FICC Nursing Home Seminar Materials

Avoiding or Mitigating Punitive Damage Exposure in Nursing Home Litigation

Michael J. Brady

Introduction

The greatest exposure that nursing homes face in tort litigation is punitive damages. Historically, juries award punitive damages against “unpopular” defendants, such as insurance companies, railroads, and corporate conglomerates. In today’s society, nursing homes often find themselves in this group as well, increasing their punitive exposure in tort cases. Witness the punitive damage verdict of nearly $100 million against a California HMO![1]

A number of societal reasons explain this recent phenomenon. First, while many nursing homes are small, some are huge national corporate conglomerates. Their larger size causes juries to view them with an unsympathetic eye. Secondly, nursing homes are in business to make a profit -- an increasingly difficult task in the healthcare field. This concern with profits sometimes results in less sympathetic treatment for nursing home patients, most of whom are elderly, vulnerable, and fragile. The result is increased sympathy for these patients in the eyes of the jury.

From a defense perspective, one of the most troubling issues surrounding punitive damages is that, unlike compensatory damages, juries are given virtually no concrete, relevant guidelines to assist them in deciding when to award punitive damages and how large a sum to award. As a result, juries are often turned loose and frequently award “runaway” sums. Fortunately, many of these awards are reduced or reversed on appeal. Therefore, an essential task for the nursing home, claim representative, risk manager, and defense attorney is to reduce or eliminate punitive damage exposure at the trial court level.

This article will address some of the problems nursing homes face when punitive damages are assessible. The appendix to this article outlines several methods defense attorneys can use when representing nursing homes either to garner jury sympathy or to reduce or eliminate punitive damage exposure altogether. Whatever the method, a game plan for trial is critical. The following suggestions are intended to help in creating that plan.

II.

The Available Law

State law largely governs issues of punitive damages. However, while each state has adopted its own distinct laws, some common elements characterize most of them. Therefore, in determining punitive damage exposure, the practitioner must begin by consulting the law of the state where the trial will occur. Further, any award of punitive damages rendered in a state court must pass the “constitutionality” test established by the Supreme Court in BMW of North America, Inc. v. Gore,[2] an additional weapon by which to judge and attack punitive damages. For illustrative purposes, this article will employ California state law when analyzing these punitive damage issues.

III.

Precipitative Conduct for Punitive Damages

Punitive damages typically are assessed to punish a defendant for especially egregious conduct and to deter the defendant from committing such conduct in the future.[3] In most states there is a statute that describes the conduct that precipitates an award of punitive damages. California has enacted a statute that allows punitive damages if a defendant acts with “malice, fraud, or oppression.” [4] California case law has interpreted “malice” to mean vile, despicable conduct, beneath all standards of human decency.[5] Punitive damages also may follow simple fraud or deception, as typically found in commercial settings.[6] Nursing home defendants must be specially wary of fraud claims because these can assume several relevant forms. Such fraud might occur in the context of financial arrangements made with patients, including how a patient’s assets or property are handled. Fraud claims may also occur from alleged misrepresentations made to patients or relatives concerning the nature and scope of care or the condition of the patient.

It is also important to remember that corporations usually own nursing homes. A corporation can act only through its servants or agents. However, a corporation is not necessarily vicariously liable for punitive damages because of the malicious conduct of a lower-level employee.[7] Instead, a corporation is liable only if a “managing agent” or highly placed corporate official commits the malicious act, or if the corporation directs, authorizes or ratifies the act after the fact, e.g., by retaining the suspect employee without discipline following knowledge of the act.[8] Therefore, nursing homes should scrutinize the conduct of their high-level officials to circumscribe the possibility of vicarious liability.

IV.

The Reasonable Relationship Requirement

A few states have adopted a ceiling or cap on punitive damage awards.[9] However, most states have not enacted this limitation, which begs the question of any permissible limit on the size of a punitive damage award.

Most courts require that the punitive damage award bear a “reasonable relationship” to the size of the compensatory award.[10] However, it is nearly impossible to develop a mathematical formula that sets an outer limit for punitive damage awards based on this concept. Indeed, the Supreme Court has refused to do so.[11] Thus, awards have been sustained that are hundreds of times greater than the corresponding compensatory award, and awards have been stricken that are only ten times greater than the compensatory award.[12] This situation illustrates the central problem with respect to punitive damage awards -- the lack of meaningful guidelines to assist the jury in determining their propriety. As a result, shocking awards are often returned, subject to being reduced or stricken by higher courts or by trial judges following post-trial motions.

The Effect of BMW v. Gore

In 1996 the United States Supreme Court issued its critical decision in BMW of North America, Inc. v. Gore.[13] At the time, uncertainty about the limits of punitive damages was rife among state courts. Members of the insurance, business and legal communities anxiously awaited guidance from the Supreme Court.

In Gore, the Court confronted the issue whether a punitive damage verdict rendered in an Alabama state court satisfied constitutional standards of due process. When issuing its determination, the Court provided some guidelines that were helpful to the defense. These guidelines assist defendants and their counsel when arguing to trial judges that the punitive damage question is not even proper for jury consideration. The guidelines also provide fodder for arguing to trial judges that the jury verdict is too high, too severe, or violative of constitutional standards. Finally, the Gore guidelines provide the defense with ammunition to attack excessive punitive damage awards at the appellate level.

A review of the “standards” articulated in Gore is helpful in understanding the new advantages provided to the defense. First of all, the Gore decision mandates that trial judges should begin their determination by examining the degree of “reprehensibility” of the defendant’s conduct. The Supreme Court was clear that this is “the most important indicium when determining the reasonableness of a punitive award.”[14] Trial judges should then compare the ratio of any punitive damage award to the actual harm inflicted on the plaintiff. These are the two principal tests. If, after applying these tests, the award is deemed to be grossly excessive, it should be set aside or reduced, as noted below in greater detail.

A. The “Reprehensibility” Test

The defense attorney facing a potential punitive damage award is best aided by the argument that the defendant’s conduct was not sufficiently reprehensible to sustain the award. Arguing that the punitive damage award does not bear a reasonable relationship to the compensatory award is a weaker argument and should be made, if at all, only after the reprehensibility argument fails. As noted earlier, the Supreme Court provides attorneys with no mathematical formula to guide the second argument. Also, recall that the Supreme Court termed reprehensibility “the most important indicium.”[15] Furthermore, the Supreme Court has established a hierarchy of “bad acts” with respect to the reprehensibility standard. From the most reprehensible to the least, these “acts” are as follows:

1. Did the defendant act violently or threaten bodily harm?

2. Was the defendant indifferent or reckless with regard to the health and safety of individuals?

3. Did the defendant act maliciously?

4. Did the defendant engage in fraud or deceit?

5. Was the defendant guilty of other bad acts (i.e. was there a pattern or practice involved or was there recidivism)?

6. Did the plaintiff suffer mental distress?

7. If the harm is only economic (rather than physical), was the victim vulnerably situated?

Turning specifically to the exposure of nursing homes, a number of these “bad acts” can be implicated:

1. Threatening Bodily Harm: If a patient is uncooperative and the nursing home attendants threaten bodily harm to coerce compliance, punitive exposure may be high, especially if the nursing home learns of the inappropriate conduct and fails to discipline the employee(s).

2. Indifference to Safety Violations: The press has reported deplorable health and safety conditions at some nursing homes and healthcare facilities. When combined with misery or injury to patients, the result could be significant punitive exposure.

3. Fraud or Deceit: This factor presents in numerous ways. First, the initial contractual relationship between patients and their families may be subject to challenge for misrepresentation and deceit. Secondly, once the nursing home undertakes to care for the patient, misrepresentations often surface when the patient’s family or friends inquire about the patient’s health or condition. The family may be lulled into a false sense of security, even though the facts are quite the contrary. Finally, some nursing homes exercise custody or control over the patient’s assets and may abuse this position of “trust.”

4. Pattern or Practice (Recidivism): Many courts are more likely to sustain a punitive damage award when the defendant demonstrates a pattern or practice of similar egregious acts. The pattern or practice provides a basis for the court to punish the defendant to ensure that such conduct is not committed in the future. Accordingly, an isolated incident may not be punished as harshly as a pattern or practice of misbehavior. As a result, the defense attorney should expect onerous and potentially embarrassing discovery requests in nursing home litigation. These will concern all past similar complaints, disciplinary actions taken by government authorities, and any other information designed to show a pattern or practice that has not been remedied. Such discovery efforts can be resisted successfully, but the move to do so can be exhausting. Given the inflammatory nature of this evidence, it may be useful for a nursing home defendant to show the absence of a pattern and practice in order to diffuse punitive exposure.

5. Mental Suffering: This factor frequently will be present in cases of patient abuse.

6. Vulnerability of the Patient: By their very nature, most nursing home patients occupy a vulnerable position. Any act that is interpreted to “prey” on that vulnerability creates significant sympathy for the patient.

B. Ratio of Punitive Award to Actual Harm Inflicted

Counsel for the defense may want to argue that the actual harm sustained by the plaintiff is insufficient to justify a large punitive damage award. However, a number of problems surround this argument. First, to posit such an argument, the defense will likely be attacking a sympathetic plaintiff. For reasons explained earlier, the defense could thereby alienate itself from the jury. Second, this argument does not address the defendant’s conduct and, by making the argument, the defense may appear to be admitting fault. Finally, the standard by which to judge this argument is unclear at best since the Supreme Court has refused to establish an applicable ratio by which to limit or cap a punitive award. As a result, the defense is best advised to address the reprehensibility argument; the ratio argument should be used only as a last resort or under circumstances in which the defendant’s conduct is so reprehensible that a punitive award is virtually certain.

C. Recent Important Constitutional Developments

In May, 2001, the United States Supreme Court handed down a momentous ruling on punitive damages, Cooper Industries, Inc. v. Leatherman Tool Group, Inc.[16] This decision sets forth an entirely new standard for reviewing the propriety of punitive damage awards rendered by juries. No longer will the usual standard of appellate review apply (that standard provided that there is a presumption of correctness in the jury verdict, and if the jury verdict is supported by any substantial evidence, it will be affirmed). Instead, punitive damage awards are now subject to “de novo” review by appellate courts (and presumably by trial judges on motions for new trial). This means that the punitive damage case can in effect be re-argued before the court of appeal. The decision is a great victory for the defense interests in that it will provide much greater opportunity for reversal or modification (downwards) of excessive punitive damage awards.

The decision goes beyond a new standard of review. The Supreme Court reaffirmed the factors that a court should deem important in reviewing punitive damages, including:

· Reprehensibility;

· The ratio of the punitive damages to the actual harm suffered by the plaintiff (this is interesting – particularly in class-action and similar cases where the individual plaintiffs may have suffered only minor damage);

· The analogous civil fines and penalties provided by the states for similar conduct; the factor is particularly interesting because it suggests that judges, when reviewing the size of the punitive damage award, should look at the civil penalties and fines provided by the statutes of the individual state for similar conduct, and those amounts can possibly be used to test the propriety of the size of the punitive damage award. Therefore, for example, in consumer type “financial injury” cases, one might look to fines and penalties for price fixing, antitrust violations, or RICO-type violations. This will be an interesting exercise, since it could lead to important opportunities for reduction in the size of punitive damage awards.

The Cooper Industries case is a constitutional case. It is decided as a matter of due process and the Eighth Amendment and therefore applies to all federal and state cases, making its breadth all-inclusive.

One California appellate case affirming a punitive damage award has recently been remanded by the Supreme Court to the Court of Appeal in California for re-review in light of Cooper Industries. Also significant, the Ninth Circuit Court of Appeals in San Francisco recently reversed the Exxon Valdez $5 billion punitive damage decision, returning it to the trial judge for re-review on grounds of excessiveness. Language in the court’s decision cited back to an earlier Supreme Court decision suggesting that a four to-one ratio of punitive to compensatory damages might be the appropriate ceiling.[17]

These developments are indeed encouraging for the defense and may pose unimagined opportunities for relief from the horrendous punitive damage awards which have been increasing in size throughout the country in the last decade.

VIII.

Taking the Offensive

This article concludes with a practical discourse outlining numerous steps that the defense should take to ingratiate itself with the jury and eliminate or reduce punitive damage exposure. The outline begins with a list of common tactics used by the plaintiffs’ bar against the nursing home industry. The tactics then are scrutinized individually in an effort to demonstrate how best to combat the tactic and assume the offensive. Bear in mind that onerous pretrial preparation and planning will likely be required of all defense counsel in these cases to insure the highest probability of success.

APPENDIX A

How to Reduce or Eliminate Punitive Damage Exposure

Introduction

· Punitive damages is the greatest exposure nursing homes face in tort litigation.

· The nursing home industry, like many others, is a notoriously unsympathetic industry.

· Be aware of the many tactics used by the plaintiffs’ bar to recover punitive damages and know how to diffuse these tactics.

Plaintiffs’ Bar Tactics Against the Nursing Home Industry

· The principal emerging strategy seeks to introduce evidence of other claims and other suits against the nursing home.

· The object of such a tactic is to show a pattern or practice about how the nursing home handles claims, using this evidence to inflame the jury so that it awards large punitive damages for the particular claim.

· Consequently, this powerful weapon must be diffused.

Lesson One: How to Combat Evidence of Other Claims and Other Suits

· Fight this issue by presenting strong legal arguments in a motion in limine.

· Demonstrate the lack of a pattern or practice.

· Use experts and statisticians to argue that the plaintiff must show, for example, that at least 5% of other similar claims were handled improperly to demonstrate a pattern or practice; then argue that the proffered evidence in no way approaches that threshold.

· If the plaintiff surpasses this hurdle, the nursing home organization should be entitled to show that hundreds or thousands of claims were properly handled by contrast.

· Demonstrate that the present suit is an isolated incident; therefore, no punitive message is necessary.

· Explain that because there is no pattern or practice of mishandled claims, the defendant’s conduct lacks the reprehensibility necessary to justify punitive damages.

· If dealing with a national nursing home organization, rely on BMW v. Gore to preclude evidence from other states where the organization operates. In Gore, the United States Supreme Court was clear that one state cannot punish a defendant for behavior in another state, regardless of whether that behavior is legal. Therefore, counsel should preclude all out-of-state evidence as a measure of reprehensible conduct.

· Produce evidence that the nursing home organization employs hundreds of people to handle thousands of claims. Mistakes will be made; these people are human.

Lesson Two: Deflecting Charge that Nursing Home Forces Insureds to Litigate

Another tactic used with regularity by the plaintiffs’ bar is to show that the nursing home fails to resolve claims and forces patients or their relatives to litigate in order to exhaust their resources.

· Produce statistical evidence demonstrating that the vast majority of claims are settled.

· Demonstrate that of those claims that are not settled and proceed to litigation, the defense wins more than it loses.

· Employ experts and statisticians creatively to counter the plaintiff’s analysis.

Lesson Three: No Intentional Destruction of Records

The latest tactic employed by the plaintiffs’ bar seeks to demonstrate that the defense undertakes to destroy records that pertain to liability and damage issues. This is commonly termed “spoliation of evidence.”[18]

· Locate relevant case law limiting spoliation claims.

· Use experts to identify relevant business reasons that justify limited retention of records and articulate a rationale for statutes that permit their destruction.

· Locate experts, such as those available in the Midwest, who are well versed in communicating this rationale to a jury.

Lesson Four: Explaining the Nursing Home’s Balance Sheet and Net Income

· Realize that a punitive damage award is largely based upon the nursing home’s net assets or net income.

· Understand and explain that the nursing home industry employs different accounting methods to determine income and profit.

· Explain the need for this industry to earn a profit; confirm that there is nothing “evil” in doing so.

· Use accountants and other financial experts to explain the nursing home’s financial condition in detail. This evidence is extremely important and should not be introduced by stipulation. The jury must understand the nature of the defendant’s business to identify its predicament.

· Use intelligent, sympathetic witnesses who will represent the company and resonate with the jury.

Lesson Five: The Client and Witnesses Are Good People

· Humanize the defendant by showing:

· That the people working for the nursing home are family people.

· That nursing home employees are involved in the community (Little League, Girl Scouts, etc.).

· That the people involved in this particular case are not vile, despicable people who acted in a contemptible manner.

Lesson Six: Claimants and Patients Like the Nursing Home

· Compile a commendation book of letters and cards from satisfied customers and patients who have been pleased with the relevant care.

· Introduce communications from claimants who were satisfied with the resolution of their claims by the nursing home.

· Locate plaintiffs’ lawyers who will testify that they deal frequently with the nursing home and are satisfied with the reasonable way their claims are handled.

Lesson Seven: The Nursing Home Is a Good Corporate Citizen

· Demonstrate that the nursing home pays its taxes.

· Demonstrate that it contributes to the community by providing employee release time to work with United Way and similar organizations.

· Show that the nursing home makes charitable contributions and is otherwise active within the community, e.g., community educational programs, etc.

Lesson Eight: Use of Retired Regulators

Since the nursing home industry is regulated by the government:

· Locate retired government regulators who can testify that the nursing home has a good, clean record.

· Demonstrate that only a small fraction of the total number of claims processed each year by the nursing home have resulted in complaints.

· Demonstrate that the nursing home can be fined by the government if it acts improperly, which constitutes sufficient disciplinary power and obviates the need for punitive damages.

Lesson Nine: Use of Effective Witnesses

· Scout the company and locate people who are knowledgeable about its practices and procedures.

· Cultivate their appearance and demeanor to make these people excellent jury witnesses.

Lesson Ten: Keep an Open Mind

· Demonstrate that the nursing home has a mission statement that informs its claims handling practices.

· Demonstrate that the nursing home periodically reviews its claims policies and manuals.

· Demonstrate that the nursing home keeps current with the requirements for good-faith claims handling and studies punitive damage verdicts in a regular effort to evaluate how it handles claims.

Lesson Eleven: Avoiding Ratification

· Show that the nursing home disciplines employees promptly and in writing.

Lesson Twelve: The Client Got the Message

· As defense counsel, explain to the jury that you understand what the jury said in its verdict; you discussed it with the nursing home and the client got the message; the client will act to take care of this problem.

· Produce high-level corporate witnesses who will attest to this fact.

Caveat: Themes for the Defense

· Be careful how these tactics are applied lest the client’s legal rights be waived on appeal or at a new trial.

· Guard against relevancy objections by the plaintiff who may object to showing that the nursing home is a good corporate citizen.

ENDNOTES