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COMPLEX LITIGATION
PUNITIVE DAMAGES CLASS II

The National Law Journal, March 6, 2000

by Elizabeth J. Cabraser and Thomas M. Sobol

 
We agree with Professor Linda S. Mullenix's choice of punitive damages class actions as a topical subject for her recent article (NLJ, Jan. 24).
The concept of a punitive damages class is, as she says, "simple, logical and compelling." A punitive damages class accomplishes distributive justice among class members that individual adjudication never will, and it achieves certainty for defendants, avoiding "the problem of successive punitive damage awards against the defendant."
The increasing importance of class-based litigation for punitive damages claims flows from our global economy, in which the vast array of consumer and business products and services is increasingly concentrated in fewer business entities. Sporadic, unpredictable and inconsistent individual punitive damages awards create havoc for business, even though the isolated awards may accomplish little, in the long run, for consumers as a whole.  The use of the class mechanism to determine and distribute punitive damages brings rationality and proportionality to the process.
A parting of the ways when it comes to analysis
We part company with Prof. Mullenix's views, however, when it comes to an analysis of the law.  Where she may see barriers to punitive damages classes, we see rigorous but simple lessons to be learned in shaping a viable class framework.
Under Rule 23(b), parties can seek certification of a mandatory punitive damages class when seriatim litigation "would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests."
One example, the "limited fund" theory, received extensive treatment by the U.S. Supreme Court last summer in Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999).  Three lessons emerge.
First, the court held that the parties had "failed to demonstrate that the fund was limited except by the agreement of the parties." Fibreboard, 527 U.S. at 2316. Settling parties, under Rule 23(b)(1)(B), "must present not only their agreement, but evidence on which the district court may ascertain the limit and the insufficiency of the fund, with support in findings of fact following a proceeding in which the evidence is subject to challenge." Id. Although, as to the sale value of Fibreboard, the district court had heard evidence and made independent findings, "[t]he same, however, [could not] be said for the value of the disputed insurance." Id. at 2317.
Second, the Supreme Court held that the settlement's unique, wholesale exclusions from the class and disparate treatment of those similarly situated were at odds with the traditional concept of the limited fund. "[T]here can be no question that such a mandatory settlement class will not qualify when in the very negotiations aimed at a class settlement, class counsel agree to exclude what could turn out to be as much as a third of the claimants that negotiators thought might eventually be involved, a substantial number of whom class counsel represent." Fibreboard, 527 U.S. at 2319. Third, in Fibreboard, treatment within the class failed to provide the Rule 23(a) structural protections elucidated in Amchem Products Inc. v. Windsor, 521 U.S. 591 (1997).
After Fibreboard, to frame properly a (b)(1)(B) mandatory class under a "limited fund" theory, class counsel must present a factual and legal record on which a court may enter detailed findings establishing the existence of a limited fund; must address the rationale for the class definition and structure and must ensure that any subclasses with truly divergent interests receive separate representation. These manageable challenges can be met to resolve mass tort litigation comprehensively and fairly.
Taking a close look at the (b)(1)(B) standard
The standard for a (b)(l)(B) punitive damages class set forth in the rule appears clear enough:  The moving litigant must establish that "the prosecution of separate actions... would create a risk of... (B) adjudications... which would as a practical matter be dispositive of the interests of [others] or substantially impair or impede their ability to protect their interests."  Fed. R. Civ. P. 23(b)(1) (emphasis added).
At one point, the U.S. Court of Appeals for the 9th Circuit appears to have adopted "a high standard" for limited fund determinations.  See In re Northern District of California, Dalkon Shield IUD Products Liability Litigation, 693 F.2d 847, 851 (9th Cir. 1982) (a proponent must show that the disposition of earlier claims would "necessarily affect" later claims). But Dalkon Shield has been criticized and rejected by more recent decisions, such as In re A.H. Robins, 880 F.2d 709 (4th Cir.), cert. denied, 493 U.S. 959 (1989); and the Dalkon Shield court itself repeatedly emphasized that limited fund certification was quite possible. It seemed disenchanted with the record before it and the lack of any advocacy for the class.
Judge Jack Weinstein's analysis in In re "Agent Orange" Products Liability Litigation, 100 F.R.D. 718, 726 (E.D.N.Y. 1983), preserves the letter and spirit of 23(b)(1)(B).  The strict standard is rejected because it "flies in the face of the language of Rule 23, which requires only that there be a 'risk' of impairment, not that there be a conclusive determination of impairment."  Id. at 726.
The "proper standard is whether there is a substantial probability—i.e., less than a preponderance but more than a mere possibility—that if damages are awarded, the claims of earlier litigants would exhaust the defendants' assets."  Id. This "substantial probability" test has become the prevailing standard. See, e.g., In re Joint Eastern and Southern District Asbestos Litigation, 129 BR. 710, 824-29 (1991) (collecting cases); Jenkins v. Raymark Industries Inc., 109 F.R.D. 269, 276-77 (E.D. Texas 1985), aff’d, 782 F.2d 468 (1986) (adopting the "substantial probability" test). Indeed, even the 9th Circuit recently rejected the argument that Dalkon Shield bars certification in the mass tort context, Valentino v. Carter-Wallace Inc, 97 F.3d 1227, 1230 (9th Cir. 1996) ("the law of this circuit... does not create any absolute bar to the certification of a multi-state plaintiff class action.").
The real failure: lack of evidentiary presentation
The failure of cases to establish limited fund certification stems more from lack of evidentiary presentation than from unrealistic legal barriers.  In the cases cited by Prof. Mullenix, the problem was not that the litigants failed in their proof of the existence of a limited fund, but that the requisite proof was not undertaken. See e.g., Payton v. Abbot Laboratories, 83 F.R.D. 382, 389 (D. Mass, 1979); In re School Asbestos Litigation, 789 F.2d 996, 1005 (3d Cir. 1986).
The lesson here is simple:  Litigants should submit persuasive evidence from which the court makes findings of fact demonstrating a limited fund under (b)(1)(B). See, e.g., Coburn v. 4-R Corp., 77 F.R.D. 43, 45-46 (E.D. Ky. 1977).
Prof. Mullenix states that punitive damages class certification may fail "because federal or state substantive law prohibits classwide determination of punitive damages."
However, the Supreme Court has suggested that there are (unspecified) due process limits on punitive damages awards, Pacific Mutual Life Insurance Co. v. Haslip, 499 (1991); TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993); and BMW of North America Inc. v. Gore, 517 U.S. 559 (1996). In TXO, the court observed that state and federal courts "have eschewed an approach that concentrates entirely on the relationship between actual and punitive damages. It is appropriate to consider the magnitude of the potential harm that the defendant's conduct would have caused to its intended victim if the wrongful plan had succeeded, as well as the possible harm to other victims that might have resulted if similar future behavior were not deterred." TXO, 509 U.S. at 2721-22.
The logic of the trilogy suggests that a consolidated award of punitive damages to a well-defined group or specific community may present an ideal balance between the due process rights of plaintiffs and defendants when a single tort has harmed many.
Counterparts exist to the "limited fund" doctrine—the theories of "limited punishment," "limited generosity" and "punitive damages overkill." They are not established doctrine but do offer promising avenues to reconcile the competing rights of plaintiffs and defendants.
The Haslip-TXO -BMW trilogy implies a due process limitation on the ultimate quantum of punitive damages awarded against a party for one wrong, although the limit is not in the form of a precise relationship between an individual plaintiff’s actual damages and the punitive damages award.
Punitive damages are most likely to survive due process scrutiny if based on evidence establishing the full scope of the harm from the tort—i.e., the actual harm inflicted on all people and the potential harm that may have occurred. As Judge Weinstein observed in Agent Orange:  "There must be some limit as a matter of policy or as matter of due process, to the amount of times defendants may be punished for a single transaction."   Agent Orange, 100 F.R.D. at 725.
A course of tortious conduct is certified
On occasion, the courts have certified classwide punitive damages trials against defendants arising from a common course of tortious conduct.  See, e.g.. Jenkins v. Raymark Industries Inc., 109 F.R.D. 269 (E.D. Texas 1985), aff'd, 782 F.2d 468 (5th Cir. 1986); Hilao v. Estate of Marcos, 103 F.3d 767 (9th Cir. 1996).
The circuit courts have acknowledged the TXO principle that "Due Process... imposes substantive limits beyond which penalties may not go."  TXO, 113 S. Ct. at 2718, by articulating a "limited fund" analog to multiple punitive damages awards, variously termed limited punishment, limited generosity and punitive damages overkill.   Morgan v. Woessner, 997 F.2d 1244, 1258 (9th Cir. 1993); Dunn v. HOVIC, 1 F.3d 1371 (3d Cir. 1993).  HOVIC reduced a punitive award because "district court gave insufficient consideration to the effect of successive punitive awards [in determining] the maximum amount of punitive damages that could reasonably have been awarded."  Id. at 1391.
In Morgan, the 9th Circuit ruled that courts reviewing punitive damages awards should consider the mitigating impacts of all awards against defendant for the same conduct, not just punitive awards.  997 F.2d at 1257 and n.14.  In the Exxon Valdez litigation, the federal trial court invoked the "limited punishment" theory, at the defendant's request, to certify punitive claims arising from a site-specific incident.  [Ms. Cabraser's firm served as one of the class counsel in the Exxon Valdez litigation.]
In short, recent circuit and Supreme Court authority validates the Agent Orange observations -- that individuals do not have the same entitlement to punitive damages that they do to compensatory damages, that the law does limit the amount of punitive damages a jury may award and that prior awards must be considered in mitigation of claims by parties seeking additional punishment for the same conduct.
At least in the mass tort context, therefore, in which the number of claimants is large, the pool of available punitive damages dollars may be a classic "limited fund" warranting "limited punishment" through 23(b)(1)(B) certification for a single punitive damages trial, or a comprehensive settlement of punitive damages liability.
Punitive damages must sting and must be unpredictable if they are to serve the purpose of punishment and deterrence.  Yet these functions do not vest particular plaintiffs with constitutional rights to receive punitive damages.
In contrast, defendants hold due process rights in the punitive damages context and are entitled to protect themselves against disproportionate awards.  Thus, certification of a class mandatory only as to punitive damages avoids the infringement of individual rights to compensatory awards and, at the same time, accommodates a defendant's interest in preventing disproportionate punitive awards.