Are Large Civil Fines For Minor Violations Unconstitutional?
By VIKRAM DAVID AMAR AND DAVID REIS
|Friday, Jun. 11, 2004|
This column is Part One of a two-part series by Professor Amar and guest columnist David Reis on the constitutionality of large civil fines imposed under administrative statutes. - Ed.
Imagine this: You are an employer with 1000 employees and you fail to post in the workplace the name of your workers' compensation insurer. Unbeknownst to you, that omission violates the state Labor Code. One of your employees notices this technical violation but doesn't tell you.
A year later, however, the employee brings a suit on behalf of all employees based on this violation. The Labor Code statute provides a mandatory, uncapped penalty of $100 per employee per pay period for the initial violation. So the court imposes upon you a fine of $2.6 million ($100 x 1000 employees x 26 pay periods in a year).
If this were a punitive damage award from a jury, surely it would be struck down on constitutional grounds as excessive. We know from recent Supreme Court cases such as BMW of North America, Inc. v. Gore and State Farm Mutual Automobile Insurance Co. v. Campbell that the Due Process Clause requires sufficient procedural safeguards and substantive limits to ensure that the punishment imposed is fair and proportional to the gravity of the conduct to be punished and the actual or possible harm caused.
Here, the conduct arguably causes little, if any, actual harm; the employer does not even know that its conduct is unlawful, and is therefore not acting intentionally, let alone maliciously. Yet the fine totals millions of dollars. The disproportionality is evident.
That raises an important question: Does the Constitution impose proportionality or other limits on the imposition of such civil fines, as it does on the imposition of punitive damages awards?
A New California Statute Raises the Issue of Disproportionate Civil Fines
California's Labor Code Private Attorneys General Act of 2004 - which took effect earlier this year -- may soon provide a testing ground to examine this very question.
This California statute provides for a private right of action for any alleged Labor Code violation. For those violations (such as failure to post the name of the workers' compensation insurer in our example) for which no more specific penalty is statutorily provided, the law imposes new penalties of $100 per employee per pay period for the initial violation and $200 per employee per pay period for subsequent violations.
Where does the penalty money, if any, go? The plaintiff-employees receive 25%. The remainder is divided between the State's general treasury (50%), and a fund used to educate employees and employers regarding rights and responsibilities under the Labor Code (25%).
The statute provides no cap on the maximum fine that can be imposed on employers. So for an employer with 1000 employees (as in our example) the fine for one year of non-compliance (as in our example) could arguably approach a whopping $3 million.
The Probable Legal Inquiry: Are Civil Fines "Punitive" Or "Remedial"?
Whether the Supreme Court's recent jurisprudence regarding the constitutional safeguards governing large punitive damage awards applies to civil fines will likely turn on whether the fines are considered "punitive" or "remedial."
A fine is "remedial" if it is designed to compensate - or remedy - actual or anticipated losses by individuals and/or the cost of enforcement through litigation or administrative channels.
A fine may be "punitive" if it seems higher than a reasonable estimate might be for remedial purposes. But in general, courts are reluctant to characterize a fine as punitive unless the legislature has already attached that label. Thus, the legislature's own characterization of a fine is respected in close cases - that is, cases in which the fine seems at least somewhat close to the amount foreseeably needed either to remedy actual harm caused by the violation and/or to reimburse enforcement costs.
Private Attorneys General Act Fines: Not Geared to Reasonable Damages Estimates
In spite of this, there are several reasons why civil fines such as those imposed by California's Labor Code Private Attorneys General Act cannot easily be characterized as "remedial," and may be judged by courts as "punitive."
First, the fines are only loosely tied, if at all, to any "actual harm" to employees because they apply even to technical violations that cause no actual harm. In our example above, clearly a $2.6 million award is grossly disproportionate to any actual or likely harm suffered by employees from being deprived of a posted notice stating the name of the workers' compensation insurer.
In this scenario, it is possible to imagine that some employee would have wanted to have the information the employer failed to post (if this is not true, then the legislation itself wouldn't be rational). But it is hard to imagine that an employee's lack of this information could lead to significant monetary or physical harm.
A contract law comparison is helpful. Parties to a contract can agree in advance to the amount of damages (called "liquidated damages") that the breaching party will pay in the event of breach. But they can do so only if they are trying in good faith to reasonably estimate the actual expected harm.
No such reasonable estimate is at issue here with the California statute. To the contrary, it's plain that the statute's civil fines are not "good-faith ex ante estimates" of actual damages, which is one of the reasons they seem punitive - not remedial.
Private Attorneys General Act Fines: Not Geared to Pay Enforcement Costs
Here's another reason the fines also look punitive, not remedial: They do not serve a remedial purpose when it comes to the cost of enforcement. That is, they do not compensate the government for a loss, as might be the case if the government incurred large costs enforcing the statute.
Indeed, the fines do not result from any government enforcement at all. Rather, they result from private suits by employees who -- under a separate provision in the statute -- already recover their actual attorneys' fees and costs incurred in bringing suit.
In a related area, the Supreme Court has struck down civil fines as "punitive" when they were grossly disproportionate to the government's enforcement costs. In United States v. Halper, a lower court had awarded a civil penalty of $130,000 under the False Claims Act ($2,000 for 65 claims of $9 each) against a defendant who had already been criminally convicted for the same misconduct. In this context, the Court struck down the civil penalty.
The Court's reasoning in Halper was that the fines would constitute an unconstitutional second "punishment" under the Double Jeopardy Clause, because they were grossly disproportionate to the government's enforcement costs.
The same analysis, we submit, should lead the Court, in this context, to conclude that the civil fines imposed by the California Act are "punitive" and not "remedial." And the logical result of this conclusion would be for the Court to subject these fines to the same constitutional due process safeguards that govern large punitive damage awards.
Applying the Court's Punitive Damages Analysis to Large Civil Fines
Accordingly, we'll now turn to an examination of those very safeguards. To begin, the Supreme Court's analysis in this area has been guided by its perception that punitive damage awards by juries of late have been expanding in ways that seem erratic, unpredictable and driven by passion rather than reason.
Punitive damages had historically been reserved for malicious or seriously reprehensible defendants in intentional tort cases. But the Court saw that they were increasingly being imposed in product liability and other mass tort actions. And the size of such awards, both in absolute terms and in relation to actual damages, had risen to breathtaking levels.
These concerns are equally applicable to a civil fine structure that could - as in the example that began this column -- impose a $2.6 million fine against an employer who unknowingly commits a technical statutory violation that arguably causes no actual harm.
To address these concerns in the punitive damage realm, the Supreme Court, in BMW of North America, Inc. v. Gore, set forth three "guideposts" for determining whether an award is excessive under the Due Process Clause: (1) the reprehensibility of the defendant's conduct; (2) the ratio between the penalty and the actual harm suffered by the plaintiff; and (3) the relative severity of civil or criminal penalties imposed for the defendant's transgressions or comparable misconduct.
Applying the Supreme Court's constitutional due process "guideposts" in the context of punitive civil fines would appear to be rather straightforward.
To begin with, the California statute imposes a fixed penalty and leaves no discretion to the trier of fact based on the culpability of a particular defendant. While certain Labor Code violations may be viewed as "reprehensible," others, such as the failure to post the name of the workers' compensation insurer, are far from morally blameworthy to the average person.
Some might argue that statutory penalties are preferable to punitive damages because they replace the jury's unguided discretion with a fixed and predictable penalty. But a statute that - like California's -- replaces the exercise of reasoned discretion by each finder of fact (based on the reprehensibility of a particular defendant's conduct) with an adding machine alone, raises serious constitutional due process concerns.
As for the second Gore guidepost, although the Constitution does not require any "simple mathematical formula," the Court has noted that punitive damages should not exceed single digit multipliers of actual or anticipated damages. (Put another way, it may be acceptable for punitive damages to be three times actual damages - but it's generally not okay for them to be thirteen times actual damages).
Whatever the exact ratio, however, a $2.6 million penalty for a statutory violation that causes little, if any, actual harm would seem to fail any constitutional standard.
The third Gore factor is the relative severity of other penalties that can be imposed on a defendant's conduct. But the Supreme Court has yet to clarify exactly why, and how, the presence or absence of other sanctions is relevant. And when we ask what other sanctions could be imposed on these Labor Code violations, the inquiry becomes a bit complicated - potentially cutting both ways.
In California, in the absence of the new Labor Code statute, a private or public lawsuit filed against an employer for failure, say, to post the identity of the employer's workers' compensation carrier would lead to very little liability. That is, there are no other serious sanctions for these particular violations. But what should the import of that fact be?
From the perspective of the Supreme Court, that fact might cut against the validity of the new Labor Code enactments; if there aren't other sanctions, the Court might reason, how bad can the conduct be, anyway? On this logic, just as high punitive damages for non-criminal behavior are suspect, so should high civil fines for behavior that is not otherwise punishable be suspect.
But presumably the legislature of California would argue, precisely to the contrary, that the very lack of other beefy sanctions explains the pressing need for the new provisions. Without the new provisions, the legislature could argue, the ills addressed would have gone unchecked.
In the end, though, the legislature's argument seems unconvincing. When we focus, by comparison, on sanctions for other employer misconduct (that is, violations of labor law principles), the new provisions look harder to defend. Because the penalties under the new California statute are ever-mounting and their duration is theoretically unlimited, they are potentially far more severe than those provided for more serious transgressions by employers against their employees.
For example, a California employer who willfully fails to pay an employee wages within 10 days after being ordered to do so by the Labor Commissioner can only be assessed a statutory penalty equal to treble damages. And even for those Labor Code violations that are criminal misdemeanors, the fines are limited to $1,000 and the trier of fact has discretion to impose a lesser fine.
Imposing fines potentially totaling millions of dollars for technical (and even unknowing) violations far exceeds the civil and even criminal fines imposed for far more serious violations of the Labor Code.
For all these reasons, large civil fines under the California statute would likely fail a test analogous to the Supreme Court's punitive damages test, and be struck down by the Court.
With Violations Inevitable, It's Important to Look at Constitutional Challenges
In today's column, we have looked at how the Supreme Court's federal due process jurisprudence in the punitive damage arena can be applied to limit large civil fines. Of course, many companies and their counsel have responded to statutes like California's new Labor Code Private Attorneys General Act by rightly focusing on compliance with the substantive requirements of the law.
But violations are inevitable in light of the number and complexity of the legal obligations imposed. And given the magnitude of potential penalties, lawsuits will surely follow.
In Part Two of this two-part series, we will move beyond the punitive damages arena and explore other possible constitutional challenges to large civil fines.