Punitive Damages: Meaning and purpose

Punitive Damages

Monetary compensation awarded to an injured party that goes beyond that which is necessary to compensate the individual for losses and that is intended to punish the wrongdoer.

Punitive damages, also known as exemplary damages, may be awarded by the trier of fact (a jury or a judge, if a jury trial was waived) in addition to actual damages, which compensate a plaintiff for the losses suffered due to the harm caused by the defendant. Punitive damages are a way of punishing the defendant in a civil lawsuit and are based on the theory that the interests of society and the individual harmed can be met by imposing additional damages on the defendant. Since the 1970s, punitive damages have been criticized by U.S. business and insurance groups which allege that exorbitant punitive damage awards have driven up the cost of doing business.Punitive damages have been characterized as "quasi-criminal" because they stand halfway between the criminal and Civil Law. Though they are awarded to a plaintiff in a private civil lawsuit, they are noncompensatory and in the nature of a criminal fine.

Punitive damages were first recognized in England in 1763 and were recognized by the American colonies almost immediately. By 1850, punitive damages had become a well-established part of civil law.

The purposes of punitive damages are to punish the defendant for outrageous misconduct and to deter the defendant and others from similar misbehavior in the future. The nature of the wrongdoing that justifies punitive damages is variable and imprecise. The usual terms that characterize conduct




justifying these damages include bad faith, fraud, malice, oppression, outrageous, violent, wanton, wicked, and reckless. These aggravating circumstances typically refer to situations in which the defendant acted intentionally, maliciously, or with utter disregard for the rights and interests of the plaintiff.

Unless otherwise required by statute, the award of punitive damages is left to the discretion of the trier of fact. A small number of states refuse to award punitive damages in any action, and the remaining states have instituted various ways of determining when and how they are to be awarded. In some states, an award of nominal damages, which acknowledges that a legal right has been violated but little harm has been done, is an adequate foundation for the recovery of punitive damages. In other states, the plaintiff must be awarded Compensatory Damages before punitive damages are allowed.

Sending a Message or a Plaintiff's Windfall?

Punitive damages are a controversial issue in tort and product liability law. Injured plaintiffs and their attorneys often seek punitive damages from companies that have made allegedly defective or unsafe products and have known about the defects or safety problems. Plaintiffs view punitive damages as a way of sending a message to the manufacturer and to business, in general, that it is financially unwise to cut corners or ignore safety concerns. On the other hand, defendants in these actions contend that punitive damages are unfair, unpredictable, and often excessive. In their view, the plaintiff receives a financial windfall unrelated to the actual damages in the lawsuit.

Proponents of punitive damages believe that this type of award serves a number of important societal functions, including retribution, deterrence, compensation, and law enforcement.

Supporters of punitive damages contend that one function for such an award is to provide retribution to the victim of the defendant's reckless or wanton conduct. When a person is injured by the wanton misconduct of another, the plaintiff has the right to express her outrage by extracting a judicial fine from the wrongdoer. Seeking retribution allows the plaintiff to punish an intentional lawbreaker in much the same way as the criminal justice system punishes him.

Proponents believe that the most important function that punitive damages serve is that of deterrence. As in Criminal Law  the predominant purpose of punitive damages is to prevent similar misconduct in the future. Because the law does not catch and punish all persons who wantonly violate the rights of others, supporters argue that punitive damages help deter misconduct by publicizing, and at times sensationalizing, the punishment of those persons found guilty of egregious misconduct. Punitive damages tell manufacturers and other businesses that financial penalties will follow if companies sell products known to be defective.

Advocates of punitive damage awards also contend that these awards serve a compensation function. Although a plaintiff may receive actual damages for the injuries suffered, many of the plaintiff's actual losses, including those involving intangible harm, are not compensable under the rules of compensatory damage liability. Punitive damages help the plaintiff to be made whole again.

Another function of punitive damages articulated by supporters is law enforcement. Without the prospect of a large punitive damage windfall, many persons would not be willing to make their claims. Punitive damages act as a law enforcement vehicle, energizing prospective plaintiffs and motivating them to enforce the rules of law and to promote the functions of retribution, deterrence, and compensation.

Critics of punitive damages believe that large monetary awards are unfair, unreasonable, and not productive for society. One of their central criticisms goes to the idea of punitive damages as "quasi-criminal" punishments. Noting that proponents talk of retribution and deterrence, these critics argue that it is unfair to impose these "criminal" fines on defendants who do not have the usual safeguards of Criminal Procedure. They note that a plaintiff should satisfy a higher Burden of Proof than a mere "preponderance of the evidence," the usual standard in a civil trial. Some states have agreed, mandating that "clear and convincing evidence," a higher burden of proof, be used by the jury in determining whether to award punitive damages.

Critics also charge that the vagueness of standards for determining the defendant's liability for punitive damages and for calculating the award itself causes juries to make decisions based on passion, bias, and prejudice rather than on the law. The vagueness in such terms as reckless, willful, or wanton leads critics to conclude that juries have no meaningful, objective way to make an informed decision. Many states have recognized this criticism and developed a variety of procedures to instruct the jury fully and precisely and to require the trial court to assess the sufficiency of the evidence before awarding punitive damages and to issue written reasons why the award was or was not deserved in light of the legal standards.

The U.S. Supreme Court, in BMW of North America v. Gore, 517 U.S. 519, 116 S. Ct. 1589, 134 L. Ed. 2d 809 (1996), also developed guidelines for assessing punitive damages. The Court held that the "degree of reprehensibility of defendant's conduct" is the most important indication of reasonableness in measuring punitive damages. The Court also measured the possible excessiveness of a punitive damage award by applying a ratio between the plaintiff's Compensatory Damages and the amount of the punitive damages.

Critics also note that the deterrence rationale is undercut when defendants are insured against punitive damage awards. In addition, when a government employee is found liable for misconduct and punitive damages are awarded, the taxpayers must pay for the award. Taxpayers are innocent parties, making it unreasonable for them to bear the punishment for the actions of a government employee.

Critics argue that because punitive damages are noncompensatory, they provide the plaintiff with an undeserved financial windfall. The public gains no benefit when an individual receives a multimillion dollar punitive damage verdict. Some states have responded to this criticism by requiring that part of a punitive damage award be paid to the state for some type of public good.

Finally, in mass disaster cases, involving products like asbestos, a manufacturer may have to pay multiple punitive damage awards. Critics contend that allowing punitive damages to early plaintiffs may bankrupt defendants, thereby depriving later plaintiffs of compensatory damages.

For these and other reasons, the critics see punitive damages as counterproductive to the public good. Large awards result in increased costs of products and services and even discourage companies from producing products or providing services out of fear of litigation.

The controversy over punitive damages is likely to continue because it involves fundamental issues of justice, fairness, and the public good.

Cross-references

Clear and Convincing Proof; Preponderance of Evidence.

In the absence of statutory authorization, punitive damages usually cannot be recovered in breach-of-contract actions. Punitive damages are sometimes recoverable in tort actions in which breach of contract is tangentially involved.

Punitive damages will not be awarded in tort actions based on the defendant's Negligence alone. The conduct must have been willful, wanton, or reckless to constitute an intentional offense. Willfulness implies a plan, purpose, or intent to commit a wrongdoing and cause an injury. For example, if an automobile manufacturer knows that the gas tank in its car will likely explode on impact but does not change the design because it does not wish to incur additional costs, the behavior could be classified as willful. Conduct is considered wanton if the individual performing the act is cognizant that it is likely to cause an injury, even though Specific Intent to harm someone does not exist, such as when an individual shoots a gun into a crowd. Although the individual does not have the intent to injure anyone in particular, injury is a natural and probable consequence of the act. Recklessness is an act performed with total disregard of its foreseeable harmful consequences. Punitive damages can be awarded on the basis of an injurious act done with ill will, a wrongful or illegal motive, or without any legal justification, but a wrongful act performed in Good Faith is an inadequate basis for such an award. For example, if a grocery sold canned goods that later turned out to be tainted, and the store did not know of the problem before selling the canned goods, it would be liable for compensatory damages to the victims who ate the food but would not be liable for punitive damages.

The measurement of punitive damages has been controversial because, traditionally, the amount to be awarded is, for the most part, within the discretion of the trier of fact. To determine the amount, the jury or court must consider the nature of the wrongdoer's behavior, the extent of the plaintiff's loss or injury, and the degree to which the defendant's conduct is repugnant to a societal sense of justice and decency. In some states, the financial worth of the defendant can properly be considered.

Ordinarily, an award of punitive damages by a jury will not be upset as excessive or inadequate. If the trial court believes that the jury award is excessive or unwarranted by the facts, it can remove punitive damages from the final judgment, or it can reduce the amount through a procedural process called remittitur.

Since the 1980s, appellate courts have been called on to review punitive damage awards and to assess the procedural fairness involved in awarding such damages. State legislatures and the courts have attempted to craft ways of ensuring reasonable punitive damage awards, but there is no uniform approach.

The U.S. Supreme Court, in Pacific Mutual Life Insurance v. Haslip, 499 U.S. 1, 111 S. Ct. 1032, 113 L. Ed. 2d 1 (1991), upheld a large punitive damage award on the grounds that the Alabama jury had received adequate jury instructions and the Alabama Supreme Court had applied a seven-factor test to assess the reasonableness of the award.

Two years later, the U.S. Supreme Court shifted its stance on how it would assess whether a punitive damage award was excessive. In TXO Productions Corp. v. Alliance Resources Corp., 509 U.S. 443, 113 S. Ct. 2711, 125 L. Ed. 2d 366 (1993), the Court stated that the due process clause of the Fourteenth Amendment to the U.S. Constitution prohibits a state from imposing a "grossly excessive" punishment on a person held liable in tort. Whether a verdict is grossly excessive must be based on an identification of the state interests that a punitive award is designed to serve. If the award is disproportionate to the interests served, it violates due process.

The Court further defined the issues surrounding excessive awards in BMW of North America v. Gore, 517 U.S. 559, 116 S. Ct. 1589, 134 L. Ed. 2d 809 (1996). In this case, the plaintiff, Ira Gore, was sold a purportedly new automobile. In fact, the car had been repainted because of damage during shipping. When Gore found out, he sued BMW. During the litigation, he discovered that for many years BMW had routinely repainted cars and sold them as new. The jury awarded Gore $4,000 in compensatory damages and punitive damages of $4 million. The Alabama Supreme Court reduced the punitive damages to $2 million but upheld the reduced award.

On appeal, the U.S. Supreme Court overturned the punitive damage award. First, the Court identified the "degree of reprehensibility of defendant's conduct" as the most important indication of reasonableness in measuring a punitive damage award under the Due Process Clause. In the Court's view, the damages imposed should reflect the enormity of the defendant's offense and may not be grossly out of proportion to the severity of the offense. In Gore's case, the award was excessive because BMW's conduct did not demonstrate indifference or reckless disregard for the health and safety of others. The minor repairs it made to the cars did not affect their performance, safety features, or appearance.

Second, the Court applied the most commonly used indicator of excessiveness, the ratio between the plaintiff's compensatory damages and the amount of the punitive damages. Even though the state court reduced the punitive damages by half, the Court found the ratio of 500 to 1 to be outside the acceptable range.

Finally, the Court examined the difference between the punitive damage award and the civil or criminal sanctions that Alabama could impose for comparable misconduct. The fact that the $2 million verdict was substantially greater than Alabama's $2,000 civil fine for deceptive trade practices was another ground for finding the punitive damages excessive, according to the Court.

This decision had important consequences in civil litigation. The decision "sent a message" about punitive damages to the lower courts, strongly implying that they should do more to rein in juries that award excessive amounts. Courts have the power to reduce or throw out punitive damages. In the wake of BMW, many federal courts carefully applied the Supreme Court's standards and reduced punitive damages awards. State courts have been less uniform in following these standards, with some courts distinguishing the decision in order to sustain large punitive awards. However, in 2003, the Supreme Court reaffirmed the BMW decision and three-part analysis in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 123 S. Ct. 1513, 155 L. Ed. 2d 585. The court made clear that state courts must employ this analysis or risk reversal.

Though the decision reassured some in the insurance industry, the industry has continued to pursue "tort reform" legislation at the state and federal level. President george w. bush proposed his own tort reform package in 2002, which included a limit on punitive damages. This proposal would cap punitive damages at whichever is less: $250,000 or twice the economic damages.

Further readings

Daughety, Andrew F., and Jennifer F. Reinganum. 2003. "Found Money? Split-Award Statutes and Settlement of Punitive Damages Cases." American Law and Economics Review 5 (spring).

Kircher, John J., and Christine M. Wiseman. 2000. Punitive Damages, Law and Practice. 2d ed. St. Paul, Minn.: West Group.

Owen, David G. 1994. "Punitive Damages Overview: Functions, Problems and Reform." Villanova Law Review 39 (March).

Schlueter, Linda L., and Kenneth R. Redden. 2000. Punitive Damages.4th ed. New York: LEXIS.

Wood, Robert W. 2003. "Proposed Nondeductibility for Punitive Damages: Will It Work?" Tax Notes (July 7).