On June 9, 2016, the California Supreme Court ruled in Nickerson v. Stonebridge Life Ins. Co., __ Cal.4th ___ (2016) that the attorneys’ fees awarded to a veteran who sued for benefits under a “hospital stay” policy should be considered compensatory damages for purposes of determining whether the punitive damages were excessive. The veteran recovered $31,500 in unpaid policy benefits. The jury found that the insurer’s failure to pay benefits was unreasonable and awarded the veteran $35,000 in emotional distress damages. The jury also found the insurer had engaged in fraudulent conduct and awarded punitive damages of $19 million.

Post-trial, the trial judge awarded $12,500 in attorneys’ fees under Brandt v. Superior Court, 37 Cal.3d 813 (1985). Brandt fees are those attorneys’ fees incurred in obtaining benefits, but not in prosecuting bad faith. The judge also reduced the punitive damages award to $350,000 unless plaintiff consented to a new trial, based on a constitutional maximum of 10 times the compensatory damages award. The Court of Appeal affirmed.

The California Supreme Court reversed and remanded. The discrete issue decided by the Nickerson court was whether attorneys’ fees awarded by the court, as stipulated by the parties, should be treated differently than fees awarded by a jury. The court concluded that Brandt fees must be considered in the constitutional evaluation of the size of the punitive award, regardless of whether awarded by a jury or a judge.

In the larger context, the court’s opinion, written by the newest Justice Leondra Kruger, may signal a change in the California Supreme Court’s evaluation of punitive damages. The Nickerson court discussed at length the six major U. S. Supreme Court cases on punitive damages (State Farm Ins. Co. v. Campbell; Cooper Industries v. Leatherman Tool Group, Inc.; Pacific Mutual Life Ins. Co. v. Haslip; Philip Morris USA v. Williams; Honda Motor Co. v. Oberg; BMW v. Gore), but made no mention of to the ratio of 3- or 4-to-1 suggested by State Farm v. Campbell as the constitutional limitation.

California has its own well-developed law on punitive damages, and the Nickerson court singled out Simon v. Sao Paolo U.S. Holding, Inc., 35 Cal.4th 1159 (2005) as allowing a 10-to-1 limitation. Simon actually discussed a range between 1-to-1 and 10-to-1, with the higher level permissible where the compensatory damages are small. The Nickerson court did not discuss the lower range of punitive damages, and omitted any discussion of Roby v. McKesson Corp., 47 Cal.4th 686 (2009), in which the California Supreme Court reduced punitive damages to a 1-to-1 ratio where the compensatory award contained a “substantial” non-economic element.

Given the high-level amicus attention the Nickerson case attracted, particularly in contrast to the small amount of compensatory damages awarded, we would not be surprised if this case is the harbinger of future appeals attempting to expand the constitutional cap on punitive damages.