GARAMENDI v. ALTUS FINANCE S.A

A. MATZ, District Judge

The bifurcated trial in this matter began on February 15, 2005. The liability phase went to the jury on April 18, 2005, and the jury issued its verdicts on May 10, 2005. The damages phase began on July 12, 2005, went to the jury on July 20, 2005, and the jury issued its verdicts on July 21, 2005. In Damages Verdict Form A, the jury found that the ELIC Estate suffered no dollar damages with respect to both of the Commissioner's damages theories. Nevertheless, in Damages Verdict Form B, the jury awarded the Commissioner $700,000,000 in punitive damages.

The Artemis Parties ("Artemis") now seek entry of a judgment in their favor on all claims. This Order addresses only the question of whether plaintiff John Garamendi ("the Commissioner") is entitled to the judgment he seeks, which would include the $700,000,000 punitive damages award. He is not. Under the constitutional due process requirements discussed in such cases as BMW of North America v. Gore, 517 U.S. 559 (1996) and State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513 (2003), that award of punitive damages against Artemis would be invalid.

This Order does not address, much less resolve, any other remaining claims, such as the Commissioner's claims for restitution and other equitable relief.

A. California Law Precludes the Award of Any Punitive Damages.

The parties agree that California law determines their respective rights and obligations, except to the extent that federal constitutional requirements apply. Although the Court, for the reasons explained below, chooses to base this order on federal constitutional requirements, it is at least appropriate to acknowledge the other key contention that Artemis advances: that under California law no punitive damages award in any amount would be lawful. Artemis's contention has considerable merit. But because the jury's verdicts can be construed as ambiguous and because there is no decisional precedent that addresses this precise situation, the question is not conclusively settled.

It is well-established that under California law an "award of actual [compensatory] damages, even if nominal, is required to recover punitive damages." Sole Energy Co. v. Petrominerals Corp., 128 Cal. App. 4th 212, 238 (2005) (citing Cal. Civ. Code § 3294); Kizer v. County of San Mateo, 53 Cal. 3d 139, 147 (1991) ("In California, as at common law, actual damages are an absolute predicate for an award of exemplary or punitive damages"); Mother Cobb's Chicken T., Inc. v. Fox, 10 Cal. 2d 203, 205 (1937). "Compensatory damages are those damages as will compensate the injured party for the injury sustained; to make good or replace the loss caused by the injury." Berg v. First State Ins. Co., 915 F.2d 460, 465 (9th Cir. 1990). In applying California law, the Ninth Circuit, too, has stated "[W]ithout actual injury, punitive damages are not recoverable under California law." Id. at 467.

The Commissioner argues that he has satisfied these prerequisites. The Court construes the Commissioner's argument to rest heavily on the proposition that in the liability phase, after having been instructed how the Commissioner claimed to have been harmed by selecting the Altus/MAAF bid, the jury found in Verdict Form 5 that the scheme that Artemis joined did cause him harm. Although the jury did not specify what the harm was, presumably it was that the Commissioner selected the Altus/MAAF bid, thereby causing the ELIC Estate to incur losses, costs or expenses that it would not otherwise have incurred if the Commissioner had picked a "bonds in" bid. (See Instruction 25). Yet Artemis was not even in existence when the Commissioner selected the Altus/MAAF bid, and in the subsequent damages phase the jury awarded the Commissioner no compensatory damages. Nor did it award even nominal damages to him, despite being instructed to do so if it found for the Commissioner but also found he "failed to prove damages as defined in these instructions. . . ." (Damages Instruction 8.)

In short, the jury may have deliberately concluded in Phase 2 that whatever "harm" the other conspirators may have caused, the conduct of Artemis in later joining that scheme did not damage the Commissioner. That construction of its verdicts in the two phases is lent credence by the fact that in closing argument Artemis's counsel emphatically and explicitly urged the jurors to write "zero" or "O" in response to Questions 1 (a) and 2(a) . . . and they did.

Despite the absence of a compensatory damages award, the Commissioner cites various cases to support the punitive damages award. Those cases are distinguishable. Without addressing all of them, in many of those cases compensatory damages were awarded. See, e.g., Johnson v. Ford Motor Co., 35 Cal. 4th 1191 (2005); Wyatt v. Union Mortgage Co., 24 Cal. 3d 773 (1979); Cummings Med. Corp. v. Occupational Med. Corp. of Amer., Inc., 10 Cal. App. 4th 1291 (1992). In other cases, nominal damages were awarded or were conclusively presumed. See, e.g., Contento v. Mitchell, 28 Cal. App. 3d 356, 358 (1972). Some of the appellate decisions the Commissioner cites were issued before trial was held or before the case was remanded for retrial. See, e.g., McLaughlin v. National Union Fire Ins. Co. of Pittsburgh, PA, 23 Cal. App. 4th 1132, 1165 (1994). Others involved plaintiffs who were prohibited by law from seeking compensatory damages, see, e.g., Gagnon v. Cont'l Cas. Co., 211 Cal. App. 3d 1598, 1603 (1989), or defendants against whom default was entered. Weiss v. Blumencranc, 61 Cal. App. 3d 536, 544 (1976).

Here, in contrast to the above cases, the Commissioner was not prohibited by law from seeking compensatory damages, damages were not presumed, the jury did not award compensatory damages or nominal damages, and default was not entered against Artemis.

The Commissioner does cite one California Supreme Court decision upholding an award of punitive damages in the absence of an award of compensatory damages: Ward v. Taggart, 51 Cal. 2d 736 (1959). In that case, a court (not a jury) did award as compensatory damages the profits the defendant secretly and wrongfully derived and the Court also awarded punitive damages. On appeal the Supreme Court upheld the compensatory damages award, but under a different theory — the equitable doctrine of unjust enrichment. Id. at 741-42. The Supreme Court then went on to uphold the punitive damages award, nothing it arose out of the defendant's fraud and that such damages are "appropriate in cases . . . where restitution would have little or no deterrent effect, for wrongdoers would run no risk of liability to their victims beyond that of returning what they wrongfully obtained." Id. at 743.

Ward v. Taggart, too, is easily distinguishable. First, in Ward the punitive damages arose out of the defendant's proven fraud; here, in Phase One the Commissioner asserted fraud claims against Artemis and did not prove liability. Second, here the Commissioner was allowed to and did seek compensatory damages for fraud in the jury trial, in addition to the restitution decree he still seeks. Thus, the Commissioner has "had a shot" at obtaining multiple recoveries on different theories, so in principle he could have achieved a deterrent effect had he been able to prove his case.

The Court concludes that under California law the Commissioner is not entitled to recover punitive damages.

The Court declines to address the parties' contentions as to whether any restitutionary award the Court may later issue would permit the jury's punitive damages verdict to stand, because (as the following analysis demonstrates) that verdict cannot survive constitutional scrutiny.

B. Constitutional Requirements of Due Process Require this Punitive Damages Award to Be Invalidated.

The analysis can be brief. In State Farm, supra, the Supreme Court reviewed many of the decisions it has rendered in the past two decades recognizing procedural and substantive constitutional limitations on punitive damages awards. The recurrent theme in those cases is that "Exacting . . . [judicial] review ensures that an award of punitive damages is based upon `an application of law, rather than a decisionmaker's caprice.'" Id. at 123 S. Ct. 1520-21 (citation deleted). Elsewhere the Court noted that "punitive damages should only be awarded if the defendant's culpability, after having paid compensatory damages, is so reprehensible as to warrant the imposition of further sanctions to achieve punishment or deterrence." Id. at 1521 (emphasis added).

In State Farm, the Supreme Court reiterated the various features of punitive damages that had previously led it to hold that "the Due Process clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor." Id. at 1599. These features include the risk that "To the extent an award is grossly excessive, it furthers no legitimate purpose and constitutes an arbitrary deprivation of property." Id. at 1520. Another risk is that `the presentation of evidence of a defendant's net worth creates the potential that jurors will use their verdicts to express biases against big businesses, particularly those without strong local presences.'" Id. (citation deleted). Yet another concern that State Farm expressed was that a "State cannot punish a defendant for conduct that may have been lawful where it occurred." Id. at 1522.

These factors (all of which were present in this case) prompted the Court in Gore to impose three "guideposts" that courts are to consider in reviewing punitive damage awards: (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." State Farm at 1520. Here, the first and second factors preclude the Court from enforcing the jury's award.

As to degree of reprehensibility, in addition to the fact that only economic injury was at stake, even before the partial settlements and voluntary defaults that resulted in Artemis and its founder, Francois Pinault, being the only defendants who went to trial, it was undisputable that the Commissioner's essential case focused on the conduct of other parties. Artemis and Pinault "were not around" at the time of the fundamental frauds (the contrats de portages), they did not enter into those agreements, and (unlike several other parties who did) they were not prosecuted criminally for them. The jury exonerated Pinault outright and its Phase One verdict left the Commissioner with only a greatly reduced remnant of his previously-staked out damages theories against Artemis. (And he failed to prove even those contentions.)

As to the second Gore guidepost, the constitutional limits on the ratio between harm or potential harm, "courts must ensure the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered." Id. at 1524. What this means, "in practice, [is that] few awards exceeding a single-digit ration between punitive and compensatory damages, to a significant degree, will satisfy due process."

Even if the jury had awarded the requisite compensatory damages verdict in the form of a nominal $1.00 award, the jury's $700,000,000 punitive damages award would resoundingly violate these principles. There simply is no rational explanation, devoid of speculation, for that figure. The jury found that Artemis's misrepresentation[s] and omission[s] caused no harm to the Commissioner. It found that of the harm that the scheme caused to the Commissioner, the amount attributable to Artemis was zero dollars. Evidently, something about the case nevertheless prompted the jurors to "sock it" to Artemis anyway, in the form of a gigantic punitive damages recovery reflecting a "breathtaking" multiplier. BMW, 517 U.S. at 583. The Commissioner wants judgment to be entered, in that very amount. Given the facts, under State Farm and Gore he is not entitled to such judgment.

For the foregoing reasons, the Court will not include any punitive damages award in the ultimate judgment.

IT IS SO ORDERED.