Professor Catherine Sharkey

Punitive Damages as Societal Damages

by Professor Catherine Sharkey

In an article published in the November 2003 issue of the Yale Law Journal ( titled “Punitive Damages as Societal Damages,” Professor Catherine Sharkey enters the raging punitive damages debate by presenting a new category of damages, compensatory societal damages. In this essay, she briefly describes her new theory.

Large punitive damages awards get attention. You likely recall the $28 billion in punitive damages awarded by a Los Angeles jury to an individual former smoker against Philip Morris. Or perhaps the $4 million that a jury awarded to the man who bought a BMW from a dealer who hadn’t mentioned a pre-sale repainting job that affected the car’s resale value. While most of these mega-awards are ultimately reduced in the course of the appellate process, it is their original immensity that attracts the greatest media attention, and that sticks in our minds.

Those who defend large punitive damages awards (such as the plaintiffs’ bar) argue that they are not the product of a jury gone wild, but an appropriate attempt, on the jury’s part, to assess the widespread damages wrought by a defendant, and to send a message to those sitting comfortably in the plush offices of the defendant’s headquarters that they cannot possibly expect their company’s misconduct, even in the far-flung corners of the United States, to go unnoticed. As one juror explained the magnitude of the $28 billion smoker award: “The jurors had been told that only one in 28,000 lung cancer victims ever get their day in court, and the panel in effect decided to impose $1 million worth of punishment on Philip Morris for each of the 28,000 who never makes it to court.”

Critics of these large awards, and there are many, raise the twin objections of “extra-territoriality” and “multiple punishment”; namely, that juries are permitted to punish a defendant in a single lawsuit for nationwide conduct that may or may not be treated differently by other states, and that defendants are susceptible to multiple punishments for the same course of conduct in each successive lawsuit brought by a single plaintiff. Moreover, the critics contend, large punitive awards result in absurd windfall gains to the plaintiff who, by virtue of his/her wherewithal, aggressive legal counsel, sufficient resources, or all of the above, just happens to have been the one to have pursued a lawsuit against the defendant. Even if, these critics claim, the defendant is indeed responsible for statewide or even nationwide wrongdoing, there is no conceivable reason why one plaintiff (and his/her attorney, in the form of contingency fees) should pocket the entirety of the damages awarded as a result of the widespread misconduct.

Photo: Dustin Ross

A Proposed Middle Ground:
The Theory of Societal Compensation

In a recent article, “Punitive Damages as Societal Damages,” I attempt to stake out a middle ground between these two seemingly irreconcilable poles of the punitive damages debate. In order to do so, I take a close look at the surprisingly overlooked question of why punitive damages are awarded in the first place. The two most common justifications for punitive damages, articulated frequently in academic writings and judicial decisions alike, are to punish, and to deter future wrongdoing by, the defendant-wrongdoer. But are these the only possible justifications? Are there any non-punitive rationales for punitive damages awards and, if so, what are the ramifications?

Beginning with a close reading of the United States Supreme Court’s recent punitive damages decision, State Farm Mutual Automobile Insurance Co. v. Campbell, my article identifies such a non-punitive rationale – a rationale that has long lurked within existing punitive damages judicial decisions and academic writings, but one that has yet to be clearly isolated and examined: the goal of societal compensation; i.e., the notion that one purpose of punitive damages is to compensate non-plaintiff individuals not before the court for the harms caused by the defendant who is before the court.

Modern Tort Litigation Trends

At issue in State Farm was a $145 million punitive damages award won by the Campbells, individuals who had sued their automobile insurer, State Farm, for bad faith refusal to settle within policy limits an underlying automobile accident lawsuit brought against them. The Supreme Court held that the $145 million punitive damages award, which was 145 times the compensatory damages award, was excessive under the Due Process Clause. State Farm addressed a situation that is occurring with increasing frequency in modern tort litigation: a single or multi-plaintiff case in which essentially “classwide” punitive damages are assessed and awarded on a statewide, or nationwide, scale. At trial, plaintiffs’ counsel had asked Utah jurors to punish State Farm for its nationwide business practices, admonishing jurors that they were “going to be evaluating and assessing, and hopefully requiring State Farm to stand accountable for what it’s doing across the country, which is the purpose of punitive damages.” Juries are, more and more, being confronted with corporate defendants whose business operations across the state or nation are likely to have affected individuals other than the plaintiff. My research was inspired by this trend. And while State Farm has seemingly put the brakes on such nationwide assessment of damages for widespread harms by limiting the extraterritorial or out-of-state reach of punitive damages – at least where defendants face the risk of paying multiple punitive awards for the same course of conduct – it leaves open the possibility of classwide assessments at the state (or more localized) level.

Indeed, it seems clear that this modern trend of jurors’ assessment of “classwide” punitive damages in single or multi-plaintiff cases will continue, even in the wake of State Farm. Late last year, the Seventh Circuit Court of Appeals in Matthias v. Accor Economy Lodging, Inc. was called upon to determine the propriety of a $186,000 punitive damages jury award to each of two plaintiffs who had been bitten by bedbugs in an Illinois hotel. The hotel had 191 rooms, practically all of which were infested by bedbugs. The hotel was found to have ignored an exterminator’s recommendation to spray every room, as well as its own manager’s recommendation to close down the hotel until spraying had been completed. Moreover, it was found to have placed the two plaintiffs in rooms that it knew to be infested.

While many in the hotel had been bitten by bedbugs, only two guests sued. The award they received reflected the jury’s attempt to calculate the harms wrought not only to those two particular plaintiff-guests, but to all other guests who stayed in the other infested rooms. Judge Richard Posner noted as much: “It is probably not a coincidence that $5,000 [the compensatory damages awarded in the case] + $186,000 = $191,000/191 = $1,000: i.e., $1,000 per room in the hotel.”

As in State Farm, then, damages that were, in essence, classwide, were awarded to the two plaintiffs who happened to have brought suit. There were many hotel guests not before the court who could just as well have been found to be entitled to some redress for their bedbug-related harms had they only been plaintiffs as well.

Judge Posner does not go on to say as much, but the “$1,000 per room” that he identifies represents, in my view, what should have been compensation to that society of guests to have stayed in the infested Illinois hotel at issue in Mathias. As I see it, then, the $186,000 in punitive damages awarded to each plaintiff is not only an attempt to punish the hotel for its misconduct, or to deter it from future failure to properly exterminate, but also, or perhaps instead, an attempt, albeit an imperfect one, to effect societal compensation.

Solving the Problem of “Windfall” Gains

The imperfection takes the form of the windfall to the two particular plaintiffs who happened to sue the hotel, and the fact that the guests in the remaining rooms did not get a dime. Can that imperfection be cured, or is it a necessary outgrowth of the tort law system to have developed in our country?

In my article, I argue that we most certainly need not be resigned to this imperfection, and that, to the contrary, it may be cured by introducing the concept of distribution of punitive damages into the debate. Indeed, certain state law legislation, already in existence but largely ignored in the academic literature, should be recognized as a rudimentary step toward this goal. By tweaking that legislation in order to harmonize it with the theory of societal compensation, I argue that our punitive damages system can be improved to address the problems identified by its many critics without detracting from that system’s ability to fulfill the punitive and non-punitive goals that these damages are designed to advance.

That state law legislation is collectively known as “split recovery schemes.” These are laws, currently in place in eight states, that require courts to distribute a portion of any punitive damages award to a recipient other than the plaintiff. For instance, the split recovery statutes in Alaska, Georgia, and Utah require a portion of each punitive damages award to be distributed to the state, which then deposits it into a general revenue fund. Other states have established more specialized funds. For instance, Missouri requires that a portion of all punitive damages awards be deposited into a fund designed to compensate tort plaintiffs unable to collect judgments from insolvent defendants, and Oregon’s “split recovery” law distributes a portion of all punitive damages awards to a Criminal Injuries Compensation Account.

From my perspective, these statutes are a significant reaction to the impropriety and unfairness of windfall gains to plaintiffs. In the face of constitutional and other challenges, they have usually been justified in terms of the retributive punishment goal of punitive damages; specifically, as punitive damages are akin to criminal fines, then it is only proper for a portion of those damages to be paid to the state or a state-designated fund.

I argue, however, that the societal compensation theory would be a better way to justify these statutes and, moreover, an effective roadmap for modifying them. Rather than distribute a portion of each punitive damages award to the state general revenue fund, these statutes could be amended to ensure that a portion of each punitive damages award be distributed to individuals either directly or via a specialized state-designated fund.

My article also includes a discussion of some judges’ creative attempts, most recently in an Ohio state supreme court case, to solve the problem of plaintiffs’ windfall gains, even where no split-recovery statute requires them to do so. In the Ohio case that I focus on in my article, Dardinger v. Anthem Blue Cross & Blue Shield, the judge, sua sponte, determined that the plaintiff, the widower of a woman whose insurer was found, in bad faith, to have denied coverage for cancer treatments, and who was, as a result, awarded $2.5 million in compensatory damages and $49 million in punitive damages by a jury, could make a choice: accept the court’s remittitur of the punitive damages award to $30 million and, of that, accept $10 million, with the remaining $20 million to be paid to a cancer research fund established by the court, or reject the proposal altogether and risk further remittitur by the court. The plaintiff opted for the former choice, and two thirds of the punitive damages award was distributed to the research fund.

I view Dardinger as yet another first step towards the implementation of the societal compensation goal. Both split recovery statutes and judicial innovations such as that of the Ohio state court judge are in search of a justifying theory, and, in my view, the goal of compensating similarly-harmed individuals not before the court can provide that justification.

Photo: Dustin Ross

Practical Implementation: One Example

Hostile work environment claims are a useful example. In the Nebraska case of Howard v. Burns Bros, plaintiff Mary Howard, an assistant manager at a truck stop, brought a Title VII claim against her employer when a co-worker made repeated sexual innuendoes, threatened that he was “going to get” her, and brushed up against her in an inappropriate manner. Her complaints to her supervisor were ignored. At trial, central to Howard’s proof was evidence of the same co-worker’s harassment of other female employees. In particular, the jury heard about four other women who had been victims of the same offensive conduct by the same individual. Unlike Mary Howard, these women had determined not to sue. But had the jury been told, in the form of a jury instruction, that these other women would be receiving a portion of the monies awarded to plaintiff Howard, and, had the jury considered those individuals’ harms when assessing the punitive damages award, would not that award have been far more “accurate”? Furthermore, given that Howard’s case relied, in large part, on the misconduct toward the four employees other than herself, would it not be fair for those individuals to be compensated for the damages that they suffered by virtue of working in the very same hostile environment?

Final Analysis, and the Wider Context

At one level, my article has ambitious aims: I attempt to demonstrate that the concept of societal compensatory damages represents both a necessary and feasible re-conceptualization of the civil damages landscape that our existing torts system can accommodate. I am far from blind to the many difficulties – theoretical, procedural, perhaps constitutional – presented by this new theory of compensatory damages, and many of these difficulties are addressed in my article. But, even if these difficulties prove insurmountable, my article may still persuade some that the existing doctrine of punitive damages serves goals beyond those of retributive punishment and deterrence. For the article marks the beginning of my exploration of the compensatory (or remedial) / punitive (or retributive) distinction that lies behind many of our laws relating to damages and remedies. But is it a distinction that makes sense? Why, for instance, do we have a policy against the insurability of punitive damages? Why do we assume that caps on punitive damages are effective tort reform measures? Will it be possible to certify a “punitive-damages-only” class action (an issue soon to be decided in the Second Circuit) in a mass torts case where, in light of Supreme Court precedents, certification of the underlying compensatory liability/damages class might fail? Each of these questions turns on a particular view of the compensatory/punitive divide within tort law – questions that I plan to probe in my future work.