AB 556
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Date of Hearing: March 22, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 556 (Wagner) – As Introduced: February 16, 2011
SUBJECT: PUNITIVE DAMAGES: RESTRICTION OF JUROR RIGHTS
KEY ISSUE: SHOULD THE TRADITIONAL RIGHT LONG HELD BY JURIES TO
DECIDE THE AMOUNT OF PUNITIVE DAMAGES THAT AN INJURED PLAINTIFF IS
ENTITLED BE RESTRICTED TO DETERMINING WHETHER THE DEFENDANT
SHOULD HAVE TO PAY PUNITIVE DAMAGES, LEAVING IT TO THE JUDGE, A
SINGLE INDIVIDUAL, TO DECIDE ON HIS OR HER OWN WHAT THE AMOUNT OF
DAMAGES SHOULD BE?
FISCAL EFFECT: As currently printed this bill is keyed non-fiscal.
SYNOPSIS
This bill is nearly identical to 2006’s AB 1863 which failed passage in this Committee. Like
prior bills similarly sponsored and supported by some business groups and the Chamber of
Commerce, this bill seeks to limit the traditional right held by juries to decide the amount of
exemplary (i.e. punitive) damages that a plaintiff is entitled to receive in the rare cases where
exemplary damages are deemed necessary. In relation to exemplary damages, the bill seeks to
limit the role of the jury to merely deciding whether or not punitive damages are necessary. In
doing so, this bill takes away the jury’s discretion to decide the amount of exemplary damages
and places it in the hands of a single individual, the judge, who on his or her own will decide
what punitive damages should be. Like the prior bill that did not pass out of this Committee, this
bill is based on an assumption made by some business groups that a trial judge will be less
emotional and sympathetic and more objective than a jury in deciding the amount of punitive
damages that an injured plaintiff is entitled to.
SUMMARY: Seeks to limit punitive damage awards in California by having the judge, instead
of the jury, decide what punitive damages will be. Specifically this bill:
1) Provides that in any civil action where exemplary damages are recoverable for the breach of
an obligation not arising from contract (i.e. tort) on or after July 1, 2012, the trier of fact (i.e.
the jury) will be limited to deciding whether the defendant is liable for exemplary (i.e.
punitive) damages.
2) Requires that where the jury determines that a defendant is liable for exemplary damages, the
judge shall then decide what the punitive damages should be.
3) After deciding what punitive damages should be, requires the judge to enter an order laying
out the amount of the award and laying out the reasons for such an award.
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EXISTING LAW:
1) Provides in tort actions, where it is proven by clear and convincing evidence that a defendant
is guilty of fraud, malice, or oppression, the plaintiff can recover punitive damages “for the
sake of example and by way of punishing the defendant.” (Civil Code Section 3294 (a).)
2) Defines for the purposes of deciding whether punitive damages apply, the following key
terms:
a) “Malice” is conduct intended by the defendant to cause injury to the plaintiff or
“despicable conduct” committed by the defendant with a “willful and conscious disregard
for the rights and safety of others.”
b) “Oppression” is defined as “despicable conduct that subjects a person to cruel and unjust
hardship in conscious disregard of that person’s rights.”
c) “Fraud” is defined as “intentional misrepresentation, deceit, or concealment of a material
fact known to the defendant with the intention on the part of the defendant of thereby
depriving a person of property or legal rights or otherwise causing injury.” (Civil Code
Section 3294(c).)
3) Provides that the purpose of punitive damages awards is “not to compensate the plaintiff but
to punish the defendant for its conduct and to deter similar conduct.” (Century Sur. Co. v.
Polisso., (2006) 138 Cal.App.4th 922, 958; Pacific Mut. Life Ins. Co. v. Haslip (1991), 499
U.S. 1, 19. )
4) Allows a trial court judge to vacate an exemplary damages award and call for a new trial if he
or she believes that a punitive damages award is excessive and the result of “passion or
prejudice.” Also allows a trial court judge to avoid a new trial if the plaintiff accepts a
reduction (“remittitur”) of his or her damages as set by the trial court. (Cal. Civ. Pro. Code
657; Cal. Civ. Pro. Code 662.5.)
5) Provides that appellate courts shall review a trial court’s award of exemplary or punitive
damages under an “abuse of discretion” standard. (Boeken v. Phillip Morris, 127 Cal. App.
4th 164, 1689.)
COMMENTS: Like similar prior bills, this bill continues a long-standing effort by some
business interests to limit what they contend are unpredictable and excessive punitive damages
awards. To do so, this bill seeks to prevent California juries from exercising their traditional
right to determine the extent and amount of punitive damage awards in the very rare cases where
punitive (i.e. exemplary) damages are available. The bill would limit the role of California juries
to merely deciding whether or not punitive damages are necessary. The role of deciding the
level of exemplary or punitive damages would be placed in the hands of a single person, the
judge, to decide on his or her own what the level of punitive damages should be. The bill is
premised on the assumption that punitive damage awards are too often awarded out of passion or
sympathy by the jury, and are thus often “arbitrary” and unpredictable for businesses, injuring
the business environment in the state.
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Author’s Statement: The author contends that arbitrary and unpredictable punitive damage
awards awarded in California have driven small businesses out of state. Arguing that excessive
punitive damage awards often have no “reasonable nexus to the conduct being punished”, the
author seeks to limit what he thinks are “unreasonable and exorbitant” damage awards in
California.
Background: Punitive damages are awarded to plaintiffs in California only in cases where a
defendant’s conduct has been especially wrongful and egregious. In particular, punitive damages
are awarded to plaintiffs in cases where a defendant has acted with “malice,” “oppression,” or
“fraud” and caused injury to a plaintiff. (Civil Code Section 3924(c).) In general therefore,
punitive damages are awarded in rare cases only where a jury finds that the defendant has
intentionally or recklessly caused harm to a plaintiff by misleading them or otherwise
committing wrongful acts. In addition to awarding punitive damages in California, the jury must
find that a defendant has acted in such a way by clear and convincing evidence. (Civil Code
Section 3924(c).)
Punitive damages must also accompany some form of actual damages that have been awarded
(either compensatory or nominal damages). (see Sole Energy Co. v. Petrominerals Corp.(2005)
128 Cal. App.4th 212, 238.) In the rare instances where punitive damages are awarded, they are
awarded not to compensate the plaintiff, but for the purpose of punishing and making an example
of the wrongdoer, in order to deter future wrongdoing. (Neal v. Farmers Ins., (1978) 21 Cal. 3d
910, 928 fn. 13.)
The Constitutional Right to Jury Trials in California Civil Cases: The Seventh Amendment right
to a jury trial in the U.S. Constitution is not binding on states in civil trials. Nonetheless, the
right to a jury in civil trials in California is forcefully laid out in Article 1 Section 16 of the
California Constitution, which states: “Trial by jury is an inviolate right and shall be secured to
all…” Reflecting the strength of this language, throughout California’s history this right has
“always been regarded as sacred and has been jealously guarded by the courts.” (Hung v. Wang
(1992) 8 Cal.App 4th 908; quoting People v. One 1941 Chevrolet Coupe (1951) 37 Cal.2d 283,
286-287.) Moreover, this “sacred” right has been interpreted as clearly extending to punitive
damage claims in tort cases, the very type of case that this bill seeks to address. (See Rowe v.
Superior Court (1993), 15 Cal.App.4th 1711, 1718-1719.) In these sorts of cases, it has long been
held that “it is the function of the jury to determine questions of fact.” (Hung v. Wang, supra at
927.) Thus, this bill’s derogation from the traditional role that juries have played in determining
punitive damages would represent a significant break from California’s long tradition of vesting
these types of factual determinations in juries rather than individual judges, who instead are
charged with determining matters of law. (See Jehl v. Southern Pac. Co. (1967) 66 Cal.2d 821,
830-831.)
Substantial Limitations on Punitive Damages Already Exist: Steps have already been taken to
limit punitive damages in California. In 1987, SB 241 (Lockyer, Ch. 1498 of 1987) raised the
standard of proof necessary to prove that punitive damages were necessary from a showing of
“preponderance of evidence” to a more stringent “clear and convincing” standard of proof. This
raises the amount of proof that a jury has to find against a defendant in order to award plaintiff
punitive damages. Along with the higher evidentiary standards required to award punitive
damages, defendants can challenge punitive damage awards they deem “excessive” by moving
for a new trial solely on the issue of damages. (see Bullock v. Philip Morris USA, Inc.(2008)
159 Cal.App.4th 655, 688.) If the trial court finds that damages were in fact excessive and the
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result of “passion or prejudice” by the jury, a new trial can be ordered. The ability of a trial court
to order a new trial is conditioned by the fact that a plaintiff can accept a reduced award
(remitter) and avoid a new trial. (Code of Civil Procedure, 662.5; Bullock v. Philip Morris USA,
Inc., supra, at 688.)
Due Process – Limitations on Punitive Damage Awards: The Due Process Clause of the
Fourteenth Amendment also prevents excessive or arbitrary punitive damage awards. (see
Bullock v. Philip Morris USA, Inc., supra at 689-90; State Farm Mut. Automobile Ins. Co. v.
Campbell (2003) 538 U.S. 408, 416-417.) Thus, if a punitive damage award is grossly
disproportionate to the actual harm suffered, as measured by the compensatory damages
awarded; the due process rights of the defendant are deemed violated. Thus in the 1995 case,
BMW v. Gore, the Supreme Court reasoned that under due process a person is entitled to fair
notice of potential liability for their conduct, and that a penalty that bears no reasonable relation
to the conduct violates due process. (BMW v. Gore (1995), 517 U.S. 559, 562.)
In determining whether a punitive damage award violates due process, the Supreme Court has
laid out three guideposts; “(1) the degree of reprehensibility of the defendant’s misconduct, (2)
the disparity between the actual or potential harm suffered by the plaintiff and the punitive
damages award; and (3) the difference between the punitive damages awarded by the jury and
the civil penalties authorized or imposed in comparable cases.” (State Farm Mut. Automobile
Ins. Co. v. Campbell, supra at 409.) Importantly, in relation to the second factor, the Court in
BMW v. Gore set a general benchmark “rule of thumb” that in relation to particularly serious
harm or bad conduct, that a ratio of 10 to 1 between punitive damages and compensatory
damages should be the outer limit. (BMW v. Gore, supra at 581.) While the ratio might be
lower in cases where conduct and harm was less extreme, this “rule of thumb” is clearly a strict
counterweight to allegedly grossly disproportionate jury awards.
In a later decision, State Farm Mut. Automobile Insurance Co. v. Campbell (2005), the Supreme
Court placed further constitutional limitations on punitive damages against corporate and
individual defendants when it overturned state case law that allowed juries to use a defendant’s
wealth as a factor to increase punitive damage awards. Thus, the Court stated that when
applying the guideposts from Gore, “[t]he wealth of a defendant cannot be used to justify an
otherwise unconstitutional punitive damage award.” (State Farm Mut. Automobile Ins. Co. v.
Campbell, supra at 427.)
In recent years the Supreme Court has set standards that place even stronger limitations on
punitive damages. For example, in Phillip Morris USA v. Williams (2007), the Court
determined that a jury cannot consider similar in-state conduct (not involved in the case) in order
to punish the defendant (although they can still consider similar in-state conduct when
determining the reprehensibility of that conduct). (Phillip Morris USA v. Williams (2007) 549
U.S. 346.) This case was soon followed by the well-publicized case Exxon Shipping Co. v.
Exxon Baker (2008), arising out of the Exxon Valdez oil spill, where the Supreme Court
reduced a $2.5 billion dollar damage award to $500 million dollars, following a 1:1 ratio of
compensatory to punitive damages based on the specific circumstances of that case. (Exxon
Shipping Co. v. Exxon Baker (2008) 128 S.Ct. 2605.)
Case Law in California Imposes Limits on Punitive Damages: California courts have applied
similar factors to those laid out by the U.S. Supreme Court when determining whether punitive
damages are excessive and they have adopted a maximum 9:1 ratio of punitive to compensatory
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damages in those cases where the court finds that the defendant’s conduct is characterized by
“extreme reprehensibility” causing physical injury and death. In less egregious cases, California
courts have found that in “unexceptional” fraud cases resulting in only economic damages, a 4:1
ratio is an appropriate maximum damage award. (See Bardis v. Oates (2004) 119 Cal. App. 4th,
1, 24-26.)
California Courts Already Reduce Punitive Damages Determinations By Juries: The Boeken
case, noted above, decided in 2005, is a good illustration of California courts’ willingness to
reduce punitive damage awards believed to be excessive. In that case, an initial verdict of $5.4
million in actual damages and $3 billion in punitive damages against Phillip Morris was awarded
to the widow of a man that died from smoking. The jury had come to this total after finding that
the defendant had fraudulently and intentionally misrepresented the health effects of cigarette
smoking, and that the deceased husband had relied on these false and misleading advertisements.
The trial court reduced the award through the remitter process described above, to $100 million.
Although the plaintiff accepted the reduced amount rather than face a new trial, the defendant
appealed on the ground that $100 million dollars was still excessive. On appeal, the 2nd District
Court in California reduced the award still further to $50 million in line with the “rule of thumb”
laid out in BMW v. Gore (Boeken, supra).
Fifty State Survey of Punitive Damage Award Statutes: In an informal survey of all fifty states,
the counsel for the Assembly Judiciary Committee found that in the vast majority of states
allowing punitive damages, the jury still retains the right to decide the amount of punitive
damages. In fact, the survey indicates that Kansas appears to be the one and only state that
currently limits the jury’s role to the broad extent that this bill would. (see Kans. Stat. Ann. 603701.)
Empirical Studies State Punitive Damages Are Still Rare: One need not rely on anecdote when
considering the frequency of punitive damage awards. As one recent study noted:
[P]unitive awards have not increased in frequency over time; most awards are modest in
size and show a reasonable proportionality between harm and potential harm of conduct;
and there is little evidence supporting the claim that juries are biased against businesses.
(Neil Vidmar & Mirya Holman, “The Frequency, Predictability, and Proportionality of
Jury Awards of Punitive Damages in State Courts in 2005: A New Audit, 43 Suffolk U.
L. Rev. 855 (2010).)
This general conclusion which is contrary to much of the recent criticism against punitive
damages was embraced by the majority in the U.S. Supreme Court case Exxon Shipping Co. v.
Baker discussed above. In that opinion, Justice Souter described studies as indicating that
“discretion to award punitive damages has not mass-produced runaway awards.” Although the
amount of punitive damage awards has grown over time the court said, “the median ratio of
punitive to compensatory awards has remained less than 1:1”. (Exxon Shipping Co. v. Baker,
supra at 497-498.)
ARGUMENTS IN SUPPORT: The California Chamber of Commerce writes that this measure
is necessary because:
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Often juries are swayed by passion or sympathy for the plaintiff, making awards far
outside constitutional limits. Therefore, requiring the courts to make these determination
[sic] from the outset will not only provide more reasonable awards, but would help
streamline court proceedings…
As widely reported in various news outlets, businesses are relocating or growing their
operations outside of California at an alarming rate. California is ranked as having one of
the worst legal climates in the nation (46 out of 50) in a 2010 Institute for Legal Reform
report. Limits on damages [are] ranked as the second most important reform issues. We
need measures like AB 556 that will help ensure predictability and consistency in these
awards.
The Civil Justice Association of California writes in support that:
In California, under Civil Code Section 3294, exemplary damages, otherwise known as
punitive damages, are available when proof by clear and convincing evidence determines
"that the defendant has been guilty of oppression, fraud, or malice." The Supreme Court
has concluded that punitive damages are similar to criminal punishment and therefore
raise both procedural and substantive federal due process concerns. In other words, they
must be fair. In TXO Production Corporation v. Alliance Resources Corporation, 509
U.S. 443 (1993), the question was posed as, "whether that punitive damages award
violated the Due Process Clause of the 14th Amendment, either because its amount is
excessive or because it is the product of an unfair procedure." 509 US 443, 443, 447.
Additionally, the Supreme Court has reversed awards of punitive damages for being
"grossly excessive" and therefore in violation of the Due Process Clause. In BMW of
North America v. Gore, 517 U.S. 559 (1996), the Supreme Court set forth three
guidelines that reviewing courts must use when determining if an award of punitive
damages is fair.
The Supreme Court favors stringent review of punitive damage awards, demonstrating a
wariness of runaway awards. In Cooper Industries v. Leatherman Tool Group, 532 U.S.
424, (2001) the Court overturned a punitive damage award that was 90 times the amount
of compensatory damages. The Court held that appellate courts must review punitive
damage awards de novo – a standard of appeal that emphasizes the need for heightened
review, without deference to the trial court’s ruling.
The Supreme Court has held that punitive damage awards that are significantly higher
than compensatory damage awards are unconstitutional. In State Farm v. Campbell, 538
U.S. 408 (2003), the Court held that a ratio of 145 times the amount of compensatory
damages was unconstitutional and ordered the award reduced. The court suggested that
anything over nine times the amount of compensatory damages would be
unconstitutional.
The Supreme Court placed additional limits on punitive damage awards, holding that a
jury may not use punitive damages to punish a defendant for harm inflicted on anyone
other than the plaintiff in the lawsuit. (Philip Morris USA v. Williams, 127 S. Ct 1057
(2007)).
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California courts have been routinely called upon to implement U.S. Supreme Court case
law in reducing awards that are found be excessive or unconstitutional (for example,
Simon v. San Paolo U.S. Holding Co., Inc., (2005) 35 Cal.4th 1159; Gober v. Ralphs
Grocery Co. (2006) 137 Cal.App.4th 204; Boeken v. Philip Morris Inc. (2005) 127
Cal.App.4th 1640 and I (2004) 119 Cal.App.4th).
ARGUMENTS IN OPPOSITION: Consumer Attorneys of California oppose this bill,
contending it "effectively takes away the right to a jury trial by mandating that the amount of
punitive damages must be decided by the judge, not the jury. There can be no legitimate reason
for this other than to try to reduce the amount of punitive damages imposed. Civil punishment
should be decided, as it always has been, by a jury of one's peers."
The California Teamsters Public Affairs Council opposes the measure, contending that the bill's
approach is "intended to diminish the punitive damage risks to defendants. There is no legitimate
need for this bill. Civil Code Sec. 3294 sets a very high bar for pleading and proving punitive
damages, and the courts have imposed significant further limits on the discretion afforded to
juries with regard to punitive damages… The safety and health of our citizens and their rights
under California law would be jeopardized if corporations had no need to worry about the
possibility of punitive damage awards resulting from flagrant unlawful activity."
The California Employment Lawyers Association (CELA) also writes in opposition that:
"[T]here is no evidence that punitive damages awards are becoming excessive or unreasonable in
this state as the author contends. In fact, the United States Department of Justice’s 2005 Civil
Justice Survey of State Courts found that punitive damages were awarded in only 5% of cases
with a successful plaintiff1. Additionally, of the ten largest civil jury verdicts in 2009, only three
included punitive damage awards… This bill is a solution in search of a problem. Punitive
damages serve an important societal purpose of ensuring that outrageous and despicable conduct
does not go unpunished and any limits placed on that function will harm workers and society as a
whole."
PRIOR RELATED LEGISLATION: AB 1863 (Harman) 2006: Contained identical language to
this bill but failed to pass out of this Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
California Chamber of Commerce
California Manufacturers and Technology Association
Civil Justice Association of California
Opposition
California Conference Board of Amalgamated Transit Union
California Conference of Machinists
California Official Court Reporters Association
Consumer Attorneys of California
Engineers and Scientists of California
International Longshore and Warehouse Union
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Professional and Technical Engineers, Local 21
Utility Workers Union of America, Local 132
UNITE HERE!
United Food and Commercial Workers – Western States Conference
Analysis Prepared by:
Drew Liebert and Travis Brooks / JUD. / (916) 319-2334