Strawn v. Farmers Ins. Co. of Or.

• Decision Date: 19 May 2011
• Docket Number: S057629).,(CC 9908–09080; CA A131605; SC S057520 (Control)
• Citation: 350 Or. 336,258 P.3d 1199
• Parties: Mark STRAWN, on his own behalf and as representative of a class of similarly situated persons, Petitioner on Review/Respondent on Review,v.FARMERS INSURANCE COMPANY OF OREGON, an Oregon stock insurance company; Mid–Century Insurance Company, a foreign corporation; and Truck Insurance Exchange, a foreign corporation, Respondents on Review/Petitioners on Review,andFarmers Insurance Group Inc., a foreign corporation, Defendant.
• Court: Oregon Supreme Court

350 Or. 336

258 P.3d 1199

Mark STRAWN, on his own behalf and as representative of a class of similarly situated persons, Petitioner on Review/Respondent on Review,

v.FARMERS INSURANCE COMPANY OF OREGON, an Oregon stock insurance company; Mid–Century Insurance Company, a foreign corporation; and Truck Insurance Exchange, a foreign corporation, Respondents on Review/Petitioners on Review,andFarmers Insurance Group Inc., a foreign corporation, Defendant.

(CC 9908–09080; CA A131605; SC S057520 (Control)

S057629).

Supreme Court of Oregon.

Argued and Submitted March 2, 2010.Decided May 19, 2011.

On review from the Court of Appeals.^*Kathryn H. Clarke, Portland, argued the cause for petitioner on review/respondent on review Strawn. With her on the briefs were Richard S. Yugler, David N. Goulder, and Lisa T. Hunt, Landye Bennett Blumstein LLP, Portland.Theodore J. Boutrous, Jr., Gibson, Dunn & Crutcher LLP, Los Angeles, California, argued the cause for respondents on review/petitioners on review Farmers Insurance Company of Oregon et al. James N. Westwood, Stoel Rives LLP, Portland, filed the brief for respondents on review/petitioners on review Farmers Insurance Company of Oregon et al. With him on the brief were P.K. Runkles–Pearson, Theodore J. Boutrous, Jr. and Thomas H. Dupree, Jr., Gibson, Dunn & Crutcher LLP, Los Angeles; and David L. Yohai and Gregory Silbert, Weil Gotshal Manges LLP, New York.Meagan A. Flynn, Portland, filed briefs in support of the petition for review on behalf of amicus curiae Oregon Trial Lawyers Association.Brian S. Campf, Portland, filed a brief on behalf of amicus curiae Oregon Trial Lawyers Association.

Andrew M. Schlesinger, West Linn, filed a brief on behalf of amicus curiae United Policyholders.Thomas M. Christ, Cosgrave Vergeer Kester LLP, Portland, filed a brief on behalf of amicus curiae Oregon Association of Defense Counsel.Brian T. Hodges, Bellevue, Washington, filed a brief on behalf of amicus curiae Pacific Legal Foundation. With him on the brief were Deborah J. La Fetra and Timothy Sandefur, Sacramento, California.Before DE MUNIZ, Chief Justice, and DURHAM, KISTLER, BALMER, WALTERS, and LINDER, Justices.^**LINDER, J.

Plaintiff Mark Strawn filed a class action against defendants Farmers Insurance Company of Oregon, Mid–Century Insurance Company, and Truck Insurance Exchange (collectively, Farmers).¹ The complaint alleged that Farmers had breached its contractual obligations and committed fraud by instituting a claims handling process that arbitrarily reduced payments for reasonable medical benefits owed under its automobile insurance policies. A jury returned a verdict for plaintiffs. Based on that verdict and a post-verdict class claims administration process, the trial court entered a judgment against Farmers for approximately $900,000 in compensatory damages and $8 million in punitive damages. Farmers appealed. On appeal, the Court of Appeals concluded that the punitive damages award exceeded federal constitutional limits, but otherwise affirmed the judgment. Strawn v. Farmers Ins. Co., 228 Or.App. 454, 209 P.3d 357 (2009).

Both parties petitioned for review. In its petition, Farmers presented three issues. The first two raise challenges to the liability verdict entered against Farmers. The third issue challenges the punitive damages award, arguing that the Court of Appeals should have reduced the punitive damages award further. In plaintiffs' petition, they first contend that the Court of Appeals should not have reached the constitutionality of the punitive damages award for procedural reasons. Alternatively, plaintiffs contend that the full amount of punitive damages awarded by the jury was within constitutional limits.

We allowed both petitions for review. As we will explain, we reject Farmers's arguments that seek to set aside the jury's liability determinations on plaintiffs' claims. On the punitive damages issues, we conclude that the Court of Appeals should not have reached Farmers's constitutional challenge to the amount of the punitive damages award. Consequently, we affirm in part and reverse in part the decision of the Court of Appeals, and we affirm the judgment of the trial court.

I. FACTS AND PROCEDURAL BACKGROUND

This case involves personal injury protection (PIP) benefits offered by insurance policies written by Farmers. Both by statute and by contract, Farmers was obligated to pay “[a]ll reasonable and necessary expenses of medical, hospital, dental, surgical, ambulance and prosthetic services incurred within one year after the date of the person's injury,” up to a certain limit. ORS 742.524(1)(a).² Because the parties do not take issue with the summary of the facts provided by the Court of Appeals (which were set out in the light most favorable to plaintiffs, as the prevailing party), we quote that summary here:

“Before 1998, Farmers processed requests for PIP benefits by having its claims adjusters review each medical bill to determine whether the bill was reasonable—that is, whether it was both ‘usual and customary.’ In 1997, however, Farmers decided to change that process. In an effort to recover losses and regenerate its surplus after the 1994 Northridge, California earthquake, Farmers instituted its ‘Bring Back a Billion’ campaign. Farmers' corporate headquarters in Los Angeles alerted its regional offices of the ‘increasing importance’ of generating money without raising premiums. In June 1997, Farmers instructed its Portland office to reduce payment of PIP benefits to realize ‘PIP dollar savings * * *[,] an untouched area.’

“In an effort to reduce PIP payments, the Oregon PIP claims manager, Heatherington, contracted with Medical Management Online (MMO), a bill review vendor. MMO, in turn, licensed a ‘cost containment software program’ from Medata, a company that manages a database of roughly 100 million medical expenses. The software sorts those medical expenses by Current Procedural Terminology (CPT) codes, geographic region, and price. CPT codes, which are created by the American Medical Association, are used by medical providers to bill insurers. Geographic regions in the database are defined according to ‘PSRO’ areas, which are socio-demographic regions established by the federal government in 1980 for workers' compensation purposes. For Oregon, the federal government identified two PSRO areas: (1) the Portland-metro area and (2) the rest of the state.

“The software allowed MMO's clients (mostly insurance companies and state agencies) to determine whether a bill from a medical provider was more expensive than a given percentage of the range of charges in other bills for the same CPT code in the provider's designated geographic area. Clients were able to select any percentile that they wished, and MMO then evaluated the bills that it received from the client to determine whether the bills exceeded that percentile. If a bill exceeded the preselected percentile, MMO generated an Explanation of Benefits (EOB) form that reduced payment with reference to ‘reason code’ ‘RC40.’ The EOB explained the code as follows:

“ ‘RC40: This procedure was reduced because the charges exceeded an amount that would appear reasonable when the charges are compared to the charges of other providers within the same geographic area.’ ³

“The software was promoted as reducing medical provider payments by 26 percent.

“Beginning in January 1998, Farmers implemented its new PIP handling process through MMO—a process that, in Heatherington's words, represented ‘a significant change in the way we handle our bills.’ Farmers selected the eightieth percentile as the cutoff point for ‘reasonable’ expenses. That is, Farmers determined that any bills that exceeded the eightieth percentile in the MMO database would be deemed to exceed the ‘reasonable’ charge and would be ‘reduced’ to that eightieth percentile. The program worked as follows: After Farmers' insureds were treated for their injuries, their medical providers sent their bills directly to Farmers. Farmers then forwarded the bills to MMO, and MMO entered the bills into its database. If the bill was more than the charge that was at the eightieth percentile of the charges for that same CPT code in the designated region, MMO documented that fact on an EOB form with an RC40 code.

“Although Farmers contended at trial (and still contends) that the EOB form constituted only a ‘recommendation’ from MMO as to reasonableness, claims adjusters were expected to follow the recommendation. The adjusters were downgraded if they departed from MMO's recommendations and were rewarded when they followed them. Thus, the ‘recommendation’ was, as a practical matter, the final determination of reasonableness.

“Between January 26, 1998 and July 21, 1999 (the class period), Farmers reduced more than 60,000 individual bills by a total of approximately $750,000. The majority of the individual reductions were small: 90 percent were for $25 or less; more than one quarter were for $3 or less. Although Farmers offered medical providers an opportunity to justify the charges that exceeded the established percentile, it was generally not cost-effective for medical providers to pursue those avenues. The medical providers who took advantage of the opportunity to justify their charges rarely secured any additional payment from Farmers. When the providers were unable to secure full payment from Farmers, the insureds became responsible for the unpaid amounts.

“As previously noted, Farmers selected the eightieth percentile as the cutoff point for payment of ‘reasonable’ charges. That cutoff point, though profitable for Farmers, also yielded an increase in customer complaints. The complaints were particularly problematic for Heatherington and Reinhardt, a regional claims manager, because customer service satisfaction was one of the components for measuring their performance and compensation. Together, Heatherington and Reinhardt decided...