September 1, 2009

Walmach v. Foster Wheeler: California May Punish for Out-of-State Conduct

The California Court of Appeal (Second District, Division Three) issued this unpublished opinion today, affirming a $2 million punitive damages award. The court ruled that the trial court did not violate the Due Process Clause by imposing punitive damages for conduct that occurred outside of California.

The defendant's alleged misconduct in this case occurred in Washington, a state which does not allow punitive damages. On appeal, the defendant argued that California cannot impose punitive damages for conduct that occurred in another state. The defendant cited the statement in BMW v. Gore that "a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasors' lawful conduct in other States." The defendant also cited these statements in State Farm v. Campbell:

A State may not punish a defendant for conduct that may have been lawful where it occurred . . . Nor, as a general rule, does a State have a legitimate interest in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State's jurisdiction.
The Court of Appeal rejected these arguments for multiple reasons.

First, the court observed that the defendant's conduct (manufacturing a defective product) was not in fact lawful in Washington. In Washington, as in California, selling a defectively designed product is a tort. In my view, that analysis is insufficient to resolve the issue, because it fails to address Campbell'scomment that a state generally has no legitimate interest in punishing lawful or unlawful out-of-state conduct.

Second, the court held that California may legitimately punish a defendant for out-of-state conduct that causes injury in California. In this case, the plaintiff was a resident of California when he was injured by the defendant's product. This seems like a more legitimate response to the BMW/Campbell extraterritoriality problem. In essence, the court is saying the conduct was not truly out-of-state conduct, because the plaintiff's exposure and injury occurred in California.

Third, the court observed that the defendant had not challenged the trial court's jurisdiction, and had not argued that Washington law should govern this case. According to the court, because defendant did not challenge the application of California law, the comity and due process considerations discussed in BMW and Campbell did not prohibit the trial court from awarding punitive damages under California law. I am not quite sure about the validity of this argument. BMW and Campbell are based upon the principle of fair notice; a defendant cannot be punished unless it had fair notice that its conduct would be punishable. I don't know how a court can say that a defendant operating in a state that does not allow punitive damages has fair notice that it might be subjected to punitive damages in another state decades later. If the defendant knowingly sold its product in California, that might provide a basis for concluding that the defendant had fair notice of potential liability for punitive damages under California law. But on a different set of facts, where the defendant does not intend or expect that its product will be used in another state, the imposition of punitive damages would seem to be a Due Process problem, even if that state may have personal jurisdiction over the dispute.

In any event, this opinion is not likely to be the last word on these issues. Given the growing number of lawsuits being filed in California for conduct that occurred in other states, or even other countries, these issues are bound to recur.