Qwest has been ordered to pay $84 million to Andy Blood and his wife. The 25 year old Xcel Energy lineman was injured on June 29, 2004, when a Qwest owned utility pole also used for Xcel Energy lines, that Qwest failed to inspect, repair and maintain broke, causing him to fall and leaving him paraplegic. A Qwest employee testified that the company had no record of inspecting or maintaining the pole since its 1958 installation.
A Denver jury awarded Blood $21.5 million in compensatory damages and $18 million in punitive damages in May, according to Unbossed.com. The judge increased the punitive damages award earlier this month, bringing the total award to $84 million, according to the Denver Business Journal. The increased punitive damage award was based upon Qwest failure to take any action to address its failure to maintain and inspect its utility poles for safety purposes, even after it was sued in this case. An exhaustive analysis of the case from a variety of perspectives appears below.Why Didn’t Xcel Pay?
Blood was entitled only to a disability payment and his medical expenses from his employer, Xcel Energy, because suits against an employer for negligence are prohibited under the worker’s compensation system. Instead, worker’s compensation benefits are available without regard to fault and generally consist of a disability pension and medical expenses related to the injury. (Work related injuries are generally not covered by health insurance.) The disability pension is typically a percentage of the worker’s pay before the injury, and may be disallowed in whole or in part if the employer can provide some sort of alternative work options that are possible after the injury. In theory, this system makes the recovery received by workers smaller, but the likelihood of recovery by a worker in any given case, such as this one, where Xcel Energy itself may have done nothing wrong, much greater.
Third parties who are responsible for work related accidents, however, are not prohibited by the ban on suing an employer for a work related injury.
Qwest tried to shift some responsiblity for the harm to Xcel Energy, under Colorado’s pro-rata liability laws, but appears to have failed to convince the jury of that point. Even with the bar on suit by Blood arising from worker’s compensation laws, a jury could have found Xcel Energy partially responsible as a “non-party at fault” which would have reduced the award against Qwest.
A part of the award attributable to medical expenses incurred by the worker’s compensation system will probably have to be turned over by Blood to the worker’s compensation insurer, in satisfaction of its “subrogation rights” probably on the basis of an agreement reached with the worker’s compensation insurer before the suit was commenced.
What Did The Jury Find To Award Compensatory Damages?
Blood showed at trial that Qwest had not inspected that 50-foot telephone pole adequately, and the jury found that Qwest’s lapse constituted a failure to exercise the care of a reasonable person under the circumstances in maintaining the pole, and that this failure to inspect and maintain the pole caused the injury, by a preponderance of the evidence
Almost all of the jury’s $21.5 million award for compensatory damages would have had to have been items such as lost wages, costs of future care, unreimbursed medical expenses, and damages for “physical impairment or disfigurement.”
In Colorado, damages for items such as “pain and suffering, inconveinience, emotional stress, and impairment of the quality of life” for husband and wife combined, cannot exceed $366,250 unless a judge finds clear and convincing evidence to support a larger amount, in which case the cap is $1,098,750.
What Did The Jury Find To Award Punitive Damages?
In order for the seven member Denver jury to award punitive damages, it also had to find beyond a reasonable doubt that Qwest’s conduct was not merely negligent, but was “willful and wanton” which “means conduct purposefully committed which the actor must have realized as dangerous, done heedlessly and recklessly, without regard to the consequences, or the the rights and safety of others, particularly the plaintiff.”
The jury awarded $18 million, which was within the limit allowed by Colorado law, which is the amount of compensatory damages awarded. Evidence of Qwest’s income or net worth was not admissible in the case, but this probably didn’t help Qwest much because its status as a large publicly held company is widely known.
Why Did The Judge Increase The Award?
Judges in Colorado have the power to decrease punitive damage awards if the “deterrent effect of the damages has been accomplished,” or the “conduct which resulted in the award has ceased;” or the “purpose of such damages has otherwise been served.”
But, a judge in Colorado also has the power to increase a punitive damage award from an amount up to the actual damages awarded to the injured party, to an amount equal to three times the amount of actual damages, if the “defendant has continued the behavior or repeated the action which is the subject of the claim against the defendant in a willful and wanton manner, either against the plaintiff or another person or persons, during the pendency of the case.”
In this case, that is precisely what Denver District Court Judge Sheila Rappaport found Qwest had done. According to Unbossed.com, the Judge found that:
* It has continued to fail to inspect, maintain and repair its telephone poles even after losing the trial.
* Qwest employees testified the company had no formal inspection and maintenance program for its estimated inventory of 157,000 telephone poles countrywide.
News reports do not make clear whether the $84 million includes or excludes statutory interest from the date of the accident on June 29, 2004, at 9% per annum, compounded annually (roughly 30%).
New reports also do not make clear if the $84 million figure includes an award for “costs” which are the out of pocket expenses other than attorneys’ fees incurred by the Plaintiff, such a costs for filing fees, mailing, copying, and most importantly, expert witness fees on issues like medical prognosis, loss of income, and the appropriate amount of maintance work that a reasonable utility company would have engaged in.
Plaintiffs’ Attorneys’ Fees and Costs
Cases such as this one generally do not involve an award of attorneys’ fees to the injured party. Instead, the law firm that represented Mr. Blood and his wife, almost certainly has a fee agreement that provides that the law firm is entitled to a percentage of any ultimate award or settlement (usually somewhere between 25% and 40% of the award in various situations ranging from early settlement to appeals followed by retrials, and based upon the amount recovered, sometimes at a flat rate and sometimes laddered based upon the size of the recovery), and in addition to reimbursement for any out of pocket costs that the firm advanced. Generally, no payment is made to the law firm until the client is paid, and it receives no attorneys’ fees if it does not prevail, so the law firm will have to do roughly four years of work in this case financed with working capital of the firm, before receiving any payment.
Of course, in a case like this one, which probably involved several hundred hours of attorney work and tens of thousands of dollar of out of pocket costs, the attorneys are likely to make something on the order of $50,000 an hour on an hourly basis, which will provide an ample return for the risk taken, working capital consumed on the case, and risks taken by the firm overall in its entire portfolio of cases.
Defense Attorneys’ Fees
The law firm representing Qwest was almost certainly compensated on an hourly basis at fees near the high end of those for insurance defense lawyers (probably $300-$600 an hour for partners), and probably was paid for their invoiced fees and expenses monthly and promptly paid by Qwest after the billings were reviewed by Qwest’s in house counsel who probably receives a salary and bonus compensation package similar to other senior executives of the company. This may or may not have been paid for by Qwest’s comprehensive general liability insurer depending upon the details of the insurance policy. For a small business, the insurance company would usually pay all of the legal bills, but large companies like Qwest sometimes negotiate to pay some or all of defense costs out of pocket in exchange for a lower insurance premium. The attorneys involved, in turn, would typically receive salary and bonus payments, based mostly upon their billings rather than their success at trial, as part of an employee compensation plan that is quite predictable in advance.
Expert Witness Fees
The expert witnesses in the case would have very likely been compensated by the parties at high hourly rates, often higher than those of defense attorneys in the case.
Judges receive a comfortable upper middle class salary, below that of a comparable position in the private sector, that can’t be reduced for any reason and have secure tenure in their jobs and does not depend in any way upon their performance.
Court staff are compensated at middle class salaries with decent benefits as civil servants with no real performance compensation, but less job security and pay security than a judge.
For their first three days of service, jury members are entitled to their regular full time pay, up to $50 dollars a day, from their employer, or, if they are unemployed, $50 a day plus certain out of pocket expenses from the court. For additional days of service, jurors are paid $50 a day plus free bus fare. The court will often pay for meals for jurors (and housing in rare cases unlike this one, where a jury is sequestered), and employers will often simply pay their regular rates of pay to employees in exchange for what they receive as pay for being a juror, even though the law does not require this compensation.
The $21.5 million compensatory damages award will probably be tax free to Andy Blood and his Wife, if and when they ultimately receive it. But, the punitive damages will be taxable, subject to a deduction for attorneys’ fees as a cost of earning income that mostly, but not completely, eliminates taxes to Mr. and Mrs. Blood on the portion of the award going to their attorneys.
Qwest will likely be able to deduct the compensatory portion of the award as an expense for corporate income tax purposes, but will likely not be allowed to deduct the punitive damage portion of the award if paid, which will be treated similarly to a dividend payment (another non-deductible corporate expenditure). Qwest can also deduct all of its expenses for attorneys’ fees and costs in the case.
The Plaintiffs’ Attorneys
For the attorneys, the entire fee will be treated as ordinary income in the year received, although any losses from prior years while the case was being tried can be carried forward to apply against the fee. But, unlike hedge fund managers who receive capital gains tax treatment for the contingent “carried interest” portion of their compensation, attorneys must pay taxes at ordinary income tax rates and must also pay either FICA or self-employment taxes on the portion of the fees that end up becoming employee or partner compensation.
In a case involving a large lump sum payment, such as this one, this means that almost all of the Plaintiffs’ attorneys’ compensation will be taxed at the highest possible income tax rates (i.e. 35% federal, 4.63% Colorado, and what will work out to about 2.8% of the gross for Medicare taxes).
The Defense Attorneys and Expert Witnesses
Defense attorneys and the expert witnesses will have ordinary compensation income after their firm business expenses are covered, but will be able to have a larger portion of their lifetime compensation taxed at lower marginal tax rates because their income is more steady. Defense attorneys also tend to have better benefit packages that are possible because of their steadier income flow that allows them to reduce the tax bite from their compensation.
Qwest, not surprisingly, has vowed to appeal the verdict. Many large punitive damage awards are reversed on appeal, but this case presents a more difficult case than many for Qwest.
Most of the court cases reversing punitive damages awards do so because the ratio of punitive damages to compensatory damages is too large. But, in this case, where there are $21.5 million in compensatory damages as a result of the very serious nature of the injury, the 3:1 ratio of punitive to compensatory damages is well within the range allowed by precedents, which have upheld awards with ratios in the high single digits.
The only issue under the constitutional law of punitive damages in this case will be whether the damages were, in fact, awarded to the plaintiffs for harm caused to someone else, rather than the mere risk of harm to others that this incident represents.
The U.S. Supreme Court prohibited punitive damages awards premised on actual injuries to people who aren’t parties to a lawsuit on February 20, 2007, in the case of Philip Morris USA v. Williams Estate. But, that case, involving a cigarette manufacturer’s liability to smokers, involved a $79.5 million punitive damage award in a case where a jury found only $821,000 of punitive damages were awarded (a ratio of about 99:1) and the argument at that trial discussed the large number of people suffering actual injuries from smoking to justify a punitive damages award. Blood’s case, in contrast, discussed the risk to other people in the future from Qwest’s conduct, but did not make injuries already actually suffered by any other person a part of the argument for punitive damages awarded to Blood.
Sufficiency of the Evidence
Qwest’s best argument at trial on the issue of punitive damages was that its conduct was merely negligent and did not rise to the level of willful and wanton conduct. But, a jury found that Qwest’s conduct did rise to that level and the judge agreed, so on appeal Qwest will have to show that no reasonable jury could have reached this conclusion beyond a reasonable doubt, based upon the facts presented to it, if it resolved all questions of credibility and the weight of the evidence in favor of Mr. Blood and his wife.
Qwest will probably argue on appeal that Colorado law does not allow punitive damages to be awarded for mere inaction, and that the evidence that Qwest realized that its conduct was dangerous was insufficient, as there were an insufficient number of other incidents to put it on notice of that fact. Both issues arise entirely under state law, and will be hard to prove.
Any argument on sufficiency of the evidence at trial, however, is always difficult to win on appeal, because a jury did find that the evidence was sufficient with the benefit of all of the live testimony presented at trial.
Qwest will also likely argue several other issues on appeal, including an argument that common law arguments about its appropriate standard of care in maintaining utility poles are pre-empted by the fact that it is a regulated utility, and that its contract with Xcel to share the utility pole ought to provide Qwest with some recourse against the company that was actually doing the work.
There will also almost certainly be arguments about the fairness of evidence and procedural rulings in the trial and pre-trial process, but those kinds of arguments are often dismissed by appellate courts as “harmless error.”
We’ll find out what actually happens, if the case doesn’t settle first, in a year or two, when the Colorado Court of Appeals decides an appeal.
Qwest has been hit with one of the biggest personal injury awards in state history. The case against it for negligence was quite strong and the injuries involved were catastrophic, which easily puts the compensatory damages alone in this case in the double digit millions in the first place, despite Colorado limitations on non-economic awards for pain and suffering tougher than proposed in most federal tort reform legislation.
Colorado also places numerous hoops in the way of large damage awards like this one, imposing strict standards of proof and requiring the assent of both the judge and the jury for such a large award.
If Qwest had taken its failure to have any plan to inspect utility polls seriously, and implemented a major inspection program after this accident, it probably could probably have avoided a judicial imposition of $42 million in punitive damages after trial, and could also probably have obtained some reduction in the $18 million punitive damage award that the jury awarded at trial from the judge, after the fact.
The law prohibits evidence of post-accident remedial efforts to be given to a jury precisely to encourage companies like Qwest to fix problems that accidents call attention to after the fact. So, it wouldn’t have hurt its case at trial by starting to inspect its utility poles. And, when punitive damages are sought, there is an additional hammer hanging over the head of a corporate defendant pressuring it to take remedial action.
But, by ignoring Mr. Blood’s assertion that Qwest had a legal obligation to maintain its utility poles, Qwest took a $50 million hit to its bottom line that will be hard to reverse on appeal. Also, Blood’s success in this suit, and the fact that many of Qwest’s poles are deteriorating after half a century without scheduled maintenance or inspections, means that this may not be the last time that Qwest takes a hit for this safety problem.