Appellate Courts and Punitive Damage Calculations

APPELLATE COURTS AND PUNITIVE DAMAGE CALCULATIONS
Addressing the “Super-Jury” Problem
the
devil
is in
the
details
BY HOWARD ANDARI
A recent case concluded with a punitive damage
award that in today’s legal world is significant, but
not extraordinary. The dispute between the parties—manufacturers
of competing products—will not
be historically noteworthy for its substance or for
its players. But as in many significant cases, the
devil is in the details. And the “devil” for counsel
involved in punitive damage cases is the standard
of review applied on appeal.
The impact of Leatherman Tool Group v. Cooper
Indus. will certainly be felt. Following Leatherman,
appellate courts will not only be in the business of
reviewing the constitutionality of punitive damage
awards de novo. They also will calculate the “constitutionally
appropriate” amount of punitive damages
from the cold paper record—without the benefit
of the live courtroom experience.
At minimum, the case opens the door for state
and federal appellate courts to act as “superjuries”
and to calculate a “permissible” amount of
punitive damages.
Given Leatherman, it is vital that counsel make
a clear and persuasive record at the trial court level
in order to maximize the chances of preserving a
punitive damage award on appeal.
The Path of the Case
In Leatherman, the Ninth Circuit Court of Appeals applied a de novo
standard of review to the constitutionality of a $4.5 million punitive
damage award. Using that standard, the Court concluded that the maximum
award consistent with constitutional principles was exactly
$500,000 1 (Leatherman II).
The Ninth Circuit’s application of the de novo standard came after it
was reversed by the U.S. Supreme Court 2 for upholding the $4.5 million
award under the less-demanding “abuse of discretion” standard of
review (Leatherman I). The circuit court previously had upheld the district
court’s determination that the punitive damage award was constitutional
and not “grossly excessive” under BMW of North America, Inc.
v. Gore. 3
Applying the more stringent standard of review on remand, the
Ninth Circuit not only decided that the punitive damage award was
unconstitutional under Gore. It also took the extraordinary step of itself
calculating the maximum award consistent with constitutional principles.
The Ninth Circuit’s decision signaled the end of the case’s journey
up and then down its appellate path. But questions for practitioners
remain:
• Did the decision in Leatherman I foreshadow this result
• What steps should practitioners take to maximize their chances of
preserving a punitive damage verdict on appeal in light of
Leatherman II
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Leatherman I: The Tale of a Corporate Misdeed
As described in Leatherman I and II, both
Cooper Industries and Leatherman Tool
Group were tool manufacturers. In the
1980s, Leatherman introduced its Pocket
Survival Tool (PST), a multifunction
pocket tool that purported to be an
improvement on the classic Swiss Army
Knife. 4 In 1995, Cooper designed and
marketed a competing multifunction tool
called the “ToolZall” that would copy the
basic features of the PST and add a few
additional features. 5
In August 1996, Cooper introduced the
ToolZall at the National Hardware Show in
Chicago. There, Cooper used photographs
in its posters, packaging and advertising
materials that purported to be that of a
ToolZall, but were in fact a modified PST.
When Cooper’s promotional materials were
created, Cooper had not yet manufactured
a ToolZall and decided to create a ToolZall
“mock-up” by grinding the Leatherman
trademark off a PST and adding fasteners
that were unique to the planned ToolZall. 6
Shortly after the trade show, Leatherman
filed suit against Cooper, asserting claims of
trade-dress infringement, unfair competition
and false advertising under § 43(a) of
the Trademark Act of 1946 (Lanham Act)
and a common-law claim for unfair competition
for advertising and selling an “imitation”
of the PST.
After a 1997 trial, a jury found that
Leatherman had trade-dress rights in the
overall appearance of the PST and that the
original ToolZall infringed on those rights,
but that the infringement had not caused
any damage to Leatherman. 7 With respect
to the advertising claims, however, it found
Cooper liable for passing off, false advertising
and unfair competition; it assessed
$50,000 in compensatory damages and
$4.5 million in punitive damages. 8
After the jury verdict, the district court
considered and rejected Cooper’s argument
that the punitive damages assessed by
the jury were unconstitutional and “grossly
excessive” under Gore. 9 The court found
that the punitive damages award “was proportional
and fair, given the nature of the
conduct, the evidence of intentional passing
off, and the size of an award necessary
to create deterrence to an entity of
Cooper’s size” and concluded “that the
award did not violate Copper’s due process
rights” under the federal Constitution. 10
On appeal, the Ninth Circuit affirmed
the punitive damages award in an unpublished
opinion, indicating, “The district
court did not abuse its discretion in declining
to reduce the amount of punitive damages.”
11
Scrutiny of the De Novo Standard
Thereafter, the U.S. Supreme Court accepted
Cooper’s petition for a writ of certiorari.
It addressed whether the Ninth Circuit
reviewed the constitutionality of the punitive
damage award under the correct standard
and whether the award violated the
Gore criteria.
The Supreme Court concluded that the
constitutionality of the punitive damages
award merits de novo review, and it remanded
the case to the Ninth Circuit for a determination
of whether the $4.5 million award
was constitutional using the correct standard
of review. 12 The Supreme Court rejected
an argument that de novo review violates
the Seventh Amendment’s Reexamination
Clause, which provides that “no fact tried
by a jury shall be otherwise re-examined in
any Court of the United States, than
according to the rules of common law.” 13 In
doing so, the Court indicated that “unlike
the measure of actual damages suffered,
which presents a question of historical or
predictive fact, … the level of punitive damages
is not really a ‘fact’ ‘tried’ by the
jury.” 14
It is this determination that may have
encouraged, or possibly foreshadowed, the
result in Leatherman II. 15
Leatherman II: Calculating Punitive
Damages
In reviewing the constitutionality of the
punitive damage award de novo, the Ninth
Circuit applied the three “constitutional
guideposts” from Gore. 16
The Court concluded that the third Gore
factor did not support the jury’s award
because Cooper’s conduct would not have
likely resulted in civil penalties in any
amount approaching the $4.5 million punitive
damage award. Regarding the second
Gore factor, the Ninth Circuit observed that
there is no mathematical bright line but
indicated that the 90-to-1 ratio of compensatory
to punitive damages was only somewhat
less “breathtaking” than that invalidated
in Gore, and it was impermissibly high
given the evidence in the record with
respect to the harm or potential harm
caused by Cooper’s conduct.
As to be expected, the Court focused
most of its attention on the first Gore factor—reprehensibility.
The Court acknowledged that in
addressing reprehensibility, trial courts will
have a somewhat superior vantage over
“The level
of punitive
damages
is not
really a
‘fact’‘tried’
by the jury.”
courts of appeal, and that it must accept the
underlying facts as found by the jury and
the trial court. But the Court noted that the
degree of reprehensibility “ultimately
involves a legal conclusion.” 17 Although it
could not “condone Cooper’s conduct,”
the Court noted that after conducting an
independent review, “Cooper’s conduct was
more foolish than reprehensible.” 18 As a
result, the Court concluded that the first
Gore factor did not support the jury’s
award.
Despite this conclusion in light of a de
novo review, the next question was of paramount
procedural importance. The Court
considered whether to:
1. determine the maximum amount of
constitutionally permissible damages or
2. remand the case to the district court
with instructions to issue a remittitur in
accordance with the views in its opinion
On that question, there was no clear
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authority (or briefing by the parties). In
deciding to determine the maximum constitutional
award of punitive damages on
the existing record, the Ninth Circuit was
influenced by Johansen v. Combustion
Engineering, Inc. 19 According to the Court,
it was not necessary to remand for a new
trial or remand to the district court for
remittitur, because a litigant would not be
entitled to any greater award on remand
than the maximum constitutional award of
punitive damages. 20
In determining the appropriate amount
of punitive damages, the Ninth Circuit
found itself in an uncomfortable and unfamiliar
position. After quoting a passage
from InterMedical Supplies v. EBI Medical
Systems 21 that “in the last analysis, an appellate
panel, convinced that it must reduce an
award of punitive damages, must rely on its
combined experience and judgment,” the
endnotes
1. Leatherman Tool Group v. Cooper Indus., 285
F.3d 1146 (2002).
2.Cooper Indus. v. Leatherman Tool Group, 532
U.S. 424 (2001).
3.517 U.S. 559 (1996).
4.Leatherman I, 532 U.S. at 427.
5.Id. Although the Cooper product was named
ToolZall, internally it had been referred to as
the “Cooperman” because of its obvious similarity
to Leatherman’s PST. Leatherman II,
285 F.3d at 1148.
6.Leatherman I, 532 U.S. at 427-428.
7.Id. at 429. As a result of this finding, however,
the district court entered a judgment permanently
enjoining Cooper from marketing
its original ToolZall in the United States or in
22 designated foreign counties. That judgment
was later set aside by the Ninth Circuit.
199 F.3d 1009 (9th Cir. 1999).
8.Id. In awarding punitive damages, the jury
answered the following special interrogatory
in the affirmative: “Has Leatherman shown by
clear and convincing evidence that by engaging
in false advertising or passing off, Cooper
acted with malice, or showed a reckless and
outrageous indifference to a highly unreasonable
risk of harm and as acted with a conscious
indifference to Leatherman’s rights”
9.517 U.S. at 559.
10.Leatherman I, 532 U.S. at 430.
11.Id.
12.The Supreme Court reiterated that in Gore,
appellate courts were instructed to evaluate a
punitive damages award’s consistency with
due process using three criteria: (1) the
degree of reprehensibility of the defendant’s
misconduct (“reprehensibility”), (2) the disparity
between the harm suffered and the
punitive damages award (“ratio”) and (3) the
difference between the punitive damages
awarded by the jury and the civil penalties
authorized or imposed in comparable cases
(“comparable statutory fines”). Id. at 440.
The Court then conceded with respect to
“reprehensibility,” trial courts “have a somewhat
superior vantage over courts of appeal”
with respect to issues turning on “witness
credibility and demeanor.” Id. However, the
Court noted that trial and appellate courts
seem equally capable of analyzing the second
inquiry, and that the third inquiry, which
“calls for a broad legal comparison, seems
more suited to the expertise of appellate
courts.” From this standpoint, the Court concluded
that “[c]onsiderations of institutional
competence therefore fail to tip the balance in
favor of deferential appellate review.” Id.
13.Id. at 437–438. Traditionally, federal courts
did not have any authority to reduce the
amount of a jury’s verdict. Kennon v. Gilmer,
131 U.S. 29 (1889). However, federal courts
did traditionally have the power to order a
new trial (e.g., when courts found a jury’s
award of damages to be excessive). The power
of courts to order a remittitur grew out of the
authority to grant a new trial. Therefore,
when trial courts believe the jury’s verdict is
excessive, they may order a new trial unless
the plaintiff agrees to remit a portion of the
jury’s award. Dimick v. Sciedt, 293 U.S. 474,
(1935). However, the Seventh Amendment
requires that the plaintiff be provided the
option of a new trial in lieu of a remittitur of
the jury’s award. Hetzel v. Prince William
County, Va., 523 U.S. 208, (1998).
14.Leatherman I, 532 U.S. at 437.
15.Justice Ginsberg’s lone dissent critiqued the
majority’s holding that the amount of punitive
damages is not a “fact tried by a jury.” Id. at
446. And she argued that the “abuse of discretion”
standard of review makes sense for
“practical reasons”: “District courts view the
evidence not on a cold paper record but in
the living courtroom context.” Id. at 448.
Therefore, with respect to Gore’s reprehensibility
factor, “District courts have an undeniably
superior vantage over courts of appeal.”
Id.
16.Leatherman II, 285 F.3d at 1148–1150.
17.Id. at 1150.
18.Id. at 1151.
19.170 F.3d 1320 (11th Cir 1999). In Johansen,
the Eleventh Circuit considered whether it
was permissible for the district court to reduce
the jury’s punitive damage verdict to a maximum
constitutional amount without affording
the plaintiffs an opportunity to elect for a new
trial. Johansen distinguished the district
court’s action from a traditional remittitur
because unlike a remittitur, a constitutional
reduction is a determination that the law does
not permit the award. Id. at 1331. As such, it
was permissible for the district court to enter
judgment for the maximum constitutionally
permissible award as a matter of law, without
giving the plaintiffs an opportunity for a new
trial. Id. According to Johansen, adjusting the
punitive damage verdict to the maximum the
Constitution allows is not a reexamination of
any facts, but if the district court exercised its
discretion to reduce the verdict lower than the
constitutional maximum for that case, the verdict
would then have been “reexamined” and
the plaintiff must be afforded the option to
elect a new trial. Id. at 1332, n.20.
20.Leatherman II, 285 F.3d at 1151–1152.
Johansen ultimately upheld the district court’s
determination of the maximum constitutional
award after consideration of the Gore factors.
170 F.3d at 1339. However, Johansen did
note that, “It is unclear to us whether BMW
allows an appellate court to determine the
‘upper limit’ the constitution permits, or
requires remand to the district court where
the record is not so ‘cold.’” Id. at 1332, n.21.
The Ninth Circuit, however, did not appear to
be tempted to remand because requiring a
new trial or remittitur by the lower court
could ultimately result in an appeal, which
would then require another evaluation of
whether the punitive damage award was constitutional
under a de novo standard.
21.181 F.3d 446, 468 (3rd Cir. 1999).
22.Leatherman II, 285 F.3d at 1152. The Third
Circuit in InterMedical Supplies reduced a
remitted $50 million punitive damage award
to $1 million after consideration of the Gore
factors. 181 F.3d at 470. The dissent criticized
the majority because it “substituted its
personal judgment for a principled review
function over a District Court’s discretion;
and without relying on record evidence, it has
reached a bottom line ‘lottery’ figure of
$1,000,000 relying only on its own ‘judgment
and experience.’” Id. at 478.
23.See e.g., Hyatt Regency v. Winston & Strawn,
907 P.2d 506 (Ariz. Ct. App. 1995).
24.See F.R.C.P. 49; A.R.C.P 49. It is important
to consider the complexity of the case to
determine whether the benefits of special verdict
forms, or a general verdict with written
interrogatories, outweigh the potential for
confusion of the jury and inconsistent jury
verdicts or answers to interrogatories.
25.See Leatherman I, 532 U.S. at 440, n.14
(“While we have determined that the Court of
Appeals must review the District Court’s
application of the Gore test de novo, it of
course remains true that Courts of Appeal
should defer to the District Court’s findings
of fact unless they are clearly erroneous.”);
Leatherman II, 285 F.3d at 1150 (“Although
determining the ‘degree of reprehensibility’
ultimately involves a legal conclusion, we must
accept the underlying facts as found by the
jury and the district court.”).
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Ninth Circuit concluded that exactly
$500,000 was the maximum constitutional
award of punitive damages on the existing
record. 22
The Implications of Leatherman II
Leatherman II’s implications are not limited
to the federal court system. Arizona’s
appellate courts have made clear that any
award of punitive damages must pass
scrutiny under the federal Constitution. 23
Because the Due Process Clause of the
Fourteenth Amendment prohibits states
from imposing “grossly excessive” punishments
on tortfeasors under Gore, it follows
that Arizona appellate courts will have to
apply a de novo review of the constitutionality
of a punitive damage award using the
Gore criteria.
Given Leatherman II, appellate courts
in Arizona may now act as super-juries and
themselves calculate “constitutionally
appropriate” punitive damages.
To somewhat mitigate the dangers
posed by Leatherman II, practitioners may
want to have juries make specific factual
findings on the issue of reprehensibility
through special verdict forms or a general
verdict accompanied by written interrogatories.
24 In addition, practitioners also
should urge the trial court to make specific
findings of fact regarding reprehensibility
in post-trial rulings on the constitutionality
of the punitive damage award. In doing so,
the language from Leatherman I and II
regarding deference to findings of fact by
the trial court and jury may prove to be
helpful in preserving and/or maximizing
punitive damage awards. 25
Given that appellate courts may now
more often calculate punitive damage
amounts from the cold paper record, making
a coherent and persuasive record on
issues surrounding reprehensibility
becomes more important than ever.
Howard Andari is an attorney in the
Scottsdale law firm of Thur & O’Sullivan,
P.C., practicing exclusively for the last six
years in the fields of insurance coverage and
insurance bad faith. The statements or opinions
expressed herein are those of the author
and do not necessarily reflect those of his firm,
its directors, partners or employees.
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