2005-8

Punitive Damages Award Against a Corporation For Racial Discrimination Exceeds Constitutional Limits

The Ninth Circuit Court of Appeals, in Bains v. ARCO Products Co., 2005 Daily Journal, DJDAR 4463 (April 20, 2005), has held that a punitive damages award equivalent to 100 times the compensatory damage award was excessive.

Paul, Gary and Deep Bains are three brothers doing business as Flying B. Flying B contracted with ARCO Products Co. to haul fuel. The Bains and their employees were subjected to repeated instances of racial discrimination throughout the performance of their contract with ARCO. Specifically, the Bains brothers and their drivers had to endure a considerable measure of abuse from Bill Davis, the lead man at ARCO's Seattle terminal where the drivers dropped off their fuel. Davis' rudeness included his ethnic animus against Sikhs and routine derogatory comments about their turbans and long beards. After the Bains brothers complained to ARCO managers, ARCO terminated Flying B, without giving a reason and without notice, not even the thirty-day minimum notice required by their contract. Thereafter, Flying B sued ARCO. The jury delivered a special verdict, finding that ARCO breached Flying B's contract, and awarding $50,000 in compensatory damages for the breach. The verdict also established that ARCO had discriminated against Flying B on account of race, in violation of 42 U.S.C. ?1981, but that actual damages to the corporation on account of this discrimination were nominal and therefore awarded only one dollar in compensatory damages on the ?1981 claim. In addition, the jury awarded five million dollars in punitive damages for the racial discrimination claim. ARCO moved for judgment as a matter of law or a new trial, or alternatively to set aside or remit the punitive damages, but the district court denied the motions. ARCO appealed, challenging, in part, the punitive damages award.

Specifically, ARCO challenged the sufficiency of the evidence supporting the punitive damages award and argued that the $5 million in punitive damages was excessive in light of BMW of North America v. Gore, 517 U.S. 599 (1996) and In re Exxon Valdez, 270 F.3d 1215 (9th Cir. 2001).

The BMW Factors:

The Court began its analysis by reiterating the three guideposts articulated in BMW, for determining the constitutionality of a punitive damages award, which are: (1) the degree of reprehensibility; (2) the disparity between the harm suffered and the punitive damages award; and (3) the difference between this remedy and the civil penalties authorized or imposed in comparable cases.

(1) Degree of Reprehensibility

As to the first BMW factor ? the degree of reprehensibility ? the Ninth Circuit noted that in this case, there was no threat of physical harm, which reduces reprehensibility. However, the Ninth Circuit concluded that, the conduct was not an isolated incident, the target was highly vulnerable financially, and the harm resulted from intentional malicious conduct. As such, the Court noted that Exxon Valdez held that "reprehensibility should be discounted if defendants act promptly and comprehensively to ameliorate any harm they cause in order to encourage such socially beneficial behavior." However, here, given ARCO's clear failure to remedy or even address the discriminatory effects of its employee's conduct, the Ninth Circuit held that "the jury could properly have concluded that punitive damages were necessary to prevent such discrimination from occurring in the future."

(2) Disparity Between the Harm Suffered and the Punitive Damages Award

In analyzing the second factor to determine the correct amount of punitive damages, the Court noted that the jury could properly consider not only the one dollar in nominal damages awarded for discrimination under ?1981, but also the $50,000 in compensatory damages awarded for breach of contract, because here, the conduct was intertwined. Thus, the Court accepted $50,000 as the "harm suffered."

As such, the Court pointed to the rule articulated in the Supreme Court case of State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003) which states 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 further held that the rare exception to this rule might be a case where a particular egregious act has resulted in only a small amount of economic damages. However, the Ninth Circuit stated that here, this is not a small amount case because the economic damages were substantial ? $50,000. Therefore, the controlling Supreme Court authority implies a punitive damages ceiling in this case of, at most, $400,000 (9 times the compensatory damages) not anywhere near the $5,000,000 (100 times the compensatory damages) that was awarded by the jury.

(3) Difference Between the Amount of Punitive Damages Awarded and the Civil Penalties Authorized or Imposed in Comparable Cases

The Ninth Circuit went on to state that it need not rely solely on the ratio explained above to support its finding, because the third BMW guidepost provides another measure that restrains the permissible amount. In its prior decisions, the Court noted that the $300,000 statutory limitation on punitive damages imposed in Title VII cases was an appropriate benchmark for reviewing ?1981 damage awards, even though the statute did not apply to ?1981 cases.

Flying B argued however, that the huge corporate assets of ARCO justify a higher award than might be justified for a defendant less able to pay. The Ninth Circuit explained that a punitive damages award is supposed to "sting" so as to deter a defendant's reprehensible conduct, and juries have traditionally been permitted to consider a defendant's assets in determining the award that will carry the right degree of sting ? but there are limits. Specifically, the wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award and cannot make up for the failure of other factors, such a reprehensibility, to constrain significantly an award that purports to punish a defendant's conduct.

Applying these principles, the Ninth Circuit classified this case as one "of highly reprehensible conduct, though not threatening to life or limb, that caused economic harm to a corporation." Therefore, because the jury found $50,000 of actual harm, and this is not the "rare case" for which State Farm leaves room, the ratio approach suggests that punitive damages could not, consistent with due process, exceed $450,000. In addition, comparing the award to the civil penalty authorized in Title VII for comparable harm suggests that Congress regards $300,000 as the highest possible appropriate amount in somewhat comparable cases. Consequently, the Ninth Circuit vacated the punitive damages award and remanded to the District Court to reduce the amount to a figure somewhere between $300,000 and $450,000.

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Uncompensated Volunteer was Not an "Employee" of a Public Employer for Purposes of Imposition of Liability under the FEHA.

The California Court of Appeal has held that an uncompensated volunteer for the Town of Ross ("Town") and not an "employee" under the FEHA. Mendoza v. Town of Ross, 2005 Daily Journal DJDAR 4451 (April 20, 2005).

Mendoza began working for the Town in January 1996 as a volunteer Community Service Officer ("CSO"). He was born with cerebral palsy resulting in quadriplegia, and he uses a wheelchair. However, Mendoza was assigned to work at a grammar school, assisting in traffic duties, crime prevention and neighborhood crime watch programs. After a probationary period, Mendoza was sworn in as a CSO in 1999 and was provided a uniform and a badge, bearing his name and the words "Community Service Officer ? Ross Police." He also received a police identification card with the word "police" appearing across the top and also reading: "This is to certify that Peter Mendoza is a duly appointed Community Service Officer." Mendoza had a regular work schedule, worked on holidays and took two weeks vacation each year. His supervisors found his work satisfactory and they even sought a grant to create a paid position for him.

In June, 2001 Mendoza's position as a CSO was terminated. Thereafter, Mendoza filed this lawsuit alleging the following six causes of action: (1) wrongful termination in violation of public policy (FEHA disability discrimination); (2) disability and/or medical condition discrimination in violation of the FEHA; (3) conspiracy; (4) intentional infliction of emotional distress; (5) negligent infliction of emotional distress; and (6) intentional interference with prospective economic advantage. Underlying all of these causes of action was the allegation that the Town refused to accommodate Mendoza's recognized disability and terminated his employment based solely on this disability.

The Town demurred to each cause of action on a variety of grounds. The trial court sustained the demurrer without leave to amend. On appeal, Mendoza only attacks the order on demurrer dismissing his first two causes of action against the Town. Specifically, Mendoza relies on the public policy articulated in the FEHA to support his first cause of action and further alleges in his second cause of action that the Town violated the FEHA by refusing to reasonably accommodate his disability, by failing to provide him reasonable access to the areas he was required to patrol, and by subjecting him to an adverse employment action because of his disability.

On appeal, there was no dispute that the key issue was whether Mendoza was an "employee" of the Town, such that he would be protected from wrongful termination and employment discrimination. The Court began its analysis by stating that the Town easily falls within the statutory definition of "employer" as defined by section 12926 (employer includes "the state or any political or civil subdivision of the state and cities...."). However, the Court went on to note that Mendoza cannot be so easily encompassed within the FEHA's statutory definition of "employee."

FEHA's Definition of "Employee"

The Court first looked to the statutory definition of "employee" found at section 12926(c) of the FEHA, noting that it was not very helpful to the analysis because it does not actually define who is an employee, but rather merely excludes persons employed by close relatives and those "employed" by nonprofit sheltered workshops and rehabilitation facilities. Because the FEHA definition was not particularly helpful in determining under what circumstances one may be considered to be an employee, the Court next looked at the definition of "employee" contained in the regulations enacted by the Department of Fair Employment and Housing ("DFEH"). The DFEH defines employees as "any individual under the direction and control of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written." (Cal. Code Regs., tit. 2, ? 7286.5(b).)

As such, the Court noted that on its face, the FEHA confers employee status on those individuals who have been appointed, who are hired under express or implied contract, or who serve as apprentices. Mendoza argued that he met this definition because he was "appointed" to his volunteer position. As evidence of this, Mendoza relied on his police identification card, which states: "This is to certify that Peter Mendoza is a duly appointed Community Service Officer." However, the Court stated that regardless of the wording that appears on Mendoza's card, the controlling local ordinance at issue vests the town council with the exclusive authority to make appointments to employment. Specifically, section 3.5.1 of the Town's Personnel Rules provides: "Appointment to full-time regular, part-time regular, or temporary positions shall be made by the Town Council with the recommendation of the department heads." Thus, the town council has exclusive authority to appoint individuals to employment positions with the Town, albeit upon the advice of city department heads.

However, Mendoza's complaint did not contain any allegation that such an appointment was made in his case, nor did he proffer, in response to the Town's request for judicial notice, that he was appointed to this CSO position in accordance with Rule 3.5.1. Therefore, the Court determined that since the Town's appointment process was not initiated, Mendoza was not "appointed," and does not fall under the FEHA employee category as an appointee.

Alternatively, Mendoza attempted to acquire employee status pursuant to an implied contract of employment or one created by estoppel. However, the Court noted that generally, terms of public employment are governed by statute, not contract and no person has a contractual right to enter into or to continue in public employment except in accordance with express terms and conditions fixed by law. Therefore, the Court went on to explain that, "as a matter of law, in order for Mendoza to allege any type of employment-based action...Mendoza must sufficiently allege that he was employed or appointed in accordance with the applicable statute or ordinance." Therefore, because Town Rule 3.5.1 is the operative legislative enactment, and it required that Mendoza be appointed to his position by action of the Ross Town Council, a process Mendoza essentially concedes did not take place here, he is not a "employee" of the Town.

The Court also noted that its holding is in line with Shepard v. Loyola Marymount Univ., 102 Cal.App.4th 837 (2002). In Shepard, the plaintiff was a student who was removed from a university's women's basketball team and her athletic scholarship terminated. The trial court granted the defendants' motion for summary judgment, and the appellate court upheld, finding no evidence that the FEHA applied because Shepard was not an employee of the university. The appellate court rejected Shepard's claim that her status as a school athlete compensated by scholarship made her an"employee" for purposes of the FEHA. The Shepard Court also concluded that since student athletes are excluded from the definition of employee for workers' compensation coverage, allowing them coverage for discrimination under the FEHA would be an absurd result.

Workers' Compensation Definition of Employee

Similarly, in the present case, Labor Code section 3352 excludes public agency volunteers from workers' compensation coverage. Thus, this Court applied the rationale in Shepard to conclude that "it would be incongruous to determine that Mendoza is an employee under the FEHA, but not an employee for workers' compensation purposes."

Federal Law Definition of Employee

Lastly, the Court also looked to federal law to support its finding that Mendoza was not an employee, covered by the FEHA. Under Title VII, "employee" is defined as an "individual employed by an employer." (42 U.S.C. ? 2000e(f).) The first prong of the Title VII test requires an individual to prove that he or she was hired by the putative employer. Thus, to satisfy the hiring prong, a purported employee must establish the existence of remuneration, in some form, in exchange for work. However, even substantial indirect compensation can satisfy the threshold requirement of remuneration for purposes of employee status under Title VII. If not direct salary, substantial benefits which are not merely incidental to the activity performed, such as health insurance, vacation or sick pay, are indicia of employment status. Applying this logic, the Court pointed to Peitras v. Board of Fire Comm'rs of Farmington, 180 F.3d 468 (2nd Cir. 1999) where volunteer firefighters were entitled to employee status, in part, based on their receipt of significant benefits, such as disability pensions, survivors' benefits, group life insurance, and scholarships for dependent children of deceased firefighters.

As such, this Court concluded that there is nothing within the FEHA or its legislative history evincing an intent to depart from the requirement that compensation of some sort is indispensable to the formation of an employment relationship. With that said, Mendoza conceded that his position was unpaid, and did not allege that he received any other type of financial benefit, such as health insurance, or retirement benefits. Therefore, the Court held that Mendoza's service as a CSO was not the result of an appointment, provided to him pursuant to contract, nor was it an apprenticeship (1). Furthermore, even if he could meet one of those definitional standards, the Court stated that the absence of remuneration prevents him from attaining "employee" status under the FEHA.

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Class Action Fairness Act of 2005 Does Not Apply Because the Case "Commenced" in 2003 When Filed, Not in 2005, When Removed to Federal Court

The Tenth Circuit of Appeals had held that an overtime class action lawsuit against Office Depot "commenced" in 2003 when the complaint was filed, and not when the case was removed to federal court in 2005, and thus the Class Action Fairness Act does not apply. Pritchett v. Office Deport, Inc., 2005 Daily Labor Report DLR, E-1 (April 13, 2005)

On April 2, 2003 Plaintiff-Appellee Romia Pritchett filed a class action complaint against Defendant-Appellant Office Depot in Colorado state court (Colorado District Court for the County of Denver). Plaintiff alleged that Office Depot violated state law by failing to pay its employees compensation for overtime hours worked. On June 21, 2004 the state court certified a class, consisting of all Store Managers employed by Office Depot in the State of Colorado from April 2, 2000. Trial was initially set for March 14, 2005.

On February 18, 2005, approximately one month before the trial date, Congress enacted the Class Action Fairness Act (the "Act"). One of the most significant features of the new law was that it expanded the subject matter jurisdiction of federal courts over class actions in which at least one plaintiff class member was diverse in citizenship from the defendant and where the amount in controversy exceeded $5 million. If such an action arose in state court, Section 5 of the Act permitted removal to federal court in accordance with 28 U.S.C. ?1446.

As such, Office Depot removed the action on March 1, 2005, just two weeks before trial was scheduled to begin, pursuant to the newly enacted provisions of the Act. On March 7, 2005 the plaintiff moved to remand the proceedings back to state court pursuant to 28 U.S.C. ?1447, arguing that the Act did not apply to actions already pending in state courts. The district court agreed and remanded the case back to state court on March 9, 2005. On March 10, 2005, just four days before the trial date, Defendant requested a stay in proceedings to appeal the district court's remand order. The state court denied the request and instead delayed trial for one week, or until March 21, 2005.

Thereafter, on March 14, 2005, Defendant filed a petition for leave to appeal the district court's remand order with this Court and also filed a motion for an emergency stay of the state court proceedings pending appeal. On March 18, 2005 this Court denied the petition for leave to appeal for lack of subject matter jurisdiction in an order and indicated that further elaboration would follow. That order also dismissed the motion for an emergency stay as moot. The following opinion by the Tenth Circuit seeks to explain the reasoning in its earlier order.

As a threshold matter, the Tenth Circuit explained that Defendant filed its petition for leave to appeal under 28 U.S.C. ?1453(c), which was recently enacted as part of the Act. Section 1453(c) is a provision that gives the U.S. courts of appeal discretionary jurisdiction to consider appeals of remand orders in certain class action cases specified in the Act, provided that the appeal is taken with seven days of the remand order. 28 U.S.C. ? 1453(c)(1). If a court of appeal accepts an appeal under subsection (c)(1),the appellate court is given sixty additional days during which to render its judgment. 28 U.S.C. ?1453(c)(2). In the present case, the appeal was filed well within the 7-day time limit and therefore jurisdiction vested in the Tenth Circuit at that time. Although the Tenth Circuit ultimately concluded that it did not have jurisdiction over this appeal predicated on the Act because this action was commenced prior to the effective date of the Act, the Tenth Circuit pointed out that federal courts always have jurisdiction to consider their own jurisdiction. Therefore, the Tenth Circuit explained that it had jurisdiction in the instant case to consider its jurisdiction to grant the relief requested.

With that said, the Court began its analysis as to whether the Act's provisions were applicable in the present case. Section 9 of the Act provides: "The amendments of this Act shall apply to any civil action commenced on or after the date of enactment of this Act." The date of enactment of the Act is February 18, 2005. The class action began on April 2, 2003 when Plaintiff filed his class action complaint. Defendant removed the case to federal court on March 1, 2005. Therefore, the Court noted that the applicability of the Act turns on whether the civil action was "commenced" on April 2, 2003 (the state court filing date) or on March 1, 2005 (the federal court removal date).

Defendant argued that when a pre-existing state action is removed to federal court, it is commenced in federal court as of the date of removal. Plaintiff, on the other hand, argued that the class action commenced just once, when it was initially filed in state court. In agreeing with the Plaintiff's reading of the Act, The Tenth Circuit first looked to the traditional rules of statutory construction noting that "traditionally, a cause of action is commenced when it is first brought in a appropriate court, which here was when it was brought in state court. See Fed. R. Civ. P. 3 (A civil action is commenced by filing a complaint with the court.)." To further support the Plaintiff's reading of the word "commenced" the Court explained that removal statutes should be narrowly construed and generally courts apply a presumption against the retroactivity of a statute absent a clear congressional intent to the contrary.

In addition, the legislative history of the Act supported the conclusion reached by the Tenth Circuit. Specifically, the Court noted that the progression language of the Act as it moved through Congress, is particularly instructive. When the Act was originally introduced in the House, the removal provision applied both to cases commenced on or after the enactment date and to cases in which a class certification order is entered on or after the enactment date. In contrast, neither the Senate version nor the final version of the Act provided for removal of an action certified on or after the enactment date. The final version provided only for application of the Act to civil actions commenced on or after the date of the Act.

Lastly, the Court noted that public policy considerations also support their finding that "commenced" refers to the initial filing date and not the removal date. Specifically, permitting the Act to apply to currently pending state court actions would be extraordinarily disruptive of many State court proceedings, allowing cases to be plucked on the eve of trial, thereby disrupting the federal-state comity and the settled expectations of the litigants. Additionally, the Court also noted that permitting removal in the present case would be at odds with the purpose of the Act to curtail jurisdictional gaming and forum-shopping.

Consequently, the district court's remand order was affirmed, as the Tenth Circuit concluded that removal to federal court does not "commence" an action for purposes of the Class Action Fairness Act of 2005.

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1. The Court noted that Mendoza's long-term volunteer service as a CSO was clearly not that of an apprentice; and Mendoza did not contend otherwise.