Czarnik v. Illumina, Inc., Docket No. D041034 (Cal. Dist. Ct. App. 2006), was an appeal in an employment law case heard before the California Court of Appeal for the Fourth District, Division One.[1] Anthony Czarnik filed an employment action against his former employer, Illumina, Inc., for disability discrimination, retaliation in violation of the California Fair Employment and Housing Act, and wrongful discharge. The company appealed the $7,521,935 judgment against it, based on four arguments: (1) the trial court had erroneously excluded evidence, (2) the court erred in instructing the jury, (3) insufficiency of the evidence, and (4) the damage awards were excessive. The appellate court found the punitive damage to be “grossly excessive” and reduced it to $2,196,935; the court otherwise affirmed the trial court’s judgment and orders. The appellate panel was made up of Judge James Alden McIntyre, who wrote the opinion, and Presiding Judge Judith McConnell and Judge Terry B. O’Rourke, who both concurred with the opinion.
Background
Dr. Anthony Czarnik is a chemist with a Bachelor of Science and master’s degree in biochemistry and a PhD in chemistry. He taught chemistry at The Ohio State University for ten years, during which time he was diagnosed with depression. He left the university to work in the private sector and became well known for his contributions in specific areas of the chemistry field.
In 1998 Czarnik joined Dr. John Stuelpnagel and Dr. Mark Chee as Founders of a company that would become Illumina, Inc. The business plan was to develop commercial applications for a technology developed by Dr. David Walt. Dr. Stuelpnagel served as Chief Executive Officer (CEO), Dr. Chee as Vice President, and Dr. Czarnik as Chief Scientific Officer (CSO). Dr. Czarnik was the company’s highest paid employee. He also received the right to purchase 400,000 shares of common stock for a penny a share, with a vesting period of five years; the company could repurchase unvested shares if Dr. Czarnik left Illumina before the end of the five years. Dr. Czarnik’s duties as CSO, as established in his employment agreement, included:
identifying and acquiring the technologies necessary to launch the company; identifying principal applications for the technology; working with his co-founders to recruit the core scientific and management team; managing the research and development group and providing technical leadership; participating in the creation of the company’s intellectual property portfolio; and participating in strategic corporate planning.[[2]]
Through 1998 Dr. Czarnik fulfilled his contractual obligations, assisting in recruiting two scientists and an engineer and promoting the company’s work in scientific publications. In late 1998 Dr. Stuelpnagel raised concerns with Dr. Czarnik that the company was not reaching its research goals. Around that time, Dr. Czarnik began experiencing depressive symptoms due to a change in his anti-depressant medication regime. He decided not to tell Dr. Stuelpnagel or Dr. Chee about his depression, due to the stigma associated with mental illness. In March 1999 Dr. Czarnik met with Dr. Chee to discuss his performance; Dr. Czarnik told Dr. Chee he would step down as CSO if Dr. Chee wanted the position and felt that doing so would benefit the company, but Dr. Chee told Dr. Czarnik to continue on in the position.
In April 1999 Dr. Czarnik’s depression began to impact his ability to work on a grant application. He explained his situation to Dr. Stuelpnagel and Dr. Chee so that they could complete the application. Dr. Czarnik became emotional during the conversation, and Dr. Stuelpnagel became angry, berating Dr. Czarnik; he ultimately told Dr. Czarnik to go home and rest. The next day, Dr. Czarnik explained his history of depression to Dr. Stuelpnagel and Dr. Chee and told them that he was getting treatment; he finished the grant application in a timely manner.
A couple days later, Dr. Stuelpnagel and Dr. Chee had a conversation about replacing Dr. Czarnik as CSO due to concerns about his mental health. The company’s senior management stopped including Dr. Czarnik in important decisions regarding fundraising, financing, company presentations, strategic planning, hiring, and taking the company public.
In October 1999 Jay Flatley became Illumina’s CEO. Although Dr. Czarnik had not discussed his depression with Mr. Flatley, Mr. Flatley was aware of it; he did not attempt to get to know Dr. Czarnik or include him in projects relevant to his position as CSO. By early 2000 Mr. Flatley felt that Dr. Czarnik was a “potential serious problem” for Illumina and decided he needed to replace him as CSO; he stopped relying on Dr. Czarnik to carry out the responsibilities assigned to the CSO position.[3] Mr. Flatley inquired of Dr. Czarnik if he would be willing to step down as CSO and told him he would involve him in the search process; however, he neglected to inform Dr. Czarnik that he had already identified an individual as a candidate for the position, David Barker.
In March 2000 Mr. Flatley removed Dr. Czarnik from the CSO position and told him that his salary would be reduced and that the company would repurchase a significant portion of his stock; Dr. Czarnik was kept on as a research fellow. The company hired Dr. Barker as CSO, and Mr. Flatley asked Dr. Czarnik to sign an employment contract reducing his salary by $20,000 and allowing for the repurchase of 167,000 shares of stock. Mr. Flatley attempted to coerce Dr. Czarnik to sign the agreement, knowing that Illumina could not repurchase the stock without Dr. Czarnik’s consent. Mr. Flatley and Dr. Czarnik engaged in severance negotiations, during which time Dr. Czarnik discovered filings with the Securities and Exchange Commission related to a planned initial public offering (IPO) that omitted Dr. Czarnik’s role in the company as required by his employment contract.
In April 2000 the company’s board of directors discussed Dr. Czarnik’s severance and agreed on a proposal. Dr. Walt agreed to discuss the proposal with Dr. Czarnik, as the two were friends. Dr. Walt told Dr. Czarnik that Mr. Flatley planned on setting unattainable performance goals for Dr. Czarnik, but Dr. Czarnik rejected the severance offer. In May 2000 Mr. Flatley began assigning Dr. Czarnik unattainable performance goals; Dr. Czarnik responded by filing a complaint with the California Department of Fair Employment and Housing (DFEH), alleging that Illumina was discriminating against him because of his disability and punishing him for complaining about the discrimination. When Illumina received a formal notice from the DFEH about the claim, it prepared a formal response but did not investigate the allegations, contrary to its personnel policies.
In July 2000 Dr. Czarnik raised concerns with Dr. Chee about the accuracy of claims being made in Illumina’s IPO promotional material. He expressed concern that the success of experiments that were an important part of the IPO promotions may not be accurate and that using the experiment results could constitute fraud on investors. The company took no action on his concerns.
In September 2000 Mr. Flatley terminated Dr. Czarnik for failing to meet his performance goals. He threatened Dr. Czarnik that if he told anyone outside of the company about the problem with the experiments referenced in the IPO materials that “the company will go after you with everything it has.”[4] Dr. Czarnik was written a check for $4,516.67 for the repurchase of his invested shares of stock, which had a fair market value of $10 million at the time; however, he did not cash the check.
Procedural History
Dr. Czarnik filed an action against Illumina in March 2001, alleging that the company had wrongfully terminated him; his claim was based on disability discrimination, retaliation in violation of the California Fair Employment and Housing Act (FEHA),[5] and wrongful discharge in violation of public policy. The parties stipulated to the existence of his depression but agreed that Dr. Czarnik’s psychiatrist could be called to testify about his treatment of Dr. Czarnik or statements Dr. Czarnik made to him regarding what had occurred at Illumina. The parties also stipulated that Dr. Czarnik was only seeking his lost stock value as part of his economic damages and was not seeking lost salary.
After a trial, the jury found in favor of Dr. Czarnik on all of his claims. Specifically, the jury found that (1) Illumina had terminated Dr. Czarnik’s employment and took adverse employment actions against him because of his disability, (2) Illumina terminated Dr. Czarnik and took adverse employment actions against him because he complained about discrimination, (3) Dr. Czarnik had a reasonable belief that Illumina used or was planning to use the results of its experiment in a misleading manner in its IPO presentations and that Dr. Czarnik had raised this concern to individuals at the company, (4) those involved in Dr. Czarnik’s termination were aware he had raised those concerns and that his termination was based on his raising those concerns, (5) Illumina terminated Dr. Czarnik because he raised those concerns, and (6) Dr. Czarnik suffered $2,196,935 in damages as a result of the company’s misconduct. The jury also found that the company was motivated by malice, fraud, and oppression and awarded Dr. Czarnik $5 million in punitive damages. The parties further stipulated that Dr. Czarnik was entitled to $325,000 in attorney fees.
Illumina appealed the trial court’s judgment and related post-trial orders. Illumina raised four issues on appeal: (1) the trial court had erroneously excluded evidence, (2) the court erred in instructing the jury, (3) insufficiency of the evidence, and (4) the damage awards were excessive.
Appellate Decision
Exclusion of Evidence
At trial Illumina tried to introduce exhibits of group therapy notes from Dr. Czarnik’s psychiatrist, Dr. Mallinger. The trial court excluded the materials, holding that Dr. Mallinger could use the notes to refresh his recollection but that it would not admit them as evidence, because Dr. Mallinger had not reviewed them to verify their accuracy and they contained extraneous and/or hearsay matters that might mislead the jury or be unduly prejudicial. At trial Dr. Mallinger testified from the notes, and Dr. Czarnik testified about conversations he had with his psychiatrist. Illumina never attempted to introduce the notes under the past recollection recorded hearsay exception or to impeach either witness.
On appeal Illumina argued that the exclusion of the notes should be reviewed de novo because the application of a hearsay exception is a question of law. The appellate panel noted that the record established that the trial court did not exclude the notes solely on hearsay grounds but exercised its discretion to exclude evidence under Evidence Code section 352;[6] such a decision is reviewed for an abuse of discretion.[7] The appellate court found no abuse of discretion, as Illumina had not authenticated the accuracy of the notes and did not attempt to admit the notes as a past recollection recorded.
Jury Instructions
Illumina also argued that the trial court erred in instructing the jury and providing a special verdict form related to Dr. Czarnik’s FEHA claim. The appellate court noted that Illumina stipulated to the instruction and special verdict form and never raised that issue in any pre-trial motions. The court held that Illumina had waived its right to challenge any error and that there was no public policy reason to resolve any such error, because there would likely be an opportunity to properly address the issue if raised in a future case.
Sufficiency of the Evidence
Illumina also challenged that there was sufficient evidence to support the judgment. Dr. Czarnik pointed out that Illumina’s brief violated rules of appellate practice, as it merely referenced evidence that supported its position as opposed to laying out all material evidence. Although the appellate court noted that Illumina’s brief was “not quite as forthcoming as it could be”, it did not believe that the procedural defect warranted waiver of the issue as Dr. Czarnik had argued.[8]
Illumina specifically argued that there was insufficient evidence to support a finding of discrimination, retaliatory termination, and termination in violation of public policy. On review, the appellate court was required to “view the evidence in the light most favorable to the judgment and resolve evidentiary conflicts and indulge all reasonable inferences possible to uphold the jury’s verdict.”[9] The court first addressed Illumina’s argument that there was no credible evidence to establish that it terminated Dr. Czarnik due to his depression. The court noted that direct evidence of intentional discrimination is rare in employment discrimination cases and that successful claims usually depend on inferences of fact.
Illumina contended that Dr. Czarnik “muddied the waters” with his testimony regarding his subjective belief that the company began treating him badly after his depression worsened.[10] The appellate court was unpersuaded by this argument, noting that there was ample evidence that Dr. Stuelpnagel and Dr. Chee expressed concern about Dr. Czarnik’s ability to continue on as CSO after the incident and that the company excluded Dr. Czarnik from important decision-making. Illumina also argued that Dr. Czarnik’s performance at the company was poor, but the court noted that the company had expressed confidence in Dr. Czarnik during the period it was now claiming he had performed poorly.
The appellate court held that there was sufficient evidence to support the jury’s finding that Illumina had improperly discharged Dr. Czarnik. The court also noted that there was evidence supporting a finding that the company had taken other adverse actions against him because of his disability. Even though Illumina had introduced evidence of legitimate, nondiscriminatory reasons for its actions, the court held that the jury had rejected those explanations as mere pretexts and that such a conclusion was supported by the evidence. Because the court found sufficient evidence to support the compensatory damage award, it did not discuss the alternate theories of retaliation and whistle blowing.
Damage Awards
Illumina challenged both the emotional distress damage award and the punitive damages award. With respect to emotional distress, Illumina merely referenced other published employment cases where smaller emotional distress damages were awarded and argued that the award for $500,000 was excessive as a matter of law. The appellate court noted that “[a] jury has ‘vast discretion’ in determining the amount of damages to be awarded and its determination will not be disturbed on appeal unless the recovery is ‘so grossly disproportionate as to raise a presumption that it is the result of passion or prejudice.’”[11] The court found Illumina’s argument to be without merit. Noting that Illumina had not cited any case invalidating an award similar to that in the case at bar as a matter of law, the court also referenced published cases where larger awards had been upheld.
Regarding the award of punitive damages, Illumina argued that the award was grossly excessive. The appellate court noted that states have broad discretion to impose punitive damages, the purpose of which is to punish and deter wrongdoing, but that the Due Process Clause of the Constitution prohibits “grossly excessive” punishments.[12] The court explained that it uses a three-factor test when determining if a punitive damage award is constitutionally excessive; the court must consider “(1) the reprehensibility of the defendant’s misconduct, (2) the disparity between the harm (or potential harm) suffered by the plaintiff and the award and (3) the difference between the award and civil penalties authorized or imposed in comparable cases.”[13] Neither party addressed the third factor in detail, so the court only analyzed the first two.
The appellate court noted that the reprehensibility factor is the “most important indicium of the reasonableness of a punitive damages award” in the due process analysis.[14] There are five factors courts should look at when determining reprehensibility:
(1) the resulting harm was physical rather than economic; (2) the tortious conduct evinced a reckless disregard of the health or safety of others; (3) the target of the conduct was financially vulnerable; (4) the conduct was repeated rather than an isolated incident; and (5) the harm was the result of intentional malice, trickery or deceit rather than a mere accident.[[15]]
Regarding the first factor, the court noted that Dr. Czarnik’s harm was primarily economic. As for factor (2), Illumina’s actions did not show a reckless disregard for his health or safety. The court found that Dr. Czarnik was not financially vulnerable, rendering factor (3) inapplicable. Regarding the fourth factor, the court indicated that the jury found that the company had “engaged in a pattern of discriminatory and retaliatory behavior”.[16] Finally, as for factor (5), the court held that the record did not demonstrate that the harm against Dr. Czarnik was the result of intentional malice, trickery, or deceit. The court therefore concluded that Illumina’s conduct was not highly reprehensible.
As for the ratio between the punitive damages and compensatory damages, the appellate court noted that Supreme Court precedent generally does not support greater than a single-digit ratio and that due process typically requires a lesser ratio when compensatory damages are substantial.[17] The court noted that in the case at bar the ratio was 2.28 and held that because the compensatory damage award was substantial and Illumina had not been highly reprehensible, a 1:1 ratio was appropriate instead.
Conclusion
The court modified the judgment, reducing the award of punitive damages to $2,196,935. It affirmed the remainder of the judgment and related post-trial orders.
-Nathan D. Inks, Esq.
[1] Czarnik v. Illumina, Inc., No. D041034, 2004 WL 2757571, at *1 (Cal. Dist. Ct. App. Dec. 3, 2014).
[2] Id.
[3] Id. at *3.
[4] Id. at *5.
[5] Cal. Gov. Code §§ 12900–12996 (West 2018).
[6] Cal. Evid. Code § 352 (West 2018) (“The court in its discretion may exclude evidence if its probative value is substantially outweighed by the probability that its admission will (a) necessitate undue consumption of time or (b) create substantial danger of undue prejudice, of confusing the issues, or of misleading the jury.”).
[7] Gouskos v. Aptos Vill. Garage, Inc., 94 Cal. App. 4th 754, 762 (2001).
[8] Czarnik, 2004 WL 2757571, at *7.
[9] Id. (citing San Diego Metro. Transit Dev. Bd. v. Handlery Hotel, Inc., 73 Cal. App. 4th 517, 528 (1999)).
[10] Id. at *8.
[11] Id. at *9 (quoting Bertero v. Nat’l Gen. Corp., 13 Cal. 3d 43, 64 (1974)).
[12] Id. at *10 (quoting Cooper Indus., Inc. v. Leatherman Tool Grp, Inc., 532 U.S. 424, 433–34 (2001)).
[13] Id. (citing Textron Fin. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 118 Cal. App. 4th 1061, 1081–82 (2004)).
[14] Id. (quoting State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 419) (2003)).
[15] Id.
[16] Id.
[17] Id. at *11 (citing State Farm, 538 U.S. at 425).