Opposition Brief — Eaton Corp. v. PKL Cos., Inc.

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In the Supreme Court

OF THE

United States

OCTOBER TERM, 1988

EATON CORPORATION,

Petitioner,

vs.

THE PKL Companiss, INc.,

BRIEF OF RESPONDENT IN OPPOSITION

STEPHEN A. KROFT,

(Counsel of Record)

RoBERtT H. Rorstein,

KELLY W. Kay

9601 Wilshire Boulevard

Fourth Floor

Beverly Hills, CA 90210

213/858-7700

Attorneys for Respondent

The PKL Companies, Inc.

Of Counsel

Rosenfeld, Meyer & Susman

Bowne of Los Angeles. Inc., Law Printers (213) 742-6600

COUNTER-STATEMENT OF QUESTIONS

PRESENTED*

1. Whether this Court’s review of the constitutionality

of a punitive damage award is warranted where the

petitioner failed to raise constitutional challenges to the

award in the state courts and where no state court passed

on the constitutional issues.

2. Whether a civil punitive damage award that, as

California law requires, bears a reasonable relationship to

plaintiff's actual damages, to the reprehensibility of the

wrongdoer’s misconduct and to the wrongdoer’s net worth

violates either the Eighth Amendment’s Excessive Fines

Clause or the Fourteenth Amendment’s Due Process

Clause.

3. Whether a state statute that imposes on a surviving

corporation in a merger responsibility for the disappear-

ing corporation’s punitive damage liabilities violates the

Due Process Clause of the Fourteenth Amendment.

* Respondent The PKL Companies, Inc. is a corporation in liqui-

dation whose assets have been transferred to the PKL Liquidating

Trust. The beneficiaries of the trust are approximately 1300 of

respondent’s shareholders. The trustees of the trust are Frederic S.

Papert, Bernard P. Dolan and Charles P. Spira. Respondent has no

other affiliates, parents or subsidiaries.

TABLE OF CONTENTS

COUNTER-STATEMENT OF QUESTIONS PRE-

te rE eee Ir re ns ey a eon years wore i

COUNTERSTATEMENT OF THE CASE........ 1

BF TNE a a 5 eos ok an poke cess 1

DB. ‘Tee Facts Proved At TAGs oo a skc svc cckass 2

_C. Post-Trial And Appellate Proceedings ...... 6

REASONS FOR DENYING THE WRIT ........ 7

BECAUSE EATON DID NOT PROPERLY RAISE

ITS CONSTITUTIONAL CLAIMS BELOW, ITS

PETITION SHOULD BE DENIED........... 8

A. By Failing To Raise Its Constitutional Claims

In The State Courts, Eaton Waived Its Right

To Invoke This Court’s Jurisdiction ........ 8

B. Eaton’s Failure To Raise Its Federal Claims

At The Time And In The Manner Required By

State Procedural Rules Constitutes An Ade-

quate, Independent State Ground Of Decision

Barring This Court’s Review Of Those Claims 14

II.

EVEN IF THE CONSTITUTIONAL ISSUES

THAT EATON RAISES WERE PROPERLY

BEFORE THE COURT, THIS WOULD BE AN

INAPPROPRIATE CASE FOR REVIEW OF

THOGE IBBURSG 3. <a + cicetnnn cud eee eda 15

A. Because The Jury’s Punitive Damage Award

Is Reasonable And Proportionate In All Re-

spects, Review Of Eaton’s Excessive Fines

Clause Argument Is Not Warranted In This

ili

TABLE OF CONTENTS

B. Because The Jury’s Discretion To Award Pu-

nitive Damages Was Neither Standardless

Nor Unrestrained, And The Amount Of Such

Damages Was Predictable, This Is Not A

Suitable Case For Review Of Eaton’s Due

Process Clause Argument................. 19

1. California Law Requires Jury Awards Of

Punitive Damages To Satisfy Several Well

Articulated Standards ................. 19

2. Because California Trial And Appellate

Courts Carefully Scrutinize Punitive Dam-

age Awards To Ensure Reasonableness

And Proportionality, The Discretion of

California Juries To Make Such Awards Is

er rr err eer 21

3. Neither California Punitive Damage

Awards In General Nor The Award In

This Case Lacks Predictability ......... 23

C. The Courts Below Properly Imposed Liability

On Eaton For Cutler-Hammer’s Punitive

Damage Obligations Under A Rational State

Statute Designed To Implement Legitimate

State Interests. Eaton’s Due Process Chal-

lenge To These Lower Court Holdings Thus

ee | ee 25

a SE ea rans a are 30

TABLE OF CONTENTS

INDEX TO APPENDICES

APPENDIX 1:

APPENDIX 2:

APPENDIX 3:

APPENDIX 4:

Minute Order Denying Motion for

New Trial, Dated November 1,

1983.

California Rules of Court, Rules

28(e)(2) and 29(b) (1).

Issues Presented In Eaton’s Peti-

tion for Review to the California

Supreme Court.

Eaton’s Supplemental Letter Brief

to Clerk, Division Five, Second Ap-

pellate District, Dated May 31,

1988.

eA.

TABLE OF AUTHORITIES CITED

CASES

PAGE

Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813 (1986) 13

Alhino v. Starr, 112 Cal.App.3d 158, 169 Cal.Rptr.

SEE, GSAS heya ph dee cok OR eee 22

Atlantic Richfield Co. v. Nielsen, cert. denied, 108

ee Ss dg a's boss ooo Oh eee We 33; 33

Bankers Life & Casualty Co. v. Crenshaw, 108 S.Ct.

SE bk ov cede eke 7, 9, 10, 11, 13, 19, 20, 21, 23

Barry v. Edmunds, 116 U.S. 550 (1886) ......... 24

Baskirk v. Carey Canadian Mines, 760 F.2d 481 (3d

Ce EE Gown edhe woe dietadeKessenawar 26

Beck v. Washington, 369 U.S. 541 (1962) ........ 11,15

Bertero v. National General Corp., 13 Cal.3d 48, 118

Ce ME i a bd vc eo onda dddacckos 12

Board of Directors of Rotary International v. Rotary

Club of Duarte, 481 U.S. 537 (1987) .......... 8, 9,11

Browning-Ferris Industries of Vermont, Inc. v. Kelco

Disposal, Inc., cert. granted, 109 S.Ct. 527

tS Epa pred rows er reer T ee rere so 15, 16,17

Burnett v. National Enquirer, Inc., 144 Cal.App.3d

991, 193 Cal.Rptr. 206 (1983) ................ 17, 22

Celotex Corp. v. Pickett, 490 So.2d 35 (Fla. 1986) 26, 27

Chicago, Indianapolis & Louisville Railway Co. v.

McGuire, 196 U.S. 128 (1905) ................ 9,11

City of Newport v. Fact Concerts, Inc., 453 U.S. 247

CR hres. aos Ra Secu eek 28

Collins v. Lucky Markets, Inc., 274 Cal.App.2d 645,

ioe 5 Gh | ere oe err rer. 21

Curtis Publishing Co. v. Butts, 388 U.S. 130 (1967) 13, 14

Day v. Woodworth, 54 U.S. (13 How.) 363 (1852) 24

Dennis v. United States, 341 U.S. 494 (1951) ..... 21

TABLE OF AUTHORITIES CITED

CASES

Page

Devlin v. Kearney Mesa AMC/Jeep/Renault, Inc., ;

155 Cal.App.3d 381, 202 Cal.Rptr. 204 (1984) .. 17, 18 |

Downey Savings & Loan Assn. v. The Ohio Casualty

Ins. Co., 189 Cal.App.3d 1072, 234 Cal.Rptr. 835 |

(1987), cert. denied, 108 S.Ct. 2023 (1988) .... 18 |

Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, |

F WET Cake, GRE kos ois 0 cscs 12

Engle v. Isaac, 456 U.S. 107 (1982) ............. 12 i

Exxon Corp. v. Governor of Maryland, 437 U.S. 117 |

| Sap tere Pitot aera Eye ON Se 26, 27

Ferguson v. Skrupa, 372 U.S. 726 (1963) ........ 27, 28

Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974) .. 20, 23

Goshgarian v. George, 161 Cal.App.3d 1214, 208

oR Oe Ri | PPro ror re ee 17, 22

Grimshaw v. Ford Motor Co., 119 Cal.App.3d 757,

ROE GAle ne Se LEAD 5.0 4:0 v0.00004 Ao Re eae<g 22

Henry v. Mississippi, 379 U.S. 443 (1965) ....... 15

International Brotherhood of Electrical Workers v.

Pent, GES UB. Ge Ree aes Kh cn in hewn hie can 20

John v. Brickey, 168 Cal.App.3d 399, 214 Cal. Rptr.

BO CRED os kcdshnnd bbws eae aha ek eee 22

Krull v. Celotex Corp., 611 F.Supp. 146 (N.D. II.

UD b wncenv cena ¥s¥hee bee Ode ke eee 26, 29

Lake Shore & M.S. Ry. Co. v. Prentice, 147 U.S. 101

ot res PE eee ea pe 27, 28

Marks v. Minnesota Mining & Mfg. Co., 187

Cal.App.3d 1429, 232 Cal.Rptr. 594 (1986) .... 25, 26

Meier v. Ross General Hospital, 69 Cal.2d 420, 71

CR eer. Gee CRE kas a we peeeesasnewns cs 13

Metromedia, Inc. v. April Enterprises, No. 88-625,

pet. for cert. filed October 14, 1988............ 13

ate eemeaiiaeemaaiamammainiiiail

vii

TABLE OF AUTHORITIES CITED

CASES

Page

Michigan v. Tyler, 486 U.S. 499 (1978) .......... 15

Moe v. Transamerica Title Ins. Co., 21 Cal.App.3d

Be, We CURE. WOE CREE) cocks sc cacccdess 26, 28

Nash v. United States, 229 U.S. 373 (1913) ....... 24

Nationwide Mutual Ins. Co. v. Clay, cert. denied, 109

S.Ct. 863 (January 23, 1989) ................ 9,16

Neal v. Carey Canadian Mines, Ltd., 548 F.Supp.

357 (E.D. Pa. 1982) aff’d on other grounds .... 26

Neal v. Farmers Insurance Exchange, 21 Cal.3d 910,

148 Cal.Rptr. 389 (1978) .................4- 20, 21

People v. Lilienthal, 22 Cal.3d 891, 150 Cal.Rptr.

So ans Bibs oe eedkd Menkes 8

People v. Mabry, 71 Cal.2d 430, 78 Cal.Rptr. 655

SR ACS aN bass oui sb Os area kek seneu ne 11

People v. Tolbert, 70 Cal.2d 790, 76 Cal.Rptr. 445

YR a eS eo See ee Op any peenee 11

People v. Triggs, 8 Cal.3d 884, 106 Cal.Rptr. 408

COREE Wisc hv ck eews een Cee ees Catcaeavewbesss 8

Petersen v. Superior Court, 31 Cal.3d 147, 181

RR See OE Swe bcc 0 00s we ben caw os 12

Ramon, Manor Convalescent Hos. v. Care Enter

prise3, 177 Cal.App.3d 1120, 225 Cal.Rptr. 120

GOES Seopa te oe gy ar, 22

Related A;be,tos Cases, In re, 566 F.Supp. 818 (N.D.

RR RS apna alegre tars mene i ut eam 26

Robinson v. United States, 324 U.S. 282 (1945) ... 25

Rosenbloom v. Metromedia, Inc., 403 U.S. 29 (1971) 20, 23

Rosener v. Sears, Roebuck & Co., 110 Cal.App.3d

740, 168 Cal.Rptr. 237 (1980) ................ 22

Roth v. United States, 354 U.S. 476 (1957) ....... 24

vill

TABLE OF AUTHORITIES CITED

CASES

ne Page

Rummel v. Estelle, 445 U.S. 263 (1980).......... 16

Schomer v. Smidt, 113 Cal.App.3d 828, 170

ee ee AD hc ea lee. Fie eeVibianiese 17

Selleck v. Globe Int'l, Inc., 166 Cal.App.3d 1123, 212

NE oi bs as cow wetaccaadebee ban 11,15

Shapiro, Bernstein & Co., Inc. v. H. L. Green Co., 316

ae ee EO REED bia nc cae couwa wdawes 28

Smith v. Wade, 461 U.S. 30 (1983) ............. 20

Solem v. Helm, 463 U.S. 277 (1983)............. 16

Sprague v. Equifax, Inc., 166 Cal.App.3d 1012, 213

eR Se ft, APES TT CT ery eerer Tree 22

Street v. New York, 394 U.S. 576 (1969) ......... 9

U.S. v. Oil Resources, Inc., 817 F.2d 1429 (9th Cir.

EN i ick tn 0506 Nb dhe ck oe One eas 26

United States v. Carolene Products Co., 304 U.S. 144

SE fe ik nh ae ac ns ee oe wee 26

United States v. National Dairy Products Corp., 372

eek se seal 6 ee wee aa ke 23

United States v. Petrillo, 332 U.S. 1 (1947)....... 24

Usery v. Turner Elkhorn Mining Co., 428 U.S. 1

SE 6 bak avs Phe eet beens heehee 26

Ward v. Illinois, 431 U.S. 767 (1977) ........... 21

Wayle v. Rollins Int'l, Inc., 169 Cal.App.3d 1, 215

eS | RO ere eee Eee ee erT 22

Webb v. Webb, 451 U.S. 493 (1981) ............ 8,10, 14

Williamson v. Lee Optical Co., 348 U.S. 483 (1955)

eh boa shaw kk sie hwewe ck meen Cee Cie 26, 28

Zhadan v. Downtown L.S. Motor Distributors, 100 :.

Cal.App.3d 821, 161 Cal.Rptr. 225 (1979) ..... 17

TABLE OF AUTHORITIES CITED

Page

| Constitutions

California Constitution, Art. I. See. 7........... 9

California Constitution, Art. I. See. 17.......... 0)

United States Constitution, Art. I. See. 9, el. 3... 12

United States Constitution, First Amendment.... 14

United States Constitution, Eighth Amendment

ome ak wadsaceeden tas aseedoa ty ¥¢ Mh aay Bey om Oe

United States Constitution, Fourteenth Amend-

CE oo cso aan cd tks ee ee i, 7, 10, 12, 19, 25

Newspapers

Chicago Tribune, Jan. 17, 1989, §C at 1, Sund-

strand To Pay U.S. $71 Million ............... 18, 19

Los Angeles Times, Dec. 24, 1988, § 1 at 1, Despite

Reforms, Abuses Still Suspected on Wall Street .. 18

New York Times, Dee. 22, 1988, at Al, Drezel

Concedes Guilt On Trading; To Pay $650 Million 18

New York Times, Jan. 24, 1979, at D4, Fines for

PUN Ss icles bh ones x oe eas ba beta ee ee 19

Wall St. Journal, Nov. 17, 1986 at Al, Spreading

Scandal: Fall of Ivan F. Boesky Leads to Broader

Probe of Insider Information .........00000085 18

Publications

Peterson, “Punitive Damages — Empirical Find-

ings’ (Rand Corp. 1987) at 58.............. 19

Rules

California Rules of Court, Rule 28(e)(2)........ 10, 15

California Rules of Court, Rule 29(b)(1)........ 11,15

TABLE OF AUTHORITIES CITED

Page

Statutes

California Civil Code See. 3294 (West 1970)..... 12

California Corporations Code §1107(a) & (ce)

Cor COPED saxabs cinaeeeoee 2, 25, 26, 27, 29

Textbooks

California Rules of Court, Rule 28, Advisory Com-

mittee Comment — 1985, p. 28 (West 1988) ... 8

2 California Jury Instructions, Civil 205, BAJI

Pete ree err er re reg aere e 20

No. 88-1354

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1988

EATON CORPORATION,

Petitioner,

vs.

THE PKL ComPANIES, INC.,

Respondent.

BRIEF OF RESPONDENT IN OPPOSITION?!

COUNTERSTATEMENT OF THE CASE

A. Prefatory Statement

In August, 1983 a jury awarded respondent The PKL

Companies, Ine. (“PKL”) $2,633,599 in actual damages

and $15,000,000 in punitive damages for a massive fraud

and breach of fiduciary duty perpetrated by petitioner’s

corporate predecessors, Macrodata Corp. and Cutler-

Hammer, Inc.” Eaton never challenged the punitive dam-

1By letter dated March 2, 1989, the Clerk of the Court granted

respondent an extension of time until April 17, 1989, in which to file

this Opposition.

"The lawsuit originally named Macrodata Corp. (‘“Macrodata’’)

and Cutler-Hammer, Ine. (“Cutler-Hammer’) as defendants. As

discussed below, Macrodata subsequently merged into Cutler-Ham-

mer. Then, two years after the action began, petitioner Eaton Corpo-

ration (“Eaton”) absorbed Cutler-Hammer in a merger and was

substituted as the sole defendant in she action pursuant to a state

statute governing obligations of swfviving corporations in mergers.

age award in the courts below on constitutional grounds.

Instead, it contested the award in the lower courts solely

on state law grounds.”

But even if Eaton’s constitutional claims had been

properly raised below, they would not merit review, be-

cause the punitive damage award in this case is, as

California law required it to be, reasonable and propor-

tionate in all respects. More specifically, as both the trial

court and court of appeal expressly found, the award

bears a reasonable relationship to actual damages, to the

reprehensibility of the wrongdoer’s misconduct and to the

wrongdoer’s net worth.* The award thus meets all of the

criteria that Eaton now contends it must satisfy under

the Constitution.

_ ———

B. The Facts Proved At Trial

At the beginning of 1974 PKL owned 160,011 shares of

unregistered stock in Macrodata, a publicly traded corpo-

ration that manufactured semiconductor test equipment.

(App. A-2). PKL had a contractual right to require

Macrodata to register the shares with the Securities

Exchange Commission (“SEC”). (Id.).

In 1974, Cutler-Hammer, an industrial and electrical

conglomerate, decided to buy 100 percent of Macrodata’s

California Corporations Code §1107(a) & (c) (West 1977). (See

Petition For Writ of Certiorari (‘“‘Pet.’’) 4).

*This was the second punitive damage verdict against Eaton in this

case. In a previous trial, a jury awarded PKL $2,250,000 in compen-

satory damages and $17,500,000 in punitive damages. (Pet. 5 n. 5 and

Appendix A at A-1 n. 1). A new trial was granted on the grounds,

among others, that portions of PKL’s damage proof in the first trial

should have been excluded and that, solely because of that errone-

ously admitted evidence, damages were excessive (1 Clerk’s Tran-

seript (“C.T.”) 338).

*See 54 Reporters Transcript (“‘R.T.”) 9809 and Opinion of Califor-

nia Court of Appeal, Appendix A to Petition for Writ of Certiorari,

pp. A-53 to A-55. Further citations to the Opinion of the California

Court of Appeal are designated as “App. A,” followed by the appro-

priate page numbers.

en ep eee ee rN ene Flees Neer ee

outstanding stock at less than fair value. (Id.). Through-

out 1974 and 1975, therefore, Cutler-Hammer bought

Macrodata stock only in private unreported transactions,

thereby artificially holding down the market price of the

stock. (App. A-2, A-3).

Meanwhile, as part of its scheme to buy Macrodata at

below fair value, Cutler-Hammer also tried to negotiate a

private purchase of PKL’s Macrodata stock at an unfairly

; low price. PKL, however, refused to sell and instead

exercised its contractual right to demand registration of

: its shares so it could distribute them to its 1300 share-

holders. (App. A-3).

. In June 1975, Cutler-Hammer became Macrodata’s ma-

i jority shareholder. (App. A-3). Over the next six months,

Macrodata, aided and abetted by Cutler-Hammer, several

times falsely promised that it would register PKL’s

Macrodata stock. (App. A-4, A-32 to A-35). These false

promises caused PKL to await the promised registration,

to delay suing to compel registration, and to refrain in the

interim from seeking other purchasers of its Macrodata

stock. (Id.).

In September 1975, Cutler-Hammer — which, as

Macrodata’s majority shareholder, was required to in-

elude Macrodata’s 1975 financial results in its own 1975

financial statement — publicly predicted through its

chairman, Edmund Fitzgerald, that Cutler-Hammer

would earn $4 per share in 1975. (App. A-5). Two months

later, Cutler-Hammer sent its manager of internal audit,

i George Thomas, to Macrodata. (Id.). One aspect of

; Thomas’ assignment was to “make Macrodata look good”

‘ so Cutler-Hammer could meet Fitzgerald’s earnings pre-

i diction. (Id.).

Before Cutler-Hammer closed its books for 1975, em-

ployees of Macrodata advised Thomas that Macrodata’s

1975 loss would be $2.4 million or higher, which posed a

grave threat to Fitzgerald’s earnings prediction. (App. A-

6). In response, Thomas told Macrodata’s financial of-

ficers “my boss at Cutler-Hammer says hold the loss at

5 anaes 0 bE, ne «

oe ne one bm pdebeoneblaicectivows puaditas he Sasa

$2.2 million”; he then instructed them not to correct

certain inventory errors which would have increased the

amount of the loss. (Id.). The Macrodata officials com-

plied with Thomas’ instructions and, as a result of Cutler-

Hammer’s pressure to “hold the loss,” also failed to

correct other significant errors. (App. A-6, A-42 to A-43).

In mid-January 1976, as a result of the falsification of

its books, Macrodata reported to Cutler-Hammer a 1975

loss of $2.28 million. (App. A-6). This $2.28 million figure,

which Cutler-Hammer included in its 1975 financial state-

ment, permitted Cutler-Hammer to report earnings of

$4.02 per share, and thus to fulfill Fitzgerald’s prediction.

(Id.).

By February 1976 the extent of Macrodata’s false

accounting entries had become well known to Cutler-

Hammer’s senior management. (Jd.). But rather than

correcting these inaccuracies, Cutler-Hammer devised a

plan to escape blame for the accounting fraud and, at the

same time, to fulfill its goal of capturing all of

Macrodata’s stock at an unfair price. (App. A-6 to A-8).

Specifically, Cutler-Hammer continued to conceal the in-

accuracies in Macrodata’s 1975 financial statement and

then intentionally permitted the false financial statement

to become public in April 1976. (Id.). After the statement

became public, Cutler-Hammer revealed the accounting

fraud to the SEC and to Macrodata’s auditors and

blamed Macrodata’s management for the misstatements.

(Id.). As Cutler-Hammer expected, the SEC then sus-

pended trading in Macrodata stock, and the auditors

withdrew their certification of Macrodata’s 1975 financial

statement and performed a reaudit. (Jd.).

The reaudit_revealed what Cutler-Hammer had known

all along: Macrodata’s true loss for 1975 was $4.53 mil-

lion, nearly double the $2.28 million loss previously re-

ported. (App. A-8). The revelation of the false

accounting, the SEC suspension, the reaudit, and the

resulting loss of investor confidence in the integrity of

5 —

Macrodata’s management permanently destroyed the

market in Macrodata stock. (Jd.).

Meanwhile, Macrodata did nothing to fulfill its numer-

ous promises to register PKL’s Macrodata shares. Ac-

cordingly, in January 1976 PKL filed a federal diversity

action to compel the registration that Macrodata had first

promised six months earlier. (App. A-8). The following

month Macrodata — again aided and abetted by Cutler-

Hammer — proposed that it seek an SEC “no action”

letter as an alternative to registration. (App. A-8, A-9).

In early April 1976, the SEC wrote Macrodata that the

request for no action had been granted in part and denied

in part. (App. A-9). The SEC’s partial denial and the late

timing of its letter — just eight days before Cutler-Ham-

mer destroyed the market for Macrodata stock — made

the no action letter useless to PKL and its shareholders.

(Id.). Accordingly, PKL dismissed its action to compel

registration, and in December 1976 filed this action,

charging, inter alia, that Cutler-Hammer had, through

misrepresentation, concealment and self-dealing, sought

to obtain PKL’s Macrodata shares at an unfair price, and

that Cutler-Hammer was thereby liable in damages (in-

eluding $25 million in punitive damages) for fraud and

breach of fiduciary duty. (29 R.T. 5053; 1 C.T. 1).°

Undaunted by PKL’s pending lawsuit, in September

1977 Cutler-Hammer used its control of Macrodata to

effect a merger with Macrodata in which Macrodata’s

shareholders, including PKL, were forced to exchange

their Macrodata shares for shares in Cutler-Hammer at a

grossly inadequate rate of exchange. (App. A-9, A-10; Ex.

1022; 12 R.T. 2000-01). Relying, in part, on the lack of a

°As indicated above, Eaton became the sole defendant in place of

Macrodata and Cutler-Hammer after the action commenced (see note

2, supra). Eaton thus entered the litigation with full knowledge of the

Complaint’s $25 million punitive damage claim (App. A-53 n. 19; 1

C.T. 13, 19). Indeed, Cutler-Hammer specifically informed its share-

holders, including Eaton, of the magnitude of that claim in its 1978

Annual Report (Exh. 1347, p. 35).

public market in Macrodata stock — a market that Cut-

ler-Hammer had itself intentionally destroyed — Cutler-

Hammer set the exchange ratio for the stock-for-stock

merger at only .165 Cutler-Hammer shares for each

Macrodata share. (App. A-9, A-10; Ex. 1022, 1122; 44 R.T.

7908). In facet, Macrodata’s shares were worth at least

four times more, or .66 Cutler-Hammer shares for each

Macrodata share. (Jd.).

Had Cutler-Hammér applied the correct .66 exchange

ratio, Cutler-Hammer would have paid PKL $2,633,599

more than it paid for PKL’s shares. (App. A-10). As the

Court of Appeal succinctly observed, by “destroying the

market for PKL’s Macrodata shares [Cutler-Hammer]

was thus able to acquire PKL’s shares in the merger at a

price below their fair value.” (App. A-25).

Finding that this conduct constituted fraud and breach

of fiduciary duty, the jury awarded PKL the $2,633,599

shortfall in the merger price as compensatory damages

and $15,000,000 as punitive damages. (App. A-2, A-10).

In so doing, the jury followed the trial court’s instruc-

tions that an award of punitive damages in California

must bear a reasonable relationship to plaintiff's actual

damages and must take into consideration the wrong-

doer’s wealth and the reprehensibility of the wrongdoer’s

misconduct. (Jury Instructions 41 & 42, App. F-1 to F-3).

C. Post-Trial And Appellate Proceedings

Following the jury’s verdict, Eaton moved for a new

trial: After re-weighing the evidence (as required by

California law) and finding “the amount of compensatory

and punitive damages... reasonable,” the trial judge de-

nied the motion. (54 R.T. 9809; Appendix 1 hereto).

Eaton appealed, and the Court of Appeal affirmed.

Significantly, Eaton raised no constitutional claims

either in the trial court or in the court of appeal. Its

challenges to the punitive damage award in both courts

rested solely on state law grounds.

After the court of appeal’s decision, Eaton filed a

petition for rehearing, which also failed to challenge the

punitive damage award on constitutional grounds. Upon

the court of appeal’s denial of this petition, Eator filed a

petition for review in the California Supreme Court. This

petition likewise failed to raise constitutional challenges

to the punitive damage award. Although the petition for

review (primarily in a footnote) casually referred to the

discussion of constitutional issues contained in Bankers

life & Casualty Co. v. Crenshaw, 108 S.Ct. 1645 (1988 ,

the petition did not ask the California Supreme Court to

review the constitutionality of the jury’s punitive damage

award. The state supreme court denied the petition for

review without opinion.

REASONS FOR DENYING THE WRIT

The petition should be denied for several reasons.

First, since Eaton failed to raise its constitutional argu-

ments below, this Court has no jurisdiction to consider

them. Second, even if, as a matter of federal law, Eaton

had properly raised its constitutional challenges to the

punitive damage award in the lower courts, its failure to

raise those arguments in aceordance with state rules of

procedure would provide an adequate and independent

state ground of decision barring this Court’s review of the

constitutional issues.

Third, the punitive damage award in this case, as

required by California law, bore a reasonable relationship

to plaintiff’s actual damages, to the reprehensibility of the

wrongdoer’s misconduct, and to the wrongdoer’s net

worth. The award also was predictable in amount and was

properly assessed against Eaton, as Cutler-Hammer’s

successor by merger, pursuant to a valid state statute.

Accordingly, even if this Court were to hold the Eighth

and Fourteenth Amendments applicable to civil punitive

damage awards, the award would meet any criteria of

fairness, reasonableness and proportionality that the Con-

stitution might require.

BECAUSE EATON DID NOT PROPERLY RAISE ITS

CONSTITUTIONAL CLAIMS BELOW, ITS PETI-

TION SHOULD BE DENIED

Since the California Supreme Court issued no opinion

in this case, Eaton’s petition to this Court seeks, as it

must, a writ of certiorari to the California Court of

Appeal, the only court that rendered an opinion below.

See Board of Directors of Rotary International v. Rotary

Club of Duarte, 481 U.S. 537, 549-50 (1987) (petition for

writ of certiorari to California Court of Appeal).® This

Court, however, lacks jurisdiction to review the constitu-

tionality of the punitive damage award approved by the

court of appeal because Eaton did not challenge that

award on constitutional grounds either in the trial court

or in the court of appeal.

A. By Failing To Raise Its Constitutional Claims In

The State Courts, Eaton Waived Its Right To In-

voke This Court’s Jurisdiction

It is well settled, as a matter of federal law, that this

Court may re-examine the judgment of a state court “only

if the record as a whole shows either expressly or by clear

implication that the federal claim was adequately

presented in the state system.” Webb v. Webb, 451 U.S.

493, 496, 498 n. 4 (1981). Here, the record as a whole

unequivocally shows the opposite: Eaton never raised its

eonstitutional arguments either in the trial court or in the

court of appeal. Therefore, as this Court recently held on

virtually identical facts, the Court has no jurisdiction to

issue a writ of certiorari to the California Court of

‘Under California law, the state supreme court’s denial of Eaton’s

petition for review did not constitute a ruling on the merits of any of

the arguments raised in the petition. Cal. Rules of Court 28, Advisory

Committee Comment — 1985, p. 28 (West 1988); People v. Triggs, 8

Cal.3d 884, 890-91, 106 Cal.Rptr. 408 (1973), disapproved on other

grounds, People v. Lilienthal, 22 Cal.3d 891, 896 n. 4, 150 Cal. Rptr.

910 (1978).

Appeal. Rotary Club of Duarte, supra, 481 U.S. at 549-50.

See also Chicago, Indianapolis & Louisville Railway Co. v.

McGuire, 196 U.S. 128, 130-33 (1905).”

Ignoring its failure to raise constitutional claims in

both the trial court and the court of appeal, Eaton

contends that it preserved those claims for review in this

Court by purportedly asserting them in its petition for

review to the California Supreme Court. (Pet. 9-15). This

argument lacks merit for two reasons. |

First, as this Court has specifically held, an attempt to

raise federal constitutional issues for the first time in the

California Supreme Court comes too late to preserve this

Court’s jurisdiction over those issues. Rotary Club of

Duarte, supra, 481 U.S. at 549-50. See also Street v. New

York, 394 U.S. 576, 581-582 (1969) (raising constitutional

issue for first time in state appellate court does not

preserve issue for review in this Court). Accordingly,

even if Eaton had unambiguously raised constitutional

challenges to the punitive damage award in the California

"Even if Eaton’s failure to raise its constitutional claims were

merely a prudential, rather than a jurisdictional, restriction on this

Court’s power to act (see Bankers Life, supra, 108 S.Ct. at 1651), this

would be an inappropriate case in which to exercise that prudential

power. The petition attempts to place at issue the constitutionality of

California’s entire punitive damage scheme. It would hardly be

prudent for this Court to examine that far-reaching constitutional

question without first giving the state court the opportunity to

address the issue on state constitutional grounds (e.g., Cal. Const.

Article I, Seetion 7 (Due Process) and Section 17 (Excessive

Fines) ) and without receiving the benefit of at least some discussion

of the federal issue in the state court opinion under examination. See

Bankers Life, supra, 108 S.Ct. at 1651. Indeed, just this term the

Court declined to consider constitutional challenges to Alabama’s

punitive damage laws where the appellate court opinion — like the

court of appeal’s opinion here — did not address the merits of

petitioner’s federal constitutional claims, and where petitioner failed,

as Eaton did here, to raise those constitutional claims in the trial

court. Nationwide Mutual Ins. Co. v. Clay, cert. denied, 109 S.Ct. 863

(January 23, 1989).

Supreme Court, these belated challenges would not pro-

vide a basis for jurisdiction in this Court.

Second, Eaton’s petition for review to the California

Supreme Court in fact did not challenge the punitive

damage award on constitutional grounds. Under Califor-

nia law, all issues presented in a petition for state su-

preme court review must be set forth “at the beginning of

the body of the petition.” Cal. Rules of Court 28(e) (2)

(Appendix 2 hereto). None of the issues presented at the

beginning of Eaton’s petition to the California Supreme

Court, however, even mentioned the United States Consti-

tution, much less the specific provisions of the Eighth and

Fourteenth Amendments on which Eaton relies in this

Court.

The cursory reference to Bankers Life buried on pages

12-13 of Eaton’s twenty-five page petition for review does

not, as Eaton argues (Pet. 9-13), overcome this glaring

omission. This Court has jurisdiction to review constitu-

tional issues arising from state court proceedings only if

“there [is] no doubt from the record that a claim under a

federal statute or the Federal Constitution was presented

in the state courts and that those courts were apprised of

the nature or substance of the federal claim at the time

and in the manner required by the state law.” Bankers

Life, 108 S.Ct. at 1650, quoting Webb v. Webb, supra, 451

U.S. at 501. The purpose and import of the reference to

Bankers Life in Eaton’s petition for review, however, are

full of doubt. The petition’s text, in a single sentence,

states only that a purported absence of standards gov-

erning punitive damages in California “may well render

~such damages unconstitutional on due process grounds.”

(App. G-18) (emphasis added). And the petition’s foot-

note discussion of Bankers Life merely summarizes the

result of that case without explaining why the summary is

®*The entire text of the issues presented to the California Supreme

Court in Eaton's petition for review is set forth in Appendix 3 hereto

and in Appendix G to the Petition for Writ of Certiorari at pages G-3

to G-5. 7

there. But nowhere did either the text or the footnote ask

the state Supreme Court to review the constitutionality of

the punitive damages award. This Court has repeatedly

held that such casual references to federal rights — which

at most merely suggest that such rights “may” have been

violated — are insufficient to satisfy this Court’s stan-

dards for review. Bankers Life, supra, 108 U.S. at 1650;

Rotary Club of Duarte, supra, 481 U.S. at 550 n. 9; Beck v.

Washington, 369 U.S. 541, 552-53 (1962); McGuire, supra,

196 U.S. at 131-32.

Eaton offers several excuses for failing to preserve its

constitutional arguments in the trial court and court of

appeal, all of which lack merit. Eaton first contends that

under California law a litigant “may” raise for the first

time in the California Supreme Court new theories that

implicate important questions of public policy and involve

pure questions of law. (Pet. 11). While the California

Supreme Court has, in exceptional cases, permitted a

party to advance legal arguments not made below, its

normal rule is to decline to consider constitutional issues

that were neither raised at trial nor briefed to the court of

appeal.’ Moreover, where, as here, the highest state court

has failed to pass upon a federal question, this Court will

“assume[ ] that the omission was due to want of proper

presentation in the state courts, unless the aggrieved

party in this Court can affirmatively show the contrary.”

Street, supra, 394 U.S. at 582. Eaton has made no such

showing, and thus it may not invoke this Court’s jurisdic-

tion based on the exception to California’s normal rule.

Rotary Club of Duarte, supra, 481 U.S. at 550.”°

*People v. Mabry, 71 Cal.2d 430, 441, 78 Cal.Rptr. 655 (1969);

People v. Tolbert, 70 Cal.2d 790, 804, 76 Cal.Rptr. 445 (1969); Selleck

v. Globe Int'l, Inc., 166 Cal.App.3d 1123, 1133 n. 5, 212 Cal.Rptr. 838

(1985); Cal. Rules of Court 29(b)(1) (West 1988) (Appendix 2

hereto).

In Atlantic Richfield Co. v. Nielsen, cert. denied, 108 S.Ct. 2023

(1988), the Court last term refused to review constitutional chal-

lenges to California’s punitive damage law that were raised for the

12 «

Eaton next argues that it would have been pointless to

raise its constitutional arguments in the trial court and

court of appeal because such arguments are contrary to

established California Supreme Court precedents. (Vet.

11- 13). No California Supreme Court decision, however,

has ever ruled on the precise issues raised here: (i)

whether the Eighth Amendment’s Excessive Fines Clause

applies to civil punitive damage awards; (ii) whether the

grant to California juries of strictly limited discretion to

award punitive damages violates the Fourteenth Amend-

ment’s Due Process Clause; and (iii) whether the Due

Process Clause precludes imposition of liability upon the

surviving corporation in a merger for the punitive damage

obligations of the disappearing corporation.’ In any

event, this Court, not the California Supreme Court, is the

final arbiter of these federal questions. Eaton was thus

not entitled to bypass the state courts simply because it

may have believed that they would be unsympathetic to its

constitutional arguments. Engle v. Isaac, 456 U.S. 107,

130 (1982) ("the futility of presenting an objection to the

first time in a petition for review to the California Supreme Court.

Eaton’s discussion of Nielsen (Pet. 13 n. 10) suggests no reason why

this case should be treated differently.

uted

i I

"The California Supreme Court cases cited by Eaton (Pet. 7, 13)

simply do not address these issues. Petersen v. Superior Court, 31

Cal.3d 147, 151, 181 Cal.Rptr. 784 (1982), involved only the ex post

facto clause (Art. I, §9, el. 3) of the Federal Constitution. Egan v.

Mutual of Omaha Ins. Co., 24 Cal.3d 809, 819-20, 157 Cal.Rptr. 482

(1979), made no constitutional rulings whatever. Bertero v. National

General Corp., 13 Cal.3d 43, 66 n. 13, 118 Cal.Rptr. 184 (1974),

merely held that the language of Cal. Civil Code § 3294 (West 1970)

was not unconstitutionally vague.

Eaton itself recognized below that these cases did not deal with the

precise issues raised here. In its petition for review Eaton stated only

that the California Supreme Court “had seemed to uphold such

damages” against Eighth and Fourteenth Amendment challenges

(App. G-18 n. 6, citing Petersen v. Superior Court, supra) (emphasis

added). As noted above, however, Petersen never discussed, much less

ruled upon, the Excessive Fines and Due Process Clause arguments

that Eaton asserts in this Court.

state courts cannot alone constitute cause for a failure to

object at trial’).

Eaton also appears to suggest that it had no opportu-

nity to bring to the court of appeal’s attention this Court’s

decisions in Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813

(1986) and Bankers Life. (Pet. 13). But the record shows

that Eaton had abundant opportunity to alert the court of

appeal to these decisions. Lavoie was decided April 22,

1986. Eaton thus had ample time to refer to Lavoie in the

opening brief it filed in the court of appeal on May 9, 1986 .

and in the reply brief it filed in that court on February 9,

1987.’ Bankers Life, moreover, was decided May 16, 1988,

two and one-half weeks before tne June 1, 1988 oral

argument in the court of appeal. This two and one-half

week interval provided Eaton the opportunity to submit,

in accordance with normal California practice, a suppie-

mental letter brief bringing Bankers Life to the court of

appeal’s attention.’® Eaton did, in fact, submit a letter

brief to the court of appeal the day before oral argument

(Appendix 4 hereto); but the letter made no reference

whatever to Bankers Life.

Finally, Eaton argues that it need not have asserted its

alleged constitutional rights in the state courts at all |

because at that time these rights had “not yet [been]

declared to exist.” (Pet. 13, citing Curtis Publishing Co. v.

Butts, 388 U.S. 130 (1967)). Curtis does not support

Eaton’s proposed broad exception to this Court’s normal

jurisdictional rules.

The Court assumed jurisdiction in Curtis despite defen-

dant’s -failure to assert its constitutional arguments

‘21t should be noted that the petitioner in Metromedia, Inc. v. April

Enterprises, No. 88-625, pet. for cert. filed Oct. 14, 1988, had no

trouble arguing the significance of Lavoie in the California courts as

early as August 1986. (See Petition for Writ of Certiorari in No. 88-

625 at 4.)

3 See, e.g., Meier v. Ross General Hospital, 69 Cal.2d 420, 423-24 n. 1,

71 Cal.Rptr. 903 (1968).

before trial because of a unique combination of facts: (i)

the First Amendment issue involved in Curtis “was

prompt[ly]” raised in a motion for new trial; (ii) the

issue was raised soon enough to permit it to be aired in

both the trial and appellate courts and thus to prevent

prejudice to plaintiff and (iii) the First Amendment right

involved was “the ‘matrix, the indispensable condition, of

nearly every other form of freedom.’” 388 U.S. at 145

(citations omitted). However, here, in contrast to Curtis,

Eaton failed to present its constitutional arguments

promptly; the courts below never ruled on the constitu-

tional issues; and, the issues do not implicate the signifi-

eant First Amendment interests involved in Curtis. Curtis

thus plainly does not apply here.'*

B. Eaton’s Failure To Raise Its Federal Claims At The

Time And In The Manner Required By State Proce-

dural Rules Constitutes An Adequate, Independent

State Ground Of Decision Barring This Court’s

Review Of Those Claims

Even if Eaton’s petition to the state supreme court

were sufficient, as a matter of federal law, to preserve this

Court’s jurisdiction over Eaton’s constitutional argu-

ments, Eaton’s violations of state rules of procedure

would bar the Court’s consideration of the federal claims.

See Webb v. Webb, supra, 451 U.S. at 498 n. 4. As this

Court has frequently stated, failures to present federal

questions in conformance with state procedural rules

constitute adequate and independent state grounds of

decision barring the Court’s consideration of the federal

Were the Court to ignore the special facts of Curtis, and to adopt

instead the broad “rights not yet declared to exist” exception that

Eaton urges, the exception would swallow the rule that constitutional

issues must be raised and preserved at the first opportunity in the

lower courts. Every case attacking the constitutionality of a state

statute or urging the extension of a constitutional doctrine would

' perforce come within the exception and expand the filings of petitions

for writs of certiorari beyond manageable limits.

issues. Michigan v. Tyler, 436 U.S. 499, 512 n. 7 (1978);

Henry v. Mississippi, 379 U.S. 448, 446 (1965).

Here, as noted above, Eaton failed to comply with

California’s procedural rules requiring (i) that “[a]

claimed violation of a constitutional right... must be

raised in the trial court to preserve the issue for appeal’”””

and (ii) that all issues presented for review to the -

California Supreme Court must be set forth at the begin-

ning of the body of the petition.” These derelictions

provide adequate and independent state grounds barring

review of Eaton’s constitutional claims in this Court.

Il.

EVEN IF THE CONSTITUTIONAL ISSUES THAT EA-

TON RAISES WERE PROPERLY BEFORE THE

COURT, THIS WOULD BE AN INAPPROPRIATE

CASE FOR REVIEW OF-THOSE ISSUES

A. Because The Jury’s Punitive Damage Award Is Rea-

sonable And Proportionate In All Respects, Review

Of Eaton’s Excessive Fines Clause Argument Is Not

Warranted In This Case

The first question presented in Eaton’s petition —

whether the Eighth Amendment’s Excessive Fines Clause

limits the amount of punitive damages awardable under

state law — is now before the Court in Browning-Ferris

Industries of Vermont, Inc. v. Kelco Disposal, Inc., cert.

granted, 109 S.Ct. 527 (1988). PKL submits that, for the

Selleck v. Globe Int’l Inc., supra, 166 Cal.App.3d at 1133 n. 5. See

also Cal. Rules of Court 29(b)(1) (“As a matter of policy, on petition

for review the Supreme Court normally will not consider: (1) any

issue that could have been but was not timely raised in the briefs filed

in the Court of Appeal’).

Cal. Rules of Court 28(e) (2) (“At the beginning of the body of

the petition, the petition shall state the issues presented for review

... Only the issues set forth in the petition and answer or fairly

included in them need be considered by the Court.”) (emphasis

added). See Beck v. Washington, supra, 369 U.S. at 553.

reasons set forth in Respondents’ Brief in Browning-

Ferris, the Eighth Amendment’s proscription against ex-

cessive fines does not apply to civil punitive damage

awards. However, even were this Court to conclude other-

wise, significant distinctions between this action and

Browning-Ferris make the issue unworthy of further re-

view in this case.

This Court has repeatedly stressed that outside the

capital punishment context successful Eighth Amend-

ment challenges to particular punishments “will be ex-

ceedingly rare.” Solem v. Helm, 463 U.S. 277, 289-90

(1983), quoting Rummel v. Estelle, 445 U.S. 263, 272

(1980). Solem also indicates that the standard for judg-

ing both criminal fines and imprisonment under the

Eighth Amendment should be “proportionality” (463 U.S.

at 284-86, 288-89) — the same standard Haton contends

should apply to civil punitive damage awards (Pet. 16-

18). This standard, in turn, requires examination of “the

gravity of the offense and the harshness [or reasonable-

ness] of the penalty.” Jd. at 290-91.

Whether the criteria of proportionality and reasonable-

ness have been met is an issue hotly contested in Brown-

ing-Ferris. No similar dispute exists here. Unlike the

punitive damage award in Browning-Ferris, the award in

this case is proportionate and reasonable in every respect.

In Browning-Ferris, the ratio between the $6 million

punitive damage award and plaintiff's $51,146 in actual

damages was 117 to 1. Here, in contrast, the ratio between

punitive damages and PKL’s actual damages of

$2,633,599 is only 5.7 to 1."”

This 5.7 to 1 ratio is also dwarfed by the 27 to 1 ratio in

Nationwide Mutual Ins. Co. v. Clay, cert. denied, 109 S.Ct. 863 (1989),

where punitive damages were $1,250,000 and actual damages were

only $46,165. The Court denied certiorari in Nationwide this term,

and Eaton advances no reason why this case — with its much smaller

ratio of punitive to compensatory damages — is more worthy of

review than Nationwide.

The gravity of the conduct to be punished and deterred

in the two eases is also very different. In Browning-Ferris,

petitioner and respondent were competitors locked in a

commercial dispute that resulted in relatively little actual

damage to plaintiff ($51,146) and absolutely no gain to

defendant. Culter-Hammer, in contrast, was not merely

an economic competitor that dealt with PKL at arm’s

length. Rather, it was a fiduciary that through fraud and

deception destroyed the market for PKL’s minority

shares so it could acquire them for a fraction of their true

value. This utterly reprehensible abuse of trust — by

which Cutler-Hammer reaped over $2.6 million in illicit

profits at PKL’s expense — fully warranted the punitive

damages awarded to PKL.

The punitive damage award in this case is also propor-

tionate in another respect: it represents less than 10% of

Cutler-Hammer’s net worth. This percentage — 9.43% of

Cutler-Hammer’s 1977 net worth of $159,084,405 (Exh.

1131, p. 25) and 6.75% of Cutler-Hammer’s 1978 net

worth of $222,059,000 (Exh. 1347, pp. 6, 15) — not only is

reasonably proportional to Cutler-Hammer’s wealth, but

also is well within the range of awards approved in other

California cases."® In light of the severity of Cutler-

Hammer’s misconduct, an award bearing this ratio to the

wrongdoer’s net worth simply cannot be deemed to consti-

tute that “exceedingly rare” punishment which is too

harsh to pass constitutional muster.

Eaton makes two arguments to support its contrary

contention. First, Eaton complains (Pet. 6, 17) that the

punitive damage award is too large in comparison to

See Devlin v. Kearney Mesa AMC/Jeep/Renault, Inc., 155

Cal.App.3d 381, 392, 202 Cal.Rptr. 204 (1984) (17.5%); Schomer v.

Smidt, 113 Cal.App.3d 828, 170 Cal.Rptr. 662 (1980) (10%); Gosh-

garian v. George, 161 Cal.App.3d 1214, 1228, 208 Cal.Rptr. 321

(1984) (10%); Zhadan v. Downtown L.S. Motor Distributors, 100

Cal.App.3d 821, 835, 161 Cal.Rptr. 225 (1979) (6.85%); Burnett v.

National Enquirer, Inc., 144 Cal.App.3d 991, 1012, 193 Cal.Rptr. 206

(1983) (5.8%).

Cutler-Hammer’s net income (62% of 1977 net income

(Exh. 1331, p. 24); 45% of 1978 net income. (Exh. 1347,

pp. 6, 15)). But under California law net worth — not net

income — is considered the best measure of defendant’s

wealth for purposes of assessing punitive damages. Dow-

ney Savings & Loan Assn. v. The Ohio Casualty Ins. Co.,

189 Cal.App.3d 1072, 1100, 234 Cal.Rptr. 835 (1987), cert.

denied 108 S.Ct. 2023 (1988); Devlin v. Kearny Mesa

AMC/Jeep/Renault, Inc., supra, 155 Cal.App.3d at 391.

This is properly so. Otherwise, a wealthy defendant guilty

of egregious misconduct could simply avoid the realiza-

tion of net income in the year immediately preceding trial

(through, e.g., accounting practices, deferral of revenues,

acceleration of expenses, or lack of productivity) and in

that way avoid the imposition of large punitive damages

for its misbehavior. Indeed, as the evidence in this case

revealed, merely through a change in accounting methods

Eaton altered the stated amount of net sales in its 1981

annual report by $12.3 million. (30 R.T. 5265).

Eaton next argues that the $15,000,000 punitive dam-

age award must be considered excessive because of its

“sheer size.” (Pet. 16). But Eaton advances no rational

reason for concluding that mere size alone renders a

punitive damage award constitutionally infirm. To the

contrary, where, as here, a fiduciary’s reprehensible be-

havior causes its beneficiary to suffer massive actual

damages, a proportionally large damage award undenia-

bly is necessary to serve the punitive and deterrent

purposes of exemplary damages.” Accordingly, the

197t should also be noted that the award in this case is well below "

the amount of fines levied for securities frauds in other contexts. See

e.g., Despite Reforms, Abuses Still Suspected On Wall Street, Los

Angeles Times, Dee. 24, 1988, §1, at 1, 19 ($25.3 million rine for

insider trading); Drexel Concedes Guilt On Trading; To Pay $650

Million, N.Y. Times, Dec. 22, 1988, at Al ($300 million fine for federal

securities violations); Spreading Scandal: Fall of Ivan F. Boesky

Leads to Broader Probe Of Insider Information, Wall St. J., Nov. 17,

1986 at Al ($50 million civil penalty plus prison term for illegal

insider -trading). See also Sundstrand-To Pay U.S. $71 Million,

Eighth Amendment issues raised by Eaton would not be

worthy of review in this case even if Eaton had properly

raised those issues below.”

B. Because The Jury’s Discretion To Award Punitive

Damages Was Neither Standardless Nor Unre-

strained, And The Amount Of Such Damages Was

Predictable, This Is Not A Suitable Case For Review

Of Eaton’s Due Process Clause Argument

Eaton asserts that this Court should review whether

granting a jury “wholly standardless” and “unfettered”

discretion to award punitive damages in “completely

unpredictable” amounts violates the Fourteenth Amend-

ment’s Due Process Clause. (Pet. 19-23). As we demon-

strate below, however, review of this issue is not

warranted by the facts of this case.

- 1. California Law Requires Jury Awards Of Punitive

Damages To Satisfy Several Well Articulated

Standards

In Bankers Life, Justice O’Connor expressed concern

that in some jurisdictions the discretion granted to juries

to award punitive damages is “wholly standardless” be-

cause in those jurisdictions “[p]unitive damages are not

measured against actual injury, so there is no objective

standard that limits their amount.” Bankers Life, supra,

Chieago Tribune, Jan. 27, 1989, §C, at 1 ($71 million in civil

penalties and $127.3 million in fines for defense-contracting fraud);

Fines for Tesoro, N.Y. Times, Jan. 24, 1979, at D4 ($56 million fine for

violating Department of Energy Regulations).

Eaton makes much of the large punitive damage awards dis-

eussed in the Rand Institute’s 1987 study on punitive damages (Pet.

14-15 n. 11). But Raton overlooks that even the largest awards in that

study (1.e., the top 25%) bore ratios to compensatory damages

ranging only from 3:1 at the low end to 5.7:1 at the high end.

Peterson, “Punitive Damages — Empirical Findings” (Rand Corp.

1987) at 58. The median ratio for all awards in the study was less

than 1.6 to 1. Id. These modest ratios are hardly indicative of

rampant vigilantism in California juries.

seh eens crear rer tiara iter

108 S.Ct. at 1655 (coneurring opinion). See also Smith v.

Wade, 461 U.S. 30, 88-89 (1983) (Rehnquist, J., dissent-

ing); International Brotherhood of Electrical Workers v.

Foust, 442 U.S. 42, 50 n. 14 (1979), quoting Gertz v. Robert

Welch, Inc., 418 U.S. 328, 350 (1974); Rosenbloom v.

Metromedia, Inc., 403 U.S. 29, 74-77 (1971) (Harlan, J.

dissenting). However, this is not so in California. Califor-

nia juries are instructed, like the jury in this case, that

“punitive damages must bear a reasonable relationship to

actual damages.” 2 California Jury Instructions, Civil! 205

BAJI 14.71 (West 1986) (emphasis added); App. F-2 to

F-3. See Neal v. Farmers Insurance Exchange, 21 Cal.3d

910, 928, 148 Cal.Rptr. 389 (1978).

California law, moreover, imposes several other stan-

dards on the exercise of a jury’s discretion to award

punitive damages. Thus, California courts routinely in-

struct juries, as the trial court did here, to limit punitive

damage awards to amounts that bear a reasonable rela-

tionship to the reprehensibility of the wrongdoer’s mis-

conduct and to the wrongdoer’s wealth. Jd. They further

instruct that the jury must exercise its discretion to

award such damages “without passion or prejudice.” Jd.

As the California Supreme Court has explained, these

multiple criteria require that a punitive damage award not

exceed the amount necessary to serve the purposes of

punitive damages, 1.e., punishment and deterrence. Neal v.

Farmers Insurance Exchange, supra, 21 Cal.3d at 928.

In sum, the complete lack of standards about which

Justice O’Connor expressed concern in Bankers Life sim-

ply does not exist in California. For this reason alone it

would be inappropriate to review Eaton’s due process

argument in this case.”

*1Eaton appears to complain that the standards governing awards

of punitive damages in California have been established judicially

rather than by statute (Pet. 20). But as this Court has stated, there

is “no difference, from the standpoint of vagueness, whether the

standard .. . is one contained in haec verba within the statute, or

whether it is the judicial measure of constitutional application.”

Se re ae

2. Because California Trial And Appellate Courts

Carefully Scrutinize Punitive Damage Awards To

Ensure Reasonableness And Proportionality, The

Discretion of California Juries To Make Such

Awards Is Not Unrestrained

In Bankers Life, Justice O’Connor observed that, under

Mississippi law, a jury’s discretion to award punitive

damages is totally unrestrained (i.¢., unfettered) because

‘the determination of the amount of punitive damages is

a matter committed solely to the authority and discretion

of the jury.’ ” 108 S.Ct. at 1656, quoting 483 So.2d 254,

278 (Miss. 1985) (opinion below). By contrast, the disere-

tion vested in California juries is not at all unrestrained.

In California, a defendant may, as a matter of right,

seek judicial scrutiny of a jury’s punitive damage award

both in a motion for new trial and on appeal. At each level

of review, the trial and appellate courts carefully examine

the award to ensure that it neither exceeds the standards

imposed on the jury’s discretion nor results from passion

or prejudice.

The right to move for a new trial provides California

litigants important safeguards. In ruling on a motion for

new trial, the trial judge “sits not in an appellate capacity

but as an independent trier of fact.” Neal v. Farmers

Insurance Exchange, supra, 21 Cal.3d at 933. The judge

must “grant a new trial on the ground of excessive

damages ...or provide for a reduction of the verdict, if

under the evidence he believes it to be too large.” Collins

v. Lucky Markets, Inc., 274 Cal.App.2d 645, 652, 79

Cai.Rptr. 454 (1969).

California appellate courts police disproportionate pu-

nitive damage awards with equal vigilance. They recog-

nize that “it is our duty to intervene in instances where

punitive awards are so palpably excessive or grossly

disproportionate as to raise a presumption they resulted

Dennis v. United States, 341 U.S. 494, 515 (1951). See also Ward v.

Illinois, 431 U.S. 767, 771-773 (1977).

from passion or prejudice.” Burnett v. National Enquirer,

Inc., 144 Cal.App.8d 991, 1011, 193 Cal.Rptr. 206

(1983).”

In short, the completely unrestrained discretion to

award punitive damages that juries may have in some

jurisdictions simply does not exist in California. Califor-

nia trial and appellate courts vigorously supervise and

review such awards; indeed, Eaton itself received the

benefit of such judicial scrutiny in this case. For this

separate reason, review of Eaton’s due process argument

in this ease would be inappropriate.

“21t is simply not true, as Eaton seems to suggest (Pet. 17), that

California trial and appellate courts have historically neglected their

duty to reduce excessive punitive damage awards. See, e.g., Egan v.

Mutual of Omaha Ins. Co., 24 Cal.3d 809, 157 Cal.Rptr. 482 (1979)

(California Supreme Court reversed $5 million punitive damage

award as disproportionate and excessive); Ramona Manor Convales-

cent Hos. v. Care Enterprises, 177 Cal.App.3d 1120, 225 Cal.Rptr. 120

(1986) (court of appeal reversed $10 million punitive damage award

and remanded for new trial unless plaintiff accepted reduction to $2.5

million); Wayte v. Rollins Int'l, Inc., 169 Cal.App.3d 1, 215 Cal.Rptr.

59 (1985) (court of appeal affirmed trial court’s reduction to

$208,000 of one $950,000 punitive damage award, and its reduction of

two other awards to $50,000 from $200,000); Jahn v. Brickey, 168

Cal.App.3d 399, 214 Cal.Rptr. 119 (1985) (court of appeal affirmed

trial court’s reduction of $250,000 punitive damage award to

$100,000); Sprague v. Equifaz, Inc., 166 Cal.App.3d 1012, 213

Cal.Rptr. 69 (1985) (court of appeal affirmed trial court’s reduction

of $5 million punitive damage award to $1 million); Goshgarian v.

George, supra (court of appeal reduced $15,000 punitive damage

award to $7,500); Burnett v. Nat’l Enquirer, Inc., supra (trial court

reduced $1.3 million punitive damage award to $750,000; court of

appeal reduced it further to $150,000); Grimshaw v. Ford Motor Co.,

119 Cal.App.3d 757, 174 Cal.Rptr. 348 (1981) (court of appeal

affirmed trial court’s reduction of $125 million punitive damage

award to $3.5 million); Alhino v. Starr, 112 Cal.App.3d 158, 169

Cal.Rptr. 136 (1980) (court of appeal remanded $150,000 punitive

damage award); Rosener v. Sears, Roebuck & Co., 110 Cal.App.3d 740,

168 Cal.Rptr. 237 (1980) ($10 million punitive damage award re-

duced to $2.5 million by court of appeal).

3. Neither California Punitive Damage Awards In

General Nor The Award In This Case Lacks

Predictability

Eaton’s assertion that California punitive damage

awards are wholly unpredictable reflects a misunder-

standing of the views expressed by the Court and its

individual members. When the Court and individual Jus-

tices have criticized punitive damage awards as “wholly

unpredictable,” they have uniformly done so only because

a jury had unbridled discretion to assess such awards in

amounts “bearing no necessary relation to the actual

harm eaused.” E.g., Gertz v. Robert Welch, Inc., supra, 418

U.S. at 350. See also Bankers Life, supra, 108 S.Ct. at 1655

(O’Connor, J., coneurring); Rosenbloom v. Metromedia,

Inc., supra, 403 U.S. at 74 (Harlan, J., dissenting).

California jury awards are not susceptible to this criti-

cism, however, because California law requires that such

awards bear a reasonable relationship to actual damages

(See § II.B.1., supra).

California law further assures predictability as to the

amount of punitive damage awards by requiring that

punitive damages bear a reasonable relationship both to

the wrongdoer’s wealth and to the reprehensibility of the

wrongdoer’s misconduct.” Indeed, by requiring punitive

damage awards to satisfy all of the foregoing criteria in

combination, California law provides even greater predict-

ability than state laws that require proportionality only to

actual damages. See e.g., United States v. National Dairy

Products Corp., 372 U.S. 29, 35 (1963) (‘the necessary

specificity of warning is afforded when, as here, separate,

though related, statutory elements of prohibited activity

come to focus on one course of conduct.”’)

734s Justice Harlan observed in discussing punitive damages in

another context, all of the foregoing criteria are objectively ascertain-

able. Rosenbloom v. Metromedia, Inc., supra, 403 U.S. at 76 (Harlan J.,

dissenting) (“{t]he defendant’s resources, the actual harm suffered

and the [wrongful conduct’s} potential for actual harm are all

susceptible of more or less objective measurement.’’)

Eaton apparently complains that, even though punitive

damage awards in California must be proportionate to all

of these three criteria, the amount of such awards is not

predictable in advance with mathematical precision. How-

ever, the Constitution does not require the mathematical

precision that Eaton seems to desire. As the Court stated

in Roth v. United States, 354 U.S. 476 (1957):

“This court...has consistently held that lack of

precision is not itself offensive to the requirements of

due process. ‘* * * [T]he Constitution does not

require impossible standards’; all that is required is

that the language ‘conveys sufficiently definite warn-

ing as to the proscribed conduct when measured by

common understanding and practices. * * *’”

354 U.S. at 491, quoting United States v. Petrillo, 332 U.S.

1, 7-8 (1947).

The multiple criteria that punitive damages must sat-

isfy in California convey, in the words of Petrillo, “suffi-

ciently definite warning...when measured by common

understanding and practices.” To require greater specific-

ity would deprive juries of the flexibility that this Court

has recognized they need in exercising their discretion to

award punitive damages in amounts appropriate to the

circumstances of each case. See Barry v. Edmunds, 116

U.S. 550, 565 (1886); Day v. Woodworth, 54 U.S. (13

How.) 363, 371 (1852). Cf. Nash v. United States, 229 U.S.

373, 377 (1913) (Holmes, J.) (due process is not of-

fended merely because a defendant’s punishment “de-

pends on his estimating rightly, that is, as the jury

subsequently estimates it, some matter of degree.”’)

The jury’s punitive damage award satisfied all of the

standards of proportionality required by California law.

The amount of the award, moreover, was much less than

the complaint’s $25 million punitive damage prayer —

which Eaton knew about from the moment it became a

party to this litigation (see note 5, supra). It is thus

inaccurate to suggest that the punitive damage award in

ee re

eens Ee)

this case was unreasonably — or at all — unpredictable or

violative of due process.”

C. The Courts Below Properly Imposed Liability On -

Eaton For Cutler-Hammer’s Punitive Damage Ob-

ligations Under A Rational State Statute Designed

To Implement Legitimate State Interests. Eaton’s

Due Process Challenge To These Lower Court

Holdings Thus Does Not Merit Review

Eaton finally contends that this Court should review

whether the courts below violated the Fourteenth Amend-

ment’s Due Process Clause by requiring the surviving

corporation in a merger (Eaton) to pay the punitive

damage liabilities of the disappearing corporation (Cut-

ler-Hammer). (Pet. 23-26). The lower court holdings,

however, fully comply with due process.

The court of appeal held Eaton liable for Cutler-Ham-

mer’s punitive damage obligations pursuant to California

Corporations Code § 1107(a). (App. A-51 to A-53). See-

tion 1107(a) provides that a surviving corporation in a

merger “shall be subject to all the debts and liabilities of

[the disappearing corporation] in the same manner as if

the surviving corporation had itself incurred them.” (em-

phasis added). In ruling that this statutory language

requires Eaton (as the surviving corporation) to pay

Cutler-Hammer’s punitive damage liabilities, the court of

appeal followed settled California case law interpreting

the phrase “all the debts and liabilities” in section

1107(a) to inelude the disappearing corporation’s puni-

tive damage liabilities. See Marks v. Minnesota Mining &

Mfg. Co., 187 Cal.App.3d 1429, 1434-35, 232 Cal.Rptr. 594

**Baton’s due process argument is not at all bolstered by the

abstract possibility that the standards governing California punitive

damage awards might somehow permit an unpredictably high award

in a hypothetical case. Cf. Robinson v. United States, 324 U.S. 282, 286

(1945). A party, like Eaton (as Cutler-Hammer’s successor), “to

whose conduct a [law] clearly applies may not successfully challenge

it for vagueness.” Parker v. Levy, supra, 417 U.S. at 756.

- 26

(1986); Moe v. Transamerica Title Ins. Co., 21 Cal.App.3d

288, 303-05, 98 Cal.Rptr. 547 (1971).™

Since the court of appeal relied exclusively on section

1107(a), Eaton’s contention that the court of appeal’s

holding violates due process necessarily constitutes an

attack on the constitutionality of section 1107(a). (See

Pet. 26). A statute will not, however, be held unconstitu-

tional on due process grounds unless “it is of such a

character as to preclude the assumption that it rests upon

some rational basis.” United States v. Carolene Products

Co., 304 U.S. 144, 152 (1938). Conversely, the stat:1te will

be upheld against a due process challenge if “there is an

evil at hand for correction, and...it might be thought

that the particular legislative measure was a rational way

to correct it.” Williamson v. Lee Optical Co., 348 U.S. 483,

488 (1955). Thus, to sustain its constitutional challenge,

Eaton must establish that the California legislature could

have had no rational basis for enacting section 1107(a),

and that it therefore “acted in an arbitrary and irrational

way.” Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15

(1976). See also Exxon Corp. v. Governor of Maryland,

437 U.S. 117, 124-25 (1978).

Baton is wrong in asserting (Pet. 24-25) that before the court of

appeal’s decision, California courts required the surviving and disap-

pearing corporations to share an “identity of interest’ (a phrase

invented by Eaton that appears in no California judicial opinion) as a

precondition to imposing liability on the surviving corporation for the

disappearing corporation’s punitive damage obligations. Indeed, the

seminal Moe case has repeatedly been cited for the proposition that

the surviving corporation in a merger is, as a matter of law, subject to

punitive damages for the torts of the disappearing corporation. U.S.

v. Oil Resources, Inc., 817 F.2d 1429, 1434 (9th Cir. 1987); Marks,

supra, 187 Cal.App.3d at 1434; Celotex Corp. v. Pickett, 490 So.2d 35,

38 (Fla. 1986); Krull v. Celoter Corp., 611 F.Supp. 146, 148 (N.D. IIl.

1985); Neal v. Carey Canadian Mines, Ltd., 548 F.Supp. 357, 391

(E.D. Pa. 1982) aff'd on other grounds, Baskirk v. Carey Canadian

Mines, 760 F.2d 481 (3d Cir. 1985). The federal court decision in Jn

Re Related Asbestos Cases, 566 F.Supp. 818 (N.D. Cal. 1983), on which

Eaton relies, does not address section 1107(a).

6 FLERE I ON LL GLI EIMOL INE YO ILE LOE PROT IAI PEA GIS

Section 1107(a) plainly has a rational basis. It furthers

the important purpose of deterring prospective corporate

merger candidates from engaging in reprehensible con-

duct. A potential acquisition target will obviously sell for

less, or not at all, if it engages in conduct that later might

subject an acquiring corporation to substantial punitive

damages liability. A law imposing on the surviving corpo-

ration in a merger responsibility for the disappearing

corporation’s punitive damage liabilities thus provides a

powerful incentive to corporate acquisition candidates to

refrain from any such misconduct. See, e.g., Celotex Corp.

v. Pickett, supra, 490 So.2d at 38 (applying Florida’s

statutory equivalent of section 1107 (a) ).”°

Eaton acknowledges this underlying reason for section

1107(a) (Pet. 25 n. 25), but contends that it is “arbitrary

and capricious.” (Pet 24). To support this contention,

Eaton argues that “logic does not sustain” the legisla-

ture’s conclusion that requiring a surviving corporation to

pay the cisappearing corporation’s punitive damage lia-

bilities deters corporate acquisition candidates from en-

gaging in reprehensible behavior. (Pet. 25-26 n. 25). But

as indicated above, the legislature could reasonably have

concluded otherwise. Eaton’s disagreement with the wis-

dom of this conelusion raises policy questions which

should be addressed to the legislature; it does not, how-

ever, raise due process concerns. See, e.g., Exxon Corp. v.

Governor of Maryland, supra, 437 U.S. at 124-25; Ferguson

v. Skrupa, 372 U.S. 726, 730-31 (1963).

Eaton also complains that it is “innocent” of any

wrongdoing and that the law ordinarily does not impose

punitive damages upon innocent parties. From these

premises, Eaton concludes, without explanation, that re-

quiring a surviving corporation in a merger to assume the

disappearing corporation’s punitive damage liabilities

necessarily violates due process. (Pet 23-24, citing Lake

*°Section 1107(a) also prevents corporations from using mergers

as a means of avoiding punishment for their reprehensible behavior.

This is yet another rational basis for the statute.

Shore & M.S. Ry. Co. v. Prentice, 147 U.S. 101 (1893) and

City of Newport v. Fact Concerts, Inc., 453 U.S. 247

_ (1983) ). This argument lacks merit for several reasons.

First, neither Lake Shore nor Fact Concerts involved

due process questions. Lake Shore applied federal com-

mon law principles; Fact Concerts involved only a question

of statutory construction.

Second, even if Eaton’s characterization of itself as

“innocent” were accurate, it does not automatically fol-

low, as Eaton suggests, that requiring it (as the surviving

corporation) to pay Cutler-Hammer’s punitive damage

obligations a fortiori violates due process. Where, as here,

a rational basis exists for a statute, the Court will not

disturb the statute on due process grounds merely be-

cause, as Eaton argues, the legislation is purportedly

“unwise, improvident or out of harmony with a particular

school of thought.” Williamson v. Lee Optical Co., supra,

348 U.S. at 488. Eaton’s quarrel with the legislature’s

decision to require so-called “innocent” surviving corpo-

rations to pay the disappearing corporation’s punitive

damage obligations is for the legislature, not the courts.

See Ferguson v. Skrupa, supra, 372 U.S. at 730 n. . Sas

Third, Eaton’s characterization of itself as an “inno-

eent” party “distinct” from wrongdoer Cutler-Hammer is

inaccurate. Upon completion of the merger Cutler-Ham-

mer became a division of Eaton known as the “Cutler-

Hammer Group” (Ex. 1347, p. 13). Thus, after the

merger, Cutler-Hammer was an inseparable part of Eaton.

See, e.g., Moe v. Transamerica Title Ins. Co., supra, 21

Cal.App.3d at 304 (a merger “does not create an entirely

new entity but “‘ “merely directs the blood of the old

corporation into the veins of the new, the old living in the

*7Baton, moreover, is incorrect in arguing (Pet. 26) that vicarious

punishment of purportedly “innocent” parties is a concept foreign to

the law. See, e.g., Shapiro, Bernstein & Co., Inc. v. H. L. Green Co., 316

F.2d 304 (2nd Cir. 1963) (copyright infringement.)

P e » 28 e *

new’ ’” (citations omitted) ).~ There is thus no merit to

Eaton’s assertions of “distinctness” or “innocence.”

Nor is there merit to Eaton’s final contention that the

court of appeal’s interpretation of section 1107(a) treats

its shareholders unfairly. Had Eaton wished to absorb

Cutler-Hammer without becoming subject to Cutler-Ham-

mer’s punitive damage liabilities, it could easily have done

so by leaving Cutler-Hammer intact as a separate corpo-

ration and purchasing either Cutler-Hammer’s stock or

its assets. Instead, Eaton made the considered decision

on behalf of its shareholders to absorb Cutler-Hammer in

a merger, knowing full well that this lawsuit — including

its $25 million punitive damage claim against Cutler-

Hammer — was pending.” There is no unfairness in hold-

ing Eaton and its shareholders to the consequences of

this conscious choice. See Krull v. Celotex, supra, 611

F.Supp. at 149.

In short, Eaton’s due process challenge to section

1107(a) — which Eaton has failed to support with a

citation to even one due process case — raises no issues

meriting review by this Court.

Moreover, the very corporate officers responsible for Cutler-

Hammer’s fraudulent conduct in this case succeeded to managerial

positions at Eaton. (30 R.T. 5254-61).

*? Indeed, despite its knowledge of Cutler-Hammer’s potential

punitive damage liability, Eaton expressly agreed in the written

merger agreement to assume all of Cutler-Hammer’s “debts, liabili-

ties, obligations and duties [as if they] had been incurred or con-

tracted by [Eaton]” (Ex. 1049, 95).

CONCLUSION

The Petition for Writ of Certiorari should be denied.

DATED: March 31, 1989.

Respectfully submitted,

STEPHEN A. KROFT,

_ (Cousel of Record),

ROBERT H. ROTSTEIN

KELLY W. Kay

Attorneys for Respondent

The PKL Compamies, Inc.

Of Counsel

Rosenfeld, Meyer & Susman

APPENDIX 1

SUPERIOR COURT OF CALIFORNIA, COUNTY OF

LOS ANGELES

C185010

THE PKL CORPORATION

MACRODATA CORPORATION, et al.

HONORABLE ALFRED L. MARGOLIS, JUDGE

V. HIRANO, Deputy Clerk

E. V. SCHNEIDER, Reporter

DEPT. 40

NATURE OF PROCEEDINGS: Deft’s Motion for New

Trial, ete., et al.

Matter resumes from 10/31/83. Argument continues.

The Court denies the Motion for New Trial and the

Motion for the Judgment notwithstanding the Verdict.

The following order is mailed this date as follows:

ROSENFELD, MEYER & SUSMAN

e/o JOHN G. DAVIES, KAREN GARVER

& FRANK A. URIBIE

9601 WILSHIRE BLVD. 4th Floor

BEVERLY HILLS, CA 90210

RINTALA, SMOOOT & JAENICKE

e/o- PETER C. SMOOT

1875 CENTURY PARK EAST, SUITE 1220

LOS ANGELES, CA 90067

APPENDIX 1

Page 2

McCUTCHEN, BLACK, VERLEGER & SHEA

e/o WARD L. BENSHOOF

& LOUIS A. KARASIK

500 WILSHIRE BLVD.

LOS ANGELES, CA 90017

APPENDIX 2

“RULE 28. Review by Supreme Court

(e) [Form of petition, answer and reply]

(2) At the beginning of the body of the petition, the

petition shall state the issues presented for review, ex-

pressed in the terms and circumstances of the case but

without unnecessary detail. The statement should be

short and concise and should not be argumentative or

repetitious. The statement of an issue will be deemed to

comprise every subsidiary issue fairly included in it. Only -

the issues set forth in the petition and answer or fairly

included in them need be considered by the court.

RULE 29. Grounds for Review in Supreme Court

(b) [Limitations] As a matter of policy, on petition for

review the Supreme Court normally will not consider:

(1) any issue that could have been but was not timely

raised in the briefs filed in the Court of Appeal;...”

APPENDIX 3

The following is the entire text of the issues presented

for review in Eaton Corporation’s Petition for Review

filed in the California Supreme Court:

“ISSUES PRESENTED FOR REVIEW

“The issues presented for review in this Petition are as

follows:

1. May punitive damages of $15,000,000 be imposed on

a totally innocent corporate successor for the conduct of a

predecessor which has completely ceased to exist, ex-

pecially where no separate identity of the predecessor

remains in the successor?

This issue calls for resolution by this Court of confu-

sion in the reported decisions concerning the application

of Cal. Corp. Code $1107 to punitive damages, and a

determination whether the public policy that punitive

damages are improper unless assessed against the party

actually responsible for the wrong applies equally to

successor corporations.

2. Where a minority shareholder has profited more

than $1.2 million on its investment, is a $15,000,000

punitive damage windfall, constituting 10% of the wrong-

doer’s net worh[sic] and 62% of its net income, excessive

under common law principles and California statutes?

This issue calls for this Court to determine whether

Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169

Cal.Rptr. 691 (1979), which held that a punitive award

constituting 58% of the wrongdoer’s net income was

‘excessive as a matter of law’ (24 Cal.3d at 824), is

controlling law in this state and prohibits a punitive

award that is three times greater than any prior punitive

award affirmed in a published opinion by the courts of

California.

APPENDIX 3

Page 2

3. Where a minerity shareholder deliberately waives

its statutory right under Cal. Corp. Code § 1300 et. seg. to

Court supervised appraisal of the value of its shares in a

merger, may the minority nonetheless pursue a jury trial

to dispute the merger price?

This question calls for this Court to determine an issue

left for future decision in Steinberg v. Amplica, Inc., 42

Cal.3d 1198, 233 Cal.Rptr. 249 (1986); is the appraisal

remedy, found by this Court in Steinberg to be both the

adequate and exclusive remedy under Cal. Corp. Code

§ 1312(a) for disputes over fair value in a merger, ren-

dered optional by the limited exception to exclusivity

found in § 1312(b); i.e., does the exception permit litiga-

tion over the fair value of stock in a ‘common control’

merger and claims for punitive damages? -

4. Are minority shareholders entitled to jury trials for

resolution of the equitable restrictions imposed on major-

ity shareholders under Jones v. Ahmanson, 1 Cal.3d 93, 81

Cal.Rptr. 592 (1969)?

This question calls for this Court to decide if its

holding in C & K Engineering Contractors v. Amber Steel

Co., 23 Cal.3d 1, 151 Cal.Rptr. 323 (1978) that there is no

right to jury trial for a claim which would not exist but for

the application of equitable principles, applies to the

cause of action for breach of majority shareholder duty

established by Jones.

5. If jury trials are to be had for breach of majority

shareholder duty under Jones, what are the elements of

the cause of action to be submitted to the jury?

May a jury be instructed to ‘presume fraud’ if the

majority has some ‘advantage’ over the minority? Is the

defendant entitled to instructions which define ‘advan-

tage’ and identify the several plain advantages possessed

APPENDIX 3

Page 3

by the majority which are incompetent, as a matter of law,

to show breach of duty under Jones?

6. Where the appellate court exonerates an em-

ployee/defendant of wrongdoing and makes findings of

fact about both his conduct and that of the plaintiff, may

the appellate court in a subsequent appeal in the same

action hold the employer/defendant liable for conduct by

the employee which the prior decision concluded did not

occur, and make other findings of fact expressly contrary

to the prior appellate decision?

This issue presents questions of the jurisdiction of trial

courts under Cal. Code Civ. Proc. $ 916(a) to adjudicate

matters that have been appealed, and ealls for this Court

to reaffirm the principle of Southern Pacific Railway Co. v.

Los Angeles, 5 Cal.2d 545, 55 P.2d 847 (1936), that it is

impermissible for two appellate courts to ‘reach [ ]

diametrically opposite conclusions as to the legal effect of

the same occurrence, where the essential same facts are

similarly presented’ (5 Cal.2d at 548).”

(Petition For Review, pp. 2-3)

APPENDIX 4

MeCUTCHEN, BLACK, VERLEGER & SHEA

Counselors at Law

600 Wilshire Boulevard

Los Angeles, California 90017

Telephone (213) 624-2400

Telex: 698261

May 31, 1988

Court of Appeal Second District

FILED

May 31, 1988

Robert N. Wilson, Clerk

HAND DELIVERED

Clerk, Division Five

Second Appellate District

3580 Wilshire Boulevard, Room 301

Los Angeles, California 90010

Re: PKL v. Eaton Corporation:

2d Civil No. BO10958

Dear Sirs:

~—

In connection with the hearing on this appeal on June 1,

1988, appellant Eaton Corporation wishes to bring to the

Court’s attention the decision in Sax v. World Wide Press,

Inc., et al., 809 F.2d 610 (9th Cir. 1987). Sax was decided

subsequent to the parties’ briefing of the issues, and is

thus an addendum to pages 122-123 of Eaton’s Opening

Brief setting forth authorities governing the disposition

of derivative claims.

APPENDIX 4

Page 2

For the Court’s convenience, five copies of this federal

decision are enclosed with this letter.

Very truly yours,

HOWARD J. PRIVETT

Howard J. Privett of

McCuTcHEN, BLACK,

VERLEGER & SHEA

Enclosures

ee: Stephen A. Kroft, Esquire [HAND DELIVERED]

PROOF OF SERVICE BY MAIL

STATE OF CALIFORNIA oF

CouNTY OF LOS ANGELES

I am a citizen of the United States and a resident of or

employed in the City of Los Angeles, County of Los

Angeles; I am over the age of 18 years and not a party to

the within action; my business address is 1706 Maple

Avenue, Los Angeles, California 90015.

On March 31, 1989, I served the within Brief of Respon-

dent in Opposition in re: “Eaton Corporation vs. The

PKL Companies, Inc.” in the United States Supreme

Court October Term 1988, No. 88-1354, on all parties

interested in said action, by placing three true copies

thereof enclosed in a sealed envelope, with postage

thereon fully prepaid, in the United States Post Office

mail box at Los Angeles, California, addressed as follows:

Howard J. Privett

McCutchen Black, Verleger & Shea

‘600 Wilshire Boulevard

12th Floor

Los Angeles, California 90017

Attorneys for Petitioner

All parties required to be served have been served.

I declare under penalty of perjury that the foregoing is

true and correct.

Executed on March 31, 1989, at Los Angeles,

California.

“J. GORDON HOOPER

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.