fraction (1)As readers doubtlessly are aware, in State Farm v. Campbell the U.S. Supreme Court provided lower courts with substantial guidance on the constitutionally permissible ratio between the punitive damages and the harm to the plaintiff.  In particular, the Court admonished that generally the ratio should not exceed the single-digit range and stated that, when compensatory damages are “substantial,” often a 1:1 ratio will mark the constitutional line.  As a result of that guidance, the calculation of the denominator of the ratio of punitive damages to harm has become increasingly important, presenting courts with a range of interesting issues.

Nickerson v. Stonebridge Life Insurance Co., which is currently pending in the California Supreme Court, involves one such issue.  In California, an insured who can persuade a jury that an insurer denied his claim for policy benefits in bad faith is entitled to recover as “compensatory damages” the amount of attorneys’ fees he incurred in pursuing payment of the policy benefits (but not in pursuing the bad-faith claim or punitive damages).  Generally, the amount of attorneys’ fees is set by the court after trial, though nothing precludes the parties from agreeing to allow the jury to set the fees.

In Nickerson, the California Court of Appeal declined to include the attorneys’ fees in the denominator of the ratio of punitive damages to actual or potential harm for the simple reason that the jury was not aware of the fees, which accordingly played no affirmative role in its determination of the amount of punitive damages.  The California Supreme Court granted review to consider whether attorneys’ fees set by a court post-verdict may be added to the denominator of the ratio of punitive damages to actual or potential harm.

On behalf of the Chamber of Commerce of the United States, my colleagues Don Falk, C.J. Summers, and I recently submitted an amicus brief in support of the respondent insurer.

Our brief makes three basic points.

First, addressing a logically antecedent question, we contend that it is inappropriate to include attorneys’ fees—whether awarded by judge or jury—in the denominator when, as in this and many other cases, the plaintiff has a contingency-fee agreement with his counsel.  In such situations, the plaintiff never experiences any “harm” in the form of attorneys’ fees because he owes them only if he prevails, in which case they are paid directly from the defendant to the plaintiff’s attorney.  To be sure, such a plaintiff can experience an “economic loss” (to use the words of the California courts) in the form of attorneys’ fees deducted from his recovery if he prevails on his breach-of-contract claim, but loses on his bad-faith claim.  But in that circumstance, he necessarily won’t be entitled to punitive damages, so the question whether to include attorneys’ fees in the denominator of the punitive damages/harm ratio simply doesn’t arise.

Second, turning to the narrow question presented, we explain that, when reviewing the amount of punitive damages post-verdict, the California courts generally have not been willing to consider evidence that was not presented to the jury—most notably, prior punitive awards against the same defendant for the same course of conduct that injured the plaintiff.  We explain the strategic dilemma that such a rule presents for defendants and argue at bottom that what is sauce for the goose should be sauce for the gander.  Of course, if the California Supreme Court decides to change the sauce—i.e., allow both parties to introduce evidence not considered by the jury in connection with the trial court’s excessiveness review, as Alabama long has done and Montana appears to do—that might benefit defendants in the long run, albeit not in this particular case or context.

Finally, and perhaps most importantly, we point out that the premise of the plaintiff’s argument—that increasing the denominator will result in a proportionate increase in the permissible amount of punitive damages—is false.  All else being equal, when the amount of compensatory damages increases, the need for additional punitive damages to punish and deter decreases.  That is especially true when the compensatory damages—in this case attorneys’ fees—represent a dead-weight loss to the defendant rather than the disgorgement of ill-gotten gains.  In such circumstances, a lower ratio of punitive to compensatory damages generally will be sufficient to accomplish the state’s interests in deterrence and retribution.

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