California Court Opinion Upholding Punitive Damages Against Manufacturer Exceeding Company's Net Worth A Warning to Defendants

Overview

A recently-published California Court of Appeal opinion should serve as a warning to defendants facing punitive damages. In Bankhead v. ArvinMeritor, Nos. A131587 and A132985, 2012 Cal.App. LEXIS 443, the court of appeal upheld a jury award of $4.5 million in punitive damages against a manufacturer defendant, roughly 2.4 times the amount of compensatory damages awarded, despite conclusive evidence that the amount exceeded the company's net worth. Relying heavily on an economist's testimony about other indicators of the company's financial health, the court rejected outright the theory that punitive damages may not exceed a company's net worth. 

The ArvinMeritor opinion opens the door for plaintiffs to submit a wide range of indicators of a defendant's financial condition in front of a jury, including executive pay. Defendants facing prayers for punitive damages must prepare for the admission of such evidence, and aggressively undermine a plaintiff's economist's opinions.

Background

ArvinMeritor is the successor-in-interest to a company which manufactured commercial truck brake shoes containing asbestos-containing parts. The Plaintiffs, a "parts man" at an automotive maintenance facility, and his wife sued a number of defendants, including ArvinMeritor. At a bifurcated trial, the jury found against all of the four remaining defendants on the issue of liability, allocating 15% of the fault to ArvinMeritor. The jury awarded Plaintiffs $1.47 million in economic damages and $2.5 million in non-economic damages. 

A separate trial was held on the issue of punitive damages. Notably, Plaintiffs' argument relied in large part on indicators presented by their economist about ArvinMeritor's financial condition from 2006 until 2010. ArvinMeritor declined to present its own expert to assess its financial condition, contradict the economist's testimony, or cast doubt on his conclusions. The jury awarded  Plaintiffs $4.5 million in punitive damages.

ArvinMeritor appealed, arguing that the damage award was excessive under existing standards, both in California and as articulated by the United States Supreme Court.

California Law: Negative Net Worth Defense Rejected by Court

The court's opinion, permitting broad discretion to jurors and trial courts to consider many different indicators of a company's financial condition, increases the importance of ensuring the defendant's expert economist properly undermines a plaintiff's proffered evidence on the defendant's financial condition.

Under California law, one of the factors a jury must consider in determining the amount of punitive damages to award, if any, is the "wealth" of the defendant. ArvinMeritor argued that, primarily due to its negative net worth, the jury could not as a matter of law award punitive damages. It cited case law suggesting that punitive damages exceeding 10% of a company's net worth was excessive, and should be reduced as a matter of law. It further argued that the jury improperly considered evidence introduced by the economist regarding financial indicators other than ArvinMeritor's net worth. Because ArvinMeritor had a negative net worth of approximately $1 billion, ArvinMeritor argued that any award of any punitive damages would be excessive.

The court of appeal roundly rejected this argument. Despite the fact ArvinMeritor had a staggering negative net worth of $1.023 billion, the court cited with approval a number of cases discussing how net worth is not a reliable indicator because it can be easily manipulated. It then found that the other indicators of ArvinMeritor's financial condition proved the company was financially sound: (1) cash flow profit of $211 million, (2) net flow profit of $12 million, (3) CEO compensation of $7.6 million, (4) its ability to borrow $245 million in one year, and (5) $343 million in cash on-hand. Finally, it pointed out with disapproval ArvinMeritor's decision to not introduce evidence which would undermine the testimony of Plaintiff's economist, or which could independently demonstrate how the $1.023 billion negative net worth tended to show that punitive damages would be excessive. 

The ArvinMeritor case, by explicitly disapproving of the negative net worth defense and implicitly approving alternative financial indicators—including executive pay—opens up the likelihood plaintiff-side economists will increasingly rely on varied financial data to support a punitive damages award. Furthermore, defendants facing the threat of punitive damage awards face a predicament: the introduction of "mitigating" evidence about the company's financial condition might be regarded by the jury as a tacit admission that some amount of punitive damages is appropriate. On the other hand, a defendant that fails to contradict the plaintiff's economist's record runs a risk of having the jury only hear evidence on its financial condition from the opposing party. Nevertheless, defendants must adequately prepare to attack a plaintiff economist's conclusions during the damages phase of trial, and must also ensure they can effectively present an economist of their own.

Federal Standards: Reprehensible Conduct Found by Court Supports 2.4 Multiplier for Punitive Damages 

ArvinMeritor also attacked the punitive damage award on the grounds that it violated the due process clause of the US Constitution. The court rejected this argument with ease, relying on factors that may be applied to most defendants in asbestos-related litigation. Specifically, the evidence demonstrated that by the 1960s, ArvinMeritor knew that workers exposed to asbestos dust were at risk of developing asbestos-related diseases. On two separate occasions in the 1970s, ArvinMeritor wrote letters to the manufacturers of component parts in its brake shoes complaining about the presence of asbestos dust in the component parts. Despite this knowledge, ArvinMeritor did not place any warnings on its products until the 1980s, did not expressly refer to cancer until 1987, and continued to sell asbestos-containing brakes until its inventory ran out in the 1990s. 

ArvinMeritor argued that its conduct was not reprehensible such as to make punitive damages available under standards articulated by the United States Supreme Court. The court found that argument meritless, pointing out a number of factors which supported a finding that ArvinMeritor—and most other "asbestos" defendants—engaged in "reprehensible" conduct. First, ArvinMeritor caused physical harm to the Plaintiff husband, contributing to his cancer. Next, ArvinMeritor's automotive employees could not avoid exposure without leaving their employment entirely. Further, its "prolonged failure to take adequate measures" to protect its employees who worked with asbestos-related products under its control amounted to malicious behavior.

That the jury only found it 15% at fault for the Plaintiff's exposure to asbestos was of no importance when considering punitive damages. Finally, evidence that ArvinMeritor in the 1980s eventually began to warn its employees about asbestos exposure did not make its conduct any less reprehensible for the period when it knew but failed to warn. Because United States Supreme Court case law supports a multiplier up to 16 times a compensatory damage award when the defendant engages in "extremely" reprehensible conduct, a 2.4 times multiplier was constitutionally permissible.

Asbestos defendants should take caution that the due process clause of the US Constitution may not provide much relief from a punitive damages award, particularly if there is admissible evidence of a "prolonged failure" to warn about the hazards of asbestos exposure.

Dean Pollack is a trial lawyer whose practice focuses on product liability and asbestos litigation. He can be reached at 510.835.6705 or dpollack@burnhambrown.com.  Mark Loper's practice focuses on general litigation, emphasizing product liability, environmental, insurance, trucking and employment.  He can be reached at 510.835.6711 or mloper@burnhambrown.com.