On January 27, 2021, the Second District Court of Appeal rendered an opinion regarding the application of punitive damages against a corporation in Morgan v. J-M Manufacturing Company, Inc.ⁱ. Norris Morgan, a construction worker, sued multiple defendants for suffering mesothelioma arising out of his exposure to various products. All defendants except J-M Manufacturing (JMM) settled by the time of trial or shortly thereafter. JMM was the only defendant who proceeded to verdict. Plaintiff established Mr. Morgan was a construction worker who worked in 1970s – 1980s when he was exposed to J-M Transit Pipes manufactured or supplied by JMM during the relevant time period. The jury found JMM to be 45% liable for Mr. Morgan’s injuries, awarding Mr. Morgan and his wife (loss of consortium claim) compensatory damages in the amount of $15,270,501, and an additional $15,000,000 in punitive damages. JMM appealed the judgment regarding punitive damages among other issues.

The Morgan court reiterated the standard required for the imposition of punitive damages against a corporate defendant. Plaintiffs failed to meet requirements of Civil Code § 3294 (b). This was further developed in Romo v. Ford Motor Companyⁱⁱ (vacated on other grounds by Ford Motor Co. v. Romo ⁱⁱⁱ wherein punitive damages were established by the entirety of the corporation’s acts, which evidenced a corporate policy of conscious disregard for the safety of others.

As mandated by Civil Code § 3294(a), plaintiffs must present clear and convincing evidence defendant acted with oppression, fraud, or malice. Civil Code § 3294(b) prohibits the malicious acts of an employee to be imputed to the corporation unless the employer had actual knowledge of the unfitness of the employee or authorized or ratified the conduct. The advance knowledge, authorization, or ratification of such malice must be on the part of the officer, director, or agent of the corporation. The purpose of this provision was to clarify the common law requirement that corporate malice had to occur at the level “of employees [who] exercised substantial discretionary authority over decisions that resulted in an ad hoc formation of policy.”^iv

Managing agents are “those corporate employees who exercise substantial independent authority and judgment in their corporate decision-making so that their decisions ultimately determine corporate policy.”^v These policies “affect a substantial portion of the company and that are the type likely to come to the attention of corporate leadership.”^vi “Corporate policies” are generally viewed as the “general principles which guide a corporate, or rules intended to be followed consistently over time in corporate operations.”^vii Corporate liability for punitive damages is not dependent on employer’s conduct at a managerial level, but rather the extent to which the employee exercises substantial discretionary authority over decisions which ultimately determine corporate policy.^viii

Meeting the statutory standard becomes difficult when dealing with products which have not been manufactured or placed in the stream of commerce for a significant period of time such as asbestos and motor vehicles. The Fifth District Court of Appeal in Romo v. Ford Motor Company^ix involved a defectively designed and manufactured 1970 Ford Bronco. The Romo Court’s ruling found plaintiff met the requirement of Civil Code § 3264 by presenting evidence which pieced together knowledge and acts of the corporation’s multitude of managing agents which evidenced a corporate policy, though no particular agent may have acted with the requisite malice. The court held the mosaic of evidence of the design, manufacture, and production was sufficient to establish the corporate policy for the conscious disregard for the safety of others.

In Morgan, plaintiffs did not present any testimony or evidence regarding the conduct of any JMM managing agent or decision maker during the relevant time. JMM argued plaintiffs did not present any evidence a JMM officer, director, or managing agent authorized or ratified any conduct, and treated JMM as a monolithic entity without ever identifying to whom “they” referred. Morgan’s argument was simply “the entire organization was involved in the act giving rise to malice,” relying on part of the ruling in Romo, supra, below:

The court could identify no case “in which a series of corporate actions and decisions, such as the design, production, and marketing of any automobile, has been found inadequate to support an award of punitive damages on the basis that the multitude of employees involved in the various aspects of the process were not high enough in the corporate chain of command”. When the entire organization is involved in the acts which constitute malice there is no danger a blameless corporation will be punished for bad acts over which it had no control, the primary goal of the ‘managing agent’ requirement. There is no requirement that the evidence established that a particular committee or office of the corporation acted on a particular date with ‘malice’. A corporate defendant cannot shield itself from liability through layers of management committees and the sheer size of the management structure. It is enough if the evidence permits a clear and convincing inference that within the corporate hierarchy authorized persons acted despicably in “willful conscious disregard of the rights or safety of others.^x

The Morgan court criticized plaintiffs’ limited interpretation of Romo, identifying the crucial language as follows:

The Romo court went on to explain that a plaintiff can satisfy the “managing agent” requirement “through evidence showing the information in possession of the corporation and the structure of management decision making that permits an inference that the information in fact moved upward to a point where the corporate policy was formulated. These inferences cannot be based upon mere speculation, but they may be established by circumstantial evidence, in accordance with ordinary proof. The court explained that “[it] is difficult to imagine how corporate malice could be showing in the case of a large corporate defendant except by piecing together knowledge and acts of the corporation’s multitude managing agents.”^xi

The court held the fact defendant is a large corporation does not relax plaintiff’s required burden of proof and found that there was insufficient evidence. The punitive damage award was reversed and remanded to the trial court.

Takeaway

This court’s decision ensures plaintiffs must present sufficient evidence to meet the burden of proof, and it will be used by corporate defendants to fight punitive damages claims. On the other hand, plaintiffs’ counsel may now be motivated to increase discovery demands. The goal of plaintiffs’ counsel will be to collect evidence that layers of management decisions established a corporate policy giving rise to a reasonable inference of malice.

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