Economic Analysis of Punitive Damages: Theory, Empirics and Doctrine

Economic Analysis of Punitive Damages: Theory, Empirics and Doctrine

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Punitive damages have been a part of the civil law landscape in the United States since the nineteenth century, but the past two decades have witnessed a firestorm of renewed interest and debate over this supra-compensatory remedy, whose goals are to punish and to deter wrongful behavior. At first glance, this intense interest may seem puzzling given how rarely punitive damages are awarded. Punitive damages are at the tip of the tip of the iceberg in the civil justice system. The number of cases going to trial is very small, on the order of 3–5 percent of civil cases filed in state court. Of those tried cases, punitive damages are awarded in a small minority—less than 5 percent of cases in state courts. So, what explains the sustained interest in what is, as an empirical matter, a very extraordinary, rarely imposed remedy? First, punitive damages are awarded much more frequently in certain types of cases. Thus, the aggregate 5 percent figure might underestimate the significance of punitive damages, at least for certain categories of cases. In cases of fraud, slander/libel, intentional torts, employment discrimination, and products liability, punitive damages are more common, and are awarded in 12–30 percent of the cases that go to trial. In addition, a recent empirical study has shown that, in tried cases in which the plaintiff prevailed and punitive damages were sought (a variable usually not present in datasets), the estimated overall rate of issue of punitive damages was 29 percent. Second, even if punitive damages are rarely awarded, the magnitude of the awards (known to reach into the millions, and even billions, of dollars) may exert an oversized influence on our litigation system. Defendants (especially if risk averse) will take precautionary measures—perhaps even excessive ones—to avoid facing the risk of a small probability of a very large damages award. Moreover, the infrequency of punitive damages awards may obscure a much larger “shadow” effect on settlements: defendants may be driven to settle rather than face potentially crippling punitive damages. The statistics cited above are taken from comprehensive surveys of state courts around the country, giving rise to a fairly detailed portrait of punitive damages in average, mine- run cases. The datasets are comprehensive and representative, but, as a general rule, have not picked up many of the rare “blockbuster” punitive damages awards that, some argue, are the real problem. So, a raging empirical debate persists, with one camp in the legal academy asserting, based upon state court data that punitive damages are predictably related to the size of compensatory awards and relatively stable over time (Ted Eisenberg and various collaborators), and a competing camp arguing that when the blockbuster punitive awards are analyzed separately, punitive damages awards appear indefensible, or at least not rationally related to compensatory damages. Third, punitive damages, regardless of their frequency or magnitude, maintain scholars’ and practitioners’ active attention because their underlying theoretical justifications raise interesting questions about the very role of the tort system. Punitive damages connote punishment, which, at least initially, would seem to be the domain of criminal law, not the civil justice system. Indeed, punitive damages were historically awarded only in cases of malice or willful and wanton conduct, a subset of intentional tort cases. The paradigmatic case was that of intentional battery or assault, including acts of physical violence and dignitary affronts such as spitting upon one’s adversary. The standard verbal formulations of the doctrine require mental states ranging from “intent to harm without lawful justification or excuse,” to “reckless disregard of the interests of others.” Gross negligence typically does not suffice. With its emphasis on malice and willful and wanton conduct, the conventional definition focused on egregious conduct, or—in economic terms—conduct that substantially deviated from the optimal level of care. A newer generation of punitive damages cases, however, falls outside this narrow band of malicious, intentionally wrongful conduct and deals almost exclusively with the recklessness side of the equation. Indeed, the gradual acceptance of insurance for punitive damages over the last 50 years stems, in part, from the evolution of punitive damages themselves: whereas punitive damages were once awarded predominantly for acts that satisfied malice aforethought or intentional wrongdoing, now many punitive damages awards arise from what was essentially accidental conduct, albeit committed recklessly. This contemporary landscape of punitive damages cases presents new theoretical challenges. Should punitive damages be restricted to malicious or willful and wanton conduct? If not, when is it appropriate to award such supra-compensatory damages in the event of a defendant’s reckless conduct? Should theories treat knowing breaches that create a high risk of injury differently from accidents caused by recklessness? This chapter addresses these issues from one vantage point: the economic perspective. The primary economic rationale for supra-compensatory damages—itself traceable back more than a century to Jeremy Bentham, but not formalized in the specific context of punitive damages until recent decades—is optimal deterrence (or loss internalization): when compensatory damages alone will not induce an actor to take cost-justified safety precautions, then supra-compensatory damages are necessary to force the actor to internalize the full scope of the harms caused by his actions. Alternative economic rationales—disgorgement of ill-gotten gains and enforcement of property rights—have been proposed to align the theory with the historical and conventional focus of punitive damages on intentionally wrongful behavior. The Calabresi-Melamed (1972) property rule/liability rule dichotomy provides one framework for choosing between the loss internalization (liability-rule) and gain elimination/voluntary market transfer (property-rule) models. Notwithstanding its academic prominence, the economic deterrence rationale has not dominated doctrine. In fact, the U.S. Supreme Court has all but rejected economic deterrence, by instead placing increasing emphasis on a competing retributive punishment rationale. But, since punitive damages lie squarely within the purview of state law, state legislatures and courts possess a degree of freedom to articulate state-based goals of punitive damages—such as economic deterrence—even in the face of heavy-handed federal constitutional review imposed by the U.S. Supreme Court.

Source Publication

Research Handbook on the Economics of Torts

Source Editors/Authors

Jennifer Arlen

Publication Date

2013

Economic Analysis of Punitive Damages: Theory, Empirics and Doctrine

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