, notwithstanding the seriousness of Roby’s emotional injury and her financial vulnerability.”  (Id. at 716-17.)

Similarly, in Gober v. Ralphs Grocery Co., supra, the jury’s finding of advance knowledge and conscious indifference by the company with regard to a store director’s sexually inappropriate conduct, while sufficient to support an award of punitive damages, did not support a finding the employer intended to cause injury to the plaintiff.  (Id. at 221.)

What multipliers of actual damages are available in employment law cases?

The second State Farm guidepost requires comparing the ratio of punitive damages to actual damages awarded in a given case to other similar cases.  Constitutional limits to punitive awards are determined on a case-by-case basis.  The reviewing court “must rely on its combined experience and judgment” (Leatherman Tool Group, Inc. v. Cooper Industries, Inc. (2002) 285 F.3d 1146, 1152) using “imprecisely determined facts and applying guidelines that contain no absolutes” (Continental Trend Resources, Inc. v. OXY USA, Inc. (1996) 101 F.3d 634, 643).  As stated by the California Supreme Court in Roby v. McKesson Corp., supra:

An appellate court must attempt to arrive at such a number using imprecisely determined facts andapplying guidelines that contain no absolutes  An appellate court should keep in mind, as well, thatits constitutional mission is only to find a level higher than which an award may not go; it is not to findthe right level in the court’s own view.”

(Id. at 723.)

In Gober v. Ralphs Grocery Co., supra, a ratio of 6:1 (reduced from 54:1) was the constitutional maximum determined based upon findings of physical harm to the plaintiff, knowing and conscious indifference to wrongdoing by the employer and the financial vulnerability of the plaintiff?  The absence of repeat conduct and intentional malice were significant factors in reducing the award.  (Id. at 222.)

In Roby v McKesson Corp, supra, a 1:1 ratio was similarly supported by findings of physical harm, indifference or reckless disregard to health or safety of others and financial vulnerability without repeat conduct or intentional malice.  (Id. at 713, 716-17, 719-20.)  Interestingly the Roby Court viewed the $1.9 million compensatory award, including a substantial sum for pain and suffering, as containing a punitive measure justifying, in part, the reduced ratio in that case. Thus the factors most strongly influencing large punitive awards are the degree of recidivism and presence of intentional malice, deceit or trickery.

Is the amount of punitive damages influenced or controlled by statutory penalties or criminal fines?

The third guidepost in State Farm requires appellate courts to evaluate a punitive award in comparison to other available fines or penalties for the same conduct.  For example, in Roby, supra, the Court reasoned that the jury’s $15 million punitive award was “grossly excessive” where the maximum statutory penalty available under for a FEHA violation was $150,000.  (Id. at 718.)

Where there is no analogous fine, “caps” on damages may be looked to for guidance.  (Zhang vs. American Gen Seafoods, supra, at 1045.)  “Caps represent a legislative judgment similar to the imposition of a fine.”  (Ibid.) Such caps exist under Title VII and are based on the number of employees. Such limitations do not exist under California Government Code.

How much detail is required to show defendant employer’s ability to pay punitive damages?

Evidence of the defendant’s financial condition is a prerequisite for an award of punitive damages. (Adams v. Murakami (1991) 54 Cal.3d 105, 108–109.)  Failure to introduce such evidence forfeits the right to punitive damages even after a finding of requisite malice.  (City of El Monte v. Superior Court (1994) 29 Cal.App.4th 272, 276.)

The plaintiff is required to show “meaningful evidence” of defendant’s current financial condition or ability to pay the damage award.  (Kelly v. Haag (2006) 145 Cal.App.4th 910, 917-18.)  “It is not too much to ask of a plaintiff seeking such a windfall to require that he or she introduce evidence that will allow a jury and a reviewing court to determine whether the amount of the award is appropriate and, in particular, whether it is excessive in light of the central goal of deterrence.”  (Adams, supra, at p. 120.)

Evidence of financial net worth, for example from profit and loss statements, is a common measure of financial condition.  However, the jury may infer financial net worth even from limited financial information.  (Green v. Laibco, LLC (2011) 192 Cal.App.4th 441, 453.)  Evidence of profits for the past 12 months and positive net worth, or failure to produce evidence of debt, will not insulate defendant from punitive damages.  (Id. at 452-53.) Defense counsel should be aware that “stonewalling” financial disclosures may lead the court to allow wider assumptions about the corporation’s financial posture than would be allowed with more meaningful cooperation. Moreover a company’s “profitability” from the bad acts (versus overall financial worth) is sufficient to uphold punitive damages.  (Cumming Medical Corp. v. Occupational Medical Corporation Health (1992) 10 Cal.App.4th 1291.)

In a case in which this office received a seven-figure punitive damages award, the defendant attempted to introduce evidence of corporate “good deeds” in Phase Two to offset the specific finding of malice, oppression and fraud. The court properly restricted Phase Two to just the financial net worth of the corporation.  Plaintiff’s counsel should prepare and file motions in limine prohibiting the defendant from arguing anything other than its financial net worth. Defendant will also try to argue: “we learned our lesson,” no need to punish us further. This is also improper for phase two.

Is there a right to a new trial on punitive damages following reduction of an award on appeal?

Appellate courts have the job of determining de novo whether a challenged punitive damage award exceeds the constitutional maximum in a particular case and, if so, reducing the award to that constitutional maximum.  Because the determination is made as a matter of law, courts, following State Farm, hold reduction of the award does not result in an option to retry the amount of punitive damages.  (Simon v. San Paulo U.S. Holding Company, Inc., supra, at 1187-88.)

Moreover after reduction of a punitive award to its constitutional maximum, affording litigants a right to a new trial would be futile:  “If on a new trial, the plaintiff was awarded punitive damages less than the constitutional maximum, he would have lost.  If the plaintiff obtained more than the constitutional maximum, the award could not be sustained.  Thus a new trial provides only a ‘heads the defendant wins; tails the plaintiff loses’ option.”  (Simon, supra, at 1188, emphasis in original.) There similarly is no right to a retrial where a punitive award is determined unsupported by substantial evidence on appeal.  (E.g., Kelly v. Haag, supra, at 920.)

Does a reduction in a compensatory award on appeal justify retrying the amount of punitive damages?

The prevailing view is that unless a punitive damage award is so disproportional to the compensatory award to render it “suspect,” there is no cause to retry the punitive award.  For example in Behr v. Redmond (2011) 193 Cal. App. 4th 517, the jury’s compensatory award was reduced on appeal resulting in a ratio of punitive to compensatory damages of 1.75 to 1, a higher ratio than if the jury’s compensatory award was allowed to stand.  Even so the court held the ratio “not so disproportionate as to render it ‘suspect’ or to otherwise require reversal.”  (Id. at 537.)

As an update to this blog, in the recent case of State of Arizona vs. ASARCO LLC, a Ninth Circuit decision from Arizona, the court was tasked with determining of a punitive damages award of $868,750 based on zero compensatory dollars and one dollar nominal damages could be sustained without being constitutionally suspect. The case went up on appeal even after the trial court reduced the jury’s verdict to $300,000. The Ninth Circuit further reduced the award to $125,000, finding that even though the trial court judge had reduced the award to an amount not above that required by Title VII’s maximum amount ($300,000), that it was still too high. The court stated that no court has ever upheld a ratio of puntive damages to compensatory damages greater than 125,000 to 1.

If the amount of punitive damages is to be retried, must it be to the same jury that decided liability?

Civil Code section 3295 states evidence of punitive damages “shall be presented to the same trier of fact” that found requisite malice supporting a punitive award.  (Civ. Code § 3295 (d).)  Liability for and the amount of punitive damages ordinarily must be tried to the same jury.  (Rivera v. Sassoon (1995) 39 Cal.App.4th 1045, 1048; City of El Monte, supra, at. 276.)  However that right is subject to waiver.  (Medo v. Superior Court (1988) 205 Cal.App.3d 64, 67.)

Following appeal the amount of punitive damages may be retried to a new jury without disturbing the old jury’s findings regarding liability, compensatory damages, and malice supporting the punitive award.(Bullock v. Philip Morris USA, Inc. (2008) 159 Cal. App. 4th 655, 701.)  The trial court has broad discretion to admit evidence in the Phase 2 trial relevant to the amount of punitive damages which, in addition to new evidence of the defendant’s financial net worth, may include much of the same evidence presented in the liability phase of trial.  However “neither party is entitled to an opportunity to seek to either reduce or increase the amount of compensatory damages established in the first trial, and the findings of liability and oppression, fraud, or malice should not be disturbed.”  (Ibid.)  The new jury need not even be informed of “which particular acts the first jury determined to be oppressive, fraudulent, or malicious where the jury made no finding specifically identifying those acts.”  (Ibid.)

Advance preparation for Phase 2 by plaintiffs’ counsel to prove the defendant’s financial net worth commonly includes stipulation with defense counsel to a summary of defendant’s financial net worth, subpoenaing financial records, requesting judicial notice of published statements such as reports to governmental agencies (e.g., the I.R.S.), and offering the testimony of an expert accountant. Juries may also infer a defendant’s financial condition from evidence of assets or profits absent evidence of liabilities as where the defendant refuses to comply with reasonable inquiry regarding its financial condition in discovery or at trial.  (See Green, supra, at 452-54 (finding defendant’s CEO’s inability testify at trial to the company’s net worth or financial condition even in reference to belatedly produced financial records tantamount to “stonewalling” justifying jury to infer financial condition from limited evidence of recent profits and profitability absent liabilities.)

What are the tax consequences of punitive damage awards?

Punitive damages are always taxable to the plaintiff regardless of whether awarded in relation to a predicate claim for personal physical injury or sickness. (26 U.S.C. § 104(a)(2); O’Gilvie v. U.S. (1996) 519 U.S. 79; Small Business Job Protection Act of 1996 § 1605(d).)  The congressional rationale is that punitive damages are intended to punish the wrongdoer, not compensate the plaintiff, and therefore represent a windfall to the taxpayer that should be included in taxable income.   (H. Rep. No. 104-586 at p. 2 (1996), accompanying H.R. 3448, Small Business Job Protection Act of 1996.)

Until recently, punitive damages paid in settlement or judgment had long been tax deductible to the corporate defendant. The American Jobs and Closing Tax Loopholes Act of 2010 eliminates that deduction. Fines and penalties are also not tax deductible.  (I.R.C., § 162, subd. (f).)  The general rule is that punitive damages fall within this category. As punitive damages are no longer tax deductible to the corporate defendant, and the amount received is always taxable to the plaintiff, there is an incentive for both sides to consider a settlement that—while taking into account the possibility of punitive damages—does not actually denominate them as such.

Does taxability of punitive damages lead to under-punishment of corporate defendants relative to jury intentions?

In the past a jury, aware that punitive damages were taxable to the plaintiff but tax-deductable to the corporate defendant, might inflate or “gross up” an award to impose the desired level of after-tax punishment on corporate wrongdoers.  Elimination of the corporate tax deduction for punitive awards was intended to mitigate this concern.  Eliminating the corporate tax deduction only incentivizes corporate defendants to disguise nondeductible punitive damages in settlement as compensatory in nature, a stratagem that might also reduce the plaintiff’s tax burden.  That raises a corollary concern that defendants will enjoy not only a tax deduction but indemnification through their insurers for punitive damages so cleverly disguised, which not only defeats the rationales of punishment and deterrence, but contravenes California Insurance Code section 533, prohibiting insurance coverage of a willful act caused by the insured. (An interesting question: Would section 533 prohibit an insurer from reimbursing a corporation who was liable—not for “direct” intentional bad conduct, but because of a finding of vicarious liability, say via respondeat superior or “joint and several” liability for acts of a co employer?)

Perhaps the real message for plaintiffs is to be careful what you ask for: a punitive award inflated to compensate for taxability concerns, or other passions may draw fire for being constitutionally excessive and reduced accordingly.  State Farm’s guideposts do not include consideration of taxability of the award in fixing the maximum constitutional limit in a given case.

Is an election required between a statutory penalty and punitive damages?

Ordinarily, recovery of a statutory penalty does not preclude recovery of punitive damages based on the same underlying conduct in a tort action where requisite malice, oppression, or fraud is demonstrated.   (Greenberg v. Western Turf Ass’n (1903) 140 Cal. 357, 364.)  However, where the statutory penalty has a punitive purpose, i.e., “to deter violations and encourage private enforcement,” plaintiffs may be required prior to entry of judgment to elect between the statutory and punitive damage remedies.  (Marshall v. Brown (1983) 141 Cal.App.3d 408, 418-19.)


Counsel must be familiar with the standards for proving and winning punitive awards that will withstand appellate review. The constitutional maximum in any case is influenced most strongly by the demonstrated reprehensibility of the defendant’s conduct.  If the goal is to win and keep a high punitive damage award, plaintiffs must discover, evidence, and effectively argue the reprehensibility of the defendant’s conduct above all.

[1]  Stephen Danz is the principal of Stephen Danz & Associates, a state-wide employment law firm with main offices in Los Angeles.  John C. Fowler is an owner of Fowler | Helsel | Vogt in Fresno and represents SD&A in the Central Valley.