Petition for Writ of Certiorari — Aetna Life Insurance v. Ace

Supreme Court brief1998

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‘ Surens Court, 0.8.

’ PILED

~ BB 2Soavea 1998

No. 97-

Be eae

In the Supreme Court of the Anited States

OCTOBER TERM, 1997

AETNA LIFE INSURANCE COMPANY,

Petitioner,

SHERRIE ACE,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Ninth Circuit

PETITION FOR A WRIT OF CERTIORARI

PHILIP ALLEN LACOVARA

ANTHONY M. SHOLTY Counsel of Record

BETHANN B. CHAPMAN ANDREW L. FREY

Faulkner Banfield JOHN J. SULLIVAN

302 Gold Street Mayer, Brown & Platt

Juneau, AK 99801 2000 Pennsylvania Ave., N. W.

(907) 586-2210 Washington, DC 20006

(202) 463-2000

Counsel for Petitioner

Stall atest sto ah chee aaa

Neve Pletcas g SrNS ell

QUESTIONS PRESENTED

In reviewing a district court’s decision to grant a new trial,

the Ninth Circuit applies a “stringent standard” — which the

Seventh Circuit has expressly rejected — under which it will not

permit the trial court to exercise its discretion to grant a new trial

based on the weakness of the evidence, unless the verdict is

against the “great weight” of the evidence or is “seriously

erroneous,” and the Ninth Circuit accords minimal deference to

that determination. In this case, which involves a $16.5 million

punitive damage verdict based on the alleged “bad faith” denial

of insurance benefits worth $27,000, the trial court granted a new

trial on punitive damages, but the Ninth Circuit, applying its

“stringent standard,” reversed.

1. Does the Ninth Circuit’s “stringent” rule for new trial

orders based on evidentiary weakness —

which (a) prohibits trial judges from awarding new trials

unless the verdict is against the “great” weight of the

evidence, (b) subjects such orders to a standard of review

more “stringent” than “abuse of discretion,” and (c) squarely

conflicts with the broader discretion allowed in other circuits

— create an unauthorized barrier to relief from problematic

verdicts and excessively intrude on trial judges’ discretion to

grant new trials?

2. Because this Court has held that the Due Process Clause

requires searching post-verdict judicial review of punitive damage

verdicts, should the Court also require appellate courts to extend

the maximum deference possible under the “abuse-of-discretion”

standard, when the trial judge concludes that a punitive award is

unwarranted, dubious, or excessive, and orders a new trial?

3. When a court of appeals concludes that a trial judge did

not make sufficiently specific findings under Fed. R. Civ. P.

50(c)(1) explaining the grant of a “conditional” new trial, should

the proper practice be for the appellate court to remand for more

detailed findings rather that to reverse the new trial decision

outright and reinstate the original verdict?

(I)

RULE 29.6 STATEMENT

Petitioner Aetna Life Insurance Company states that its parent

companies and non-wholly owned subsidiaries consist of:

Aetna Inc. (parent)

Aetna U.S. Healthcare, Inc. (parent)

Aetna Chile Seguros Generales S.A. (a Chilean corporation)

Administradora de Fondos de Pensiones Santa Maria, S.A.

(a Chilean corporation)

Aetna Capital L.L.C.

Amerin Corporation

Fianzas Monterrey, S.A. (a Mexican corporation)

TABLE OF CONTENTS

Page

tos ge oo By so sy 1 2 RRR er me I

AP ATR POIOEER 8 ka a we CERN RUNS Oe ii

RAE PE PAU RUREEID ie wie ee tee eee iv

NS oe ky aw a o's Wb As bee wk as 2

SER a Rag I Sa a Ea ae Repeat 2

FPEUERAL RULES INVOLVED ..... 0. cc ccccsees 3

RAAT he Wh 8 3G Ch OWS ORR. c s BEES Cs 4

A. Aetna’s Evaluation of Ace’s Claim For Benefits .. 4

B. The Trial, Verdict, And Post-Verdict Motions ... 6

C. Te Neen Croun 8 Decision... ww tt 9

I. THE NINTH CIRCUIT’S ERRONEOUS STAN-

DARDS FOR GRANTING AND REVIEWING NEW

TRIAL ORDERS BASED ON THE SUFFICIENCY

OF THE EVIDENCE CONFLICTS WITH DECI-

SIONS OF THIS COURT AND OTHER CIRCUIT

St RE RS SD ee ee ea Grane 14

II. DUE PROCESS REQUIRES SPECIAL DEFERENCE

ON APPEAL TO ORDERS GRANTING NEW TRI-

ALS ON PUNITIVE DAMAGE VERDICTS ..... 24

Ill. IF FINDINGS ARE INSUFFICIENT UNDER RULE

50(c)1) TO EXPLAIN THE GRANT OF A NEW

TRIAL, THE PROPER PROCEDURE IS TO RE-

MAND FOR ADDITIONAL FINDINGS, NOT TO

SRE RURMRIEES: 36.45 Bin 8 0 Fo wien eee 27

SE 6 cGN0 Fw BOR bw 08 4.8 98 6 ee ae ak 30

TABLE OF AUTHORITIES

Page(s)

Cases:

Allied Chemical Corp. v. Daiflon, Inc.,

ee a No ck ap ew po 9 ce 14

Binder v. Long Island Lighting Co., 57 F.3d 193

PRN MEE Oe oe yk we 5 15

Books v. Chater, 91 F.3d 972 (7th Cir. 1996) ....... 28

Browning-Ferris Industries of Vermont, Inc. v.

Kelco Disposal, Inc., 492 U.S. 257 (1989) . . . 14, 25-26

Byrd v. Blue Ridge Rural Electric Cooperative,

Pe See ME EE Se ky wack ais t Aw ce ks 14, 17

Calderon v. Thompson, US. .

RAED. Ae, MOE ks oe ek ca 20

Carter vy. DecisionOne Corp., 122 F.3d 997

Seen REE oo ns AS Oh ov owe ee ee 16

Carter v. Fenner, 136 F.3d 1000 (Sth Cir. 1998) ...... 16

Chizmar v. Mackie, 896 P.2d 196 (Alaska 1995) ...... 12

Collazo-Santiago v. Toyota Motor Corp.,

No. 97-1365, 1998 U.S. App. LEXIS

Se Cae ee, SOY TE i i ee eee 19

Cooter & Gell v. Hartmax Corp., 496 U.S. 384

(RUPUE: ok a Nee Wie ke EK Pilea < SEO Ee ee 20

EEOC v. Pape Lift, Inc. , 115 F.3d 676

Ce ee) ks oe ee er oe 2S 16

Gasperini v. Center for Humanities, Inc.,

FI RE OE RIE 8 Shak ec aw ee passim

General Electric Co. v. Joiner, __ U.S. _,

SAU Os Goes PNG CITE oo bi eels ok Sas 21

TABLE OF AUTHORITIES — Continued

Page(s)

Gutierrez-Rodriguez v. Cartagena, 882 F.2d 553

Se SUN i a oo Sk tk os Sew oe oe ee 19

Harte-Hanks Communications, Inc. v.

Connaughton, 491 U.S. 657 (1989) ........... 25

Hetzel v. Prince William County, U.S. __,

CER ae Ge ee Ore os ae i eR 18, 21

Honda Motor Co. v. Oberg, 512 U.S. 415

CE iow he te a ee Se er has 11, 25

Kelley v. Airborne Freight Corp., 140 F.3d 335

Coet te Tes Se ss a ve aie oe ch WE SS 19

Kirsch v. Fleet Street, Ltd., Nos. 96-9631,

97-7021, 1998 U.S. App. LEXIS 13516

oe Gat Be te re a ee DEN Sk 18

Liddell v. Board of Educ. , 20 F.3d 324

Ce Sr POs oss Ke ee SESS 29

Lind v. Schenley Indus., Inc., 278 F.2d 79

(3d Cir.), cert. denied, 364 U.S. 835

REE Ae i oe Serre ee eee ees iS, 37

McClain v. Owens-Corning Fiberglass Corp.,

5D Foe cee Cree Gay Fe 8 BPE wr 21

Medcom Holding Co. v. Baxter Travenol

Laboratories, Inc., 106 F.3d 1388

Cea See ee a re he nh 1, 18

Miksis v. Howard, 106 F.3d 754 (7th Cir. 1997) ...... 20

Montgomery Ward & Co. v. Duncan,

BEd SF Re CI ov ck eee ewe es 1, 14-15, 18

National Hockey League v. Metropolitan

Hockey Club, 427 U.S. 639 (1976) ........... 20

TABLE OF AUTHORITIES — Continued

Page(s)

NAACP v. Town of East Haven, 70 F.3d 219

See I os ei A a ae 29

Preferred RX, Inc. v. American Prescription

Plan, Inc., 46 F.3d 535 (6th Cir. 1995) ........ 29

Rattray v. City of National City, 51 F.3d 793

(9th Cir. 1994), cert. denied, 516 U.S. 820

NBER RSG AERC 2 EDS ie Oo a a 25

Reich v. Newspapers of New England, Inc.,

0 ee Se SO ee 28

Santa Maria v. Metro-North Commuter R.R..,

a Fae A ee as I no he Se oa so ke 18

Sheridan v. E.I. DuPont de Nemours & Co..,

100 F.3d 1061 (3d Cir. 1995), cert.

Ge, Re oe Oe ee CPT ook sc oc Kew 16

South-Western Publishing Co. v. Simons,

651 F.2d 653 (9th Cir. 1981),

cert. denied, 455 U.S. 1018 (1982) ........... 28

Spurlin v. General Motors Corp., 528 F.2d 612

Oe i ae ate 16-17

Taylor v. Washington Terminal Co., 409 F.2d 145

(D.C. Cir.), cert. denied, 396 U.S. 835

SE Skee et ba eee Ea et 19

TEC Engineering Corp. v. Budget Molders Supply,

ine. Ge Fie: S62 Cist Cie, 1996) co ee 29

Constitutional Provision, Statutes, and Rules:

Li Cay OE Wa a Ck Se kee wes ees passim

ere COO kk Oo eu s EK ee acs ae ees 3

Pie TOs EU ek Se wk ORR Se eben eee, 12

vii

TABLE OF AUTHORITIES — Continued

Page(s)

Pes Whi See OEE oe a vas UR KER ORCS passim

A ee a sin a Ka we CS Oe Oe 28

We I, Oe a kk We CAA Oe koe oS 25

a ee I oy oss aS 5 Ae ob eta 17, 28

cae fe ey alee ae ww eee 28

Miscellaneous:

1 W.S. Holdsworth, A HISTORY OF ENGLISH

SU TUS OUND <6 ob eh ee eS ee ce eee e's 14

11 Charles Alan Wright, Arthur R. Miller &

Mary Kay Kane, FEDERAL PRACTICE AND

PCE Se ee ee y oS oak passim

Henry J. Friendly, Indiscretion About Discretion,

Oe ME a a PPE COED Ss ok eee ack oc 6 cee 19-20

PETITION FOR A WRIT OF CERTIORARI

The jury in this case returned a verdict for respondent

Sherrie Ace, finding that petitioner Aetna Life Insurance

Company had “wrongfully withheld” nine-months of long-

term disability insurance benefits worth $27,000. The jury

also imposed punitive damages of $16.5 million on Aetna.

The district judge, who had heard all of the testimony and

examined all of the exhibits, expressed “surprise” at the

jury’s punitive damages decision. In a subsequent, detailed

opinion, he granted Aetna’s motion for judgment as a matter

of law on punitive liability. He also granted Aetna’s motion

under Fed. R. Civ. P. 50(c)(1) for a “conditional” new trial

on punitive damages, in the event the court of appeals found

the evidence sufficient to preclude judgment for Aetna as a

matter of law.

On appeal, the Ninth Circuit reversed not only the

judgment for Aetna, but also the district court’s “conditional”

new trial order. In reversing the award of a new trial on

punitive liability, the court of appeals eschewed the “weight

of the evidence” and “abuse of discretion” standards pro-

pounded and refined by this Court, see, e.g., Gasperini v.

Center for Humanities, Inc., 518 U.S. 415, 434 (1996);

Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251

(1940), in decisions which the Seventh Circuit has expressly

ruled do not permit the “stringent” standards applied by the

Ninth Circuit. See, e.g., Medcom Holding Co. v. Baxter

Travenol Laboratories, Inc., 106 F.3d 1388, 1397 (7th Cir.

1997).

Under the correct standards, a trial court may grant a

new trial if the verdict “appears” to the judge to be against

the “weight of the evidence,” and the appellate court in turn

is limited to reviewing that assessment for “abuse of

discretion.”

Instead of following this approach, the Ninth Circuit

applied its own more “stringent standard,” under which a

“district court may order a new trial based on insufficient

evidence only if it finds that the jury’s verdict ‘is against the

great weight of the evidence, or it is quite clear that the jury

has reached a seriously erroneous result.’” App., infra, 14a

(emphasis added; citation omitted). These special constraints

deprive federal trial judges in that Circuit (and in several

others that follow the Ninth Circuit’s tests) of the traditional

flexibility to evaluate the “weight of the evidence” and in

“the interest of justice” to set aside verdicts that “appear” to

be unwarranted.

The erroneous standards applied in the Nation’s largest

circuit, which several other circuits also follow, is especially

pernicious in the context of judicial review of punitive

damages verdicts, where the Due Process Clause compels

searching post-verdict scrutiny. In punitive damages cases,

the trial court has a unique position to view the evidence and

to serve as a judicial check on unwarranted or excessive

punishment. Its exercise of discretion to order a new trial on

punitive damages should be subject to substantial deference

under the abuse-of-discretion standard rather than being

subjected to the “stringent,” and entirely non-deferential,

standard applied by the Ninth Circuit.

OPINIONS BELOW

The amended opinion of the court of appeals (App. A) is

reported at 139 F.3d 1241. The order of the court of appeals

amending its opinion (App. B) is unreported. The original

opinion of the court of appeals (App. C) is also unreported.

The order of the district court granting Aetna’s motion for a

conditional new trial on punitive damages (App. D) is

unreported. The order of the district court granting, in part,

Aetna’s motion for judgment as a matter of law (App. E) is

also unreported.

JURISDICTION

The original opinion of the court of appeals was entered

on April 12, 1998. Acting on timely petitions for rehearing

by both parties, the court of appeals entered an order on May

7, 1998, granting the rehearing petitions in part and amending

the court’s opinion. The Ninth Circuit treats that date as the

date of entry of its judgment. The jurisdiction of this Court

is invoked under 28 U.S.C. § 1254(1).

FEDERAL RULES INVOLVED

The Federal Rules of Civil Procedure provide in pertinent

part:

Rule 50. Judgment as a Matter of Law in Jury

Trials; Alternative Motion for New Trial; Conditional

Rulings

* * *

as a Matter of Law; Conditional Rulings; New

Trial Motion

(1) If the renewed motion for judgment as a

matter of law is granted, the court shall also rule on

the motion for a new trial, if any, by determining

whether it should be granted if the judgment is

thereafter vacated or reversed, and shall specify the

grounds for granting or denying the motion for the

new trial. If the motion for a new trial is thus

conditionally granted, the order thereon does not

affect the finality of the judgment. In case the

motion for a new trial has been conditionally granted

and the judgment is reversed on appeal, the new trial

shall proceed unless the appellate court has otherwise

ordered. * * *

Rule 59. New Trials; Amendment of Judgments

(a). Grounds. A new trial may be granted to

all or any of the parties on all or part of the issues

(1) in an action in which there has been a trial by

jury, for any of the reasons for which new trials

have heretofore been granted in actions at law in the

courts of the United States; * * *.

STATEMENT

A. Aetna’s Evaluation of Ace’s Claim For Benefits.

The State of Alaska contracted with Aetna to make

available to employees, under defined conditions, insurance

coverage for short-term disability (“STD”) and long-term

disability (“LTD”). App. 3a-4a._ The State published a

benefits booklet that described the terms on which LTD

benefits were payable:

“To receive benefits from this plan, you must be

totally disabled. That is, you are unable to work at

any gainful occupation due to sickness or injury, and

under care of a physician. Medical certification is

required.” Jd. at 59a-60a; ER 22.'

The “unable to work at any gainful occupation” language

describing the standard for LTD benefits was required by the

State contract, and is “not common” in Aetna LTD insurance

agreements. App. 60a; SER 47, 52.

Sherrie Ace was a loan examiner for the State. App. 3a.

In December 1986, Ace injured her knee while sledding. As

a result, she required several surgeries by Dr. McEvoy over

the next six years. Jbid. In April 1992, Dr. McEvoy

performed an osteotomy on Ace’s knee. Following this

surgery, Ace obtained STD benefits from Aetna. When her

STD benefits lapsed, Ace applied for LTD benefits in

September 1992. Id. at 3a-4a.

' “ER” refers to the Excerpt[s] of Record filed by Ace in the

court of appeals and “SER” refers to the Supplemental Excerpts of

Record filed by Aetna; and “Tr.” refers to the trial transcript,

identified first by volume followed by page number(s).

With her LTD application, Ace submitted a report from

her family physician, Dr. Kiessling, who opined that Ace

suffered from “severe degenerative joint disease.” App. 4a.

He “rated her to be between 30-50% [‘capable of light work’]

and 50-70% [‘capable of clerical/administrative (sedentary)

activity’] physically disabled.” Jbid. Ace’s LTD application

also included a work release from her orthopedic surgeon,

Dr. McEvoy, dated July 27, 1992, authorizing her to perform

half-time, light-duty work for six weeks as of August 1,

1992. Id. at 3a-4a; ER 99. The surgeon stated:

“This half time should continue for six weeks after

which time she can be converted to full time * * *.

After six weeks [I] would anticipate that these

restrictions can gradually be diminished and she

could hopefully return to a more vigorous level of

activity.” Ibid.

After receiving Ace’s submissions, Aetna forwarded the

medical records to Dr. Galvin, a medical consultant who

reviewed disability benefit claims. App. 5a, 61a; 4 Tr. 116.

Dr. Galvin reported that Ace had not established a long-term

disability and could perform her own occupation as a loan

examiner. App. 5a; SER 156-157.

Relying on Ace’s submissions and Dr. Galvin’s analysis,

Aetna informed Ace on November 17, 1992, that her LTD

benefits claim was denied, explaining:

“In order to be eligible for Long-term Disability

Benefits, you must be totally disabled to the extent

that you are unable to work at any gainful occupa-

tion due to bodily injury or illness. * * *

“The most current medical information we have

* * * has revealed that you are capable of perform-

ing clerical, sedentary-type employment. Your old

occupation as a loan examiner would be considered

to be sedentary-type employment. Therefore, we

cannot consider you as being totally disabled from

performing the duties of any gainful occupation as

required by the policy * * *.” App. 5a-6a; ER 57-

58.

Aetna also advised Ace that she was “entitled to a review of

this benefit determination,” and explained the review process.

ER 57-58.

Over the next four months, Ace submitted several

requests for reconsideration (App. 6a-10a), which included

more materials from her family physician, Dr. Kiessling, and

two physical therapists. Dr. Kiessling changed his opinion of

Ace’s condition, concluding that it “had worsened since his

earlier [s]tatement, [and] that she * * * was unable to perform

clerical work.” Jd. at 7a. Aetna subsequently advised Ace

that she “would have to have her physicians ‘furnish . . .

objective medical evidence to support [her] contention [of

total disability].’” bid.

Although Aetna did not contact Ace’s physicians, her

requests for reconsideration were reviewed by, among others,

Aetna’s medical consultant, Dr. Galvin, who concluded that

Ace had failed to submit any “objective medical evidence” to

support the conclusion that she was totally disabled. App. 7a-

10a. Despite this finding, Aetna did not close the case, but

instead asked Ace to undergo an independent medical exami-

nation (“IME”). After Ace refused to appear for an IME,

Aetna denied her claim. Jd. at 10a, 61a.

Ace had further surgery on her knee in April 1993 (App.

10a) and “[w]ithin two months, [she] was walking without

crutches and returned to work.” Her alleged “long term”

disability ended June 1, 1993, nine months after she sought

the benefit. Ibid.

B. The Trial, Verdict, And Post-Verdict Motions.

Ace sued Aetna, alleging that Aetna had denied her LTD

benefits claim in “bad faith” and that Aetna was liable for

compensatory and punitive damages. App. 2a. After a

seven-day trial, the jury returned a verdict finding Aetna

liable for the tort of “bad faith” and awarding $27,009 in

damages for the “wrongful denial” of LTD benefits,

$100,000 in emotional distress damages, and $16.5 million in

punitive damages. Jbid. Once the jury was discharged, the

district court expressed “surprise” (7 Tr. 35-36) at the jury’s

punitive damage award.

Aetna then filed a motion for judgment as a matter of law

under Fed. R. Civ. P. 50 on its tort liability for bad faith and

its liability for punitive damages. App. 49a, 51a. The court

denied Aetna’s motion for judgment on the issue of bad faith

liability, finding that “a reasonable jury could have concluded

that Aetna breached its obligation to deal fairly and in good

faith with Ace.” Jd. at 58a-59a. The court stated:

“Although it is a close question, particularly in light

of the fact that where an insurer has an objectively

reasonable basis for denying a claim the denial does

not constitute bad faith, * * * this court concludes

that when all the evidence is viewed in the light most

favorable to Ace, a reasonable jury could have found

that Aetna acted in bad faith by not promptly making

some affirmative inquiry after receiving Dr.

Kiessling’s second opinion. * * *” Ibid.

Turning to the question of Aetna’s liability for punitive

damages under Alaska law, which requires “clear and

convincing” proof of “outrageous” behavior, the court ruled

in Aetna’s favor. App. 59a. The court first specifically

rejected Ace’s argument that the “any gainful occupation”

language used in the policy issued by Aetna could support

punitive liability here. Jd. at 60a. Although this language

sets a “standard far higher than the law would allow Aetna to

enforce literally,” this:

“* * * was not language inserted intc a policy

presented to an individual insured on a take it or

leave it basis. The language was contained in a

contract between Aetna and a state government. The

language was not actually employed by Aetna to

deny benefits to Ace. Ace’s qualification for disabil-

ity benefits turned upon whether she was able to go

back to work at her own job. That this was the

central issue was clearly known by all the Aetna

personnel involved in handling the claim. Whatever

might be said about quoting back the ‘any gainful

occupation’ language in some other context, it is

unreasonable to conclude that on the facts here it

shows any malice toward Ace.” Jbid.

Finally, the court concluded that the “manner in which

Ace’s claim was actually handled in terms of the information

available to Aetna at each step in the process,” could not

support an award of punitive damages:

“At all times, Aetna had knowledge of Dr.

McEvoy’s opinion which, given his role in Ace’s

care [as her orthopedic surgeon], was never persua-

sively contradicted by any other information.

Moreover, the lay claims personnel referred the

medical information to a qualified physician, Dr.

Galvin, for review. He found no basis for conclud-

ing Ace was disabled. Despite Dr. Galvin’s opinion,

Aetna did make arrangements for an IME. Surpris-

ingly, Ace declined the IME. * * *

“* * * Plainly put, there is nothing outrageous about

relying on the opinion of the most knowledgeable

physician, Dr. McEvoy, to the exclusion of what

little contrary indication of Ace’s condition had

emerged prior to asking for an IME, the one proce-

dure that could be expected to clear up any uncer-

tainty.” App. 6la-62a.

Aetna also moved under Fed. R. Civ. P. 50(c)(1) for an

order “conditionally” granting a new trial on punitive

damages, if a reviewing court disagreed with the judgment in

Aetna’s favor as a matter of law. In supporting that motion,

in addition to offering four reasons why the amount of

damages was excessive, Aetna presented three distinct

arguments why a new trial on punitive liability was war-

ranted:

(1) the verdict was “against the weight of the evidence,”

(2) the verdict was tainted by “unduly speculative”

expert testimony, and

(3) Ace’s counsel in closing argument had made an

improperly inflammatory reference to extra-record,

unrelated cases against other companies.

See generally Memorandum of Law in Support of Aetna’s

Motion for a New Trial, filed July 18,1996.

After considering the extensive briefing on this motion,

the district judge granted Aetna a conditional new trial on

punitive damages, finding:

“In general, the court agrees with the arguments

advanced by defendant [Aetna] and therefore grants

the motion for a new trial as to the claim for puni-

tive damages such that if the court of appeals should

reverse this court’s decision [granting judgment to

Aetna notwithstanding the verdict] on the punitive

damages claim there will be a new trial on that

claim.” App. 49a.

The court rejected Aetna’s motion for a new trial on its

underlying tort liability. Ibid.

C. The Ninth Circuit’s Decision.

Both parties appealed. Ace sought to have the jury’s full

verdict reinstated. Aetna sought to overturn its liability for

the underlying tort or at least to secure a new trial because of

various disputed trial rulings. On March 12, 1998, a panel

of the Ninth Circuit reversed the grant of judgment as a

matter of law to Aetna on punitive damages, repeatedly

asserting — incorrectly — that the evidence in Ace’s favor

was “undisputed” at trial, and that the district court had

simply “ignored” it. App. 36a.

The court also vacated the trial judge’s order condition-

ally granting a new trial on punitive damages. App. 39a.

Stating that the district court had not made sufficiently

explicit findings to support the order, the majority speculated

that “it is a fair inference that it granted a new trial for the

same reasons for which it granted [Aetna’s motion for]

judgment as a matter of law,” and thus assumed “that the

new trial was granted on the erroneous ground that the

evidence was insufficient as a matter of law.” ZJd. at 38a.

In asserting those conclusions, the court did not consider

the various other “grounds” that Aetna had advanced in

seeking a new trial, the “grounds” with which the trial judge

had stated his “general” agreement. See page 9, supra. Nor

did the court remand the matter to the trial judge to provide

an opportunity to resolve any uncertainty about the judge’s

grounds for awarding a new trial on punitive damages.

The court of appeals simply nodded in the direction of

the appropriate standard of review but stated:

“While our review of an order granting a new trial

is for abuse of discretion, ‘a stringent standard

applies when the motion is based on insufficiency of

the evidence.” * * * A district court may order a

new trial based on insufficient evidence only if it

finds that the jury’s verdict ‘is against the great

weight of the evidence, or it is quite clear that the

jury has reached a seriously erroneous result.’” App.

38a-39a (citations omitted).

Applying this “stringent standard,” the court concluded that

“the record would not support” a finding that the verdict was

“against the great weight of the evidence.” Ibid.

The majority did conclude, however, that the punitive

award of $16.5 million was excessive and that any lawful

award of punitive damages in this case could not exceed

three-times the actual damages. App. 40a-4la. The court

thus ordered a remittitur from $16.5 million to $381,000.

Judge Fletcher dissented from fixing that sum and would have

remanded the matter for the trial judge to address any

remittitur in the first instance. Jd. at 45a-48a.

In response to petitions for rehearing filed by both

parties, the court issued an order amending its opinion. App.

22a-24a. The only substantive change in the amended

opinion of the court was the deletion of the amount to which

the punitive judgment was to be remitted. Jbid. Instead, the

court simply remanded the case to the district court with

instructions to “den[y] Aetna’s motion for a new trial on

punitive damages on condition that Ace accepts a remittitur

of punitive damages in an amount to be determined by the

district court.” Jbid. With this change, Judge Fletcher

withdrew her dissent.

REASONS FOR GRANTING THE PETITION

This case raises substantial issues of nationwide signifi-

cance concerning the scope of the power of federal trial

judges to set aside jury verdicts as well as the appropriate

role of the courts of appeals in reviewing the exercise of

discretion to grant a new trial. The Ninth Circuit’s “stringent

standard” is particularly unsuitable in cases setting aside

awards of punitive damages and allowing a new trial. As this

Court has held, in evaluating punitive damage verdicts,

careful judicial control is a traditional and important safe-

guard to ensure fairness in punishments and has a constitu-

tional dimension. See Honda Motor Co. v. Oberg, 512 U.S.

415 (1994).

The district court ia this case properly performed the

constitutionally required scrutiny of the punitive damage

verdict, finding that the weight of the evidence did not rise to

the level of “clear and convincing” proof of “outrageous”

conduct that Alaska requires before a jury may award any

punitive damages.” The trial judge then exercised what this

Court has called his “large” discretionary authority, see

Gasperini v. Center for Humanities, Inc., 518 U.S. 415, 432-

433 (1996), to grant a new trial on Ace’s punitive damages

claim because of the weakness of the evidence and various

other flaws in the determination of both Aetna’s liability for

punitive damages and the amount of the punishment.

In reversing the district court’s new-trial ruling on

punitive damages, the Ninth Circuit committed three signifi-

cant errors, each of which merits plenary review by this

Court.

First, it applied its “stringent standard” to constrain the

traditional power of federal trial judges to grant new trials

based on their view of the weakness of the evidence, limiting

the trial judge’s discretion to award new trials to cases in

which the jury’s verdict is against the “great” weight of the

evidence. App. 14a. Application of this standard, however,

conflicts with longstanding decisions of this Court and

exacerbates a Circuit conflict on this issue, which has become

more acute in the wake of this Court’s decision in Gasperini

reaffirming the broad discretion vested in district judges to

grant new-trial motions.

* The Alaska Supreme Court long has “held that punitive damages

are a harsh remedy ‘not favored in law. They are to be allowed

only with caution and within narrow limits.’” Chizmar v. Mackie,

896 P.2d 196, 210 (Alaska 1995). Under the governing Alaska

statute, AS § 09.17.020, and case law, punitive damages are not

available in tort cases unless the tortfeasor’s conduct was

“outrageous, [such as] acts done with malice or bad motives or *

* * reckless indifference to the interests of another person.”

At common law and under general federal practice, the

power of the trial court to grant a new trial in what the judge

believes is the interest of justice is one of the most significant

protections against misguided verdicts. A special “stringent”

standard for exercising that power, coupled with intrusive

second-guessing of its exercise, has the inevitable effect of

leaving in force verdicts that experienced, front-line trial

judges consider unfair and unwarranted.

Leaving this conflict in place would undermine one of the

central purposes of the Federal Rules of Civil Procedure,

which is to establish uniform standards for federal civil

litigation throughout the Nation. There is no legitimate

reason why federal trial judges in some circuits should have

less power to protect litigants against problematic verdicts

than their colleagues in other circuits possess and exercise.

Second, the court of appeals failed to appreciate the

constitutional significance of the district court’s review of the

punitive damage verdict. Because of the risk of arbitrary

deprivation of property, the Due Process Clause compels trial

courts to scrutinize any punitive verdict. And where, as here,

a trial judge has reviewed such a verdict and concluded that

it is not supported by the weight of the evidence, that

conclusion is entitled to the greatest possible deference on

appeal.

Third, the court of appeals erred in speculating about the

reasons for the district court’s grant of a “conditional” new

trial under Fed. R. Civ. P. 50(c)(1) and basing its decision to

reverse the district court on that speculation. To tie extent

there was any doubt about the district court’s reasons for

granting Aetna’s motion and ordering a new trial on the entire

punitive claim, the sound and accepted practice among the

courts of appeals is to remand for clarification of those

reasons, not to reverse on the basis of speculation and to

order the judge to reinstate the problematic verdict. The

Ninth Circuit’s failure to remand in this case thus creates a

circuit conflict on this issue as well.

I. THE NINTH CIRCUIT’S ERRONEOUS STAN-

DARDS FOR GRANTING AND REVIEWING NEW

TRIAL ORDERS BASED ON THE SUFFICIENCY

OF THE EVIDENCE CONFLICTS WITH DECI-

SIONS OF THIS COURT AND OTHER CIRCUIT

COURTS.

Under this Court’s precedents, the “authority to grant a

new trial * * * is confided almost entirely to the exercise of

discretion on the part of the trial court.” Allied Chemical

Corp. v. Daiflon, Inc., 449 U.S. 33, 36 (1980); Browning-

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

492 U.S. 257, 279 (1989). The trial court’s authority has a

long history at common law, see 1 W.S. Holdsworth, A

HISTORY OF ENGLISH LAW 321, 346 (7th ed. 1956), and is

premised on the court’s broad “power and duty to order a

new trial whenever, in its judgment, this action is required in

order to prevent injustice.” 11 Charles Alan Wright, Arthur

R. Miller & Mary Kay Kane, FEDERAL PRACTICE AND

PROCEDURE § 2805 (1995) (citing cases).

In Montgomery Ward & Co. v. Duncan, 311 U.S. 243,

251 (1940), this Court held that a “motion for a new trial

may invoke the discretion of the court in so far as it is

bottomed on the claim that the verdict is against the weight of

the evidence, that the damages are excessive, or that, for

other reasons, the trial was not fair to the party moving.”

See also Byrd v. Blue Ridge Rural Electric Cooperative, 356

U.S. 525, 540 (1958) (“[t}he trial judge in the federal system

has powers * * * to comment on the weight of the evidence

and credibility of witnesses, and discretion to grant a new

trial if the verdict appears to be against the weight of the

evidence”) (emphasis added).

A. It is questionable whether conditional new-trial

orders based on the “weight” of the evidence are reviewable

at all. This Court’s emphasis on the trial judges’ discretion

in Montgomery Ward indicated that the conditional award of

a new trial is not reviewable in cases like this one:

“Should the trial judge enter judgment n.o.v. and, in

the alternative, grant a new-trial on any of the

grounds assigned therefor, his disposition of the

motion for a new trial would not ordinarily be

reviewable, and only his action in entering judgment

would be ground of appeal. If the judgment were

reversed, the case, on remand, would be governed by

the trial judge’s award of a new-trial.” 311 U.S.

254 (emphases added).

This analysis, which this Court has never questioned, let

alone overruled, has been interpreted by some courts to mean

that the exercise of discretion to order a new trial because of

the weakness of the evidence is not reviewable at all. Thus,

until recently, a “line of cases” in the Second Circuit held

that “a ‘trial court order granting or denying a motion for a

new trial on grounds that a verdict is against the weight of the

evidence is not reviewable on appeal.’” Binder v. Long Island

Lighting Co., 57 F.3d 193, 201 (2d Cir. 1995) (citations

omitted). See also Lind v. Schenley Indus., Inc., 278 F.2d

79, 88 (3d Cir.), cert. denied, 364 U.S. 835 (1960) (some

courts have “stated that a motion for a new trial on th{e]

ground [that the verdict is against the weight of the evidence]

ordinarily is nonreviewable because within the discretion of

the trial court,” citing Montgomery Ward). The Second

Circuit, however, has now rejected those authorities and

“adopt[ed] the view held by most circuits” asserting power to

review such decisions. Binder, 57 F.3d. at 202.

B. In any event, the Ninth Circuit’s standards for

issuing and reviewing such orders — which it applied with

vigor in this case — conflict directly and irreconcilably with

the standards repeatedly articulated by this Court. And at

least one circuit has squarely repudiated the Ninth Circuit’s

“stringent” standards.

The Ninth Circuit held that “‘a stringent standard applies

when the motion is based on insufficiency of the evidence’”

and that a trial court “may order a new trial based on

insufficient evidence only if it finds that the jury’s verdict ‘is

against the great weight of the evidence, or it is quite clear

that the jury has reached a seriously erroneous result.’” App.

14a (emphases added) (quoting EEOC v. Pape Lift, Inc., 115

F.3d 676, 680 (9th Cir. 1997)). Several other circuits also

apply this more rigorous and more skeptical standard when

reviewing new trial orders based on the weight of the

evidence. See, e.g., Sheridan v. E.I. DuPont de Nemours &

Co., 100 F.3d 1061, 1076 (3d Cir. 1995) (en banc) (a

“stringent standard is necessary to ensure that a district court

does not substitute its judgment of the facts and credibility of

the witnesses for that of the jury”), cert. denied, 117 S. Ct.

2532 (1997); Carter v. Fenner, 136 F.3d 1000, 1010 (Sth

Cir. 1998) (applying stringent standard in order to protect

jury verdict); Carter v. DecisionOne Corp., 122 F.3d 997,

1004 (11th Cir. 1997) (motion for new trial “may only be

granted when the jury’s verdict is against the great weight of

the evidence”).

These courts offer a single rationale for constraining the

trial judge’s power and applying heightened scrutiny to new

trial orders based on the trial judge’s evaluation of the weight

of the evidence. They argue that the Seventh Amendment

precludes a trial judge from exercising the full measure of

discretion otherwise accorded him by law. Specifically, these

courts express concern that, without a “closer degree of

scruiiny and supervision,” a trial judge will merely substitute

his decision for that of the jury’s in derogation of the Seventh

Amendment. See Lind v. Schenley Indus., Inc., 278 F.2d at

90 (“close scrutiny is required in order to protect the

litigant’s right to a jury trial”); Spurlin v. General Motors

Corp., 528 F.2d 612, 619-620 (Sth Cir. 1976) (noting

“several jurisdictions” apply a “more exacting” standard to

motions seeking new trials on evidentiary grounds because

such motions must be viewed “against the background of the

Seventh Amendment”).

In Gasperini, however, this Court flatly rejected this

rationale for constraining effective post-verdict review by the

trial court, holding that the court may, without offending the

Seventh Amendment, exercise the full measure of its discre-

tion to grant a new trial based on its evaluation of the weight

of the evidence:

“The reexamination clause does not inhibit the

authority of trial judges to grant new trials ‘for any

of the reasons for which new trials have heretofore

been granted in actions at law in the courts of the

United States.’” 518 U.S. at 432 (quoting Rule

59(a)).

This authority, the Court held, is “large:”

“The trial judge in the federal system, has

discretion to grant a new trial if the verdict appears

to [the judge] to be against the weight of the

evidence.” Jbid. (citing Byrd v. Blue Ridge Rural

Electric Cooperative, supra).

Indeed, the exercise of the district court’s broad discretion to

set aside a jury’s verdict and grant a new trial “is not a

derogation of the right of a trial by jury but is one of the

historic safeguards of that right.” 518 U.S. at 433.

The decision in Gasperini has since been applied in

numerous cases to support a trial judge’s broad discretion to

grant new-trial motions in cases precisely like this one. In

the Term just concluded, for example, this Court applied

Gasperini in reaffirming the substantial deference an appellate

court must accord to a district judge’s decision to order a new

trial unconditionally or to offer a remittitur in lieu of a new

trial: “the trial judge’s discretion includes ‘overturning

verdicts for excessiveness and ordering a new trial without

qualification, or conditioned on the verdict winner’s refusal

to agree to a reduction (remittitur).’” Hetzel v. Prince

William County, _U.S.__, __, 118 S. Ct. 1210, 1212

(1998) (per curiam).

Moreover, following Gasperini, some courts — but not

all circuits — have reevaluated their more stringent standards

fcr reviewing new-trial orders based on the weight of the

evidence.

For example, in the wake of Gasperini the Seventh

Circuit recently overruled its prior “exacting” standard for

such orders. In Medcom Holding Co. v. Baxter Travenol

Laboratories, Inc., 106 F.3d 1388, 1397 (7th Cir. 1996), the

court stated: “At one time we applied [the review] standard

* * * more exacting[ly] when the district court granted a new

trial because of the Seventh Amendment.” The court held,

however, that “in light of the Supreme Court’s decision in

Gasperini that an abuse of discretion standard of review does

not violate the Seventh Amendment * * * we hereby abandon

this practice as unnecessary” and recognized that the “trial

judge in the federal system has discretion to grant a new trial

if the verdict appears against the weight of the evidence.”

Ibid.

The Second Circuit now also appears to recognize the

appropriate scope of the trial judge discretion, stating in Santa

Maria v. Metro-North Commuter R.R., 81 F.3d 265, 273 (2d

Cir. 1996) (quoting Montgomery Ward & Co. v. Duncan, 311

U.S. at 251), that a “new trial must be granted if the court

determines that the verdict is against the weight of the

evidence.” More recently, the Second Circuit quoted

Gasperini in declaring that “the trial judge has ‘discretion to

grant a new trial if the evidence appears to [the judge] tu »e

against the weight of the evidence.” Kirsch v. Fleet Street,

Lid., Nos. 96-9631, 97-7021, 1998 U.S. App. LEXIS 13516

at *34 (June 25, 1998).

The First Circuit has also recently invoked Gasperini for

the proposition that the “trial judge has ‘discretion to grant a

new trial if the verdict appears to [the judge] to be against the

weight of the evidence.’” Kelley v. Airborne Freight Corp.,

140 F.3d 335, 355 (1998). This is a departure from prior

First Circuit practice. See Gutierrez-Rodriguez v. Cartagena,

882 F.2d 553, 558 (1989) (applying a “strict standard of

review”). However, another panel of the same court even

more recently stated that a “strict standard of review” applies

to new-trial orders based on the weight of the evidence.

Collazo-Santiago v. Toyota Motor Corp., No. 97-1365, 1998

U.S. App. LEXIS 15330, at *16 n.6 (July 9, 1998). This

apparent intra-circuit conflict underscores the confusion in the

lower courts over the appropriate standard for awarding new

trials and for reviewing new-trial orders and the need for

definitive resolution of the issue.

C. Despite paying lip-service to the “abuse of discre-

tion” standard of appellate review, the Ninth Circuit made

plain that it enforces the heavy burden that it imposes on trial

judges by subjecting their new-trial decisions to virtual de

novo review in reevaluating the nature and thrust of the

evidence.

The traditional, deferential abuse-of-discretion standard,

however, is especially appropriate in reviewing evidence-

based decisions ordering new trials. The trial judge enjoys

the “unique opportunity to consider the evidence in the living

courtroom,” and that special perspective “must be respected.”

Taylor v. Washington Terminal Co., 409 F.2d 145, 148

(D.C. Cir.), cert. denied, 396 U.S. 835 (1969); see also

FEDERAL PRACTICE AND PROCEDURE, supra, at § 2819 (“the

appellate court must defer to the better opportunity the trial

judge has to appraise the situation”) (citing cases).

As Judge Henry J. Friendly wrote in /ndiscretion About

Discretion, 31 EMorY L. J. 747, 784 (1982), a trial “court’s

superior opportunities of observation * * * require greater

deference than would be accorded to its formulations of law

or its application of law to the facts.”

Thus, on appellate review of an order granting a new

trial, a court of appeals should “defer to the district court

because of its unique position to view the evidence and the

course of the trial.” Miksis v. Howard, 106 F.3d 754, 757

(7th Cir. 1997); cf. Cooter & Gell v. Hartmax Corp., 496

U.S. 384, 404 (1990) (“[d]eference to the determination of

[the] courts on the front lines of litigation will enhance these

courts’ ability to control the litigants before them. Such

deference will streamline the litigation process by freeing

appellate courts from the duty of reweighing evidence and

reconsidering facts already weighed and considered by the

district court”).

Abuse-of-discretion review, of course, is not a mere

rubber stamp for any decision reached by the trial court. “A

district court would necessarily abuse its discretion if it based

its ruling on an erroneous view of the law or on a clearly

erroneous assessment of the evidence.” Cooter & Gell, 496

U.S. at 405. But the court of appeals may not simply

substitute its judgment for that of the district court. See

National Hockey League v. Metropolitan Hockey Club, 427

U.S. 639, 642 (1976) (“[t]he question * * * is not whether

this Court, or whether the Court of Appeals, would as an

original matter” have taken the same action; “it is whether

the District Court abused its discretion”) (citation omitted);

see also Calderon v. Thompson, __ U.S. _, __, 118 S.

Ct. 1489, 1506-1507 (1998) (Souter, J., dissenting) (“a high

degree of deference to the court exercising discretionary

authority is the hallmark of such review”; “abuse of

discretion” standard compels deference to any “reasonable”

conclusion by trial judge).

Where the district court makes a reasoned decision about

the quantity and quality of the evidence supporting a verdict

and decides that a new trial is appropriate, the court of

appeals should defer to the trial judge’s assessment of the

evidence, even if the court of appeals believes that it would

have reached a different conclusion had it sat at the trial.

The Seventh Circuit struck the right balance recently in

applying Gasperini to sustain a new-trial order, “[b]ecause

the very nature of the problem counsels restraint . . . [and

w]e must give the benefit of every doubt to the judgment of

the trial judge.” McClain v. Owens-Corning Fiberglass

Corp., 139 F.3d 1124, 1127 (1998).

The Ninth Circuit’s “stringent” standard of review hardly

accords the required “considerable deference,” when the trial

judge has weighed the evidence, assessed the credibility of

witnesses, and decided that the jury’s verdict is against the

fair weight of the evidence. Rather, the Ninth Circuit's

“stringent” standard of review, as applied in this case,

licenses the appellate court to substitute its judgment for the

trial court’s — despite “the better opportunity the trial judge

has to appraise the situation.” FEDERAL PRACTICE AND

PROCEDURE, supra, at § 2819.

The court of appeals clearly erred, therefore, in applying

a “stringent standard” in the guise of abuse-of-discretion

review. See General Electric Co. v. Joiner, U.S. ___,

___, 118 S. Ct. 512, 517 (1997) (“[i]n applying an overly

‘stringent’ review * * * [the court of appeals] failed to give

the trial court the deference that is the hallmark of abuse of

discretion review”).

In addition, even the Ninth Circuit panel agreed that the

amount of damages awarded here was grossly excessive.

Nevertheless, the appellate court overturned the grant of a

new trial and simply remanded for remittitur. This course,

too, exceeded the appellate court’s proper function. As this

Court held just last Term in Hetzel, U.S. at__,, 118 S.

Ct. at 1212, it is properly within the trial judge’s discretion

to fashion an appropriate remedy for dealing with an exces-

Sive verdict by granting a new trial “without qualification”

rather than opting for the alternative the court of appeals

selected, offering the plaintiff a remittitur in lieu of a new

trial.

D. The Ninth Circuit’s erroneous standards have very

serious practical ramifications. They prevent trial judges

from granting relief, even when the judges conclude that

verdicts are not in line with the fair thrust of the evidence.

As applied, the “stringent” standard also allows an appellate

court to substitute its judgment for the trial judge’s more

informed evaluation of the “weight” of the evidence.

By applying its erroneous standard, the Ninth Circuit

ignored the district court’s “unique position to view the

evidence.” The court of appeals simply accepted at face

value each of Ace’s theories about how Aetna had failed to

process her claim properly. On several occasions, the court

of appeals styled the evidence as “undisputed.” App. 3a-15a.

This characterization is patently untrue, since — as the trial

judge recognized — Aetna countered every one of plaintiff’s

theories with substantial countervailing evidence. Jd. at 58a-

62a. Indeed, the existence of a substantial dispute about the

evidence properly led the trial judge to find that the weight of

the evidence did not demonstrate that Ace had met the higher

standard of proof that Alaska law demands for imposing

punitive damages — “clear and convincing evidence” of

“outrageous” conduct.

For example, the court of appeals asserted that punitive

damages were permissible because of allegedly “undisputed”

evidence showing, among other things, that Aetna based its

denial of Ace’s disability claim “on an illegal standard for

benefit eligibility.” App. 12a. This was one of Ace’s central

theories of punitive liability. In fact, however, as the trial

judge appreciated and the court of appeals evidently did not,

Aetna’s witnesses testified that they denied the claim after

applying a concededly lawful standard: they viewed the data

as showing that Ace was capable of performing her own job.

SER 36-37; 43-44. Moreover, the contemporaneous docu-

ments confirmed that the company was actually applying a

lawful standard.?

It is hardly surprising, therefore, that the trial judge

expressly concluded that, rather than showing “undisputed”

evidence establishing that Aetna had applied what the court of

appeals called “an illegal standard for benefit eligibility”

(App. 12a), the record contained such substantial evidence

that Aetna had applied a Jegitimate standard that Ace’s

contentions to the contrary could not satisfy the “clear and

convincing evidence” test. Jd. at 58a-62a.

Another example of the Ninth Circuit’s failure to defer

to the trial judge’s more informed assessment of the record

concerns the content of the job that Aetna viewed Ace as

capable of performing — “her own job.” App. 5a, 60a. The

court of appeals faulted Aetna for “determining the physical

nature of Ace’s occupation” by relying on her supervisor’s

“Physical Demands Analysis worksheet” while “ignor{ing]”

the more complete job description that was attached, which

purportedly showed that “Ace’s position required her to

engage in rigorous travel to remote communities.” Jd. at Sa.

This characterization, however, ignores what the trial

judge saw and heard in the evidence. The court of appeals

relied on Ace’s original 1987 job description, which had

described her job as involving travel to remote locations about

5% of the time. ER 111. Her supervisor testified, however,

that the loan program on which she worked in the intervening

* The Claim Department medical review form explicitly stated

that the applicable test was whether the claimant was “Disabled

any Reasonable Occ.” (SER 2) (emphasis added). The actual

determinations recorded the application of a lawful standard:

“Claim denied — not T.D. any reasonable occ” (SER 4); “Not

disabled own occ” (SER 3); and “Not disabled from any

reasonable occupation” (SER 5) (emphases added).

years had narrowed considerably, and so had her tasks. SER

100-105. So, when he completed the current “Physical

Demands” job description for her in February 1992 — just

months before Ace claimed that her knee injury made her

totally disabled to perform “any reasonable occupation,”

including her own — he reported that her job was “100%”

inside her office, mainly sitting down. SER 1. Accordingly,

the trial judge was amply justified in finding that Ace had

failed to show by “clear and convincing evidence” that Aetna

had acted “outrageously” in relying on accurate, contempora-

neous information rather than on a stale and inaccurate form.

App. 59a-62a.

This brief recital suggests why the Ninth Circuit was

wrong in overturning the trial judge’s decision to grant

judgment as a matter of law to Aetna on the punitive damage

claim. At most, however, the evidence on liability was

“close” — as the trial judge characterized it (App. 58a) —

and the decision to grant a “conditional” new trial was a

particularly appropriate discretionary alternative. The Ninth

Circuit was able to reject that determination only because it

applied its excessively intrusive standard of review.

The erroneously “stringent” standards adopted by the

Ninth Circuit, and by several other circuits, thus interfere

with the power of the court most familiar with the actual

evidence — the trial court — to exercise its better informed

discretion to determine whether the jury’s verdict is against

the “weight” of the evidence.

II. DUE PROCESS REQUIRES SPECIAL DEFERENCE

ON APPEAL TO ORDERS GRANTING NEW

TRIALS ON PUNITIVE DAMAGE VERDICTS.

The new trial order here granted relief from a punitive

damage award the trial judge viewed as unwarranted. Even

greater deference should be paid to such orders, because the

Due Process Clause itself requires “‘meaningful and adequate

review by the trial court’” of a punitive damage verdict. See

Honda Motor Co. v. Oberg, 512 U.S. 415, 420, 432 (1994)

(due process requires careful, post-verdict judicial review

because “[p]unitive damages pose an acute danger of arbitrary

deprivation of property”).

In every one of its decisions reviewing the validity of

punitive verdicts, this Court has recognized the enormous

threat that juries will impose this kind of punishment without

legitimate foundation. The risk is especially grave where, as

in this case, the target is an out-of-state corporation and the

plaintiff explicitly urges the jury to “send a message” back to

corporate headquarters in another part of the country. This

is a reason why the trial judge’s determination that the

evidence does not properly warrant any “punishment”

deserves the greatest respect.

Judicial control of defamation claims provides a pertinent

parallel. In those cases, the Constitution imposes a special

responsibility on the trial court “to review independently the

evidence” and requires added deference on appeal to such a

review. Harte-Hanks Communications, Inc. v. Connaughton,

491 U.S. 657, 686-687 (1989) (requiring heightened scrutiny

of evidence supporting finding of “actual malice”); Rattray v.

City of National City, 51 F.3d 793, 800 (9th Cir. 1994), cert.

denied, 516 U.S. 820 (1995). So too in punitive damage

cases, the trial court’s duty “to review independently the

evidence” should be entitled to special deference, when the

trial judge concludes that a punitive award is unwarranted or

excessive.

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

Disposal, Inc., 492 U.S. 257, 279 (1989), this Court unam-

biguously directed:

“In reviewing an award of punitive damages, the

role of the district court is to determine whether the

jury’s verdict is within the confines set by state law,

and to determine, by reference to federal standards

developed under Rule 59, whether a new trial or

remittitur should be ordered. The court of appeals

should then review the district court’s determination

under an abuse-of-discretion standard.”

Thus, when the trial court decides that a punitive award

is against the weight of the evidence, it is faithfully imple-

menting a form of protection derived directly from the Due

Process Clause. There is no legitimate basis for constraining

that corrective power by insisting, as the Ninth Circuit does,

that the trial judge must rubber stamp any punitive verdict

unless it is against the “great” weight of the evidence.

In addition, when the trial court exercises its discretion

to grant a new trial in a punitive damage case, the court of

appeals properly performs only a “limited function” in

reviewing the order. The court of appeals must accord

“considerable deference” to the district court’s decision.

Browning-Ferris, 492 U.S. at 280.

Moreover, most of the important factual issues weighed

and decided by the trial judge in the typical case involving

punitive damages turn on credibility determinations. These

cases most often hinge on questions of motive and intent,

good faith or bad faith. In deciding whether to sustain the

jury’s verdict, the trial judge, not an appellate panel review-

ing a cold record, is in the “unique” position to make those

credibility assessments. Taylor, 409 F.2d at 148. In this

Case, it was the trial judge who had the unique opportunity to

observe the demeanor of the Key witnesses, such as Ace

herself, her expert witness, and Aetna’s claims analysts.

This Court should grant review in this case to require the

maximum deference on appeal to a trial court’s decision to

order a new trial in a punitive damages case.

Il. IF FINDINGS ARE INSUFFICIENT UNDER

RULE 50(c)(1) TO EXPLAIN THE GRANT OF

A NEW TRIAL, THE PROPER PROCEDURE IS

TO REMAND FOR ADDITIONAL FINDINGS,

NOT TO REVERSE OUTRIGHT.

As explained above (at page 9), in moving for a condi-

tional new trial on punitive damages, Aetna argued for that

relief not only because the verdict was against the “weight of

the evidence,” but also on six other grounds, not dependent

on the strength or weakness of the evidence. Those grounds

included such issues as errors in instructions, improper

closing argument, and excessiveness of damages suggesting

passion and prejudice. In granting Aetna’s motion, the trial

judge specified that “[i]Jn general the court agrees with the

arguments advanced by the defendant * * *.” App. 49a.

The court of appeals stated that this formulation “failed”

to satisfy the requirement of Rule 50(c)(1) that a court ruling

on a conditional new-trial motion “shall specify the grounds

for granting * * * the motion,” because the judge had not

“explicitly” enumerated the grounds on which he based his

ruling. App. 14a. The court then proceeded to “infer,”

despite the trial judge’s statement, that the conditional new

trial was granted solely because of the “erroneous” view that

the evidence was legally insufficient. Having rejected the

finding of insufficiency in setting aside the judgment for

Aetna as a matter of law, the court of appeals went on to

reverse the order granting a new trial, directing the trial judge

to reinstate the verdict on punitive liability.

That approach suffers from four serious flaws that merit

this Court’s review, because they seriously distort the proper

procedure for acting on new trial motions and reviewing those

orders.

First, it is beyond question that the trial judge had

expressly relied on at least several of the grounds for relief

Aetna had advanced, not simply the objection to the weight

of the evidence. Thus, on its face, the trial judge’s order

foreclosed the interpretation the court of appeals placed on it,

as turning exclusively on the trial judge’s view of the legal

“insufficiency” of the evidence.

Second, nothing in Rule 50(c)(1) describes the specificity

with which the trial judge must note the “grounds” for

conditionally “granting or denying the motion for the new

trial.” It is not at all uncommon for trial judges to recite that

they are accepting the arguments of one side or the other in

granting or denying a new-trial motion. Indeed, the principal

Rule governing motions for new trials, Rule 59(a), contains

no requirement whatsoever that the trial judge recite anything

to explain the decision to grant the motion. Compare Rule

5c) (trial court “shall specify the grounds” for awarding a

new trial “on its own initiative” rather than in response to a

motion).

Thus, unlike Rule 52(a) for example, which requires the

court in a bench trial to “find the facts specially and state

separately its conclusions of law thereon,” the Rule applicable

here does not prevent a district judge from using a short-hand

description incorporating “the grounds” for his ruling on a

new-trial motion. The Ninth Circuit’s approach erects an

artificial requirement not warranted by the text or purpose of

Rule 50(c)(1).

Third, even when a Rule calls for the district court to

make specific findings, other circuits have held that those

findings are sufficient if they are adequate to “indicate the

factual basis for the ultimate conclusion” and inform the

reviewing court about the reasons for the district court’s

decision. Books v. Chater, 91 F.3d 972, 978 (7th Cir.

1996); Reich v. Newspapers of New England, Inc., 44 F.3d

1060, 1079 (ist Cir. 1995); South-Western Publishing Co. v.

Simons, 651 F.2d 653, 656 n.2 (9th Cir. 1981), cert. denied,

455 U.S. 1018 (1982). Here, the district judge explained that

he agreed “in general” with the arguments expressly enumer-

ated in Aetna’s moving papers. That recital sufficiently

incorporated “the grounds” for his order.

Fourth, and most fundamentally, if there was any fair

doubt about the grounds on which the district judge relied,

the proper remedy was to remand with directions to specify

those grounds in fuller detail. It is the established practice of

the courts of appeals to remand for such clarification, not to

assume a basis for the ruling and then reject it. See, e.g.,

TEC Engineering Corp. v. Budget Molders Supply, Inc., 82

F.3d 542 (ist Cir. 1996); NAACP v. Town of East Haven, 70

F.3d 219 (2d Cir. 1995); Preferred RX, Inc. v. American

Prescription Plan, Inc., 46 F.3d 535 (6th Cir. 1995); Liddell

v. Board of Educ., 20 F.3d 324 (8th Cir. 1994). The

contrary decision of the Ninth Circuit in this case presents a

clear conflict in the circuits on this issue.

Moreover, the Ninth Circuit could not properly review —

much less reverse — the order granting a new trial unless the

court addressed and evaluated the grounds that actually

motivated the trial judge’s exercise of discretion. If the

appellate court was right that the trial judge had not ade-

quately described his reasons for granting relief, the court

could not perform its review function without ascertaining

why the judge entered the order.

The failure of the court of appeals to elicit any necessary

clarification before proceeding to reverse the order and to

reinstate the verdict was a further consequence of its errone-

ous arrogation of the power to conduct virtual de novo review

of the new trial application. This failure denied Aetna its

due-process right to fair appellate consideration of ‘he

grounds on which the trial judge had relied in setting are

the award of punitive damages and allowing a new trial.

This Court should therefore grant review to resolve the

conflict among the courts of appeals on the proper procedures

to be followed in assessing a district court’s compliance with

the requirements of Rule 50(c)(1).

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.

PHILIP ALLEN LACOVARA

ANTHONY M. SHOLTY Counsel of Record

BETHANN B. CHAPMAN ANDREW L. FREY

Faulkner Banfield JOHN J. SULLIVAN

302 Gold Street Mayer, Brown & Platt

Juneau, AK 9980] 2000 Pennsylvania Ave., N. W.

(907) 586-2210 Washington, DC 20006

(202) 463-2000

Counsel for Petitioner

AUGUST 1998

)

APPENDICES

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 96-35813 AND 96-36020

D.C. No. CV-94-00018-TWS

SHERRIE ACE,

PLAINTIFF-APPELLANT-CROSS-APPELLEE,

AETNA LIFE INSURANCE COMPANY,

DEFENDANT-APPELLEE-CROSS-APPELLANT.

Appeals from the United States District Court

for the District of Alaska

John W. Sedwick, District Judge, Presiding

Argued and Submitted

November 5, 1997 — Seattle, Washington

Filed March 12, 1998

Amended May 7, 1998

Before: FLETCHER and O’SCANNLAIN, Circuit

Judges, and SCHWARZER,,” Senior District Judge.

COUNSEL

“ Honorable William W. Schwarzer, Senior United States District

Judge for the Northern District of California, sitting by designation.

Jeffrey Feldman and Susan Orlansky, Young & Feldman,

Anchorage, Alaska; Richard H. Friedman, Jeffrey K. Rubin,

Friedman, Rubin & White, Anchorage, Alaska, for

plaintiff-appellant.

Philip Lacovara, New York, New York, for

defendant-appellee.

OPINION

SCHWARZER, Senior District Judge:

Sherrie Ace (“Ace”), a resident of Alaska, sued Aetna

Life Insurance Company (“Aetna”) in Alaska state court

alleging that Aetna acted in bad faith in denying her claim for

long-term disability benefits. Aetna removed the case to

federal court pursuant to 28 U.S.C. §§ 1332, 1441.

The jury ruled for Ace on her bad faith claim and

awarded her $27,009 for the wrongful denial of disability

benefits and $100,000 for emotional distress. It also awarded

her $16.5 million in punitive damages. The court then

granted Aetna’s post-trial motion for judgment as a matter of

law on punitive damages and for a conditional new trial,' but

denied its motions for judgment and for a new trial on the

bad faith claim. It entered judgment for Ace in the amount

of $127,009. Both parties appeal from the adverse rulings on

their motions. Aetna also asserts error in the instructions to

the jury with respect to emotional distress damages.

We have jurisdiction pursuant to 28 U.S.C. § 1291, and

‘ve affirm in part, reverse in part and remand.

' At oral argument, Aetna’s counsel advised that Aetna had also

moved for remittitur of the punitive damage award but that the

court had not ruled on its motion.

itil li

FACTS

A. Sherrie Ace’s Accident

Ace was employed by the State of Alaska as a senior loan

examiner. As a state employee, Ace participated in an Aetna

group insurance plan, which provided both short-term and

long-term disability benefits. She selected and paid monthly

premiums for the maximum available health and disability

coverage.

In December 1986, Ace broke her leg in a sledding

accident, which completely shattered her knee. Despite

multiple surgeries, the condition of Ace’s knee deteriorated

and she suffered chronic pain in her leg and in her lower

back. On April 30, 1992, Ace’s orthopedic surgeon, Dr.

McEvoy, performed an osteotomy’ on Ace’s knee.

Immediately prior to the osteotomy, Ace applied for and

received short-term disability benefits from Aetna.

Dr. McEvoy released Ace on a “trial” basis for

half-time, light duty work from August 1, anticipating that

she would be able to return to full-time by mid-September.’

Because her pain had worsened, Ace felt unready to return to

work and expressed her concerns to Dr. McEvoy. He

suggested that she find another doctor. Ace saw a specialist,

Dr. Zorn, who informed her that the osteotomy had failed

and that she would need a total knee replacement. That

operation would have to wait, however, until April 1993 to

permit her knee to heal.

* In this procedure, a patient’s bones are rebroken and recast in

order to shift the patient’s weight onto less-damaged parts of the

knee.

> At trial, Dr. McEvoy stated that he referred to the release as

“trial” because “[i]t alerts the insurer and the employer and the

patient . . . that [returning to work} may not work.”

| B. Ace’s Application for Long-Term Disability Benefits

| Ace contacted Aetna and requested a long-term disability

| benefits application because her short-term disability benefits

had expired early in September 1992. Aetna representatives

advised her that although her policy required her to be “under

the care of a physician,” the physician need not be a

specialist. Accordingly, Ace had Dr. Kiessling, her long-time

family physician, complete Aetna’s Attending Physician’s

Statement (“Statement”). On the form, he diagnosed Ace as

suffering from “severe degenerative joint disease,” stated that

her condition had retrogressed, noted that she experienced

“frequent swelling” and “constant pain,” and rated her to be

between 30-50% and 50-70% physically disabled.* Aetna

received Ace’s application, along with the Statement and Dr.

McEvoy’s July work release, on October 12, 1992.

On October 20, Aetna returned the Statement to Ace for

signature by the physician and asked her to submit a physical

capacities evaluation form, which had been prepared by a

physical therapist in July. Ace submitted these forms and

queried Aetna several times about the status of her claim,

indicating her urgent need.

C. Aetna’s First Denial

On November 17, Aetna denied Ace’s claim. In the

denial letter, Stephen Elliott (“Elliott”), Aetna’s account

specialist, informed Ace that [iJn order to be eligible for

Long-term Disability Benefits, you must be totally disabled to

the extent that you are unable to work at any gainful

* Aetna’s form characterized 30-50% disabled as “Class III . . .

capable of light work,” and 50-70% disabled as “Class IV . . .

capable of . . . sedentary activity.”

* The form indicated that Ace could not work an eight-hour day

but predicted that her condition would improve in four to six

weeks.

;

| ee mn ERT Ne Re ea NEE

occupation due to bodily injury or illness. He noted that

according to the Statement — the most current medical

evidence on file — Ace was capable of continuing her

employment as a loan examiner because she could perform

clerical, sedentary work. Therefore, he wrote, “we cannot

consider you as being totally disabled from performing the

duties of any gainful occupation as required by the policy,”

and denied her request for benefits.

Neither Elliott nor any other Aetna employee investigated

Ace’s claim other than to review the material sent by Ace.

Elliott did have the material reviewed by Dr. John Galvin, an

Aetna medical consultant, who reported that Ace had not

established that she had a long-term disability. But Elliott did

not contact Ace’s medical care providers or obtain additional

medical records, though Ace had signed a release. In

determining the physical nature of Ace’s occupation, Elliott

relied entirely on Aetna’s Physical Demands Analysis

worksheet, ignored the more complete description that was

attached,® and did not contact Ace or her supervisor to

discuss her job’s physical requirements.

The “unable to work at any gainful employment” phrase

in Elliott’s letter is drawn from Aetna’s policy. In his

deposition, Elliott testified he understood Aetna’s policy to

require Ace to be “totally disabled from any gainful

employment” and “unable to do . . . any work,” though he

added that he would have denied her application even if he

believed that Ace could only have worked half-time. Elliott’s

supervisor, Bryan Southall (“Southall”), testified, however,

that he knew Aetna could not apply the “unable to work at

any gainful employment” language literally, and that Aetna

® Aetna’s physical demands analysis work sheet described her

position as 100% office-based. Ace’s supervisor ‘iad attached a

more complete description, explaining that Ace’s position required

her to engage in rigorous travel to remote communities.

did not apply it literally in Ace’s case.’ Both he and Elliott

testified Aetna applied a “reasonableness” test in evaluating

| disability.* Aetna conceded at trial, however, that no one

from Aetna ever told Ace that the policy was not being

interpreted and applied literally.” Ace testified she had called

Aetna several times, but no one would clarify the term

“disabled” or suggest specific documents she should send.

Based on what she had been told in the letter, she would have

to be totally disabled to be eligible for benefits; she knew

that her condition was not that bad but also that it did not

permit her to perform her job.

D. Ace’s Request for Reconsideration

Ace responded to Aetna’s denial by writing a short letter

requesting reconsideration."° She enclosed a longer letter

| from Dr. Kiessling, dated November 30, explaining why Ace

| should be considered totally disabled. Dr. Kiessling’s letter

? Both parties agree that insurers cannot lawfully apply this

standard literally. See Aetna Life Ins. Co. v. Orr, 205 Ark. 566,

169 S.W.2d 651, 654 (1943); Erreca v. Western States Life Ins.

Co., 19 Cal.2d 388, 121 P.2d 689 (1942).

® Both Elliott and Southall testified they determined disability

based on whether an applicant was capable of earning a monthly

amount equal to her disability benefits. Ace’s benefits equaled

70% of her salary; thus, under their reasonableness test, Ace

should have received benefits if she was incapable of working at

least 70% of the time at her current job.

* Aetna’s practice was to quote only the language of the policy

and not to inform claimants of the legal requirements governing

interpretation of the policy or of informal reasonableness guidelines

used in evaluating applications.

'© Elliott’s November 17 letter had informed Ace that she could

appeal his denial but did not specify particular documents or

information to send that would be helpful.

ene nE Rn eee neers

noted that Ace’s condition had worsened since his earlier

Statement, that she now needed “nearly continuous[ ]

traction” to obtain any pain relief, that she had received

epidural injections for her back pain, that she could not sit for

prolonged periods of time, and that she was unable to

perform clerical work. He reclassified her as a “Class V

disability,” which Aetna’s form describes as “severe

functional capacity; incapable of minimal (sedentary)

activity.”

E. Aetna’s Response to the Request for Reconsideration

On December 11, Elliott responded to Ace’s request.

His letter stated that the information submitted by Ace had

been reviewed oy Aetna’s medical consultant who had advised

that “there is no objective medical evidence . . . to support

your contention that you are unable to work at any gainful

occupation.” It reiterated that to receive benefits “you must

be totally disabled . . . from working at any gainful

occupation.” The letter advised Ace that for Aetna to review

her file, Ace would have to have her physicians “furnish . .

. Objective medical evidence to support [her] contention [of

total disability].” Aetna’s policy neither contains nor defines

the term “objective medical evidence,” and it did not inform

Ace what would qualify as objective medical evidence; _ its

claim handling guidelines, moreover, instruct analysts to

consider subjective complaints of pain even in the absence of

objective medical findings."

Southall testified that he was uncertain whether Ace’s

documents contained objective medical evidence and that he

would not be surprised if a claimant did not know whether a

'' Aetna’s Proper Claim Handling Guidelines instruct claim

analysts to “[cjonsider subjective complaints of the claimant as well

as objective evidence” and give as an example “[a] disability

claimant [who] genuinely appears to be in pain, although there are

no objective medical findings.”

physician’s letter constituted objective or subjective evidence.

He stated that what he wanted to see was Dr. Kiessling’s

chart notes, reports of examinations, and x-rays, but he never

asked Ace or Dr. Kiessling to supply these materials.

Aetna’s medical consultant, Dr. Galvin, again reviewed

Ace’s file and concluded there was no medical evidence to

support Dr. Kiessling’s opinion that Ace was in the Class V

| disability category. At trial, however, he conceded that Dr.

Kiessling’s letter contained objective medical evidence and

that he was unable to ascertain from Ace’s file whether she

was disabled.

| F. Ace’s Response to Aetna’s Second Response

Although Aetna’s December 11 letter did not state that

the claim had again been denied, it was the functional

equivalent of a denial. When Ace received this letter, she

had been without income since her short-term disability

| benefits expired in September and had begun to sell her

| personal property. She consulted a lawyer, Francine Harbour

| (“Harbour”), who wrote to Aetna on Ace’s behalf “to

facilitate the review process in this matter.” Harbour’s letter

stated that Ace believed she already had furnished objective

medical evidence but would submit additional information to

“clarify any misunderstanding.” To that end she requested

that Aetna send to her “the pertinent claim adjustment

guidelines that [Aetna] relied on in reaching [the] denial

determination” and certain other material. She asked Aetna

to provide the documents prior to her sending additional

information, so that she could ensure that her submission was

complete.

| Southall responded to Harbour’s request on January 28,

| 1993, stating, “There are no claim adjustment guidelines

| which we follow.” During discovery, however, Aetna

produced its “Proper Claim Handling Guidelines” contained

ill eal

in its Methods and Procedures Manual,” and at trial Aetna’s

director of disability claims testified that the guidelines are

mandatory for its claim analysts to follow.

G. Ace’s Renewed Request for Reconsideration

On February 12, 1993, Harbour submitted an additional

packet of materials to Aetna enclosing another Attending

Physician Statement prepared by Dr. Kiessling on January 7,

1993, which rated Ace as a Class V disability, a letter by Dr.

Kiessling summarizing the objective medical evidence upon

which he based his opinion and explaining why Dr.

McEvoy’s July release should not carry dispositive weight,’

and a physical capacities evaluation (“PCE”) completed

January 28, 1993. The PCE stated that Ace was capable of

sitting, standing or walking for less than an hour each during

the day.

Harbour’s cover letter explained Ace’s fragile physical,

emotional and economic position and advised Aetna that

unless it accepted Ace’s application by March 1, Ace would

file suit. By February 1993, Ace had been forced to sell

much of her personal property and her home. She sent her

eldest son to live with another family and she lived in her car

from late February through early April.

H. Aetna’s Response

Southall called Harbour on February 24, 1993, and left

a phone message the content of which was disputed at trial.

It may have confirmed that the denial of the claim stood or it

may have been a request for an independent medical

' See note 11, supra.

'3 In his letter, Dr. Kiessling stated that, “Dr. McEvoy’s release

ignored the slower than anticipated healing and associated pain of

the osteotomy procedure . . . as well as the critically complicating

feature of her low back pain.”

10a

examination (“IME”). In any event, after receiving the

additiona! materials, Dr. Galvin and Southall had concluded

that there was insufficient information to support a finding

that Ace was disabled. Dr. Galvin considered Dr. Kiessling’s

letter as being of “no value” because of its tone, and asserted

that he “{did] not accept Dr. K’s opinion, he is not a

specialist and we are not providing a social benefit service.”

Southall testified that he discounted Dr. Kiessling’s letter

because it was unaccompanied by Dr. Kiessling’s chart notes,

examination results or other materials. Neither Southall nor

Dr. Galvin contacted Dr. Kiessling to discuss his letter or to

ask him to submit materials to support his conclusions.

I. Aetna’s Demand for an Independent Medical Examination

On March 4 Aetna wrote Ace a letter, directing her to

appear before a designated physician for an IME on April 5,

1993. On advice of counsel, Ace refused to appear. On

March 15, Aetna wrote to Harbour, reaffirming its decision

to deny the claim on the basis of Ace’s failure to produce

proof of “[tJotal disability [which] is the inability to work at

any gainful occupation due to sickness or injury.” Ace then

retained litigation counsel who attempted, unsuccessfully, to

reschedule the IME.

J. End of Ace’s Disability

On April 8, 1993, Ace’s previously-scheduled knee

surgery was performed. Dr. Zorn successfully replaced

Ace’s knee. Within two months, Ace was walking without

crutches and returned to work. Her disability ended June 1,

1993.

DISCUSSION

1. Judgment as a Matter of Law—Punitive Damages

Judgment as a matter of law is appropriate only when the

evidence, “viewed in the light most favorable to the

nonmoving party,” could not reasonably support the verdict.

lla

Amarel v. Connell, 102 F.3d 1494, 1517-18 (9th Cir.1997),

(as amended). We review the grant of a motion for judgment

as a matter of law de novo. Id. at 1517.

To support punitive damages under Alaska law, a

plaintiff must prove by clear and convincing evidence that the

wrongdoer’s conduct “was outrageous, such as acts done with

malice or bad motives or reckless indifference to the interests

of another person.” Alaska Stat. § 09.17.020;'* State Farm

Fire & Cas. Co. v. Nicholson, 777 P.2d 1152, 1158 (Alaska

1989) (quoting Sturm, Ruger & Co. v. Day, 594 P.2d 38, 46

(Alaska 1979), modified on reh’g, 615 P.2d 621 (Alaska

1980), overruled on other grounds by Dura Corp. v. Harned,

703 P.2d 396 (Alaska 1985)). Alaska courts will overturn a

punitive damage award only if consideration of the record as

a whole leaves them with a firm conviction of error and the

need to intervene to prevent a miscarriage of justice. Alaskan

Village, Inc. v. Smalley, 720 P.2d 945, 948 (Alaska 1986).

The district court concluded that no reasonable jury could

find by clear and convincing evidence that Aetna acted with

malice, bad motives or reckless indifference. After

determining that the evidence did not support a finding of

malice or bad motive, the court held that the evidence did not

clearly and convincingly support a finding of reckless

disregard, stating: A jury could find that by requiring the

insured to marshall [sic] all the information, especially after

Dr. Kiessling’s second opinion was communicated, it is more

likely than not that Aetna acted with enough disregard for

Ace’s interest to represent bad faith sufficient to breach the

contract . . . but the evidence cannot support a finding that

Aetna’s disregard for Ace’s interest was clearly and

convincingly reckless to the point that Aetna should be

punished. Plainly put, there is nothing outrageous about

'* The statute was amended in August 1997 to make minor

textual changes not significant to the decision of this case.

a — = —

ee SS eee Ce eS ee ee ie eee eee ee Se ee ee oe een ee a AS aig ta

12a

relying on the opinion of the most knowledgeable physician,

Dr. McEvoy, to the exclusion of what little contrary

indication of Ace’s condition had emerged prior to asking for

an IME, the one procedure that could be expected to clear up

any uncertainty.

In ruling that while Aetna acted “with enough disregard

for Ace’s interest to represent bad faith” but not “clearly and

convincingly reckless[ly],” the district court ignored

significant and undisputed evidence. Focusing only on Aetna’s

“requiring the insured to marshall all the information” and

“relying on the opinion of the most knowledgeable

physician,” the court failed to take into account substantial

evidence’ from which a jury could reasonably have found,

clearly and convincingly, that Aetna acted with reckless

indifference to Ace’s interests."° That evidence, which is

summarized in the preceding part of this opinion and is

undisputed, includes the following conduct by Aetna: (1)

basing denial of the claim on an illegal standard for benefit

eligibility;'” (2) failing to inform the claimant of the standard

actually used by Aetna in evaluating disability claims;'* (3)

'S The court also failed to take into account that Aetna had

effectively twice denied the application before it asked for the IME;

had it wished to “clear up any uncertainty,” it would presumably

have asked for the examination before it decided whether to grant

or deny the application.

‘© Because under Alaska law, the jury could award punitive

damages on evidence that Aetna acted with reckless indifference to

Ace’s interests, it is not necessary to address the court’s findings

with respect to malice and bad motives.

'7 See note 7, supra.

‘8 Alaska law requires the insurance company to provide a

reasonable explanation of the basis in the policy for denial of a

claim. Alaska Stat. §§ 21.36.125(1) and (14).

13a

fe‘ling to investigate the claim and to seek or request the

supporting information alleged to be missing; (4) failing to

assist the claimant in presenting her disability claim;'? (5)

relying on outdated prognoses of the claimant’s expected

recovery and disregarding recent reports of her actual

condition; (6) denying her claim based on an undefined

“requirement” not a term of her policy and contrary to

Aetna’s internal claim adjustment guidelines; (7) falsely

advising the claimant that Aetna had no claim adjustment

guidelines; and (8) making a last-minute demand for an IME

after having denied the claim.

In evaluating the sufficiency of the evidence, the district

court failed to consider it as a whole and to resolve all

inferences in favor of the jury’s verdict. See Continental Ore

Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699,

82 S. Ct. 1404, 1410, 8 L.Ed.2d 777 (1962) (“In cases such

as this, plaintiffs should be given the full benefit of their

proof without tightly compartmentalizing the various factual

components and wiping the slate clean after scrutiny of

each.”). Viewing the evidence in the light most favorable to

the nonmoving party, we cannot say the evidence does not

reasonably support an award of punitive damages.”

'9 Alaska law requires n insurer upon receipt of notice of a

claim, promptly to provide t .c necessary claim forms, instructions

and assistance so that the .laimant is able to comply with all

reasonable requirements. Alaska Admin. Code tit. 3, § 26.040(a)(3)

(1997).

20 The two cases on which the district court relied, State Farm

Mut. Auto. Ins. Co. v. Weiford, 831 P.2d 1264 (Alaska 1992), and

Nicholson, 777 P.2d 1152, are inapposite. Both involved

negotiations leading to disputes between the insured and the carrier

over the amount to be paid on the insured’s damage claim, the

court holding that the evidence did not support a finding of

“outrageous” conduct. Neither involved denial of coverage or

benefits or other misconduct by the carrier.

l4a

2. Conditional Grant of New Trial — Punitive

Damages

We have jurisdiction to review the conditional grant of a

new trial order under Fed.R.Civ.P. 50(c)(1). Air-Sea

Forwarders, Inc. v. Air Asia Co., 880 F.2d 176, 190 n. 15

(9th Cir.1989). The district court’s order stated in relevant

part:

In general the court agrees with the arguments advanced

by defendant and therefore grants the motion for a new

trial as to the claim for punitive damages such that if the

court of appeals should reverse this court’s decision on

the punitive damages claim there will be a new trial on

that claim.

Rule 50(c)(1) states that the court “shall specify the

grounds for granting the motion for the new trial.” The court

failed to do so here, at least explicitly, but it is a fair

inference that it granted a new trial for the same reasons for

which it granted judgment as a matter of law. The court’s

failure to rule on Aetna’s request for a remittitur or to base

its new trial order specifically on the magnitude of the

punitive damage award, as opposed to the fact of the award,

leads us to the conclusion that the new trial was granted on

the erroneous ground that the evidence was insufficient as a

matter of law. While our review of an order granting a new

trial is for abuse of discretion, “a stringent standard applies

when the motion is based on insufficiency of the evidence.”

EEOC v. Pape Lift, Inc., 115 F.3d 676, 680 (9th Cir. 1997)

(internal quotations omitted) (quoting Venegas v. Wagner, 831

F.2d 1514, 1519 (9th Cir.1987)). A district court may order

a new trial based on insufficient evidence only if it finds that

the jury’s verdict “is against the great weight of the evidence,

or it is quite <Jear that the jury has reached a seriously

erroneous resuit.” Id.; Roy v. Volkswagen of Am., Inc. , 896

F.2d 1174 (9th Cir.), as amended by 920 F.2d 618 (9th

15a

Cir.1990). The court made no such finding and the record

would not support it.

Rule 50(c)(1) further provides that where “the motion for

a new trial has been conditionally granted and the judgment

is reversed on appeal, the new trial shall proceed unless the

appellate court has otherwise ordered.” The rule

contemplates that in a case such as this, we may give

direction for further proceedings. See 28 U.S.C. § 2106

(“any [ ] court of appellate jurisdiction may . . . remand the

cause and direct the entry of such. . . order . . . as may be

just under the circumstances”).

While the evidence was sufficient as a matter of law to

support an award of punitive damages, whether the award

was excessive is a different issue.”

A punitive damage award is excessive if it is manifestly

unreasonable, resulting from passion or prejudice or

disregard of the rules of law. Relevant factors include

the compensatory damage amount, magnitude of the

offense, importance of the policy violated and the

defendant’s wealth.

Alaskan Village, 720 P.2d at 949; see also Sturm, Ruger &

Co., 594 P.2d at 48; Pluid v. B.K., 948 P.2d 981, 983

(Alaska 1997) (per curiam). No single factor is dispositive.

Sturm, Ruger & Co., 615 P.2d at 624 & n.3. The award must

also pass muster under federal due process analysis. BMW v.

Gore, 517 U.S. 559, 575-87, 116 S.Ct. 1589, 1599-1604,

134 L.Ed.2d 809 (1996) (identifying as “guideposts” that

must be considered: (1) “degree of reprehensibility of the

defendant’s conduct”; (2) “ratio [of punitive damage award]

to the actual harm inflicted on the plaintiff”; and (3)

“{c]omparing the punitive damage award and the civil or

21 Aetna does not contend that the award was the product of

passion or prejudice.

16a

criminal penalties that could be imposed for comparable

misconduct”).

Our review of the reported Alaska decisions leads us to

the conclusion that the punitive damage award was excessive.

Although not dispositive itself, the ratio of punitive-to-

compensatory damages — 130 to 1 — is far beyond any

approved by Alaska courts.” Moreover, the amount of

punitive damages far exceeds the potential civil and criminal

penalties for Aetna’s actions.” Accordingly, we remand with

directions to the district court to enter an order denying a new

trial on punitive damages conditioned on Ace accepting a

remittitur of punitive damages in an amount to be determined

by the district court.

2 See Pluid, 948 P.2d at 984, 986 (upholding jury’s 5-to-1 ratio

of punitive to compensatory damages); Day, 615 P.2d at 624

(remitting jury punitive damage award, resulting in a 3.6-to-1

ratio); Alaska Ins. Co. v. Movin’ On Constr. Inc., 718 P.2d 472,

475 (Alaska 1986) (upholding 3-to-1 ratio); Teamsters Local 959

v. Wells, 749 P.2d 349, 361 n.26 (Alaska 1988) (upholding

2.54-to-1 ratio); Ben Lomond, Inc. v. Campbell, 691 P.2d 1042,

1048 (Alaska 1984) (upholding 2.38-to-1 ratio); Alaskan Village,

720 P.2d at 949 (upholding 2-to-1 ratio). Cf Cameron v. Beard,

864 P.2d 538, 551 (Alaska 1994) (upholding 70-to-1 and 45-to-1

ratios). In Cameron, however, in addition to the $1,000 in

compensatory damages received from each of the two individual

defendants, the plaintiff also recovered $700,000 in actual damages

from the State, another defendant. /d. at 544. Thus, the overall

ratio of punitive to compensatory damages was 1-to-6.

23 The maximum fine under the applicable provisions of the

Alaska criminal code is $500,000. Alaska Stat. §§ 11.46.600(a)(2),

12.55.035(c)(1)(A).

O, <_<

17a

3. Denial of Aetna’s Motion for Judgment—Bad

Faith Liability

The district court’s denial of Aetna’s motion may be

reversed only if the evidence, construed in the light most

favorable to Ace, permits only one reasonable conclusion, and

that conclusion is contrary to that of the jury’s. Acosta v. City

& County of San Francisco, 83 F.3d 1143, 1145 (9th Cir.),

cert. denied sub nom., Yawczak v. Acosta, __ U.S. ___, 117

S.Ct. 514, 136 L.Ed.2d 403 (1996). We review de novo the

denial of a motion for judgment as a matter of law. Id.

To prove bad faith, a plaintiff must establish “the absence

of a reasonable basis for denying benefits of the policy and

the defendant’s knowledge or reckless disregard of the lack

of a reasonable basis for denying the claim.” Hillman v.

Nationwide Mut. Fire Ins. Co., 855 P.2d 1321, 1324 (Alaska

1993) (quoting Anderson v. Continental Ins. Co., 85 Wis.2d

675, 271 N.W.2d 368, 376-77 (1978)). As the foregoing

discussion shows, the court’s denial of judgment as a matter

of law is supported by the evidence that (1) Aetna did not

investigate Ace’s claim and shifted the burden of investigating

entirely to her; (2) Aetna did not gather any medical

records, contact Ace’s lawyers, or telephone Ace or her

employer to obtain evidence relevant to her claim; (3) Aetna

failed to disclose the standard it was obliged to use in

evaluating a disability claim; (4) Aetna failed to provide a

reasonable explanation for its denial of Ace’s claim; (5) Aetna

acted unreasonably in reviewing Ace’s records by relying on

outdated prognoses of her expected recovery and ignoring

more recent reports on her actual condition; (6) Aetna failed

4 Aetna’s claim handling guidelines instruct claims handlers to:

“Obtain all available pertinent facts, not just those that are

favorable to the company. Develop the claimant’s case as well as

the company’s. If he is being treated by different doctors, obtain

medical information from all of them.”

18a

to answer Ace’s questions and to tell her what documents to

submit in support of her claim; and (7) Aetna knew that Ace

suffered from a chronic condition that had been predicted to

deteriorate.

The foregoing discussion also disposes of Aetna’s appeal

from the denial of a new trial on its bad faith liability.

4. Denial of Aetna’s Motion for New Trial on the

Award of “Emotional Distress” Damages

Aetna appeals the denial of a new trial on the award of

“emotional distress” damages, asserting that the district court

erred by failing to instruct the jury that a plaintiff seeking

emotional distress damages must prove that her distress was

“severe” before any damages may be awarded. We review

the denial of a new trial for abuse of discretion. Wharf v.

Burlington N. R.R. Co., 60 F.3d 631, 637 (9th Cir.1995).

We hold that the district court did not abuse its discretion in

denying Aetna’s motion for a new trial.

Under Alaska law, breach of the implied covenant of

good faith and fair dealing is actionable in tort against

insurers. Nicholson, 777 P.2d 1152. Emotional distress is

a category of damages in a bad faith case but is not an

element of the claim. Alaska courts have never explicitly

limited recovery of emotional distress damages in bad faith

insurance cases to those instances where the plaintiff has

shown “severe” emotional distress. However, Aetna

interprets Chizmar v. Mackie, 896 P.2d 196 (Alaska 1995),

a negligent infliction of emotional distress case, as requiring

plaintiffs seeking emotional distress damages from any type

of tort to prove that their distress was “severe” before any

damages may be awarded.”

25 Aetna also relies on Hillman, 855 P.2d. at 1324. Hillman

cites a Wisconsin case, Anderson, 271 N.W.2d at 376-77, which

required severe emotional distress, but uses the case to explain the

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19a

Aetna’s reliance on Chizmar is misplaced. The

requirement that the damages be “severe” is an element of the

underlying torts of negligent and intentional infliction of

emotional distress, but not of the tort of breach of the duty of

good faith and fair dealing by an insurer to an insured.

Chizmar, 896 P.2d at 204 (negligent infliction); Cameron v.

Beard, 864 P.2d 538, 548 (Alaska 1993) (intentional

infliction). Aetna contends that the elements of the two torts,

intentional infliction of emotional distress and bad faith

breach, are so similar that any attempt to distinguish them

would be artificial. The argument overlooks the fact that

Alaska courts have treated intentional infliction of emotional

distress and bad faith breach cases differently. For instance,

under Alaska law, a plaintiff cannot sustain a claim for

intentional infliction of emotional distress unless the

defendant’s conduct rises to the level of outrageousness,

which would warrant a punitive damage award. Hawks v.

Department of Pub. Safety, 908 P.2d 1013, 1015 (Alaska

1995) (citing Richardson v. Fairbanks N. Star Borough, 705

P.2d 454, 456 (Alaska 1985)). However, a plaintiff may

successfully bring a bad faith breach claim and recover

compensatory damages where the evidence was insufficient to

support an award of punitive damages because it did not show

objective and subjective elements of bad faith. The Hillman court

did not address the severity of the emotional distress damages that

must be proved or cite to the Anderson court’s discussion of this

issue. The fact that the court relied on one portion of the Anderson

opinion does not support the claim that it also adopted other parts

of the opinion.

2 Under Alaska law, a claim for intentional infliction of

emotional distress has three elements: (1) the defendant’s conduct

is extreme and outrageous; (2) the conduct is intentional or

reckless; and (3) the conduct causes severe emotional distress.

Bishop v. Municipality of Anchorage, 899 P.2d 149, 155 (Alaska

1995) (citing King v. Brooks, 788 P.2d 707, 711 (Alaska 1990)).

20a

that the insurer’s actions were outrageous OF reckless.

Nicholson, 777 P.2d at 1158; Weiford, 831 P.2d at 1267.

Moreover, the policy considerations for requiring severity

to be shown do not support applying the requirement to bad

faith insurance cases. As the court said in Chizmar, “The

| basic assumption underlying the traditional rule is that

EI emotional distress without physical injury is relatively trivial

| and easily feigned.” Chizmar, 896 P.2d at 201. In contrast,

when an insurance company wrongly refuses to honor its

obligations, emotional distress is a natural and believable

response. Insureds bargained and paid for the security and

peace of mind of knowing that reimbursement and financial

support will be provided in the event that a misfortune

occurs. As insurance payments often serve as a safety net for

the insured, Aetna’s refusal to cover Ace’s injury is

foreseeably egregious.

The fact that the Alaska courts have applied the tort of

bad faith breach only to insurance contracts between the

insurer and the insured further demonstrates that these policy

considerations do not come into play. See Nicholson, 777

P.2d at 1157. By allowing insureds to bring the action in

tort, Alaska courts have relieved plaintiffs of the obligation of

bringing a separate tort claim for negligent or intentional

infliction of emotional distress. However, unlike a plaintiff

in an insurance case, a plaintiff bringing a claim for bad faith

breach of an employment contract would have to

independently establish the tort of negligent or intentional

infliction of emotional distress to recover emotional distress

damages. See, e.g., ARCO Alaska, Inc. v. Akers, 753 P.2d

1150, 1153-54 (Alaska 1988) (no independent tort for breach

of good faith and fair dealing in an employment contract).

CONCLUSION

We AFFIRM the denial of Aetna’s motions for judgment

as a matter of law on bad faith liability, for a new trial on

bad faith liability and for a new trial on emotional distress

2la

damages. We REVERSE the grant of judgment as a matter

of law on punitive damages and we VACATE the conditional

grant of a new trial on punitive damages. We REMAND

with direction to enter an order denying Aetna’s motion for

new trial on punitive damages on condition that Ace accepts

a remittitur of punitive damages in an amount to be

determined by the district court.

Costs on appeal shall be awarded to Ace pursuant to

Fed.R.App.P. 39(a).

22a

APPENDIX B

UNITED STATES COURT OF APPEALS

) FOR THE NINTH CIRCUIT

| Nos. 96-35813 AND 96-36020

) D.C. No. CV-94-00018-JWS

SHERRIE ACE,

PLAINTIFF-APPELLANT-CROSS-APPELLEE,

AETNA LIFE INSURANCE COMPANY,

DEFENDANT-APPELLEE-CROSS-APPELLANT.

Appeals from the United States District Court

for the District of Alaska

John W. Sedwick, District Judge, Presiding

Argued and Submitted

November 5, 1997 — Seattle, Washington

Filed May 7, 1998

ORDER AMENDING OPINION AND GRANTING

PETITIONS FOR REHEARING IN PART

Before: Betty B. Fletcher and Diarmuid F. O’Scanniain,

Circuit Judges, and William W. Schwarzer,” Senior District

Judge.

* Honorable William W. Schwarzer, Senior United States District

Judge for the Northern District of California, sitting by designation.

Aah oes

SLL AGRE CPE

Fi aL ha als ic yh Sli hse bins nai RRA Wu nnn SIU eA MLR hei ts ala tna ta Sian

23a

COUNSEL

Jeffrey Feldman and Susan Orlansky, Young & Feldman,

Anchorage, Alaska; Richard H. Friedman and Jeffrey K.

Rubin, Friedman, Rubin & White, Anchorage, Alaska, for

the plaintiff-appellant.

Philip Lacovara, New York, New York, for the

defendant-appellee.

ORDER

The opinion filed on March 12, 1998, is hereby amended

as follows:

1) by deleting all of the text contained in the paragraph

beginning on slip opinion page 2267 at line 21 with the words

“Our review . . .” and ending on page 2268, line i6, with “.

. . a new trial)” and replacing it with the following:

Our review of the reported Alaska decisions

leads us to the conclusion that the punitive damage

award was excessive. Although not dispositive

itself, the ratio of punitive-to-compensatory damages

— 130 to 1 — is far beyond any approved by Alaska

courts.' Moreover, the amount of punitive damages

' See Pluid, 948 P.2d at 984, 986 (upholding jury’s 5-to-1 ratio

of punitive to compensatory damages); Day, 615 P.2d at 624

(remitting jury punitive damage award, resulting in a 3.6-to-|

ratio); Alaska Ins. Co. v. Movin’ On Constr. Inc., 718 P.2d 472,

475 (Alaska 1986) (upholding 3-to-1 ratio); Teamsters Local 959 v.

Wells, 749 P.2d 349, 361 n.26 (Alaska 1988) (upholding 2.54-to-1

ratio); Ben Lomond, Inc. v. Cambell, 691 P.2d 1042, 1048 (Alaska

1984) (upholding 2.38-to-1 ratic*; Alaskan Village, 720 P.2d at 949

24a

far exceeds the potential civil and criminal penalties

for Aetna’s actions.? Accordingly, we remand with

directions to the district court to enter an order

denying a new trial on punitive damages conditioned

on Ace accepting a remittitur of punitive damages in

an amount to be determined by the district court.

2) by deleting the last sentence of the opinion at slip

opinion 2272 and replacing it with the following:

We REMAND with direction to enter an order

denying Aetna’s motion for new trial on punitive

damages on condition that Ace accepts a remittitur of

punitive damages in an amount to be determined by

the district court.

3) by deleting Judges Fietcher’s dissent in its entirety.

4) by adding after the last sentence of the opinion:

Costs on appeal shall be awarded to Ace pursuant to

Fed. R. App. P. 39 (a).

In all other respects, the petitions are denied.

(upholding 2-to-1 ratio). Of. Cameron v. Beard, 864 P.2d 538, 551

(Alaska 1994) (upholding 70-to-1 and 45-to-1 ratios). In Cameron,

however, in addition to the $1,000 in compensatory damages

received from each of the two individual defendants, the plaintiff

also recovered $700,000 in actual damages from the State, another

defendant. Jd. at 544. Thus, the overall ratio of punitive to

compensatory damages was 1-to-6.

2 The maximum fine under the applicable provisions of the

Alaska criminal code is $500,000. Alaska Stat. §§ 11.46.600(a)(2),

12.55.035(c)(1 (A).

25a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 96-35813 AND 96-36020

D.C. No. CV-94-00018-JWS

SHERRIE ACE,

PLAINTIFF-APPELLANT-CROSS-APPELLEE,

AETNA LIFE INSURANCE COMPANY,

DEFENDANT-APPELLEE-CROSS-APPELLANT.

Appeals from the United States District Court

for the District of Alaska

John W. Sedwick, District Judge, Presiding

Argued and Submitted

November 5, 1997 — Seattle, Washington

Filed March 12, 1998

Before: Betty B. Fletcher and Diarmuid F. O’Scannlain,

Circuit Judges, and William W. Schwarzer,” Senior District

Judge.

COUNSEL

“Honorable William W. Schwarzer, Senior United States District

Judge for the Northern District of California, sitting by designation.

26a

Jeffrey Feldman and Susan Orlansky, Young & Feldman,

Anchorage, Alaska; Richard H. Friedman, Jeffrey K. Rubin,

Friedman, Rubin & White, Anchorage, Alaska, for

plaintiff-appellant.

Philip Lacovara, New York, New York, for

defendant-appellee.

OPINION

SCHWARZER, Senior District Judge:

Sherrie Ace (“Ace”), a resident of Alaska, sued Aetna

Life Insurance Company (“Aetna”) in Alaska state court

alleging that Aetna acted in bad faith in denying her claim for

long-term disability benefits. Aetna removed the case to

federal court pursuant to 28 U.S.C. §§ 1332, 1441.

The jury ruled for Ace on her bad faith claim and

awarded her $27,009 for the wrongful denial of disability

benefits and $100,000 for emotional distress. It also awarded

her $16.5 million in punitive damages. The court then

granted Aetna’s post-trial motion for judgment as a matter of

law on punitive damages and for a conditional new trial,’ but

denied its motions for judgment and for a new trial on the

bad faith claim. It entered judgment for Ace in the amount

of $127,009. Both parties appeal from the adverse rulings on

their motions. Aetna also asserts error in the instructions to

the jury with respect to emotional distress damages.

We have jurisdiction pursuant to 28 U.S.C. § 1291, and

we affirm in part, reverse in part and remand.

' At oral argument, Aetna’s counsel advised that Aetna had also

moved for remittitur of the punitive damage award but that the

court had not ruled on its motion.

27a

FACTS

A. Sherrie Ace’s Accident

Ace was employed by the State of Alaska as a senior loan

examiner. As a state employee, Ace participated in an Aetna

group insurance plan, which provided both short-term and

long-term disability benefits. She selected and paid monthly

premiums for the maximum available health and disability

coverage.

In December 1986, Ace broke her leg in a sledding

accident, which completely shattered her knee. Despite

multiple surgeries, the condition of Ace’s knee deteriorated

and she suffered chronic pain in her leg and in her lower

back. On April 30, 1992, Ace’s orthopedic surgeon, Dr.

McEvoy, performed an osteotomy? on Ace’s knee.

Immediately prior to the osteotomy, Ace applied for and

received short-term disability benefits from Aetna.

Dr. McEvoy released Ace on a “trial” basis for half-

time, light duty work from August 1, anticipating that she

would be able to return to full-time by mid-September.’

Because her pain had worsened, Ace felt unready to return to

work and expressed her concerns to Dr. McEvoy. He

suggested that she find another doctor. Ace saw a specialist,

Dr. Zorn, who informed her that the osteotomy had failed

and that she would need a total knee replacement. That

operation would have to wait, however, until April 1993 to

permit her knee to heal.

? In this procedure, a patient’s bones are rebroken and recast in

order to shift the patient’s weight onto less-damaged parts of the

knee.

> At trial, Dr. McEvoy stated that he referred to the release as

“trial” because “[iJt alerts the insurer and the employer and the

patient . . . that [returning to work] may not work.”

28a

B. Ace’s Application for Long-Term Disability Benefits

Ace contacted Aetna and requested a long-term disability

benefits application because her short-term disability benefits

had expired early in September 1992. Aetna representatives

advised her that although her policy required her to be “under

the care of a physician,” the physician need not be a special-

ist. Accordingly, Ace had Dr. Kiessling, her long-time

family physician, complete Aetna’s Attending Physician’s

Statement (“Statement”). On the form, he diagnosed Ace as

suffering from “severe degenerative joint disease,” stated that

her condition had retrogressed, noted that she experienced

“frequent swelling” and “constant pain,” and rated her to be

between 30-50% and 50-70% physically disabled.* Aetna

received Ace’s application, along with the Statement and Dr.

McEvoy’s July work release, on October 12, 1992.

On October 20, Aetna returned the Statement to Ace for

signature by the physician and asked her to submit a physical

Capacities evaluation form, which had been prepared by a

physical therapist in July. Ace submitted these forms and

queried Aetna several times about the status of her claim,

indicating her urgent need.

C. Aetna’s First Denial

On November 17, Aetna denied Ace’s claim. In the

denial letter, Stephen Elliott (“Elliott”), Aetna’s account

specialist, informed Ace that

* Aetna’s form characterized 30-50% disabied as “Class III . . .

capable of light work,” and 50-70% disabled as “Class IV .. .

capable of . . . sedentary activity.”

* The form indicated that Ace could not work an eight-hour day

but predicted that her condition would improve in four to six

weeks.

29a

{ijn order to be eligible for Long-term Disability

Benefits, you must be totally disabled to the extent that

you are unable to work at any gainful occupation due to

bodily injury or illness.

He noted that according to the Statement — the most current

medical evidence on file — Ace was capable of continuing

her employment as a loan examiner because she could

perform clerical, sedentary work. Therefore, he wrote, “we

cannot consider you as being totally disabled from performing

the duties of any gainful occupation as required by the

policy,” and denied her request for benefits.

Neither Elliott nor any other Aetna employee investigated

Ace’s claim other than to review the material sent by Ace.

Elliott did have the material reviewed by Dr. John Galvin, an

Aetna medical consultant, who reported that Ace had not

established that she had a long-term disability. But Elliott did

not contact Ace’s medical care providers or obtain additional

medical records, though Ace had signed a release. In deter-

mining the physical nature of Ace’s occupation, Elliott relied

entirely on Aetna’s Physical Demands Analysis worksheet,

ignored the more complete description that was attached,° and

did not contact Ace or her supervisor to discuss her job’s

physical requirements.

The “unable to work at any gainful employment” phrase

in Elliott’s letter is drawn from Aetna’s policy. In his

deposition, Elliott testified he understood Aetna’s policy to

require Ace to be “totally disabled from any gainful

employment” and “unable to do . . . any work,” though he

added that he would have denied her application even if he

believed that Ace could only have worked half-time. Elliott’s

® Aetna’s physical demands analysis work sheet described her

position as 100% office-based. Ace’s supervisor had atiached a

more complete description, explaining that Ace’s position required

her to engage in rigorous travel to remote communities.

30a

’ supervisor, Bryan Southall (“Southall”), testified, however,

that he knew Aetna could not apply the “unable to work at

| any gainful employment” language literally, and that Aetna

| did not apply it literally in Ace’s case.’ Both he and Elliott

testified Aetna applied a “reasonableness” test in evaluating

disability.* Aetna conceded at trial, however, that no one

from Aetna ever told Ace that the policy was not being

interpreted and applied literally.” Ace testified she had called

Aetna several times, but no one would clarify the term

“disabled” or suggest specific documents she should send.

Based on what she had been told in the letter, she would have

to be totally disabled to be eligible for benefits; she knew that

her condition was not that bad but also that it did not permit

her to perform her job.

D. Ace’s Request for Reconsideration

Ace responded to Aetna’s denial by writing a short letter

requesting reconsideration."® She enclosed a longer letter

7 Both parties agree that insurers cannot lawfully apply this

standard literally. See Aetna Life Ins. Co. v. Orr, 169 S.W.2d

651, 654 (Ark. 1943); Erreca v. Western States Life Ins. Co., 121

P.2d 689 (Cal. 1942).

8 Both Elliott and Southall testified they determined disability

based on whether an applicant was capable of earning a monthly

amount equal to her disability benefits. Ace’s benefits equaled

70% of her salary; thus, under their reasonableness test, Ace

should have received benefits if she was incapable of working at

least 70% of the time at her current job.

* Aetna’s practice was to quote only the language of the policy

and not to inform claimants of the legal requirements governing

interpretation of the policy or of informal reasonableness guidelines

used in evaluating applications.

appeal his denial but, did not specify particular documents or

Bi asc a erent i a NR au ala oa ere Sec eas eae

3la

from Dr. Kiessling, dated November 30, explaining why Ace

should be considered totally disabled. Dr. Kiessling’s letter

noted that Ace’s condition had worsened since his earlier

Statement, that she now needed “nearly continuous[ ]

traction” to obtain any pain relief, that she had received

epidural injections for her back pain, that she could not sit for

prolonged periods of time, and that she was unable to

perform clerical work. He reclassified her as a “Class V

disability,” which Aetna’s form describes as “severe

functional capacity; incapable of minimal (sedentary)

activity.”

E. Aetna’s Response to the Request for Reconsideration

On December 11, Elliott responded to Ace’s request.

His letter stated that the information submitted by Ace had

been reviewed by Aetna’s medical consultant who had advised

that “there is no objective medical evidence . . . to support

your contention that you are unable to work at any gainful

occupation.” It reiterated that to receive benefits “you must

be totally disabled . . . from working at any gainful

occupation.” The letter advised Ace that for Aetna to review

her file, Ace would have to have her physicians “furnish . .

. Objective medical evidence to support [her] contention [of

total disability}.” Aetna’s policy neither contains nor defines

the term “objective medical evidence,” and it did not inform

Ace what would qualify as objective medical evidence; its

claim handling guidelines, moreover, instruct analysts to

consider subjective complaints of pain even in the absence of

objective medical findings."

information to send that would be helpful.

'' Aetna’s Proper Claim Handling Guidelines instruct claim

analysts to “[cJonsider subjective complaints of the claimant as well

as objective evidence” and give as an example “[a] disability

claimant [who] genuinely appears to be in pain, although there are

no objective medical findings.”

32a

Southall testified that he was uncertain whether Ace’s

) documents contained objective medical evidence and that he

| would not be surprised if a claimant did not know whether a

physician’s letter constituted objective or subjective evidence.

He stated that what he wanted to see was Dr. Kiessling’s

4 chart notes, reports of examinations, and x-rays, but he never

| asked Ace or Dr. Kiessling to supply these materials.

Aetna’s medical consultant, Dr. Galvin, again reviewed

Ace’s file and concluded there was no medical evidence to

| support Dr. Kiessling’s opinion that Ace was in the Class V

| disability category. At trial, however, he conceded that Dr.

| Kiessling’s letter contained objective medical evidence and

that he was unable to ascertain from Ace’s file whether she

was disabled.

F. Ace’s Response to Aetna’s Second Response

Although Aetna’s December 11 letter did not state that

the claim had again been denied, it was the functional

equivalent of a denial. When Ace received this letter, she

had been without income since her short-term disability

benefits expired in September and had begun to sell her

personal property. She consulted a lawyer, Francine Harbour

(“Harbour”), who wrote to Aetna on Ace’s behalf “to

facilitate the review process in this matter.” Harbour’s letter

stated that Ace believed she already had furnished objective

medical evidence but would submit additional information to

“clarify any misunderstanding.” To that end she requested

that Aetna send to her “the pertinent claim adjustment

guidelines that [Aetna] relied on in reaching [the] denial

determination” and certain other material. She asked Aetna

to provide the documents prior to her sending additional

information, so that she could ensure that her submission was

complete.

Southall responded to Harbour’s request on January 28,

1993, stating, “There are no claim adjustment guidelines

which we follow.” During discovery, however, Aetna pro-

;

33a

duced its “Proper Claim Handling Guidelines” contained in

its Methods and Procedures Manual,” and at trial Aetna’s

director of disability claims testified that the guidelines are

mandatory for its claim analysts to follow.

G. Ace’s Renewed Request for Reconsideration

On February 12, 1993, Harbour submitted an additional

packet of materials to Aetna enclosing another Attending Phy-

sician Statement prepared by Dr. Kiessling on January 7,

1993, which rated Ace as a Class V disability, a letter by Dr.

Kiessling summarizing the objective medical evidence upon

which he based his opinion and explaining why Dr.

McEvoy’s July release should not carry dispositive weight,”

and a physical capacities evaluation (“PCE”) completed

January 28, 1993. The PCE stated that Ace was capable of

sitting, standing or walking for less than an hour each during

the day.

Harbour’s cover letter explained Ace’s fragile physical,

emotional and economic position and advised Aetna that

unless it accepted Ace’s application by March 1, Ace would

file suit. By February 1993, Ace had been forced to sell

much of her personal property and her home. She sent her

eldest son to live with another family and she lived in her car

from late February through early April.

H. Aetna’s Response

Southall called Harbour on February 24, 1993, and left

a phone message the content of which was disputed at trial.

It may have confirmed that the denial of the claim stood or it

'2 See note 11, supra.

'? In his letter, Dr. Kiessling stated that, “Dr. McEvoy’s release

ignored the slower than anticipated healing and associated pain of

the osteotomy procedure . . . as well as the critically complicating

feature of her low back pain.”

34a

may have been a request for an independent medical examina-

tion (“IME”). In any event, after receiving the additional

materials, Dr. Galvin and Southall had concluded that there

was insufficient information to support a finding that Ace was

| disabled. Dr. Galvin considered Dr. Kiessling’s letter as

| being of “no value” because of its tone, and asserted that he

| “[did] not accept Dr. K’s opinion, he is not a specialist and

a we are not providing a social benefit service.” Southall

| testified that he discounted Dr. Kiessling’s letter because it

a was unaccompanied by Dr. Kiessling’s chart notes,

examination results or other materials. Neither Southall nor

Dr. Galvin contacted Dr. Kiessling to discuss his letter or to

ask him to submit materials to support his conclusions.

| I. Aetna’s Demand for an Independent Medical Examination

On March 4 Aetna wrote Ace a letter, directing her to

appear before a designated physician for an IME on April 5,

1993. On advice of counsel, Ace refused to appear. On

March 15, Aetna wrote to Harbour, reaffirming its decision

to deny the claim on the basis of Ace’s failure to produce

proof of “[t]otal disability [which] is the inability to work at

any gainful occupation due to sickness or injury.” Ace then

retained litigation counsel who attempted, unsuccessfully, to

reschedule the IME.

J. End of Ace’s Disability

On April 8, 1993, Ace’s previously-scheduled knee

surgery was performed. Dr. Zorn successfully replaced

Ace’s knee. Within two months, Ace was walking without

crutches and returned to work. Her disability ended June 1,

1993.

| DISCUSSION

| 1. Judgment as a Matter of Law—Punitive Damages

Judgment as a matter of law is appropriate only when the

evidence, “viewed in the light most favorable to the nonmov-

35a

ing party,” could not reasonably support the verdict. Amarel

v. Connell, 102 F.3d 1494, 1517-18 (9th Cir. 1997), (as

amended). We review the grant of a motion for judgment as

a matter of law de novo. Id. at 1517.

To support punitive damages under Alaska law, a plain-

tiff must prove by clear and convincing evidence that the

wrongdoer’s conduct “was outrageous, such as acts done with

malice or bad motives or reckless indifference to the interests

of another person.” Alaska Stat. § 09.17.020;"* State Farm

Fire & Cas. Co. v. Nicholson, 777 P.2d 1152, 1158 (Alaska

1989) (quoting Sturm, Ruger & Co. v. Day, 594 P.2d 38, 46

(Alaska 1979), modified on reh’g, 615 P.2d 621 (Alaska

1980), overruled on other grounds by Dura Corp. v. Harned,

703 P.2d 396 (Alaska 1985)). Alaska courts will overturn a

punitive damage award only if consideration of the record as

a whole leaves them with a firm conviction of error and the

need to intervene to prevent a miscarriage of justice. Alaskan

Village, Inc. v. Smalley, 720 P.2d 945, 948 (Alaska 1986).

The district court concluded that no reasonable jury could

find by clear and convincing evidence that Aetna acted with

malice, bad motives or reckless indifference. After

determining that the evidence did not support a finding of

malice or bad motive, the court held that the evidence did not

clearly and convincingly support a finding of reckless

disregard, stating:

A jury could find that by requiring the insured to

marshall [sic] all the information, especially after Dr.

Kiessling’s second opinion was communicated, it is more

likely than not that Aetna acted with enough disregard for

Ace’s interest to represent bad faith sufficient to breach

the contract . . . but the evidence cannot support a

finding that Aetna’s disregard for Ace’s interest was

'* The statute was amended in August 1997 to make minor

textual changes not significant to the decision of this case.

364

clearly and convincingly reckless to the point that Aetna

should be punished. Plainly put, there is nothing

outrageous about relying on the opinion of the most

knowledgeable physician, Dr. McEvoy, to the exclusion

of what little contrary indication of Ace’s condition had

emerged prior to asking for an IME, the one procedure

| that could be expected to clear up any uncertainty.

In ruling that while Aetna acted “with enough disregard

for Ace’s interest to represent bad faith” but not “clearly and

| convincingly reckless[ly],” the district court ignored signifi-

| cant and undisputed evidence. Focusing only on Aetna’s

| “requiring the insured to marshall all the information” and

“relying on the opinion of the most knowledgeable

physician,” the court failed to take into account substantial

evidence’ from which a jury could reasonably have found,

clearly and convincingly, that Aetna acted with reckless indif-

ference to Ace’s interests.'° That evidence, which is summa-

rized in the preceding part of this opinion and is undisputed,

includes the following conduct by Aetna: (1) basing denial of

the claim on an illegal standard for benefit eligibility;'’ (2)

failing to inform the claimant of the standard actually used by

'S The court also failed to take into account that Aetna had

effectively twice denied the application before it asked for the IME;

had it wished to “clear up any uncertainty,” it would presumably

have asked for the examination before it decided whether to grant

or deny the application.

damages on evidence that Aetna acted with reckless indifference to

Ace’s interests, it is not necessary to address the court’s findings

with respect to malice and bad motives.

'7 See note 7, supra.

ee ee ee

37a

Aetna in evaluating disability claims;'* (3) failing to investi-

gate the claim and to seek or request the supporting informa-

tion alleged to be missing; (4) failing to assist the claimant in

presenting her disability claim;'® (5) relying on outdated

prognoses of the claimant’s expected recovery and

disregarding recent reports of her actual condition; (6)

denying her «laim based on an undefined “requirement” not

a term of her policy and contrary to Aetna’s internal claim

adjustment guidelines; (7) falsely advising the claimant that

Aetna had no claim adjustment guidelines; and (8) making a

last-minute demand for an IME after having denied the claim.

In evaluating the sufficiency of the evidence, the district

court failed to consider it as a whole and to resolve all

inferences in favor of the jury’s verdict. See Continental Ore

Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699

(1962) (“In cases such as this, plaintiffs should be given the

full benefit of their proof without tightly compartmentalizing

the various factual components and wiping the slate clean

after scrutiny of each.”). Viewing the evidence in the light

most favorable to the nonmoving party, we cannot say the

evidence does not reasonably support an award of punitive

damages.”

'* Alaska law requires the insurance company to provide a

reasonable explanation of the basis in the policy for denial of a

claim. Aleska Stat. §§ 21.36.125(1) and (14).

'? Alaska law requires an insurer upon receipt of notice of a

claim, promptly to provide the necessary claim forms, instructions

and assistance so that the claimant is able to comply with all

reasonable requirements. Alaska Admin. Code tit. 3, §

26.040(a)(3) (1997).

0 The two cases on which the district court relied, State Farm

Mut. Auto. Ins. Co. v. Weiford, 831 P.2d 1264 (Alaska 1992), and

Nicholson, 777 P.2d 1152, are inapposite. Both involved

negotiations leading to disputes between the insured and the carrier

38a

2. Conditional Grant of New Trial — Punitive

Damages

We have jurisdiction to review the conditional grant of a

new trial order under Fed. R. Civ. P. 50(c)(1). Air-Sea For-

warders, Inc. v. Air Asia Co., 880 F.2d 176, 190 n. 15 (9th

Cir. 1989). The district court’s order stated in relevant part:

In general the court agrees with the arguments advanced

by defendant and therefore grants the motion for a new

trial as to the claim for punitive damages such that if the

court of appeals should reverse this court’s decision on

the punitive damages claim there will be a new trial on

that claim.

Rule 50(c)(1) states that the court “shall specify the

grounds for granting the motion for the new trial.” The court

failed to do so here, at least explicitly, but it is a fair

inference that it granted a new trial for the same reasons for

which it granted judgment as a matter of law. The court’s

failure to rule on Aetna’s request for a remittitur or to base

its new trial order specifically on the magnitude of the

punitive damage award, as opposed to the fact of the award,

leads us to the conclusion that the new trial was granted on

the erroneous ground that the evidence was insufficient as a

matter of law. While our review of an order granting a new

trial is for abuse of discretion, “a stringent standard applies

when the motion is based on insufficiency of the evidence.”

EEOC vy. Pape Lift, Inc., 115 F.3d 676, 680 (9th Cir. 1997)

(internal quotations omitted) (quoting Venegas v. Wagner, 831

F.2d 1514, 1519 (9th Cir. 1987). A district court may order

anew trial basec_on insufficient evidence only if it finds that.

the jury’s verdict “is against the great weight of the evidence,

over the amount to be paid on the insured’s damage claim, the

court holding that the evidence did not support a finding of

“outrageous” conduct. Neither involved denial of coverage or

benefits or other misconduct by the carrier.

39a

Or it is quite clear that the jury has reached a seriously

erroneous result.” Jd.; Roy v. Volkswagen of Am., Inc., 896

F.2d 1174 (9th Cir.), as arsended by 920 F.2d 618 (9th Cir.

1990). The court made no such finding and the record would

not support it.

Rule 50(c)(1) further provides that where “the motion for

a new trial has been conditionally granted and the judgment

is reversed on appeal, the new trial shall proceed unless the

appellate court has otherwise ordered.” The rule contemplates

that in a case such as this, we may give direction for further

proceedings. See 28 U.S.C. § 2106 (“any [ ] court of

appellate jurisdiction may . . . remand the cause and direct

the entry of such . . . order . . . as may be just under the

circumstances”).

While the evidence was sufficient as a matter of law to

support an award of punitive damages, whether the award

was excessive is a different issue.!

A punitive damage award is excessive if it is manifestly

unreasonable, resulting from passion or prejudice or

disregard of the rules of law. Relevant factors include

the compensatory damage amount, magnitude of the

offense, importance or the policy violated and the

defendant’s wealth.

Alaskan Village, 720 P.2d at 949; see also Sturm, Ruger &

Co., 594 P.2d at 48; Pluid v. B.K., 948 P.2d 981, 983

(Alaska 1997) (per curiam). No single factor is dispositive.

Sturm, Ruger & Co., 615 P.2d at 624 & n.3. The award must

also pass muster under federal due process analysis. BMW v.

~ Gore, U.S. __, 116 S. Ct. 1589, 1599-1604 (1996)

(identifying as «guideposts” that must be considered: (1)

“degree of reprehensibility of the defendant’s conduct”; (2)

* Aetna does not contend that the award was the product of

passion or prejudice.

40a

“ratio [of punitive damage award] to the actual harm inflicted

on the plaintiff”; and (3) “[c]omparing the punitive damage

award and the civil or criminal penalties that could be

imposed for comparable misconduct”).

Our review of the reported Alaska decisions leads us to

the conclusion that the punitive damage award was excessive.

Although not dispositive itself, the ratio of punitive-to-

compensatory damages — 130 to 1 — is much higher than

any ratio approved by Alaska state courts. Moreover, the

amount of punitive damages far exceeds the potential civil and

criminal penalties for Aetna’s actions.” The trend of reported

Alaska decisions (subject to some variation taking into

account unusual factual situations) reflects approval of

punitive damage awards on the order of two to three times the

amount of compensatory damages.” Taking all relevant

factors into account, we conclude that Alaska courts would

not approve an award in excess of three times compensatory

~ The maximum fine under the applicable provisions of the

Alaska criminal code is $500,000. Alaska Stat. §§ 11.46.600(a)(2),

12.55.035(c)(1)(A).

® See Pluid, 948 P.2d at 984, 986 (upholding jury’s 5-to-1 ratio

of punitive to compensatory damages); Day, 615 P.2d at 624

(remitting jury punitive damage award, resulting in a 3.6-to-1

ratio); Alaska Ins. Co. v. Movin’ On Constr. Inc., 718 P.2d 472,

475 (Alaska 1986) (upholding 3-to-1 ratio); Teamsters Local 959 v.

Wells, 749 P.2d 349, 361 n.26 (Alaska 1988) (upholding 2.54-to-1

ratio); Ben Lomond, Inc. v. Cambell, 691 P.2d 1042, 1048 (Alaska

_1984) (upholding 2.38-to-1 ratio); Alaskan Village, 720 P.2dat949

(upholding 2-to-1 ratio). Cf Cameron v. Beard, 864 P.2d 538,

551 (Alaska 1994) (upholding 70-to-1 and 45-to-1 ratios). In

Cameron, however, in addition to the $1,000 in compensatory

damages received from each of the two individual defendants, the

plaintiff also recovered $700,000 in actual damages from the State,

another defendant. Id. at 544. Thus, the overall ratio of punitive

to compensatory damages was 1-to-6.

4la

damages in this case. Following the lead of the Alaska

Supreme Court in Sturm, Ruger & Co., 615 P.2d at 624, we

will remand with directions to the district court to enter an

order denying a new trial on punitive damages conditioned on

Ace accepting a remittitur of punitive damages to $381,000.

See American Nat’l Bank & Trust v. Regional Transit Auth.

125 F.3d 420, 437 (7th Cir. 1997) (“We, like the district

court, certainly have the authority to grant a new trial or a

remittitur if the circumstances so warrant.”); Jn re Torcise,

116 F.3d 860, 869 (11th Cir. 1997) (remanding with

directions to enter remittitur in specified amount or, if

plaintiff does not accept, a new trial).

3. Denial of Aetna’s Motion for Judgment—Bad

Faith Liability

The district court’s denial of Aetna’s motion may be

reversed only if the evidence, construed in the light most

favorable to Ace, permits only one reasonable conclsion, and

that conclusion is contrary to that of the jury’s. Acosta v.

City & County of San Francisco, 83 F.3d 1143, 1145 (9th

Cir.), cert. denied sub nom., Yawczak v. Acosta, Sie | ef

__» 1178S. Ct. 514, 136 L. Ed. 2d 403 (1996). We review

de novo the denial of a motion for judgment as a matter of

law. Td.

To prove bad faith, a plaintiff must establish “the absence

of a reasonable basis for denying benefits of the policy and

the defendant’s knowledge or reckless disregard of the lack

of a reasonable basis for denying the claim.” Hillman v.

Nationwide Mut. Fire Ins. Co., 855 P.2d 1321, 1324 (Alaska

1993) (quoting Anderson v. Continental Ins. Co., 271

~N-W.2d 368, 376-77 (Wis. 1978)). As the foregoing

discussion shows, the court’s denial of judgment as a matter

of law is supported by the evidence that (1) Aetna did not

investigate Ace’s claim and shifted the burden of investigating

42a

entirely to her;** (2) Aetna did not gather any medical

records, contact Ace’s lawyers, or telephone Ace or her

employer to obtain evidence relevant to her claim; (3) Aetna

failed to disclose the standard it was obliged to use in

evaluating a disability claim; (4) Aetna failed to provide a

_ reasonable explanation for its denial of Ace’s claim; (5) Aetna

acted unreasonably in reviewing Ace’s records by relying on

outdated prognoses of her expected recovery and ignoring

more recent reports on her actual condition; (6) Aetna failed

to answer Ace’s questions and to tell her what documents to

submit in support of her claim; and (7) Aetna knew that Ace

suffered from a chronic condition that had been predicted to

deteriorate.

The foregoing discussion also disposes of Aetna’s appeal

from the denial of a new trial on its bad faith liability.

4. Denial of Aetna’s Motion for New Trial on the

Award of “Emotional Distress” Damages

Aetna appeals the denial of a new trial on the award of

“emotional distress” damages, asserting that the district court

erred by failing to instruct the jury that a plaintiff seeking

emotional distress damages must prove that her distress was

“severe” before any damages may be awarded. We review

the denial of a new trial for abuse of discretion. Wharf v.

Burlington N. R.R. Co., 60 F.3d 631, 637 (9th Cir. 1995).

We hold that the district court did not abuse its discretion in

denying Aetna’s motion for a new trial.

Under Alaska law, breach of the implied covenant of

good faith and fair dealing is actionable in tort against insur-

** Aetna’s claim handling guidelines instruct claims handlers to:

“Obtain all available pertinent facts, not just those that are

favorable to the company. Develop the claimant’s case as well as

the company’s. If he is being treated by different doctors, obtain

medical information from all of them.”

43a

ers. Nicholson, 777 P.2d 1152. Emotional distress is a cate-

gory of damages in a bad faith case but is not an element of

the claim. Alaska courts have never explicitly limited recov-

ery of emotional distress damages in bad faith insurance cases

to those instances where the plaintiff has shown “severe”

emotional distress. However, Aetna interprets Chizmar v.

Mackie, 896 P.2d 196 (Alaska 1995), a negligent infliction of

emotional distress case, as requiring plaintiffs seeking emo-

tional distress damages from any type of tort to prove that

their distress was “severe” before any damages may be

awarded.”

Aetna’s reliance on Chizmar is misplaced. The

requirement that the damages be “severe” is an element of the

underlying torts of negligent and intentional infliction of

emotional distress, but not of the tort of breach of the duty of

good faith and fair dealing by an insurer to an insured.

Chizmar, 896 P.2d at 204 (negligent infliction); Cameron v.

Beard, 864 P.2d 538, 548 (Alaska 1993) (intentional

infliction). Aetna contends that the elements of the two torts,

intentional infliction of emotional distress and bad faith

*> Aetna also relies on Hillman, 855 P.2d. at 1324. Hillman

cites a Wisconsin case, Anderson, 271 N.W.2d at 376-77, which

required severe emotional distress, but uses the case to explain the

objective and subjective elements of bad faith. The Hillman court

did not address the severity of the emotional distress damages that

must be proved or cite to the Anderson court’s discussion of this

issue. The fact that the court relied on one portion of the Anderson

opinion does not support the claim that it also adopted other parts

of the opinion.

emotional distress has three elements: (1) the defendant’s conduct

is extreme and outrageous; (2) the conduct is intentional or

reckless; and (3) the conduct causes severe emotional distress.

Bishop v. Municipality of Anchorage, 899 P.2d 149, 155 (Alaska

1995) (citing King v. Brooks, 788 P.2d 707, 711 (Alaska 1990)).

44a

breach, are so similar that any attempt to distinguish them

would b artificial. The argument overlooks the fact that

Alaska courts have treated intentional infliction of emotional

distress and bad faith breach cases differently. For instance,

under Alaska law, a plaintiff cannot sustain a claim for

intentional infliction of emotional distress unless the

defendant’s conduct rises to the level of outrageousness,

which would warrant a punitive damage award. Hawks v.

Department of Pub. Safety, 908 P.2d 1013, 1015 (Alaska

1995) (citing Richardson v. Fairbanks N. Star Borough, 705

P.2d 454, 456 (Alaska 1985)). However, a plaintiff may

successfully bring a bad faith breach claim and recover

compensatory damages where the evidence was insufficient to

support an award of punitive damages because it did not show

that the insurer’s actions were outrageous or reckless.

Nicholson, 777 P.2d at 1158; Weiford, 831 P.2d at 1267.

Moreover, the policy considerations for requiring severity

to be shown do not support applying the requirement to bad

faith insurance cases. As the court said in Chizmar, “The

basic assumption underlying the traditional rule is that

emotional distress without physical injury is relatively trivial

and easily feigned.” Chizmar, 896 P.2d at 201. In contrast,

when an insurance company wrongly refuses to honor its

obligations, emotional distress is a natural and believable

response. Insureds bargained and paid for the security and

peace of mind of knowing that reimbursement and financial

support will be provided in the event that a misfortune

occurs. As insurance payments often serve as a safety net for

the insured, Aetna’s refusal to cover Ace’s injury is

foreseeably egregious.

___ The fact that the Alaska courts-have applied_the-tort-of

bad faith breach only to insurance contracts between the

insurer and the insured further demonstrates that these policy

considerations do not come into play. See Nicholson, 777

P.2d at 1157. By allowing insureds to bring the action in

tort, Alaska courts have relieved plaintiffs of the obligation of

45a

bringing a separate tort claim for negligent or intentional

infliction of emotional distress. However, unlike a plaintiff

in an insurance case, a plaintiff bringing a claim for bad faith

breach of an employment contract would have to indepen-

dently establish the tort of negligent or intentional infliction

of emotional distress to recover emotional distress damages.

See, e.g., ARCO Alaska, Inc. v. Akers, 753 P.2d 1150, 1153-

54 (Alaska 1988) (no independent tort for breach of good

faith and fair dealing in an employment contract).

CONCLUSION

We AFFIRM the denial of Aetna’s motions for judgment

as a maiter of law on bad faith liability, for a new trial on

bad faith liability and for a new trial on emotional distress

damages. We REVERSE the grant of judgment as a matter

of law on punitive damages and we VACATE the conditional

grant of a new trial on punitive damages. We REMAND

with direction to enter an order denying Aetna’s motion for

new trial on punitive damages on condition that Ace accepts

a remittitur of punitive damages to $381,000.

FLETCHER, Circuit Judge, Dissenting:

I respectfully dissent from that portion of the opinion that

would have our court dictate the amount of punitive damages

for the purposes of remittitur. The majority picks a multiple

of 3 out of the air, stating only that we are “taking all

relevant factors into account . . .” Majority at 2268.

The Alaska Supreme Court has recently stated that “[t}he

ratio between compensatory and punitive damages is merely

a-factor-to-be taken into account and we have never laid out

a definitive permissible ratio.” Pluid v. B.K., 982 P.2d 981,

985 (Alaska 1997). The issue is one of state law. We should

not imperially delegate to ourselves the decision as to what

that ratio should be. When reviewing an award of punitive

da®ages, Alaska courts look to a number of factors to

46a

determine what is “manifestly unreasonable.” Jd. at 984.

“Relevant factors include the compensatory damage amount,

magnitude of the offense, importance of the policy violated,

and the defendant’s wealth.” Jd. If we had an adequate record

and, in fact, could and did review the relevant factors, we

could determine what is too much, but certainly not what is

enough.

The majority pays only lipservice to the Alaska Supreme

Court’s determination that the facts, and not the ratio, drive

the results of a review of punitive damages. The majority

notes that the jury awarded a 130-1 ratio of punitive to

compensatory damages and that Alaska typically approves “of

punitive damage awards on the order of two to three times the

amount of compensatory damages.” Majority at 2267-68.

Waving its judicial wand and invoking the incantation —

[t]aking all relevant factors into account,” the majority

divines the proper award of damages to be three to one. Jd.

The majority has engaged in no meaningful analysis. It

does not even attempt to compare the facts of this case with

those of other cases where different multipliers were

approved. Were it our business to set maximums, the facts

of this case would support a much higher award. The three

discretionary factors outlined by Pluid, would support a much

higher multiple. First, as to the “magnitude of the offense,”

we need only look to the harm caused to Ace, harm that her

insurance was intended to avoid. She lost everything she had,

including her home; she had to live in her car; and she had

to send her child away because she couldn’t care for him.

Next, with respect to the “importance of the policy violated,”

Aetna’s wrongful and bad faith refusal to cover Ace

implicated a much broader company policy of wrongfully

denying coverage to many who met the definition of

“disabled,” exhibiting a callous breach of trust owed to their

insureds at a time when they are most vulnerable. Finally,

the “defendant’s wealth,” is estimated at 1.7 billion dollars

and the evidence presented demonstrates that Aetna’s assets

47a

would not be sufficiently diminished by the punitive damages

award set by the majority. Punitive damages by definition

are to be adequate in amount to punish the offender.

All of these factors weigh heavily in favor of a

substantial award to Ace. In Pluid, a sexual battery case, the

Alaska Supreme Court affirmed a 5-1 ratio of punitive

damages to compensatory damages. Id. at 984. I see nothing

in the opinion that suggests that the Alaska Supreme Court

found this ratio to be high or even near the limit that would

be acceptable. Certainly nothing in Pluid suggests that a 3-1

ratio represents a “standard.” Indeed, there is strikingly little

evidence of Alaska courts disturbing jury awards at all. Of

the cases cited by the majority, the Alaska courts disturbed

the jury’s punitive damages award in only two, Alaska Ins.

Co. v. Movin’ On Constr. Inc., 718 P.2d 472, 475 (Alaska

1986) (reducing punitives damages proportionally to a

reduction of compensatory damages because it appeared that

the jury had set punitives itself by using a 3 to 1 ratio); and

Sturm, Ruger & Co. v. Day, 615 P.2d 621, 624 (Alaska

1980) (on rehearing increasing a cap it had previously set on

the punitive damages from $250,000 to $500,000).

In Sturm, Ruger & Co., the Alaska Supreme Court was

dealing with its own law under the facts presented in that

case. If we compare the facts of Sturm, Ruger & Co. to our

facts, this case involves more egregious facts, a more

important relationship — that of the insured to the insurer,

and a greater likelihood of reoccurrence. Even so the Alaska

Court set a ratio significantly higher in Sturm, Ruger & Co.

than the majority sets here. Of the other cases cited by the

majority, not only were the awards left undisturbed but the

underlying facts and public policy concerns appear to have

been less compelling than those before us. Moreover, in a

later case, the Alaska Supreme Court denied a request to fix

the amount of punitive damages at the appellate level. It

explained that Sturm, Ruger & Co. was a case where “[i]t

was only after an extensive trial record was established that

48a

the appellate court reduced the award of punitive damages.”

Pletnikoff v. Johnson, 765 P.2d 973, 978 (Alaska 1988). It

went on to state, as did the court in Pluid, that “[w]e have

noted on numerous occasions that the factors to consider in

awarding punitive damages are the amount of compensatory

damages and, more importantly, the magnitude and flagrancy

of the offense, the importance of the policy violated, and the

wealth of the defendant.” Jd. at 978-79. As a federal

appellate court, we have no business setting the amount of the

remittitur in this case. The majority ignores the fact that a

raotion is pending before the district court to grant a

remittitur. It should be ruled upon by the district court in the

first instance where a proper record can be made.

49a

APPENDIX D

MINUTES OF THE UNITED STATES

DISTRICT COURT

FOR THE DISTRICT OF ALASKA

Case No. J94-0018 CV (JWS)

SHERRIE ACE

AETNA LIFE INSURANCE Co.

THE HONORABLE JOHN W. SEDWICK

Deputy Clerk, Pam Richter

Official Recorder,

APPEARANCES: for Plaintiff: —-----

for Defendant: -----

PROCEEDINGS: ORDER FROM CHAMBERS

[Filed September 9, 1996]

The court has considered the motion for new trial at docket

228 and the opposition thereto. In general the court agrees

with the arguments advanced by defendant and therefore

grants the motion for a new trial as to the claim for punitive

damages such that if the court of appeals should reverse this

court’s decision on the punitive damages claim there will be

a new trial on that claim.

The question of whether there should be a new trial on the

underlying tort claim for compensatory damages is a closer

question. The court resolves that issue in favor of plaintiff.

5Ca

The motion at docket 228 is GRANTED IN PART AND

DENIED IN PART as set forth above.

ENTERED AT JUDGE’S DIRECTION

INITIALS: _prr_

DATE: September 9, 1996 Deputy Clerk

Sla

APPENDIX E

UNITED STATES DISTRICT COURT

DISTRICT OF ALASKA

Case No. J94-018 CV (JWS)

SHERRIE ACE, PLAINTIFF,

vs.

AETNA LIFE INSURANCE CO., DEFENDANT.

(Motion for Judgment, as

Matter of Law — Docket 214)

[Filed: July 2, 1996]

ORDER FROM CHAMBERS

MOTION PRESENTED

Plaintiff Sherrie Ace (“Ace”) applied for disability

benefits pursuant to an insurance policy issued by Aetna Life

Insurance Company (“Aetna”) . Aetna denied the ap,lication,

and Ace sued, alleging that Aetna denied her _‘aim in bad

faith, and seeking compensatory and punitive damages. A

jury trial was conducted in Juneau, Alaska, from May 20,

1996 through May 30, 1996. Upon conclusion of plaintiff’s

case, Aetna moved for judgment as a matter of law, which

the court denied. At the close of all the evidence, Aetna

again moved for judgment as a matter of law, pursuant to

Fed. R. Civ. P. 50. The court took the motion under

advisement. The case was submitted to the jury, which

returned a verdict for Ace awarding compensatory damages

of $127,009 and punitive damages of $16,500,000. Aetna

renewed its motion and the court invited further briefing.

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Defendant’s memorandum was filed at docket 214 and

plaintiff's memorandum was filed at docket 216. No party

has requested additional oral argument, and it would not be

of material aid to the court.

This order also addresses plaintiff's motion at Docket

212, which requests that prejudgment interest begin to accrue

on March 3, 1993.

DISCUSSION

1. Jurisdiction; Governing Law

This court has jurisdiction under 28 U.S.C. § 1332. The

applicable substantive law in this diversity action is the law

Alaska. The Home Indemnity Co. v. Lane Powell Moss and

Miller, 43 F.3d 1322, 1325 (9th Cir. 1995).

2. Rule 50 Standard

Judgment as a matter of law is proper if the only

reasonable conclusion supported by the evidence presented at

trial would require judgment for the moving party; it is not

proper where there is substantial evidence to support a

judgment for the non-moving party. Evidence must be

considered in the light most favorable to the non-moving

party. E.g., Morgan v. Woessner, 997 F.2d 1244, 1252 (9th

Cir. 1993).

3. Insurance Bad Faith and Punitive Damages

The Alaska Supreme Court recognized a cause of action

in tort for bad faith handling of a first party insurance claim

in State Farm Fire & Casualty Company v. Nicholson, 777 P.

2d 1152 (Alaska 1989). The Alaska court explained that the

tort cause of action arises from a breach of the covenant of

good faith and fair dealing implied in the insurance contract.

The court chose to allow a cause of action in tort for conduct

which in other contexts would give rise only to a claim for

breach of contract in recognition of the adhesionary nature of

insurance contracts and to afford an adequate remedy to

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insureds who would not be able to recover consequential

damages on a contract cause of action. Nicholson, 777 P.2d

at 1155-57. Noting that, as a tort cause of action, an

insurance bad faith claim could support an award for punitive

damages, the Nicholson court cautioned that such a cause of

action cannot support an award of punitive damages unless

the plaintiff can prove that the insurer engaged in conduct

which was “outrageous, such as acts done with malice or bad

motives or reckless indifference to the interests of another.”

777 P.2d at 1158 (quoting Sturm, Ruger & Co. v. Day, 594

P.2d 38, 46 (Alaska 1979), overruled on other grounds, Dura

Corp. v. Harned, 703 P.2d 396 (Alaska 1985)).

In Nicholson, and again in State Farm Mutual Auto. Ins.

Co. v. Weiford, 831 P.2d 1264 (Alaska 1992), the Alaska

Supreme Court made it clear that there are circumstances

under which the evidence may be sufficient to present a jury

question on a bad faith claim, but insufficient to support a

claim for punitive damages. In both cases, the Alaska court

found wanting evidence of the outrageous conduct required to

warrant punishment.

In addition to the need to establish truly outrageous

behavior, under Alaska law, a plaintiff has a higher burden

of proof for the recovery of punitive damages than for the

recovery of compensatory damages. To recover punitive

damages, a plaintiff must prove the elements of her case by

clear and convincing evidence. AS 09.17.020. This

legislative recognition of the “narrow limits in which punitive

damages should be allowed”, Weiford, 831 P.2d at 1266 n.

2, is a corollary to the Alaska Supreme Court’s admonition

that punitive damages, “are not favored in law” and “are to

be allowed only with caution and within narrow limits.”

Weiford, 831 P.2d at 1266 (quoting Alaska Placer Co. v. Lee,

553 P.2d 54, 61 (Alaska 1976)).

The facts in Nicholson were summarized by the Alaska

court as follows:

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In February, 1983 a water main. . . broke. The water

main . . . ran (underground] beside the Nicholson house

and other houses. . . . The escaping water caused the soil

underneath the house to erode and settle. More than a

year later, on March 27, 1984, the Nicholsons first

contacted State Farm to report the loss. On April 6,

1984 Vere Hotchkiss, claims adjuster for State Farm,

made an initial on-premise inspection, and returned again

on April 11, 1984 with an engineer to conduct another

inspection. Relying on the . . . engineering report which

stated two possibilities for the loss i.e. water alone or

permafrost and earth settling, State Farm denied coverage

on April 22, 1984, because its policy contained an

exclusion for [the second possibility]. Furthermore the

. . . report recommended that the Nicholson house be

observed during the winter of 1984-1985 to determine if

any more settling would occur. Another consulting

engineering report agreed... ..

In the meantime State Farm agreed to cover the

Nicholson’s next door neighbor for the same loss. On

June 14, 1984 State Farm now agreed to extend coverage

to the Nicholsons for their loss and requested them to

obtain property appraisals. On August 15, 1984 a

general contractor . . . declined to give a repair estimate

to the Nicholsons until a soil survey was performed

{which was done during the 1984-85 winter]. During

this time the Nicholsons experienced electrical and

structural problems in their house. They were upset with

the delay in fixing their house.

On May 29, 1985, a new State Farm adjuster [directed

the Nicholsons to contact Pac-Rim Construction Services

for an estimate on repair or replacement of the house.]

The Pac Rim report was issued on June 14, 1985 [with

estimates] well in excess of the policy limits of

$113,264.

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State Farm then obtained an appraisal of the property [in

the amount of] $98,200, and offered to pay that amount

plus additional reimbursement for repair or replacement

costs up to the policy limits. The offer was made on

October 9, 1985. The Nicholsons rejected this offer and

filed suit... .

777 P.2d at 1153-54. In the October 9, 1985 letter, State

Farm also required the Nicholsons to complete a sworn

statement of loss within 60 days. Jd., 777 P.2d at 1154 n. 1.

The Nicholson case was tried to a jury which returned a

verdict awarding compensatory damages and punitive

damages.' At trial:

State Farm offered testimony from several witnesses that

the adjustment of this claim was highly unusual, difficult,

and complex. The Nicholsons offered testimony from

Robert Lowe, as an expert independent claim adjuster,

that State Farm’s delay in deciding coverage and

settlement of the claim was unreasonable and outrageous.

777 P.2d at 1154. Recognizing that State Farm’s wrongful

acts constituted a tort, the Nicholson court then addressed the

sufficiency of the evidence to support an award of punitive

damages. The court had no trouble concluding that it did not.

“Based upon the factual scenario [set out at length above] we

conclude that there was insufficient evidence as a matter of

law to support a finding of outrageous conduct or a gross

deviation from an acceptable standard of reasonable conduct

in order to sustain an award of punitive damages.” 777 P.2d

at 1158.

In State Farm Mutual Auto. Ins. Co. v. Weiford, 831

P.2d 1264 (Alaska 1992), the Alaska court again examined

' In State Farm Fire & Casualty Co. v. Nicholson, 777 P.2d

F452 (Alaska 1989), the jury awarded $107,500 in compensatory

damages and $7,500 in punitive damages.

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the sufficiency of evidence presented in a bad faith case

where a jury had awarded both compensatory and punitive

damages.* The court found that the evidence was sufficient

to present a jury question on the bad faith claim, but

insufficient to support a claim for punitive damages. Linda

Weiford was injured in an automobile accident in August of

1984. She attempted to collect benefits under her uninsured

motorist policy issued by State Farm. In October, 1984, she

was diagnosed with a cervical strain. She initially demanded

$17,500 and State Farm initially offered $3,408. After

further negotiations, State Farm offered $5,000, and Weiford

progressively reduced her demand until it was $10,000. In

July 1986, Weiford was diagnosed with a nerve root injury at

the seventh cervical vertebra, which injury the physician

thought was attributable to the auto accident. Weiford then

demanded the $25,000 policy limit and State Farm offered

$7,500. Further negotiations brought State Farm up to

$12,500, while Weiford reduced her demand to $18,500.

Anticipating arbitration, State Farm requested that Weiford

undergo an independent medical exam (“IME”). She agreed,

and the IME confirmed the nerve root injury. State Farm

then offered $17,500, which was countered by Weiford at

$21,000. Prior to the arbitration, State Farm increased its

offer to $20,000, but that was rejected. The arbitration

resulted in an award to Weiford of $22,000, which State

Farm paid. Weiford then sued for bad faith in the handling

of her claim.

On appeal, Weiford argued that the award of punitive

damages was justified because State Farm had adopted a

“tough stance” policy on claim payments in 1984 and 1985

which led State Farm adjusters to make unreasonably low

offers to Weiford. Weiford also pointed to a State Farm

2 In State Farm Mutual Auto. Ins. Co. v. Weiford, 831 P.2d 1264

(Alaska 1992), the jury awarded $18,007.50 in compensatory

damages and $1,200,000 in punitive damages.

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supervisor’s note that indicated that State Farm should not

exceed $20,000 in its offers to Weiford prior to arbitration,

because with a policy limit of only $25,000, the insured

would have more to lose at arbitration than the insurer.

As in Nicholson, the Alaska court let the compens

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