Punitive Damages -- 2005



Simon v. San Paolo U.S. Holding Co.   (California Supreme Court)

Punitive damages

The California Supreme Court ruled 6/16/05 that a $1.7 million punitive damages award was unconstitutionally excessive when compared with the underlying compensatory damages award of $5,000 (the amount spent by the plaintiff to hire a lawyer). This issue arose in the context of a real estate transaction gone bad, and the jury awarded $5,000 for promissory fraud.

The central issue was whether the punitive damages should be based on the plaintiff’s actual damages or the $400,000 in profit he claims he lost when the deal fell through. Because that loss was not proven and damages were not awarded for it, the court refused to use it as a basis for calculating punitive damages. Using the $5,000 loss as the base number, the court reduced the punitive damages award to just $50,000, 10 times the actual loss. It held that the claim for lost profits was not caused by the fraudulent conduct at issue and that the plaintiff would not have received the property even if no fraudulent statements had been made. In an appropriate case, however, punitive damages may be based on harm that was likely to occur, even if it did not actually occur. The fraud in this case was a single instance, resulting in only a small financial loss. But the court took into consideration the financial condition (i.e., the size) of the defendant, so that the amount of the punitive damages could serve as a deterrent against further fraudulent conduct. It decided that $50,000 in punitive damages was the maximum that could be considered constitutional given all the facts and circumstances of this case.

The NAM, the California Chamber of Commerce, the American Chemistry Council, Unocal Corp. and the American International Group, Inc. had filed an amicus brief 10/13/04 supporting this result. Our brief argued that the lower court misapplied the Supreme Court’s recent guidance in the State Farm case, and ignored the state legislature when it failed to reasonably limit the punitive damages award. We also argued that the lower courts allowed punitive damages far in excess of comparable civil penalties under state law, a factor the U.S. Supreme Court has also required to be taken into account.