Wednesday, May 26, 2004

Punitive Damages

My grad-school buddy Susanne emailed me this L. A. Times article about Gov. Schwarzenegger’s proposal to divert 75% of punitive damage awards to the state. I first encountered this idea as a debate case on the APDA circuit, but I didn’t know any actual policymakers had proposed such a thing. But it turns out that several states (Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon, and Utah) already collect some percentage of punitive damage awards.

In favor of the proposal, there's the fact that punitive damages will deter tortious behavior regardless of who receives the award, and giving the damages to the plaintiff (on top of compensatory damages that he will receive regardless) just encourages more lawsuits.

Against the proposal, we should recognize that plaintiffs do need a sufficient incentive to file suit. Especially when a large chunk of all damages, including compensatory damages, goes to the plaintiffs’ attorneys instead of the actual victims, punitive damages might be needed to fill in the gap to make the bottom-line payment to the victim large enough. (Punitive damages serve some other purposes besides giving plaintiffs incentive to bring suit, but all of those other purposes would be served just as well if the damages went to the state.)

But what is a “large enough” payment for the victim to receive? It depends on the goal. Damage awards serve two purposes – compensation of victims and deterrence of future tortfeasors – and the correct amount for the former might not be the optimal amount for the latter. The right dollar amount for deterrence purposes could be greater or less than the right amount of compensation. Think about it this way: if someone did $1 million of damage to you, but you could only get $800,000 of it back, would that stop you from filing suit? I think not. Thus, there’s no particular reason to think that a damage award (net of attorney’s fees) equal to the monetary damage suffered by the victim necessarily induces the right amount of lawsuits.

On balance, the proposal sounds good to me, because I'm not terribly concerned about having too few lawsuits. I think it's pretty clear that we currently have too many. Given that punitive damages are often determined as a multiple – sometimes a very large multiple – of compensatory damages, I suspect allowing plaintiffs to keep 25% of punitive damages is sufficient to make sure they actually receive full compensation even after paying off their attorneys. Still, if I were voting on the proposal, I’d want to see some figures on typical punitive damage awards to be sure.

I’m squeamish about giving the government a new source of revenues, though. If we could trust that the new revenue stream would be offset by decreases in other sources, like income taxes, that would be one thing. But that never happens. The state will spend whatever money you give it and ask for more. Indeed, the Governor’s proposal is part of his plan to balance California’s budget. Worse, the state might have an incentive to encourage larger punitive damage awards or more tortious behavior. Those baleful possibilities would have to be weighed against the reduced incentive for plaintiffs to file lawsuits.

Here’s an alternative proposal: collect the punitive damages from the defendants, give the plaintiffs a 25% cut, and burn the rest. Destroying dollar bills does not reduce wealth or resources; it just increases the value of the remaining money supply. The punitive damages would still deter people from committing torts, without creating perverse incentives for potential plaintiffs or the agents of the state. (I’m joking, but only by half. Can anyone tell me what’s wrong with this proposal?)

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