United States: Federal District Court Upholds 13:1 Ratio Based On Defendant’s Wealth

Last Updated: January 21 2015
Article by Carl J. Summers

We have noticed a disturbing trend recently of courts upholding punitive damages awards that are high multiples of the compensatory damages.  One example is Mitri v. Walgreen Co., in which the U.S. District Court for the Eastern District of California upheld a punitive award that is thirteen times the substantial compensatory award based almost entirely on the fact that the defendant is a wealthy corporation.

In Mitri, a pharmacist alleged that he was terminated under false pretenses because he had reported Medicare fraud at his branch of the pharmacy.  The jury awarded him $88,000 for economic losses and imposed $1,155,000 in punitive damages.  Following trial, the district court vacated the punitive award, concluding that the individual who supervised Mitri's discharge was not a managing agent whose conduct could be charged to the corporation.

The Ninth Circuit reversed, holding that the evidence, viewed in the light most favorable to the plaintiff, supported a finding that the individual was a managing agent.  It accordingly remanded to the district court to consider whether the punitive damages were excessive.

On remand, the district court upheld the punitive award in its entirety.  Considering the reprehensibility factors identified in State Farm v. Campbell, the court held that the defendant's conduct was highly reprehensible even though the harm was economic and there was no risk to health or safety.

The court found high reprehensibility for four reasons.  First, the plaintiff, who depended on the defendant for his livelihood and whose employability was threatened by the termination, was financially vulnerable.  Second, even though there was no evidence of other retaliatory terminations, the court held that "the termination was not an isolated incident with respect to Mitri himself" because it involved several steps over the course of half a year.  Third, the court found that the pretextual nature of the termination made the conduct "intentional, deceitful, and malicious."  Finally, the court noted that "as an additional consideration, ... retaliation may be reprehensible conduct when an employee engages in protected activity" such as reporting Medicare fraud.

The Court's analysis of the reprehensibility guidepost strikes us as highly questionable.  While firing a whistleblower under false pretenses may satisfy the standard for imposing punitive damages under California law, characterizing it as highly reprehensible distorts the spectrum of reprehensible conduct by leaving no room at the top for plainly more egregious acts such as battery, death threats, or racial harassment.  If courts do not respect the range of conduct that might deserve punishment, and appropriately assess the reprehensibility of the conduct before them relative to other punishable acts, then the first guidepost serves little purpose.  Moreover, in analyzing State Farm's reprehensibility factors, the district court committed a number of common mistakes.

First, the "financial vulnerability" factor refers not to whether the plaintiff happens to be rich or poor or was harmed financially.  Instead, as seems clear from the Supreme Court's decision in BMW in which it first identified this factor, and as the Ninth Circuit recognized in the Exxon Valdez case, this factor acknowledges that conduct is more reprehensible when it targets someone because he or she is financially vulnerable and seeks to exploit that vulnerability.  There is no indication of targeting or exploitation in Mitri.

Second, the "repeated misconduct" factor does not refer to whether the conduct that harmed this plaintiff can be divided into multiple steps or whether it happened over a protracted period of time.  Instead, as many courts, including the California Supreme Court in Simon v. San Paolo U.S. Holding Co., have recognized, this factor deems conduct more reprehensible—and, more to the point, warranting greater deterrence—if the defendant is a recidivist that has engaged in the same misconduct before.  In Mitri, there was no evidence of other retaliatory terminations and this factor should have counted against a finding of high reprehensibility.

More troubling than its watering down of the reprehensibility guidepost, however, is the district court's application of the ratio guidepost.  Even if the conduct in this case were appropriately placed on the high end of the spectrum of reprehensible conduct, the court should not have approved a 13:1 ratio.  As the court acknowledged, the compensatory award of $88,000 is substantial.  Indeed, it is well above amounts that other courts have recognized to be sufficiently substantial to afford no basis for departing from the Supreme Court's presumption in favor of lower ratios.

Compare this case, for example, with Payne v. Jones, an excessive-force case in which the Second Circuit deemed a $60,000 compensatory award to be substantial and ordered a remittitur of a $300,000 punitive award to $100,000.  Although the Supreme Court has allowed that higher ratios may be appropriate when the harm is difficult to detect, that exception is likewise inapplicable here because the termination, though found to be pretextual, was done in the open.

Given that there was no reason for an upward departure, the district court should have followed the Supreme Court's guidance in State Farm that, in most cases, a ratio of 4:1 is "close to the line of constitutional impropriety" and "[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee."

Instead, the court approved a ratio of 13:1—well above the ratio of 9:1 that the Supreme Court has staked out as presumptively unconstitutional in all but the most extreme cases—based almost entirely on the defendant's wealth.  The court quoted Ninth Circuit precedent holding that punitive awards are "supposed to sting," observed that "Walgreens is a multi-billion dollar publicly traded corporation," and concluded that "[g]iven how large Walgreens is, it is debatable whether a $1.155 million award would be much of a sting."

As Andy Frey wrote in a previous post, punishing the defendant based on its wealth makes no sense for a number of reasons.  Among them, doing so fails to recognize that larger corporations engage in more transactions and thus will statistically be exposed to punitive liability more often than smaller corporations.  Imposing damages based on wealth in each case thus results in disproportionate aggregate punishment for large corporations.  For this and other reasons, we have argued that juries should not even be made aware of the defendant's finances in the run-of-the-mine case.

But the error is multiplied when courts that are supposed to be policing jury awards for improper influences instead defer to those influences as a justification for the award.  As the Supreme Court made clear in State Farm (a case involving a company of comparable size to Walgreens), the defendant's wealth cannot justify an otherwise unconstitutional punitive damages award.  Yet it is hard to interpret the district court's decision in Mitri as doing anything but that.

Tags: ratio, reprehensibility

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