How to defend punitive damages claims effectively--and maybe successfully.

• Author: Montgomery, C. Barry

Punitive damages cases present difficult challenges to defense counsel, but attention to a lot of details may produce success

If a man steals an ox or a sheep, and kills it or sells it, he shall pay five oxen for an ox, and four sheep for a sheep. He shall make restitution; if he has nothing, then he shall be sold for his theft. If the stolen beast is found alive in his possession, whether it is an ox or an ass or a sheep, he shall pay double.

--Exodus 22:1

A PUNITIVE damage award in a high-profile case is a corporate defense counsel's worst nightmare. Consider, as examples,

* $2.7 million punitive damages against McDonald's Corp. for burns a customer suffered from a coffee spill;

* $7.1 million for a secretary who prevailed in a sexual harassment case;

* $101 million against General Motors in a design defect case;

* $125 million against a pharmaceutical company; and

* $3 billion against Exxon Corp. related to the Exxon Valdez oil spill.

Although punitive damages often are reduced by the trial court or on appellate review, the original awards usually generate fierce debate and media hype, as well as injury to the defendant corporation's reputation.

In today's climate of intensified accountability and safety consciousness, juries expect manufacturers, professionals and other providers of products and services to account for the safety of their respective endeavors. When a plaintiff successfully proves liability against a highly visible defendant on the theory that the defendant failed to provide a safe product or service, the threat of a substantial punitive damages award must be taken seriously. In addition to the award itself, the corporation can anticipate the cost of litigating the issue to final appeal and of dealing with hostile media exposure and private activist groups.

In order to avoid this catastrophe, defense counsel must focus on the punitive aspect of the case from the day the file is opened. All too often, the punitive damages claim is one of the last things considered, when it should be one of the first.

There are risks associated with claims for punitive damages, and there are different methods that may be employed to protect a corporate defendant from those claims. It is important to remember that the law of punitive damages claims varies from jurisdiction to jurisdiction and must always be carefully researched and analyzed.

A LITTLE HISTORY

Punitive damages in civil actions are defined in Section 908 of the Restatement (Second) of Torts as those damages awarded "against a person to punish him for his outrageous conduct and to deter him and others like him from similar conduct in the future." They have been characterized as "exemplary," because they make an example of a defendant; "punitive," because they punish a defendant; "vindictive," because they exact revenge on a defendant; and "smart money," because they make a defendant smart with pain, not intelligence.(1)

The concept of punitive damages dates back more 2,000 years before the birth of Christ to the Code of Hammurabi, under which a judge who altered a judgment previously rendered was required to pay a twelve-fold penalty. In 1400 B.C., Hittite law, according to Exodus 22:9, required the thief of a "great" bull or horse to repay the owner with 15 bulls or horses. Exodus also refers to exemplary damages for the commission of other egregious acts. These biblical references to exemplary damages appear to be the first indication that punitive damages should bear a multiple, albeit arguably reasonable, relationship to the compensatory award.(2)

The first recorded punitive damage award in a civil case appears in an 18th century case in England, Huckle v. Money.(3) Lord Camden found that the authority for punitive damages awards is inherent in the jury's exercise of uncontrolled discretion in arriving at damages. Interestingly enough, he also found that the amount of punitive damages may warrant a new trial when it is so "outrageous" that "all mankind at first blush must think so."

In the United States, punitive damages have existed in one form or another since early days. In 1791, in Coryell v. Colbaugh,(4) a New Jersey court held that punitive damages may be appropriate "for example's sake, to prevent such offenses in the future ... [and] as would mark [the jury's] disapprobation." By 1851, the U.S. Supreme Court noted in Day v. Woodworth(5) that the doctrine of punitive damages was firmly entrenched in the American legal system. Justice Grier stated that a jury "may inflict what are called exemplary, punitive, or vindictive damages upon a defendant, having in view the enormity of his offense rather than the measure of compensation to the plaintiff."

Although the "theoretical correctness" of the punitive damages doctrine was debated as late as the 1880s and 1890s, nearly all American courts had accepted the concept by the turn of the century. In the last 30 years, thanks in large part to a spread of "consumerism" and extensive media attention on defective products, consumer goods and services, claims for punitive damages have become almost commonplace(6) According to a pair of recent commentators, "the doctrine of punitive damages survives [to this day] because it continues to serve the useful purposes of expressing society's disapproval of intolerable conduct and deterring such conduct where no other remedy would suffice."(7)

PINPOINTING APPLICABLE LAW

1. Choice of Law

   Because the law affecting punitive damages varies from jurisdiction to jurisdiction, defense counsel may need to analyze choice of law issues, if appropriate, based on the facts of the case. Courts typically consider these factors in determining choice of law for punitive damages: (1) the state of the plaintiff's residence; (2) the state where the wrongful conduct occurred; and (3) competing states' interests.(8) Also worth noting is that in certain jurisdictions, the law applied to punitive damages may differ from the law applied to other issues in the same action.(9)

2. Punitive Damages Law

   It is important to note that there is no cause of action for punitive damages alone. Nearly all jurisdictions require entitlement to compensatory damages before punitive damages may be awarded, although some permit them if injunctive relief is granted. In many jurisdictions, nominal damages are insufficient as a matter of law to support punitive damages, while in others nominal damages will support punitive damages. What constitutes "nominal damages" is generally left to the trial court' s discretion.(10)

   Punitive damages have been prohibited in certain types of cases, including wrongful death cases, property damage claims, and claims against public entities.(11) In addition, in most jurisdictions, if the complaint sounds in contract, punitive damages are unavailable.(12)

   Jurisdictions differ in their descriptions of the type of conduct warranting punitive damages. Some courts require that the character of negligence necessary is the same as that required for a conviction of manslaughter.(13) Others require only a showing of gross negligence.(14) Still others allow punitive damages when a defendant has exhibited "reckless or flagrant indifference," or "willful," "wanton" or "malicious" disregard of the rights of others.(15) Yet others have held that the exhibition of a "flagrant indifference to the public safety" is enough.(16)

   No matter what description is employed, one thing is clear: punitive damages should not be awarded on the basis of the mere inadvertence, mistake or errors of judgment that constitute ordinary negligence.(17)

   It is generally recognized that an employer may be liable to third parties for the tortious acts of its employees, but there appears to be a conflict of opinion as to when an employer can be held vicariously liable for punitive damages based on an employee's conduct. According to Section 217C of the Restatement (Second) of the Law of Agency and Section 909 of the Restatement (Second) of Torts, employers are vicariously liable for punitive damages when the employee's act was ratified, approved or authorized by the employer, when the employee was acting in a managerial capacity, or when the employee was unfit for duty.(18)

   California Civil Code Section 3294(b) states that an employer may be vicariously liable for punitive damages based on the actions of an employee if the employer "had advanced knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others[,] or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud or malice." One California case imposed vicarious liability for punitive damages without authorization or ratification of the actions of employees who had been placed in a managerial capacity.(19)

   Other jurisdictions impose punitive damages on an employer if those damages would have been charged to the employee--for example, if the employee acted wantonly or willfully, or with a reckless indifference to the rights of others.(20) Yet other courts require some showing of an act or omission on the part of the employer before imposing liability, so that an "innocent employer" cannot be held vicariously liable for punitive damages.(21) Still other states recognize specific instances where punitive damages cannot be imputed to an employer for an employee's act, such as when the employee has been discharged from personal liability. Essentially, a favorable judgment for the employee relieves the employer of liability.(22)

3. Plaintiff's Burden of Proof

   The burden of proof for punitive damages differs among jurisdictions. For example, the Indiana Supreme Court has held that the standard in that state is proof of the misconduct by "clear and convincing evidence."(23) In Maine, Idaho, Arizona and California, punitive damages may be awarded only when the plaintiff proves by clear and convincing evidence that the...