Line your forensic expert up early with the necessary tools to rebut these kinds of arguments well before trial ever begins. The case also has a great discussion of constitutionally permissible ratios.
[sws_yellow_box box_size="550"]By Solange Ritchie, who practices civil law in Costa Mesa, CA[/sws_yellow_box]
Punitive damage awards are under attack. Defendants use all kinds of strategies to escape responsibility for their conduct. A tool often used to overturn a jury’s award of substantial punitive damages is a defendant’s cry that the size of the award can financially destroy them.
Following a jury’s finding and award under Civil Code §3294 of oppression, malice or fraud, defendants produce evidence that they have a negative net worth during the punitive damage phrase of trial. In the alternative, they argue that a punitive damage award in the amount requested by Plaintiff’s counsel would put them out of business.
This was exactly the defense argument in Bankhead v. ArvinMeritor, Inc. 205 Cal.App.4th 68 at pages 78-84.
The case was an mesothelioma asbestos personal injury case where a jury found Defendant ArvinMeritor, Inc. (ArvinMeritor) liable to Plaintiffs Gordon and Emily Bankhead for compensatory and punitive damages. On appeal, ArvinMeritor did not challenge the jury’s verdicts as to liability or the amount of compensatory damages, contending only that the trial court erred in declining to reduce the punitive damages awarded by the jury. (The ratio of compensatory to punitive damages awarded by the jury was 2.4 to one). Id. at 72.
During the appeal, Gordon Bankhead died. On November 28, 2011, his widow, Emily Bankhead, was substituted in on behalf of his estate. Id. at footnote 1, Page 72.
The Court of Appeal, Ruvolo, P.J., held that:
Id. at 68.
This case is a wonderful primer on punitive damages, given these issues and the Court’s detailed analysis of relevant case law and facts, including the necessary testimony from an expert on a company’s financial condition and worth and the necessary documents that should be obtained by plaintiff’s expert and reviewed prior to the expert’s trial testimony.
This case details the level of analysis that an economic expert should be prepared to undertake prior to taking the stand to discuss a company’s net worth and ability to withstand a large verdict. It provides insight into how to overcome common usual defense arguments on net worth and it provides plaintiff’s counsel reference to relevant cases that should be included in any brief related to punitive damages and net worth.
Percentage argument is outdated
The cases cited point to many factors other than net worth that a trial court can consider in determining if a defendant can pay the punitive damage award and if the award may stand. These include a review of loan documents, net worth statements, a review of cash on hand, checking account balances, amounts of credit lines carried by a company, corporate resolutions and corporate salaries and other compensation provided to executives. The case also confirms that a simple percentage argument, i.e., that the punitive damage award should not stand exceed a specified percentage, as a matter of law, are outdated arguments based on current California law.
The Court of Appeal affirmed the trial Court’s rulings. Id. at 73. It engaged in an exhaustive discussion of whether a defendant’s net worth should be the only standard for determining the viability of a finding of punitive damages against a defendant.
A separate trial was held to determine the amount of punitive damages to be assessed against each defendant. By the time of that trial, all defendants except ArvinMeritor and Abex had settled. At the punitive damages trial, respondents presented an expert witness, Robert Johnson, to testify about ArvinMeritor’s financial condition. In evaluating ArvinMeritor’s economic status, he reviewed publicly available documents filed with the Securities and Exchange Commission, including ArvinMeritor’s 2008, 2009, and 2010 annual 10–K reports; its adjusted 2009 10–K reports; a 2010 proxy statement sent to shareholders; and data regarding its market capitalization. These are “generally accepted financial documents used and relied upon by economists or experts in finance to evaluate a company.” Id. at 74.
During the jury trial, Johnson testified that:
Johnson explained that cash flow profit is derived by subtracting from revenue those expense items that actually have to be paid, such as cost of goods sold and salaries, but not subtracting any deductions that do not actually require an expenditure of cash, such as depreciation. Id. at footnote 6, page 75.
Ability to pay
ArvinMeritor’s chief executive officer, who also served as its board chair and corporate president, earned over $7.6 million in 2010, and stood to receive between $19.9 million and $26.9 million upon leaving the company. Johnson explained that a company’s willingness and ability to pay sums of this magnitude to its chief executive is an indicator of financial strength. Given all of these facts, Johnson opined that ArvinMeritor was financially sound. Id. at 75.
Johnson acknowledged that ArvinMeritor reported that as of 2010, it had a negative net worth of $1.023 billion. He opined, however, that this number, taken on its own, did not “reflect the full context of ArvinMeritor’s financial condition and ability to pay.” He explained that net worth is only one of “a number of different tools that we use to assess a company’s financial health, wealth and condition,” and opined that “net worth is probably one of the least reliable financial metrics or statistics you can use,” because there are “a number of financial or accounting transactions” in which a company can engage to lower its net worth, while remaining profitable. Id.
[sws_pullquote_right]The court’s task simply is to determine whether the punitive damages award, in light of the defendant’s wealth and the gravity of the particular act, exceeds the level necessary to properly punish and deter. [/sws_pullquote_right]
Johnson testified that net worth “is not a measure of a company’s financial condition totally or their ability to pay,” because “even within the guidelines of the generally accepted accounting principles … net worth is something that can be pretty easily manipulated.” As an example, Johnson noted that a company can reduce its net worth simply by repurchasing shares of its stock. Id.
He explained that because net worth can be unreliable, banks look instead to a company’s cash flow and profits, which are the most reliable indicators of its ability to repay debt, in determining whether to lend money to it. Id. For this reason, companies with a negative net worth are still able to borrow money. Indeed, ArvinMeritor itself borrowed a total of $245 million in 2010, and still had $539 million available on its line of credit as of September 30 of that year. Id. at 75-76.
Johnson also acknowledged that over the past couple of years, ArvinMeritor had been “weathering … the financial travails of the economy”; its sales had not gone up, and it had lost some money. He believed, however, that ArvinMeritor was “still a financially sound company” that was “able to meet all of its obligations,” was “not anywhere near on the verge of bankruptcy,” and had “generally turned the corner.” Id. at 76. In all but one year (2009) during the period Johnson considered (2006–2010), the company’s losses resulted primarily from significant capital expenditures, as well as expenses for research and development. Id.
ArvinMeritor’s trial counsel cross-examined Johnson, but ArvinMeritor did not offer any expert witness or other evidence to cast doubt on Johnson’s methodology or his conclusions. Id.
In its opening brief on appeal, ArvinMeritor cited financial data taken from the company’s 2010 annual report. However, though the report was entered into evidence, Johnson was not asked about those particular figures at trial, and they were not called to the attention of the jury. Id.
The jury returned a verdict awarding respondents $4.5 million in punitive damages against ArvinMeritor. ArvinMeritor filed motions for judgment notwithstanding the verdict and for new trial. The trial court denied both motions, and a timely appeal ensued. Id.
Arguments on appeal
ArvinMeritor’s first argument on appeal is that the punitive damages award was excessive under California law, primarily because of ArvinMeritor’s negative net worth. ArvinMeritor argues that because of its financial condition, the award should be stricken altogether, or reduced to $300,000 at most. Id. The Court of Appeal did not adopt this argument.
After discussing the standard of review, the Court of Appeal reviewed the award of punitive damages to determine whether the award is excessive as a matter of law, or raised a presumption that it is the product of passion or prejudice.
In so doing, they evaluated the award under three criteria:
1. The nature of the defendant’s wrongdoing;
2. The actual harm to the plaintiff;
3. The defendant’s wealth.
(Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 928, 148 Cal.Rptr. 389, 582 P.2d 980 (hereinafter “Neal“); see Adams v. Murakami (1991) 54 Cal.3d 105, 109–110, 284 Cal.Rptr. 318, 813 P.2d 1348 (hereinafter “Adams” ).) Id. at 77.
[sws_blockquote_endquote align="" cite="" quotestyle="style01"] “An appellate court will not reverse the jury’s determination unless the award as a matter of law is excessive or appears so grossly disproportionate to the relevant factors that it raises a presumption it was the result of passion or prejudice. [Citations.]” Rufo v. Simpson (2001) 86 Cal.App.4th 573, 623, 103 Cal.Rptr.2d 492 (hereinafter “Rufo“). Id. at 77. [/sws_blockquote_endquote]
ArvinMeritor’s argument under California law focused on its financial condition, and did not address ArvinMeritor’s wrongdoing and the actual harm to Bankhead. Id. at footnote 7, page 77.
[sws_blockquote_endquote align="" cite="" quotestyle="style01"]Under California law, “[w]ealth is an important consideration in determining the excessiveness of a punitive damage award. Because the purposes of punitive damages are to punish the wrongdoer and to make an example of him, the wealthier the wrongdoer, the larger the award of punitive damages. [Citation.]” (Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072, 1099–1100, 234 Cal.Rptr. 835, citing Bertero v. National General Corp. (1974) 13 Cal.3d 43, 56, 118 Cal.Rptr. 184, 529 P.2d 608.) Id. at 77-78. “[O]bviously, the function of deterrence … will not be served if the wealth of the defendant allows him to absorb the award with little or no discomfort. [Citations.]” (Neal, supra, 21 Cal.3d at p. 928, 148 Cal.Rptr. 389, 582 P.2d 980.) Moreover, “[b]oth California and the federal authorities agree that profits earned from tortious activity that supports an award of punitive damages are appropriately considered in the amount awarded. [Citations.]” (Boeken v. Philip Morris, Inc. (2005) 127 Cal.App.4th 1640, 1697, 26 Cal.Rptr.3d 638 (hereinafter “Boeken“).) Id. at 78. [/sws_blockquote_endquote]
In footnote 8, the Court stated that:
In assessing whether a punitive damages award is excessive relative to the defendant’s wealth, “the key question … is … whether the amount of damages exceeds the level necessary to properly punish and deter.’ [Citations.]” (Adams, supra, 54 Cal.3d at p. 110, 284 Cal.Rptr. 318, 813 P.2d 1348.) Calculation of punitive damages “involves … ‘a fluid process of adding or subtracting depending on the nature of the acts and the effect on the parties and the worth of the defendants.’” (Devlin v. Kearny Mesa AMC/Jeep/Renault, Inc. (1984) 155 Cal.App.3d 381, 390, 202 Cal.Rptr. 204 (hereinafter “Devlin“).) These factors are not evaluated under a rigid formula. “Whether punitive damages should be awarded and the amount of such an award are issues for the jury and for the trial court on a new trial motion. All presumptions favor the correctness of the verdict and judgment. [Citation.]“ Id. at pp. 387–388, 202 Cal.Rptr. 204. ” ‘Juries … have a wide discretion in determining what is proper. [Citation.]’ [Citation.]” Id. at p. 390, 202 Cal.Rptr. 204.
Nonetheless, “[b]ecause the important question is whether the punitive damages will have the deterrent effect without being excessive, an award that is reasonable in light of the … reprehensibility of the defendant’s conduct and injury to the victims, may nevertheless ‘be so disproportionate to the defendant’s ability to pay that the award is excessive’ for that reason alone. [Citation.] ‘[T]he purpose of punitive damages is not served by financially destroying a defendant. The purpose is to deter, not to destroy.’ [Citation.]” (Rufo, supra, 86 Cal.App.4th at p. 620, 103 Cal.Rptr.2d 492.)
Not the only measure
In the present case, ArvinMeritor’s principal ground for contending the award is excessive under California law is that punitive damage awards are limited to 10 percent of the defendant’s net worth, which in ArvinMeritor’s case was negative. Contrary to this contention, net worth is not the only measure of a defendant’s wealth for punitive damages purposes that is recognized by the California courts. ” Indeed, it is likely that blind adherence to any one standard [of determining wealth] could sometimes result in awards which neither deter nor punish or which deter or punish too much.” (Lara v. Cadag (1993) 13 Cal.App.4th 1061, 1064–1065 & fn. 3, 16 Cal.Rptr.2d 811 (hereinafter “Lara“).)
“Although net worth is the most common measure of the defendant’s financial condition, it is not the only measure for determining whether punitive damages are excessive in relation to that condition. [Citations.]” (Rufo, supra, 86 Cal.App.4th at p. 624, 103 Cal.Rptr.2d 492.) For example, in Rufo, the court upheld a punitive damages award that “technically exceed [ed]” the wealthy individual defendant’s net worth, because the evidence showed that the defendant would not be financially “destroyed by the award.” Id. at p. 625, 103 Cal.Rptr.2d 492.
Moreover, as one California court has pointed out, ” ‘[n]et worth’ is subject to easy manipulation and … should not be the only permissible standard.” (Lara, supra, 13 Cal.App.4th at p. 1065, fn. 3, 16 Cal.Rptr.2d 811.) Thus, for example, in Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 36 Cal.Rptr.2d 343, the evidence of the defendant’s financial condition included net worth statements for two successive years. The first statement, which was prepared for submission to a bank as part of a loan application, showed a far higher net worth figure than the second, which was prepared for litigation. The trial judge called the lower figure ” ‘patently crooked,’ ” and the Court of Appeal, although holding the punitive award excessive, agreed that the higher figure was the appropriate one to use for the purpose of determining that question. Id. at pp. 1595–1596, 36 Cal.Rptr.2d 343.
Subject to manipulation
In Zaxis Wireless Communications, Inc. v. Motor Sound Corp. (2001) 89 Cal.App.4th 577, 107 Cal.Rptr.2d 308 (hereinafter “Zaxis“), the court affirmed an award of punitive damages in the amount of $300,000, even though the defendant had a negative net worth of $6.3 million, because the evidence showed that the defendant had the ability to pay the award. Id. at pp. 580–581, 107 Cal.Rptr.2d 308. The court noted that “the [California] Supreme Court has expressly declined to adopt net worth as the standard for determining a defendant’s ability to pay in any given situation. [Citation.]” Id. at p. 582, 107 Cal.Rptr.2d 308, citing Adams, supra, 54 Cal.3d at p. 116, fn. 7, 284 Cal.Rptr. 318, 813 P.2d 1348. It agreed that “[n]et worth is too easily subject to manipulation to be the sole standard for measuring a defendant’s ability to pay….” Id. at pp. 582–583, 107 Cal.Rptr.2d 308, citing Lara, supra, 13 Cal.App.4th at pp. 1064–1065 & fn. 3, 16 Cal.Rptr.2d 811. Noting the “ease with which net worth is subject to adjustment for amortization and depreciation,” the court pointed out that in the case before it, “the net worth calculation included accumulated depreciation…and a note to the sole shareholder,” which “represent[ed] a loss for accounting purposes,” but “did not impact” the defendant’s ability to pay in the same way that salary and wage expenses would. (Zaxis, supra, 89 Cal.App.4th at p. 583, 107 Cal.Rptr.2d 308.)
The Zaxis court also noted that the defendant’s financial statement showed it had “cash on hand and a checking account balance of over $19 million,” as well as a credit line of $50 million, of which $5.3 million remained available to the defendant. The extension of the line of credit “indicate[d] the lender made a determination [the defendant] had the ability to pay amounts well in excess of the…punitive damage award.” (Zaxis, supra, 89 Cal.App.4th at p. 583, 107 Cal.Rptr.2d 308.) Accordingly, the award was not “excessive as a matter of law or so disproportionate to the ability to pay as to indicate passion or prejudice on the part of the jury.” Ibid.
17.5% of net worth
Similarly, in Devlin, supra, 155 Cal.App.3d 381, 202 Cal.Rptr. 204, the court affirmed a punitive damages verdict against a corporation that represented 17.5 percent of its annualized net worth, or almost four months net profit. See Id. at pp. 391–392, 202 Cal.Rptr. 204. In rejecting the defendant’s argument that the award was excessive, the Devlin court relied in part on an unexplained accounting adjustment in the company’s financial records that operated to reduce its net worth. See Id. at pp. 385, 391, 202 Cal.Rptr. 204.
The court also took note of a resolution authorizing the corporation to borrow money, opining that a resolution to borrow “serves as an indicator of the continuing health and viability of a business.” Id. at p. 391, 202 Cal.Rptr. 204. The Devlin court “compiled a list of cases in an attempt to discover a formula for determining whether a given percentage of net worth is excessive ultimately concluded there is no formula, and that each case must be decided on its own facts, considering…various indicators of wealth….” (Rufo,supra, 86 Cal.App.4th at p. 625, 103 Cal.Rptr.2d 492, citing Devlin, supra, 155 Cal.App.3d at pp. 388–389, 391–392, 202 Cal.Rptr. 204.)
Thus, the court held that in arriving at the amount of punitive damages, the trial court properly took into account the defendant’s “net worth plus a variety of other figures relating to [the defendant's] wealth,” and noted that “[o]ther courts have considered various asset and income figures relevant to the issue of punitive damages.” (Devlin,supra, at p. 391, 202 Cal.Rptr. 204.)
[sws_pullquote_right]“Awards generally are not allowed to exceed 10 percent of the net worth of the defendant.” [/sws_pullquote_right]
ArvinMeritor’s challenge to the punitive damages award relied primarily on a plethora of older California cases to the effect that punitive damages amounting to more than 10 percent of the defendant’s net worth are excessive. The most recent case ArvinMeritor cited is Sierra Club Foundation v. Graham (1999) 72 Cal.App.4th 1135, 1162–1163, 85 Cal.Rptr.2d 726. In that case, the court affirmed a punitive damages award amounting to between two and three percent of defendant’s net worth. As part of the rationale for affirming the award, the court noted that it was “far less than the 10 percent cap generally recognized by our courts. [Citation.]” Bankhead v. ArvinMeritor, Inc., supra, 205 Cal.App.4th 68, 80-81.
ArvinMeritor also relied for this point on Weeks, supra, 63 Cal.App.4th at pages 1166–1167, 74 Cal.Rptr.2d 510. In that case, the court affirmed an award that the trial judge had reduced to five percent of the defendant’s net worth. In so doing, the court noted that “[i]t has been recognized that punitive damages awards generally are not permitted to exceed 10 percent of the defendant’s net worth. [Citation.]” (Fn. omitted.)Bankhead v. ArvinMeritor, Inc., supra, 205 Cal.App.4th 68, 81.
In Michelson v. Hamada, supra, 29 Cal.App.4th at pages 1595–1596, 36Cal.Rptr.2d 343, the court vacated an award of punitive damages equal to 28 percent of the defendant’s net worth, and remanded for remittitur or retrial. In that context, the court noted that punitive damages “awards generally are not allowed to exceed 10 percent of the net worth of the defendant. [Citation.]” Similarly, in Storage Services v. Oosterbaan (1989) 214 Cal.App.3d 498, 514–516, 262 Cal.Rptr. 689, in reversing an award amounting to 33 percent of the defendant’s net worth, the court indicated that “punitive damage awards are generally not allowed to exceed 10 percent of the defendant’s net worth.” Id. at 81.
In Seeley v. Seymour (1987) 190 Cal.App.3d 844, 237 Cal.Rptr. 282, which arose from the defendant’s “unethical business tactics,” the court vacated as excessive an award of $2.66 million in punitive damages, which was equal to 13.3 times the compensatory damages, and remanded for a new trial on both compensatory and punitive damages. While expressly declining to compare the punitive damages to the defendant’s net worth, the court remarked in dictum that “awards totalling more than 10 percent of a defendant’s net worth have been disfavored by our courts….” Id. at pp. 868–869, 237 Cal.Rptr. 282. Id. at 81.
35% is too much
In Burnett v. National Enquirer, Inc. (1983) 144 Cal.App.3d 991, 193 Cal.Rptr. 206, a defamation case, the court held that an award of $1.3 million in punitive damages, which the trial court had reduced to $750,000, was still excessive, inasmuch as it amounted to 35 percent of the defendant’s $2.6 million net worth. The court ordered a new trial unless the plaintiff accepted a reduction to $150,000. Id. at pp. 997, 1012, 1018–1019, 193 Cal.Rptr. 206. This figure was three times the compensatory damages, and fell between five and six percent of the defendant’s net worth, but the court did not rely on either of these facts. Indeed, the court did not articulate any rationale for the choice of the $150,000 figure, and made no reference to any set limitation on punitive damages as a percentage of net worth. Id. at 81.
In Goshgarian v. George (1984) 161 Cal.App.3d 1214, 208 Cal.Rptr. 321, the court noted that “punitive damage awards exceeding 10 percent of a defendant’s net worth have generally been disfavored by the appellate courts” Id. at p. 1228, 208 Cal.Rptr. 321, (italics omitted), and on that basis, concluded that a punitive damage award amounting to approximately 10.7 percent of the defendant’s net worth was not unduly disproportionate to his wealth. Id. at pp. 1227–1229, 208 Cal.Rptr. 321. The court did hold the amount of punitives awarded was too large, but only because the defendant’s conduct in draining his swimming pool across his neighbors’ property was not sufficiently reprehensible to support such a large award. Id. at pp. 1229–1230, 208 Cal.Rptr. 321.Bankhead v. ArvinMeritor, Inc., supra, 205 Cal.App.4th 68, 82.
[sws_pullquote_right]Net worth alone is an untrustworthy standard, because it is so easily manipulated. [/sws_pullquote_right]
In Little v. Stuyvesant Life Ins. Co. (1977) 67 Cal.App.3d 451, 469–470, 136 Cal.Rptr. 653, the court held that a punitive damages award of $2.5 million, which was more than 15 percent of the defendant’s net worth, and 14 times the compensatory damages, was excessive as a matter of law. It ordered a new trial unless the plaintiff agreed to reduce the award to the amount of punitive damages originally demanded in her complaint, which was $250,000. Id. at 82.
In Merlo v. Standard Life & Acc. Ins. Co. (1976) 59 Cal.App.3d 5, 18, 130 Cal.Rptr. 416, the court reversed the award of punitive damages on a number of grounds, including that the amount of the award was almost one-third of the defendant’s net worth, as shown by the uncontradicted evidence. It remanded for a retrial on liability for punitive damages, as well as the amount. In neither of these cases did the court make any mention of any fixed limitation on punitive damages as a percentage of the defendant’s net worth. Id. at 82.
ArvinMeritor argued these cases establish, as a matter of law, that punitive damages may not exceed 10 percent of the defendant’s net worth, which represents a “cap” on allowable punitive damage awards. However, as shown by the court’s summaries in the preceding paragraphs, none of the cited cases actually held that punitive damages exceeding 10 percent of the defendant’s net worth are per se impermissible. Moreover, these cases cannot be read as requiring punitive damages to be measured only against the defendant’s net worth despite undisputed expert testimony that the defendant’s net worth is not an accurate measure of its wealth. Id. at 82.
Here, the jury was entitled to credit Johnson’s uncontroverted testimony that ArvinMeritor was far wealthier than its stated net worth would indicate, and that net worth alone is an untrustworthy standard, because it is so easily manipulated. Johnson’s caveat about the perils of relying solely on a net worth valuation standard echoed the same concerns expressed by the courts in the relatively more recent Zaxis, Rufo, Lara, and Devlin cases. Zaxis, supra, 89 Cal.App.4th at p. 582, 107 Cal.Rptr.2d 308; Rufo, supra, 86 Cal.App.4th at p. 621, 103 Cal.Rptr.2d 492; Lara,supra, 13 Cal.App.4th at pp. 1064–1065 & fn. 3, 16 Cal.Rptr.2d 811; Devlin, supra, 155 Cal.App.3d at pp. 391–392, 202 Cal.Rptr. 204. Thus, (the court) rejected the argument that 10 percent of net worth constitutes a ceiling above which juries may not go in setting the amount of punitive damages. Id. at 82-83.
[sws_pullquote_right] So the message is line your forensic expert up early with the necessary tools to rebut these kinds of arguments well before trial ever begins. [/sws_pullquote_right]
The issue before (the court) on review is not whether the award exceeds some specified percentage of the company’s net worth. Rather, it is whether the trial court abused its discretion in determining that the amount of punitive damages awarded by the jury was not the result of passion or prejudice. Id. at 83.
(The court’s) task simply is to determine whether, “[c]onsidering all the factors, the punitive damages award, ‘in light of the defendant’s wealth and the gravity of the particular act,’ … exceed[s] ‘the level necessary to properly punish and deter.’ [Citation.]” Rufo, supra, 86 Cal.App.4th at p. 625, 103 Cal.Rptr.2d 492. Id. at 83.
The size of the jury’s punitive damage verdict, and the trial judge’s denial of ArvinMeritor’s motions for judgment notwithstanding the verdict and for new trial, imply that both the jury and the trial judge accepted Johnson’s assessment as to ArvinMeritor’s ability to pay the $4.5 million punitive damages award. This implied factual finding is fully supported by the evidence. Id.
As already noted, in 2010, ArvinMeritor earned a cash flow profit of $211 million, and reported a net profit of $12 million. The 2010 compensation of its CEO was $7.6 million. Moreover, while the company had a negative net worth of $1.023 billion, it was able to borrow $245 million in 2010, and had $343 million in cash or the equivalent at its disposal as of the end of the year. Id.
The jury’s punitive damages award of $4.5 million amounted to 37.5 percent of ArvinMeritor’s net profit for 2010. While this is hardly a slap on the wrist, $4.5 million is only a small percentage—about 1.3 percent—of ArvinMeritor’s immediately available funds as of the end of 2010. It is significantly less than what ArvinMeritor paid its CEO that year, and less than one-fourth of the amount ArvinMeritor had promised to pay its CEO if he were fired without cause ($24.5 million) or replaced if the company were sold ($26.9 million). Moreover, Johnson’s testimony that the company was financially sound was uncontroverted, and ArvinMeritor chose not to introduce evidence tending to show that it would be financially destroyed by an award of $4.5 million in punitive damages. Id.
At footnote 9, the Court of Appeal stated:
[sws_blockquote_endquote align="left" cite="" quotestyle="style01"]At oral argument, ArvinMeritor’s counsel warned that affirming the punitive damages award in this case could lead to plant closures, layoffs, and other dire consequences. Nothing in the record supports these speculative contentions. ArvinMeritor also argues that it should not be faulted for its failure to controvert Johnson’s testimony about its financial condition, citing Adams, supra, 54 Cal.3d 105, 284 Cal.Rptr. 318, 813 P.2d 1348. In that case, the Supreme Court opined that “[i]t is inherently prejudicial to require a defendant to introduce evidence of personal finances” Id. at p. 120, 284 Cal.Rptr. 318, 813 P.2d 1348, citing a treatise advising defense counsel in insurance bad faith cases to ” ‘be careful about presenting “mitigating” evidence as to [the defendant's] financial condition,’ ” lest the jury ” ‘regard it as a tacit admission that some award of punitive damages is appropriate.’ ” Id. at p. 121, 284 Cal.Rptr. 318, 813 P.2d 1348. Adams did not hold, however, that a defendant facing a punitive damages claim cannot or should not present evidence to controvert the plaintiff’s factual showing regarding the defendant’s financial condition. It held only that plaintiffs who seek punitive damages have the burden of presenting evidence, as well as the burden of proof, regarding the defendant’s finances. See Id. at pp. 119–123, 284 Cal.Rptr. 318, 813 P.2d 1348. Id. at 83.[/sws_blockquote_endquote]
Under these circumstances, (the Court of Appeal) concluded that they could not “say that the jury’s punitive damages award, though large, is so disproportionate to ArvinMeritor’s ability to pay as to lead ineluctably to the conclusion that the award resulted from passion or prejudice.” Rather, it stated “the jury was justified by the evidence in concluding that an award of that magnitude was necessary and appropriate in order to punish ArvinMeritor for its contribution to causing the disease that took Bankhead’s life, and to deter ArvinMeritor and other manufacturers from failing to take every available precaution to mitigate workers’ exposure to life-threatening toxic substances.” Id. at 84.
So the message is line your forensic expert up early with the necessary tools to rebut these kinds of arguments well before trial ever begins. The case also has a great discussion of constitutionally permissible ratios.
Solange E. Ritchie, an attorney with the Law Offices of Steven R. Young in Costa Mesa, CA, specializes in business litigation, personal injury, insurance, real estate, intellectual property, high technology law (including patent litigation).