2006-5

California Court of Appeal Limits Punitive Damages on Sexual Harassment Verdict to 6-to-1 Ratio to Compensatory Damages.

In Gober v. Ralphs Grocery Co., 2006 DJDAR 2479 (Cal. App. Mar. 1, 2006)(1), the Fourth District Court of Appeal, Division One, reconsidered the constitutional limits of a punitive damage award in light of the California Supreme Court's decision in Simon v. San Paolo U.S. Holdings Co., Inc., 35 Cal.4th. 1159 (2005).

1. Underlying Facts and Procedural History

Six female employees of a Ralphs grocery store in Escondido sued Ralphs under the Fair Employment and Housing Act ("FEHA"), alleging gender-based harassment by the store director, Roger Misiolek. They alleged, among other things, that a Ralphs district manager had known about prior harassment of female employees by Misiolek at other stores, but nevertheless allowed him to become the store director in Escondido. Trial on the matter was bifurcated. In the liability phase of the trial, a jury found that Ralphs failed to take reasonable steps to prevent Misiolek's gender-based harassment and awarded the six plaintiffs compensatory damages in amounts ranging from $50,000 to $200,000. In a separate punitive damages phase of the trial, the jury awarded plaintiffs $3.3 million in punitive damages. Ralphs appealed this verdict, and the appellate court remanded the case for retrial only as to punitive damages.

After a second trial in which the evidence Ralphs was permitted to introduce was drastically limited, punitive damages of $5 million per plaintiff were awarded. This amounted to a punitive damages to compensatory damages ratio ranging from 25-to-1 up to 100-to-1 for individual plaintiffs, and a ratio of 54-to-1 overall. Ralphs moved for judgment notwithstanding the verdict ("JNOV") and for a new trial on grounds that the punitive damage awards were excessive. The court denied the motion for JNOV, but conditionally granted the motion for new trial as to any plaintiff who would not consent to accept a reduction of the punitive damage award to 15 times her compensatory damages. Two of the six plaintiffs, Gober and Swann, accepted this remittitur, while the other four (referred to as the "Finton Plaintiffs") refused to accept the reduction. The court issued a new trial order which vacated its prior judgment.

All parties appealed. The Finton Plaintiffs appealed the new trial order. Ralphs appealed the trial court's denial of its motion for JNOV. All plaintiffs appealed the trial court's denial of post-judgment interest. Ralphs filed an interpleader and deposited the stipulated awards to Gober and Swann with the court, pending appeal. In 2004, the Court of Appeal upheld the punitive damage award, but the state Supreme Court granted review and transferred the case back to the Court of Appeal to reconsider the matter in light of its decision in Simon.

2. Procedural Rulings

The Finton Plaintiffs argued that the trial court could not have granted Ralphs' motion for JNOV on the issue of excessive damages, because damages are a matter of fact which much be determined by the trier of fact, and not a matter of law to be decided by the trial court. The appellate court rejected this argument, pointing out that the jury had fixed the damages, and the question at bar was whether those damages are constitutionally excessive, which is a matter of law not fact. Thus, a constitutionally-reduced punitive damage award, which is based on law, is distinguishable from a remittitur, where a court reduces an award because it is unreasonable based on the facts of the case.

The Finton Plaintiffs also argued that, rather than challenging the damage award by appealing the denial of its motion for JNOV, Ralphs could and should have appealed the order for retrial, which set the refusal of any plaintiff to consent to a punitive damages award of 15 times compensatory damages as a condition to granting retrial. The Court of Appeal rejected this argument as well, pointing out that, under Code of Civil Procedure section 902, only an "aggrieved party" can appeal a new trial order, and a party is not "aggrieved" if a motion is granted in its favor.

Finally, the court rejected the Finton Plaintiffs' assertion that setting punitive damages based on the current record would be unfair because the trial court in the liability phase of the trial erroneously excluded evidence relevant to the reprehensibility of Ralphs' conduct ? specifically, additional evidence regarding Misiolek's misconduct prior to his transfer to Escondido and Ralphs' reaction to it. The court pointed out that the Finton Plaintiffs were assuming that introducing the new evidence in a retrial would result in punitive damages at ratios greater than the 25-to-1 to 100-to-1 the jury had already awarded. Under State Farm Mutual Auto Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003), a constitutionally permissible award of punitive damages would "almost never" exceed a 9 to 1 ratio, absent "extraordinary factors." The court held that such factors did not exist in this case.

3. Maximum Constitutionally Permissible Punitive Damage Award

To determine the maximum constitutionally permissible punitive damages, the court considered the three "guideposts" set out by the U.S. Supreme Court in State Farm and the California Supreme Court in Simon: (1) the degree of reprehensibility of defendant's conduct; (2) the disparity between punitive damages and the actual or potential harm suffered by plaintiffs; and (3) the disparity between the punitive damages awarded and the amount of statutory civil penalties which could be imposed for comparable conduct.

a. Reprehensibility

Reprehensibility is the single most important indicium of the reasonableness of a punitive damages award. In determining the degree of reprehensibility, five sub-factors are considered: (1) whether the harm was physical as opposed to economic; (2) whether the defendant's conduct evinced an indifference to or a reckless disregard for the health or safety of others; (3) whether the target of the conduct was financially vulnerable; (4) whether the conduct was "recidivistic" as opposed to an isolated incident; and (5) whether the harm was the result of intentional malice.

The jury had found that Ralphs had advance knowledge of Misiolek's unfitness to serve as a store director yet continued to employ him in conscious disregard of the rights of its employees. The harm that resulted from Ralphs' conduct was emotional harm which did not "threaten life and limb." Thus, Ralphs' conduct was not as reprehensible as the conduct of the defendant cigarette manufacturer in Broeken v. Philip Morris, 127 Cal. App. 4th 1640 (2005), which had marketed a dangerous product while taking advantage of consumers' false belief that "light" cigarettes were safer than regular cigarettes. In that case, the court had upheld a 9-to-1 punitive damages ratio.

In analyzing whether Ralphs' conduct was "recidivistic," the court noted that, although Ralphs' acted reprehensibly before Misiolek's transfer to the Escondido store, it immediately transferred him out after learning of his misconduct there. It also instituted additional sexual harassment training and zero-tolerance policies, thereby protecting the Finton Plaintiffs from future harm. The court compared this to the conduct of the defendant in BMW of North America v. Gore, 517 U.S. 559 (1996), where the defendant was held not recidivistic despite defrauding hundreds of purchasers by selling re-painted cars as new, because it had not known that its conduct was unlawful and it did not persist in that conduct after it had been adjudged unlawful.

The Finton Plaintiffs argued that the court should consider Ralphs endangerment of female employees at other stores when it transferred Misiolek out of Escondido. The court declined to do so. Citing State Farm, it held that "[i]n calculating punitive damages, courts cannot adjudicate the merits of other parties' hypothetical claims against a defendant under the guise of the reprehensibility analysis; rather, a defendant should be punished for the conduct that harmed the plaintiff."

Finally, as to the "malice" sub-factor, the court rejected the Finton Plaintiffs' argument that the jury's finding that Ralphs acted with "conscious disregard for the rights of its employees" established intentional malice, noting that this was not the same as a finding that Ralphs intended to cause injury. On consideration of all of these factors, the court held that Ralphs acted with "a modest degree of reprehensibility."

b. Ratio of Punitive Damages to Actual or Potential Harm

The court noted that, under State Farm, "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process" and cautioned that a 4-to-1 ratio "might be close to the line of constitutional impropriety." Although extraordinary factors, such as extreme reprehensibility, or unusually small, hard-to-detect or hard-to-measure compensatory damages may justify a higher ratio, those factors do not appear in this case, where the degree of reprehensibility was "modest" and compensatory damages for the Finton Plaintiffs ranged from $50,000 to $75,000.

c. Comparable Civil Penalties

Under FEHA, the combined total of actual damages and administrative fines awarded by the Fair Employment and Housing Commission cannot exceed $150,000 for each plaintiff, or a total of $600,000 for the four Finton Plaintiffs. (Cal. Gov't Code ? 12970(a)(3).) Since their compensatory damages totaled $250,000, any additional administrative fines could not exceed $350,000, which amounts to 1.4 times actual damages. The court rejected the Finton Plaintiffs' argument that potential fines based on Miliosek's harassment of other women should be considered, again citing to State Farm.

On consideration of all of these factors, the court held that a punitive damages ratio of 6-to-1 is "sufficient to punish Ralphs and deter it and others from similar conduct in the future." However, the court took pains to stress the narrowness of its decision and limit it to the facts of this case, stating that the 6-to-1 ratio will not always be an appropriate constitutional maximum, even under similar facts.

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Agent of Corporate Employer Cannot Be Held Individually Liable Under California Law for Unpaid Wages.

In Jones v. Gregory, 2006 DJDAR 3062 (Cal. App. Mar. 14, 2006) (2), the Fourth District Court of Appeal, Division Three, reversed a judgment holding a corporate CEO jointly and severally liable for unpaid wages, along with his bankrupt corporation.

William Gregory was the CEO of Science Adventures ("SA"), an operator of summer camps for elementary school children. Gregory was the company's founder and maintained complete operational control of the day-to-day business of the company, including setting wage rates. He was the only individual authorized to sign checks for the company. In 1999, SA experienced cash flow problems and could not meet payroll. By the end of that summer, unpaid wages were owed to approximately 700 instructors and administrators nationwide. In August 2000, the Division of Labor Standards Enforcement ("DLSE") filed suit against Gregory and SA to recover unpaid wages, unpaid vacation time, unreimbursed business expenses, waiting time penalties and interest for 45 former SA employees. SA filed for bankruptcy in October 2000. The matter went to trial and the trial court entered judgment in favor of 14 employees and against Gregory and SA, jointly and severally, for about $100,000. In finding Gregory individually liable, the trial court cited to federal case law which holds that individual corporate officers who had "operational control" of a corporate may be held individually liable for unpaid wages under the federal Fair Labor Standards Act ("FLSA"). The trial court expressly declined to rule on whether Gregory was SA's "alter ego."

The Court of Appeal reversed, holding that Gregory could not be held individually liable pursuant to the Supreme Court's recent decision in Reynolds v. Bement, 36 Cal. 4th 1075 (2005). Reynolds held that, regardless of the broad definition of "employer" found in the IWC wage orders (which includes "any person ... who directly or indirectly ... exercises control over the wages, hours and working conditions of any person"), these orders cannot be used to imposed individual liability on corporate agents where there is no clearly expressed legislative intent to do so. In the absence of such intent, common law principles shielding corporate agents from personal liability control. The court held that none of the statutes SA was found to have violated (Cal. Labor Code ?? 1194.5, 201-203, 227.3, 227, 2802) contained any indication of legislative intent to impose individual liability on corporate officers. The court also rejected DLSE's attempts to distinguish Reynolds on grounds that the plaintiff there was a private individual, not the DLSE. The DLSE argued that the broader wage order definition of "employer" should be used in this case because Labor Code section 98.3 empowers DLSE to prosecute actions for wage order violations. The court disagreed, holding that the enforcement schemed set out in sections 98 through 98.8 pertain only to administrative actions (so-called "Berman hearings").

Although the court reversed judgment for the plaintiffs, it remanded the matter to the trial court for a determination of whether Reynolds was plaintiffs' employer under the common law definition, including consideration of whether he was the company's "alter ego." In a footnote, the court also noted that DLSE had not included a cause of action for violation of Business and Professions Code section 17200, and that it therefore would express no opinion as to whether an individual corporate officer could be sued under that statute. Likewise, the court noted that this case arose before the effective date of Labor Code section 558, which expressly provides for the imposition of civil penalties for violation of overtime or rest break provisions by any "person acting on behalf of an employer," and before the Private Attorney General Act (Cal. Labor Code ? 2699), which would allow employees to recover such penalties through a civil suit.

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Ninth Circuit Affirms Summary Judgment for Employer on Title VII Retaliation Claim, but Reverses as to Race Discrimination Claim and Questions Whether Plaintiffs Need "Specific and Substantial" Evidence to Overcome Summary Judgment.

In Cornwell v. Electra Central Credit Union, 2005 DJDAR 2500 (9th Cir. Mar. 1, 2006)(3), the court overturned summary judgment for the employer in a race discrimination case alleging discriminatory demotion. However, the court affirmed summary judgment as to the plaintiff's claims that he was later terminated on the basis of race, and that he was demoted and terminated in retaliation for engaging in protected activity under Title VII of the federal Civil Rights Act of 1964.

Raymond Cornwell, who is African-American, was a Vice President and Chief Operating Officer for Electra, an Oregon-based credit union. Cornwell was in charge of both branch operations and lending operations. He was the company's only African-American executive. In September 2001, Electra hired a new CEO, Jim Sharp, who is Caucasian. In the early days of Sharp's tenure, he excluded Cornwell from meetings that were within the scope of Cornwell's responsibilities. At a November 2001 meeting at Sharp's home, Sharp made comments about women which Cornwell considered "close to sexual harassment." A few days later, Cornwell told the V.P. of Human Resources, Bonnie Cottrell, about Sharp's comments. He did not explicitly ask Cottrell to investigate the matter, and she did not do so.

In late November or December 2001, Sharp informed managers that he intended to make organizational changes. He discussed the pending changes with some managers, but not Cornwell. Some weeks later, Cornwell asked Sharp what organizational changes he was planning. Sharp told him that the Chief Operating Officer position would be eliminated and a second V.P. position would be created. The new position, V.P. of Sales and Branch Operations, was to be filled by Virginia Hall, who is Caucasian. Cornwell's title would be changed to V.P. of Lending and he was to focus on lending operations. Sharp testified that he transferred branch operations to Hall so that Cornwell could focus on correcting problems with Electra's lending business, including a four percent decrease in the value of Electra's loan portfolio. He also testified that he had not told Cornwell about his reorganization plan because he knew Cornwell would oppose it. However, Cornwell testified that when he asked Sharp why he had not been included in planning the reorganization, Sharp did not answer and, instead, offered to help Cornwell find a position elsewhere.

Cornwell asked Cottrell if race had played a role in Sharp's decision to demote him. Cottrell said that she did not think this was the case, but suggested that Cornwell take his concerns to the Board of Directors. Cornwell than spoke to a Board member, Bob Pearson. He did not tell Pearson that he thought race had influenced Sharp's decision to demote him. However, he did tell Pearson that he was "unsure" of Sharp's motives. Cornwell testified:

"I asked [Pearson] a question, I don't know if it's the color of my skin, I don't know if it's the fact that he just doesn't like me, I don't know whether it's the fact that I'm a man and not a woman, I said, I'm not sure what's driving him in this situation, I just feel that it's wrong."

In February 2002, Cornwell met with Bob Potter, the Chairman of Electra's Board, who gave him a memorandum stating that the board ratified Sharp's reorganization plan and endorsed Sharp's authority to reorganize in order to improve Electra's financial performance. Cornwell testified as to the following exchange with Potter:

"[Potter] indicated that he did not question [Sharp's] motives. I said, I'm concerned whether the motives are illegal or not. I said, is it because I said something in November about his sexual harassment issues, is it because of the color of my skin, is it because he doesn't like me, and I said all these things to [Potter] direct. [Potter] said, you're raising a different issue now and it's not one that we address here."

On May 23, 2002, Cornwell wrote Potter a letter ? with a copy to Sharp ? offering to "sign a release" in exchange for a specified severance package which included two years salary. According to the court, the proposed release would be a release "presumably absolving Electra from liability for employment discrimination." On June 5, 2002, Sharp placed Cornwell on paid administrative leave pending resolution of severance negotiations. Potter attempted to meet with Cornwell on June 19, but Cornwell cancelled, stating that he wanted a lawyer present and had not yet retained one. That same day, Potter sent Cornwell a letter setting out the company's severance package proposal, proposing dates and times over the next six days when Potter could meet with Cornwell, and instructing Cornwell that he had a duty as a management level employee to give the Board any evidence in his possession regarding employment discrimination at Electra. On June 21, when Cornwell had apparently still failed to respond, Potter sent an email which again urged Cromwell to schedule a meeting by June 25, and repeated the demand that Cornwell turn over any evidence of employment discrimination. On July 3, 2002, when Cornwell had apparently still failed to respond, Cottrell sent him a letter terminating his employment for "actions inconsistent with [his] duties as a management level employee."

Cornwell filed an action in federal court alleging race discrimination and retaliation in violation of Title VII and Oregon law. The trial court granted Electra's motion for summary judgement, holding that the evidence of pretext which Cornwell produced ? all of which was circumstantial evidence ? was not sufficiently "specific" and "substantial" to raise an inference that Electra demoted or terminated Cornwell because he is African-American. Cornwell appealed.

1. In Dicta, the Ninth Circuit Questions Whether Circumstantial Evidence of Pretext Must Be "Specific and Substantial" to Defeat Summary Judgment.

In its majority opinion, the Ninth Circuit set out the elements of the burden-shifting framework under McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). As to the quantum of proof required to establish pretext and defeat summary judgment, the court stated: "to establish that a defendant's nondiscriminatory explanation is a pretext for discrimination, plaintiffs may rely on circumstantial evidence, which we previously have said must be ?specific and substantial' to create a triable issue of fact." The court cited to Godwin v. Hunt Wesson, Inc., 150 F.3d 1217, 1222 (9th Cir. 1998) for this principle (the "Godwin standard"), but went on to suggest that the "specific and substantial" requirement may no longer be valid in light of the U.S. Supreme Court's holding in Desert Palace v. Costa, 539 U.S. 90 (2003), and the Ninth Circuit's subsequent decision in McGinest v. GTE Serv. Corp., 360 F.3d 1103 (9th Cir. 2004).

In Costa, the Supreme Court held that a plaintiff does not have to produce direct evidence of discrimination, and thus may rely entirely on circumstantial evidence, to prove discrimination under a "mixed motive" theory. In that context, the Court held that "[c]ircumstantial evidence is not only sufficient, but may also be more certain, satisfying and persuasive than direct evidence."

In McGinest, an African-American employee was selected for promotion but then, according to the employer, could not be promoted because of a "hiring freeze" in the company at that time, due to financial problems. However, the employer was unable to produce any documentation of a hiring freeze or financial problems at that time. The Ninth Circuit held that this fact, combined with evidence of a "permissive response" to racially-based harassment (racist graffiti and statements) and "the absence of black supervisors and managers in the workplace" was sufficient to raise an inference of race discrimination. McGinest did not discuss Godwin and its requirement that circumstantial evidence must be "specific" and "substantial." Nevertheless, the Cornwell majority stated that "[i]n view of [Costa and McGinest], Title VII does not require a disparate treatment plaintiff relying on circumstantial evidence to produce more, or better, evidence than a plaintiff who relies on direct evidence."

The majority conceded that there "may be some tension in our post-Costa cases on this point," and, in a footnote, cited to six post-Costa Ninth Circuit decisions ? two of which are post-McGinest decisions ? which uphold the Godwin standard. The majority went on to hold that even under the Godwin standard, Cornwell produced "specific" and "substantial" evidence of pretext sufficient to survive summary judgment. For this reason, the majority's statements on the continuing vitality of the Godwin standard may be viewed as mere dicta.

2. Cornwell Produced "Specific and Substantial" Evidence That Electra's Reorganization Was a Pretext for Race Discrimination.

The majority held that Cornwell offered circumstantial evidence from which a reasonable jury could conclude that Electra demoted Cornwell because of his race. Specifically: (1) Cornwell was the only black member of Electra's management team; (2) Cornwell was the only senior executive demoted; (3) Sharp excluded Cornwell from management meetings and did not consult with him on topics which were within his purview; (4) when Cornwell asked Sharp why he had not been consulted, Sharp's response was to offer to help him find a job elsewhere; (5) Sharp promoted a less-experienced Caucasian to manage branch operations; and (6) Electra never addressed Cornwell's "expressed concerns that his demotion was the result of race discrimination." The majority held that from this evidence a rational jury could conclude that "Sharp was, to put it starkly, a CEO who did not want to work with an African-American Chief Operating Officer."

3. Cornwell Did Not Produce Sufficient Evidence to Create a Triable Issue of Fact that Electra Terminated Him On The Basis of Race, or That It Demoted or Terminated Him On the Basis of Protected Activity.

The court held that Electra presented admissible evidence that it terminated Cornwell because he disregarded the Board's repeated requests for a meeting, and its demand that he turn over any evidence he had of race discrimination. Cornwell produced no evidence undermining the credibility of this explanation.

Cornwell's retaliation claims were based on his complaints to Cottrell about Sharp's offensive language which Cornwell thought were "close to sexual harassment." There was no evidence that Cottrell ever spoke to Sharp about the complaints or that Sharp knew about them from any other source before he decided to "demote" Cornwell. Moreover, the time gap between Cornwell's complaint in November 2001 and his termination in July 2002 was too great to support an inference the complaint caused the termination.

4. Concurring Opinion

Judge Bea, concurring separately, opined that the only evidence which supported an inference of pretext was Sharp's offer to help Cornwell find a different job in response to Cornwell's question as to why he wasn't included in planning the reorganization. A reasonable trier of fact could find that this response was inconsistent with Electra's proffered nondiscriminatory reason for demoting Cornwell, i.e., that Sharp wanted him to stay with the company and focus on lending operations. However, Judge Bea disagreed that any of the other evidence cited by the majority ? e.g., that Cornwell was the only African-American manager, that he was the only senior manager demoted or that he was kept out of meetings where his demotion was discussed ? raised any inference that Sharp's explanation that it wanted Cornwell to focus on lending operations was a pretextual. Judge Bea pointed out:

... [T]he fact that Cornwell is the sole African-American and the sole executive to be demoted provides no evidence that he was demoted because of his race.... One must distinguish between coincidence and causal effect. To think otherwise would tend to insulate Cornwell form adverse action, or explain his advance, solely because of his race.

Similarly, because a person about to be reassigned or demoted is not consulted before the determination is made does not suggest that the reassignment or demotion is being made because of racial animus, dressed up in pretextual reasons. Suppose he were the sole executive promoted, with a prior interview. Would it be evidence that he was promoted because of his race?

When it is unnecessary to grant probative effect to certain evidence, it is necessary not to do so, lest in another case it be cited back to us.

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1. Opinion by McIntyre, J., joined by Huffman, Acting P.J. and McDonald, J.

2. Opinion by Aronson, J., joined by O'Leary, Acting P.J. and Fybel, J.

3. Opinion by Gould, J., joined by Fisher, J. Separate concurring opinion by Bea, J.