Punitive Damages and Agency Limitations

In Roby v. McKesson, the California Supreme Court limited the amount of punitive damages that may be awarded against a company on the basis of bad conduct by a midlevel manager. At trial, the jury found that a McKesson supervisor had harassed the plaintiff and that the supervisor was a “managing agent” of McKesson. The jury awarded $17 million in punitive damages against McKesson. Among questions the California Supreme Court considered on review were (a) whether the supervisor exercised the sort of “broad authority that justifies punishing an entire company for an otherwise isolated act of oppression, fraud, or malice” and (b) whether the supervisor was a “managing agent,” under Civil Code §3294, defined by the Court as someone who “exercise[s] substantial discretionary authority over decisions that ultimately determine corporate policy.”

The trial record showed that McKesson had over 20,000 employees and that the supervisor in question worked at a local distribution center supervising a total of only four other employees. Based on this record the California Supreme Court ruled that “the record here does not support the conclusion that [the supervisor] exercised broad authority or that she was a “managing agent” for purposes of awarding punitive damages under Civil Code section 3294, subdivision (b).” Therefore, in reviewing the jury’s punitive damages award against McKesson, the Court looked to what McKesson’s more senior managers knew and did.

Plaintiff met with two of McKesson’s midlevel managers and told them of her supervisor’s ongoing harassment. That McKesson thereafter continued to employ the supervisor without taking any corrective measures indicated a “conscious disregard of the rights or safety of others” (Civ. Code, § 3294, subd. (b)), thus warranting punitive damages. Nevertheless, the evidence establishing corporate wrongdoing in regard to the supervisor’s unlawful harassment did not indicate any repeated corporate misconduct. There was no evidence, for example, that the supervisor’s harassment was the product of a corporate culture that encouraged similar supervisorial conduct. Rather, the Supreme Court found, the harassment appeared to be isolated actions of a single supervisor, combined with the one-time failure on the part of employer McKesson to take prompt responsive action when these events came to its attention.

The California Supreme Court then reviewed the due process standard for awarding punitive damages imposed by the US Supreme Court in State Farm v. Campbell, which includes the following three factors: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

The California Supreme Court then reviewed recent cases in California that had resulted in larger punitive damages awards based on an express finding of “oppressive, fraudulent or malicious conduct”:

 In Romo v. Ford Motor Co. (Cal.App.2003), the defendant mass-produced and sold a vehicle it knew to be designed in a way that was inherently dangerous to human life; three people died; three others were injured; punitive damages: $23,723,287;

 In Rufo v. Simpson (Cal.App.2001), tthe defendant maliciously stabbed and killed two people; punitive damages: $25 million;

 In Weeks v. Baker & McKenzie (Cal.App.1998), a partner of the defendant law firm put his hand in the breast pocket of his secretary’s blouse, made a grabbing gesture toward her breasts, touched her buttocks, and made sexually harassing statements; the defendant law firm was aware of numerous prior incidents of severe sexual harassment involving the same partner; punitive damages: $3.5 million.

At the end of this review process, the California Supreme Court reasoned that because the McKesson’s failure to take corrective action against its supervisor was a one-time failure, the company’s conduct evidenced a low degree of reprehensibility under the State Farm v. Campbell test, and did not exhibit oppression, fraud or malice that would be required for a large punitive award. With a low degree of reprehensibility and without oppression, fraud or malice, the punitive damages award against McKesson could be no greater than a 1:1 ratio with compensatory damages (which were held to be $1.9 million), and the Court reduced the jury’s punitive damages award from $17 million to $1.9 million.

This case continues an ongoing trend of reducing corporate liability for punitive damages as initially established by the US Supreme Court in State Farm v. Campbell.