Justices to Look at O.C. Case of Punitive Award

WASHINGTON —  The Supreme Court, in a case that could resolve whether juries may impose heavy punitive damages, agreed Monday to decide whether the constitutional rights of an Orange County-based insurance company were violated by having to pay more than $1 million in punitive damages.

The company, Pacific Mutual Life Insurance of Newport Beach, was ordered to pay the damages for a fraud perpetrated without its knowledge by one of its agents.

In cases of fraud or other wrongdoing, juries can use a punitive award to punish the wrongdoer, in addition to forcing him to pay for actual damages. Though long a part of the U.S. civil justice system, punitive-damage verdicts have grown in number and size in the last 15 years. Sometimes, a punitive award is up to 100 times greater than the actual damages.

Lawyers for manufacturers, insurance companies, and now even churches, say it is unconstitutional to allow an irate jury to simply select a monetary verdict as a means of punishment. They argue that courts cannot punish someone--whether it be for a parking violation or a murder--without spelling out in law the nature of the crime and the range of possible punishments.

But defenders of the system say that large punitive verdicts are the only means to punish and deter big corporations engaged in gross misconduct.

In the past month, two California-based religious groups, the International Society for Krishna Consciousness and the Church of Scientology, have filed appeals at the court challenging multimillion-dollar punitive awards against them.

The Krishnas say their churches will be sold off and their religion destroyed unless the court overturns a $5-million award won by a young Orange County woman who said she was brainwashed and held against her will by church members.

Since 1986, several justices have voiced doubts about the constitutionality of big punitive awards, but the court as a whole has been unable to agree on a basis for imposing limits on them.

The Pacific Mutual case granted a review Monday may give the justices a vehicle for setting national standards for punitive damages. But it could also yield a narrow ruling on whether a company can be punished for the illegal actions of one of its low-level officials.

The case, Pacific Mutual Life Insurance vs. Haslip, 89-1279, will be argued in the fall, with a ruling likely early next year.

Pacific Mutual sells life insurance nationwide. In 1981, one of its sales agents in Birmingham, Ala., sold a combined life and health insurance policy to employees of Roosevelt, Ala. The health coverage was to be provided by a second company, Union Fidelity.

But the agent simply pocketed the premiums for the health coverage, and Union Fidelity soon canceled the policy. When Cleopatra Haslip, a city employee, was hospitalized for a kidney infection, she was surprised to learn that she had no health insurance. Her bills came to more than $2,500.

She and several other employees then filed a suit against Pacific Mutual and the agent, alleging fraud. When the agent disappeared, the Orange County company was left to defend itself alone.

An Alabama jury ruled for the city employees and awarded them nearly $1.1 million in damages, most of which were punitive.

In its appeals, the company said it did not know of the fraud. It also called the award “grossly excessive” and that it violated its rights to due process of law. In September, the Alabama Supreme Court upheld the verdict on a 5-2 vote, ruling that the company should have known of the fraud and was responsible for it. Pacific Mutual then appealed the same issues to the Supreme Court.

In June, the high court ruled that a million-dollar punitive damage award does not violate the 8th Amendment’s ban on “excessive fines (and) cruel and unusual punishment.” But the justices specifically left open whether such an award violates the right to “due process of law” in the 5th and 14th Amendments.

Since then, the justices have dismissed without comment a series of appeals challenging punitive damages on just those grounds, leaving most lawyers entirely puzzled. On Monday, they issued a brief order saying they would review the Pacific Mutual case, but without saying which issues they will focus on.

“I’m very surprised. I thought this case was weaker than some of the ones they have turned down,” said Bruce Ennis, a Washington lawyer who filed a brief on behalf of the employees urging that the verdict be upheld.

Bruce Beckman, an attorney representing Pacific Mutual, noted that the court had previously expressed interest in reviewing the due-process issues raised by large awards of punitive damages.

Beckman said the Haslip case “presented the issues clearly, and we’re very pleased the court decided to look at it.”

In some earlier such cases, the constitutional question was not raised correctly in the trial courts, Beckman said, making it more difficult for the Supreme Court to review the issue.

“The company has been pursuing this because these are important issues,” he said, adding that punitive damages “are a serious problem for both manufacturers and insurance companies.”

In a case that raises some of the same issues, the International Society for Krishna Consciousness has appealed a $2.9-million damage award granted to the family of Robin George, a former Cypress resident who alleged that she had been kidnaped and brainwashed by the religious group.

George was originally awarded $32.5 million by an Orange County jury in 1983, but that award was reduced to $9.7 million by the trial judge. The 4th District Court of Appeal in San Diego dismissed claims last year that the Krishnas had libeled George and caused her emotional distress, letting stand only a $2.9-million award to her mother, Marcia George, for emotional distress and libel.

The California Supreme Court let that judgment stand. Last month the Krishnas appealed the verdict to the U.S. Supreme Court. Edward M. Gaffney, a Berkeley attorney representing the Krishnas, said the appeal was based on both freedom of religion and due-process claims.

Punitive damages against religious organizations, Gaffney said, have a chilling effect on freedom of religion and thus should be limited.

Specifically, the Krishnas maintain that the Georges judgment could force them to sell some churches, sharply limiting their ability to practice their religion.

The Krishnas have also challenged the damage award on due-process grounds, the same challenge asserted by Pacific Mutual. A related case involving a $2.5-million California judgment against the Church of Scientology is also being appealed to the Supreme Court on due-process grounds. Those two cases could be heard by the court as companion cases, Gaffney said, though the Court has not said whether it will hear the appeals.