June 25, 2009

Electronic Funds Solutions, LLC v. Murphy: Court of Appeal Reverses Punitive Damage Award That Is Six Times Defendant's Annual Income

The California Court of Appeal (Fourth District, Division Three), in an unpublished opinion, reversed a $50 million punitive damages award on the ground that plaintiff failed to put forward evidence of defendant's net worth. This is a common mistake plaintiff's lawyers make, as seen in our prior post here. The court went on to point out that a plaintiff may be able to get around this failure of proof in situations where "net worth may be subject to manipulation, requiring the court to consider other financial indicators of a defendant's ability to pay." As an example, the court cited Zaxis Wireless Communications, Inc. (2001) 89 Cal.App.4th 577, 582-583 for the proposition that a "$300,000 punitive damage award [can be] upheld despite large negative net worth where defendant had annual gross revenues in excess of $100 million and cash on hand of $19 million." By contrast, the punitive damage award in this case had to be reversed because: "Here, plaintiffs point to the income calculations for [defendant] used in supporting their compensatory damages claim, in which they determined [defendant] earned $8,128,800 per year in net income. Viewed in this light, the $50 million punitive damage award represented approximately six times [defendant's] annual income. Such an award would be ruinous to any company, not to mention its owners."

Will plaintiff's lawyers learn their lessons?