Reply Brief — Lorillard, Inc. v. Horowitz

Bupreme Court, U.S.

i 424i, ££ D

No. 97-1459 APR 99 1998

OFFICE OF THE CLERK

In The

Supreme Court of the United States

October Term, 1997

e

LORILLARD, INC.,

Petitioner,

MILTON HOROWITZ and SHIRLEY HOROWITZ,

Respondents.

¢

On Petition For A Writ Of Certiorari

To The Court Of Appeal Of California

+

REPLY BRIEF IN SUPPORT OF

PETITION FOR A WRIT OF CERTIORARI

ca

Kevin J. DUNNE

Counsel of Record

FREDERICK D. BAKER

Kirk C. JENKINS

SepGwick, DETERT,

Moran & ARNOLD

1600 One Embarcadero Center

San Francisco, California 94111

Telephone: (415) 781-7900

WILLIAM S. OHLEMEYER

SHooK, Harpy & Bacon

One Kansas City Place

1200 Main Street

Kansas City, Missouri 64105

Telephone: (816) 474-6550

Counsel for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

. EEE Fl lac 7

i

LISTING OF PARTIES TO THE PROCEEDING

The parties to the proceeding in the Court of Appeal

of California were:

Plaintiffs / Respondents:

Milton Horowitz

Shirley Horowitz

Defendants/ Appellants:

Lorillard, Inc.

Hollingsworth & Vose Company

RULE 29.6 STATEMENT

Petitioner Lorillard, Inc. states that Lorillard, Inc. is a

owned subsidiary of Loews Corporation. Lorillard, Inc.

has no non-wholly owned subsidiaries.

il

TABLE OF CONTENTS

Page

LISTING OF PARTIES TO THE PROCEEDING ..... i

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ADA ATINGIE 6065 AN a ee 2

I. THE RESPONDENTS ADMIT THE EXIS-

TENCE OF THE SPLIT IN AUTHORITY

REGARDING THE IMPOSITION OF PUNI-

TIVE DAMAGES ON SUCCESSOR CORPO-

RATIS os 6005590 4 ees 2

Il. THE QUESTION PRESENTED BY

LORILLARD WAS PROPERLY RAISED AND

DECIDED BELOW, SO THIS COURT HAS

JURISDICTION OVER THE PETITION ...... 6

Ill. THE RESPONDENTS’ CLAIM THAT PUNI-

TIVE DAMAGES WERE PROPERLY

IMPOSED UPON LORILLARD IS PREMA-

TURE AND IS BASED UPON A MISUNDER-

STANDING OF THE BURDEN OF PROOF.. 7

CAIVC AARON 0s 5 han $s 0b + cd ew eae ean eeebees 9

iii

TABLE OF AUTHORITIES

FEDERAL CASES

City of Richmond v. Madison Management Group,

ine., 91S FId 430 (4th Cir. 1990). co ees eee

Drayton v. Jiffee Chemical Corp., 395 F.Supp. 1081

WO i ON ee els vac wae ines:

Drayton v. Jiffee Chemical Corp., 591 F.2d 352 (6th

(OG. apnea ae arn iene eee a ea rere earner Pee

Glasscock v. Armstrong Cork Co., 946 F.2d 1085 (5th

Oe Es eine so) cee Rt RaW Ra enh 8 phe ee ee ess

Sterling v. Velsicol Chemical Corp., 855 F.2d 1188

Ny Se IE 86 ad a hs Cea a ike dort n eee e eke a ie es

State Cases

Brotherton v. Celotex Corp., 202 N.J. Super. 148, 493

i Se SID oo as iB a Ne Fetes Vere ee

Celotex Corp. v. Pickett, 490 So.2d 35 (Fl. 1986)....

Davis v. Celotex Corp., 187 W.Va. 566, 420 S.E.2d

a ce baneab arenes

Douglas v. Bank of New England 566 A.2d 939 (R.I.

NG a ic edie cha hah eWan ss Hass ase beh tNA®

Martin v. Johns-Manville Corp., 322 Pa. Super. 348,

Gy Fi Ge CIGD nc ovis ccc ccc asccevctsseces

Sheppard v. AC&S, Inc., 484 A.2d 521 (Del. Super.

ae adagaceny nvass

Wussow v. Commercial Mechanisms, Inc., 97 Wis. 2d

136, 293 N.W.2d 897 (1980) .........-..seeeeeee

sy

iV

TABLE OF AUTHORITIES - Continued

Page '

STATE STATUTES

California Civil Code, Section 3294(a)................ 8

INTRODUCTION

The respondents admit in their Opposition to

Lorillard’s petition that a twenty-year-old split in author-

ity exists regarding the circumstances in which punitive

damages may properly be imposed upon a successor

corporation. The respondents raise three points in their

Opposition, none of which has merit:

e The respondents argue that since most of the

courts involved in the split of authority did

not say the words “due process” in their

opinions, they were not deciding due process

claims. In fact, all of the cases relied upon by

Lorillard turned on principles of substantive

and procedural due process.

e The respondents claim that Lorillard failed to

properly raise the question presented before

the trial and appellate court, and that the

appellate court did not rule on the issue. The

record is clearly to the contrary.

e The respondents claim that the petition

should be denied because the appellate court

properly affirmed the punitive damages

award. This argument is premature and

based upon mistaken characterizations of the

record.

The petition for writ of certiorari should be granted.

+

ARGUMENT

I. THE RESPONDENTS ADMIT THE EXISTENCE OF

THE SPLIT IN AUTHORITY REGARDING THE

IMPOSITION OF PUNITIVE DAMAGES ON SUC-

CESSOR CORPORATIONS

The respondents concede that a split in authority

exists regarding the circumstances under which a suc-

cessor-in-interest may be assessed punitive damages

based upon the conduct of its predecessor. In seven of the

eighteen cases cited by Lorillard, the petitioners admit,

“the courts held that the successor assumed the punitive

damages liabilities of its predecessor either expressly in

the corporate merger agreement or under the relevant

jurisdiction’s corporate merger statute.” (Opposition, p.

12.) In the remaining eleven cases, on the other hand,

“the courts ... analyzed the particular facts as allowing

punitive damages in some cases but not in others.”

(Opposition, pp. 12-13.) Thus, both Lorillard and the

respondents agree that “[u]nless the split in authority is

resolved, the availability of punitive damages in such

cases will depend on what jurisdiction a plaintiff files suit

in.” (Petition, p. 13.)

The respondents’ only quibble is that the courts

involved in this twenty-year-old split of authority have

not, for the most part, used the words “due process” in

analyzing the principles involved. Nevertheless, the cases

cited by Lorillard in its Petition all involve due process ]

principles.

The Sixth Circuit and the Supreme Courts of West

Virginia and Wisconsin have found that the imposition of

punitive damages against successor corporations is

alll

impermissible unless the goals of punishment and deter-

rence would be served, a conclusion based on the princi-

ples of substantive due process. In Drayton v. Jiffee

Chemical Corp., 395 F.Supp. 1081, 1098 (N.D. Ohio, 1975),

the District Court considered the same question at issue

here: whether a successor-in-interest could fairly be held

liable for the culpable conduct of its predecessor. The

District Court held that it could not, and the Sixth Circuit

affirmed. Id.; Drayton v. Jiffee Chemical Corp., 591 F.2d 352,

366 (6th Cir. 1978).

Similarly, in Sterling v. Velsicol Chemical Corp., 855

F.2d 1188 (6th Cir. 1988) the appellant argued that puni-

tive damages could not be assessed against a successor

corporation without proof of independent wrongdoing.

Id. at 1215, n.27. The Sixth Circuit agreed that a punitive

award was not appropriate where the successor was “a

new and different entity” who had not continued the

wrongful activities. Id.

In Davis v. Celotex Corp., 187 W.Va. 566, 420 S.E.2d 557

(1992), the Supreme Court of West Virginia declined to

mechanically apply a state statute which provided that a

successor automatically acquired the liabilities of its pre-

decessor in a merger. 187 W.Va. at 571, n.5, 420 S.E.2d at

562, n.5. Instead, the Court found that it would be fair

and reasonable to impose punitive damages on successor

corporations only where the successor had knowingly

continued to manufacture and market a product which

the successor knew was dangerous. 187 W.Va. at 573, 420

S.E.2d at 564. The Supreme Court of Wisconsin concurred

with the Davis court’s approach in Wussow v. Commercial

Mechanisms, Inc., 97 Wis. 2d 136, 293 N.W.2d 897 (1980),

relying upon the successor corporation’s continuation of

the wrongful conduct after the merger and the virtual

identity of corporate directors between the predecessor

and successor to affirm the imposition of punitive dam-

ages against the successor. 97 Wis. 2d at 152-156, 293

N.W.2d at 905-07.!

The cases described above all implicitly recognize

that punishment of innocent parties is substantively

improper. But the Fifth Circuit and the Supreme Courts of

Rhode Island and Florida, when confronted with suc-

cessor liability cases, have held that mere notice through

the language of a merger statute that punitive liabilities

will be passed along is sufficient to justify the imposition

of punitive damages against successor corporations.

For example, in Glasscock v. Armstrong Cork Co., 946

F.2d 1085 (5th Cir. 1991), cert. denied, 503 U.S. 1011 (1992),

the appellant challenged the punitive damages award on

substantive due process grounds, arguing that imposition

of punitive damages would satisfy neither the goals of

punishment or deterrence. 946 F.2d at 1094. The Fifth

Circuit disagreed, finding that punitive liabilities were

automatically passed along in a merger and subsequent

1 In Martin v. Johns-Manville Corp., 322 Pa. Super. 348,

370-71, 469 A.2d 655, 666-67 (1983), vacated on other grounds, 508

Pa. 154 n.16, 494 A.2d 1088 n.16, the court concluded that

punitive damages could be imposed upon successor

corporation only where the goals of punishment and deterrence

would be served. Brotherton v. Celotex Corp., 202 N.J. Super. 148,

156-57, 493 A.2d 1337, 1341 (1985) adopted the Martin test. The

court in Sheppard v. AC&S, Inc., 484 A.2d 521, 526 (Del. Super.

1984) declined to rule out punitive damages based upon

evidence that the successor corporation had continued to

market the product with knowledge of its dangers.

stock purchase agreement. Id. at 1094-95. Tine appellant in

City of Richmond v. Madison Management Group, Inc., 918

F.2d 438 (4th Cir. 1990) made the same argument, id. at

455, with the same result. Id. at 455-56. The petitioner in

Celotex Corp. v. Pickett, 490 So.2d 35 (Fl. 1986) made the

same argument as well, 490 So.2d at 38, but the court

found that the goals of punishment and deterrence would

be served by imposition of punitive damages on the

successor. Id. Finally, the Supreme Court of Rhode Island

acknowledged in Douglas v. Bank of New England, 566

A.2d 939, 942 (R.I. 1989) that the appellant had raised a

due process challenge to the award of punitive damages

by the trial court.

The respondents admit that a twenty-year-old split of

authority exists regarding the circumstances under which

punitive damages may be imposed upon a successor cor-

poration for the acts of its predecessor. The respondents’

claim that this Court should not address this admitted

split in authority because many of the courts have not

used the words “due process” in their opinions is merit-

less — all of the cases revolve around the due process

questions of whether punishment can be inflicted upon

an innocent party, and when the imposition of punitive

damages on a successor serves the goals of punishment

and deterrence.

Lorillard has demonstrated the existence of a split of

authority on an important federal question. The petition

should be granted.

|

Il. THE QUESTION PRESENTED BY LORILLARD

WAS PROPERLY RAISED AND DECIDED BELOW,

SO THIS COURT HAS JURISDICTION OVER THE

PETITION

Respondents claim that Lorillard has failed to invoke

the jurisdiction of this Court because the question it seeks

to have reviewed was not properly raised and decided in

the trial and appellate courts below. (Opposition, pp.

7-10.) Not true.

During the trial, Lorillard filed a motion in limine,

arguing that punitive damages could not be imposed

upon Lorillard for the actions of its distant predecessor-

in-interest, P. Lorillard, and that the goals of punitive

damages, punishment and deterrence, required proof of

wrongdoing by Lorillard itself. (App., 1-11.) Imposition

of punitive damages without such proof, Lorillard

argued, would violate the due process clause. (App. 11;

CT 1754.) The respondents opposed the motion, arguing

that “A punitive damage award in this case is constitu-

tional and not violative of due process.” (CT 1727.) The

trial court denied Lorillard’s motion. (Petition, p. 37a.)

Lorillard raised the issue again before the California

Court of Appeal, discussing the question extensively in

its Opening and Reply Briefs. (App., 12-21) The Court of

Appeal correctly understood Lorillard’s argument:

“Finally, [Lorillard] argue[s] there is no substantial evi-

dence of [Lorillard’s] wrongdoing to support an award of

punitive damages, and consequently the punitive damage

award violates the Federal due process clause.” (Petition,

p. 24a.) The Court of Appeal decided the issue, holding

that punitive liabilities were automatically passed along

in the various mergers which led from P. Lorillard to

Lorillard, and that P. Lorillard’s wrongdoing was suffi-

cient to support the award of punitive damages against

Lorillard. (Petition, pp. 24a-30a.) Lorillard raised the

issue again in its Petition for Review to the California

Supreme Court, but the petition was denied.

Thus, Lorillard has properly invoked the jurisdiction

of this Court over the Petition.

Ill. THE RESPONDENTS’ CLAIM THAT PUNITIVE

DAMAGES WERE PROPERLY IMPOSED UPON

LORILLARD IS PREMATURE AND IS BASED

UPON A MISUNDERSTANDING OF THE BUR-

DEN OF PROOF

Finally, the respondents claim that the petition

should be denied because “the court below properly

affirmed the assessment of punitive damages against

Lorillard.” (Opposition, p. 17.)

The respondents’ argument suffers from two flaws.

First, the question of whether Lorillard can satisfy the

proper test for imposition of punitive damages upon a

successor-in-interest has nothing to do with whether this

petition should be granted. (Supreme Court Rules, Rule

10.) Although Lorillard vigorously disputes the respon-

dents’ claim that punitive damages were properly

assessed here, the time for briefing and deciding that

issue is on remand to the trial court, after this Court

determines the proper test to be applied and the parties

can fully develop the relevant facts.

The respondents claim that Lorillard would still be

subject to punitive damages even if the trial court had

applied the test adopted by the Sixth Circuit and the

Supreme Courts of West Virginia and Wisconsin. Accord-

ing to the respondents, Lorillard has offered no evidence

to prove that “P. Lorillard’s ownership, directors, officers,

corporate practices, or products changed in any way”

after the various mergers. (Opposition at 17.)

The respondents misconstrue the burden of proof.

Since they are seeking punitive damages in this action,

the respondents have the burden of proving that punitive

damages are justified and proper under the facts and

circumstances. (California Civil Code, Section 3294(a).)

Thus, on remand, the respondents will be required to

demonstrate that punitive damages are appropriate

under the test set forth by this Court.

Besides, the respondents are wrong in claiming that

Lorillard failed to demonstrate that it is an independent,

unrelated successor-in-interest to P. Lorillard, and that

the conduct at issue had stopped years before P. Lorillard

was purchased by an unrelated company. There is no

dispute that P. Lorillard was acquired in November 1968

by Loews Theaters, Inc. RT 2328-29. Loews Theaters, Inc.

was completely independent of P. Lorillard at the time of

the merger. There is also no dispute that P. Lorillard

ceased manufacturing the asbestos-containing Kent ciga-

rette filter in 1956, and the filter has not been manufac-

tured or marketed since. (Petition, pp. 3-4.) Lorillard, the

distant successor-in-interest to P. Lorillard, has done

nothing wrong. Consequently, if this Court adopts the

test for imposition of punitive damages on successor

corporations followed by the Sixth Circuit and the

Supreme Courts of West Virginia and Wisconsin, the

al lala

punitive damages award against Lorillard must be

reversed.

CONCLUSION

Petitioner Lorillard demonstrated in its Petition that

a twenty-year-old split of authority exists among the

Circuits and the state courts of last resort respecting the

circumstances in which a successor corporation may be

assessed punitive damages without proof of independent

wrongdoing. The respondents concede that the split

exists and offer no valid response to Lorillard’s argu-

ments.

The respondents admit that the eighteen state and

federal cases cited by Lorillard as proof of the split in

authority differ markedly in their approach to imposition

of punitive damages on successor corporations.

Contrary to the respondents’ representations, the

record plainly shows that Lorillard raised the question

presented here before the trial court and the Court of

Appeal, and each court resolved the issue.

Finally, respondents improperly raise an argument

on the merits of this case in opposition to the petition,

claiming that Lorillard cannot satisfy the tests proposed

for imposition of punitive damages on successors by

courts on either side of the split in authority, but the

record is to the contrary.

10

The petition for writ of certiorari should be granted.

Dated: April 23, 1998.

Respectfully submitted,

KevIN J. DUNNE

Counsel of Record

SepGwick, DeTEeRT, MORAN

& ARNOLD

Counsel for Petitioner Lorillard, Inc.

App. 1

LEWIS L. FENTON - BAR NO. 22211

LARRY E. HAYES - BAR NO. 95077

FENTON & ZELLER

A Professional Corporation

Post Office Box 791

2801 Monterey-Salinas Highway

Monterey, California 93942-0791

Telephone: (408) 373-1241

DAVID K. HARDY

WILLIAM S. OHLEMEYER

MARK J. EVANS

SHOOK, HARDY & BACON

One Kansas City Place

1200 Main Street

Kansas City, Missouri 64105-2118

Telephone: (816) 474-6550

Attorneys for Defendant LORILLARD, INC.

SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR THE COUNTY OF SAN FRANCISCO

MILTON J. HOROWITZ NO. 965245

and SHIRLEY

)

HOROWITZ, . DEFENDANT

ee ) LORILLARD, INC.’S

Plaintiffs, | BRIEF DENYING

V. ) PLAINTIFFS’ RECOVERY

RAYBESTOS- ) OF PUNITIVE

) DAMAGES

MANHATTAN, INC.,

et al., )

Defendants.

)

App. 2

I. INTRODUCTION

Lorillard, Inc., as a successor corporation, should not

be held liable for any punitive damages awarded to the

plaintiffs. Plaintiffs seek to recover punitive damages

against Lorillard, Inc. for injuries allegedly caused, in

part, by plaintiffs’ use of Kent cigarettes, which employed

asbestos-containing filters. These cigarettes were pro-

duced from 1952 to 1956, and at no time after 1956 were

these cigarettes available.

P. Lorillard, a corporation which had been in exis-

tence since 1760, manufactured and distributed these

allegedly defective cigarettes. In 1968, however, Lorillard,

Inc. succeeded P. Lorillard; in no way was Lorillard, Inc.

directly or indirectly involved with or responsible for any

decisions regarding the production, distribution, or mar-

keting of these asbestos-containing cigarettes. In fact,

these cigarettes were on the market for more than a

decade before Lorillard, Inc. even came into existence. In

short, since Lorillard, Inc. had no control over the deci-

sions to produce these cigarettes, it should not be held

responsible for any punitive damages. Given the over-

riding purposes of punishment and deterrence which

underlie an award of punitive damages, as construed

under California law, Lorillard should not be held liable

for any punitive damages premised on the actions of an

allegedly culpable predecessor corporation. Nevertheless,

even if the court should find that a successor corporation

can be held liable for its predecessor’s punitive liability,

the plaintiffs have the burden of establishing the grounds

for holding the successor liable.

|

Ee RES Se ee ee ee

App. 3

[TEXT DELETED]

B. To Hold Lorillard Liable for the Punitive Dam-

ages Based on Its Predecessor’s Action Wouid

Subvert the Goals of Punishment and Deterrence.

It would not only be patently unfair to punish

Lorillard for defective products for which it had no con-

trol, but such an award would in no way deter future bad

conduct. California courts hold that punitive damage lia-

bility is not imposed on the basis of vicarious fault,

noting that punitive damages “will have no deterrent

effect if awarded against a party not responsible for the

wrong.” Hartman v. Shell Oil Co., 68 Cal. App. 3d 240, 249,

137 Cal. Rptr. 244 (1977) (citing 4 Witkin, Summary of

California Law, 1974, Torts, § 855, p. 3147). Likewise, the

California Supreme Court has held that “punitive dam-

ages may be visited only upon the actual wrongdoer in

proportion to his guilt”. Evans, supra, 31 P.2d at 395

(emphasis added). Here, P. Lorillard produced the

asbestos-containing cigarettes from 1952 to 1956;

Lorillard, Inc. did not succeed P. Lorillard until 1968 —

more than a decade after any of the alleged wrongful

conduct occurred. The persons who would bear the brunt

of such an award of punitive damages would be current

management, directors, shareholders, employees, and

customers, all of whom had nothing to do with the

alleged misconduct that occurred nearly four decades

ago.

Recognizing the qualitatively different nature

between compensatory and punitive damages, the court

in Related Asbestos Cases refused to hold successor corpo-

rations liable for punitive damages, even though they

App. 4

may be liable for compensatory damages premised on the

conduct of their predecessors:

[W]e conclude that California would not expand

the reach of (cases holding successor’s liable for

compensatory damages) to hold Celotex liable

for punitive damages under the present circum-

stances. The justifications underlying successor

liability for compensatory damages articulated

in Ray v. Alad simply are not present in the

instant case.

Id. at 822.

In refusing to hold the successor corporation puni-

tively liable, the court in Related Asbestos Cases evaluated

the California Supreme Court’s concerns that warranted

holding a successor corporation liable. Specifically, the

court noted that “punitive damages provide a windfall to

a plaintiff [and if] the plaintiff is unable to recover puni-

tive damages, he will not suffer unrectified injury.” Id.

Furthermore, the court stated that “the assets of successor

corporation could arguably suffer such serious depletion

as a result of punitive damage suits, that the corporation

would be unable to provide compensatory damages to

future plaintiffs genuinely in need of monetary recovery.”

Id.

Citing one of the established rationales for strict lia-

bility, the court noted that a successor corporation could

not easily assume a risk-spreading/role:

The probability and amount of punitive dam-

ages would be extremely difficult to anticipate,

and moreover, California law does not permit

App. 5

insurance coverage to include liability for puni-

tive damages.

Id. (citations omitted).

In refusing to hold a successor corporation punitively

liable, the court further noted that the successor had

“sufficiently assumed the ‘burden’ which ‘runs’ with its

enjoyment of the predecessor’s goodwill when it is ren-

dered liable for the product’s defectiveness.” Id. at 823.

In short, the court doubted “that California would

choose to expand the aegis of punitive liability in the

context of mass product liability litigation.” Id. (emphasis

in original). Such justifications equally apply in this case,

thereby warranting the court’s refusal to impose punitive

damages on Lorillard as a successor corporation.

Furthermore, the imposition of successor liability for

punitive damages does not serve an appropriate punish-

ment function because innocent shareholders of Lorillard,

the successor corperation, will be punished as a result.

Cf., Western Resources Life Ins. Co. v. Gerhardt, 553 S.W. 2d

783, 787 (Tex. App. 1977) (when presented with this argu-

ment, the court conceded the “logicof [defendant’s] argu-

ment with respect to their liability for exemplary

damages”). Corporations are legal entities, and this fic-

tional existence is their raison d’etre. In theory, punitive

awards are levied against the corporate fisc (i.e., the

corporate shareholders) because the wrongful conduct of

corporate employees and agents is charged to the corpo-

ration. The wrongful conduct for which shareholders are

punished, and from which they are deterred, is their

inattention to the actions of the corporate agents. Levying

App. 6

punitive awards may make some sense when the corpora-

tion that employs the tortfeasor is called upon to pay the

punitive damages, because presumably the same share-

holders who were inattentive to the tortfeasor’s action

will feel the bite of the punitive award. In short, the

effectiveness of this punitive sting hinges on its applica-

tion to the actual perpetrators.

Applied to a successor corporation, however, both the

punishment and deterrence functions of punitive liability

are misdirected because the punished shareholders are

not the ones guilty of inattention. There was no way

Lorillard, Inc.’s shareholders, who took over P. Lorillard

in 1968, could have controlled the actions of the prede-

cessor corporation, P. Lorillard, from 1952 through 1956,

when the asbestos-containing cigarettes were produced.

Therefore, hitting a successor corporation’s shareholders,

who are guilty of no willful or wanton conduct or inatten-

tion to the corporate management, with such damages is

manifestly unjust and serves no purpose but to grant an

unwarranted windfall to an already compensated plain-

tiffs.

C. To Recover Punitive Damages, the Plaintiffs have

the Burden of Proving the Successor Corporation

Committed the Wrongful Acts

In light of this rationale of punishment and deter-

rence underlying punitive damages, the plaintiffs, in

order to recover such damages from a successor corpora-

tion, have the burden of proving the successor corporation's

wrongful conduct, and not just that of the predecessor

corporation. In Related Asbestos Cases, the court faulted

App. 7

the plaintiffs for failing to meets its burden, noting that

the plaintiffs “proffered no evidence [of] culpable and

responsible officers” in the successor corporation. Related

Asbestos Cases, supra, 566 F. Supp. 823. Furthermore,

although the court in Marks mistakenly focused on the

corporate acquisition for determining successor liability,

it nevertheless required “evidence [to] establish that [the

successor corporation] succeeded to the liability of [the

predecessor],” clearly implying a burden of proof on

plaintiffs’ part “before [the successor corporation] may be

found liable for punitive damages.” Marks, supra, 232 Cal.

Rptr. at 596. When dealing with the onerous penalty of

punitive damages, it is only logical that the plaintiff, who

stands to reap a windfall, will have to establish the pro-

priety of holding a successor corporation liable for such

damages in order to recover.

Courts in other jurisdictions, acknowledging this

compelling need to focus on the actual wrongdoers, place

the burden of proving the successor’s punitive liability

on the plaintiff. For example, the Pennsylvania Supreme

Court, in determining whether or not to impose the jury’s

award of punitive damages against a successor corpora-

tion, analyzed separately the propriety of an award of

punitive damages, and looked beyond the form of the

transaction to determine whether or not those actually

responsible for the wrongful conduct were held liable.

Martin v. Johns-Manville, 469 A.2d 655 (Pa. 1983), reversed

on other grounds, 494 A.2d 1088 (1985). The court required

the plaintiff to prove that the “identity of the successor

with its predecessor as to justify the conclusion that those

responsible for the reckless conduct of the predecessor

will be punished and the successor will be deterred from

App. 8

similar conduct.” Id. at 667. Similarly, the New Jersey

Supreme Court also required the plaintiff to demonstrate

that persons involved in the reckless conduct of the pre-

decessor corporation became involved with the successor

corporation after the corporate restructuring. Brotherton v.

Celotex Corp., 493 A.2d 1337, 1343 (N.J. 1985). While these

courts hold that in order for plaintiffs to recover punitive

damages, they must identify those who actually commit-

ted the wrongful conduct, i.e., that the plaintiffs have the

burden of proving the successor corporation’s actual

wrongdoing, it is equally significant that these courts

emphasized the need to focus not on the corporate struc-

ture, but on the purposes for which punitive liability-was

designed.

[TEXT DELETED]

[CT 1566, 1572-77]

App. 9

LEWIS L. FENTON - BAR NO. 22211

LARRY E. HAYES - BAR NO. 95077

FENTON & ZELLER

A Professional Corporation

Post Office Box 791

2801 Monterey-Salinas Highway

Monterey, California 93942-0791

Telephone: (408) 373-1241

DAVID K. HARDY

WILLIAM S. OHLEMEYER

MARK J. EVANS

SHOOK, HARDY & BACON

One Kansas City Place

1200 Main Street

Kansas City, Missouri 64105-2118

Telephone: (816) 474-6550

Attorneys for Defendant LORILLARD, INC.

SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR THE COUNTY OF SAN FRANCISCO

MILTON J. HOROWITZ

and SHIRLEY

HOROWITZ,

NO. 965245

)

)

) DEFENDANT

at ) LORILLARD, INC.’S

Plaintiffs, ) REPLY TO PLAINTIFFS’

v. ) TRIAL BRIEF SEEKING

PUNITIVE DAMAGES

RAYBESTOS-

)

)

)

)

MANHATTAN, INC.,

et al.,

Defendants.

Under California law, Lorillard, Inc., should not be

held liable for punitive damages purportedly caused by

App. 10

an asbestos-containing cigarette filter that was manufac-

tured by P. Lorillard Company from 1952 to 1956. P.

Lorillard’s merger into Lorillard Corporation (a prede-

cessor of Lorillard, Inc.) in 1968 is an insufficient basis

under California law to warrant the imposition of puni-

tive liability on the succeeding corporation.

[TEXT DELETED]

Finally, plaintiffs contend that successor liability for

punitive damages is constitutional under the United

States Supreme Court’s recent due process decisions

regarding punitive damages, citing Pacific Mutual Life Ins.

Co. v. Haslip, 113 L.Ed.2d 1 (1991) and TXO Production

Corp. v. Alliance Resources Corp., 125 L.Ed.2d 366 (1993).

These decisions, however, do not address the constitu-

tionality of holding a corporation liable for punitive dam-

ages for conduct in which the current owners and/or

management of the corporation played no part. In fact,

factual circumstances involving successor liability such as

the circumstances between P. Lorillard and Lorillard, Inc.

have not been specifically addressed by the United States

Supreme Court. The California Supreme Court, however,

has specifically held that “punitive damages may be vis-

ited only upon the actual wrongdoer in proportion to his

guilt.” Evans, 31 P. 2d at 395 (emphasis added). Moreover,

the California Supreme Court noted in Ray that when the

United States Supreme Court considers whether an

employer who acquires and continues to operate a busi-

ness succeeds to the prior operator’s labor obligations,

the Supreme Court “refuses to be bound by [the general

rules of state law on corporate succession] where their

application would unduly thwart the public policies

underlying the applicable labor law.” Ray, 560 P.2d at 8.

App. 11

Likewise, given the important “public policies” of pun-

ishment and deterrence which form the basis for punitive

damages, this Court should critically analyze whether

punishing Lorillard, Inc. for conduct wholly unrelated to

its actions effectively furthers such policy goals. To do so,

in short, denies Lorillard, Inc. of its due process guaran-

teed under the California and United States Constitu-

tions.

[TEXT DELETED]

[CT 1748, 1753-54]

App. 12

No. A072695

COURT OF APPEAL

STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FIVE

MILTON HOROWITZ and

SHIRLEY HOROWITZ,

Plaintiffs and Respondents,

v.

LORILLARD, INC., et al.,

Defendants and Appellants.

APPELLANT LORILLARD’S OPENING BRIEF

On Appeal from a Judgment of the

San Francisco County Superior Court

(No. 965245)

Honorable Winton McKibbon, Judge

KEVIN J. DUNNE (No. 40030)

FREDERICK D. BAKER (No. 111277)

KIRK C. JENKINS (No. 177114)

SEDGWICK, DETERT, MORAN & ARNOLD

One Embarcadero Center, i6th Floor

San Francisco, California 94111

Telephone: (415) 781-7900

se tit PN Se

App. 13

WILLIAM S. OHLEMEYER

SHOOK, HARDY & BACON

One Kansas City Place

1200 Main Street

Kansas City, Missouri 64105

Telephone: (816) 474-6550

Attorneys for Appellant

LORILLARD, INC.

[TEXT DELETED]

D. THE TRIAL COURT ERRED IN PERMITTING

THE JURY TO AWARD PUNITIVE DAMAGES

AGAINST LORILLARD, A SUCCESSOR COR-

PORATION WHICH NEITHER PRODUCED

ASBESTOS-CONTAINING KENT NOR WAS

GUILTY OF ANY INDEPENDENT WRONG-

DOING

The trial court permitted the jury to award $560,000

in punitive damages against Lorillard, rejecting

Lorillard’s argument that punitive damages were not

available on these facts; an unrelated corporation had

acquired the company whose conduct was being chal-

lenged long after the alleged misconduct had ceased. (RT

at 2352-55; CT at 1566-78, 1713-15.) [Footnote deleted]

The United States Supreme Court first addressed the

constitutional implications of punitive damage awards in

Pacific Mutual Life Insurance Co. v. Haslip (1991) 499 U.S. 1.

There, for the first time, the Court held that the rules of

due process were properly applicable to punitive damage

awards. (499 U.S. at 15-18.) The Court noted, however,

that punitive damages had been accepted in the law for

generations, and relied upon that history to reject the

claim that punitive damages awards inherently violated

the due process clause: “ ’ “If a thing has been practiced

App. 14

for two hundred years by common consent, it will need a

strong case for the Fourteenth Amendment to affect

it.”’” (499 U.S. at 17, quoting Sun Oil Co. v. Wortman

(1988) 486 U.S. 717, 730.)

But the Haslip Court’s refusal to invalidate punitive

damages per se under the due process clause does not

mean that an award of punitive damages against a suc-

cessor corporation without a showing of fault is immune

from due process attack. The Haslip Court relied heavily

on the historical acceptance of punitive damages in the

common law. No such historical background exists for the

proposition that punitive damages can be imposed on |

successor corporations without fault.

In fact, the overwhelming consensus of courts around

the country is that punishment should not be imposed on

innocent parties. As the California Supreme Court held in

Evans v. Gibson (1934) 220 Cal. 476, 490, since the purpose

of punitive damages is punishment and deterrence, the

reason for such damages ceases to exist with the death of

the wrongdoer.

The law has long recognized that punitive damages

“will have no deterrent effect if awarded against a party

not responsible for the wrong.” (Hartman v. Shell Oil Co.

(1977) 68 Cal.App.3d 240, 249.) For this reason, courts

have held, for example, that innocent partners cannot be .

punished for the fraud of their partners, Duncan v.

Henington (1992) 114 N.M. 100, 102-03, 835 P.2d 816,

818-19; In Re WPMK Corp. (Bankr. D. Haw. 1986) 59 B.R.

991, 997; Husted v. McCloud (Ind. 1983) 450 N.E.2d 491,

495, superseded on other grounds, Ind. Code § 34-4-30-2;

Bt

App. 15

that punitive damages are only available against a princi-

pal for the misconduct of his agent given proof that (1)

the agent was unfit and the principal was reckless in

employing him; (2) the principal authorized or ratified

the conduct; or (3) the agent involved in the misconduct

was a managerial level employee of the principal acting

within the scope of his employment (Egan v. Mutual of

Omaha Ins. Co., 24 Cal.3d at 822; Restatement (Second) of

Torts, § 909); and that punitive damages are not available

against the estate of a tortfeasor. (Jonathan Woodner Co. v.

Breeden (D.C. 1995) 665 A.2d 929, 939-40; Parker v. Artery

(Wyo. 1995) 889 P.2d 520, 525; Evans v. Gibson, 220 Cal.2d

at 490; Restatement (Second) of Torts, § 926(b).)

The courts have long recognized that the imposition

of punishment upon a party without a finding of fault

deprives that party of liberty and property without due

process of law. (St. Ann v. Palisi (5th Cir. 1974) 495 F.2d

423, 426 (“personal guilt is a fundamental element in the

American scheme of liberty”); Commonwealth v. W. P.

(1992) 417 Pa. Super. 192, 199, 612 A.2d 438, 441 (“Punish-

ment of the innocent is the clearest denial of life, liberty

and property without due process of law”); see TXO

Production Corp. v. Alliance Resource Corp. (1993) 509 U.S.

443, 454 & n. 17 (recognizing that the Court has long held

that there are certain constitutional limits beyond which

punitive damages may not go); Bordenkircher v. Hayes

(1978) 434 U.S. 357, 363 (“To punish a person because he

has done what the law plainly allows him to do is a due

process violation of the most basic sort . . . and for an

agent of the State to pursue a course of action whose

objective is to penalize a person’s reliance on his legal

rights is ‘patently unconstitutional’ ”); Weber v. Aetna Cas.

App. 16

& Sur. Co. (1971) 406 U.S. 164, 175 (rejecting imposition of

burdens on illegitimate alien children, noting the “basic

concept of our system that legal burdens should bear

some relationship to individual responsibility or wrong-

doing”); Southwestern Telegraph & Telephone Co. v. Danaher

(1915) 238 U.S. 482, 490-91 (invalidating penalty under

Due Process clause for conduct that involved “no inten-

tional wrongdoing; no departure from any prescribed or

known standard of action, and no reckless conduct”);

Jonathan Woodner Co. v. Breeden, 665 A.2d at 939-40 (“[T]o

punish the innocent ignores our basic philosophy of jus-

tice”); see also Bell v. Wolfish (1979) 441 U.S. 520 (finding

that punishment could not constitutionally be imposed

on pre-trial detainees, who retained the presumption of

innocence); Miller v. Carson (5th Cir. 1977) 563 F.2d 741,

746 & n.6 (same).) |

ee ee ee

Nor can the plaintiffs mend the constitutional defects

in this punitive damage award by claiming that punish-

ment was imposed not on Lorillard, but on P. Lorillard

Company, and that Lorillard simply acquired that lia-

bility when it acquired the successor to P. Lorillard Com-

pany. (Marks v. Minnesota Mining & Manufacturing Co.

(1986) 187 Cal.App.3d 1429, 1435 (suggesting that puni-

tive damages may be imposed on successor corporation

when a de facto merger has occurred, because the surviv-

ing corporation acquires the liabilities of its predecessor);

contra In re Related Asbestos Cases (N.D. Cal. 1983) 566

F.Supp. 818, 825.)

Counsel for the plaintiffs urged the jury repeatedly

during her closing argument in the punitive damages

phase of the trial to punish Lorillard, not the defunct

corporation P. Lorillard Company:

App. 17

The net worth of Lorillard is $402,195,000. That’s

net worth. That’s after all of the salaries have

been paid, after all the capital improvements

have been made, after any debt has been paid.

That’s the balance sheet at the bottom after

everything is taken out. . . . That’s what net

worth is. And they made $402,000,000. This is

1990 — up till June of ‘95, I believe the date is; as

of June 30th, 1995... an in order to punish a

company, you can’t give them a two-dollar fine.

Because a two-dollar fine to a $402,000,000 com-

pany is like slapping them on the pinky. They’d

barely feel it. They wouldn’t have any response

to it. You’ve got to send a large enough message

for it to have an effect, for them to feel it.

(RT at 2325.)

I would suggest that it should be larger for

Lorillard, because they . . . have more money, so

they need to be told in greater terms that this is

not something that companies should do.

(RT at 2326.)

And you need to tell them it was not a good

idea. It wasn’t a good idea back then to put out

a product that they hadn’t tested, and when

they tested found out it caused harm and it isn’t

a good idea today —- and, by the way, in doing

that, you are telling them and you are telling

every other company: Don’t do that kind of

reckless behavior . . . The deterrent effect is to

send a message to these companies that they

shouldn’t behave or engage in this behavior

again. They are both still marketing products.

They are both still out there selling things. And

if you send them a message that says it’s okay to

do this, then that message gets passed on to the

App. 18

products that they sell today and that they sell

into the future, and that is something that

shouldn’t be done.

(RT at 2327.)

Counsel for the plaintiffs invited the jury to impose

punishment on Lorillard based upon its current activities

and its current worth. Although counsel erroneously told

the jury that Lorillard and P. Lorillard were the same

company (RT at 2327-28), there was not a scintilla of

evidence in the record showing that Lorillard did any-

thing wrong. Imposing punitive damages against

Lorillard without such proof violated the due process

clause of the Fourteenth Amendment.

[TEXT DELETED]

App. 19

No. A072695

COURT OF APPEAL

STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FIVE

MILTON HOROWITZ and

SHIRLEY HOROWITZ,

Plaintiffs and Respondents,

V.

LORILLARD, INC., et al.,

Defendants and Appellants.

APPELLANT LORILLARD’S REPLY BRIEF

On Appeal from a Judgment of the

San Francisco County Superior Court

(No. 965245)

Honorable Winton McKibbon, Judge

WILLIAM S. OHLEMEYER KEVIN J. DUNNE

SHOOK, HARDY & (No. 40030)

BACON FREDERICK D. BAKER

One Kansas City Place (No. 111277)

1200 Main Street KIRK C. JENKINS

Kansas City, Missouri (No. 177114)

64105 SEDGWICK, DETERT,

Telephone: (816) 474-6550 MORAN & ARNOLD

One Embarcadero Center,

16th Floor

San Francisco, California

94111

Telephone: (415) 781-7900

Attorneys for Appellant

LORILLARD, INC.

App. 20

[TEXT DELETED]

3. The Imposition of Punitive Damages

Against A Party Without Evidence of

Wrongdoing Violates the Due Process

Clause of the Federal Constitution

Lorillard demonstrated that to the extent the trial

court imposed punitive damages without evidence of

wrongdoing, the judgment violated the Due Process

clause of the United States Constitution. (AOB at 61-65.)

Although the United States Supreme Court refused to

invalidate punitive damages per se under the due process

clause in Pacific Mutual Life Insurance Co. v. Haslip (1991)

499 U.S. 1, that refusal was based in part upon the long

history in the American and English common law of

punitive damages. (499 U.S. at 15-18.) No such historical

background exists for the imposition of punitive damages

upon innocent parties; in fact, the courts have long recog-

nized that the imposition of punishment on parties with-

out a finding of fault represents the most fundamental

due process violation. (AOB at 63-65.)

Plaintiffs offer virtually no response to Lorillard’s

argument. First, plaintiffs argue that the Supreme Court

invalidated a punitive damages award for the first time in

BMW of North America, Inc. v. Gore (1996) ___ U.S. __, 116

S.Ct. 1589, a case which plaintiffs claim “turned on a

unique set of facts.” (RB at 93-94.) Lorillard has obviously

not contended differently, since Lorillard did not cite

BMW in its opening brief. Lorillard’s position before this

Court is that the imposition of punishment without a

finding of wrong-doing is a violation of the due process

clause, a principle recognized by the United States

a

App. 21

Supreme Court as long ago as 1915. (AOB at 64-65 and

cases cited therein.)

The trial court denied Lorillard’s motion for a

directed verdict and permitted the jury to impose

$560,000 in punitive damages despite that the record

showed no evidence whatever of wrongdoing by

Lorillard. The imposition of punitive damages against

Lorillard on this record was a violation of Lorillard’s

rights to due process of law. The judgment should be

reversed and remanded for a new trial.

[TEXT DELETED]