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The most important court decisions of the season
Welcome to Berger Kahn's quarterly e-publication summarizing the most important California state and federal court decisions. 

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Brandt Fees Help Justify The Punitive Damages Ratio Even If Assessed Post-Verdict
Nickerson v. Stonebridge Life Ins. Co.
(Cal. Sup. Ct.) filed June 9, 2016

Veteran Thomas Nickerson, who was paralyzed from the chest down, broke his leg when he fell from a wheelchair lift on his van. He was hospitalized for 109 days due to his injury. Nickerson applied for indemnity benefit policy benefits from Stonebridge Life Insurance Company for $350 for each day he was confined to a hospital bed for the “necessary care and treatment of a covered injury.” Stonebridge argued that the necessary care and treatment was only 18 days. Nickerson sued, alleging that Stonebridge breached his insurance contract and acted in bad faith in denying his claim. The parties stipulated that if Nickerson succeeded on his complaint, then the trial court could determine the amount of Brandt fees awarded to Nickerson. At the close of evidence, the trial court granted Nickerson’s motion for directed verdict on the breach of contract cause of action, awarding Nickerson $31,500 in unpaid policy benefits. The jury found that Stonebridge had acted in bad faith and awarded $35,000 for emotional distress damages and $19 million in punitive damages. After the verdict, the parties stipulated to $12,500 in Brandt fees and the trial court awarded that amount. Stonebridge moved for a new trial, arguing that the punitive damages award was constitutionally excessive. The trial court agreed to the new trial unless Nickerson consented to reduce the punitive damages amount to $350,000, noting, “a punitive-compensatory ratio exceeding single digits will ordinarily exceed constitutional bounds.” The trial court determined it was bound to reduce the punitive damage award to a 10-to-1 ratio, only considering the compensatory award, and not the $12,500 in Brandt fees. Nickerson appealed. A divided Court of Appeal affirmed the 10-to-1 ratio. The California Supreme Court granted review limited to the question of whether Brandt fees should be excluded from the compensatory award for purposes of calculating a ratio when a trial court awards fees after the jury’s verdict. The Court emphasized that under Brandt, “attorney fees reasonably incurred to compel payment of the benefits are recoverable as an element of the plaintiff's damages.” In Brandt, the Court had held that a “stipulation for a postjudgment allocation and award by the trial court would normally be preferable since the determination then would be made after completion of the legal services, and proof that otherwise would have been presented to the jury could be simplified because of the court's expertise in evaluating legal services.” The Court further confirmed that Brandt fees ordinarily qualified as compensatory damages because they were considered an economic loss caused by a tort. Stonebridge argued, however, that because the trial court determined Brandt fees after the jury rendered its punitive damages award, the fees could not be considered in calculating the punitive-compensatory damages ratio. Stonebridge argued further that because no evidence was presented to the jury relative to the fees, then it could not be considered in reviewing the punitive damages ratio. The California Supreme Court disagreed. It applied the Gore guideposts analysis: “(1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” In applying the Gore analysis, the Supreme Court noted that a reviewing court’s role in “applying the second Gore guidepost may consider not only the compensatory damages actually awarded by the jury, but also the ‘potential harm’ suffered by the plaintiff, even though the jury was never asked to consider potential harm in rendering its verdict.” Ultimately, the Court found no reason to exclude the Brandt fees merely because they were awarded pursuant to stipulation after the jury rendered its verdict. The Court acknowledged that “to exclude the fees from consideration would mean overlooking a substantial and mutually acknowledged component of the insured's harm. The effect would be to skew the proper calculation of the punitive-compensatory ratio, and thus to impair reviewing courts' full consideration of whether, and to what extent, the punitive damages award exceeds constitutional bounds.”

Attorneys Who Occasionally Act As Private Judges Should Adhere To Disclosure Requirements
Hayward v. Superior Court
(Ct. App. 1st Dist., Div. 2), filed August 3, 2016

Particularly in the field of family law, private judging has become commonplace. A private judge may be an active, practicing attorney the parties stipulate to use and who becomes empowered to make judicial decisions in the case. In this case, the Court of Appeal recognized that a private judge is subject to the same on-the-record disclosure requirements that apply to sitting judges. Here, the wife filed for divorce. The parties initially stipulated to use a local family law attorney as a private judge. That private judge did not make any on the record or written disclosures. While the private judge recalled informally discussing her professional contacts, she did not disclose the fact that she enjoyed a mutual private judging relationship with the husband’s attorney in writing or on-the-record. The action proceeded with several adverse rulings against the wife. The wife and the private judge developed a strained relationship. On the eve of a significant hearing that could have seriously affected or impaired the business the wife had founded two decades earlier, the wife signed a settlement agreement and avoided the next days’ scheduled hearing. The husband moved to enforce the settlement agreement. Before the motion was decided, the wife’s attorneys learned that the private judge had previously judged cases for the husband. When they requested copies of any disclosures, they learned that the husband’s attorney had also private judged for the private judge (when the private judge was acting as an attorney and representing a client). The wife moved to disqualify the current private judge. Rather than file a verified answer, the private judge sent a letter to the superior court judge, asking that she be “recused.” The trial court ordered disqualification. The wife then moved to set aside the disqualified private judge’s prior orders. After a series of adverse discovery rulings resulted in sanctions and broad attorney-client privilege waivers, the wife petitioned for writ relief. The Court of Appeal granted the petition, recognizing that “temporary judges operate in a context that greatly increases the likelihood of potential conflicts.” Due to this potential, the Court emphasized, “the greater interest in assiduous disclosure than [private judges] may realize.” It noted, the “requirement that disclosure be ‘in writing or on the record,’ as well as that any waiver of disqualification be in writing and recite the basis of disqualification (§ 170.3, subd. (b)(1)), cannot be treated casually by a temporary judge except at his or her peril—and also that of the system of private judging in California.” Then, turning to the settlement agreement the wife had signed, the Court asked, “[m]ight a person aware of these facts reasonably entertain a doubt whether [the wife] would have signed the MOA in the absence of [the disqualified private judge’s] rulings? To ask the question is to answer it: Even if she did not sign the MOA under economic duress, how could she not have taken into consideration the orders that had been issued in the case and what they led her to expect from the highly consequential hearing the next day?” It held as a matter of law, “the [settlement agreement] cannot be enforced under section 664.6, because the effectuation of a settlement tainted by the void rulings of a disqualified temporary judge would undermine public confidence in the judiciary and the right of litigants to fair and impartial adjudication.”

Outside Counsel's Post-Employment Investigation Not Discoverable
City of Petaluma v. Superior Court
(Ct. App. 1st Dist. Div. 3), filed on June 8, 2016

Andrea Waters was the first and only woman to hold the positions of firefighter and paramedic for the City of Petaluma. Waters claimed she was harassed, discriminated, and retaliated against because of her gender. After she went on leave, the City received a notice of the charges from the EEOC. Waters ultimately resigned from her position. The city attorney first noted that Waters had not exhausted her administrative remedies before filing suit against the City. Rather than conduct the investigation itself, the City retained an outside expert, Amy Oppenheimer, to conduct the investigation. The retention agreement between the City and Oppenheimer confirmed that an attorney/client relationship was formed. The agreement specified that the “investigation would be subject to the attorney-client privilege until the City waived the privilege or a court determined that some or all of the investigation was not subject to the privilege.” However, the agreement acknowledged that it is “understood that in this engagement we will not render legal advice as to what action to take as a result of the findings of the investigation.” Oppenheimer’s report was provided only to the City. The report noted on each page that it was confidential and privileged. All communications with Oppenheimer were not disclosed to anyone outside the attorney-client relationship. Waters filed a lawsuit. In discovery, she requested the Oppenheimer report. Waters ultimately moved to compel production, arguing that the investigation was not privileged and even if it was privileged, the City had waived any applicable privilege. The trial court granted the motion to compel, concluding that the report and any related documents were not subject to the attorney-client privilege or work product protection. It emphasized that since Oppenheimer’s retention agreement stated that she would “not render legal advice,” and even if she did the privilege would only extend to the advice, and not the facts of the investigation. The court also concluded that any applicable privilege was waived because the City put the investigation at issue when it asserted the “avoidable consequences” defense in its answer to the complaint. The City filed a writ. The Court of Appeal emphasized that to determine whether a communication was privileged, “the initial focus of the inquiry is on the ‘dominant purpose of the relationship’ between attorney and client and not on the purpose served by the individual communication.” It also emphasized that the “work product protection applies irrespective of whether any material claimed to be privileged is communicated to the client.” The Court of Appeal agreed that the City had “an attorney-client relationship with outside counsel even though counsel's role was limited to a factual investigation and did not extend to providing legal advice as to which course of action to take based upon the results of the investigation.” The Court rejected the trial court’s findings that the agreement specified that legal advice would not be rendered. Instead, it reasoned “plain terms of the statute support the conclusion that an attorney-client relationship may exist when an attorney provides a legal service without also providing advice. The rendering of legal advice is not required for the privilege to apply.” Oppenheimer had specifically been retained for her legal experience and expertise in employment law. Therefore, the Court concluded that “Oppenheimer's investigation constituted the provision of legal services to a client supports not only the application of the attorney-client privilege, but also supports the application of the work product doctrine to her investigative efforts.” The Court of Appeal then turned to the avoidable consequences defense, which allows an employer to escape liability for those damages “the employee more likely than not could have prevented with reasonable effort and without undue risk, expense, or humiliation, by taking advantage of the employer's internal complaint procedures appropriately designed to prevent and eliminate sexual harassment.” The Court noted that the avoidable consequences defense could have put the investigation at issue, if it was used to show that the employer took reasonable steps to prevent and correct workplace harassment while Waters was employed. Since the investigation was done post-employment, the Court concluded, “an employer does not waive any applicable privileges associated with an investigation conducted after the employee leaves his or her employment when the employer asserts an avoidable consequences defense.” The trial court’s order compelling production was vacated.

An Arbitrator -- Not The Court -- Decides Whether A Class Action Is Subject To Arbitration
Sandquist v. Lebo Automotive, Inc.
(Cal. Sup. Ct.) filed July 28, 2016

Timothy Sandquist worked as a salesperson for Lebo Automotive. On his first day, Sandquist’s manager gave him about 100 pages of paperwork to fill out with the instruction to do it as quickly as possible so that he could start work. Sandquist was required to sign the documents, but the documents were not reviewed with Sandquist. Among these documents were three arbitration agreements. Sandquist signed the documents without realizing he was signing arbitration agreements. Later, Sandquist filed a class action against Lebo, alleging that as an African American, he and other non-Caucasians had been harassed, discriminated, and retailed against because of their race. Lebo moved to compel arbitration based on the arbitration agreements Sandquist signed on his first day. The trial court found the agreements enforceable and granted the motion. The trial court also found that the agreements did not allow class arbitration, and therefore, struck the class allegations in the complaint. Although the court initially allowed Sandquist leave to amend to find a suitable class representative, when it determined that all the employees had signed the same arbitration agreements, it dismissed the class claims. The Court of Appeal reversed in part. It refused to address whether the arbitration agreements were unconscionable because the ruling was not appealable. It considered the challenge to dismissing the class allegations under the death knell doctrine. The Court of Appeal disagreed with the trial court’s conclusion that it could determine whether class arbitration was available, emphasizing that it was an open and unsettled issue. The California Supreme Court granted review. The Court first emphasized that “who decides” the class arbitration issue is “a matter of party agreement.” Then, the Court determined that initially, the agreement would be examined under state law. The three arbitration agreements Sandquist signed included two clauses that defined the range of disputes, then stated that binding arbitration would be the exclusive method of resolution. While the agreements suggested that an arbitrator would determine questions such as the availability of class arbitration, there was room for debate. The Court noted that in most circumstances, doubts were resolved in the favor of arbitration. It also said in the employment context, ambiguities would be construed against the drafting employer and in favor of the non-drafting employee. Since the agreements described the arbitrator’s role so comprehensively, the Court determined that under state law, it was the arbitrator -- and not the court -- who would decide the availability of class arbitration. Lebo argued that the agreement should be read to allocate the class arbitration availability question to the court, arguing that there is a “strong presumption that courts should determine the jurisdiction of arbitrators.” But the Court rejected Lebo’s argument, emphasizing that nothing in the California Arbitration Act addressed the question of class arbitration availability. The Court then turned to a federal law analysis. Under the Federal Arbitration Act, the Court emphasized that “courts presume that the parties intend courts, not arbitrators, to decide . . . disputes about 'arbitrability,' e.g., whether there is an enforceable arbitration agreement or whether it applies to the dispute at hand.” Then, on the other hand, “courts presume that the parties intend arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration." Ultimately, the Court found that that the determination of “whether a particular agreement allows for class arbitration is precisely the kind of contract interpretation matter arbitrators regularly handle.” The Court of Appeal’s decision was affirmed.


The Genuine Issue Defense Exists If The Insurer's Denial Was Based On A Genuine Disputed And The Insurer Establishes That It Reasonably Investigated
Paslay v. State Farm General Insurance Company
(Ct. App. 2d Dist., Div. 4), filed June 27, 2016

Clayton and Traute Paslay insured their home with State Farm. During a heavy rain, a roof drain failed and water entered the master bedroom through the ceiling and damaged the house. The Paslays reported the claim to State Farm who arranged for them to live in a rented residence while their home was being repaired. State Farm made over $248,000 in payments, including repairs to the house, but denied work done in the master bedroom, the drywall ceilings replacement, and new electrical panel installation. The Paslays filed a lawsuit against State Farm, alleging breach of contract, bad faith, and elder abuse. The Paslays alleged that State Farm breached the policy in refusing to pay for repairs and replacements and forcing the Paslays to move out of the rental housing prematurely. State Farm moved for summary judgment. It argued that it had provided all available policy benefits to the Paslays. And it further argued that the bad faith claim failed under the “genuine dispute” doctrine because there was a triable issue regarding whether State Farm had acted unreasonably in evaluating the Paslays’ claim. The trial court granted summary judgment. In granting summary adjudication, the court noted that the claim failed to establish triable issues for unpaid policy benefits. But stated, that if it had to address the claims under other grounds, it would have granted summary adjudication in light of the “genuine dispute” doctrine. The Court of Appeal reversed on the breach of insurance contract claim only. To establish bad faith, the Court said that “the Paslays must demonstrate misconduct by State Farm more egregious than an incorrect denial of policy benefits.” It noted that “an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith[,] even though it might be liable for breach of contract.” It emphasized that the genuine dispute doctrine did not “relieve an insurer of its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. A genuine dispute exists only where the insurer's position is maintained in good faith and on reasonable grounds.” The Paslays’ bad faith claim failed under the genuine dispute doctrine. The only triable issues related to unpaid policy benefits for the master bedroom work and drywall replacements. The record disclosed a genuine issue as to the extent of damage and required repairs based on expert testimony. And the Court found that where “the parties rely on expert opinions, even a substantial disparity in estimates for the scope and cost of repairs does not, by itself, suggest the insurer acted in bad faith.” The Court of Appeal rejected the Paslays’ argument that there was a question of whether State Farm adequately investigated the damage. It said, “the adequacy of the insurer's claims handling is properly assessed in light of conduct limiting the insurer's investigation by parties with an interest in policy benefits.” Since the Paslays removed the damaged property before State Farm had an opportunity to inspect it, they effectively curtailed State Farm’s ability to investigate. With that, the Court held that there was nothing in the record that showed that State Farm acted in bad faith, and summary adjudication was proper.


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