The Wall Street Journal
Thursday, October 31, 2002

Damaging Justice

By Douglas McCollam

For a long time now massive punitive damage awards have been so commonplace in America that they no longer provoke the kind of slack-jawed wonder they once did. But every now and again a judgment comes along that's so huge it can still flabbergast corporate chieftains and late-night comedians alike.

That was the case earlier this month when a California jury slapped tobacco giant Philip Morris with $28 billion in punitive damages in a case brought by Betty Bullock, a 64-year-old lifelong smoker diagnosed with lung cancer. Amazingly, after the trial a juror told this paper that the jury hadn't found Ms. Bullock's case that compelling. But skepticism about her claims had been overridden by another, more powerful, consideration: a desire for retribution. "We wanted to hurt them," the juror said of Philip Morris, "and we wanted to send a message."

Avenging Angels?

Ah, "the message." No gazillion dollar award is complete without it. Today many juries, led by ringmaster trial lawyers, have been transformed from sober, deliberative bodies into gangs of avenging angels, manning the barricades against corporate marauders. Once upon a time, in a land now far, far away, regulating corporate conduct was seen as the duty of elected representatives and their designees. No more. In the last two decades trial lawyers have supplanted government regulators and labor unions as the bedevilers-in-chief of corporate America. And the heaviest cudgel the trial lawyer swings is the threat of huge punitives.

The idea of "punitive" damages, i.e. an amount of money in excess of a person's actual harm meant to deter and punish bad conduct, has been with us, in one form or another, since antiquity. The Egyptians had them as did the Greeks. So too the Hittites and ancient Hindus. Even the Bible says a man who steals one ox should be made to return five.

And for as long as punitive damages have been around, there have been outraged defendants to complain about them. In one celebrated case tried in England in 1763, a lowly printer's assistant sued Lord Halifax, the secretary of state, for false arrest. Though the man was held only six hours and treated well, a jury awarded him the then astronomical sum of £300. Asked to strike the award as excessive, the court refused, noting that, while it was many times more than was warranted by the man's actual suffering, "exemplary damages" were just in this case given the government's blatant attack on public liberty, one "which no Englishman would wish to live under for an hour."

By the time of the American Civil War, punitives were common enough in this country for the Supreme Court to call them "a well-established principle" in our legal system. But not everyone agreed. Writing in 1872, the New Hampshire Supreme Court said that allowing plaintiffs to recover money in excess of their damages merely to punish the defendant was a "monstrous heresy." In a statement many might find relevant today, the court opined that "There is no branch of the law more exposed to the influence of a just and manly and honorable indignation than that which involves the subject of damages for a malicious wrong, nor any branch of the law more liable to be warped and perverted by violent hatred of evil and corrupt motives and deeds."

Today, punitive damages have become the Armageddon upon which the holy war of tort reform is fought. Legal thinkers from opposing camps generate contradictory studies with the rapidity and ferocity of medieval scholars debating the dogma of the Trinity. But despite the poisonous rhetoric, there are some simple changes that could preserve the use of punitive damages while bringing some sanity to the system.

Any reform should start by recognizing that, as an institution, juries are spectacularly ill-suited to making punitive damage awards. The reasons are varied. Part of the problem stems from simple unfamiliarity with the process -- there is virtually no chance that anyone on a jury will have calculated a punitive award before, or ever will again. Also, juries tend to rely on the plaintiff's math, no matter how skewed. In the Philip Morris case, for example, the jury seems to have arrived at $28 billion by adopting the plaintiff's suggestion that they award a million dollars for each of the 28,000 persons who die from smoking-related illness in California each year. Never mind that it was more than a quarter of the market cap of the entire company, and roughly four times the GDP of Iceland.

Many states have tried to enact laws that cap the amount of punitive damages juries can award, or limit punitives to a set ratio of the compensatory damage award. Such efforts are misguided. One can readily envision cases (like our English printer of yore), where the harm to an individual is slight, but the conduct of the defendant egregious. Likewise, study data suggests that if you give the jury a hard number or ratio to follow, that's the amount they are going to award whether it's appropriate to the case or not.

The best and most practical reform is to let the jury vote up or down on punitive damages, then have judges set the amount. Judges already chop down roughly two-thirds of all punitive-damage awards, and though they usually aren't experts in economics, judges are trial veterans and less likely to be swayed by emotion or messianic zeal. They are also accustomed to following court precedents and statutory guidelines, both of which provide ample direction on calculating appropriate punitive damages. If a judge chooses not to follow those guidelines for whatever reason, their rulings would be subject to de novo review by appellate courts, without any of the messy questions of deference often accorded jury determinations.

In short, punitive damages would be handled much like criminal sentencing, a logical outcome given their similar objectives. Federal judges seeking not to be overturned and state judges wishing not to be voted out of office could be effectively constrained without resorting to the crude limitations of caps and ratios.

Public Fund

Furthermore, since punitive damages are in the nature of civil fines, they should not be paid to the plaintiff, but into a public fund, preferably one dedicated by law to some common need (funding indigent defender programs would be a good start). And, yes, trial lawyers should be denied their standard 40% cut. In the smoker Ms. Bullock's case, that would amount to a mind-blowing $11.2 billion payday, though a clear-headed judge will no doubt substantially scale back the punitive award. Instead, plaintiffs' attorneys should be paid for their time and reimbursed for their costs, with amounts determined at a fee-award hearing.

Taken together, these reforms would go a long way toward getting America's legal system back on message.

Mr. McCollam is the Washington correspondent of the American Lawyer magazine.

Copyright © 2002 Dow Jones & Company, Inc., all Rights Reserved