California Supreme Court Clarifies Constitutional Limits on Punitive Damages

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In Brandt v. Superior Court, the California Supreme Court held that when a plaintiff proves that an insurance company withheld policy benefits in bad faith, attorneys' fees reasonably incurred to compel payment of the benefits are recoverable as an element of damages. 37 Cal. 3d 813, 815 (1985). Such fees often are referred to as "Brandt fees." Recently, in Nickerson v. Stonebridge Life Insurance Company, 371 P.3d 242 (Cal. 2016), the court clarified the circumstances in which Brandt fees constitute compensatory damages for purposes of determining whether an accompanying award of punitive damages is unconstitutionally excessive. Specifically, the court considered whether Brandt fees are "properly included as compensatory damages where the fees are awarded by the jury, but excluded from compensatory damages when they are awarded by the trial court after the jury has rendered its verdict." Id. at 246.

Brandt Fees

The court in Brandt explained that when an insurer breaches the implied covenant of good faith and fair dealing by failing to pay a covered loss, "the insurer is liable for any damages which are the proximate result of that breach." 37 Cal. 3d at 817 (internal quotation marks omitted). Thus, "[w]hen an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney's fees are an economic loss—damages—proximately caused by the tort." Id.

Brandt further explained that because "the attorney's fees are recoverable as damages, the determination of the recoverable fees must be made by the trier of fact unless the parties stipulate otherwise." Id. at 819. It noted that "[a] stipulation for a postjudgment allocation and award by the trial court would normally be preferable since the determination then would be made after completion of the legal services [citation], and proof that otherwise would have been presented to the jury could be simplified because of the court's expertise in evaluating legal services." Id. at 819-20.

Constitutional Limits on Punitive Damages

The U.S. Supreme Court has explained that there are procedural and substantive constitutional limitations on punitive damages awards. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003). The Due Process Clause of the Fourteenth Amendment "prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor." Id. To ensure that unconstitutional punishment is not imposed in the form of punitive damages, the Court has set forth three "guideposts" for courts to consider in reviewing punitive damages awards: "(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." The second guidepost was primarily at issue in Nickerson. Id. at 418 (citing BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 575 (1996)).

Although the Court has declined to "impose a bright-line ratio which a punitive damages award cannot exceed," it has concluded that "in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." State Farm, 538 U.S. at 425. Following the Court's guidance, the Supreme Court of California has explained that "ratios between the punitive damages award and the plaintiff's actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification . . . , cannot survive appellate scrutiny under the due process clause." Simon v. San Paolo U.S. Holding Co., 35 Cal. 4th 1159, 1182 (2005).

Nickerson v. Stonebridge Life Insurance Company

The court in Nickerson applied the above well-settled legal principles to the following question: Are Brandt fees awarded by a trial court after the jury has rendered its verdict properly considered "compensatory damages" for purposes of calculating the "9 or 10 to 1" ratio? If so, that in turn increases the constitutionally permissible amount of punitive damages.

The plaintiff in Nickerson was insured under a hospital indemnity policy issued by defendant Stonebridge Life Insurance Company (Stonebridge). The plaintiff sued Stonebridge for bad faith withholding of policy benefits. The parties stipulated before trial that if plaintiff succeeded on his complaint, the trial court could determine the amount of attorneys' fees to which plaintiff was entitled under Brandt. At trial, neither party presented evidence to the jury regarding the claim for, or amount of, Brandt fees.

The jury found in favor of plaintiff on his bad faith cause of action and awarded him $35,000 in damages for emotional distress. The jury also found that Stonebridge had "engage[d] in the conduct with fraud" and awarded $19 million in punitive damages. The parties then stipulated that the amount of attorneys' fees to which plaintiff was entitled under Brandt was $12,500, and the court awarded that amount.

The trial court applied the case law discussed above and held that it was bound to reduce the punitive damages award so that the ratio of punitive to compensatory damages did not exceed 10 to 1. Critically, in calculating this ratio, the trial court excluded the Brandt fees and considered only the $35,000 awarded as compensatory damages for emotional distress. It thus found the maximum permissible punitive damages award to be $350,000. The Court of Appeal affirmed.

The California Supreme Court reversed the lower courts. It first noted that Stonebridge did not dispute that Brandt fees ordinarily qualify as compensatory damages for purposes of applying the second Gore guidepost—a conclusion that "follows from Brandt itself." Nickerson, 371 P.3d at 248. Instead, Stonebridge argued that the purpose of the three-factor analysis laid out by the U.S. Supreme Court is to permit courts to identify punitive damages awards that are tainted by irrational or arbitrary jury decision making, and only evidence presented to the jury properly has a role in that inquiry. According to Stonebridge's argument, Brandt fees determined by the trial court post-verdict must be excluded from the calculation.

The court rejected Stonebridge's argument, stating that it "misconceive[d] the nature of the Gore inquiry." That inquiry does not regulate the jury's decision-making process in the way certain other limitations do,1 but is instead aimed at ensuring that "the state ultimately does not impose an award whose size exceeds constitutional limits" on the state's power to punish. If a reviewing court concludes that the jury's punitive damages award is excessive, the remedy is not to set the award aside, as would be the case if there were a defect in the way the jury reached its decision. Rather, the remedy would be to reduce the award to constitutional limits. Therefore, the court concluded that "there is no apparent reason why a court applying the second guidepost may not consider a postverdict compensatory damages award in its constitutional calculus." Id. at 248-49.

In so holding, the Nickerson court disapproved the Court of Appeal's decision in Amerigraphics, Inc. v. Mercury Casualty Co., 182 Cal. App. 4th 1538 (2010). While Amerigraphics held that the trial court had properly excluded Brandt fees awarded by the court after the jury verdict on punitive damages, id. at 1565, the court in Nickerson noted that the decision was made "without further elaboration or citation." 371 P.3d at 246.

Finally, the court rejected Stonebridge's argument that the jury's verdict was invalid because the jury was unaware of a substantial component of harm the plaintiff had suffered. Stonebridge gave this argument "little more than a passing nod, . . . presumably because Stonebridge itself invited this state of affairs when it stipulated to a postverdict determination of Brandt fees and raised no objection to the jury returning a punitive damages verdict in the absence of evidence about the fees." Having consented to, or at least acquiesced in, this procedure, Stonebridge had forfeited any argument that the procedure itself was legally impermissible. Id. at 248.

The court acknowledged Stonebridge's concern, but noted that the jury's ignorance about Brandt fees could cut both ways. On the one hand, if the jury heard evidence that the plaintiff suffered even more harm than it previously thought, it might have decided to award even greater punitive damages. On the other hand, the defendant could argue that the Brandt fees would have a deterrent effect on future misconduct, and that punitive damages should be reduced accordingly. Id. at 250.

Takeaways

The considerations in the preceding paragraph are ones both parties should take into account when determining whether to stipulate to trial court determination of Brandt fees if the plaintiff prevails on a bad faith claim. To the extent there was a possibility pre-Nickerson that reaching such a stipulation might reduce the constitutionally permissible amount of punitive damages, that possibility no longer exists. However, the court in Nickerson recited Brandt's preference for a stipulation, which (1) allows the determination to be made after legal services are completed, (2) simplifies the evidence presented to the jury, and (3) places the determination in the hands of the court, which has "expertise in evaluating legal services." Id. at 248.

1. "For example, the jury must be adequately informed of the nature and purposes of punitive damages in order to reasonably accommodate the defendant's interest in rational decision making." Id. at 249 (internal quotations and alterations omitted).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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