June 20, 2005
The California Supreme Court issued two landmark rulings that could
have a nationwide impact on how courts award punitive damages.
Applying the argument offered in an amicus brief filed by Pillsbury
& Levinson LLP on behalf of United Policyholders, the California
Supreme Court determined that previous rulings across the country
severely limiting punitive damages were misinterpretations of a 2003
U.S. Supreme Court ruling. These rulings effectively lift the
ceiling previously applied on punitive damages.
Courts across the country have almost uniformly applied a
"single-digit" test to determine the ratio between punitive damages
and compensatory damages, such that punitive damages could not
exceed a ratio of 9 to 1. The California Supreme Court ruled in the
case of Johnson v. Ford Motor Company and Simon v. San Paolo U.S.
Holding Company, Inc. that this is a misinterpretation of the
guidelines for awarding punitive damages under the principles laid
out by the U.S. Supreme Court in State Farm Mutual Auto Insurance
Co., v. Campbell in 2003, The California Supreme Court, however
explained that Campbell did not support a uniformly applied
single-digit test. The California Supreme Court said that punitive
damages are expected to exceed single-digit ratios in many cases,
but should not exceed them "to a significant degree." This language
was left for interpretation in future cases but clearly permits much
larger punitive damage awards that could be five or 10 times as
large as they were under the previous interpretations of Campbell.
"These rulings will reverberate across the country. They blow the
doors off of the idea dearly held by insurance companies and large
corporations that punitive damages must be confined to a small
multiplier of compensatory
damages," said Arnold Levinson, partner at Pillsbury & Levinson.
"They rebalance the scales to properly assess punitive damages and
mark a major victory for those seeking justice against fraudulent
corporate behavior. Before this ruling many corporations believed
that they could justify reprehensible business practices because
they thought that the penalty for fraudulent conduct was so small
that it could simply be absorbed as a cost of doing business. These
two cases will be a shock to their systems."
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