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Punitive Damages: Why predictability is not necessarily good

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The law generally recognizes two types of damages. Compensatory and punitive damages. Compensatory damages are designed to make an injured person “whole.” In other words, these damages are intended to put the plaintiff in the same position as they would have been if they had not been injured by the defendant. Punitive damages, on the other hand, are designed punish the defendant in the particular case and serve as a deterrent to others from engaging in similar conduct. The availability of punitive damages varies from state to state. In Nevada punitive damages are never permitted. In other states, punitive damages may only be awarded if they are authorized by statute. Some states impose caps on the amount of punitive damages that may be awarded in a particular case. As a general rule, juries determine if punitive damages should be awarded and the amount. Judges then review the amount to ensure that it is reasonable.

The United States Supreme Court recently decided the case of Exonn Shipping Company v. Baker which raises multiple issues including the appropriateness of a $5 billion punitive damage award. The case arose from the famed 1989 Exxon Veldez oil spill on Prince William Sound in Alaska. Many legal actions were brought against Exxon including the Baker case which involved claims brought by commercial fisherman and Alaskans who suffered economic damages as a result of the oil spill. At trial, evidence was presented that the tanker’s captain was a relapsed alcoholic and that supervisors and managers at Exxon knew of the relapse. Testimony at trial also revealed that, on the night of the spill, the tanker’s captain drank enough vodka to cause extreme intoxication. The captain left for his cabin to do paperwork in the midst of a maneuver that required his presence. During the maneuver, the tanker ran into reef causing the spill.

The jury awarded $5 billion in punitive damages against Exxon which was later reduced by the appellate courts to $2.5 billion. These damages were to be divided against 32,000 plaintiffs who had been damaged by the oil spill.

The United States Supreme Court, on June 25, 2008, rules that the punitive damages should not be awarded in excess of a one to one ration of compensatory damages. That is, punitive damages should not exceed compensatory damages. This reduced the jury’s $5 billion award to approximately $500 million. This $500 million split among 32,000 plaintiffs equals approximately $15,000 per plaintiff (the jury’s figure would have awarded approximatley $150,000 in punitive per plaintiff).

The Court’s opinion reveals that one of the court’s primary concerns was ensuring predictability in punitive damages award. According to the Court, a potential defendant should know what the consequences of his contemplated bad acts will be. But is this really a good idea? One of the situations in which punitive damages are awarded is when wrongful conduct was undertaken in order to enhance profits. By coming up with these punitive damages ratios, the Court has allowed companies to determine the maximum amount they will have to pay if they are caught engaging in illegal conduct that enhances their bottom lines. Now, companies can make calculated business decisions whether to engage in this conduct. Establishing these fixed ratios has undermined the deterrent effect that the possibility of large, unrestricted punitive damages awards created.

While the Exonn case was decided as a matter of federal martime common law, it will likely have implications for punitive damages awards in all types of cases. In 2003, the same Court ruled that, as a matter of constitutional law, punitive damages should not, except in exceptional circumstances, exceed a nine to one ratio to compensatory damages.

For more information see:

http://www.supremecourtus.gov/opinions/07pdf/07-219.pdf

http://www.nytimes.com/2008/06/26/washington/26punitive.html?_r=1&oref=slogin