January 9, 2018

Court of Appeal vacates punitive damages in case where jury awarded $75 million (City of Modesto v. Dow)

This partially published opinion issued yesterday contains an interesting discussion of California's "managing agent" requirement.  As we have discussed in prior posts, California law does not permit punishment of corporations for the acts of non-managerial employees.  Civil Code section 3294 requires plaintiffs seeking punitive damages to prove that the misconduct at issue was committed (or authorized or ratified) by an officer, director, or managing agent of the corporation.

The California Supreme Court has set a fairly high bar for proving that a corporate employee qualifies as a managing agent within the meaning of section 3294.  The employee must have authority to create "formal policies that affect a substantial portion of the company and that are the type likely to come to the attention of corporate leadership."  (See Roby v. McKesson.)

Recent cases have applied this standard inconsistently.  One decision last summer found that an employee who merely applied company policy qualified as a managing agent. Another decision a few months ago ruled that employees who applied corporate policy were not managing agents because they did not have the discretion to create company policy.

Yesterday's decision arises from a long and complex procedural history, most of which is not relevant to the subject of this blog.  What's important for our purposes is that a jury in a groundwater contamination case, the City of Modesto won a jury award of $3.1 million in compensatory damages against various defendants, and $75 million in punitive damages against one defendant (Dow).

The City's punitive damages claim against Dow rested on the premise that Dow sold dry cleaning chemicals and knowingly provided inadequate instructions regarding the proper use and disposal of the chemicals, which ultimately led to the contamination of groundwater supplies in Modesto.

The trial court reduced the punitive damages awards during the posttrial proceedings, ruling that any amount in excess of $5,444, 221 (four times compensatory damages) would violate due process.

The City and Dow both appealed.  The City sought reinstatement of the jury's $75 million punitive damages award, and Dow argued that it was entitled to judgment in its favor on the issue of punitive damages because the City failed to satisfy the managing agent requirement.

The Court of Appeal (First Appellate District, Division Four) agreed with Dow and vacated the punitive damages award in its entirety.  The court rejected the City's argument that Dow's "product stewards" qualified as managing agents. Product stewards were responsible for knowing and understanding the health, safety, and environmental effects of Dow's chemical products. They were involved in the preparation of Dow's communications with its customers, including instructions on how users could properly dispose of chemicals.  But the Court of Appeal found no evidence that the product stewards had "broad discretion" or "ultimate authority" regarding Dow's communications, as the City contended.

Having concluded that the product stewards did not qualify as managing agents, and finding no other evidence of any culpable officer, director, or managing agent, the Court of Appeal vacated the jury's award of punitive damages against Dow.

Notably, the Court of Appeal took the clear and convincing standard of proof into account when evaluating the sufficiency of the evidence on the managing agent issue.  That approach is well grounded in California case law, but not every Court of Appeal has adhered to it, as we have noted.

Unfortunately, the entire punitive damages discussion in this opinion has been designated "not for publication."

Disclosure: Horvitz & Levy LLP represented Dow as consulting counsel on appeal.