Saturday, May 15, 2004

Punitive Damages in the Extended Sphere

Governor Schwarzenegger's new budget includes a provision giving state government (through a trust) 75% of any punitive damage award. A representative for the Governor justifies this idea by arguing that "the money should go to the public good." I think this fits with some views on punitive damages, but not the Supreme Court's.

Of the various justifications for punitive damages, such as retribution (criminal law, anyone?), compensating for recurring misses, compensating for attorney's fees, compensation for social cost of bad conduct, and deterrence, none seem to be at odds with this plan, because none contemplate where the award goes. The pay-out could go to the victim, but it could just as easily go to California - the point is that it came from the defendant's pocket. That is, except for the view that punitives are for the lawyers, which the plan answers - attorney pay-off comes before the distribution to the trust, ensuring full payment (or at least priority payment).

So if the provision doesn't conflict with any of these views, what's wrong? To answer, it's important to read the Supreme Court's most recent punitive damages decision, State Farm v Campbell, 538 US 408 (2003). Here's the relevant discussion:

"For a more fundamental reason, however, the Utah courts erred in relying upon this and other evidence: The courts awarded punitive damages to punish and deter conduct that bore no relation to the Campbells' harm. A defendant's dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties' hypothetical claims against a defendant under the guise of the reprehensibility analysis, but we have no doubt the Utah Supreme Court did that here." Id at 422-23.

I believe the proper conclusion to draw from this language is that the courts are not supposed to be compensating for misses. Courts are not to look to other cases at all. The Court is saying that punitive damages are about pay-outs in this case for this plaintiff. I don't think you can read language like "[a] defendant should be punished for the conduct that harmed the victim, not for being an unsavory business" to say anything less.

How does this analysis fit in with the usual justifications for punitive damages? Not very well at all. The best we can say is that the Court doesn't make clear that the plaintiff should receive the award, even if the award centers around their loss only. Thus, on retribution, social cost, and deterrence rationales, it might still be acceptable to send a portion of the award to the state.

But I think this is a stretch. Social cost and deterrence have their backbone in a view that the punitive aspect of the case isn't really about this case at all, but about past and future cases, respectively (retribution has its backbone in criminal law, where it should stay). The "social cost" for the victim at issue is already answered by their compensatory damages award. If we think this calculation inadequate, moreover, it would only justify providing punitive damages to the victim. But the large-scale social cost must be about more than that - it must be about past cases, moral/psychic externalities, etc. The Supreme Court in State Farm ruled these kinds of considerations out.

The same problem is even more evident from a deterrence rationale. It is quite impossible to conceive how a court could ask itself "how much money should defendant pay to make sure this never happens again?" when the Court commands that the judge focus on this case only, not “hypothetical claims.”

It is clear State Farm undermines much of our current thinking on punitive damages (and the "public good" M.O. for the California provision). But I think the Court’s views can be explained in part by noting the procedural posture of this case. It was not a class action, but a suit brought by a single estate. Thus, the facts provide inadequate information about all the other cases, victims, etc. One could conceive of an action in every state, in which each judge decides to deter the defendant from engaging in this kind of behavior again. Obviously, 50-fold over deterrence is not what we’re looking for, unless each judge is willing to divide his determination by some proportion, in deference to other claims. Such a system would be unwieldy, to say the least.

The answer, of course, is to have a nation-wide class action. Bring it everyone, and then let the judge grant a single award that will hit the defendant hard, but only once. Unfortunately, the both the current and proposed Rule 23 (which I discussed at some length here) just won’t make this work. Such a suit, because it does not have the unity and uniformity of interest of a 23(b)(2) action, must go the (b)(3) route, which requires any given plaintiff the opportunity to opt-out. So long as a significant number of plaintiffs do so, our central planning-minded judge won’t get his valuation right and the defendants won’t get peace. After all, if a case like State Farm teaches us anything, it’s that just one plaintiff, with just one jury, can cost a defendant a bundle.

Ultimately I think all of these issues show that judicial competency has its limits, and that the central planning aspect of punitive damages is best left to central planners (aka Congress). If you’d rather Congress didn’t take-on this role either, then I think you ultimately must agree with the Supreme Court. Let the class actions run their course, but if they only represent 5% of all victims, its better that punitive damages be tied down to the harm inflicted upon that 5%, rather than trying to compensate for the other 95% in some way. It’s an imperfect system, but better than the alternatives. Sometimes that the best you can do in an extended sphere republic.

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