January 29, 2021

Court of Appeal affirms trial court order that vacated $7.5 million punitive damages award due to insufficient managing agent evidence (Verotel Merchant Services v. Rizal Commercial Bank)

This unpublished opinion is worth a read for anyone litigating a California punitive damages case involving a "managing agent" issue under Civil Code section 3294.

The facts are complicated but here's a simplified recap:  Plaintiff was an online merchant who accepted credit card payments. Plaintiff sent its credit card transactions to the defendant, a bank.  The transactions were processed by an intermediary, who was secretly pocketing a percentage of the transactions.  The plaintiff caught on and sued the bank for fraud, claiming the intermediary was the bank's agent.  The bank argued that the intermediary was actually the plaintiff'agent.  A jury sided with the plaintiff, awarding $1.5 million in compensatory damages and $7.5 million in punitive damages.

The trial judge, Michael J. Raphael (who is now a Court of Appeal justice), granted the defendant's JNOV motion and vacated the punitive damages.  He ruled that the bank could not be liable for punitive damages because the intermediary was not a managing agent of the bank. In so doing, he correctly anticipated the Supreme Court's holding in Conservatorship of O.B., and took the clear-and-convincing evidence standard into account when evaluating the sufficiency of the evidence.

The plaintiff appealed, arguing that the trial court applied the wrong standard in its JNOV order because it focused too much on the small number of accounts that the intermediary handled, in comparison to the bank's overall business.  The Court of Appeal (Second District, Division Four) rejected that argument because the trial court's analysis was squarely in line with the Supreme Court's decision in White v. Ultramar, which held that a managing agent must have the ability to affect a "substantial portion" of the defendant's business.    

The plaintiff also argued that the trial court, when it ruled on the JNOV, should not have applied the holding in Roby v. McKesson that a managing agent must be in a position to create "formal policies that affect a substantial portion of the company."  The plaintiff argued that standard was inapplicable because the jury was not instructed on it.  That argument was actually adopted by a different Court of Appeal last year in a published opinion. (See Colucci v. T-Mobile [refusing to follow the Roby standard because it was not set forth in jury instructions].)  In this case, however, the Court of Appeal didn't buy it.  The court held that nothing about the holding of Roby is inconsistent with the standard CACI jury instruction that tells jurors to consider whether a managing agent has the power to determine corporate policy.  Therefore, the court was correct to consider Roby's guidance when evaluating the sufficiency of the evidence under that standard.