Punitive damages are meant to serve two purposes: punish the defendant for the conduct at issue in the lawsuit and deter similar conduct in the future. But, sometimes a punitive damages award goes beyond serving these two purposes and moves into the territory of violating the Due Process Clause of the 14th Amendment to the United States Constitution. The 14th Amendment, through the Due Process Clause, prohibits the imposition of grossly excessive or arbitrary punishments.

Punitive damages are allowed in California under California Civil Code section 3294(a), which states “In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.” Although California law does not define “clear and convincing evidence”, it carries a higher burden of proof than “preponderance of the evidence,” which is the burden of proof necessary to prevail in a civil lawsuit. In determining whether to award punitive damages, the jury considers: (1) the reprehensibility of the defendant’s conduct; (2) whether there is a reasonable relationship between the amount of punitive damages and the plaintiff’s harm; and (3) what amount will punish the defendant and discourage similar future conduct. In determining this amount, the jury considers the defendant’s financial condition. In California, there is no official cap on punitive damages.

California Civil Code 3294(c) defines “malice,” “oppression” and “fraud” as follows:

“Malice” means:

  • Conduct which is intended by the defendant to cause injury to the plaintiff, or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.

“Oppression” means:

  • Despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.

“Fraud” means:

  • An 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.

When dealing with a company as opposed to a private person, California Civil Code section 3294 states that an employer shall not be liable for punitive damages, based upon acts of an employee of the employer, unless the employer had advance 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. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.

So how do the courts balance the interests of punishing the defendant while upholding the 14th Amendment? This frequent issue was recently put to the test in Bahamas Surgery Center, LLC v. Kimberly-Clark Corporation et al., a case in the United States District Court for the Central District of California.

In Bahamas Surgery Center, a jury awarded punitive damages in the amounts of $350 million and $100 million against defendants Kimberly-Clark and Halyard, respectively. With respect to compensatory damages, however, the jury only awarded approximately $3.9 million and $260,000 against Kimberly-Clark and Halyard, respectively. These are ratios of approximately 90 to 1 and 384 to 1, and in response to the defendants’ motion for remittitur, the Court found the punitive damages figures to be excessive and unconstitutional.  The Court found that ratios of approximately 5 to 1 were more appropriate. In an amended order, the Court ultimately amended the judgment such that the punitive damages assigned to Kimberly-Clark were $19,446,635, and the punitive damages assigned to Halyard were $1,307,225, which is in step with an approximate 5 to 1 ratio.

As California statutes do not set a cap on punitive damages nor provide a formula as to how punitive damages should be calculated, the 5-to-1 ratio is often seen as reasonable; although officially the Supreme Court of the United States is on record as stating that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process,” and that punitive damages awards ratio of 4 to 1 is “close to the line of constitutional impropriety.” State Farm Mutual Automobile Insurance vs. Campbell 538 U.S. 408 (2003).

The courts, however, do not simply rely on a ratio when evaluating a punitive damages award. In evaluating the fairness of an award, the court will analyze: (1) the degree of reprehensibility of the defendant’s conduct; (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. The court will also often not allow a punitive damages award to exceed a certain percentage of the defendant’s net worth; this has typically been anywhere from 10 to 30 percent.

In addition to excessive punitive damages awards being an issue in California, a continuing issue across the country is multiple lawsuits seeking punitive damages for the same tortious conduct. That issue, however, will not come to a head just yet, as the Supreme Court of the United States denied a defendant’s petition for writ of certiorari seeking to address the issue.