INTRODUCTION


On January 1, 1996, the legislature codified the law of punitive damages in North Carolina. Chapter 1D lays out the procedural and substantive aspects of litigation as it relates to punitive damages claims. Even though the statute has been in effect for more than three years, there are no appellate cases interpreting its application. As a result, the application of this new law is largely determined by trial judges and trial lawyers. This manuscript will highlight the significant changes Chapter 1D has brought in punitive damages litigation and explore how judges and defense counsel have crafted their own interpretations of Chapter 1D.


COMMON LAW

Prior to enactment of Chapter 1D, punitive damages litigation was a product of the common law. A plaintiff could allege facts giving rise to intentional acts, malice, oppression, gross negligence or a reckless and wanton disregard of his rights to create a punitive damages claim. Cook v. Lanier, 267 N.C. 166, 147 S.E.2d 910 (1966). Assuming the plaintiff can offer sufficient evidence to support his claim for punitive damages, a judge will allow the jury to consider whether punitive damages are appropriate and the amount of such damages. During the trial, the courts routinely admitted evidence of the defendant's financial worth for the jury's consideration. E.g., Hinson v. Dawson, 244 N.C. 23, 92 S.E.2d 393 (1956) (holding that sufficient pleadings and evidence as to punitive damages liability were necessary to allow admission of defendant's financial information to the jury in a wrongful death case); Roth v. Greensboro News Co., 217 N.C. 13, 6 S.E.2d 882 (1940) (noting that submission of punitive damages to the jury requires a heightened evidentiary showing); Patrick v. Williams, 102 N.C. App. 355, 402 S.E.2d 452 (1991) (allowing plaintiffs to discover defendant's net worth where trial court improperly granted defendant's motion for summary judgment on punitive damages).

The standard jury instruction in punitive damages cases read:

The (state number) issue read:

"Was the defendant's (name tort) accompanied by outrageous or aggravated conduct?"

You are to answer this issue only if you have answered (identify issues and specify answers necessary for a consideration of this issue).

On this issue the burden of proof is on the plaintiff. This means that the plaintiff must prove, by the greater weight of the evidence, that the defendant's (name tort) was accompanied by outrageous or aggravated conduct. Outrageous or aggravated conduct may include one or more of the following: actual malice, oppression, a gross and willful wrong, insult, rudeness, indignity or a reckless or wanton disregard of the plaintiff's rights.

Finally, as to this issue on which the plaintiff has the burden of proof, if you find by the greater weight of the evidence that the defendant's (name tort) was accompanied by outrageous or aggravated conduct such as one or more of the following: actual malice, oppression, a gross and willful wrong, insult, rudeness, indignity, or a reckless or wanton disregard or the plaintiff's rights, then it would be your duty to answer this issue "Yes" in favor of the plaintiff.

If, on the other hand, you fail to so find, then it would be your duty to answer this issue "No" in favor of the defendant.

The (state number) issue reads:

"What amount of punitive damages, if any, does the jury in its discretion award to the plaintiff?"

You are to answer this issue only if you have answered (identify issues and specify answers necessary for a consideration of this issue).

Whether to award punitive damages is a matter within the sound discretion of the jury. Punitive damages are not awarded for the purpose of compensating the plaintiff for his [injury] [damage], nor are they awarded as a matter of right. In deciding whether to award punitive damages, you must determine that there is a need to punish the defendant for his conduct, or to deter the defendant or others from engaging in this or similar conduct in the future, or to make an example out of the defendant.

Furthermore, if you decide, in your discretion, to award punitive damages, any amount you award must bear a rational relationship to the sum reasonably needed to punish the defendant for his conduct, or to deter the defendant or others from engaging in this or similar conduct in the future, or to make an example out of the defendant.

Finally, if you determine, in your discretion, to award punitive damages, then, you may award to the plaintiff an amount which bears a rational relationship to the sum reasonably needed to punish the defendant, or to deter the defendant or others from engaging in this or similar conduct in the future, or to make an example out of the defendant. That amount should be written in the space provided on the verdict sheet.

If, on the other hand, you determine, in your discretion, not to award the plaintiff any amount, then you should write the word "None" in the space provided on the verdict sheet.

N.C. Pattern Jury Instruction 810.00 and 810.01. Thus, there were few standards to help jurors decide whether to award punitive damages and how much to award.


OVERVIEW OF CHAPTER 1D

In some ways, Chapter 1D merely codified the rules that had been developed by the common law. In other ways, Chapter 1D radically changed how punitive damages cases are tried and the amount of damages that can be awarded. The following is a section-by-section outline of Chapter 1D, along with a commentary on its effect.

Sec. 1D-1. Purpose of punitive damages.

Punitive damages may be awarded, in an appropriate case and subject to the provisions of this Chapter, to punish a defendant for egregiously wrongful acts and to deter the defendant and others from committing similar wrongful acts.

Comment: This section simply codifies the courts' prior holdings concerning the purpose of punitive damages.

Sec. 1D-5
. Definitions.

As used in this Chapter:

(1) "Claimant" means a party, including a plaintiff, counterclaimant, cross-claimant, or third-party plaintiff, seeking recovery of punitive damages. In a claim for relief in which a party seeks recovery of punitive damages related to injury to another person, damage to the property of another person, death of another person, or other harm to another person, "claimant" includes any party seeking recovery of punitive damages.

(2) "Compensatory damages" includes nominal damages.

(3) "Defendant" means a party, including a counterdefendant, cross-defendant, or third-party defendant, from whom a claimant seeks relief with respect to punitive damages.

(4) "Fraud" does not include constructive fraud unless an element of intent is present.

(5) "Malice" means a sense of personal ill will toward the claimant that activated or incited the defendant to perform the act or undertake the conduct that resulted in harm to the claimant.

(6) "Punitive damages" means extracompensatory damages awarded for the purposes set forth in G.S. 1D-1.

(7) "Willful or wanton conduct" means the conscious and intentional disregard of and indifference to the rights and safety of others, which the defendant knows or should know is reasonably likely to result in injury, damage, or other harm. "Willful or wanton conduct" means more than gross negligence.

Comment: This section provides a starting point for defining terms used in Chapter 1D, and in many ways, codifies the common law. However, note that the definition of "willful or wanton conduct" does not include gross negligence. This represents a change from the common law, in that a plaintiff can no longer recover punitive damages for gross negligence. A higher standard is required.

Sec. 1D-10. Scope of the Chapter.

This Chapter applies to every claim for punitive damages, regardless of whether the claim for relief is based on a statutory or a common-law right of action or based in equity. In an action subject to this Chapter, in whole or in part, the provisions of this Chapter prevail over any other law to the contrary.

Comment: This section makes clear that punitive damages may apply to any claim, regardless of whether it is legal or equitable. It also makes clear that Chapter 1D will supersede the common law where the two conflict.

Sec. 1D-15. Standards for recovery of punitive damages.

a) Punitive damages may be awarded only if the claimant proves that the defendant is liable for compensatory damages and that one of the following aggravating factors was present and was related to the injury for which compensatory damages were awarded:

    (1) Fraud.

    (2) Malice.

    (3) Willful or wanton conduct.

(b) The claimant must prove the existence of an aggravating factor by clear and convincing evidence.

(c) Punitive damages shall not be awarded against a person solely on the basis of vicarious liability for the acts or omissions of another. Punitive damages may be awarded against a person only if that person participated in the conduct constituting the aggravating factor giving rise to the punitive damages, or if, in the case of a corporation, the officers, directors, or managers of the corporation participated in or condoned the conduct constituting the aggravating factor giving rise to punitive damages.

(d) Punitive damages shall not be awarded against a person solely for breach of contract.

Comment: This section appears to codify the case law standard for punitive damages based on fraud, malice, or willful or wanton conduct. Again, note that gross negligence is not a sufficient basis to award punitive damages. The burden of proof has also been modified significantly. In most civil cases, the plaintiff is required to prove his case by the preponderance of the evidence. However, note that for punitive damages cases, the plaintiff must prove the existence of the aggravating factors by clear and convincing evidence. This is a significant change from prior law and can be used by defense counsel in several ways. First, you can make a motion for summary judgment or directed verdict on the punitive damages claim when plaintiff's evidence does not meet this standard. Second, if the case does go to the jury, you can use this higher standard to argue to the jury that punitive damages are not appropriate because plaintiff has not met his burden of proof.

This section also prohibits punitive damages based on vicarious liability. For example, in a case where a plaintiff is seeking to hold an employer liable for the actions of its employee based on an agency or vicarious liability theory, punitive damages may not be awarded against the employer unless the plaintiff can prove that the employer participated in or approved the aggravated conduct. Thus, in cases in which you represent a corporate defendant, you may be able to get a court to dismiss the plaintiff's claims for punitive damages on this basis.

Subsection (d) codifies that common-law rule that punitive damages cannot be awarded for mere breach of contract. If, however, the facts surrounding the breach also support a tort action, punitive damages were appropriate under the common law. King v. Insurance Co. of North Am., 273 N.C. 396, 159 S.E.2d 891 (1968). Presumably, the same rule will apply under Chapter 1D.

Sec. 1D-20. Election of extracompensatory remedies.

A claimant must elect, prior to judgment, between punitive damages and any other remedy pursuant to another statute that provides for multiple damages.

Comment: This section codifies existing case law that a plaintiff must elect between punitive damages and any other type of statutory damages. For example, in a case in which a plaintiff alleges separate claims for fraud and unfair and deceptive trade practices, the plaintiff can recover either (1) actual damages for fraud and punitive damages or (2) treble damages. This was the rule at common law. United Labs, Inc. v. Kuykendall, 102 N.C. App. 484, 403 S.E.2d 104 (1991), aff'd, 335 N.C. 183, 437 S.E.2d 374 (1993); Jennings Glass Co. v. Brummer, 88 N.C. App. 44, 362 S.E.2d 578 (1987); Mapp v. Toyota World, Inc., 81 N.C. App. 421, 344 S.E.2d 97, cert. denied, 318 N.C. 283, 347 S.E.2d 464 (1986).

However, there is significant disagreement among lawyers and judges as to when the plaintiff must choose his damages. Some judges would require plaintiffs to elect a remedy prior to submitting the compensatory damages issue to the jury. Others would allow the plaintiff to wait until after the jury comes back with a verdict on compensatory damages. Still others would allow the case to be tried all the way through the punitive damages stage and then allow the plaintiff to choose which verdict he wishes to accept. From a practical perspective, it seems that the last approach is the most logical. If both the compensatory and punitive portions of the case are tried before the plaintiff must elect, the plaintiff can compare what he would receive if compensatory damages were trebled versus what the jury has awarded him by way of punitives, and make an informed decision on which verdict he will accept.

Sec. 1D-25. Limitation on amount of recovery.

(a) In all actions seeking an award of punitive damages, the trier of fact shall determine the amount of punitive damages separately from the amount of compensation for all other damages.

(b) Punitive damages awarded against a defendant shall not exceed three times the amount of compensatory damages or two hundred fifty thousand dollars ($250,000), whichever is greater. If a trier of fact returns a verdict for punitive damages in excess of the maximum amount specified under this subsection, the trial court shall reduce the award and enter judgment for punitive damages in the maximum amount.

(c) The provisions of subsection (b) of this section shall not be made known to the trier of fact through any means, including voir dire, the introduction of evidence, argument, or instructions to the jury.

Comment: In a drastic change from the common law, this section sets a cap on punitive damages of three times the compensatory damages or $250,000, whichever is greater. Note that the jury is not told of this limitation in setting the award. The statute provides for an automatic reduction if the jury's verdict exceeds the amount set forth in the statute.

Sec. 1D-26. Driving while impaired; exemption from cap.

G.S. 1D-25(b) shall not apply to a claim for punitive damages for injury or harm arising from a defendant's operation of a motor vehicle if the actions of the defendant in operating the motor vehicle would give rise to an offense of driving while impaired under G.S. 20-138.1, 20-138.2, or 20-138.5.

Comment: This section excepts drunk driving cases from the cap on punitive damages. Thus, there is no limit on the amount of damages that can be awarded in these types of cases.

Sec. 1D-30. Bifurcated trial.

Upon the motion of a defendant, the issues of liability for compensatory damages and the amount of compensatory damages, if any, shall be tried separately from the issues of liability for punitive damages and the amount of punitive damages, if any. Evidence relating solely to punitive damages shall not be admissible until the trier of fact has determined that the defendant is liable for compensatory damages and has determined the amount of compensatory damages. The same trier of fact that tried the issues relating to compensatory damages shall try the issues relating to punitive damages.

Comment: This section significantly changes the trial procedure in cases involving punitive damages. First, the defendant has the option to bifurcate the compensatory damages portion of the trial from the punitive damages. The statute indicates that the trial judge must grant bifurcation if requested. During the first phase, the jury hears only evidence related to liability and compensatory damages and renders a verdict on those issues. No evidence of the defendant's financial worth is admitted during this stage. Assuming the court finds evidence sufficient to submit a punitive damage issue (under the clear and convincing evidence standard), the court will conduct a second trial for the sole purpose of determining punitive damages. In this second phase, the jury or judge will hear evidence relating to the factors set forth in Section 1D-35, which includes evidence of the defendant's financial worth. A verdict will then be returned on punitive damages. The same jury or judge will hear both phases of the trial.

Whether to request bifurcation is a strategy decision based on the facts of your case. If you decide to bifurcate and the jury gets to the punitive damages portion of the trial, they may feel compelled to award punitive damages because there has been a separate proceeding for that very purpose. The bifurcated procedure also prohibits you from asking potential jurors questions about punitive damages during voir dire, but those same jurors will be deciding the punitive damages portion of the case. If you do not bifurcate, you will have the ability to discuss punitive damages with potential jurors during voir dire, but you also open the door for the plaintiff to present evidence of aggravating conduct and the defendant's financial worth before the jury has rendered a verdict on liability and compensatory damages. Because bifurcation is a double-edged sword, you must carefully analyze your evidence and your opponent's evidence to determine how you want to proceed.

Sec. 1D-35. Punitive damages awards.

In determining the amount of punitive damages, if any, to be awarded, the trier of fact:

(1) Shall consider the purposes of punitive damages set forth in G.S. 1D-1; and

(2) May consider only that evidence that relates to the following:

    a. The reprehensibility of the defendant's motives and conduct.

    b. The likelihood, at the relevant time, of serious harm.

    c. The degree of the defendant's awareness of the probable consequences of its conduct.

    d. The duration of the defendant's conduct.

    e. The actual damages suffered by the claimant.

    f. Any concealment by the defendant of the facts or consequences of its conduct.

    g. The existence and frequency of any similar past conduct by the defendant.

    h. Whether the defendant profited from the conduct.

    i. The defendant's ability to pay punitive damages, as evidenced by its revenues or net worth.

Comment: This section gives the jury specific, concrete factors to consider when awarding punitive damages. This represents a significant change from the common law, where the jury was given little guidance on whether to assess punitive damages and how to determine an appropriate amount.

Sec. 1D-40. Jury instructions.

In a jury trial, the court shall instruct the jury with regard to subdivisions (1) and (2) of G.S. 1D-35.

Comment: The North Carolina Pattern Jury Instructions have been modified to reflect the changes in Chapter 1D. The standard charge on punitive damages now reads:

The (state number) issue reads:

"Is the defendant liable to the plaintiff for punitive damages?"

(You are to answer this issue only if you have awarded the plaintiff compensatory damages in conjunction with (state number(s) of compensatory damage issue(s).).

On this issue the burden of proof is on the plaintiff to prove three things. The plaintiff must prove the first thing by clear and convincing evidence. Clear and convincing evidence is evidence which, in its character and weight, establishes what the plaintiff seeks to prove in a clear and convincing fashion. You shall interpret and apply the words "clear" and "convincing" in accordance with their commonly understood and accepted meanings in everyday speech.

Thus, the first thing the plaintiff must prove, by clear and convincing evidence, is the existence of [fraud] [malice] [willful or wanton conduct].

[Fraud means a false representation of material fact made by the defendant with intent to deceive which was reasonably calculated to deceive and which did, in fact, deceive and damage the plaintiff because of his reasonable reliance on it.]

[Malice means a sense of personal ill will toward the plaintiff that activated or incited the defendant to perform the act or undertake the conduct that resulted in harm to the plaintiff.]

[Willful or wanton conduct means the conscious and intentional disregard of and indifference to the rights and safety of others, which the defendant knows or should know is reasonably likely to result in injury, damage or other harm. Willful or wanton conduct means more than gross negligence.]

The plaintiff must prove the second and third things by the greater weight of the evidence. The greater weight of the evidence does not refer to the quantity of the evidence, but rather to the quality and convincing force of the evidence. It means that you must be persuaded, considering all of the evidence, that the necessary facts are more likely than not to exist. These second and third things are:

Second, that the [fraud] [malice] [willful or wanton conduct] was related to the injury to the plaintiff for which you have already awarded compensatory damages.

Third, that the [defendant participated in] [the defendant's officers, directors or managers participated in or condoned] the [fraud] [malice] [willful or want conduct].

Finally, as to this issue on which the plaintiff has the burden of proof, if you find by the standards herein explained that the defendant is liable to the plaintiff for punitive damages, then it would be your duty to answer this issue "Yes" in favor of the plaintiff.

If on the other hand, you fail to so find, then it would be your duty to answer "No" in favor of the defendant.

The (state number) issue reads:

"What amount of punitive damages, if any, does the jury in its discretion award to the plaintiff?"

You are to answer this issue only if you have answered the (state number issue) "Yes" in favor of the plaintiff.

Whether to award punitive damages is a matter within the sound discretion of the jury. Punitive damages are not awarded for the purpose of compensating the plaintiff for his [injury] [damage], nor are they awarded as a matter of right.

If you decide, in your discretion, to award punitive damages, any amount you award must bear a rational relationship to the sum reasonably needed to punish the defendant for egregiously wrongful acts and to deter the defendant and others from committing similar wrongful acts. In making this determination, you may consider only that evidence which relates to

[the reprehensibility of the defendant's motives and conduct]

[the likelihood, at the relevant time, of serious harm (to the plaintiff or others similarly situated]

[the degree of the defendant's awareness of the probable consequences of his conduct]

[the duration of the defendant's conduct]

[the actual damages suffered by the plaintiff]

[any concealment by the defendant of the facts or consequences of his conduct]

[the existence and frequency of any similar past conduct by the defendant]

[whether the defendant profited by the conduct]

[the defendant's ability to pay punitive damages, as evidenced by his revenues or net worth].

Finally, if you determine, in your discretion, to award punitive damages, then you may award to the plaintiff an amount which bears a rational relationship to the sum reasonably needed to punish the defendant for egregiously wrongful acts and to deter the defendant and others from committing similar wrongful acts. That amount should be written in the space provided on the verdict sheet.

If, on the other hand, you determine, in your discretion, not to award the plaintiff any amount, then you should write the word "None" in the space provided on the verdict sheet.

N.C. Pattern Jury Instructions 810.05 and 810.06.

Sec. 1D-45. Frivolous or malicious actions; attorneys' fees.

The court shall award reasonable attorneys' fees, resulting from the defense against the punitive damages claim, against a claimant who files a claim for punitive damages that the claimant knows or should have known to be frivolous or malicious. The court shall award reasonable attorney fees against a defendant who asserts a defense in a punitive damages claim that the defendant knows or should have known to be frivolous or malicious.

Comment: This section creates a substantial penalty for both plaintiffs and defendants who attempt to raise frivolous claims or defenses in punitive damages cases. This statute requires the court to award reasonable attorneys' fees against a plaintiff who files a claim for punitive damages that is frivolous or malicious. Conversely, this section requires the court to award attorneys' fees against a defendant who asserts a defense that is frivolous or malicious. At least one judge in the survey indicated that this section should be used more often to cut down on frivolous claims.

Sec. 1D-50. Judicial review of award.

When reviewing the evidence regarding a finding by the trier of fact concerning liability for punitive damages in accordance with G.S. 1D-15(a), or regarding the amount of punitive damages awarded, the trial court shall state in a written opinion its reasons for upholding or disturbing the finding or award. In doing so, the court shall address with specificity the evidence, or lack thereof, as it bears on the liability for or the amount of punitive damages, in light of the requirements of this Chapter.

Comment: This section requires a trial judge to review the evidence carefully and give written reasons for upholding or overturning a punitive damages award. Unlike other post-trial motions that can be granted or denied without explanation, this statute mandates that trial judges issue a written analysis of the evidence and whether punitive damages were justified. This section provides an additional check against runaway verdicts or unwarranted punitive damages and allows the appellate courts to conduct a more thorough review on appeal because they will know exactly what evidence the court did and did not consider in setting a punitive damages award.

SURVEY RESULTS

Because there were no appellate decisions discussing Chapter 1D, I surveyed a random sample of superior court judges and NCADA members concerning their experiences with Chapter 1D. The results are printed below.

JUDGES' SURVEY ON CHAPTER 1D

(13 out of 26 Superior Court judges responding)

1. Since the enactment of Chapter 1D in January, 1997, how often have you had to apply it during motions or trial?

9 1 - 10

1 10 - 20

1 20 - 30


2. How often have you presided over a trial in which the punitive damages issue was bifurcated under Chapter 1D?

11 1 - 10

Of those cases, in what percentage did the jury return a punitive damages verdict?

100% 1

 50% 1

 10% 1

  0% 7

usually because the claim was dismissed at close of plaintiff's evidence)


3. Have you ever had an occasion to reduce the amount of punitive damages awarded pursuant to the cap imposed by Chapter 1D?

   Yes

12 No


4. How have you handled the plaintiff's request to discover financial information on the defendant when punitive damages are alleged in the complaint?

1
Deny until shortly before trial.

1
Allow free discovery of financial information whenever punitive damages are alleged in the complaint.

4
Allowing discovery of financial information, subject to a protective order on the scope of information produced and to whom it is produced.

5
Required the plaintiff to make a prima facie showing that it is entitled to punitive damages before allowing such discovery.

4
Require the defendant to file financial information with the court under seal, with such information to be released to the plaintiff shortly before trial.


5. In cases where both punitive damages and statutory damages are alleged ( such as under Chapter 75), when have you required the plaintiff to elect between the statutory damages and punitive damages?

2
Before the compensatory damages portion of the case is submitted to the jury.

1
After the jury returns a verdict on compensatory damages.

6
After the jury returns a verdict on punitive damages.


6. If you have any other experiences, insights or comments on Chapter 1D that you feel would be helpful for litigation attorneys, please describe below:

"A lawful claim for punitive damages arises very seldom."

"The awarding of attorneys' fees should be used to cut down on frivolous claims."

DEFENSE COUNSEL SURVEY ON CHAPTER 1D

(6 out of 35 NCADA members responding)

1. Since the enactment of Chapter 1D in January, 1997, how often have you had issues regarding its interpretation arise during motions or trial?

4 1 - 10


2. How many cases have you tried in which the punitive damages issue was bifurcated under Chapter 1D?

3 0

1 1 - 10

Of those cases, in what percentage did the jury return a punitive damages verdict? 0 % (4)


3. Have you ever had a judge reduce the amount of punitive damages awarded pursuant to the cap imposed by Chapter 1D?

  Yes

5 No


4. How have you handled the plaintiff's request to discover financial information about the defendant when punitive damages are alleged in the complaint?

2
Refuse to produce anything without a court order.

3
Produce the information, subject to a protective order on who can see it and the scope of the information produced.

Other

  • Obtain an order sealing net worth information pending motions to dismiss/ summary judgment.
  • Agree with opposing counsel to hold off production voluntarily until after a directed verdict ruling.
  • Produce only after summary judgment on punitives has been denied.
  • Object to production until plaintiff has made a prima facie showing of entitlement to punitive damages.

5. If you have been involved in motions to compel discovery of financial information, how has the judge ruled?

1
Motion denied.

2
Allow free discovery of financial information whenever punitive damages are alleged in the complaint.

6
Allowing discovery of financial information, subject to a protective order on the scope of information produced and to whom it is produced.

3
Required the plaintiff to make a prima facie showing that it is entitled to punitive damages before allowing such discovery.

2
Require the defendant to file financial information with the court under seal, with such information to be released to the plaintiff shortly before trial.


6. In cases where both punitive damages and statutory damages are alleged ( such as under Chapter 75), when has the Court required the plaintiff to elect between the statutory damages and punitive damages?

1
Before the compensatory damages portion of the case is submitted to the jury.

1
After the jury returns a verdict on compensatory damages.

1
After the jury returns a verdict on punitive damages.


7. If you have any other experiences, insights or comments on Chapter 1D that you feel would be helpful for litigation attorneys, please describe below:

"If financial information is discoverable, it should be limited to "net worth" at the time of trial."

"Carefully consider bifurcation – it may not always be the best strategy."

"The 'clear and convincing standard' makes great jury argument."


DISCOVERY ISSUES IN PUNITIVE DAMAGES LITIGATION

Chapter 1D does not specifically address the discovery issues that often arise in punitive damages litigation, and there are no North Carolina appellate decisions discussing how and when discovery of the defendant's financial information should be handled. However, federal courts and courts in other states have addressed the issue and adopted some rather interesting approaches. Outlined below is a fairly typical discovery dispute and arguments that defense counsel can use when confronted with a motion to compel.

Facts: Plaintiff has filed a complaint alleging fraud and unfair and deceptive trade practices. The plaintiff also alleges that he is entitled to punitive damages based on the defendant's willful and wanton conduct. In discovery, the plaintiff serves a set of interrogatories and request for production of documents asking for the defendant's financial statements and tax returns from the past five years. Defendant's counsel objects and does not produce the documents.

Subsequently, plaintiff's counsel takes the deposition of the defendant's corporate representative. Plaintiff's counsel asks a series of questions about the defendant's financial status. Defense counsel instructs her client not to answer these questions. Plaintiff files a motion to compel the defendant to produce the financial records, or in the alternative, allow him to take a second deposition of the corporate representative at the defendant's expense.

Analysis: The North Carolina state courts have never squarely addressed the issue of what circumstances would allow a plaintiff to discover the defendant's financial worth. The federal courts and courts in other states, on the other hand, have struggled with this issue and have required substantially more than mere allegations of punitive damages to compel discovery of financial information. Some jurisdictions hold that evidence regarding financial condition is not discoverable until after the trier of fact has determined the defendant's liability for punitive damages. James McLaughlin, Annotation, Necessity of Determination or Showing of Liability for Punitive Damages Before Discovery or Reception of Evidence of Defendant's Wealth, 32 A.L.R. 4th 432 (1982). For example, in Rupert v. Sellers, 48 A.D.2d 265 (N.Y.A.D. 4 Dept., 1975), the court held that evidence of the defendant's wealth could not be obtained until the jury had brought in a special verdict that the plaintiff was entitled to punitive damages. The court stated: "Not until plaintiff obtains such a special verdict that he is entitled to punitive damages is it necessary or important for him to know the defendant's wealth." Id. at 272; see also Campen v. Stone, 635 P.2d 1121 (Wyo. 1981) (requiring prima facie showing that viable issue existed as to punitive damages before pre-trial discovery of financial status of defendant would be allowed).

A similar procedure was required in James D. Volertsen Assoc., Inc. v. John T. Nothnagle, Inc., 48 A.D.2d 1007 (N.Y.A.D. 4 Dept. 1975). In that case, the court declared a split trial between compensatory and punitive damages and held that a determination on punitive damages would have to be made before financial information on the defendant could be discovered. "If plaintiffs obtain a special verdict entitling them to punitive damages against defendants, they may make immediate application for defendants to answer such interrogatory [concerning the present worth of the defendants]." Id. at 1007.

Other courts have required prima facie proof of the plaintiff's punitive damages claim before they would allow discovery of the financial condition of the defendant. James McLaughlin, Annotation, Necessity of Determination or Showing of Liability for Punitive Damages Before Discovery or Reception of Evidence of Defendant's Wealth, 32 A.L.R. 4th 432 (1982). For example, in Blount v. Wake Elec. Membership Corp., 162 F.R.D. 102 (E.D.N.C. 1993), the plaintiff's complaint contained a claim for punitive damages. Plaintiff moved to compel the defendants to produce profit and loss statements and tax returns for the past five years. Plaintiff argued that the financial condition of the defendant was a relevant factor to be considered in awarding punitive damages and was discoverable. Defendant, on the other hand, contended that plaintiff must make some kind of factual showing that a viable claim for punitive damages existed before allowing the discovery of financial worth. The court agreed with the defendant and held that it was premature to allow the discovery of financial information. The court ruled that the defendant would not be required to produce any financial information to the plaintiff until dispositive motions had been heard and ruled upon. If defendant were successful in getting the punitive damages claim dismissed, it would not be required to produce the financial records. If, however, the defendant's motion were not successful, defendant would be required to produce the documents. Id. at 104; see also Shearin v. Safelite Glass Corp., U.S. Dist. LEXIS 8115 (E.D.N.C. 1998) (unpublished opinion) (recognizing that plaintiff is not entitled to defendant's financial records until plaintiff has established a prime facie case for punitive damages).

Based on the policy expressed in these cases and Chapter 1D, you can argue that the court should deny the plaintiff's motion to compel the defendant to answer questions concerning its financial condition at this time. Mere allegations of punitive damages are not sufficient to allow discovery of such confidential information. At this point in the litigation, the plaintiff has not elected the punitive damages remedy, nor has he satisfied a higher evidentiary standard required to support a punitive damages claim. The plaintiff's claim for punitive damages is uncertain at best, and it would unduly prejudice the defendant to release such confidential information at this time.

You may also argue that attempts to compel the discovery of financial information may be an abuse of the discovery process. The courts have recognized that requiring a defendant to permit pre-trial examination of financial records could constitute undue pressure on the defendant to compromise unwarranted claims and can be used as a weapon by plaintiffs to unduly harass defendants. E.g., Rupert, 48 A.D.2d at 271.

The right of privacy and the right to keep confidential one's financial affairs is well recognized. . . . This information can be obtained at the trial if the trial progresses to the point where it becomes relevant. It seems oppressive and unreasonable to require these persons to disclose this information in advance when many things may happen between now and the trial that might make the disclosure unnecessary.

Hecht v. Pro-Football, Inc.
, 46 F.R.D. 605, 607 (D.D.C. 1969).

You can argue that the court should deny the plaintiff's motion to compel discovery of the defendant's financial information because discovery on this issue is unnecessary and premature. At this point in the litigation, plaintiff has not established that he is entitled to recover any actual damages – much less punitive damages. Even if actual damages are ultimately awarded, the plaintiff must elect between punitive damages for fraud and treble damages for his other statutory cause of action. If the plaintiff chooses punitive damages, then the court must scrutinize the plaintiff's evidence to determine whether he has met the "clear and convincing" standard. If so, a separate trial must be held to determine the amount of such damages. At this early stage of the litigation, it is doubtful that the plaintiff will ever clear all of these hurdles such that punitive damages become an issue for the court. Under these circumstances, the better policy is to deny plaintiff's motion to compel discovery of financial information until the defendant's liability has been determined.

Other Authority: Not all courts have followed this procedure. There are several cases to the contrary (although none are from North Carolina) that plaintiff can use to support his position that he is entitled to the financial information without making any showing of an entitlement to punitive damages. See Coy v. Superior Court of Contra Costa County, 373 P.2d 457 (Cal. 1962) (holding that defendant's financial condition was relevant to the issues where plaintiff was seeking punitive damages and requiring defendant to provide financial information); Vollert v. Summar Corp., 389 F. Supp. 1348 (D.C. Hawaii 1975) (ordering a defendant to answer interrogatories pertaining to its financial condition based on allegations of punitive damages in the plaintiff's complaint, but making such information subject to a protective order on disclosure); Hughes v. Groves, 47 F.R.D. 52 (W.D. Mo. 1969) (allowing plaintiff to discover current assets and liability of defendant where plaintiff alleged that defendant was driving while intoxicated and stating that "information regarding damages is as discoverable as is that which pertains to liability"); Miller v. O'Neill, 775 S.W.2d 56 (Tex. App. 1989) (allowing plaintiff seeking punitive damages from defendant for willful breach of fiduciary duty to pre-trial discovery of documents showing net worth of defendant without making prima facie showing that viable issue existed for punitive damages); Kern v. Gleason, 840 S.W.2d 730 (Tex. App. 1992) (allowing plaintiffs to discover net worth of defendant corporation where exemplary damages were alleged).

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