Defending "pattern and practice" evidence in punitive damages cases.

• Author: Gross, Jonathan

THE DEFENSE bar is struggling to come to grips with punitive damages, which are being imposed more frequently and in larger amounts.(1) The plaintiffs' bar is becoming more adept at presenting punitive damages cases, and juries are more willing to impose significant awards.

One response of the defense bar has been to ask the U.S. Supreme Court to set constitutional restrictions on punitive damages. In 1991 in Pacific Mutual Life Insurance Co. v. Haslip(2) the Court affirmed an Alabama punitive damages award. In doing so, the Court approved the procedural and substantive standards issued by the Alabama Supreme Court:

(a) whether there is a reasonable relationship

between the punitive damages award and the

harm likely to result from the defendant's con-

duct as well as the harm that has occurred; (b)

the degree of reprehensibility of the defendant's

conduct, the duration of that conduct, the defen-

dant's awareness, any concealment, and the ex-

istence and frequency of similar past conduct;

(c) the profitability to the defendant of the

wrongful conduct and the desirability of remov-

ing that profit and of having the defendant also

sustain a loss; (d) the "financial position" of the

defendant; (e) all the costs of litigation; (f) im-

position of criminal sanctions on the defendant

for its conduct, these to be taken in mitigation;

and (g) the existence of other civil awards

against the defendant for the same conduct, these

also to be taken in mitigation.(3)

However, the substantive standards consist of general considerations rather than concrete guidelines against which a judgment can be compared. The application of these standards to a particular case usually depends on rhetorical arguments rather than a clear and objective determination. Experience since Haslip has shown that punitive damage awards are largely unaffected by that case's requirements.

When the Supreme Court granted certiorari in 1992 in the West Virginia case of TXO Production Corp. v. Alliance Resources Corp.,(4) many people thought that the Court would clarify the Haslip guidelines. In particular, the defense bar asked the Court to establish a constitutional ceiling on punitive awards.

IN TXO, Alliance received an award of $19,000 in compensatory damages and $10 million in punitive damages in a state court trial. TXO argued that the disproportionate ratio of punitive to actual damages--more than 500 to 1--violated its constitutional right to due process. The Supreme Court rejected this argument and, more important, refused to create a "bright-line" test for determining when, or if ever, punitive damages are so excessive as to be unconstitutional.(5) Instead, the Court affirmed the judgement based on the evidence presented at trial, stating through Justice Stevens, who announced the judgment of the 6-3 Court:

The punitive damages award in this case is

certainly large, but in light of the amount of

money potentially at stake, the bad faith of

[TXO], the fact that the scheme employed in this

case was part of a larger pattern of fraud, trick-

ery and deceit, and [TXO's] wealth, we are not

persuaded that the award was so "grossly exces-

sive" as to be beyond the power of the state to

allow.(6)

The TXO trial court allowed evidence of questionable admissibility regarding other claims made against TXO in other states. This evidence included (1) hearsay, (2) legal opinions, (3) conclusions about TXO's state of mind, (4) testimony about claims that subsequently were resolved in TXO's favor and (5) testimony about activities that seemed to have no relevance other than showing TXO's disposition toward "fraud, trickery, and deceit."

TXO is a striking example of what is called evidence of "other claims" against a defendant that a plaintiff may offer and, more important, a trial court may admit. TXO emphasizes the impact of such evidence on a jury and presents an example of many of the evidentiary challenges defense counsel face in punitive damages cases.

This article discusses a manner of analyzing and defending against this type of evidence.

A CLOSE LOOK AT TXO

At trial, TXO was portrayed as a hard-ball Texas oil and gas company, similar to that portrayed in the Dallas television series. TXO and Alliance came to a preliminary agreement over the sale of oil and gas rights to a tract of land. TXO then tried to create a cloud on Alliance's title. TXO purchased the alleged cloud from a third party for $6,000 and then used the purported cloud as leverage in an attempt to win a better deal on royalties from Alliance. When that failed, TXO filed a quiet title action based on the $6,000 cloud on title. Alliance counter-claimed for slander of title.

At trial, Alliance presented videotaped depositions of lawyers from Texas, Louisiana and Oklahoma describing how TXO had treated their clients, who were not parties to this case. None of the attorneys was called as an expert witness. Rather, they were called, as the West Virginia Supreme Court of Appeals put it, "to establish a lack of good faith by TXO."(7)

One attorney described conversations between TXO and his client that took place outside his presence. According to that attorney, TXO coerced his illiterate client into signing a lease without consulting counsel. TXO later settled that case favorably to the client.

Another lawyer testified about two cases in which TXO did not pay owed royalties. Regarding one of the cases, TXO owed the client $200,000. The attorney testified about a conversation between TXO and his partner in which TXO threatened to sue their client for $50,000 instead of paying the $200,000.

A third lawyer testified that TXO underpaid him and his clients royalties by claiming that a producing well was non-producing. The lawyer filed a lawsuit that later was settled.

A fourth lawyer testified about pending lawsuits in Oklahoma. The source of his knowledge was his review of discovery and court pleadings in those cases. He opined, according to the West Virginia court's opinion, that "TXO had violated the rights of Dr. Freede and hundreds or thousands of other people across the nation, as a result of this willful, wanton action."(8)

In upholding the $10 million punitive damage award, the West Virginia court stated that "an award of this magnitude is necessary to discourage TXO from continuing its pattern and practice of fraud, trickery and deceit."(9) Ironically, the court noted that after the West Virginia trial "an Oklahoma jury found for TXO in the case brought by Dr. Freede."(10) Justice Neely of the West Virginia court dismissed this with the remark, "Well, even a blind hog finds an acorn now and again."(11)

The U.S. Supreme Court plurality agreed, picking up, as previously noted, the "fraud, trickery and deceit" language.

OTHER ACTIVITIES EVIDENCE

The TXO case demonstrates the devastating effect that evidence of other cases or claims against the same defendant can have on a jury, the court and ultimately the defendant. Without any limit to the scope of this evidence, a trial can easily be transformed from a proceeding in a court of law into an inquisition probing every fault of the defendant. Such evidence also tends to escape the restrictions in the rules of evidence. The evidence of other claims against TXO, for instance, consisted of multiple hearsay and opinions from attorneys who represented clients that were adversaries of TXO. This evidence would seem of doubtful credibility and probative value, but the West Virginia court found these statements to be trustworthy, material, probative and necessary to serve the interests of justice.(12)

It is virtually impossible for a defendant to receive a fair trial if a plaintiff is permitted unlimited breadth in the presentation of other claims against the defendant and can present this evidence through the testimony of attorneys who summarize and characterize the facts of the other incidents in a biased manner. As a practical matter, the bombardment of prejudicial evidence will cause the jury to look at the defendant with a jaundiced eye. Even though the plaintiff is supposed to carry the burden of proof, this evidence may cause the jury to look to the defendant to establish that its activities were beyond reproach.

After being blistered by other claims at trial, some defendants may hope that the appellate courts will rectify the miscarriage of justice. However, a defendant may experience the just the opposite. Evidence of other claims also may create prejudice at the appellate level, and the appellate court may use this evidence to uphold the verdict. For example, TXO complained to the U.S. Supreme Court that the evidence of other claims led the jury to base its award on impermissible passion and prejudice. But Justice Stevens merely stated for the plurality, "Under well-settled law, however, factors such as these are typically considered in assessing punitive damages."(13)

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