Punitive Damage Award Reversed Based on Erroneous Admission of Other Dissimilar Instances

Interesting application of State Farm Mutual Automobile Insurance Company v. Campbell (2003) 538 U.S. 408 in the California context in yesterday's decision in Holdgrafer v. Unocal Corp. (2008) ___ Cal.App. 4th ___ (2d Civil No. B175953). 

Unocal (now owned by Chevron) owned and operated oil wells, a refinery, and hundreds of miles of underground petroleum pipeline in Central California in general and San Luis Obispo County in particular.  The company replaced two of the pipelines in 1952, installed cathodic protection (which guards against corrosion) in 1957 and hired a full-time manager to monitor the cathodic protection system starting in 1984.  Alas, there were still some 426 leaks from 1972 to 1992, and most of these were related to corrosion.

In 1988, substantial contamination from the pipes was found on the plaintiffs' property.  After a rapid-fire negotiation session lasting a mere 13 years, negotiations broke down and the plaintiffs sued Unocal.  The jury awarded them $564,348 in damages for past economic loss and $2 million for diminished value of the property.

Civil Code section 3294 permits a jury to award punitive damages if it finds by clear and convincing evidence that the defendant has been guilty of "malice, fraud or oppression."  Section 3295(d) (scroll down) provides that on  application of the defendant,  evidence of the defendant's financial condition shall not be admissible until such time as the jury has found malice, fraud or oppression. 

What this means in most instances is that punitive damage cases are bifurcated.  In phase I, the jury decides all of the compensatory damage issues, and also decides whether there is malice, fraud or oppression.  If it so finds, then in phase II, it looks at evidence concerning what punitive award is appropriate, including the defendant's financial condition.  This bifurcation is the right of the defendant, who can also waive it.

Well, Unocal had other leak and petroleum release problems besides this one.  It spilled, and then cleaned up, 400,000 gallons of oil at Avila Beach.  It leaked about 8.5 million gallons of a diesel-like substance at its Guadalupe field.

And the trial court admitted evidence of both of these mishaps in connection with the plaintiff's punitive damage claims, both as evidence of malice and as evidence of the amount of punitive damages that were appropriate.  The evidence was admitted only in Phase II.  But the trial court bifurcated in an unusual way:  both the malice issue and the amount of punitive damages issue were decided in Phase II.  Only compensatory issues were decided in Phase I.  In order to prevent evidence of the other spills from being admitted in the liability phase, Unocal waived its right to a section 3295 bifurcation.

The jury somewhat whimsically awarded $10,000,000.76 in punitive damages (Unocal, of course, was previously known as Union 76).  Confirming my analysis that San Luis Obispo Superior Court is a pretty conservative place, the trial court reduced the number to an even $5 million, even taking away the seventy-six cents.

The Court of Appeal took away the rest, on the ground that Avila and Guadalupe were dissimilar incidents.  State Farm held that dissimilar incidents were not admissible to prove the amount of punitive damages.  The California court held that dissimilar incidents are inadmissible to prove the entitlement to punitive damages.

Of course, the case was remanded for JUST a trial on the punitive part of the case -- probably not a happy scenario for Unocal.  One questions how well it will do trying ONLY punitive damages, with the jury being instructed that the company has already been found liable, and the only thing they need to do is look at all the similar evidence and determine whether there is malice and how much is appropriate to punish the company.