June 9, 2016

California Supreme Court rules for plaintiff in dispute over ratio calculations in insurance bad faith cases (Nickerson v. Stonebridge)

The California Supreme Court issued its opinion this morning in Nickerson v. Stonebridge.

Ordinarily, a California Supreme Court decision on punitive damages would be big news around here.  But in this case, not so much.  The scope of the decision is so narrow that it won't apply to many cases, and even when it does it will not make much difference. 

The issue involves "Brandt fees," a particular type of compensatory damages available only in insurance bad faith cases. Brandt v. Superior Court held that when an insurance company withholds policy benefits in bad faith, forcing the policyholder to bring a lawsuit to obtain those benefits, the policyholder can recover the attorney's fees he or she incurred to obtain the benefits that the insurer unreasonably withhold.  Those fees are treated as an element of the policyholder's compensatory damages.

Brandt fees can be awarded by a jury along with all the other available damages, or the parties can stipulate to allow the trial court to decide the issue of Brandt fees. 

In this case, the parties stipulated that the trial court would decide the Brandt fees after the jury's verdict.  The jury then awarded $35,000 in damages for emotional distress and $19 million in punitive damages.  The trial court tacked on $12,500 in Brandt fees.

As you might expect, the defendant challenged the punitive damages as excessive in violation of due process.  The trial court agreed with that argument and concluded that 10-to-1 was the maximum permissible ratio of punitive damages to compensatory damages under the facts of this case.  In applying that ratio, the court considered only the $35,000 in compensatory damages awarded by the jury, and not the additional $12,500 in compensatory damages that the court had awarded in Brandt fees.  Accordingly, the trial court stated that it would order a new trial unless the plaintiff agreed to a reduction of the punitive damages to $350,000.

The plaintiff rejected the reduction in punitive damages and appealed the order granting a new trial.  The Court of Appeal affirmed the trial court's ruling, rejecting the plaintiff's argument that the trial court should have taken the Brandt fees into account for ratio purposes.  The Court of Appeal observed that the jury did not know about the Brandt fees when it awarded punitive damages, and therefore the Brandt fees could not be considered in determining the propriety of the jury's award.

The Supreme Court disagreed.  Justice Kruger, writing for a unanimous court, explained that a court reviewing a punitive damages award for constitutional excessiveness is not tasked with regulating the jury's decisionmaking process.  Instead, the court must determine whether the result reached by the jury exceeds the bounds of due process:

Because the Gore guideposts are designed to govern postverdict judicial review of the amount of a jury‘s award, not the adequacy of the jury‘s deliberative process, there is no apparent reason why a court applying the second guidepost may not consider a postverdict compensatory damages award in its constitutional calculus.
The Supreme Court therefore sent the case back to the Court of Appeal, where the punitive damages award will presumably be increased to $475,000, which is ten times the combined emotional distress damages and Brandt fees.

A few notes and observations:

1.  The Supreme Court did not address whether the lower courts were correct in setting a 10-to-1 ratio.  The petitioner raised that issue when seeking review, but the Supreme Court expressly declined to tackle that question.

2.  Nothing in this opinion authorizes courts to consider other types of attorney's fees, besides Brandt fees, for ratio purposes.  The court was careful to explain that Brandt fees are in a special category because, unlike other attorney's fees, they are a form of compensatory damages.

3.  The Supreme Court pointed out an error by the trial court that the parties themselves did not identify: when the trial court concluded the jury's punitive damages awarded was excessive, it should not have allowed the plaintiff to choose between a new trial or a reduction in punitive damages. The trial court should have just reduced the award to the constitutional maximum without ordering a new trial.  A new trial would be pointless because the plaintiff could not possibly obtain anything higher than the constitutional maximum.  The Supreme Court made the same point in its earlier decision in Simon v. San Paolo, but courts continue to make this error, so it is nice to see the Supreme Court trying to fix that problem.

4.  The opinion highlights problems with the statement in Brandt that trial courts can perform a postjudgment assessment of punitive damages, if the parties so stipulate.  Under California's longstanding "one final judgment rule," a trial court should not enter judgment until all the issues in a case have been resolved.  That means there can be no judgment until after the compensatory damages are have been determined.  So how can a trial court award Brandt fees after judgment, when Brandt fees are an element of compensatory damages?  And how can jurors deciding punitive damages comply with the CACI instruction that tells them to make their award proportionate to the plaintiff's actual harm, if the jury does not yet know the extent of the plaintiff's actual harm because the Brandt fees have not yet been calculated?  The Supreme Court's opinion hints at some of these problems, but ultimately declines to address them because both parties had stipulated to the procedure adopted.