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PUNITIVE DAMAGES

By: William A. Dreier and Steven A. Karg
January 2000

Last summer, the Third Circuit Court of Appeals in Intermedical Supplies Ltd. v. EBI Medical Systems Inc., 181 F.3d 446 (1999) exercised its power to review the quantum of punitive damages awarded in the District Court. As a result, it reduced a $50 million punitive damage award to $1 million. There is no question that the award of punitive damages is subject to both a trial judge’s and an appellate court’s virtual de novo review, a duty recognized to be of constitutional proportions in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), building upon TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993), and Pacific Mutual Life Insurance Co. v. Haslip, 499 U.S. 1 (1991). The District Court had previously reduced the jury’s award of $100,600,000 to the $50 million figure. The Circuit Court explained its decision in great detail. See 181 F.3d 463-470. Yet its opinion boiled down to a subjective determination by two of the three judges, with the third vigorously dissenting and finding no basis to overturn the District Court’s award.

The Third Circuit in Intermedical Supplies, Ltd. candidly stated that once an appellate court determines that the award must be reduced, it has little more basis than “its combined experience and judgment” when it sets the amount to be paid. 181 F.3d at 468. The Court reached this conclusion after looking carefully at the various indicia of reasonableness for a punitive damage award, such as the ratio of the compensatory to punitive damages, the nature of the harm inflicted by the defendant, comparison of punitive damages and potential civil or criminal penalties for comparable misconduct, the character of the acts committed by the defendant, the economic effect of the award on the defendant, and the like. Yet these were the same standards applied by the jury and the trial judge.

>What is revealed through the open decision making process in Intermedical Supplies, Ltd. is the need to keep the remedy of punitive damages in check, while recognizing the necessity of the remedy in cases of actual malice or reckless disregard of the effects of a defendant’s conduct. The Court first applied the three-part test established by the Supreme Court in BMW to determine if the punitive damages awarded by the District Judge were excessive: “The degree of reprehensibility of the [conduct]; the disparity between the harm or potential harm suffered…and [the] punitive damage award; and the difference between this [punitive] remedy and the civil penalties authorized or imposed in comparable cases.” 181 F.3d at 445 (quoting BMW, 517 U.S. at 574-75). These tests, however, provided little by way of concrete standards to set the modified amount of punitive damages. “[T]he Supreme Court has instructed as to the analysis but has provided nothing concrete as to the amount.” 181 F.3d at 468. The judges cited “Justice Kennedy’s concurring opinion in TXO recognizing that the courts

are still bereft of any standard by which to compare the punishment to the malefaction that gave rise to it. A reviewing court employing this formulation comes close to relying upon nothing more than its own subjective reaction to a particular punitive damages award in deciding whether the award violates the Constitution. This type of review, far from imposing meaningful, law-like restraints on jury excess, could become as fickle as the process as it is designed to superintend.”

Ibid. (quoting TXO 509 U.S. at 466-67).

The New Jersey statute, N.J.S.A. 2A:15-5.14(b), provides little additional guidance, although does limit the amount of an award to the greater of $350,000 or five times the compensatory award without the jury being told of this limitation. Section 5.14(a) notes specifically that the trial judge “may reduce the amount of or eliminate the award of punitive damages.” We note that there is no provision for an increase. As previously stated, appellate courts have a constitutional duty to review and reassess these awards.

There is no question that punitive damages are necessary. Without them, a defendant can act with impunity to harm individuals if the cost of protecting them is greater than any compensatory damages that might be awarded. The system for the award of these damages, however, leaves much to be desired. See William A. Dreier, “Reform of the Personal Injury Damages Delivery System,” 48 Rutgers Law Review 799, 807-808 (1996). In the mass tort context, multiple awards of punitive damages repeatedly punish a defendant for the same conduct, even to the point of bankruptcy. Furthermore, the “company” that is punished most probably no longer is owned or even operated by the same stockholders, employees, or directors who engaged in the conduct that is subject to the punitive damages. The officers who may have declined to perform a necessary test or who turned a blind eye to the harmful effect of a product, may have long since retired or have been replaced. Enough shares of the company had been bought and sold in the interim so that the stockholders who had benefitted from the defective product may have divested themselves of their shares. The present stockholders may have bought their interest in the company after it had already been devalued because of the very problems the plaintiffs are asserting, and the employees working for the company at the present time may well be those who have corrected the harmful effects of which the plaintiffs complain. Yet with the profit motive at the forefront, the plaintiffs and their attorneys press on for punitive damages against the manufacturer even in its altered state. They whip juries into a protective frenzy against a dragon that has already been slain.

Although there still is a need for punitive damages in some cases, is it reasonable to assess punitive damages and to pay them over to the plaintiff? These are separate questions. The plaintiff by definition will have received full and fair compensatory damages, and thus will have been made whole financially, with awards for all out-of-pocket expenses, all past and future disability, and pain and suffering. Why should this fully-compensated plaintiff receive the punitive damage award? If the aim of such awards is to punish the offender so that products will be safer in the future, should not the bulk of the award be used to further this end? The Law Review article cited earlier, citing Ripa v. Owens Corning Fiberglas Corp., 282 N.J. Super. 373, 398 n. 8 (App. Div.), certif. den., 142 N.J. 518 (1995), stated:

Fully-compensated plaintiffs reap the benefit of a defendant’s punishment, while other tort victims may be uncompensated. At the same time, funds for product safety are legislatively reduced for lack of funds. Should not the proceeds of these awards, after reasonable compensation to the victim and attorney who have generated them, be employed for the general benefit of the larger society that the defendant has harmed? For example, a sizable share of any punitive damage award in a product liability case could be contributed to a state or federal fund to advance product safety.

This suggestion recognizes that while there properly should be some reasonable compensation to the client and attorney who generated these funds, punitive damages should not take on the aspects of lottery winnings.

We also must note that punitive damages are seldom awarded. According to a 1995 analysis published in the ABA Journal, by Stanford’s Richard C. Ruben, in a 1992 Department of Justice survey, before the onslaught of state punitive damage restrictions, only two percent of 762,000 cases disposed of in the 75 largest counties of this country were actually decided by juries, and plaintiffs won in 52 percent of these cases. Punitive damages were awarded in only 6 percent of the cases in which plaintiffs prevailed, and only half of these awards exceeded $50,000. Simple arithmetic shows that there were under 500 punitive awards in excess of $50,000 in the 762,000 cases. The study further demonstrated that the larger punitive awards were in real property cases, where there was a $85,000 median award, and the smallest in tort cases ($36,000 median), and that the tort cases comprised only slightly over 50 percent of those in which punitive damages were awarded. The study concluded that “punitive awards in product liability and medical malpractice cases are rare. Plaintiffs won only 41 percent of products liability lawsuits, and received punitive damages in only 2 percent of those.” The 1996 update of the study, the results of which were released and analyzed in September 1999, shows a slight decrease in punitive awards to five percent, with the median award down to $40,000. In products liability cases, however, punitive damages amounts increased significantly, but the figures were affected by several large individual asbestos and other awards, some centered in a particular Texas county. Overall, in only one-third of the punitive damage cases were the punitive awards greater than the compensatory damages, and in only 15% were they over twice the compensatory awards.

While the study demonstrates that punitive damages are not significantly eroding American industry, we are left with a decided lack of standards, and we are wasting an opportunity to put punitive damage awards to a better use than the enrichment of a fully-compensated plaintiff. We suggest to our clients that they not be overly wary of the threat of punitive damages, and that they employ their efforts through the political process, trade associations or the like to support litigation that would place the bulk of punitive damage awards in a fund to correct the conditions that occasion such damages. We may trust the courts to suppress unreasonable awards, but we suggest that these awards be put to better use than the over-compensation of the injured.