Calif. Supreme Court Holds Atty Fees to be Included in Determining Constitutional Limits of Punitive Damages Awards

The Supreme Court of California recently held that, in determining whether punitive damages awards are within constitutional limits, attorney’s fees may be included in the calculation of the ratio of punitive to compensatory damages, regardless of whether the fees are awarded by the trier of fact as part of its verdict or are determined by the trial court after the verdict has been rendered.

A copy of the opinion in Nickerson v. Stonebridge Life Insurance Company is available at:  Link to Opinion.

The plaintiff suffered a broken leg and was taken to a veterans hospital.  He experienced several complications from his injury and was required to remain in the hospital for 109 days. Following discharge from the hospital, the plaintiff made a claim under his indemnity benefit policy that promised to pay him $350 per day for each day he was confined to a hospital for the necessary care and treatment of a covered injury.

The insurance company determined that the plaintiff’s hospitalization was only medically necessary for the 18 days immediately following the injury.

The plaintiff thereafter filed suit alleging that the insurance company breached the policy by failing to pay him benefits of the full 109 days he was in the hospital, breached the implied covenant of good faith and fair dealing, and acted in bad faith in denying him full policy benefits.

Prior to trial, the parties stipulated that if the plaintiff prevailed in his action, the trial court could determine the amount of attorney’s fees the plaintiff was entitled to under the Supreme Court of California’s prior ruling in Brandt v. Superior Court (1985) 37 Cal.3d 813, 817, as compensation for having to retain counsel to obtain the policy benefits.

The trial court granted the plaintiff’s motion for a directed verdict regarding the breach of contract action, awarding $31,500 in unpaid policy benefits. The jury returned a special verdict finding that the insurer’s failure to pay policy benefits was unreasonable, and finding that the insurer engaged in the conduct with fraud.

The jury awarded $35,000 in compensatory damages and $19 million in punitive damages.  The parties stipulated the amount of attorney’s fees the plaintiff was entitled to under Brandt was $12,500.

The insurer sought a new trial and a reduction in punitive damages, claiming them as unconstitutionally excessive. The trial court agreed and granted the insurer a new trial, unless the plaintiff agreed to a reduced punitive damages award of $350,000. The trial court determined it was bound to reduce the punitive damage award to a ratio of punitive to compensatory damages of 10 to 1. The trial court did not consider the $12,500 in attorney’s fees when calculating the compensatory damages.

The plaintiff rejected the reduced punitive damages award, and appealed the order for a new trial. The Court of Appeal affirmed, and the Supreme Court of California granted review.

As you may recall, in Brandt v. Superior Court (1985) 37 Cal.3d 813, 817, the Supreme Court of California held that when an insurance company withholds policy benefits in bad faith, attorney’s fees reasonably incurred to compel payment of the benefits are recoverable as an element of the plaintiff’s damages.

In addition, the Supreme Court of California looked to the ruling of the Supreme Court of the United States in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), for substantive guideposts that reviewing courts must consider in evaluating the size of punitive damages awards.

Under BMW of North America, Inc. v. Gore, the guideposts are: “(1) the degree of reprehensibility of the defendant’s misconduct; (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.” Id. at 575.

The main Gore guidepost at issue was the second one – i.e., that damages must bear a reasonable relationship to compensatory damages. The Supreme Court of California previously held that a ratio between the punitive damages award and the plaintiff’s actual or potential compensatory damages significantly greater than 9 or 10 to 1 will be suspect, and subject to appellate scrutiny as a denial of due process.

The Supreme Court of California noted that, under Brandt, attorney’s fees are recoverable as compensatory damages as they represent an economic loss proximately caused by the tort.

Thus, the question for the Court in this case was whether attorney’s fees may be included in the calculation of the ratio of punitive damages to compensatory damages for the purpose of determining whether the punitive damages award exceeds constitutional limits.

The Supreme Court of California held that the Gore guideposts prescribed a set of rules for courts to apply, rather than regulating the jury’s decision making process.

Because the Gore guideposts are designed to govern post-verdict judicial review of the amount of the jury’s award, not the adequacy of the jury’s deliberative process, the Supreme Court of California held there is no apparent reason why a court may not consider post-verdict compensatory damages awards in its calculations to limit punitive damages awards.

The insurer conceded that the third guidepost is aimed at courts, rather than juries.  The insurer also acknowledged that courts have applied the second Gore guidepost to consider not only the compensatory damages awarded by the jury but also the potential harm suffered by the plaintiff, even though the jury was never asked to consider potential harm in rendering the verdict.

Therefore, the Court held, even though the jury did not consider the attorney’s fees, the courts may nonetheless consider them.

In sum, the Supreme Court of California held that attorney’s fees should be included in the calculation of the punitive to compensatory damages ratio by the trial court after the jury renders its punitive damages verdict.

Accordingly, the Supreme Court of California reversed the judgment of the Court of Appeal.

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Patrick R. Tira is based in Maurice Wutscher's San Diego office, where he practices in the firm's Commercial Litigation, Consumer Credit Litigation, Business Formation and Transactions, Intellectual Property Litigation, and Employment Litigation groups. He has extensive litigation experience in matters involving a wide variety of complex real estate and business disputes, ranging from post-foreclosure evictions and real estate fraud to misappropriation of trade secrets claims and shareholder disputes. He is experienced in all stages of litigation and has recovered millions for his clients in judgments and arbitration awards. In addition to his success in the courtroom, Patrick advises internet and other technology companies, real estate investors, medical professionals, and other businesses on an array of transactional matters. For example, he has extensive experience counseling clients on entity formation, licensing and service-level agreements, real estate agreements, internal policies and procedures, and related matters. Patrick employs his litigation experience to appropriately structure internal policies and procedures, licensing and service-level agreements, ownership and other agreements, and also to anticipate where disputes may arise in the future. He strives to enable his clients to achieve their goals and to avoid potential litigation.