10th Circuit Reverses Punitive Damages Against Property Owner Based on Use of “Reputable” Contractor

June 15, 2016

As we reported earlier this month, courts sometimes disregard the general rule of non-liability for the conduct of independent contractors, and allow liability to be imposed against principals — including for punitive damages — based on contractor conduct.

Recently, however, a ray of light emerged from the 10th Circuit Court of Appeals, where the court reversed a $3 million punitive award against a property owner in a carbon monoxide poisoning case, holding that the owner’s reliance on a “reputable property manager” precluded a finding of “willful and wanton misconduct necessary to support an award of punitive damages[.]” See Lompe v. Sunridge Partners, LLC, 818 F.3d 1041 (10th Cir. April 1, 2016).

The court also reduced the $22.5 million punitive award against the contractor to $1.95 million (resulting in a 1:1 ratio to compensatory damages), emphasizing that appellate courts must conduct an “exacting de novo review of the constitutionality of the punitive damages award.” These holdings are significant for companies facing exposure to punitive damages in any arena, particularly where independent contractors are involved.

The plaintiff in Lompe suffered carbon monoxide poisoning after a furnace in her apartment malfunctioned. She claimed that both the property owner and the property manager — an independent contractor hired by the property owner — were liable for compensatory and punitive damages. The jury awarded $3 million in compensatory damages, and apportioned the fault 65 percent to the contractor, 25 percent to the owner, and 10 percent to the plaintiff. The jury then returned a punitive damages award of $25.5 million, assessing $3 million against the owner and $22.5 million against the contractor. Although the district judge noted that “the award of punitive damages is significant and far greater than that usually seen in this district,” it denied the defendants’ post-trial challenges to the award.

Addressing first the owner’s challenge to the sufficiency of the evidence in support of punitive damages, the 10th Circuit noted that the owner had “purchased the property for investment purposes and hired a reputable property manager to take care of the day-to-day management of the apartments.” In the court’s view, the owner “relied on [the manager] to manage the property competently and had prior experience suggesting that such trust was warranted.” The owner “had no reason to assume” the manager “would not respond appropriately to whatever circumstances” presented themselves at the property, and, “as opposed to” the manager, had “received no complaints about the furnaces.” Based on these facts, the court concluded that “the trial evidence was insufficient to send the question of punitive damages to the jury” as to the owner.

In contrast, the court concluded that the evidence was sufficient to support punitive damages against the property manager, but nevertheless determined that the amount of that award was “grossly excessive and arbitrary in violation of constitutional due process.” The court stressed that “[d]ue process requires federal courts to perform an exacting de novo review of the constitutionality of punitive damages awards to ensure that an award of punitive damages is based upon an application of law, rather than a decisionmaker’s caprice.” This standard “differs from the deferential de novo review that a court applies when ruling on a motion for JMOL, new trial, or remittitur.” A court reviewing the constitutionality of a punitive award “must primarily decide whether the particular award is greater than reasonably necessary to punish and deter.”

In conducting its de novo review of the punitive award against the contractor, the 10th Circuit touched upon a frequently misunderstood concept — the relevance of a plaintiff’s “financial vulnerability” in cases alleging personal, as opposed to economic, injury. Financial vulnerability is a component of the broader concept of reprehensibility that courts are required to consider in assessing the constitutionality of a punitive award. See BMW of N. America v. Gore, 517 U.S. 559 (1996).

As noted previously, “some courts have interpreted financial vulnerability not as the Court in Gore indicated, i.e., meaning a defendant targeted a financially or economically vulnerable plaintiff, but instead as meaning that the defendant had a greater net worth than the injured plaintiff or that the plaintiff’s injuries left him or her in a financially vulnerable position.” See The Supreme Court’s Reprehensibility Factors Don’t Work in Product Liability Cases , Bloomberg BNA Product Safety & Liability Reporter (March 2, 2016). The 10th Circuit in Lompe correctly noted that “the financial vulnerability factor does not have particular relevance in this case, where the harm Ms. Lompe suffered was physical rather than a reprehensible exploitation of financial vulnerability through fraud or other financial misconduct.” While “it is true that as a low income college student, Ms. Lompe was financially vulnerable,” the court held that “such matters [were] tangential to the constitutionality of the amount of punitive damages in this case.” Ultimately, the court determined that, based on the record before it, a “1:1 ratio of punitive damages to compensatory damages here satisfies the State’s legitimate objectives of punishing and deterring future misconduct[.]”

Taken as a whole, the 10th Circuit’s opinion in Lompe is a positive one for litigants — especially those who rely on independent contractors — facing potential exposure to punitive damages, or seeking to overturn an existing punitive award as unconstitutionally excessive. For more information concerning McGuireWoods’ punitive damages practice, please visit the firm’s website.