California Supreme Court Embraces 1:1 Punitive Damages Ratio
The California Supreme Court has embraced the principle suggested by the U.S. Supreme Court that a ratio of punitive damages to compensatory damages of one-to-one is the federal constitutional maximum where there is relatively low reprehensibility and the compensatory damages award is substantial.
In Roby v. McKesson Corporation, plaintiff Charlene Roby filed alleged a wrongful termination and harassment action against McKesson and her supervisor Schoener claiming she was fired because of a medical condition and a related disability. The jury found in favor of Roby on all causes of action and awarded compensatory damages of $3,511,000 against McKesson and $500,000 against the supervisor, Schoener. The jury also awarded punitive damages: $15,000,000 against McKesson and $3,000 against Schoener. The trial court reduced the compensatory damages against McKesson to $2,805,000 because some of the damage awards overlapped.
The California Court of Appeal reduced the compensatory damages award to $1.4 million, finding there was insufficient evidence for a harassment verdict against McKesson and that the $15 million punitive damages award was excessive under the federal due process clause. The Court of Appeal determined that the maximum permissible punitive damages award, based on the facts of the case and size of the compensatory damages award, was $2 million, or 1.4 times the amount of the compensatory damages award.
The California Supreme Court decided two important issues: whether personnel actions undertaken by a supervisor can be used as evidence of harassment and whether the punitive damages award against McKesson was excessive. As to the first issue, the Supreme Court reversed the Court of Appeal holding that there was insufficient evidence of Roby’s harassment claim. Rather, the Supreme Court held that biased personnel actions can be used as evidence of harassment because they can contribute to harassment by communicating hostility and evidence the discriminatory animus of the person taking the personnel action. These actions included demeaning comments about her body odor, arm sores, and the demeaning manner in which her supervisor acted towards her, including refusing to respond to greetings, failing to give gifts and other less favorable treatment. The Court found that none of these events was fairly characterized as official employment actions or personnel actions, and thus, could not be conduct that fell within the supervisor’s business and management duties. Thus, it reinstated the jury’s verdict finding for Roby on the discrimination claim. The Court also found there was sufficient evidence for the jury to infer the supervisor discriminated against Roby based on her medical condition, and that the constant hostility was also based on medical conditions, constituting harassment and in violation of applicable laws.
As to the punitive damage award, the Supreme Court found that McKesson’s implementation of its attendance policy was not an act with intentional but “managerial malfeasance.” Thus, although punitive damages were appropriate in that Roby was financially vulnerable, the conduct affected her physical and mental well being and McKesson’s conduct showed a reckless disregard for the health and safety of others, it reduced the punitive damage award to the amount of the compensatory damages, $1,905,000.
The California Supreme Court reversed, holding that there was sufficient evidence to support the harassment verdict and affirming $1.9 million in compensatory damages. However, although the Supreme Court agreed that the award of $15 million in punitive damages was excessive, it relied on U.S. Supreme Court precedent to determine that the ratio of punitive damages to compensatory damages could not exceed one-to-one. In reaching its decision, the California Supreme Court based its determination on an analysis of the five "reprehensibility factors" articulated by the U.S. Supreme Court in State Farm Mut. Auto Ins. Co. v. Campbell, 538 US 408 (2003): (1) the harm caused was physical as opposed to economic, (2) the defendant's indifference to or reckless disregard of the health or safety of others, (3) the plaintiff's financial vulnerability, (4) the defendant's conduct involved repeated actions or an isolated incident, and (5) the harm was the result of intentional malice, trickery or deceit. The Court found that only the first three factors were present, and that the defendant's conduct "was at the low end of the range of wrongdoing."
With respect to the first of these reprehensibility factors, the Court explained that the harm to Roby was “physical” in the sense that it affected her emotional and mental health, rather than being a purely economic harm. With respect to the second reprehensibility factor, the Court determined that it was objectively reasonable to assume that employer McKesson‟s acts of discrimination and harassment toward Roby would affect her emotional well being, and therefore McKesson‟s “conduct evinced an indifference to or a reckless disregard of the health or safety of others.” The third reprehensibility factor was likewise present: Roby was a relatively low-level employee who quickly depleted her savings and lost her medical insurance as a result of her termination, and therefore it appears that she “had financial vulnerability.”
With respect to the fourth reprehensibility factor of the State Farm test, however, the Court found it was not present. Schoener‟s wrongful conduct was repeated, as she subjected Roby to a series of discriminatory disciplinary actions and harassed Roby on an almost daily basis, but there was no indication of repeated wrongdoing by McKesson, as discussed below.
Concerning the discrimination claim, McKesson’s wrongdoing was limited to its one-time decision to adopt a strict attendance policy that, in requiring 24-hour advance notice before an absence, did not reasonably accommodate employees who had disabilities or medical conditions that might require several unexpected absences in close succession. The Court stated that McKesson’s act of discharging Roby (including the perfunctory investigation that accompanied it) was simply an application of this attendance policy. Although te jury found that McKesson’s adoption of this flawed attendance policy constituted “oppression” or “malice,” justifying an award of punitive damages under Civil Code section 3294(a), nevertheless, McKesson’s adoption of this attendance policy was a single corporate decision.
The significance of this opinion lies partly in the fact that the California Supreme Court has issued so few opinions on punitive damages in recent years. But the primary significance seems to be that the court has put the final nail in the coffin of the argument that the portion of State Farm calling for a one-to-one ratio limit is mere dicta that should does not apply in California. However, where the reprehensibility factor is considerably more egregious than was present in this case, it would appear that single digit punitive damages well above the one-to-one ratio could be mandated.