November 30, 2009

Roby v. McKesson: Cal. Supreme Court Embraces 1:1 Ratio

Now that I've had a chance to review this morning's opinion from the California Supreme Court, here's a more detailed summary of the court's ruling. The primary significance of the case, for purposes of this blog, is that the California Supreme Court has embraced the principle that the maximum permissible ratio of punitive damages to compensatory damages is one-to-one in cases where the compensatory damages award is substantial.

The Lower Court Proceedings
The plaintiff in this case, Charlene Roby, claimed she was fired because of a medical condition and a related disability. A jury found in her favor and awarded $3.5 million in compensatory damages and $15 million in compensatory punitive damages. (That was the award against her employer. She received a separate, smaller award against her supervisor.)

The Court of Appeal reduced the compensatory damages award to $1.4 million, based on ambiguities in the jury's verdict and a lack of evidence to support some of Roby's claims. The court further concluded that the $15 million punitive damages award was excessive under the federal Due Process Clause. The court determined that the maximum permissible punitive damages award, based on the facts of the case and the size of the compensatory damages award, was $2 million (1.4 times the amount of compensatory damages).

Roby's Petition for Review and Briefing on the Merits

Roby petitioned for California Supreme Court for review. She asked the court to decide two issues relating to the Court of Appeal's reduction of the compensatory damages, and she asked the court to decide several punitive damages issues, including whether the Court of Appeal erred in reducing the punitive damages award.

In the briefing on the merits, Roby and her amicus, the Consumer Attorneys of California (CAOC), argued that the Court of Appeal went too far in adhering to the U.S. Supreme Court's statement in State Farm v. Campbell that "[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process clause." According to Roby and CAOC, that statement in Campbell was dicta but some lower courts have taken it as a license to substitute their view of the appropriate amount of punitive damages in place of the jury's decision.

The Supreme Court's Opinion

The Supreme Court ruled in Roby's favor on one of her arguments regarding compensatory damages, and increased the amount of compensatory damages by $500,000 (for reasons that are outside the topic of this blog).

Having decided to affirm $1.9 million in compensatory damages, the Supreme Court then addressed the amount of the punitive damages. It agreed with the Court of Appeal that the jury's $15 million award was excessive, but it disagreed with the Court of Appeal's adoption of a maximum ratio of 1.4 to one. The Supreme Court held that the ratio could not exceed one to one on the facts of this case.

The Supreme Court first analyzed the reprehensibility of the defendant's conduct in light of the five "reprehensibility factors" discussed in State Farm: (1) whether the harm was physical as opposed to economic, (2) whether the defendant's conduct evinced an indifference to or reckless disregard of the health or safety of others, (3) whether the plaintiff was financially vulnerable, (4) whether the conduct involved repeated actions or was an isolated incident, and (5) whether the harm was the result of intentional malice. The Supreme Court concluded that the first three factors were all present in the case, but the latter two factors were not. Accordingly, the court concluded that the defendant's conduct "was at the low end of the range of wrongdoing that can support an award of punitive damages under California law."

As part of its discussion of reprehensibility, the court considered which employees of the defendant could be considered "managing agents" within the meaning of Civil Code section 3294, such that their conduct could subject their employer to punitive damages. The court concluded that certain corporate managers had participated in some of the misconduct at issue, and therefore punitive damages could be awarded. But the court also held that Roby's immediate supervisor, who had authority over four employees at a local distribution center, did not constitute a managing agent. The court emphasized that a managing agent must have authority to set company-wide policy, i.e., "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." This statement is inconsistent with some recent Court of Appeal decisions that have held that employees could qualify as managing agents even if they lacked such broad authority. (See our post on Major v. Western Home.)

After discussing the reprehensibility issue, the court then turned to the question of ratio. The court noted that under State Farm, and under the California Supreme Court's own opinion in Simon v. San Paolo, the maximum permissible ratio of punitive damages is low, perhaps only one to one, when the amount of compensatory damages is substantial. And the court noted that a low ratio is especially appropriate when the compensatory damages award includes a punitive component in the form of emotional distress damages.

Finally, the court considered the difference between the jury's punitive damages award and the applicable civil penalties authorized by the Legislature for similar misconduct. The court noted that if Roby had pursued a claim administratively before the California Fair Employment and Housing Commission, the commission could have assessed a maximum fine of $150,000. "Obviously, this guidepost weighs in favor of a lower constitutional limit in this case."

After considering all these factors, the court concluded that a one-to-one ratio is the federal constitutional limit in this case. The court then ordered a reduction of the punitive damages to a $1.9 million maximum, without affording the plaintiff the option of a new trial. Thus, the Supreme Court implicitly rejected Roby's argument that a new trial was the only appropriate remedy. Curiously, while embracing the one-to-one ratio as the limit in this case, the Supreme Court did not mention the U.S. Supreme Court's opinion in Exxon Shipping, which adopted a one-to-one ratio limit as a matter of federal common law.

In a concurring and dissenting opinion, Justice Werdegar (joined by Justice Moreno), agreed with most of the majority's analysis, but argued that a ratio of two to one should be the limit. Justice Werdegar reasoned that a higher award was warranted for two reasons: (1) she viewed the defendant's conduct as being more reprehensible than described in the majority opinion, and (2) the defendant is a large corporation, ranked in the top 50 of the Fortune 500.

The significance of this opinion lies partly in the fact that the California Supreme Court has issued so few opinions on punitive damages in recent years. The opinion is fairly lengthy, and various tidbits from this opinion will likely be relevant to a variety of sub-issues that arise in punitive damages litigation. But the primary significance seems to be that the court has put the final nail in the coffin of the argument that the portion of State Farm calling for a one-to-one ratio limit is mere dicta that should does not apply in California.
UPDATE (12/01/2009): The Daily Journal has a story on Roby here (subscription required).