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January 8, 1995

By David Thomasson

Punitive damages v. common sense

This is about the law of punitive damages. It is written by a layman for laymen, but lawyers are invited to tag along.

My criticisms of punitive damages rest on the assumption that law must be redeemable in the coin of common sense. If educated laymen lack a common-sense understanding of the laws that govern them, the fault will be found not in the laymen but in the law. The law of punitive damages confirms this uncomplicated truth.

Begin with a fictional case. While drag racing on a public street, Ralph crashes into your car. You awaken the next day in a hospital. After you recover, you sue Ralph for damages.

At trial, the jury awards you $65,000 in compensatory damages to pay for your medical bills, car repairs, lost wages, and pain and suffering. The jury adds another $135,000 in punitive damages. So, you end up with $200,000.

Why the plaintiff?

If you see no problem thus far, then consider this question: Why should you, the plaintiff, be paid punitive damages? It's clear why you should get compensatory damages. Ralph owes you that for the harm he caused. But why should you also get the punitive damages?

If you answer that Ralph showed wanton disregard for your safety, you've answered a different question. That answer tells us why Ralph deserves to pay a penalty. But it doesn't tell us why you should get the money. Ralph would be penalized all the same if his money were turned over to the state or to the Home for Little Wanderers. The question is: Why should you get it?

It's a bedeviling question. I'll wager that even the lawyers tagging along can't answer it without falling back on some claim to compensation. And that answer won't wash. If compensatory damages are sufficient to do what they're intended to do — repay you for your losses and "make you whole" — then you've exhausted your claims to compensation. If you think you're also entitled to those punitive damages, your claim must be based on something else. But what?

This is a puzzle, but not merely a puzzle. It has serious implications. Let's look at a few.

Misplaced incentives

The prospect of winning punitive damages gives plaintiffs and their attorneys a strong incentive to seek large awards.

If $25 million is good, $50 million is twice as good. More is better. At least that's how it usually looks from the plaintiff's point of view.

Properly understood, however, that offends common sense. Consider an analogy. Your child has broken your rule against staying out past a certain hour. You think punishment is appropriate and decide to ground him. You could ground him for a week. But wouldn't two weeks be better, a month even better, and six months far better yet?

Surely not. In setting punishment, more isn't always better. One of our common-sense notions about punishment is the rule of proportionality — punishment should fit the offense. Reasonable people can disagree about what fits in a given case, but no one could convincingly argue that "More is better" is an acceptable rule for assigning punishment.

Because punitive damages are a windfall for the plaintiff, they divert attention from their primary purpose, which is to punish the defendant, not enrich the plaintiff. But money is a powerful motivator. A tacit rule in seeking punitive damages is, "Get all you can." From a disinterested perspective, however, that translates as "Punish all you can" — or "More is better."

Lawyers ought to get paid for their work, of course. But the practice of allowing them to take a percentage of punitive damages cannot pass the test of common sense.

To see the problem, suppose it were proposed that prosecutors be paid on a progressive scale in criminal cases — with their pay directly proportioned to the length of the prison term (or the size of the fine) defendants get when convicted. The flaw in that scheme is that it would create an incentive that is contrary to justice — contrary to the rule of proportionality. Reasonable people would reject the progressive pay scale because its incentive implies that in seeking punishment for crimes, more is better.

Yet we accept precisely that incentive in civil law as an integral and legitimate part of the law of punitive damages. Contingency fees reward plaintiffs' lawyers in direct proportion to the degree of punishment they mange to inflict on defendants.

Jury perceptions

Defenders of the current system might reply as follows: "Even if plaintiffs and their lawyers have an incentive to seek maximum punitive awards, they aren't the ones who determine the amounts of awards. Juries do that. Since jurors don't stand to gain or lose by their verdict, it doesn't matter that the plaintiff gets the punitive damages."

Oh, but it does matter. Jurors know that when they assess punitive damages, they are giving money to the plaintiff. Consequently, they often and understandably consider whether a given plaintiff deserves a punitive award — a question that has no relevance to the issue of punishment.

That distraction is clearly illustrated in two recent cases in Jefferson County. BMW (the auto manufacturer) was sued twice by separate plaintiffs. The facts were the same in both cases, each plaintiff alleging he was sold a car with defective paint. The jury in the first case awarded $4 million in punitive damages. A few weeks later, the second jury awarded only $4,000.

No one expects all juries to think alike, of course, but a thousandfold difference is astounding when the facts are essentially the same. When these cases subsequently came up for discussion at a law symposium, one of the trial judges said that the low punitive award appeared to be explained by the plaintiff. He was a doctor who made a bad impression on the jury.

Such irrelevant considerations are predictable, because laymen on juries are going to be led astray by the knowledge that punitive damages are paid to the plaintiff. They will judge his worthiness according to whether he is likable or detestable, rich or poor, attractive or ugly, white or black, male or female, fat or thin, neat or slovenly, arrogant or humble, young or old, and so on.

None of those considerations has the slightest bearing on whether the defendant deserves to be punished. Yet, our tort system makes it all but impossible for jurors not to be distracted by the question of whether the plaintiff "deserves" the windfall that goes with punishing the defendant.

Punishment by proxy

Now I'll ask you to imagine something truly absurd. Imagine a man convicted of a crime and sentenced to prison for, say, two years. After hearing his sentence the defendant addresses the court: "Your honor, I have paid a man who has agreed to go to prison in my place. He is here in court today." The man steps forward. "You may take him into custody. And with the court's permission, I will go home now."

The absurdity I ask you to imagine is the judge allowing the proxy to serve the prison sentence — or a legislature passing a law that allows punishment by proxy.

And yet this shouldn't stretch anyone's imagination. Alabama's courts, like those in many other states, routinely allow punishment by proxy in civil cases. When a defendant's insurance covers punitive damages, it is the insurer and not the defendant who pays the penalty.

Courts in other states have produced an amazing patchwork of conflicting rulings that variously allow or prohibit insurance coverage of punitive damages. They approach the question by carving up punishable behavior into categories that reflect differences in the defendant's state of mind. Was his behavior intentional? Was it wanton but not intentional? Was it reckless but not wanton? Was it grossly negligent? Grossly reckless? Courts then decided (inconsistently from court to court) whether insurance may cover punitive damages in these categories.

That's all a splendid exercise in logic-chopping, but it entirely misses the common thread that runs through these categories of behavior. Each is, by definition, a class of punishable behavior. And punishment always requires a moral justification.

This is one point on which most courts do agree. The central, justifying purpose of punitive damages is to deter the defendant and others from the behavior being punished. The clear and deterring lesson is supposed to be that those who engage in wrongful behavior must bear the moral burden of their actions.

But when courts allow insurance to pay the penalty, this removes or greatly lightens that burden by spreading it among others who pay premiums. This in turn removes the deterrent effect and thus the moral justification of punitive damages. Once again, tort law heads in one direction, common sense in another.

Blind justice

Try another scenario. You are on the jury in a civil case. Before you retire to the jury room to deliberate, the judge reminds you that if you assess punitive damages, the amount should be high enough to deter the defendant from further engaging in the behavior for which he is being punished. In the jury room, you raise this question: What dollar amount would be sufficient to deter this defendant? Someone suggests $100,000. Would that do the trick?

Well, that depends on the defendant's wealth. If he's an average, working-class Moe, a penalty of that size could wipe him out. But suppose his net worth is $50 million. In that case, a $100,000 penalty would equal just two-tenths of 1 percent of his net worth. No deterring jolt there. Seeing the dilemma, you and your fellow jurors ask the court for information about the defendant's financial status. After all, you can't estimate the deterrent effect of a penalty if you don't have that information.

Recognizing this common-sense fact, 43 states allow juries to consider information about the defendant's financial status when setting punitive damages. Some states even require it. But if you serve on an Alabama jury, you won't be allowed to have that information.

Your task is thus made impossible by the very system that assigned it to you. You must arrive at a penalty that is large enough to deter a particular defendant, yet you are not allowed to have essential information about that defendant's financial status.

Because Alabama juries are left to shoot in the dark on punitive damages, cases like one recently tried in Barbour County aren't surprising. The plaintiff bought a used car from the defendant and claimed the defendant cheated him our of a $1,000 discount to which the buyer was entitled. The trial lasted one day. The jury awarded punitive damages of $50 million.

The dunce cap

Such wildly disproportionate awards propelled the state legislature in 1987 to put a cap of $250,000 on punitive damages. The law has since been struck down by the Alabama Supreme Court. Capping punitive damages as a solution to excessive awards in fact perpetuates the core problem in a different form.

The core problem is disproportionate punishment. If a defendant's net worth is $100,000, then a penalty of $100,000 is ruinous and therefore excessive, just as a penalty of $1 would be disproportionately low for most people.

The standard of proportionality is deterrence. A penalty should be great enough to deter but not so great as to constitute a financial death sentence. Although caps might prevent the latter, they virtually guarantee that some punitive judgments will be so disproportionately low as to have no deterrent effect at all.

To illustrate, suppose a corporation with annual gross income of $10 billion loses a lawsuit and is ordered to pay punitive damages of $250,000. If the company does business 80 hours a week, it grosses $250,000 every six minutes — hardly what you could call an effective deterrent. To put that on a more familiar scale, if your annual salary were $50,000, that would be equivalent to a penalty of $1.25.

Thus, caps don't solve the problem of disproportionate punishment. They merely shift it to the wealthiest defendants, typically large corporations.

The larger picture

The problems I've described are all related to confusions about punishment. Some of them exacerbate that confusion; others arise out of it. To summarize: Punitive damages is a topic of growing debate, especially in Alabama. But the burgeoning awards that attract so much attention are symptoms of deeper problems in our tort system. In focusing mainly on symptoms, many are led into the error of supposing that punitive damages is a Big Problem that can be fixed with a Big Solution (such as a cap on punitive awards). What we are confronted with, in fact, is a body of law riddled with smaller problems.

This brief essay attempts to throw light on a few of them, but only a few, and to suggest that these problems, though numerous and complex, all share the fault of offending common sense. We might find solutions that are rigorous, elegant and logically pristine, but we ought to insist on solutions that make sense.

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