Some of the most important unanswered questions in the law of punitive damages relate to the procedures governing the imposition of punitive damages in a class action. Last week, the Second Circuit addressed one such question in Johnson v Nextel Communications Inc.
The plaintiffs in the case are 587 individuals who had filed discrimination claims against their employer, Nextel. Nextel entered into an agreement with the plaintiffs' law firm to set up a dispute resolution process to resolve the claims without litigation. After most of the claims settled, a few plaintiffs brought a class action against Nextel and the law firm alleging various causes of action. Much procedural wrangling (including an appeal to the Second Circuit) followed. Ultimately, however, the district court granted the plaintiffs' motion to certify a class and adopted a three-phase trial plan. In Phase I a jury would decide the ostensibly common liability issues. In Phase II the same jury would set the compensatory damages for the named plaintiffs, determine whether the defendant was liable for punitive damages and if so "determine a punitive-to-compensatory damages 'ratio' based on defendants' conduct toward the entire class". In Phase III mini-trials would be held before multiple juries to determine compensatory damages for each class member and resolve any individualised defences. The court would then mechanically apply the ratio established in Phase II to the damages awarded in Phase III to determine the amount of punitive damages to be received by each class member, "while retaining the discretion to make an independent assessment of whether the total award was inappropriate for any particular class member". Both defendants appealed, but the law firm settled and dismissed its appeal, leaving Nextel as the sole appellant.
The Second Circuit agreed with Nextel that the district court had abused its discretion in certifying a class. The court then went on to address the propriety of the trial plan, holding that:
"under the specific facts of this case and the trial plan proposed here, determining a punitive damages ratio without any grounding in a compensatory damages award is impracticable and fails to give the jury an adequate basis for determining what measure of punitive damages is appropriate."
The court explained that under the US Supreme Court's decision in State Farm Mutual Automobile Insurance Co v Campbell:
"the propriety of the ratio can be meaningfully assessed only when comparing the ratio to the amount of compensatory damages awarded. A larger punitive-to-compensatory ratio may be appropriate where 'a particularly egregious act has resulted in only a small amount of economic damages,' and similarly, '[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."
However, under the trial plan adopted by the district court, the Phase II jury would be tasked with:
"determin[ing] a punitive damages ratio based on an amalgam of the actual damages to only the named plaintiffs and defendants' conduct toward the entire class. Whatever considerations would go into developing the punitive damages ratio in [the] trial plan, the Phase II jury would lack any conception of the actual damages to the members of the class to whom the ratio would subsequently be applied."
This ruling effectively ends – in the courts of the Second Circuit at least – the threat presented by trial plans that seek to obtain a once-and-for-all ratio of punitive to compensatory damages before the total amount of compensatory damages is known. That is a real benefit for defendants because a ratio that may seem reasonable in the abstract in the context of a single case (eg, 4:1) may turn out to be grossly excessive when the entire amount of compensatory damages owed to the class is taken into account. This is especially so given the Supreme Court's admonition in State Farm that punitive damages should be awarded only when the compensatory damages fail to satisfy the state's interest in deterrence and punishment.
For further information on this topic please contact Evan M Tager at Mayer Brown LLP by telephone (+1 202 263 3000) or email (firstname.lastname@example.org). The Mayer Brown International LLP website can be accessed at www.mayerbrown.com.
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