MJS Thesis
University of Nevada
Reno
PUNITIVE DAMAGES IN ALABAMA:
Allocation or Caps?
A thesis submitted in partial fulfillment of the
requirement of the degree of Master of Judicial Studies in
Trial Court Judges Major
By
Philip Dale Segrest
Professor John Dobra, Thesis Chair
May, 1999
c Copyright by Philip Dale Segrest 1999
All Rights Reserved
This Thesis of Philip Dale Segrest is approved:
_______________________________________
Thesis Chair
_______________________________________
Department Chair
_______________________________________
Dean, Graduate School
University of Nevada
Reno
May 1999
ABSTRACT
This thesis uses economic analysis to compare and contrast two approaches to punitive damages as proposed in the State of Alabama. The two approaches are allocation of punitive damages, with a portion going to the plaintiff and a portion to the state, and caps, the term commonly applied to a legislatively imposed limit on punitive damages. The thesis applies a model called the economics of civil litigation to four areas of impact for the two approaches to punitive damages:
1) Effect of allocation and caps on settlements;
2) Effect of allocation and caps on volume of litigation;
3) Effect of allocation and caps on deterrent value of litigation; and
4) Effect of allocation and caps on quality of litigation.
TABLE OF CONTENTS
ABSTRACT……………………………………………………………………………………………………….. iii
TABLE OF CONTENTS……………………………………………………………………………………… iv
Chapter I: Introduction…………………………………………………………………………………………. 1
Chapter II: Literature Review…………………………………………………………………………………. 5
Chapter III: Methodology…………………………………………………………………………………….. 18
Chapter IV: Background of the Punitive Damages Controversy………………………………. 25
Chapter V: Law, Economics, and Punitive Damages……………………………………………… 43
Chapter VI: The Economics of Civil Litigation……………………………………………………… 51
Chapter VII. Effect of Allocation and Caps on Settlements…………………………………….. 64
Allocation……………………………………………………………………………………………….. 64
Caps… 67
Chapter VIII. Effect of Allocation and Caps on Volume of Case Filings…………………… 69
Allocation……………………………………………………………………………………………….. 70
Caps… 72
Chapter IX: Effect of Allocation and Caps on Deterrent Value of Litigation……………… 75
Allocation……………………………………………………………………………………………….. 79
Caps… 81
Chapter X: Effect of Allocation and Caps on the Quality of Litigation………………………. 84
Allocation……………………………………………………………………………………………….. 86
Caps… 87
Chapter XI: Summary, Conclusions, and Recommendations……………………………………. 88
Bibliography and Table of Cases………………………………………………………………………….. 93
Articles…………………………………………………………………………………………………… 93
Books. 95
Cases.. 96
Newspaper Articles………………………………………………………………………………….. 98
Statutes…………………………………………………………………………………………………… 98
Chapter I: Introduction
In 1987, the Alabama Legislature placed caps on punitive damages as a part of a package of tort reform legislation.[1] The Supreme Court of Alabama declared the caps legislation unconstitutional in 1993.[2] Then one Thursday afternoon near the end of 1995, the Supreme Court of Alabama announced its own version of tort reform in a sweeping change in Alabama’s law pertaining to punitive damages. In Life Insurance Company of Georgia v. Johnson,[3] the Court announced that the State of Alabama would receive one-half of all future awards of punitive damages.[4] The plaintiff’s attorney would continue to receive a full contingent fee based on the entire award, including the half that would go to the State.[5] The Court later withdrew the 1995 opinion and issued a new one that refined the provisions of the initial opinion and retained the innovative proposal for allocation.[6] The United States Supreme Court granted the defendant’s petition for certiorari and remanded the case for further consideration in light of the principles announced in BMW of North America, Inc. v. Gore.[7] After the United States Supreme Court remanded Johnson,[8] the Supreme Court of Alabama eliminated the requirement for allocating punitive damages.[9]
The events in Alabama provide an excellent opportunity to examine the controversy surrounding punitive damages. Even though the Alabama court finally decided not to require allocation, the court’s innovative approach to punitive damages gives us an opportunity to examine and compare the impact of allocation and caps of punitive damages. We will use tools of economic analysis to compare these two often-proposed tort reform measures. The court’s approach, which was to allocate awards of punitive damages between the plaintiff and the state, stands in sharp contrast to attempts by the Alabama legislature to place limits–commonly referred to as “caps”–on the amount of punitive damages that courts can award. The court’s proposal for allocation and its opposition to caps underscores the need to compare and contrast the impact that these two approaches to punitive damages would likely have on the civil justice system. Both approaches are important. Legislatures often choose to limit the amount of punitive damages that juries can award.[10] Likewise, legislatures often choose to eliminate the alleged windfall[11] to the plaintiff by allocating punitive damages between the plaintiff and the state.[12] Both measures are advocated as desirable tort reform measures. Policy makers need to clearly understand the impact of both measures on potential plaintiffs, defendants and attorneys. Policy makers considering the two approaches need to know what results they can expect by adopting either of these approaches. They need to know how these two approaches will impact on the civil justice system. Only if they understand the results that the rules will likely produce can policy makers wisely choose whether to adopt either or both allocation and caps.
After describing in some detail the political and economic background of the controversy about punitive damages in Alabama, I will use the basic economic concepts of bargaining theory and market theory to compare the likely effect on the civil justice system of both the court’s proposal for allocation and the legislature’s proposal for caps. To look at tort litigation as merely the resolution of a dispute between a plaintiff and a defendant in a particular case oversimplifies the economic issues. This thesis will attempt to take a broader view of the interface between law and economics with regard to punitive damages. A more complete approach to the questions surrounding allocation and caps includes an examination of the economics of civil litigation. The motives of the lawyers, as well as the motives of the parties must be examined. We will analyze the impact of the two rules on the civil justice system in four separate areas: (1) impact on the likelihood of settlement, (2) impact on volume of case filings, (3) impact on deterrence, and (4) impact on the quality of litigation. Bargaining theory and market theory will enable us to make reasonable predictions about how potential plaintiffs, defendants, and attorneys will respond to allocation or caps. I conclude that both caps and allocation would have a predictable effect on the volume of settlements and the volume of case filings. Based on my analysis, I suggest that allocation will increase the volume of settlements; caps will decrease the volume of settlements. Allocation will increase the volume of case filings; caps will decrease the volume of case filings. Neither caps nor allocation will assure adequate deterrence or improve the quality of litigation. Due to the dynamics of selection, caps may indirectly improve the quality of litigation but adversely affect deterrence. Allocation may indirectly increase deterrence while decreasing quality of litigation.
Chapter II: Literature Review
Practically every textbook that deals with law and economics considers the topic of punitive damages.[13] In recent years, punitive damages have become controversial and have attracted much attention in law review articles and scholarly journals.[14] Various proposals for effecting sound policy for punitive damages emerge from the articles. In this thesis, I compare and contrast two of these proposals, both of which have been proposed in Alabama: allocation and caps. Legislators often propose legislation to place a dollar limit on the amount of punitive damages that can be awarded.[15] This approach is commonly referred to as “caps.” Caps attract much scholarly opposition, both from economists and legal scholars, who contend that an artificial limit on punitive damages would impair their power to deter.[16] Legislators–and the Supreme Court of Alabama–have also proposed that states (or other entities) receive a share of any award of punitive damages.[17] The second approach is often called allocation or split-recovery. The Supreme Court of Alabama used the term allocation in Life Insurance Company of Georgia v. Johnson.[18] Since that case is central to the discussions in this thesis, I will also use the term allocation to describe statutes that provide for the state to receive a portion of punitive damages awards.
Exactly what are legislatures and courts trying to accomplish by allowing juries to award punitive damages? First, they want to deter wrongdoers from engaging in egregious conduct. “According to the usual formulation, punitive damages can be awarded when the defendant’s behavior is malicious, oppressive, gross, willful and wanton, or fraudulent.”[19] For less egregious conduct, most economists believe that awards of compensatory damages adequately deter the defendant’s wrongful behavior.[20] Posner would limit damages generally to actual loss[21] and award punitive damages only in the case of intentional torts or their equivalent.[22] As Posner points out, over-precaution can be costly, or can actually stifle creative economic activity. Cooter concludes that (1) punitive damages should be restricted to intentional faults; (2) these faults will usually violate the legal standard of care by a wide margin; and (3) the awards of punitive damages should be large.[23] While Cooter discounts the rationale that punitive damages are a justifiable reward to the plaintiff for pursuing litigation, his suggestion that awards “should be large” will no doubt accomplish that objective, whether Cooter justifies punitive damages on that basis or not. Some courts want to give the victim of such wrongdoing incentive to bring suit, and want his lawyer to have sufficient incentive to take the case.[24] However, courts and legislatures don’t want to make the prospect of recovery so inviting that it causes plaintiffs to file frivolous lawsuits.[25] Will either allocation or caps help to create such a desired state of the law? The contending forces in Alabama’s punitive damage controversy have proposed both.
The State of Alabama has been a focal point in the punitive damages controversy. Two leading punitive damage cases decided by the United States Supreme Court in recent years arose in Alabama.[26] Alabama’s experience sheds light on the political and economic forces at work in the punitive damage controversy. In 1987, the Alabama Legislature, with strong encouragement from the business and insurance community, passed legislation imposing caps on punitive damages.[27] When the Supreme Court of Alabama declared the caps legislation unconstitutional in 1993,[28] the public debate included charges that the court was influenced by the plaintiff’s bar. In 1995, the court began an unsuccessful attempt to provide for allocation of punitive damages.[29]
The leading cases show that both the Supreme Court of Alabama and the United States Supreme Court approve of punitive damages as a measure to deter egregious conduct.[30] However, conceptual difficulties arise in attempting to define the precise circumstances under which punitive damages should be awarded and how to properly measure and limit the size of the award so that punitive damages are optimally effective.[31] In TXO Production Corp. v. Alliance Resources Corp.,[32] and Pacific Mutual Life Insurance Company v. Haslip[33] the United States Supreme Court validated the use of punitive damages by states for effecting legitimate state policies. In Haslip the Court carefully reviewed the jury charge used in Alabama, the trial court’s mandatory review responsibility, and the ultimate review by the Supreme Court of Alabama, and found that these procedures afforded due process. However, in Gore the United States Supreme Court found the award of punitive damages so “grossly excessive” as to violate due process. Dr. Ira Gore, Jr., purchased a new BMW. Later, he learned that on its trip from Germany, the BMW had encountered acid rain. The defendant, BMW of North America, Inc., repainted the automobile before it was sold to Dr. Gore. The cost of the paint job was approximately $300.00. BMW did not disclose that the automobile had been repainted. Dr. Gore sued for fraud. At trial, Dr. Gore produced evidence indicating that the market value of the automobile was approximately $4,000.00 less than it would have been had the car not required new paint. An Alabama jury awarded Dr. Gore four million dollars in punitive damages. The Supreme Court of Alabama thought that four million dollars was too much, so it required a remittitur of two million dollars. The United States Supreme Court granted certiorari and found that the two million dollars approved by the Supreme Court of Alabama was grossly excessive and that the award violated the requirements of due process as contained in the fifth and fourteenth amendments of the United States Constitution. In analyzing the verdict, the United States Supreme Court established three guideposts for determining whether a verdict is grossly excessive so as to violate the requirements of due process.
The first guidepost indicated by the Court is the degree of reprehensibility of the defendant’s conduct. The Court observed that Dr. Gore’s injury was purely economic. It further noted that BMW’s conduct would not have been illegal in a number of states. In short, the Court found that BMW’s conduct was not so reprehensible as to require extensive punitive damages.
As a second guidepost, the Court indicated that punitive damages should bear some reasonable relationship to the plaintiff’s actual loss. Accepting the jury’s determination of $4,000.00 compensatory damages, the Court was of the opinion that a multiple of 500 was excessive. The Court declined to suggest a “bright line” test, recognizing that the reasonableness of the relationship between compensatory damages and punitive damages must be controlled by the circumstances of each case.
The third guidepost established by the Court was a comparison of the award to civil or criminal sanctions that could be imposed for comparable misconduct. It noted that “the $2 million economic sanction imposed on BMW is substantially greater than the statutory fines available in Alabama and elsewhere for similar malfeasance.”[34] The Court also noted an absence of a BMW history of non-compliance with a known statutory requirement.
The facts in TXO[35] provide an interesting comparison and contrast for Gore.[36] TXO Production Corp., Inc., leased property from Alliance Resources Corp. After leasing the property, and agreeing to pay handsome royalties, TXO did a title search and discovered a deed in the chain of title which reserved an interest in coal. TXO paid $6,000.00 for a quitclaim deed from the holder of the interest in coal, and filed suit against Alliance Resources to quiet title in the property, based on the quitclaim deed. Alliance Resources counterclaimed for slander of title. TXO attempted to use the lawsuit as leverage to renegotiate the lease. The Supreme Court of West Virginia and the United States Supreme Court approved a 10-million-dollar punitive damage award against TXO although the actual damages were only $19,000.00. The actual evidence in the case showed that TXO had engaged in the same kind of nefarious conduct in many other instances. The findings of the Court, stated simply, show that TXO acted in total bad faith and that such a practice was routine for TXO. TXO would do whatever was necessary to get control of valuable oil and gas property and then, to use the word chosen by the Supreme Court of West Virginia, begin “chiseling”[37] their way out of their obligations, often using legal process to do so. In its most quotable quote, the Supreme Court of West Virginia said, “Generally, then, we can distinguish between the ‘really mean’ punitive damages defendant and the ‘really stupid’ punitive damages defendant. We want to discourage both forms of unpleasant conduct, but not necessarily with the same level of punitive damages.”[38] Obviously, the court found TXO to be “really mean.”
Gore is the only case in which the United States Supreme Court has struck down a punitive damage award purely on the basis that it was so “grossly excessive” that it violated due process requirements. The Court neither used nor suggested economic analysis or an economic formula for establishing the amount of punitive damages that would achieve optimal deterrence. The case establishes only the outer limits of due process, and leaves to states the task of assuring reasonableness within the limits of due process. States can consider principles of economics in formulating punitive damages policy if they wish.
States, in an effort to establish sound policy for the use of punitive damages, have enacted a variety of statutes providing some form of caps or allocation. The use and regulation of punitive damages by the states is a patchwork. Statutes and caselaw vary considerably from state to state as to whether punitive damages are available, whether they will be limited as to amount, whether the state will receive a portion of the award, and numerous other details.[39] Numerous articles concerning both allocation and caps appear in law reviews and journals.[40] Although the verdict of scholars and critical writers is not unanimous, most authors who have written about allocation are favorable to the idea.[41] By contrast, most of the authors who have written about caps do not favor placing arbitrary limits on awards of punitive damages.[42] Law review articles about allocation and caps tend to center on constitutional issues rather than economic issues.[43] This author has been unable to locate literature that uses economic analysis to compare the impact of both allocation and caps on the civil justice system.
Law and economics literature generally agrees on a few basic points:[44]
1) Punitive damages should not be awarded in most cases that arise from negligence or contract.[45] Economists generally agree that an award of economic monetary damages that compensate the loss to the plaintiff for the actual economic loss is ordinarily adequate.
2) However, punitive damages may serve a useful purpose to deter egregious wrongdoing.[46] Such wrongdoing is usually described as reprehensible, evil, mean, bad, intentional, wanton, reckless, or malicious.
3) Circumstances that give rise to punitive damages should be carefully defined.[47] If punitive damages should be awarded but are not awarded, deterrence may be inadequate. If punitive damages are awarded inappropriately, they may discourage worthwhile activity, or even economically injure innocent third parties, such as customers or employees of the defendant.[48]
4) The standard by which courts measure punitive damages needs to be accurate. If punitive damages are too low they may not adequately deter wrongdoing. If they are too high, they will over-deter and discourage worthwhile activity.[49]
5) Economists find no strong economic reason to reward plaintiffs for suing.[50] They contend that economic efficiency is not promoted by giving back to plaintiffs any more than their actual loss, despite the fact that extraction of punitive damages from the defendant in appropriate cases might promote efficiency.[51] By contrast, many legal writers and courts assert that we should reward the plaintiff for bringing suit.[52]
Law review writers have made the following assertions and assumptions that we will carefully examine in this thesis: (1) Allocation of punitive damages is likely to produce a larger number of settlements.[53] The writers assert that caps will reduce the percentage of cases that settle.[54] (2) Allocation of punitive damages is likely to reduce the number of case filings.[55] The writers have little to say about the impact of caps on the number of case filings. (3) Allocation of punitive damages will not affect the deterrent value of punitive damages,[56] since the economic impact of punitive damages will be the same, regardless of who receives the award. Caps will adversely affect the deterrent value of punitive damages.[57] (4) Allocation of punitive damages will improve the quality of litigation.[58] Law review writers have little to say about the effect that caps will have on the quality of litigation, but obviously proponents believe caps will reduce frivolous lawsuits.[59]
None of these assertions or assumptions are unanimous, but based on a review of the literature, they appear to represent the weight of scholarly opinion. Using economic analysis, we will critically assess these issues in this thesis. On two important issues, our analysis leads to conclusions that differ from the assertions made by writers. I conclude that allocation is likely to increase the volume of cases filed and that allocation will have an adverse effect on the quality of litigation. Although writers have little to say about the effect of caps on the volume of litigation, our analysis suggests that caps will cause fewer cases to be filed.
Chapter III: Methodology
The primary methodology used in preparation of this thesis has been academic research of applicable legal and economic theory, and synthesis of the results. Using the results of the research and synthesis, I have analyzed, compared, and contrasted allocation and caps of punitive damages. Research for the analyses provided in this thesis included (1) a search of the treatises dealing with law and economics for economic principles that enable economic analysis of the impact that rules imposing allocation and/or caps of punitive damages will likely have on the civil justice system; (2) the identification and study of cases dealing with punitive damages that have been decided by the United States Supreme Court and the Supreme Court of Alabama; and (3) research of law review articles dealing with punitive damages, especially those that deal with caps or allocation.
Chapter I introduces the topic that this thesis analyzes. The thesis compares and contrasts the impact of allocation and caps on the civil justice system in four areas: (1) likelihood of settlement; (2) volume of case filings; (3) impact on deterrence; and (4) quality of litigation. Chapter II introduces the literature dealing with these two proposals to reform punitive damages. It summarizes assertions and assumptions that writers have made about the four areas that we analyze. In the analysis, I critically examine those assertions and assumptions and report on agreement or disagreement. The present chapter describes the methodology used to assess the impact of the two rules on the civil justice system.
Chapter IV describes the punitive damages controversy, and explains how that controversy has evolved in the State of Alabama. The discussion elucidates motives of various groups embroiled in the controversy. The Alabama experience provides a specific example that illuminates subsequent discussions of economic forces, political forces, and motives of participants.
Chapter V describes in detail economic principles that we use to analyze caps and allocation of punitive damages. To successfully analyze the problems associated with punitive damages from the perspective offered by the law and economics approach, and posit sound policy for dealing with those problems, we must touch the issues at multiple levels. First, we must carefully examine the interface between law and economics. Exactly what does economics have to offer that will be helpful to policy makers in their quest for sound policy about punitive damages? After we have examined what economics has to offer–and implicitly what it does not offer–then we can use the tools of economics to analyze the proposals for allocation or caps. Our analysis relies on fundamental assumptions of economic theory which will be described in Chapter V. It also relies on the economic principles of bargaining theory and market theory. Market theory is based on the laws of supply and demand. We describe bargaining theory and market theory.
Chapter V provides the foundation for Chapter VI which is entitled “The Economics of Civil Litigation.” In Chapter VI, we use the economic theories described in the Chapter V to construct an economic model for the civil litigation system. Chapter VI discusses the economic motives of lawyers and shows how their motives enter into the punitive damages controversy. To assess the impact of allocation and caps, we must figure out what is likely to happen when the plaintiffs, characterized by enlightened self-interest, and the attorneys, with their enlightened self-interest encounter a civil justice system that allows punitive damages against defendants, who are also characterized by enlightened self-interest. What effect will caps have on the behavior of the individual participants? What effect will allocation have on their behavior? How will the activities of all the individuals involved in the system impact on the civil justice system that encompasses the entire group? The economics of civil litigation model shows that a symbiotic relationship exists among plaintiffs’ attorneys, defense attorneys, insurance companies, and large corporate defendants. The symbiotic relationship forms an economic system or organization that serves the economic wants[60] of the participants, who rely on the system of litigation for their livelihood. Only by understanding the wants of the participants can we fully understand the impact of caps and/or allocation on the civil justice system. In Chapter VI, we also show that it would be possible to create an economic model for more optimally gearing punitive damages to their intended deterrent purpose. Although full development of such a model is beyond the scope of this paper, we use the possibility of such a model to show that neither allocation nor caps provides any assurance of optimal performance of punitive damages.
Utilizing the background information and economic analysis developed in the three preceding chapters, Chapter VII assesses the effects of allocation and caps on the likelihood of settlements. We argue that caps will reduce the number of settlements, since the defendant will incur less risk by trying the case than it would have incurred without caps. By contrast, allocation will increase the number of settlements, since, by settling, the plaintiff and defendant can share the portion of the punitive damage award that would go to the state if the case were tried.
Chapter VIII provides an analysis of the effects of allocation and caps on the volume of litigation. For the purposes of this chapter, we make two important, and possibly questionable assumptions. First, we assume that courts are working to full capacity. Stated differently, we assume that courts cannot, in the short run, increase the volume of cases tried. Please note that the assumption deals only with the number of cases that the court system can try. If more cases settle, the court system can process a larger number of cases. Secondly, we assume that plaintiffs’ attorneys select cases from a large volume of human controversy. They select the cases that they believe to be most profitable to themselves. They could file more cases if more cases settle. Based on these assumptions, the conclusions from Chapter VII that allocation will induce more settlements and caps will induce fewer settlements leads to interesting results about the volume of case filings. Caps, which would produce fewer settlements, would also result in fewer case filings, because plaintiffs’ attorneys could not process as many cases through the system. More importantly, allocation might produce a larger number of filings, since plaintiffs’ attorneys could process more cases through the system. This result is significant, because most writers either assert or assume that allocation will result in fewer case filings.
Chapter IX continues to build on the themes introduced in the two preceding chapters. It provides an analysis of the effects of allocation and caps on deterrent value of litigation. The chapter deals with the impact of allocation and caps on deterrent value of punitive damages in the civil justice system. It does not provide a general economic analysis of the deterrent value of punitive damages, although it refers to such analyses to show that caps and allocation alone are inadequate to assure optimal deterrence. If we assume that punitive damages are hitting their target in a certain percentage of the cases that are filed, and are producing desired deterrence in those cases, then we can reach certain conclusions about the impact rules imposing allocation and/or caps will have on deterrence produced by the civil justice system. As shown in Chapter VII, caps will result in fewer case filings. Plaintiffs’ attorneys will select cases more carefully if caps are imposed. They may be more likely to select meritorious cases. However, even if attorney’s select more meritorious cases, this provides no assurance that the system is producing optimal deterrence. Plaintiffs’ attorneys may be forced to pass over other cases that should have been filed. Similarly, an allocation rule that results in more settlements will enable plaintiffs’ attorneys to file more cases. Under a rule of allocation, they can be less selective. However, the fact that plaintiffs’ attorneys can file more cases doesn’t mean that the system will produce optimal deterrence.
Chapter X provides an analysis of the effects of allocation and caps on the quality of litigation. Chapter X is closely related to the preceding chapter. In Chapter IX, we examine the impact of allocation and caps on the system’s ability to deter egregious conduct. In Chapter X, we examine the likelihood that either allocation or caps would encourage frivolous litigation. Because of plaintiffs’ attorneys’ selectivity, as described in Chapter IX, caps would marginally decrease the likelihood of frivolous cases and allocation would marginally increase the likelihood of frivolous cases. Neither allocation nor caps offers any assurance of optimal effectiveness for the system.
In Chapters VII, VIII, IX, and X, I approach the analyses at two different levels. First, I assess the impact of rules of allocation or caps on individual cases. Secondly, I assess the impact of the two rules on the system as a whole, using the economics of civil litigation model. The dual approach indicates that analyses that deal only with individual cases and motives of the parties is misleading. Only by considering the economics of civil litigation model and the motives of attorneys and insurers can we adequately predict the impact of the two rules on the civil justice system.[61] Chapter XI summarizes the findings of the preceding discussions and makes recommendations based on those findings.
I am making several general assumptions in this thesis that need to be carefully noted since they may not be true. First, in the analysis predicting that allocation will produce more settlements and a higher volume of case filings, I assume that, except for the rule imposing allocation or caps, the civil justice system and the forces acting on it will remain unchanged. For instance, I assume (1) that the attitude of jurors and the size of verdicts will not be affected by the fact that the state may participate in the award, and (2) that the clamor over punitive damages and the normative force that it engenders will not change the behavior of lawyers, parties, judges, and jurors in any significant way. Both assumptions are questionable.
I have not attempted to empirically verify the accuracy of the predictions made in this thesis. The approach is limited to rational analyses. I believe that the approach is justified for the following reasons: (1) the rational analyses are based upon verified economic theory and are inherently valuable as hypotheses; (2) there is no readily available way to test the predictions with empirical evidence. The existing statutes on caps and allocation vary considerably from state to state, and internal differences in the formulas that are used could have a significant impact on outcome. For instance, if the allocation statute makes no provision for attorneys’ fees, as is the case in Indiana, then the analysis of this thesis simply would not apply. Secondly, as stated in the preceding paragraph, it has been necessary to make the basic assumption that all other things will remain unchanged in order to make the analyses and predictions in this thesis. Since all other things probably would not remain unchanged, the value of empirical evidence would be questionable. While I encourage others to prove or disprove the analytical predictions of this thesis with the use of empirical evidence, verification through empirical evidence is beyond the scope of the present thesis.
Chapter IV: Background of the Punitive Damages Controversy
To understand the controversy surrounding punitive damages, we need to understand the concerns that gave rise to punitive damages in the common law. We also need to understand the economic and political motives and interests of the persons and organizations who are actively engaged in the controversy. The controversy in Alabama has been particularly acrimonious. Political repercussions have been considerable, including political impact on the Alabama court system itself. The strong political repercussions evidence the energy of contending economic and social forces that fuel the punitive damage controversy. Since we will be using Alabama cases and legislative acts as the basis for the analysis of allocation and caps, we need to understand the context of the controversy in Alabama. If we can understand the motives of the participants in the controversy in Alabama, and what caused the legislature to propose caps and the Supreme Court of Alabama to propose allocation for punitive damages, then we can more accurately understand the economic analysis.
Punitive damages are intended to punish the defendant and deter wrongdoing, while compensatory damages are intended to repair the damage to the plaintiff.[62] Punitive damages are awarded in a variety of circumstances. Legal theory ties these circumstances together conceptually only through the mental state of the defendant. Terms used to describe the mental state include intentional, conscious, deliberate, malicious, reckless, and wanton. The actions of the defendant are described as egregious, reprehensible, bad, mean, evil, oppressive, and fraudulent. Although these terms have understandable meaning, they are quite vague and subjective. Their subjectivity contributes to the difficulty of economic analysis. Robert Cooter, who has written extensively about law and economics, suggests that both social norms and economic theory have roles to play in the law of punitive damages.[63] He suggests that normative force is a better guide for determining when to award punitive damages than for measuring the amount of the award.[64] The terms that we use to express emotions that back normative force can describe a wide variety of undesirable behavior. Injuring someone while driving under the influence of alcohol,[65] selling alcoholic beverages in violation of the Dram Shop Act to a person who then injures someone,[66] defrauding customers,[67] failing in bad faith to pay an insurance claim,[68] assault,[69] conversion of property accompanied by insult,[70] and other inappropriate activities can result in awards of punitive damages. Despite the variety of circumstances involved in such cases, the judge, at the appropriate time in an Alabama trial, reads the punitive damage instruction found in footnote 62 to the jury. One measure fits all. In Chapter V, I will suggest a method for differentiating the varied circumstances that justify awards of punitive damages for analytical purposes, so that we can see why neither caps nor allocation can assure optimal deterrence. For now, my purpose is merely to note the broad variety of activities that can invoke punitive damages, the lack of guidance for jury and judge that the descriptive terms provide, and the emotional force that those reprehensible activities are likely to produce in victims and juries. Since one punitive damage jury charge is applied to all activities, it is not surprising that juries produce widely disparate results. However, to survey the Aegean stables is not to clean them, and I limit my analysis to the impact of allocation and caps.
Historically punitive damages have gone directly to the plaintiff. Often the punitive damage award far exceeds the plaintiff’s actual loss. This gives rise to the charge that plaintiffs receive a windfall. Some of the award goes to plaintiffs’ attorneys, since plaintiffs’ attorneys usually accept punitive damage cases on a contingent fee basis. Proponents of contingent fees justify the practice on the basis that it provides access to courts for those who could not otherwise afford it. The resulting litigation, in turn, produces social good by bringing wrongdoers to justice, and deterring them and others from similar conduct in the future. The contingent fee arrangement pays plaintiffs’ attorneys for handling the case.
Business and insurance interests contend that the availability of unlimited punitive damages–discretionary with the jury–often causes verdicts to be excessive. From their standpoint, punitive damages should be curtailed. They contend that for plaintiffs to receive anything more than compensatory damages–an amount that restores them to their pre-injury position–amounts to a windfall.[71] They feel that punitive damages discourage legitimate business endeavors. They believe that the economic interest of lawyers–especially lawyers who represent plaintiffs–is the real reason for what they perceive to be an inappropriate, gigantic increase in punitive damage awards in recent years. For all these reasons, business and insurance interests have sought legislation that would place caps–dollar limits–on the amount of punitive damages that can be awarded by a jury.
When the Supreme Court of Alabama issued its decision in Johnson,[72] it disagreed with the contentions of business and insurance interests. The majority of the court asserted that punitive damages are the only remedy for certain types of egregious behavior. They stated that plaintiffs’ attorneys perform a valuable service in ferreting out wrongdoing, and that there is no other way to deal with the problem.[73] The court found that the economic reward to plaintiffs’ attorneys is justified by the societal value of the service that plaintiffs’ attorneys perform.[74]
Although the public was surprised by Johnson,[75] by applying hindsight, we can see that the opinion, now withdrawn, was predictable. Associate Justice Janie Shores, who authored the opinion, wrote a law review article that appeared in the Fall, 1992, Alabama Law Review, entitled A Suggestion For Limited Tort Reform: Allocation of Punitive Damage Awards To Eliminate Windfalls.[76] Both she and Associate Justice Gorman Houston had written earlier, non-majority opinions advocating the type of changes announced in Johnson.[77] Justice Houston offered his views when he specially concurred in Charter Hospital of Mobile v. Weinberg.[78] Justice Shores expressed her views in Smith v. States General Life Ins. Co.,[79] and Fuller v. Preferred Risk Life Ins. Co.[80]
The Johnson[81] decision certainly did not occur in a vacuum. The legislature had enacted tort reform[82] measures which had been either rejected by the court on constitutional grounds[83] or rendered ineffective by judicial gloss.[84] The court struck down legislation placing caps on punitive damages in 1993.[85] Johnson[86] and decisions dealing with tort reform clearly indicated that the court believed punitive damages are the only effective vehicle for punishing corporate wrongdoing and for preventing the kind of injury caused by such torts as insurance fraud. The court asserted that private litigants and plaintiffs’ lawyers will have no economic motive to ferret out wrongdoing and press for an adequate remedy, unless punitive damages are available. In short, the court affirmed the policy that activity of plaintiffs and their attorneys promotes the general welfare of society. The court also held that the legislature’s attempt to limit punitive damages violates the doctrine of separation of powers.[87] The court reasoned that the review of awards of punitive damages is purely a judicial function and that the Alabama Legislature’s attempt to remove that power from the court could deprive the court of the power to carry out an essential judicial function.[88]
At the time that Johnson[89] was initially decided, Alabama’s governor was proposing a special session of the Alabama Legislature to consider tort reform. The governor convened the special session in January, 1996, but no tort reform legislation was enacted. High on the agenda of proposed measures that went before the Legislature was a renewed proposal to cap punitive damages.[90] The court, perhaps anticipating this move by the governor and legislature, pointedly indicated in Johnson[91] its disapproval of any legislative measure to limit punitive damages.[92] The court found two constitutional flaws in the caps legislation. First, the court indicated, as mentioned above, that the legislatively imposed caps violated the doctrine of separation of powers by depriving the court of its inherent power to review punitive damage awards. Secondly, the court found that legislative caps violate the plaintiff’s right to trial by jury as provided by the Constitution of the State of Alabama. The political struggle for control of punitive damages defines the context in which the court presented its proposed rule for allocation.
The court’s eventual abandonment of the allocation rule[93] also has an important context. Prior to the time that the Supreme Court of Alabama issued its initial Johnson[94] opinion in 1995, the United States Supreme Court had shown great deference to the power of state courts to use punitive damages to enforce state interests. In Haslip,[95] the Court had approved Alabama’s approach to punitive damages, including the discretion given to juries in making the award. The Court in Haslip[96] reasoned that due process was afforded by Alabama’s announced standards for trial and appellate review. However, in Haslip, the United States Supreme Court placed responsibility for controlling inappropriate awards squarely on Alabama appellate courts.[97] In TXO,[98] the United States Supreme Court upheld the basic policy arguments for punitive damages,[99] but the release of the Thurgood Marshall Papers revealed that some members of the United States Supreme Court had grave reservations about how the Alabama courts were dealing with punitive damages. On March 8, 1995, during the week that the United States House of Representatives voted on caps legislation that was ultimately vetoed by President Clinton, the Wall Street Journal published material found in the recently released Marshall Papers.[100] It printed on its editorial page a draft concurring opinion in Aetna Life Insurance Co. v. Lavoie,[101] that had been written by Justice Lewis Powell and circulated among his colleagues, including Justice Marshall, on March 6, 1986. Although the opinion was not published by Justice Powell, it shows his deep reservations about punitive damages in Alabama:
The jurors who pass sentence on tort defendants according to these procedures probably have never decided a punitive damages case before. Thus, they have no basis for determining what penalties are common in particular kinds of cases. Yet they are called upon to impose potentially limitless civil fines with neither sufficient experience nor adequate information, and without any of the procedural safeguards that ordinarily protect against arbitrary punishment.[102]
This grant of standardless discretion to punish has no parallel in our system of justice.[103]
The opinion included a footnote that may be extremely germane to the idea of allocation:
Footnote: The private windfall aspects of punitive damages aggravates these problems. Unlikecriminal fines, which go to the public treasury, punitive damages awards go to private plaintiffs. A prosecutor in a criminal case receives no benefit or reward for convincing the judge to impose a severe sentence; consequently, the prosecutor’s recommended sentence is likely to reflect his measure of the public’s interest in punishment. But the plaintiff in a punitive damages case has every incentive to seek to inflate the award in any way possible, since the award will go into his pocket. Thus the jury that imposes punitive damages receives no dispassionate estimate of the proper punishment beyond any rational bounds.[104]
Then, after the second opinion in Johnson,[105] issued April 26, 1996, the thunderbolt struck: In Gore,[106] decided May 20, 1996, the United States Supreme Court found that the Supreme Court of Alabama had approved punitive damages awards that were “grossly excessive.” Gore also makes it clear that punitive damages should bear some reasonable relationship to the actual damages suffered, should take into account the degree of egregiousness of the conduct, and should bear some relationship to other criminal and civil penalties for similar conduct. For those of us on the trial bench, that still leaves a large volume of subjectivity as to what is egregious, how much is enough to deter, and how much is too much. We don’t mind being the referees, but it helps if the playing field is lined off before the game starts. Lining off the playing field is the responsibility of states. The United States Supreme Court has left an extremely broad level of apparent discretion in the states to establish policy concerning punitive damages.
The United States Supreme Court granted certiorari in Johnson[107] and others,[108] and remandedthem for further consideration in light of Gore. On reconsideration, the final opinion in Johnson[109] stated, “[I]t is not necessary to share punitive damage awards with the state treasury in order to prevent windfalls to those who pursue claims against tortfeasors.”[110] The jury in Johnson[111] had awarded $250,000 compensatory and $15 million in punitive damages. The trial judge reduced punitive damages to $12.5 million. The Supreme Court of Alabama reduced the punitive damages to $5 million. On remand from the United States Supreme Court, the Supreme Court of Alabama further reduced the punitive damages to $3 million by way of remittitur. In the other cases remanded by the United States Supreme Court, to be reviewed in light of Gore, the Alabama court reduced the $2 million that it had previously affirmed in Union Security Life Ins. Co. v. Crocker[112] to $1 million; it reduced the $2 million it had previously affirmed in American Pioneer Life Ins. Co. v. Williamson[113] to $750,000; and it reduced the $6 million it had previously approved in Ford Motor Co. v. Sperau[114] to $1.792 million. The court focused more on reprehensible conduct and punishment than on economics of deterrence in reaching its conclusions. Punishment does not lend itself to rational calculation as does deterrence, which can be linked to the profit motive.
The controversy surrounding punitive damages entered dramatically into judicial elections in Alabama.[115] The 1994 election of the Chief Justice of the Supreme Court of Alabama was the first of a pair of extremely hostile supreme court races.[116] The incumbent Democrat was reputedly aligned with plaintiffs’ lawyers. That alignment became a significant issue in the race. He allegedly personally solicited campaign funds from lawyers who had cases pending in his court, including defense lawyers. The Republican challenger sought the support of the business community.[117] The race was extremely close and was contested in court. Without reciting all the details, it is sufficient to say that the final decision in the matter came from The United States Court of Appeals for the Eleventh Circuit. The Republican challenger was declared winner. Throughout the court contest, news media faithfully reported the political affiliation of both state and federal judges.
The second high-profile election occurred in 1996 and pitted an incumbent Democrat associate justice who was reputedly aligned with plaintiffs’ attorneys against a Republican challenger, who was allegedly pro-business. The highlight of that campaign was a television commercial in which the incumbent’s campaign portrayed the challenger as a skunk. The challenger won, and there was no legal challenge to the election. These events are significant to our analysis only to show the great emotion–not to mention cash–invested in these political events, which evidences the feelings of the warring factions. Punitive damages were the central issue in both races.[118]
In recent years, the Republican party–which tends to align itself with conservatism and tends to be pro-business–has gained a firm foothold in Alabama. Elections have altered the composition of the court that opposed tort reform. Some justices have been defeated at the polls. Others have retired, and their successors do not seem to be aligned politically with plaintiffs’ lawyers. Faced with disapproval of its overly broad affirmation of punitive damages in Gore by the United States Supreme Court, and possible lack of general political support for its position on tort reform, the court abandoned its attempt to allocate punitive damages. The opinion withdrawing Johnson[119] and its requirement of allocation was issued August 15, 1997.[120] It reduced the $5 million award to $3 million, reasoning that even under the Gore guideposts, the behavior of the defendant was very reprehensible, and the potential economic harm was great.[121] The court found that there was no basis for comparison to other civil and criminal penalties.
In the 1998 elections, Republicans gained a majority[122] on the Supreme Court of Alabama, which might seem to indicate that the present court will be sympathetic to tort reform. However, in the same elections, Democrats maintained control of the Legislature and elected a Democratic governor. There was a significant resurgence of the Democratic Party. The incumbent governor, who had been a strong supporter of tort reform, was soundly defeated. Admittedly, the tort reform issue and punitive damages did not loom large in the gubernatorial election,[123] but nevertheless, the incumbent’s defeat may be a sign, in this traditionally populist state, that the battle over tort reform and punitive damages is far from over.
The Supreme Court of Alabama continues to struggle with the difficulties of punitive damages. In a 1998 case,[124] the court approved punitive damages in a case that involved bad faith for failure to pay an insurance claim. The jury returned a verdict that included $880.00 compensatory damages and $150,000.00 punitive damages. In the yet-to-be-released opinion, the court discusses the guideposts of Gore as well as Alabama authority. It noted that “the punitive damage award of $150,000.00 is 170 times the compensatory award of $880.00. That 170:1 ratio is unacceptable.”[125] The court eventually settled upon a remittitur of punitive damages resulting in a judgment that included $15,000.00 in punitive damages. The court also decided a case with facts resembling Gore[126] in 1999. In Chrysler Corp. v. Schiffer,[127] the manufacturer suppressed evidence that the automobile had been significantly damaged. The dealership knew of the damage but failed to disclose it. The court found that other states do not have laws approving non-disclosure of such damage as was the case in Gore. Nevertheless, when the court reviewed the facts pursuant to the Gore guideposts, it found that the damage to the plaintiff was essentially economic and that material damage is fairly easy to detect, so it reduced punitive damages from $325,000 to $150,000.
The battlefield has shifted, at least for the moment. The business community is now pushing binding arbitration as a way to avoid the courts, no doubt feeling that this will overcome some of their problems with punitive damages. In Allied-Bruce Terminix Cos., Inc. v. Dobson,[128] yet another case arising in Alabama, the United States Supreme Court held that binding arbitration clauses in all contracts involving interstate commerce are enforceable; that federal policy has pre-empted the field; and that state courts are bound by those clauses. Binding arbitration is contractually required in many cases that formerly threatened punitive damages.[129] Binding arbitration clauses are beginning to appear in practically all commercial contracts in Alabama. However, defining a new battlefield does not negate the power of contending economic and political forces. A clear understanding of the forces at work in the punitive damages controversy will aid in the establishment of policy, regardless of the battlefield.[130]
The Supreme Court of Alabama was unsuccessful in its tort reform effort to require allocation of punitive damages, but several other states have enacted statutes providing allocation, and others may be considering such statutes. Legislatures considering either allocation or caps need to know what results such laws will produce. If they consider the present analysis, they need to understand precisely what the Supreme Court of Alabama proposed, since other schemes for allocation may differ in important ways from the court’s approach. The court’s plan, announced prospectively, was that the state of Alabama would receive one-half of all punitive damage awards, after appropriate review, and after payment of expenses, including plaintiffs’ attorneys’ fees.[131] Under Johnson,[132] the state would receive no part of a settlement, even if the complaint sought punitive damages.[133] Both the allowance of a full contingency fee to plaintiffs’ lawyers and the fact that the state would not receive any part of a settlement are important factors in our analyses. Allocation formulas from other states contain differing provisions, and our analysis may not hold true for them. With this background for the court proposed allocation and legislatively proposed caps in mind, we will now turn to economics. We will be searching for ways to assess the impact allocation or caps would have on the civil justice system.
Chapter V: Law, Economics, and Punitive Damages
Economics strives to be an empirical science. It is based on actual observed behavior–on the way people actually behave. Economics is concerned with what people actually do and can make important suggestions as to which is the best of several policy proposals by comparing their economic efficiency.
The entire edifice of economics is built on basic assumptions about human nature and human behavior. The following assumptions made by economists are important for our analysis:
1) Human beings are rational, and their behavior–their actions–are based on enlightened self-interest.[134] This does not mean that everyone always behaves selfishly, since altruism may give pleasure. It does not mean that everyone always acts rationally, but it does mean that the aggregate of human behavior is predictable. Predictability is based on probabilities. Most people will act to preserve themselves, and to maximize economic advantage to themselves most of the time. This makes the behavior of a group of people predictable, even though the behavior of a given individual is quite unpredictable. Economics is not concerned exclusively, or even primarily, with money. Any perceived human good can be analyzed using the economic model.[135] An economic model can be created, not because we can predict what a given individual will do in a particular circumstance, but because, based on theories of probability, we can accurately predict what most people would do in that circumstance.
2) Most people are risk averse.[136] For example, most people who are offered the opportunity to receive a sure $1000, or a chance at $2000 based on a coin toss will take the sure $1000.
3) The economic theory that prevails in the United States is based on the free enterprise system. It asserts that maximum efficiency will be achieved in a system that recognizes private ownership of property and freedom to bargain.[137]
4) Economic theory assumes an allocation of goods and enforceable property rights.[138] It does not deal with the fairness of the initial allocation of goods.[139] In America for instance, property can be privately owned, and courts and other governmental agencies enforce rights. Many economists argue that government should play a limited role, since freely operating economic forces will produce the most efficient use of the available resources.
5) Prevailing economic theory in the United States strongly supports free markets as opposed to central planning as in the former Soviet Union.[140] Implicit in this approach is the claim that markets in a free enterprise system make more efficient decisions about production and distribution than central planners can make. The market regulates activities of groups and firms that compete for business and consumers who buy their products. Participants can be expected to engage in activities that are profitable, and to avoid activities that are not profitable; i.e., competitors will act on enlightened self-interest. Fair competition is an integral part of the American economic system. Anti-trust laws underscore the free market policy. Congress enacted anti-trust laws to protect the competitive nature of markets.[141]
At this point we must note a caveat important to our analysis of punitive damages: there are certain matters which society, for policy reasons, places beyond the realm of free trade. Robert Cooter points out that social norms require that the law attempt to place certain types of conduct completely off limits. He argues that social norms are a much better guide to when punitive damages should be awarded than to how much the award should be.[142] Some types of activities do not lend themselves to a market approach because of social norms. For instance, a person cannot sell one of his or her own kidneys, even though he or she has two. Society does not allow a person to sell babies or body parts. Murder for hire is definitely illegal. The mere fact that these types of activity are totally forbidden by social norms does not mean that they cannot be analyzed from an economic point of view. For any of the cited types of activity, the potential for harmful externalities would be extremely great. Social norms represent a good of great value that is confirmed by a strong consensus in society.
With these fundamental assumptions of economics in mind, we need to examine the way in which law interfaces with economics. Our system of law is drawn from the same societal beliefs that form the basis for our economic system.[143] Law protects property rights, civil rights, and our rights, in general, to engage in activities that constitute a free economy. Freedom to act includes the freedom not to act. Law also enforces rights not based on economic theory. For lack of better terminology, we can say that such rights are based on the mores of society. We do not allow non-consensual scientific experimentation upon human beings.[144] Our criminal justice system places a wide variety of activities outside the realm of free choice.
The need for punitive damages often arises at the interface between activities that are best regulated by a free economy and activities that are proscribed by the moral judgment of our culture.[145] Often, the activities law places completely off limits for individuals and firms would be inimical to the free economy itself. Our law embraces freedom of contract and free markets because of our deep-seated belief that a group of individuals, pursuing enlightened self-interest, will knit itself into a web of economic relations that will maximize the welfare of society.[146] For such an economic system to exist, there must be rights in property and a system to enforce those rights. The situations that call for punitive damages violate the sine qua non of economic theory that prevails in the Western World that there must be individual rights in property, and a legal system to enforce those rights. The system of property rights which creates the possibility of a free economy can only exist in an established and validated legal order.
The actual principles of economics that I use to analyze allocation and caps of punitive damages are very basic assumptions, laws and theories. They include the above-mentioned basic assumptions, bargaining theory and market theory. Bargaining theory[147] plays an important role in the economics of civil litigation model that I will develop in Chapter VI. What is bargaining theory? If a sales transaction occurs, obviously the buyer values the good sold more than the seller. Economists say that the transaction creates value. The value created is the difference between the value that the buyer assigns to the good and the value the seller assigns to it. Cooter and Ulen give the following example:[148] If Adam values his car at $3,000 and sells it to Blair, who values it at $4,000, the transaction creates a $1,000 value. If the sales price is $3,500, the parties share the created value equally with each receiving $500 of the created value.
Cooter and Ulen distinguish cooperative solutions from non-cooperative solutions. If the sale in the example does not occur, the parties reach a non-cooperative solution. Blair had inherited $5,000 that she could spend, but thought the car was worth $4,000. The non-cooperative solution leaves Blair with $5,000 and Adam with his $3,000 car–a total of $8,000. If the sale takes place–a cooperative solution–then Blair has her $4,000 car and $1,500 cash. Adam has $3,500 cash. The combined value is $9,000. The difference between the $9,000 cooperative solution value and the $8,000 non-cooperative solution value–$1,000–is the cooperative surplus.
Non-cooperative solution results are called threat values. Adam’s threat value is $3,000–the amount at which he values the car. Blair’s threat value is $5,000–the money she inherited. According to Cooter and Ulen, “[T]he process of bargaining can be divided into three steps: establishing the threat values, determining the cooperative surplus and agreeing upon the terms for distributing the surplus from cooperation.”[149] For the purposes of our analysis–and the economics of civil litigation model–the threat value (what the parties have at risk)–and the cooperative surplus (the value the parties can divide by reaching an agreement) play vital roles. In a typical case, the plaintiff’s threat value is the plaintiff’s estimate of the value of the claim; the plaintiff’s attorney’s threat value is the value of time invested in the case and costs advanced; the defendant’s (or its insurance carrier’s) threat value is the defendant’s exposure in the lawsuit; and the defense attorney’s threat value is zero. These factors obviously enter into settlement negotiations as well as negotiations between plaintiffs and plaintiffs’ attorneys for a contingency fee.
Market theory also plays an important role in the economics of civil litigation model. In a typical market, there are a large number of buyers and a large number of sellers of the goods that are being marketed. In our model of the economics of civil litigation, the nature of the goods is an issue, so in the present discussion, we will use the generic term goods. Buyers in a typical market attempt to maximize utility. Sellers attempt to maximize profits. Buyers and sellers are guided by enlightened self-interest. This means that buyers attempt to maximize the utility of the goods that they are able to purchase within the limits of their means. Buyers can buy only what they can afford. Enlightened self-interest causes sellers to attempt to maximize profit. They sell their goods at a price that will maximize profit. Producers produce the volume that will maximize profit. Buyers compete with other buyers, and sellers compete with other sellers. Producers compete with other producers. In this atmosphere of competition, the laws of supply and demand emerge. The wants of the buyers, who are competing with each other, interacts with the profit motive of the sellers, who are competing with each other. The result is a market price for the goods.[150]
Buyers must balance their desire for particular goods with their desire for other goods. In addition to their desire for televisions and automobiles, buyers must also deal with their desire for food and clothing. The net result is an equilibrium in the supply and demand for goods. In our free economy, we believe that market activity maximizes social good.
Applying these principles of economics, we will construct an economic model called the economics of civil litigation which will be useful in the ensuing analyses. The economics of civil litigation model will provide a description of the economic forces at work in the legal profession, and in the civil litigation system itself. This model provides a convenient shorthand reference to a complex system. We will use the model to analyze allocation and caps of punitive damages.
Chapter VI: The Economics of Civil Litigation
The practice of law is not immune from the operation of the principles of economics. Lawyers can be expected to pursue their own enlightened self-interest. Most lawyers will be risk averse in dealing with their own business. The nature of the judicial system and the practice of law create a special community of interests, and special economic relationships between and among the various members of that community. As with other economic activities in a free economy, lawyers have found it advantageous to specialize. In civil litigation, some attorneys represent plaintiffs and others represent defendants.[151] The economic aspects of law practice tend to organize themselves into a system that I call the economics of civil litigation.
In a typical tort case, the injured or defrauded plaintiff consults an attorney to see if he or she “has a case.” The plaintiff describes the factual background of the possible claim, and based on those facts, the attorney decides to take the case, not take the case, or to refer the case to another attorney. These decisions are based in large measure on economic considerations. For our typical case, we assume that the attorney takes the case and files suit against the defendant. Typically, the lawyer who takes the plaintiff’s case specializes in handling plaintiffs’ cases. Usually, the lawyer will be handling a number of other similar claims. The defendant has anticipated the possibility of being sued and has purchased liability insurance. When the complaint is served on the defendant, the defendant sends the suit papers to the insurer. The defendant will usually have already notified the insurer of the possibility of suit if the defendant knows that the plaintiff has threatened suit. The insurer insures thousands of other people and has an on-going relationship with one or more law firms equipped to defend the lawsuit. The insurer selects a law firm and makes financial arrangements for the defense. Economic considerations and competition among law firms enters into the choice. Often, the case will be one of several cases that the defense firm is defending for the insurer. The defense firm answers the complaint on behalf of the defendant. The lawyers for the plaintiff and defendant then go through the processes of preparation of the case, including discovery of evidence. The plaintiff’s attorney, who has taken the case on a contingency fee arrangement, pays the costs of filing the lawsuit and the costs of discovery, including the costs of deposing witnesses. The time and money invested by the plaintiff’s attorney is at risk. Unless the plaintiff wins, the plaintiff’s attorney loses the costs and is not paid for the time involved. By contrast, the defense attorney keeps meticulous time records and is paid by the insurer for his or her services.[152] If the plaintiff wins, the plaintiff’s attorney is paid a contingency fee and is reimbursed for costs. The defense attorney is paid regardless of the outcome. This general description sets the stage for developing the concept of the economics of civil litigation.
The concept of the economics of civil litigation plays an important part in our analysis of punitive damages. A popular model in economics is market theory, based on laws of supply and demand. What is being supplied and what is being demanded in connection with civil litigation? The general perception is that attorneys, insurance companies, and courts are supplying the services necessary for dispute resolution. Competition among attorneys allegedly assures competitive pricing for legal services.[153] After we explore an economic model of attorneys and insurers marketing the services for dispute resolution, I will suggest another model that may portray the economic market of these activities more accurately than the perception of a market for legal services.
If we view activities of attorneys in the civil justice system as a market for legal services, who is supplying and who is demanding? Where do the plaintiff and defendant and their dispute fit in? Both plaintiffs and defendants are on the demand side of the market. They are buyers of the services required for dispute resolution. Even though defendants are drawn into the market for dispute resolution because they are sued, they are still buyers. Perhaps they purchased insurance, but that, too, just makes them buyers in the market for dispute resolution.
The supply side of the market for dispute resolution presents a different picture. Who supplies the services for dispute resolution? Courts, lawyers for both plaintiffs and defendants, and insurance companies are all on the supply side.[154] Unlike the demand side, the supply side is highly organized, and has identifiable economic peculiarities. For instance, services that are marketed for dispute resolution in the civil justice system are highly dichotomized. Plaintiffs’ law firms supply one kind of service while defense firms and insurance companies supply a quite different service. Plaintiffs’ lawyers usually work on a contingent fee arrangement and receive a portion of the award as compensation. By contrast, the defense lawyer is typically paid by the hour. The two groups in the supply market–those supplying services to plaintiffs and those supplying services to defendants–enjoy a symbiotic relationship. Both groups profit from litigation. Neither group has any serious economic incentive to decrease the volume or seriousness of litigation. Insurance companies appear to make money by insuring against the risk of litigation, and the cost of insurance is ultimately passed on to the consuming public.[155]
On the demand side, we have all those persons who need to have disputes resolved. They are not an organized group in the same way that the supply side is organized. Plaintiffs did not want a dispute. They were injured in an accident, or possibly defrauded in some transaction, or were the victims of a breach of contract, and want to recover the loss. Plaintiffs and defendants are all involuntary participants in the market for dispute resolution.
Large corporations are likely to be sued. For corporations, litigation can become merely a cost of doing business which presents a problem for courts intent on enforcing the rule of law. The penalty for violating the law can be computed into the costs of doing business just like any other cost. If penalties are predictable, defendants can usually factor them into the cost of the defendants’ products and pass them on to the consumers of the products.[156] So law must provide a penalty for violation high enough to compel compliance, if social norms unconditionally demand compliance. Even if defendants expect to be sued and anticipate the need for dispute resolution, they are still buyers in the market for dispute resolution. The demand side of the market for dispute resolution is not organized by symbiotic economic forces to the same extent as the supply side, although insurers and business entities share common interests and organize themselves politically to promote those interests.
The persons who purchase the services of attorneys are not engaging in typical free market activities. Certainly, every individual is free to shop around and choose an attorney. Attorneys compete for business, and potential litigants have a choice. Prospective litigants should be provided accurate information so they can make a rational choice in selecting an attorney. To this degree, the market for legal services appears similar to other markets. However, unlike a free market, the plaintiff must hire an attorney in order to effectively deal with his or her problem.[157] Likewise, the defendant would not be acting prudently if it failed to employ an attorney to assist in defending a lawsuit. Prices in the economics of civil litigation on the supply side face little constraint from the demand side of the market.
Interestingly, the attorneys–for both the plaintiff and the defendant–and the insurance companies are all on the supply side of the market. The attorneys and insurance companies, in many instances, are the primary movers in settlement discussions.[158] In typical cases, plaintiffs’ attorneys and insurance companies make the ultimate decisions about settlement. Mere competition among the providers of legal services cannot assure sound pricing or assure appropriate professionalism in a situation where the buyers have no choice but to buy, and sellers are on both sides of price negotiations.
A market of services required for civil litigation would not be constrained by the means of the plaintiff. Because of the contingent fee, plaintiffs are not required to invest anything except their injury or loss in the lawsuit. Looking only at the wants of the plaintiff, it is difficult to see how such a market would achieve equilibrium. All these peculiarities in our market model hint that our perception of the market is incorrect. Maybe we are not dealing with a market for the services required for dispute resolution after all. We will return to this line of argument after introducing another important point.
Quantitatively, a case is whatever a plaintiff’s attorney says it is. There is a large amount of human conflict that could become the subject of litigation. The human conflict on which the economics of civil litigation sustains itself is not of limited or finite quantity.[159] Plaintiffs’ lawyers are selective in accepting cases. They choose the cases that are most likely to be profitable. They are the gate-keepers of the quality of the system, but they also are rational maximizers. If those who manage the court system were somehow able to settle every pending lawsuit at a given point in time, the economics of civil litigation would mandate that plaintiffs’ attorneys refill the dockets very quickly. There is enough human dispute to enable them to do so. Plaintiffs’ lawyers would agree to take cases that previously they would not have taken, unless they believe that there is no possibility of profit in the case or their time could be used more profitably in some other activity. If the attorney believes that he or she can make more money by accepting a case, the attorney will take the case and file suit. Even if there is some risk of loss, the attorney will take the case if he or she has time to deal with it, provided there is a possibility of a profit. It is really the attorney’s portfolio of cases, not the individual case, that counts. Plaintiffs’ attorneys appear to be willing to invest money, perhaps for exploratory purposes, in numerous “dry wells.”
Earlier, we suggested that a “market for services required for dispute resolution” may not be the most accurate portrayal of the economics of civil litigation. Now, we will suggest a different model, but in doing so, we are not suggesting that the earlier model is without merit. The earlier model may, in fact, explain some of the difficulties that the system has in dealing with punitive damages. The fact that the suppliers of the services required for dispute resolution–plaintiffs’ attorneys and insurers–negotiate settlements, frequently with little input from the demand side, is probably significant. Nevertheless, it is possible to construct a different model that may portray the forces of the economics of civil litigation more accurately.
The fact that a person has been injured or wronged entitles that person to a legal claim that can be asserted in the civil litigation system. Some writers have referred to such a claim as an entitlement.[160] The entitlement has value because the law requires government to lend its power to enforce the claim. Plaintiffs’ attorneys assay the value of an entitlement. If the plaintiff’s attorney believes the entitlement to be valuable, then he or she purchases a partial interest in the entitlement through the contingent fee arrangement. What do plaintiffs’ attorneys pay for their share in the entitlement? Of course, they offer their time and services, but they also offer something else that is extremely important: they offer the coercive power of government through the court system to perfect the entitlement.[161] The entitlement is valuable only because government–acting through the court system–will intervene with coercive force to adjust the claim. The lawsuit is filed asserting the entitlement, and the stage is set for negotiation of the price. The defendants–or their insurance companies–are the only prospective purchasers. They would like to buy the entitlement to avoid the coercive power of the courts. Defendants’ possible liability imposes a threat value for defendants.
Although the defendants are the only prospective purchasers, in a typical situation plaintiffs’ lawyers will be managing a portfolio of such claims. Insurance carriers and large corporate defendants also manage a portfolio of claims. A high percentage of civil lawsuits result in settlement. Discussions for settlement involve comparison of the case under consideration to other cases and the prices for which they have settled. The market analogy for the “entitlement” model seems much stronger than the “market for legal services” that we discussed earlier. In this model, plaintiffs supply entitlements which are, strangely enough, demanded by insurers and defendants. Exactly what are insurers and defendants buying? They are purchasing their peace. They are purchasing freedom from coercive governmental intervention. The market for entitlements is constrained by the capacity of the plaintiffs’ bar to handle proposed litigation. Equilibrium is possible.
A key ingredient in the entitlement market is the value of the entitlement. Punitive damages, governed by terms such as egregious, reprehensible, bad, and mean, offer little guidance as to value. Of course, the attorneys and insurers are familiar with similar cases. The comparison of factual situations is a key element in the negotiations. Nevertheless, the vague, subjective, emotionally charged terms that apply to punitive damages offer little guidance as to the value of the entitlement. The evaluation of the entitlement entails not only a comparison to other cases: unfortunately, it necessitates analysis of the demographics and propensities of judges and juries.
The legitimate complaint of economists is that the emotion-laden terms cannot be quantified. The idea of punishment offers little guidance to a fact finder, although the United States Supreme Court suggested in Gore[162] that a punitive damage award should be compared to the fines that apply to criminal cases or to legislatively established penalties in civil cases. Economists zero in on deterrence and suggest that the appropriate measure of punitive damages is that amount which will remove the incentive of the defendant and other potential defendants to commit the wrong.[163]
Based on the present status of the law, which provides that defendants should pay punitive damages only for intentional conduct or its equivalent,[164] we propose a model that is helpful for analytical purposes. (See Figure 1, page 60) The horizontal line divides the plaintiffs’ entitlements. Below the line we place everything for which a plaintiff would normally be expected to bargain. Above the line, we place all those things that are incommensurable losses. Incommensurables include everything for which plaintiffs would not normally be expected to bargain, such as lost limbs, lost lives, extreme emotional distress and
pain and suffering. The vertical line that divides the culpable mental states of defendants. Everything to the left of the line represents unintentional conduct–mere negligence. Everything to the right of the line reflects intentional conduct or its equivalent. Economists agree the activities represented right of the line could possibly justify punitive damages, but those left of the line could not.
In this model, the upper left quadrant represents a difficult area of regulation because of the nature of the injuries, but punitive damages should not apply since the defendant’s actions are not intentional. Even though the defendant’s actions are unintentional, the injuries are incommensurable, and computation of monetary damages is difficult. For instance, how can we measure in dollars the loss of the ability to walk or the ability to see? Pain and suffering and emotional distress are often elements of damages above the line. For cases falling in the upper left quadrant, Cooter and Ulen suggest that the measure of damages should be the amount that is required to assure that defendants take adequate precaution to avoid inflicting such injuries.[165] He calls this the risk-equivalent value.[166] Law inappropriately[167] calls such damages compensatory damages.
In the lower right quadrant, the damage to the plaintiff is purely economic. Nevertheless, punitive damages are available because the defendant’s acts are intentional. In this quadrant, the defendant has deliberately appropriated the property of the plaintiff. For economic theory to work, property rights must be enforceable. The zeal with which we are willing to enforce claims arising in this quadrant is evidenced by the intensity with which we enforce criminal sanctions related to bad checks. The proper measure of punitive damages in this quadrant is to remove all potential profit from the defendant. Cooter and Ulen suggest, “In general, allowing each injured consumer to recover punitive damages and setting the punitive multiple equal to the inverse of the enforcement error restores incentives for efficient precaution.”[168] The computation would be complex and is beyond the scope of this thesis.[169]
The upper right quadrant obviously describes activities that frequently form the basis for criminal law but would also describe the most egregious conduct for the purposes of awarding punitive damages. In this quadrant, the damages should be sufficient both to assure that defendants take adequate precaution to avoid inflicting the type of injury (risk-equivalent); to remove all potential profit; and possibly an extra amount–perhaps a percentage or multiple of the risk-equivalent value–for punishment.[170]
The lower left quadrant describes unintentional, purely economic damage. Damages in this quadrant should be purely compensatory. Markets often provide an equivalent value for the loss. Cooter and Ulen suggest that such damages can be computed on an economic standard of indifference: “[C]ompensation is perfect when the victim is indifferent between having the injury plus the damages and having neither.”[171]
I introduced this four-quadrant analysis of damages not to show exactly how damages should be computed, but to show that the present system is not optimal because of imprecision. The model demonstrates the inadequacy of the present system, which is too dependent on vague, subjective terms such as reprehensible and egregious. Without this kind of analysis, we cannot identify and differentiate the circumstances giving rise to punitive damages, and apply a rational method of computing punitive damages. Neither allocation nor caps defines the circumstances or assists in the rational measurement of punitive damages. Any impact that they have will be indirect, and will arise from their impact on the civil justice system because of the dynamics of case selection.
I have now described the assumptions, theories and principles of economics that I will use to analyze settlement probability, volume of case filings, impact on deterrent value, and quality of litigation under rules imposing either allocation or caps. In the literature review, I summarized assumptions and assertions made by law review writers concerning these four topics.[172] In each of the next four chapters, I will analyze one of the four topics and compare the results to the assertions of law review writers. I will look at each topic from two different vantage points. First, how will allocation or caps impact on that topic in individual cases? Secondly, how will allocation or caps impact on that topic, taking into account the economics of civil litigation, and looking at the effect on the entire civil justice system.
Chapter VII. Effect of Allocation and Caps on Settlements
Perhaps the most fruitful area for economic analysis in comparing the rule of allocation with the rule imposing caps is the impact each has on the likelihood of settlement. Law review writers frequently assert that a rule requiring allocation will result in a larger number of cases being settled.[173] Their reasoning is that since plaintiffs and defendants can share the portion of the punitive damages award that would go to the state if the case is tried, both parties will have greater incentive to settle. Economic analysis supports the conclusion of law review writers in this regard.
With regard to caps, law review writers agree that caps may provide less incentive for settlement.[174] The writers correctly believe that defendants will have less at risk under a rule imposing caps. Economic analysis supports the conclusion of law review writers with regard to the impact of caps on settlement. The conclusion is further supported by the economics of civil litigation model.
Allocation
The traditional economic model for bargaining can be applied to negotiations to settle claims for punitive damages. Bargaining theory indicates that the prospects of settlement are much greater under a rule of allocation than under either the previous practice or under the rule imposing caps. Bargaining theory teaches that the likelihood of reaching agreement will be based on what each of the parties has at risk. Under a rule of allocation, the parties, by settling, have the opportunity to save and share the amount that the state would receive if the case were tried. In the language of bargaining theory, this is part of the cooperative surplus.
The fact that the state gets one half of the punitive damage award if the case is tried, but nothing if the case is settled, creates a built-in cooperative surplus that the parties can share by settling. Johnson[175] clearly stated that the State would not receive any portion of an agreed upon settlement, even if the complaint sought punitive damages. According to Johnson,[176] the state would acquire no interest in a settlement that occurs prior to the jury’s verdict and the completion of all appeals. Both sides are much more likely to settle in order to share this fund that will be taken by the state if the case is tried. The threat of state participation in the award creates a much larger middle ground in the bargaining process.[177] In a trial, the defendant’s risk in the case will be just as great as it ever was. Bargaining theory calls the defendant’s risk threat value. The risk of litigating and incurring the possibility of punitive damages is great,[178] so the pressure for the defendant to settle will be at least as great as it is prior to the rule of allocation.
The rule of allocation will bring a great deal of pressure on both parties to settle. The defendant will incur pressure to settle because of the built-in cooperative surplus. If the case is not settled, the defendant will be left with the threat value of the case. The added cooperative surplus comes from what would have been the plaintiff’s share except for the allocation rule. However, if the case settles, the defendant will share the cooperative surplus which includes the portion that would go to the state if the case were tried. Unless the parties settle, both lose the cooperative surplus added to settlement value by the rule of allocation.
The pressure to settle will fall on both parties. It is true that by going to trial, the plaintiff not only runs the risk of losing, but also, will have one-half the punitive damage award taken by the state. This will tend to drive a wedge between the plaintiff and plaintiff’s lawyer, since the lawyer has no more to lose by going to trial than under the previous practice.[179] No doubt, in some instances this will cause the plaintiff to exercise independent judgment to force the attorney to settle. However, in many cases, the client will do whatever the lawyer thinks best, and the lawyer will not want to settle the case for less than what he or she thinks is the optimal settlement to maximize the fee. The defendant will realize that, unless it wins the case, trial may cost a great deal more than settlement.
Perhaps the greatest settlement pressure will come after the verdict, but before completion of the review process. The amount of the verdict will then be determined. The risk for the plaintiff is reversal, but even if the appeal is successful, the state gets one-half of the punitive damages. The risk for the defendant is that the judgment will be affirmed. The plaintiff and defendant can share the state’s half by settling the case before the review process is complete. What will they do? Bargaining theory says they are likely to settle, and share the cooperative surplus. Because the results of the trial are known, an appeal presents an entirely new bargaining situation. The threat values differ from the pre-trial threat values. The advantage of settling while the case is on appeal is quite clear. The plaintiffs’ attorney is in an unenviable position.
Caps
Law review writers who suggest that caps will result in fewer settlements are correct.[180] Bargaining theory suggests that a rule imposing caps will decrease the prospects of settlement.[181] With caps in place, the defendant’s risk of litigating is not nearly as great. In bargaining theory terminology, the defendant’s threat value will be lower. There would still be the cost of litigation, including attorneys’ fees for defense attorneys, but the more significant risk of a large punitive damage award would be greatly reduced. Defendants may have little to lose by trying egregious cases that are likely to bring the maximum punitive damages. Defendants will no longer face the risk of runaway verdicts. Many cases that would quickly settle either under the common law rules or under the rule of allocation will be tried if caps are applied. Plaintiffs will have no bargaining leverage on cases in which the maximum is likely to be awarded anyway. Defendants, managing a portfolio of cases, and taking into account the limitations of the system, can rationally choose to try cases that will likely bring a maximum verdict. Defendants, including insurance carriers, could try definite “losers,” rather that settling them, and thereby avoid having other more doubtful cases come to trial.
Where the rule of allocation creates a cooperative surplus, a rule imposing caps eliminates or narrows the cooperative surplus. There will be less cooperative surplus–less middle ground–and less reason for either side to settle. The greatest risk of loss on the most egregious cases will shift to plaintiffs and plaintiffs’ attorneys. Unquestionably, caps will bring about a sharp readjustment of the bargaining power of the parties. I submit that the result will be fewer settlements under a rule imposing caps.
Chapter VIII. Effect of Allocation and Caps on Volume of Case Filings
What impact will a rule of allocation, or in the alternative, a rule imposing caps, have on the volume of cases filed? Law review writers frequently assert that a rule requiring allocation will result in fewer cases being filed.[182] Their reasoning is that since the plaintiff will receive a lesser sum of money, the plaintiff will have less motivation to sue, and as a consequence, fewer cases will be filed.[183] Based on economic analysis, we conclude that instead of fewer filings, a rule requiring allocation will likely result in more case filings for two reasons. First, for economic reasons that we will explain later in this chapter, we believe that writers have misjudged plaintiffs’ motive to sue. Secondly, we believe that writers have ignored the economic motives of plaintiffs’ attorneys as revealed by the economics of civil litigation model.
Law review writers have little to say about the impact of caps on the number of case filings. They seem to go no further than considering the impact on individual cases. However, economic analysis suggests that caps will reduce the number of cases that plaintiffs’ attorneys will file.
The volume of case filings is important to policy makers, court managers, and those interested in tort reform. The volume of litigation is a major part of the complaint against the present system. Critics claim that we are an overly litigious society. The charges made by the advocates of tort reform are that many claims are frivolous, and that punitive damages encourage the filing of baseless lawsuits.
The analysis provided in this chapter draws on the conclusions reached in the preceding chapter. In the preceding chapter, we concluded that allocation will produce a larger number of settlements while caps will produce fewer settlements. The conclusion that allocation will increase settlements and caps will diminish them leads to the further conclusion that allocation will increase the volume of case filings and caps will diminish the volume of case filings.
To explain our conclusion, we first need to reiterate our assumption that in the short run, courts are working to full capacity. The number of cases tried will be limited by the capacity of the courts to try them. We also must reiterate the assumption that plaintiffs’ attorneys select cases for filing from a large quantity of human conflict. However, the economic assumption that plaintiffs’ attorneys will act on enlightened self-interest suggests that they will select the “best” (most profitable) cases first. With the findings of the preceding chapter and these assumptions in mind, we are prepared to analyze the effect of allocation and caps respectively on the volume of case filings.
Allocation
Unlike most law review writers, we conclude that allocation will produce a greater volume of case filings. Our most important reason for this conclusion is based on the plaintiffs’ attorneys’ motives and the economics of civil litigation model. We will discuss the motives of the plaintiff later. In the discussion of settlements we argued that the rule of allocation will bring pressure on both sides to settle. Realizing that the prospects of settlement are greater, plaintiffs’ attorneys, like everyone else, can be expected to follow the guidance of enlightened self-interest and are likely to file more suits. Settlements will take less time for plaintiffs’ attorneys to process. This will increase the capacity of plaintiffs’ attorneys to accept cases. Each year produces a bumper crop of new lawyers and a net increase in the number of lawyers, and they are all looking for income. As was pointed out in the discussion of the economics of civil litigation, there is an unlimited potential for human conflict, giving rise to a potentially unlimited number of lawsuits.
The limited capacity of the courts may be the most significant constraint on case filings. If the number of settlements increases, so will the number of case filings. An increase in the number of settlements increases the capacity of courts to process cases. Clearly, any prediction about the effect of allocation on the number of filings must take into account the economic motives of plaintiffs’ attorneys as well as the motives of the plaintiff. Allocation as advocated in Johnson[184] will precipitate more lawsuits claiming punitive damages, rather than diminishing the number of lawsuits. Attorneys are likely to fully utilize the available capacity of the court system. Under the allocation rule, attorneys are likely to file suits that would not have been filed under common law rules.
Several writers have asserted that reduced recovery by plaintiffs resulting from allocation will curtail the volume of litigation, because plaintiffs will not be encouraged by windfall damages to be overzealous in bringing suit.[185] Economic analysis suggests that this assertion is probably false. Anything that the plaintiff receives in excess of actual loss (compensatory damages) will be an economic gain. The normal economic assumption is that individuals will pursue activities that are economically beneficial, so long as there is an incremental gain. Only if the plaintiff stands to break even or lose money by bringing suit would the plaintiff’s motivation to bring suit–including the claim for punitive damages–be discouraged. The suggestion that the plaintiff will be discouraged from bringing a lawsuit because she or he will receive only $50,000 above the actual loss rather than $100,000 is a poor guess about human motivation.
Caps
What impact will caps have on case filings? Although writers have largely ignored the impact of caps on the volume of case filings, policy makers need to know the impact of a proposed rule. Economic analysis enables us to make a rational prediction that caps will, in fact, have an impact on case filings. The reason that we predict fewer filings is not because plaintiffs will have less incentive to sue, but because of the impact of the rule on the economics of civil litigation, and on the court system. Caps would have little impact on plaintiffs’ motive to sue. Moreover, a large number of attorneys who identify with the plaintiff’s side have probably never received an award as high as any reasonable cap would be. Caps will have little or no impact on their filings.
The real impact of caps will be on high volume, highly specialized plaintiffs’ firms, and on the court system. These firms account for a significant volume of the type of litigation with which caps are concerned. For specialized plaintiffs’ firms, the “big hit” is not a once in a lifetime occurrence. Large verdicts must occur with a certain frequency in the portfolio of the firm’s cases, and be large enough to offset contingent fee cases that are lost. The economics of civil litigation, which we discussed earlier, plays an important role in their decision making. As in the case of allocation, motivation of plaintiffs’ attorneys will be at least as important as the motive of plaintiffs. Plaintiffs will be as motivated to sue as ever, despite a rule imposing caps, since punitive damages are in addition to compensatory damages, and at least theoretically, are all profit. If whatever punitive damages plaintiffs receive will be profits, caps will provide no significant economic discouragement to plaintiffs. So the real question comes down to the impact of caps on plaintiffs’ lawyers.
Several things are predictable about the economic impact caps will have on the volume of lawsuits filed by plaintiffs’ attorneys. In the preceding chapter, we developed a strong probability that caps will bring about fewer settlements. Fewer settlements mean that a higher percentage of cases will try. Since we believe that the system cannot process more cases in the short run, plaintiffs will be unable to process as many cases through the system. Since plaintiffs’ attorneys work on a contingency fee, they cannot receive payment until the case is over. Under these circumstances, plaintiffs’ attorneys are likely to file fewer lawsuits.
An increase in the percentage of cases requiring trial will cause the dockets to become more congested, which will impact adversely on the economics of plaintiffs’ lawyers. If the system is processing cases to the full extent of its capacity, there cannot be a significant increase in the number of trials in the short run. If caps reduce the number of settlements, backlogs will occur. Plaintiffs’ attorneys will not be able to process as many cases through the system. The cases that are filed will move through the system more slowly. Since plaintiffs’ attorneys are not paid until the case is over, caps will have a direct, real, and economically stressful impact on the plaintiffs’ bar. In the short run, and probably over a longer period of time, there are likely to be fewer cases filed if caps are imposed.
Chapter IX: Effect of Allocation and Caps on Deterrent Value of Litigation
In this chapter, we analyze the impact of allocation and caps on the ability of punitive damages, in the total system of civil litigation, to accomplish their purpose; i.e., prevention of wrongdoing. In the following chapter, we analyze the impact of the two rules on quality of litigation; i.e., preventing frivolous lawsuits. Law review writers often assert that allocation will not affect the deterrent value of punitive damages.[186] Their reasoning is that the impact on the defendant will be the same regardless of who receives the punitive damages award. Economic analysis indicates that a rule imposing allocation could possibly affect deterrent value of civil litigation in two different and inconsistent ways. First, if there are more settlements and more lawsuits filed, the system as a whole will produce more deterrence. Secondly, the threat that the state will take a portion of the award may reduce the amount of the settlement. If allocation causes the defendant to pay less to settle, there may be less deterrence for individual defendants. The greater risk of being sued probably more than offsets the reduced settlement costs, since the liability remains open-ended, and difficult to estimate.
Law review writers and economists agree that caps will have an adverse impact on the deterrent value of litigation.[187] Economic analysis supports this conclusion for two reasons. First, in individual cases, computation of the amount required to deter may, in fact, exceed the fixed caps. Secondly, the economics of civil litigation model indicates that under a rule imposing caps, plaintiffs’ attorneys could file fewer lawsuits, which would also result in less deterrence. The writers have not considered the economic motives of plaintiffs’ attorneys as described in the model for the economics of civil litigation. Economic analysis based on the model for the economics of civil litigation further supports the conclusion that caps may impair the overall deterrent value of punitive damages.
The analysis in this chapter continues to build on the conclusions of the two preceding chapters. In Chapter VII, we concluded that allocation would induce a higher percentage of settlements, while caps would result in fewer settlements. Then in Chapter VIII, we concluded that because of the impact on settlements, allocation would produce more case filings, and caps fewer case filings. Now we follow the logical progression, concluding that allocation will produce more deterrence, and caps less deterrence.
To produce appropriate deterrence, law must clearly identify the circumstances in which punitive damages are needed to deter egregious or reprehensible conduct. Punitive damages should be awarded only in the case of intentional wrongdoing, or its equivalent. Economists agree that liability for simple negligence, measured by the plaintiff’s actual loss, is adequate to encourage the defendant to adhere to the standard of care.[188]
Our goal in this chapter is to determine whether either legislative caps as proposed by the Alabama Legislature or allocation as proposed by the Supreme Court of Alabama in Johnson[189] will improve the deterrent value of punitive damages. To evaluate the effect of these two proposals on the civil justice system, we must also look into their impact on the motives of potential plaintiffs, potential plaintiffs’ lawyers, potential defense lawyers, and potential insurance companies. In short, we must consider the impact of allocation or caps on the economics of civil litigation.
Neither allocation nor caps will help identify the circumstances under which punitive damages should be awarded. Earlier, I discussed the vague, subjective nature of terms such as egregious and reprehensible. Such terms cannot be quantified. Past the threshold question of whether punitive damages should be awarded in a particular case lies the difficult question of how much punitive damages must be awarded to deter further wrongdoing. The award of punitive damages in a particular case may be need to be considerably more than the actual loss that the plaintiff has incurred in order to deter the defendant and others similarly situated from repeating the same conduct. Punitive damages should be large enough to punish and deter, but not so large as to discourage worthwhile economic activity.
In Chapter VI, I developed a simple model[190] that shows how the mental state of the defendant could be paired with the injury or harm to create categories to which formulas such as those developed by Cooter and Ulen[191] could be applied. Some such approach must be utilized by states if they wish to create rational rules for the computation of punitive damages. Our only purpose for developing the model was to demonstrate that neither allocation nor caps deals with the problem of rational measurement of punitive damages so as to match the offense with the appropriate level of deterrence. Since neither rule more clearly identifies the circumstance justifying the award, nor for rationally calculating the amount required to deter, any effect that they have on deterrence will be indirect. The effect, if any, will result from the impact of the rule on the economics of civil litigation.
For punitive damages to be effective, they must be calculated to stir motivational forces that discourage potential wrongdoers, and encourage victims and their attorneys to file lawsuits against the wrongdoers. However, they must not over-kill, and they must not encourage vexation litigation that harms wholesome business. How do we arrive at such a happy state of affairs? The search is for the optimal amount of litigation that addresses only the undesired behavior and results in precisely the right award that will discourage wrongdoers and cause victims to seek a remedy. Nothing about allocation or caps suggests that they will inherently bring about such results.
The justification for giving the award to the plaintiff is sometimes said to rest on the social advantage of encouraging the prosecution of such cases.[192] This was the position taken by the Supreme Court of Alabama in Johnson.[193] Punitive damages make it economically feasible for the plaintiff’s attorney to take an interest in the case, thereby deterring wrongdoing that cannot be deterred in any other way.[194] The deterrent value of the rule cannot be separated from the willingness of plaintiffs’ attorneys to sue. If attorneys are not willing to sue, the rule has no deterrent value. If either rule discourages worthy lawsuits, then the law will lose important deterrent value.
Risk is inherent in all human activity. The courts are not trying to keep anyone from engaging in useful activity merely because it involves risk. They are attempting to prevent intentional wrongdoing and reckless conduct. But if a person engages in rational behavior, he or she evaluates the options. If the penalty for violation of a rule is less than the cost of compliance, a person may elect to violate the rule. Such rational valuation can include an evaluation of the chances of being caught, the chances of being sued or prosecuted, and the chances of being successful in litigation. Therefore, a person could conceivably make an intentional choice to violate the law and still be acting consistently with enlightened self-interest. The intentional nature of the violation of the law is only one element in the constellation of factors that justify awards of punitive damages. Repeated violations that evidence a disregard for the requirements of law can become a factor, but more than intent and repetition is necessary. The degree of reprehensibility of the conduct is a factor.
Allocation
First we will consider the impact of allocation on the entire system. If we were to assume that every case seeking punitive damages would (and could) be tried and that the state would receive one-half of the punitive damage award, then perhaps a rule requiring allocation would have no impact on deterrence in individual cases. However, that is not the way the system works. As previously indicated, allocation will produce a greater number of settlements and a greater number of case filings. Neither the motives of plaintiffs nor their attorneys will be adversely affected by a rule imposing allocation. Indeed, the Supreme Court of Alabama clearly indicated in Johnson[195] that it wanted to preserve the plaintiffs’ attorneys’ incentive for litigating.[196] Law review writers who assert that since the defendant would be paying the same amount, the rule of allocation will not affect deterrence, ignore the teachings of bargaining theory and the overall impact of the rule.
Utilizing the economics of civil litigation model, we have shown that the rule of allocation would produce more settlements and more case filings. The mere fact that more cases will be filed in the system increases the probability of more deterrence. Allocation increases the probability that a wrongdoer will be sued. An increased number of case filings will increase the capacity of the system to deter wrongdoing. Plaintiffs’ attorneys should be held to the standard of filing only meritorious lawsuits, and the problems associated with frivolous litigation needs to be considered separately from the issue of deterrence. If only meritorious lawsuits are filed, then a rule that brings about more settlements potentially brings about more deterrence. We leave to the next chapter the question of whether defendants who have committed no wrong will be sued. However, since allocation has no inherent properties that would assure the quality of lawsuits, the fact that it might precipitate more lawsuits presents a serious issue. As we will see, the fact that plaintiffs’ attorneys could be somewhat less selective in choosing cases might marginally increase the probability of frivolous lawsuits.
However, under a rule imposing allocation there will be less deterrence in individual cases. Even if plaintiffs’ attorneys file more lawsuits under the rule of allocation, the deterrent value of increased litigation will be partially offset by the fact that the net settlement paid by defendants is likely to be less. When parties negotiating for settlement take into account the threat that the state will receive a portion of the award, the total settlement paid by the defendant will be decreased by the defendant’s share of the cooperative surplus; i.e., the state’s share. The increase in the cooperative surplus brought about by the rule of allocation is totally at plaintiffs’ expense (in comparison to the pre-allocation rule). Defendants’ threat values remain the same and are not affected by the imposition of the rule of allocation, since we assume that all other factors remain unchanged when the rule is imposed. Plaintiffs’ threat value is lowered because the state gets half. Therefore, if we assume that plaintiffs and defendants will share the cooperative surplus equally, the amount that the defendants pay for settlement will be reduced. Nevertheless, the fact that more defendants will be sued under a rule imposing allocation will probably have more deterrent impact than the possible reduction in settlement amount. Verdicts will probably remain high and unpredictable. The prospect of paying seventy five or eighty percent of what is presently paid to settle lawsuits will not likely provide much incentive to defendants to engage in egregious wrongdoing.
Caps
Law review writers correctly assert that caps will adversely affect the deterrent value of litigation.[197] Economic analysis supports the conclusion of the writers. First, we will discuss the impact that a rule imposing caps will have on individual cases. Caps on punitive damages will, in some cases, impair the ability of punitive damages to deter, or even to effectively punish, if the injury is great, the defendant is large, and the wrongdoing is great. Caps could encourage such a defendant to take calculated risks. This problem should not be underestimated, given the number of large corporations and insurers operating in today’s economy. The judiciary must retain the ability to control egregious conduct by large corporations. However, the number of cases in which the stakes will be that high are relatively few. Assuming that all other factors remain the same, caps would not have a great impact on the deterrent value of punitive damages in individual cases.
Plaintiffs’ motive to sue would not likely be affected by caps, since punitive damages are allegedly all profit to the plaintiff. However, in some instances, the perceived risk of litigation cost might discourage plaintiffs’ attorneys from accepting a case because of caps. The cap is not only a limit on plaintiffs’ recoveries. It mathematically limits contingent fees based on a percentage of recovery. The limitation of fees might assure that the very biggest wrongdoers will not be sued. Plaintiffs’ attorneys will be more selective in accepting cases under a rule imposing caps, but the selection would be based on potential profit. In some instances, that would probably mean a preference for really egregious cases, but not if the time investment required for pursuing the case were greater than the potential fee.
Our assessment of deterrent value under a rule imposing caps extends beyond its impact on individual cases. Analysis using the economics of civil litigation model indicates that the impact of caps on the system will adversely affect the deterrent capability of the system as a whole. As previously suggested, if we assume that courts are working to capacity, and that they will continue under either rule to work at full capacity, the volume of cases actually tried will remain the same. Since a lower percentage of cases will settle, fewer cases will be filed. Defendants’ risk of loss will be diminished, both by the limits on the award and the decrease in the system’s capacity to process cases. In bargaining theory terminology, defendants’ threat value will be reduced by a rule imposing caps. Given the limitations of the court system itself, if all defendants insist on trial, the system will become backlogged. Defendants could even take a hard line against settlement, knowing that trials will tie up the system. Insurance companies and large corporations are managing a portfolio of cases–not a single case. Caps could encourage this kind of activity on the part of large corporate defendants and insurance companies.
The courts must have power to issue whatever orders are necessary to see that essential law is enforced. Such a policy does not permit an arbitrary limitation on the amount of punitive damages. In the presently existing literature, it is fair to say that very few economic analysts advocate an arbitrary cap for awards of punitive damages.[198] In some instances, punitive damages might need to be greater than the proposed cap in order punish and deter and to assure future compliance by the defendant and others similarly inclined. Further, even though the system tries as many cases under a rule imposing caps, the deterrent impact of the system will be diminished because fewer defendants will be sued.
Chapter X: Effect of Allocation and Caps on the Quality of Litigation
Law review writers assert that allocation will improve the quality of litigation.[199] One of the charges against the civil justice system is that it spawns too much frivolous litigation. The reasoning of a few law review writers, mentioned earlier in connection with their assertion that allocation would reduce the volume of lawsuits, is that the lure of gigantic awards causes plaintiffs to sue. By eliminating the windfall, they reason, the allurement will be eliminated. Economic analysis does not support the claim of writers that allocation will reduce the volume of litigation, and does not support the claim that allocation will improve the quality of litigation.
The writers have little to say about the effect of caps on the quality of litigation. Economic analysis suggests that caps will marginally improve the quality of litigation because plaintiffs’ attorneys will be more selective in choosing their cases. However, as mentioned in the preceding chapter, plaintiffs’ attorneys may also avoid costly, time-consuming litigation, even though the case has merit, because of the limitations on the contingency fee that is implicit in caps. The case may just be too big for the contingency fee which is limited to a percentage of the capped recovery.
The problem with frivolous litigation is real. In Johnson,[200] the very case in which the Supreme Court of Alabama would have eliminated windfalls, Justice Shores, justifying a full contingent fee to plaintiffs’ attorneys, wrote:
“There are also many cases that are concluded by the entry of a summary judgment for the defendant. Cases decided by summary judgments formed the largest category of civil cases decided by this Court in 1994, 47.6%. Eight-three percent of those cases were affirmed by this Court, either in whole or in part. In those cases in which the plaintiff’s lawyer works on a contingency fee basis, the lawyer loses the amount she or he has expended in filing the action and in preparing for trial.[201]”
The statistics quoted by Justice Shores arose in a year in which neither allocation nor caps applied in Alabama. They provide valuable empirical data for the present analysis. For summary judgment to be granted, there can be no genuine issue of material fact–no substantial evidence to support the claim. It is difficult to see how the filing of lawsuits that are dismissed on summary judgment justifies any special consideration to plaintiffs’ attorneys. Indoctrination into the legal profession, and the economics of law practice possibly encourages this kind of thinking. Our friends in the economic community and business community take a very different view of such lawsuits, and they are right. The data cited by Justice Shores actually shows that an unacceptable number of case filings land wide of the mark. These lawsuits could, in fact, deter legitimate business activity. One can only speculate as to how many other such cases defendants settled, rather than incurring the risk of litigation Many other frivolous lawsuits that ended in summary judgments probably were not appealed. To arm plaintiffs’ attorneys with the threat of punitive damages that can be used to extract settlement in the environment that a Johnson[202] rule of allocation would create is probably bad policy on its face. It allows the rule of law itself–the coercive power of government–to be commercialized.
Allocation
In the three preceding chapters, we have shown that allocation will lead to more settlements and caps will lead to fewer settlements. Allocation will lead to a greater volume of filings and caps will lead to fewer filings. Allocation will lead to greater deterrence of activity and caps will lead to less deterrence of activity. However, we cannot be sure that only “egregious conduct” will be deterred by either rule, or whether either will achieve the appropriate amount of deterrence. We cannot tell whether either caps or allocation will improve the quality of litigation.
Marginally, allocation might diminish the quality of lawsuits. The statistics quoted by Justice Shores indicates that defendants who should not be sued are being sued. They are defending cases all the way to the Supreme Court of Alabama. Since an extremely high percentage of cases settle, this invokes the scary thought that other defendants may be settling such cases. If that is happening, the civil justice system may be deterring worthwhile activity.
If we are deterring some worthwhile activity now, we would deter even more under a rule of allocation. Plaintiffs’ attorneys would file more lawsuits, and would be less selective. Assuming that plaintiffs’ attorneys are already selective in choosing cases, the queue from which they select would already be picked over, and they would be forced to choose less meritorious cases to increase volume. Any increase in volume of filings would produce this result.
Nevertheless, we truly do not know the optimal volume of litigation. We don’t know whether we have too much or too little litigation. While the statistics from Johnson[203] may indicate that a significant number of defendants are being sued who should not be sued, there may be still others who should have been sued but were not. The point is that allocation does not even pretend to address the quality of litigation. However, based on the information that we have available, a rule imposing allocation would probably cause the filing of even more meritless cases than are presently filed, since it would induce more filings. Because the better cases will be selected first (unless they are too expensive for plaintiffs’ lawyers), any increase in volume of filings means a decrease in the overall quality of litigation.
Caps
Caps would affect quality of litigation exactly opposite from the way that allocation would affect quality of litigation. Caps would produce fewer settlements, and fewer case filings. Like allocation, caps do not directly address either the deterrent value or the matter of quality. Nothing inherent in the idea of caps discourages meritless lawsuits.
However, the economics of civil litigation model may indicate that caps would marginally improve the quality of civil litigation. Plaintiffs’ attorneys are already selecting the best cases in the queue, but that includes some cases that should not be filed, as evidenced by the statistics in Johnson.[204] If caps cause fewer filings, then the plaintiffs’ attorneys will become even more selective, possibly selecting fewer cases that result in summary judgment.
Based on the economics of civil litigation model and the systemic impact, caps would marginally improve the quality of litigation. Attorneys would file fewer frivolous lawsuits under a rule imposing caps. However, policy makers need to carefully weigh the benefits of that result against the diminished deterrent power that would result from the rule.
Chapter XI: Summary, Conclusions, and Recommendations
The State of Alabama has occupied center stage in the development of punitive damages during the past several years. In this thesis, we examined the punitive damages controversy in the State of Alabama and developed a picture of the contending social, political and economic forces in the State. While one writer has suggested that the controversy in Alabama about punitive damages is unique,[205] we suspect that the picture of the controversy in Alabama merely caricatures the picture elsewhere. The accentuation of notable features possibly enables us to identify underlying motive forces more clearly.
From the examination of Alabama’s experience, two distinct approaches to the reform of punitive damages emerged. The Legislature proposed caps, and the Supreme Court of Alabama proposed allocation. Both approaches have considerable support among those interested in tort reform throughout the nation.
The purpose of this thesis is to compare the likely impact of the two rules that have been proposed in Alabama, using the tools of economic analysis. In making the analysis, we have looked beyond the likely impact on individual cases. We looked beyond the motives of the plaintiff and defendant. We constructed a model of the economics of civil litigation in an attempt to show how the providers of the services for civil litigation naturally form a symbiotic community. We also considered the likelihood that the real market involved does not center upon the marketing of legal services but on the marketing of plaintiffs’ claims and coercive governmental power. We believe that both models are helpful as we attempt to probe the impact of the two rules beyond the impact on individual cases. We compared the results of economic analysis to the assertions most often made by law review writers about the impact of allocation and caps, respectively on (1) volume of settlements, (2) volume of case filings, (3) deterrent value of litigation, and (4) quality of litigation.
The results of the analysis confirmed a number of the intuitive assertions of the writers; however, economic analysis produced results that differ widely from the opinions of writers in other matters. Most writers correctly surmised that a rule imposing caps would produce a higher volume of settlements. However, the writers did not appear to follow the logic of this conclusion to its impact on the economics of civil litigation and on the court system itself. Our analysis supports the conclusion of writers who assert that caps will decrease the volume of settlements.
At the next level of analysis, we concluded that if a higher percentage of cases settle under a rule of allocation, the number of case filings will also increase. Similarly, because caps reduce the percentage of settlements, they would also reduce the number of case filings. The conclusion that allocation will produce more case filings stands in stark contrast to the intuitive opinion of the writers, who believe that the elimination of the windfall will reduce the number of case filings.
At the third level of analysis, we considered, in separate chapters, the impact of both allocation and caps on the deterrent value of litigation and the quality of litigation. By creating a model that suggests, but does not fully develop, the requirements for quality and deterrence, we showed that neither allocation nor caps will inherently improve the deterrent value of litigation or the quality of litigation. However, we concluded that both rules have some systemic impact on deterrence and quality.
The deterrent value of litigation as a whole is likely to increase as a result of allocation because more suits will be filed, but the selection process indicates that the quality of such suits would probably be diminished by a rule of allocation. Several writers believed that allocation would also improve the quality of litigation because of the elimination of the windfall to plaintiffs but they do not take into account the systemic effect of the rule. A rule imposing allocation would likely increase the volume of cases filed, and as volume increases, quality is likely to decrease.
Under a rule imposing caps, the quality of litigation would likely improve. Since lawyers would be more selective in filing the cases that they could process through the system, fewer frivolous lawsuits would be filed. However, caps would diminish the deterrent value of litigation because (1) fewer cases would be filed, (2) plaintiffs’ attorneys would not accept some of the most important cases, because of the cost, and (3) in some instances, the capped amount would not be enough to deter the conduct in question.
In summary, our findings differed from the intuitive opinions of writers in two important matters. First, the writers thought that allocation would reduce the number of case filings. Secondly, the writers believed that allocation would improve the quality of litigation. Our economic analysis suggests that those opinions are incorrect for at least three reasons. First, cutting a windfall in half will not reduce motivation to sue. A half of a windfall is better than no windfall at all. Secondly, the writers do not take into account the motives of plaintiffs’ attorneys who usually have a 30- to 50-percent interest in the award. Thirdly, the writers appeared to consider only how the rules impact on individual cases, rather than how they would impact on the economics of civil litigation and on the entire civil justice system.
If my economic analysis is correct, then the traditional proponents of tort reform may come to regard allocation as a Trojan Horse.[206] Its initial appearance is somewhat misleading. My own opinion, based on my experience as a trial judge and my research and analysis in preparing this thesis, is that both allocation and caps have more short-comings than benefits. Caps would discourage important litigation, and in some instances not allow enough punitive damages to deter the wrongdoing. Allocation would increase the volume of litigation while diminishing its quality, and inappropriately arm plaintiffs’ attorneys with the threat of punitive damages. The threat of punitive damages would combine with increased cooperative surplus to constitute an extremely strong inducement to settle. Neither rule inherently helps define the appropriate circumstances for awarding punitive damages, and neither provides a rational basis for calculating punitive damages.
Better education for judges, particularly in the area of economics, including the economics of civil litigation, could enable the common law system to produce correct solutions to the problems associated with punitive damages. Specifically, the jury charge should be tailored to the circumstances of the case, based on the analytical model that pairs the defendants’ culpable mental state with the nature of the plaintiff’s injury.[207] One Procrustean charge cannot cover everything from fist fights to insurance fraud. The charge should also provide the jury with a description of a rational way to compute the amount required to deter the egregious conduct.
The trial judge, in the required post-trial review, should consider the economics of deterrence, including formulas as proposed by Cooter and Ulen.[208] The trial judge should consider calling an economist with expertise in the economics of deterrence as the court’s expert. Review by appellate courts would then produce a rational body of common law that is appropriate for punitive damages.
Bibliography and Table of Cases
Articles
Ayres, Ian and Talley, Eric, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995).
Barrick, Stephen, Comment, Moriel and the Exemplary Damages Act: Texas Tag-Team Overhauls Punitive Damages, 32 Hous. L. Rev. 1059 (1995).
Beasley, Brian, North Carolina’s New Punitive Damages Statute: Who’s Being Punished, Anyway?, 74 N.C.L. Rev. 2174 (1996).
Berry, David, Comment, Untwisting New Jersey’s Cap on Punitive Damages, 27 Seton Hall L. Rev. 167 (1996).
Breslo, James, Taking the Punitive Damage Windfall Away From the Plaintiff: An Analysis, 86 Nw. U. L. Rev. 1130 (1992).
Burrows, Sharon, Comment, Apportioning a Piece of A Punitive Damage Award to the State: Can State Extraction Statutes be Reconciled With Punitive Damage Goals and the Takings Clause?, 47 U. Miami L. Rev. 437 (1992).
Calcagni, Thomas, Note, Constitutional Law–Fourteenth Amendment–Due Process Clause Requires That a State Provide Fair Notice of the Magnitude of a Punitive Damages Award Assessed Against a Tortfeasor–BMW of N. AM, Inc. v. Gore, 116 S.Ct. 1589 (1996), 27 Seton Hall L. Rev. 708 (1997).
Clements, Jimmie, Comment, Limiting Punitive Damages: A Placebo For America’s Ailing Competitiveness, 24 St. Mary’s L. J. 197 (1992).
Cooter, Robert, Economic Analysis of Punitive Damages, 56 S. Cal. L. Rev. 79 (1982).
Cooter, Robert, Punitive Damages, Social Norms, and Economic Analysis, 60 Law & Contemp. Probs. 73 (Summer 1997).
Eisenberg, Theodore and Wells, Martin, Punitive Awards After BMW, A New Capping System and the Reported Opinion Bias, 1998 Wis. L. Rev. 387 (1998).
Epstein, Kevin, Note, Punitive Damage Reform: Allocating a Portion of the Award to the State, 13 Rev. Litig. 597 (1994).
Evans, Benjamin, “Split-Recovery” Survives: The Missouri Supreme Court Upholds the State’s Power to Collect One-Half of Punitive Damage Awards, 63 Mo. L. Rev. 511 (1998).
Grube, Jeffrey, Note, Punitive Damages: A Misplaced Remedy, 66 S. Cal. L. Rev. 839 (1993).
Haddock, McChesney and Spiegel, An Ordinary Economic Rationale For Extraordinary Legal Sanctions, 78 Cal. L. Rev. 1 (1990).
Hallahan, Janet, Social Interests Versus Plaintiffs’ Rights: The Constitutional Battle Over Statutory Limitations on Punitive Damages, 26 Loy. U. Chi. L.J. 405 (1995).
Harpen, Shawn and Widman, Marilyn, Note, BMW of North America, Inc. v. Gore & Life Insurance Co. of Georgia v. Johnson: Blazing the Judicial Trails in Punitive Damage Reform, 28 U. Tol. L. Rev. 401 (1997).
Hawkins, Andrea, Note, Balancing Act: Public Policy and Punitive Damages Caps, 49 S.C. L. Rev. 293 (1998).
Holmes, Oliver, The Path of the Law, 10 Harv. L. Rev. 457 (1910).
Hoole, Gregory, Note, In the Wake of Seemingly Exorbitant Punitive Damage Awards America Demands Caps on Punitive Damages–Are We Barking Up the Wrong Tree?, 22 J. Contemp. L. 459 (1996).
Kagan, Jonathan, Toward a Uniform Application of Punishment: Using the Federal Sentencing Guidelines as a Model for Punitive Damage Reform, 40 UCLA L. Rev. 753 (1993).
Kirgis, Paul, The Constitutionality of State Allocation of Punitive Damage Awards, 50 Wash. & Lee L. Rev. 843 (1993).
Klaben, Matthew, Note, Split-Recovery Statutes: The Interplay of the Takings and Excessive Fines Clauses, 80 Cornell L. Rev. 104 (1994).
Lance, Edward, Tort Reform Hits Supreme Snag in Illinois, 10 Loy. Consumer L. Rev. 10 (1998).
Miracle, Douglas, Note, Punitive Damages, Jury Discretion and the “Outer Limits” of the Fourteenth Amendment in Civil Cases, 13 Miss. C. L. Rev. 221 (1992).
Owen, David, A Punitive Damages Overview: Functions, Problems and Reform, 39 Vill. L. Rev. 363 (1994).
Parkinson, Charles, Note, A Shift in the Windfall: An Analysis of Indiana’s Punitive Damages Allocation Statute and the Recovery of Attorney’s Fees Under the Particular Services Clause, 32 Val. U. L. Rev. 923 (1998).
Priest, George, Insurability and Punitive Damages, 40 Ala. L. Rev. 1009 (1989).
Priest, George, Punitive Damages Reform: The Case of Alabama, 56 La. L. Rev. 825 (1996).
Priest, George, The Current Insurance Crisis and Modern Tort Law, 96 Yale L.J. 1521 (1987).
Richmond, Douglas, The Business and Ethics of Liability Insurers’ Efforts to Manage Legal Care, 28 U. Mem. L. Rev. 57 (1997)
Saichek, David, Putting a Lid on Caps, 69 Wis. Law 5 (Dec.1995).
Shores, Janie, A Suggestion For Limited Tort Reform: Allocation of Punitive Damage Awards To Eliminate Windfalls, 44 Ala. L. Rev. 61 (1992).
Sloane, Lynda, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 Val. U. L. Rev. 473 (1993).
Stepanian, Leo, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 Duq. L. Rev. 301 (1994).
Stephens, Michelle, Punitive Damages: Making the Plaintiff Whole or Making the State Wealthy?, 19 Am. J. Trial Advoc. 698 (1996).
Stevens, Clay, Comment, Split Recovery: A Constitutional Answer to the Punitive Damage Dilemma, 21 Pepp. L. Rev. 857 (1994).
Toy, Amelia., Comment, Statutory Punitive Damage Caps and the Profit Motive: An Economic Perspective, 40 Emory L.J. 303 (1991).
Wall, Brett, Comment, Sympathy For the Devil: How the Ohio Tort Reform Act Creates A Flawed System of Punitive Damages, 58 Ohio St. L.J. 1023 (1997).
Welles, Dede, Note, Charitable Punishment: A Proposal to Award Punitive Damages to Nonprofit Organizations, 9 Stan. L. & Pol’y Rev. 203 (1998).
Books
Blackstone, Sir William, 1 Commentaries on the Laws of England, (St. George Tucker, ed.) South Hackensack: (1st ed. 1803) (Reprinted 1969 , Rothman Reprints, Inc.).
Butler, Henry, Economic Analysis for Lawyers. Durham: Carolina Academic Press, 1998.
Cooter, Robert and Ulen, Thomas, Law and Economics. HarperCollinsPublishers, 1988.
Hazlitt, Henry, Economics in One Lesson. New York: Crown Publishers, Inc., 1979. (Originally published in 1946).
Heilbroner, Robert, The Worldly Philosophers, 6th ed. New York: Simon & Schuster, Inc., 1986.
Johnson, Winthrop, Courting Votes in Alabama. LaFayette: Prescott Press, Inc., 1999.
Posner, Richard, Economic Analysis of Law. Boston: Little, Brown and Company, 1992.
Posner, Richard, Overcoming Law. Cambridge: Harvard University Press, 1995.
Rawls, John, A Theory of Justice. Cambridge: Belknap Press of Harvard University Press, 1971.
Segrest, Dale, Conscience and Command. Atlanta: Scholars Press, 1994.
Alabama Pattern Jury Instructions Civil, 2nd Edition. Rochester: Lawyers Cooperative Publishing, 1993.
Cases
United States Supreme Court:
Aetna Life Insurance Co. v. Lavoie, 475 U.S. 813 (1986).
Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265 (1995).
American Pioneer Life Ins. Co. v. Williamson, 135 S. Ct. 1872 (1996).
BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996).
Ford Motor Co. v. Sperau, 116 S. Ct. 1843 (1996).
Life Ins. Co. of Ga. v. Johnson, 116 S. Ct. 1589 (1996).
Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1 (1991).
TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993).
Union Security Life Ins. Co. v. Crocker, 116 S. Ct. 1872 (1996).
Federal Cases
Pollard v. United States, 69 F.R.D. 646 (1976)
State cases:
American Pioneer Life Ins. Co. v. Williamson, 704 So. 2d 1361 (Ala. 1997).
Bloodsaw v. United Ins. Co. of America , 648 So. 2d 553 (Ala. 1994).
BMW of North America, Inc. v. Gore, 701 So. 2d 507 (Ala. 1997).
Charter Hospital of Mobile v. Weinberg, 558 So. 2d 909 (Ala. 1990).
Chavers v. National Security Fire and Casualty Co., 405 So. 2d 1 (Ala. 1981).
Chrysler Corp. v. Schiffer, No. 1970789, 1999 WL 97991 (Ala. Feb. 26, 1999) (not yet released for publication).
Crown Life Ins. Co. v. Smith, 657 So. 2d 821 (Ala. 1995).
Employees’ Benefit Association v. Grisset, No. 1961766, 1998 WL 599498 (Ala. Sept. 11, 1998) (not yet released for publication).
Ford Motor Co. v. Sperau, 708 So. 2d 111 (Ala. 1997).
Fuller v. Preferred Risk Life Ins. Co., 577 So. 2d 878 (Ala. 1991).
Henderson v. Alabama Power Co., 627 So. 2d 878 (Ala. 1993).
Jackson v. Souza, 636 So. 2d 427 (Ala. 1994).
Lewis v. Lennox, 567 So. 2d 264 (1990).
Life Ins. Co. of Ga. v. Johnson, No. 1940357, 1995 WL 683857 (Ala. Nov. 17, 1995) (withdrawn by the court and no longer available through Westlaw).
Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996).
Life Ins. Co. of Ga. v. Johnson, 701 So. 2d 524 (Ala. 1997).
Life Ins. Co. of Ga. v. Johnson, No.1970037, 1998 WL 515948 (Ala. Aug. 21, 1998) (not yet released for publication).
Loyal American Life Ins. Co., Inc. v. Mattiace, 679 So. 2d 229 (Ala. 1996).
Moore v. Mobile Infirmary Ass’n, 592 So. 2d 156 (Ala. 1991).
National Security Fire & Casualty Co. v. King, 621 So. 2d 250 (Ala. 1993).
Peete v. Blackwell, 504 So. 2d 222 (Ala. 1986).
Reed v. Tucker, 598 So. 2d 840 (Ala. 1992).
Shiver v. Waites, 408 So. 2d 502 (Ala. 1981).
Smith v. States General Life Ins. Co., 592 So. 2d 1021 (Ala. 1992).
The Booth, Inc. v. Miles, 567 So. 2d 1206 (Ala. 1990).
TXO Production Corp. v. Alliance Resources Corp., 419 S.E. 2d 870 (W. Va. 1992).
Union Security Life Ins. Co. v. Crocker, 709 So. 2d 1118 (Ala. 1997).
Newspaper Articles
The ‘Bizarre Results’ of Punitive Damages, Wall St. J., March 8, 1995.
Statutes
Ala. Code § 6-11-21 (1975).
Ala. Code § 6-5-544(b) (1975).
[1]Ala. Code § 6-11-21 (1975):
Punitive damages not to exceed $250,000; exceptions.
An award of punitive damages shall not exceed $250,000, unless it is based upon one or more of the following:
(1) A pattern or practice of intentional wrongful conduct, even though the damage or injury was inflicted only on the plaintiff; or,
(2) Conduct involving actual malice other than fraud or bad faith not a part of a pattern or practice; or,
(3) Libel, slander, or defamation
[2]Henderson v. Alabama Power Co., 627 So. 2d 878 (Ala. 1993); accord, Moore v. Mobile Infirmary Ass’n, 592 So. 2d 156 (Ala. 1991), in which the Supreme Court of Alabama held that Ala. Code § 6-5-544(b) (1975), which limited the amount of “non-economic” damages recoverable in a medical malpractice action violated the plaintiff’s right to trial by jury.
[3]Life Ins. Co. of Ga. v. Johnson, No. 1940357, 1995 WL 683857 (Ala. Nov. 17, 1995) (withdrawn by the court and no longer available through Westlaw). Dissents by Justices Maddox and Butts questioned the propriety–indeed the legality–of this type of judicial lawmaking. However, in this paper, I am concerned only with an economic analysis of the allocation rule announced in the decision.
[4]The newly announced allocation rule would have become effective as to all cases filed more than ninety days after entry of judgment in the case. It never became effective.
[5]The opinion also provided for a bifurcated trial with the jury first deciding whether the defendant is liable, and if so, deciding the amount of punitive damages in a separate hearing.
[6]Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996), rev’d 117 S. Ct. 288 (1996).
[7]BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996).
[8]Life Ins. Co. of Ga. v. Johnson, 116 S. Ct. 1589 (1996).
[9]Life Ins. Co. of Ga. v. Johnson, 701 So. 2d 524 (Ala. 1997).
[10]See articles cited infra note 15.
[11]Since compensatory damages allegedly make the plaintiff whole, punitive damages are sometimes described as a “windfall” to the plaintiff.
[12]See articles cited infra note 17.
[13]See, e.g., Henry N. Butler, Economic Analysis for Lawyers 639-45 (1998); Robert Cooter & Thomas Ulen, Law and Economics 337-38, 388-97 (1988); Richard A. Posner, Economic Analysis of Law, 191-92, 206-10 (4th ed. 1992).
[14]While preparing this thesis, I consulted several hundred notes, comments and articles that discuss and debate punitive damages. I cite those that are relevant, but many others, while evidencing the strong interest in the issues, have no direct bearing on the present thesis.
[15]“Capping punitive damages awards is a centerpiece of the tort reform movement. ‘According to the American Tort Reform Association, as of June 30, 1996, forty‑three states allowed punitive damages awards. Of these, twenty‑nine states impose no caps on punitive damages and fourteen impose some form of cap. In states that cap punitive awards, the preferred method is to employ a simple multiple of the compensatory award. Eleven states rely on a multiple of the compensatory damages award. The most popular multiple is three times the compensatory award, but this is used by only five states. The capping multiples range from one to five.’” Theodore Eisenberg & Martin T. Wells, Punitive Awards After BMW, A New Capping System, and the Reported Opinion Bias, 1998 Wis. L. Rev. 387, 388 (1998); For examples of the heated debate over such measures, see Jimmie O. Clements, Jr., Comment, Limiting Punitive Damages: A Placebo for America’s Ailing Competitiveness, 24 St. Mary’s L.J. 197 (1992); Gregory Nathan Hoole, Note, In the Wake of Seemingly Exorbitant Punitive Damage Awards America Demands Caps on Punitive Damages‑‑Are We Barking up the Wrong Tree?, 22 J. Contemp. L. 459 (1996); Amelia J. Toy, Comment, Statutory Punitive Damage Caps and the Profit Motive: An Economic Perspective, 40 Emory L.J. 303 (1991); Edward G. Lance, IV, Tort Reform Hits Supreme Snag in Illinois, 10 Loy. Consumer L. Rev. 10 (1998); David A. Saichek, Putting a Lid on Caps, 69‑DEC Wis. Law. 5 (Dec. 1996); Brian Timothy Beasley, North Carolina’s New Punitive Damages Statute: Who’s Being Punished, Anyway?, 74 N.C. L. Rev. 2174 (1996); Brett McComb Wall, Comment, Sympathy For the Devil: How the Ohio Tort Reform Act Creates A Flawed System of Punitive Damages, 58 Ohio St. L.J. 1023 (1997); Andrea Moore Hawkins, Note, Balancing Act: Public Policy and Punitive Damages Caps, 49 S.C. L. Rev. 293 (1998); Janet V. Hallahan, Social Interests Versus Plaintiffs’ Rights: The Constitutional Battle Over Statutory Limitations On Punitive Damages, 26 Loy. U. Chi. L.J. 405 (1995); J. Stephen Barrick, Comment, Moriel and the Exemplary Damages Act: Texas Tag-Team Overhauls Punitive Damages, 32 Hous. L. Rev. 1059 (1995); David C. Berry, Comment, Untwisting New Jersey’s Cap on Punitive Damages, 27 Seton Hall L. Rev. 167 (1996).
[16]See supra note 15.
[17]For examples of scholarly debate about allocation, see Shawn Harpen & Marilyn Widman, Note, BMW of North America, Inc. v. Gore & Life Insurance Co. of Georgia v. Johnson: Blazing the Judicial Trails in Punitive Damage Reform, 28 U. Tol. L. Rev. 401 (1997); Sharon G. Burrows, Comment, Apportioning a Piece of a Punitive Damage Award to the State: Can State Extraction Statutes be Reconciled with Punitive Damage Goals and the Takings Clause? 47 U. Miami L. Rev. 437 (1992); Dede W. Welles, Note, Charitable Punishment: A Proposal to Award Punitive Damages to Nonprofit Organizations, 9 Stan. L. & Pol’y Rev. 203 (1998); Lynda A. Sloane, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 Val. U. L. Rev. 473 (1993); Paul F. Kirgis, Note, The Constitutionality of State Allocation of Punitive Damage Awards, 50 Wash. & Lee L. Rev. 843 (1993); Kevin M. Epstein, Note, Punitive Damage Reform: Allocating a Portion of the Award to the State, 13 Rev. Litig. 597 (1994); Matthew J. Klaben, Note, Split-Recovery Statutes: The Interplay of The Takings and Excessive Fines Clauses, 80 Cornell L. Rev. 104 (1994); Leo M. Stepanian II, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 Duq. L. Rev. 301 (1994); Charles F.G. Parkinson, Note, A Shift in the Windfall: An Analysis of Indiana’s Punitive Damages Allocation Statute and the Recovery of Attorney’s Fees Under the Particular Services Clause, 32 Val. U. L. Rev. 923 (1998); Michelle Riley Stephens, Punitive Damages: Making the Plaintiff Whole or Making the State Wealthy?, 19 Am. J. Trial Advoc. 698 (1996); E. Jeffrey Grube, Note, Punitive Damages: A Misplaced Remedy, 66 S. Cal. L. Rev. 839 (1993); Benjamin F. Evans, “Split-Recovery” Survives: The Missouri Supreme Court Upholds the State’s Power to Collect One-half of Punitive Damage Awards, 63 Mo. L. Rev. 511 (1998); Clay R. Stevens, Comment, Split-Recovery: A Constitutional Answer to the Punitive Damage Dilemma, 21 Pepp. L. Rev. 857 (1994).
[18]Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996), rev’d 117 S. Ct. 288 (1996).
[19]Cooter & Ulen, supra note 13, at 389-90.
[20]See generally id. at 326-71.
[21]Id. at 192.
[22]Id. at 206. We should note that “intent” may not have exactly the same meaning for economists as it does in legal jargon. Additionally, writers often apply the term indiscriminately to individuals and corporations.
[23]Robert D. Cooter, Economic Analysis of Punitive Damages, 56 S. Cal. L. Rev. 79 (1982).
[24]See, e.g., Johnson, 684 So. 2d 685.
[25]See, e.g., James A. Breslo, Taking the Punitive Damage Windfall Away From the Plaintiff: An Analysis, 86 Nw. U. L. Rev. 1130 (1992).
[26]See BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996); Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1 (1991).
[27]Ala. Code § 6-11-21 (1975).
[28]Henderson v. Alabama Power Co., 627 So. 2d 878 (Ala. 1993).
[29]Life Ins. Co. of Ga. v. Johnson, No. 1940357, 1995 WL 683857 (Ala. Nov. 17, 1995) (withdrawn by the court and no longer available through Westlaw).
[30]TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993); Haslip, 499 U.S. 1 (1991); BMW of North America, Inc. v. Gore., 701 So. 2d 507 (Ala. 1997); cf. Gore, 517 U. S. 559 (1996), (reversing the Supreme Court of Alabama’s decision for exceeding the bounds of due process, but affirming the concept of punitive damages).
[31]See generally Cooter & Ulen, supra note 13.
[32]TXO, 509 U.S. 443.
[33]Haslip, 499 U.S. 1.
[34]Gore, 517 U.S. 559, 584.
[35]TXO, 509 U.S. 443.
[36]Gore, 517 U.S. 559.
[37]“The appellees offered their evidence of other evil acts to disprove TXO’s good faith defense and to show that this case was but part of a pattern and practice of deception and chiseling by TXO.” TXO Production Corp. v. Alliance Resources Corp., 419 S.E. 2d 870, 883 (W. Va. 1992).
[38]Id. at 887.
[39]See, e. g., articles cited supra notes 15 and 17.
[40]See, e. g., articles cited supra notes 15 and 17.
[41]See, e.g., articles cited supra note 17.
[42]See generally articles cited supra note 15; but cf. George L. Priest, Punitive Damages Reform: The Case of Alabama, 56 La. L. Rev. 825, 830-32 (1996).
[43]See, e.g., Matthew J. Klaben, Note, Split-Recovery Statutes: The Interplay of The Takings and Excessive Fines Clauses, 80 Cornell L. Rev. 104 (1994); Paul F. Kirgis, Note, The Constitutionality of State Allocation of Punitive Damage Awards, 50 Wash. & Lee L. Rev. 843 (1993); Sharon G. Burrows, Comment, Apportioning a Piece of a Punitive Damage Award to the State: Can State Extraction Statutes be Reconciled with Punitive Damage Goals and the Takings Clause? 47 U. Miami L. Rev. 437 (1992); Douglas T. Miracle, Note, Punitive Damages, Jury Discretion and the “Outer Limits” of the Fourteenth Amendment in Civil Cases, 13 Miss. C. L. Rev. 221 (1992); Eighth Amendment – Punitive Damages – Florida Supreme Court Upholds “Split -Recovery” Statute, 106 Harv. L. Rev. 1691 (1993); Thomas R. Calcagni, Note, Constitutional Law–Fourteenth Amendment– Due Process Clause Requires That a State Provide Fair Notice of the Magnitude of a Punitive Damages Award Assessed Against a Tortfeasor–BMW of N. AM, Inc. v. Gore, 116 S.Ct. 1589 (1996), 27 Seton Hall L. Rev. 708 (1997).
[44]The writers are not unanimous on these points, and the points are presented here to give a reader who has no experience in the literature of law and economics a general idea about how the writers in the field feel about the interface between punitive damages and economic theory. I tender these points in good faith, with no desire to debate their validity. Persons with expertise in law and economics will recognize that these points distill the essence of a vast literature, and that the assertions are debatable. While I believe that these points are supported by the opinions of persons recognized as experts in the field, it is not the purpose of this thesis to prove or disprove them. The expert can simply ignore these assertions and move on to the arguments that follow.
[45]See Posner, supra note 13, at 191-92.
[46]Id. at 206.
[47]Id. at 206-12.
[48]Id. at 209.
[49]Id. Gore, 517 U.S. 559, only established the outer limits of due process. It did not undertake to prescribe the optimal policy for states with regard to punitive damages.
[50]Johnson, 684 So. 2d 685, appeared to recognize this policy by recognizing that the plaintiff has no right to an award of punitive damages. At the same time, the court openly asserted the public policy, independent of economic considerations, that plaintiffs should be encouraged to sue in order to punish and deter wrongdoing. Economists should have no objection to this policy unless it causes inefficiency by over-deterrence.
[51]Posner, supra note 13, at 191-92.
[52]Gregory Nathan Hoole, Note, In the Wake of Seemingly Exorbitant Punitive Damage Awards America Demands Caps on Punitive Damages‑‑Are We Barking up the Wrong Tree?, 22 J. Contemp. L. 459, 475 (1996) (“The other historical rationale behind awarding punitive damages to plaintiffs instead of the state was to create an incentive, or ‘bounty’ to bring malefactors to justice that for one reason or another had not or would not be punished criminally.”); Sharon G. Burrows, Comment, Apportioning a Piece of A Punitive Damage Award to the State: Can State Extraction Statutes be Reconciled With Punitive Damage Goals and the Takings Clause?, 47 U. Miami L. Rev. 437, 446 (1992) (“The system depends on these actors to bring and prosecute cases, and if they do not act, the system will not function. To an appreciable extent, the incentives for this action lie in the expected damage awards.”)
[53]See, e. g., Harpen & Widman, supra note 17, at 446 (“[T]he Supreme Court of Alabama recognized the possibility that this ruling would foster settlements in lieu of litigation.”); Welles, supra note 17, at 211 (“[T]hey still have financial incentive to split the sum that would otherwise go to the public sector.”); Stepanian supra note 17, at 323 (“One advantage of full statutory extraction is that it provides an incentive to settle rather than to litigate.”); Kirgis, supra note 17, at 872 (“Additionally, in cases that are likely to result in punitive damages, state allocation provides an incentive for both parties to settle.”)
[54]Berry, supra note 15, at 197 (“The cap eliminates incentives for large corporations to settle suits because the potential for a large punitive damage award has been severely restricted.”)
[55]Burrows, supra note 17, at 437 (“The court looked to the legislative objectives behind Florida’s state extraction statute to find that one of its purposes was to discourage punitive damage claims by making them less remunerative to the claimant and the claimant’s attorney”); Welles, supra note 17, at 211 (“Split‑recovery statutes diminish the amount plaintiffs can recover and thus probably decrease their incentive to sue no matter who is the other beneficiary of the award.); Kirgis, supra note 17, at 845 (“It may also reduce the incidence of such awards by reducing the incentive to sue for punitive damages.”); Epstein, supra note 17, at 559 (“The second intended function of the statutes is to lessen the incentive for a plaintiff to sue for punitive damages, because the awards will not be as profitable.”); Klaben, supra note 17, at 118 (“Finally, a split‑recovery system, while not directly restricting the amount of punitive awards, offers incidental benefits to defendants since ‘it reduces the artificially high incentives of some plaintiffs to sue.’”)
[56]Stepanian, supra note 17; Stevens, supra note 17; Hoole, supra note 15 at 481 (“[T]his system of allocation will do nothing to inhibit the important deterrent and punishment function punitive damages are meant to serve.”); but see Burrows, supra note 17.
[57]Toy, supra note 15, at 304 (“Arbitrary caps can even undermine the effect of punitive damages by denying the court both the flexibility to adapt to the case before it and the unpredictability that constitutes a large part of deterrence.”); Clements, supra note 15, at 218 (“Limiting a punitive damage award eliminates the deterrent effect and nullifies any punishment intended by such an award.”); Hawkins, supra note 15, at 309 (“[T]hey must not be legislatively capped at arbitrary levels. Such a drastic reform would eviscerate… .”); Berry, supra note 15, at 195 (“Capping punitive damages not only fails to address the problem of vague jury standards, but it creates opportunities for corporations to profit from antisocial behavior.”)
[58]Hoole, supra note 15, at 481 (“A split award statute should be adopted because it redresses the historical anomaly of plaintiffs receiving windfalls, does nothing to frustrate the important purposes punitive damages are meant to serve, and deters frivolous lawsuits.”); Stepanian, supra note 17, at 317 (“Although one benefit of full statutory extraction is that fewer marginal suits seeking punitive damages will be brought…”); Evans, supra note 17, at 520 (“As an additional benefit, split‑recovery statutes may have the effect of discouraging unnecessary, excessive, and frivolous litigation.”)
[59]Opponents tend to argue other bad effects on deterrence, such as the removal of uncertainty and inadequacy of the amount of the award in some cases. They seem not to notice the further point that caps will likely adversely affect deterrence by reducing the number of instances in which wrongdoers are sued. See supra note 57.
[60]Economists prefer the word wants rather than the word needs for technical reasons. I will use the terms interchangeably, since I am writing to a broader audience, and the word needs often conveys my meaning more accurately.
[61]Henry Hazlitt, Economics in One Lesson 17 (New ed. 1979) (“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”)
[62]Jury charges commonly given in Alabama demonstrate the difference between the two types of damages:
“APJI 11.02
Compensatory
“The purpose of awarding compensatory damages is to fairly and reasonably compensate the injured party for the loss or injury sustained. Compensatory damages are intended as money compensation to the party wronged, to compensate him for his injury and other damages which have been inflicted upon him as a proximate result of the wrong complained of.
“APJI 11.03
Punitive
“The purpose of awarding punitive or exemplary damages is to allow money recovery to the plaintiff by way of punishment to the defendant, and for the added purpose of protecting the public by deterring the defendant and others from doing such wrong in the future. The imposition of punitive damages is entirely discretionary with the jury. Should you award punitive damages, in fixing the amount, you must take into consideration the character and degree of the wrong as shown by the evidence in the case, and the necessity of preventing similar wrongs.
“For a plaintiff to be entitled to recover punitive damages, the plaintiff must prove by clear and convincing evidence that the defendant consciously or deliberately engaged in oppression, fraud, wantonness, or malice with regard to the plaintiff.
“Clear and convincing evidence means evidence that, when weighed against evidence in opposition, will produce in the mind of the trier of fact a firm conviction as to each essential element of the claim and a high probability as to the correctness of the conclusion. (Proof by clear and convincing evidence requires a level of proof greater than a preponderance of the evidence or the substantial weight of the evidence, but less than beyond a reasonable doubt.)” Alabama Pattern Jury Instructions, Civil (2nd ed. 1993).
[63]“From its beginnings, the economic analysis of law has traced the incentive effects of liability on potential wrongdoers who pursue their material advantage. Recently the economic analysis of law has turned to the study of social norms. This paper relates these two literatures to punitive damages. People who internalize social norms feel righteous anger against those who violate them. The institution of punitive damages allows judges and juries to express righteous anger through speech and punishment. Expression of emotions by the court demonstrates the strength of its commitment to the law in question. Perception of this commitment shapes the expectations of citizens and changes their behavior. In technical terms, expressions of emotion signal commitment, and commitment provides a focal point in a game with multiple equilibria.” Robert D. Cooter, Punitive Damages, Social Norms, and Economic Analysis, 60 Law & Contemp. Probs. 73, 73-74 (Summer 1997).
[64]“Social norms provide a better guide to the need for punitive damages than to their extent. Inconsistent awards of punitive damages muddle the message conveyed by the courts concerning the seriousness of the wrong. Courts should not ask juries to determine the extent of punishment without providing instructions for its computation from the facts of the case.” Cooter, id. at 74.
[65]National Security Fire & Casualty Co. v. King, 621 So. 2d 250 (Ala. 1993) (driver and passenger injured by drunk driver awarded $100,000 each in punitive damages).
[66]The Booth, Inc. v. Miles, 567 So. 2d 1206 (Ala. 1990) (victim injured by drunk driver awarded $65,000 punitive damages against bar owner under Dram Shop Act).
[67]Fuller v. Preferred Risk Life Ins. Co., 577 So. 2d 878 (Ala. 1991) (plaintiff awarded $1,000,000 punitive damages for fraud in sale of insurance policy when insurer refused to pay claim); Chrysler Corp. v. Schiffer, No. 1970789, 1999 WL 97991 (Ala. Feb. 26, 1999) (not yet released for publication) (purchaser of automobile represented to be new but actually damaged and repaired awarded $200,000 punitive damages).
[68]Chavers v. National Security Fire and Casualty Co., 405 So. 2d 1 (Ala. 1981) (plaintiffs awarded $42,500 punitive damages because of defendant’s bad faith failure to pay a fire insurance claim); Loyal American Life Ins. Co., Inc. v. Mattiace, 679 So. 2d 229 (Ala. 1996) (plaintiff awarded $75,000 punitive damages for defendant’s bad faith failure to pay a claim on a life insurance policy. On application, decedent said he had not been convicted of DUI within five years, but had been convicted eight months earlier, and was intoxicated at the time he was killed in an automobile accident. Defendant would have issued the policy at standard rates, despite the conviction.)
[69]Jackson v. Souza, 636 So. 2d 427 (Ala. 1994) (Defendant real estate agent hit the plaintiff with his fist, believing the plaintiff had interfered with a sale, necessitating medical treatment, and resulting in a $15,000 punitive damages award.); Reed v. Tucker, 598 So. 2d 840 (Ala. 1992) (plaintiff awarded $2,500 punitive damages because the defendant broke plaintiff’s nose with his fist at graduation party); Lewis v. Lennox, 567 So. 2d 264 (Ala. 1990) (wife awarded punitive damages in an amount not mentioned in the opinion because former husband assaulted her); Peete v. Blackwell, 504 So. 2d 222 (Ala. 1986) (plaintiff nurse awarded $10,000 punitive damages from defendant doctor, who hit her on the forearm and told her to “turn on the goddam suction” during a medical emergency at the hospital); Shiver v. Waites, 408 So. 2d 502 (Ala. 1981) (claw hammer attack).
[70]Crown Life Ins. Co. v. Smith, 657 So. 2d 821 (Ala. 1995) (plaintiff awarded $2,000,000 because life insurance agent converted their whole life insurance policy’s cash value).
[71]In this thesis we assume the conventional position that compensatory damages actually compensate the plaintiff fully for his or her loss. Since there is often no provision for attorneys’ fees for successful plaintiffs, and seldom any compensation for plaintiffs’ time in pursuing the case–or even for the delay in payment from injury to verdict–this assumption is highly questionable. A business person who ignores transaction costs is likely making a serious mistake. The usual award of compensatory damages ignores transactions cases. The fact that compensatory damages often do not fully compensate the plaintiff may be a major motivating force within the system for awards of punitive damages.
[72]Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996), rev’d 117 S. Ct. 288 (1996).
[73]The criminal justice system is not particularly effective in ferreting out the kind of wrongdoing that has traditionally been dealt with by the civil justice system through punitive damages. It is much more effective in dealing with the traditional crimes such as murder, robbery, rape, theft, burglary. Prosecutors have little economic incentive to prosecute many of the kinds of cases that result in punitive damages, even if the behavior is a crime. We would probably frown on economic incentives for prosecutors, but give them to plaintiffs’ attorneys.
[74]“Alabama citizens who become the victims of fraud have little recourse other than through litigation. * * * Attorneys who represent victims of fraud, such as the fraud practiced upon this plaintiff, usually bear all of the expense of the litigation and carry all of the risk of failure.” Johnson, 684 So. 2d 685, 693.
[75]Life Ins. Co. of Ga. v. Johnson, No. 1940357 1995 WL 683857 (Ala. Nov. 17, 1995) (withdrawn by the court and no longer available through Westlaw). The Maddox dissent pointed out that in admittedly announcing new rules without advance formal notice, the court violates its own tradition. He is right. There is substantial normative force, as evidenced by the requirements in administrative procedures acts, that there should be advance notice of proposed rules changes. In the legislative branch, advance notice is inherent in the process. The proposed legislation must be filed in advance, referred to committee, read three times, and meet other formal requirements. The meeting of the legislature is a public event that theoretically assures appropriate notoriety for proposed legislation. Deliberation by the justices of the Supreme Court of Alabama is not a public event. Since the court has rule making authority, it would have been wiser for the court to offer the procedural changes in proposed rules. This would allow public debate and possible consensus, which is better practice than using a particular case to announce new procedural rules with which the attorneys and trial court could not possibly have been expected to comply.
[76]Janie Shores, A Suggestion For Limited Tort Reform: Allocation of Punitive Damage Awards To Eliminate Windfalls, 44 Ala L. Rev. 61 (1992).
[77]Johnson, 684 So. 2d 685.
[78]Charter Hospital of Mobile v. Weinberg, 558 So. 2d 909 (Ala. 1990).
[79]Smith v. States General Life Ins. Co., 592 So. 2d 1021 (Ala. 1992).
[80]Fuller v. Preferred Risk Life Ins. Co., 577 So. 2d 878 (Ala. 1991).
[81]Johnson, 684 So. 2d 685.
[82]In the political and legal arena, the term “tort reform” has been applied to a variety of measures that are generally intended to make the litigation climate more favorable to the defendant. Tort reform usually curtails punitive damages in some way.
[83]The Maddox dissent pointed out the propensity of the court to dismantle tort reform.
[84]For instance, in Bloodsaw v. United Ins. Co. of America, 648 So. 2d 553 (Ala.1994), the Court curtailed the discretion of the trial court to transfer a case under the tort reform concept of forum non-conveniens, even though none of the parties to the litigation lived in the county and the transaction itself had no significant connection to the plaintiff’s chosen venue, which has a reputation for being plaintiff oriented.
[85]“[A] limitation on punitive damages, such as that imposed by [tort reform legislation] clearly impairs the traditional function of the jury, thus violating the right to trial by jury… .” Henderson v. Alabama Power Co., 627 So. 2d 878, 887 (Ala. 1993).
[86]Johnson, 684 So. 2d 685.
[87]“Under our system of government, with its guarantee of separation of powers between the executive, legislative, and judicial branches of government, it is peculiarly and exclusively the function of the judiciary to determine whether a jury award in a civil case exceeds the amount that the State and Federal Constitutions will allow without violating the due process rights guaranteed to all citizens of this State and this country.” Johnson, 684 So. 2d 685, 699.
[88]The Court’s reasoning can possibly be understood by an a fortiori argument. Suppose that the Legislature were to pass a law stating, “Henceforth, the courts shall have the power only to declare wrongdoing in connection with civil litigation. They shall not enter judgments ordering any person to pay money to another.” Such a law would no doubt violate the doctrine of separation of powers. The Court’s position is that the legislative attempt to regulate the courts’ power to deal with damages also violates the doctrine of separation of powers.
[89]Johnson, 1995 WL 683857 (withdrawn by the court and no longer available through Westlaw) (opinion issued in November of 1995, but subsequently withdrawn).
[90]Of course, the measure would have required a constitutional amendment, in light of the court’s previous holding in Henderson, 627 So. 2d 878. Constitutional amendments are not unusual in Alabama. Alabama has the most amended constitution in the United States.
[91]Johnson, 1995 WL 683857 (withdrawn by the court and no longer available through Westlaw); see also Johnson, 684 So. 2d 685.
[92]In Johnson, 1995 WL 683857 (withdrawn by the court and no longer available through Westlaw) (issued in 1995), the Court stated, “[U]nder the separation of powers provisions, it is the inherent and exclusive power of the judiciary to determine whether a jury award in a civil case exceeds the amount that the state and federal constitutions will allow without violating due process rights… .” The identical language was repeated in the revised opinion (Johnson, 684 So. 2d 685, 700) (issued in 1996). The language is not found in the third opinion issued as a result of the remand from the United States Supreme Court, (Life Ins. Co. of Ga. v. Johnson, 701 So. 2d 524 (Ala. 1997)), but since the separation of powers issue was not the basis of the decision in Gore, 517 U.S. 559, there is no reason to assume that the Supreme Court of Alabama has changed its position. Admittedly, the issue of the court’s exclusive power to review punitive damage awards is not extremely clear at the present moment.
[93]Life Ins. Co. of Ga. v. Johnson, 701 So. 2d 524 (Ala. 1997).
[94]Johnson, 1995 WL 683857 (withdrawn by the court and no longer available through Westlaw).
[95]Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1 (1991).
[96]Haslip, 499 U.S. 1, 19-23.
[97]“These standards have real effect when applied by the Alabama Supreme Court to jury awards.” Haslip, 499 U.S. 1, 22.
[98]TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993).
[99]Punitive damage awards are an appropriate way to punish wrongdoers and to deter wrongdoing.
[100]The ‘Bizarre Results’ of Punitive Damages, Wall St. J., March 8, 1995, at A21.
[101]Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813 (1986).
[102]Wall St. J., supra note 100.
[103]Id.
[104]Id.
[105]Johnson, 684 So. 2d 685.
[106]BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996).
[107]Life Ins. Co. of Ga. v. Johnson, 116 S. Ct. 1589 (1996).
[108]Union Security Life Ins. Co. v. Crocker, 116 S. Ct. 1872 (1996); American Pioneer Life Ins. Co., v. Williamson, 135 S. Ct.1872 (1996); and Ford Motor Co. v. Sperau, 116 S. Ct. 1843 (1996).
[109]Johnson, 701 So. 2d 524.
[110]Johnson, 701 So. 2d 524, 532.
[111]Johnson, 684 So. 2d 685.
[112]Union Security Life Ins. Co. v. Crocker, 709 So. 2d 1118 (Ala. 1997).
[113]American Pioneer Life Ins. Co. v. Williamson, 704 So. 2d 1361 (Ala. 1997).
[114]Ford Motor Co. v. Sperau, 708 So. 2d 111 (Ala. 1997).
[115]For a graphic, if a bit one-sided, description of the extent to which punitive damages and the civil justice system were issues in the 1994 chief justice race, see Winthrop E. Johnson, Courting Votes in Alabama: When Lawyers Take Over a State’s Politics (1999).
[116]See generally, id.
[117]See generally, id.
[118]See generally, id. Author Winthrop E. Johnson participated in the campaign of the Republican challenger in the 1994 election. He writes, “Gigantic punitive damages awards were common in Alabama. Remember the BMW case, in which a jury awarded a doctor in Birmingham four million dollars for his purchase of a new BMW that had a touched-up paint job. Yale Law School Professor George Priest studied Alabama’s punitive damage system and concluded: ‘It used to be that a million dollar verdict distinguished a plaintiff lawyer. Now in Alabama that’s considered a defense verdict.’” Id. at 8.
[119]Johnson, 701 So. 2d 524.
[120]Although the final opinion in the case was issued on August 15, 1997, there was a subsequent appeal concerning post-judgment interest resulting in an August 21, 1998, opinion that has not yet been released for publication.
[121]The defendant had sold worthless insurance to a poor elderly woman. Apparently, such sales were intentionally made by the defendant to increase profits.
[122]Actually, the court presently consists of four declared Republicans, four declared Democrats, and one additional justice who was appointed by a Republican governor. It is generally assumed that the Republican appointee will run for election as a Republican.
[123]In the 1998 gubernatorial, the successful Democratic candidate, Don Siegelman, used as his primary campaign issue the establishment of a state lottery for the support of education.
[124]Employees’ Benefit Association v. Grisset, No. 1961766, 1998; 599498 (Ala. Sept. 11, 1998) (not yet released for publication).
[125]Id. at 10.
[126]Gore, 517 U.S. 559.
[127]Chrysler Corp. v. Schiffer, No. 1970789, 1999 WL 97991 (Ala. Feb. 26, 1999) (not yet released for publication).
[128]Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265 (1995).
[129]A cursory Westlaw search quickly revealed dozens of recent cases decided by the Supreme Court of Alabama dealing with the issue of enforceability of binding arbitration clauses. Generally speaking, such clauses are binding if the subject matter involves interstate commerce–which is almost any commercial transaction.
[130]Justice Oliver Wendell Holmes suggested that law is a prediction of what a court will do in fact. See: Oliver Wendell Holmes , The Path of the Law, 10 Harv. L. Rev. 457 (1910). If arbitration becomes the primary method of resolution of all disputes involving a contract, what will law be 50 years from now? Generally, there is no appeal from the results of arbitration, while the results of the work of the 28,000 trial court judges in the United States can be readily appealed.
[131]Deduction of attorneys fees from the state’s portion of a punitive damage award is not a part of all schemes for allocation. See, e. g.,Charles F.G. Parkinson, Note, A Shift in the Windfall: An Analysis of Indiana’s Punitive Damages Allocation Statute and the Recovery of Attorney’s Fees Under the Particular Services Clause, 32 Val. U. L. Rev. 923 (1998), in which the author points out the unavailability of attorney’s fees as to the state’s portion of the punitive damage award in Indiana, and makes a case for paying the attorney.
[132]Johnson, 684 So. 2d 685.
[133]The initial opinion of the Supreme Court of Alabama in Johnson (Life Ins. of Ga. v. Johnson, No. 1940357, 1995 WL 683857 (Ala. Nov. 17, 1995) (withdrawn by the court and no longer available through Westlaw) did not state explicitly that the state would not participate in settlement awards, even if the threat of punitive damages had precipitated the settlement. The next opinion in the series (Johnson, 684 So. 2d 685) made this point explicitly: “In the case of settlement, the parties need not designate any part of the settlement proceeds as punitive damages and no part of the settlement proceeds shall be paid into the general fund.” Id. at 699. Justice Shores pointed to the small number of litigated cases resulting in punitive damages that reach the appellate courts. Reciting the actual punitive damages approved by the Alabama courts, she argued that they were of small consequence to the entire system. Justice Shores minimized the possibility that punitive damages had a significant economic impact by excluding from consideration the cases that were settled without litigation, although they included the threat of punitive damages. The parties bargaining for settlement would take into account the threat of punitive damages. The Johnson approach would have eliminated windfalls to the plaintiff only in the small percentage of cases that are tried–not in the overwhelming majority that are settled.
[134]See Posner, supra note 13, at 3 (The task of economics … is to explore the implications of assuming that man is a rational maximizer of his ends in life, his satisfactions–what we shall call his “self–interest.”); see generally Butler, supra note 13, at 4-5.
[135]The numerical quality of money, and the fact that it is the “medium of exchange” causes discussions of economics to gravitate toward money.
[136]Posner, supra note 13, at 12; Butler, supra note 13, at 565-82.
[137]See generally Butler, supra note 13, Cooter & Ulen, supra note 13.
[138]Butler, supra note 13, at 20.
[139]Cf. John Rawls, A Theory of Justice 17-22 (1971).
[140]For informative background information about the development of various economic theories, see generally Robert L. Heilbroner, The Worldly Philosophers (6th ed. 1986).
[141]Interestingly, the anti-trust laws utilized, among other things, private causes of action and a form of punitive damages. Imbedded in this approach is an important suggestion as to the nature of punitive damages: often they guard against evil conduct that free markets cannot be expected to regulate. There is a moral element in the policy behind punitive damages. There is an element that economic theory itself assumes and depends upon.
[142]Cooter, supra note 64. If a social norm requires that certain behavior should be deterred by punitive damages, that result can usually be explained in economic terms based on externalities; i.e., the potential effect on third parties constitutes an inherent justification for punitive damages.
[143]Sir William Blackstone, 1 Commentaries on the Laws of England, (St. George Tucker, ed. 1st ed. 1803) (Reprinted 1969 , Rothman Reprints, Inc.). “For [God] has so intimately connected, so inseparably interwoven the laws of eternal justice with the happiness of each individual, that the latter cannot be attained but by observing the former; and, if the former be punctually obeyed, it cannot but induce the latter. In consequence of which mutual connection of justice and human felicity, he has not perplexed the law of nature with a multitude of abstracted rules and precepts, referring merely to the fitness or unfitness of things, as some have vainly surmised; but has graciously reduced the rule of obedience to this one paternal precept, that man should pursue his own true and substantial ‘happiness.’ This is the foundation of what we call ethics, or natural law.” What Blackstone suggests as the basis for natural law sounds very much like the “enlightened self-interest” that lies at the core of economic theory. Id. at 40.
[144]See, e.g., Pollard v. United States, 69 F.R.D. 646 (1976). In Pollard, the United States Government admitted wrongdoing and settled with the plaintiffs. The government paid 9.5 million dollars to the plaintiffs. Approximately 600 black men participated in a human experiment known as the “Tuskegee Syphilis Study.” The subjects were poor black men of limited education who knew nothing of their role in the experiment.
[145]See generally, Cooter, supra note 64.
[146]Blackstone, supra note 143; Cf. Dale Segrest, Conscience and Command 86-92 (1994).
[147]See generally, Cooter & Ulen, supra note 13, at 92-95. (My description of bargaining theory is adapted from their work.) See also Butler, supra note 13, at 21-22.
[148]Cooter & Ulen, supra note 13, at 92-94.
[149]Id. at 94.
[150]Complete descriptions of market theory, including the laws of supply and demand, are readily attainable in any number of sources. See, i.e., Butler, supra note 13, Ch. III; Cooter & Ulen, supra note 13, at 16-32.
[151]There are general practitioners, but the strong tendency is specialization.
[152]During the last decade, the hourly rate has come under fire, and in some instances, the insurer may negotiate a fixed fee. Douglas R. Richmond, The Business and Ethics of Liability Insurers’ Efforts to Manage Legal Care, 28 U. Mem. L. Rev. 57 (Page references not available through Westlaw) (1997) (“Insurers also have imposed on defense counsel a variety of alternative billing arrangements, including ‘flat fees’ or ‘fixed fees.’”)
[153]See generally, Richard A. Posner, Overcoming Law 33-80 (1995).
[154]Of course, all of these persons and entities are supported by staff that includes secretaries, investigators, paralegals, adjusters, underwriters, and other personnel, all of whom expect to be paid for their services.
[155]Cf. George L. Priest, The Current Insurance Crisis and Modern Tort Law, 96 Yale L.J. 1521 (1987).
[156]Mass tort litigation, and massive class actions are not “predictable.”
[157]Pro se litigation has not made much of a showing in complicated civil litigation.
[158]Of course, if a large corporation is the defendant, it is likely to play a major role in settlement negotiations.
[159]Although there obviously are a finite quantity of automobile accidents, fistfights, automobile sales, insurance sales and other situations from which lawsuits arise, there are a great number of them. The point is that anyone can sue anyone else for any dispute of any kind, despite the fact that the lawsuit might not be successful.
[160]Cf. Ian Ayres and Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) (The word entitlement is used with a similar but technically different meaning.)
[161]Query, whether the government has a monopoly position in coercive power, which it distributes through licenses.
[162]BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996).
[163]See generally Cooter & Ulen, supra, note 13, at 388-97.
[164]Cooter & Ulen, supra note 13.
[165]Cooter & Ulen supra note 13, at 379-82.
[166]Id.
[167]The injuries or losses in question have no monetary equivalent. Money does not compensate for such injuries. Law needs better terminology. Such damages are neither compensatory nor punitive. Although they are called compensatory, this probably serves to confuse, since the emotion they engender makes them more like punitive damages.
[168]Cooter & Ulen supra note 13, at 392.
[169]See generally, id. at 388-97.
[170]Cooter & Ulen supra note 13, does not address computation of damages in this quadrant. See id. at 396.
[171]Id. at 380.
[172]Supra pp. 15-17.
[173]Supra note 53.
[174]Supra note 54.
[175]Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996), rev’d 117 S. Ct. 288 (1996).
[176]Id.
[177]See the discussion of bargaining theory, supra pp. 47-49.
[178]BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), established the outer limits that due process will allow, and clearly shows that there is a limit, but the limit remains subjective, and can still include substantial punitive damage awards.
[179]This argument would not apply in those states in which the lawyer receives no part the state’s portion of the award. Further, the argument would be affected by the regulation or limitations placed on attorney’s contingent fees in some allocation statutes.
[180]Supra note 54.
[181]In making this assertion, I am referring to single limit caps such as the $250,000 cap enacted by the Alabama Legislature. Ala. Code § 6-11-21 (1975). As the size of the cap increases, the effect on settlement would decrease. If the cap were computed differently, i.e.,as a multiple of compensatory damages, the effect would also be different.
[182]Supra note 55.
[183]Klaben, supra note 17, at 118 (“[A] split-recovery system, while not directly restricting the amount of punitive awards, offers incidental benefits to defendants since ‘it reduces the artificially high incentives of some plaintiffs to sue.’”); Epstein, supra note 17, at (page number not available through Westlaw) ( “The second intended function of the statutes is to lessen the incentive for a plaintiff to sue for punitive damages, because the awards will not be as profitable. Of course, this would mean fewer opportunities for the state to collect its portion of an award of punitive damages, which might be used by the state to reduce a budget deficit or to fund a program compensating tort victims who could not otherwise recover.”); Kirgis, supra note 17, at 871 ( “[Split-recovery] may also reduce the incidence of such awards by reducing the incentive to sue for punitive damages.”); Burrows, supra note 17, at 444-45 (assuming that allocation will reduce the incentive to sue).
[184]Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996), rev’d 117 S. Ct. 288 (1996).
[185]See articles cited supra note 183.
[186]Supra note 56.
[187]Supra note 57.
[188]Posner, supra note 13, at 191-92.
[189]Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996), rev’d 117 S. Ct. 288 (1996).
[190]Supra pp. 59-63.
[191]See generally Cooter & Ulensupra note 13, at 388-97.
[192]This is the position taken by Justice Shores. Shores, supra note 76.
[193]Johnson, 684 So. 2d 685.
[194]We assume the usual contingency fee contract, which was assumed by the court in Johnson, 684 So. 2d 685.
[195]Johnson, 684 So. 2d 685.
[196]Johnson, 684 So. 2d 685.
[197]Supra note 57.
[198]Robert D. Cooter, Economic Analysis of Punitive Damages, 56 S. Cal. L. Rev. 79 (1982). See Jimmie O. Clements, Jr., Limiting Punitive Damages: A Placebo For America’s Ailing Competitiveness, 24 St. Mary’s L. J. 197 (1992), for a typical non-economic legal argument against caps.
[199]See supra note 58.
[200]Life Ins. Co. of Ga. v. Johnson, 684 So. 2d 685 (Ala. 1996), rev’d 117 S. Ct. 288 (1996).
[201]Johnson, 684 So. 2d 685, 694.
[202]Johnson, 684 So. 2d 685.
[203]Johnson, 684 So. 2d 685, 694.
[204]Id.
[205]George L. Priest, Punitive Damages Reform: The Case of Alabama, 56 La. L. Rev. 825, 830-832 (1996).
[206]The dreaded enemy–plaintiffs’ attorneys–are protected within the structure.
[207]Supra pp. 59-63.
[208]Cooter & Ulen, supra note 13, at 388-397.
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