U.S. District Court Decides That Punitive Damages Claim Allows Investigation into Corporation’s Books and Records

The issue in this case was whether the financial condition of Wexford Health Sources, the defendant in this federal lawsuit, is relevant for Federal Rule of Civil Procedure 26(b) to apply. This rule limits discovery to that which is “relevant to any party’s claim or defense.” If a corporate defendant’s wealth may not be considered when assessing punitive damages, it is not “relevant,” but if it may be properly considered then, of course, it is relevant. In this U.S. Federal District Court of Illinois (Central District) lawsuit, the initial question to be answered was whether Wexford’s financial condition could be investigated through discovery; this was answered mostly by the case of Zazu Design v. L’Oréal, 979 F.2d 499 (7th Cir. 1992).

In Zazu, a case relied upon by Wexford, the defendant in this case, the court considered the defendant’s appeal in a trademark infringement action. The court reversed and remanded, finding that the plaintiff did not have superior rights in trademark to the defendant and, even if it had, the damages award was excessive.

Regarding the punitive damages award, the court noted that although courts “take account of a defendant’s wealth when an amount sufficient to punish or deter one individual may be trivial to another,” such may not be the case when the defendant is a corporation. The court explained:

“For natural persons the marginal utility of money decreases as wealth increases, so that higher fines may be needed to deter those possessing great wealth. Corporations, however, are not wealthy in the sense that persons are. Corporations are abstractions; investors own the net worth of the business. These investors pay any punitive awards (the value of their shares decreases), and they may be of average wealth. Pension trusts and mutual funds, aggregating the investments of millions of average persons, own the bulk of many large corporations. . . .”

This language implies that for a corporate defendant, its financial condition is irrelevant for purposes of calculating punitive damages.  There were actually two parts to the Zazu opinion. This complicates what should have been a fairly simple issue: the fact that other district courts decline to follow Zazu, not because its punitive damages analysis is dictum, but rather because the punitive damages claim in the cases involve individual persons, not corporations; state law claims, not federal; or specific statutes, not federal common law. In this case, the court concluded that it is not bound to follow Zazu’s dictum on punitive damages, but it must still determine whether, absent that dictum, the financial condition of a corporate defendant may ordinarily be considered when assessing punitive damages.

The general rule, as stated by the Supreme Court in Newport v. Fact Concerts, 453 U.S. 247 (1981), is that “’evidence of a tortfeasor’s wealth is traditionally admissible as a measure of the amount of punitive damages that should be awarded.”  Accordingly, as a general rule, a defendant’s wealth can be considered when evaluating punitive damages. It is therefore “relevant” within the meaning of Rule 26(b).

Donald v. Wexford Health Sources, 1:16-cv-0141 (C.D. Ill., July 20, 2017).

Kreisman Law Offices has been handling commercial litigation, corporation lawsuits, business disputes, arbitration cases and federal court litigation for individuals, families and businesses for more than 40 years, in and around Chicago, Cook County and its surrounding areas, including Westmont, Arlington Heights, Waukegan, Vernon Hills, University Park, Country Club Hills, Naperville, Evanston, Elmhurst, Orland Park, Mundelein, New Lenox, South Holland, Barrington, Chicago (Englewood, West Rogers Park, Washington Park, Woodlawn, Chatham, Pullman, Lake Calumet, Pill Hill, Stockyards, Canaryville, Bronzeville, Little Italy, West Town, Ukrainian Village), Villa Park, Clarendon Hills and Burr Ridge, Ill.

Related blog posts:

Laws in Illinois and on Federal Level Protect Trade Secrets

U.S. Court of Appeals Ruled that Previous Business Owner Did Not Violate Non-compete Agreement

Illinois Appellate Court Reverses Summary Judgment in Case Where Contract Was Found to be Ambiguous