June 30, 2009

Magana v. Charlie's Foods: $500,000 Punitive Damages Award is Excessive Compared to Defendant's $600,000 Net Worth

The California Court of Appeal (4th District, Division 3) issued an unpublished opinion today, reversing a $500,000 punitive damages award as excessive.

In this sexual harassment case, the defendant asked the Court of Appeal to reverse the punitive damages award in its entirety because the plaintiff failed to meet her burden of introducing meaningful evidence of the defendant's financial condition. As readers of this blog are well aware, this unique feature of California law is a trap for many an unwary plaintiff's attorney. (See, for example, these two decisions last week reversing punitive damages awards on this basis.)

The Court of Appeal here agreed that plaintiff's counsel failed to present adequate evidence of the defendant's financial condition. (Typed opn., at p. 13 ["If all we had in this record was the evidence that Magana proffered as to Charlie's financial condition, we would have to reverse and there would be no possibility of punitive damages on retrial . . . "].) Ordinarily, the plaintiff's failure to present such evidence would have doomed the punitive damages award. But in this case, the court concluded that defense counsel had elicited evidence that the defendant's net worth was at least $600,000. Based on that testimony, the court concluded that the record could support an award of some punitive damages, but not an award of $500,000 (83 percent of the defendant's net worth).

Having concluded that the award was excessive, the court was then faced with the question of the proper remedy. The court acknowledged that California law allows appellate courts in this situation to simply reduce the amount of punitive damages without ordering a new trial. Following this approach, the court could have used the "rule of thumb" that punitive damages cannot exceed 10 percent of the defendant's net worth, and reduced the punitive damages to $60,000. (See Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1596.)

Instead, the court chose to send the case back to the trial court to allow the jury to decide the proper amount of punitive damages in the first instance. But the court made clear that, for purposes of the retrial, the defendant's net worth is established at $600,000.

A retrial of this nature seems to offer little upside for the plaintiff. She must incur the expense of a retrial, during which the jury will have to hear much of the evidence from the first trial in order to assess the proper amount of punitive damages. The plaintiff runs the risk that the jury will not award any punitive damages, and even if she wins, any award larger than $60,000 can be challenged as excessive.

I happened to be present in the courtroom when this case was argued. (I was arguing a different punitive damages case that has not yet been decided.) The plaintiff was represented on appeal by Norm Pine, a well-respected appellate specialist. Mr. Pine was asked by the court during argument what remedy the court should order if the court concluded that the defendant's net worth was $600,000, based on the evidence in the record. My recollection is that Mr. Pine requested a new trial, to allow the plaintiff to present further evidence regarding the defendant's finances. I don't think Mr. Pine contemplated a retrial in which the defendant's net worth would be fixed at $600,000.