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What Are Punitive Damages?

Jeremy DerfnerPosted Tuesday, July 18, 2000, at 5:10 PM ET

On Friday a Florida jury ordered five tobacco companies to pay $145 billion in "punitive damages." This is by far the biggest punitive damage award ever. (The previous record was $5 billion for the Exxon Valdez oil spill.)

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What are punitive damages? Punitive damages are money the defendant in a lawsuit is sometimes ordered to pay when the behavior at issue is held to be especially egregious. Each state makes its own rules, but typically the defendant is supposed to have acted knowingly and with malicious intent, not just negligently. Punitive damages are assessed on top of "actual damages," which are supposed to include compensation for all of the victim's actual losses, including hard-to-measure ones such as pain and suffering.

Who gets the money? The victim gets the money, minus the lawyers' share (generally one-third, though usually less in huge class actions like the tobacco case).

If actual damages are supposed to make up for all the harm done by the defendant, why should it have to pay more than that? The theory is that if the price for gross misbehavior is just enough to make up the victims' losses, the defendant may not be sufficiently punished or discouraged from misbehaving again. Punitive damages are supposed to guarantee that the wrongdoer gets the message.

Who decides whether there will be punitive damages, and how much? Sometimes the judge, sometimes the jury. Jury awards are usually reviewed by the judge and often reduced (as most people expect them to be in the Florida smoking case). The standard of how much is vague: enough to deter future misbehavior but not enough to put the wrongdoer out of business.

If punitive damages are not about compensating the victim, who supposedly has been fully compensated by actual damages, why does the victim get the money? The theory is that deterring bad behavior through lawsuits is socially useful activity and that victims and their lawyers need an incentive and reward for bringing such suits. Critics of the tort litigation system believe that punitive damages are one of its central flaws and that encouraging lawsuits is one of the main things wrong with them.

Can other states recover punitive damages too? Yes, in theory, although the tobacco companies claim that paying $145 billion even once will wipe them out. One criticism of punitive damages is that they can be assessed again and again in lawsuits by different victims of the same misbehavior. Meanwhile, though, the judge or jury in each case is supposed to measure punitive damages as if this case were the only one.

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Jeremy Derfner is a former Slate editorial assistant.

COMMENTS

Reader Response from The Fray:

It is important to recognize two other things about punitive damages: one is that awards of such damages are very, very rare (I've never seen such an award in 20 years in practice. Even requesting such relief is rare). The other thing is that even though such awards are very, very rare, criticism of the tort system often uses such awards as a basis for suggesting that the entire system is in dire need of reform. It is not. These arguments for reform are, more often than not, a form of bait and switch: the chimera of huge punitive awards is raised as support for the contention that compensatory awards should be capped or otherwise limited. The fact such schemes would then leave the victims of others' fault less than fully compensated is inevitably overlooked.

--Bill Altreuter

(To reply, click here.)

To Bill Altreuter: Just because outrageous jury awards are rare does not disqualify them as evidence for the need for tort reform. Executing innocent people wrongly accused of a capital crime is rare, but it's still a good argument for reforming or abolishing capital punishment. I firmly believe that tort reform is needed in the specific case of class action suits. While there is value in this form of litigation, too often it serves as merely a form of wealth redistribution that benefits only one group: trial lawyers. The fact that the members of the class usually get paid a small amount of money, or often some form of compensation in kind (I think American had to give out airline coupons, and often shareholders who sue get an additional distribution of a poorly-performing stock) while the lawyers get a fat check for 1/3 the total damages undercuts any claim that this litigation is for the benefit of the class. The fact that large awards are so rare simply underscores the point that the class members rarely receive any material benefit from the case. The Florida case will be one of the few where the "victims", in this case a bunch of moron smokers who are trying to blame someone else for their stupidity, actually benefit.

--Tom

(To reply, click here.)
[Tom and Bill continued their argument.... follow the thread.]

(7/20)

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