Governor Schwarzenegger of California has proposed taxing punitive damage awards by having 75% of such awards go to the state instead of the plaintiff.
The Governor has suggested that the proposal could raise $450 million per year for the state.
I have no major objection to having a portion of punitive damages go to the state. The purpose of punitive damages is to punish a wrong-doer and to deter future wrongful conduct. Punitive damages do not exist to compensate the plaintiff and, as a result, allowing all of such damages to flow to the plaintiff (and plaintiff’s counsel) does result in a windfall.
I would object to the state taking 100% of punitive damages awards as it would eliminate all incentive for the plaintiff to bring actions that deter wrongful behavior. Just as a government whistleblower gets a windfall of 10% of the amounts saved by exposing fraud, the plaintiff should have an incentive to deter wrongful conduct. Deterring wrongful behavior is a social good.
That said, I think that Schwarzenegger’s estimate of the state collecting $450 million per year from the proposal is wildly optimistic.
I have some experience with this issue as Georgia has a similar provision applicable to product liability cases. Under Georgia statute 51-12-5.1, if an award of punitive damages is made in a product liability case,
Seventy-five percent of any amounts awarded under this subsection as punitive damages, less a proportionate part of the costs of litigation, including reasonable attorney´s fees, all as determined by the trial judge, shall be paid into the treasury of the state through the Office of Treasury and Fiscal Services.
I know for a fact that the amount collected by the State of Georgia under that provision from my cases has been exactly zero. Inquiry to some of my friends who try product cases in Georgia also failed to turn up a single dollar ever paid to the state under the punitive damages provision. To see if our experience was common, I called the Georgia Office of Treasury and Fiscal Services to ask how much had been paid to Georgia under that provision. After locating the right person to speak to, the official stated that he could not recall any money having ever been paid to the state under the punitive damages provision.
Georgia’s punitive damage tax in products liability cases has resulted in little or no funds being collected by the state. It is my understanding that the California proposal will apply to all awards of punitive damages and not only to products cases. Nonetheless, I suspect that little money will be collected by the State for two reasons.
First, at least in Georgia, punitive damages are very hard to get. There are a myriad of protections built into the system to make it hard to get punitive damages.
For instance, punitive damages are not recoverable in any contract case, regardless of the egregiousness of the conduct, and are not available in some types of tort cases (such as actions for conversion). Under Georgia law, in products liability cases, the defendant can only be liable for punitive damages only once per defect. If punitive damages have been awarded against that defendant for the same product defect in some other case, a claim for punitive damages is not available to the plaintiff.
Secondly, even in tort cases in which the punitive damages are nominally available, simple negligence will not support an award of such damages. Georgia allows punitive damages only in cases in which the defendant’s conduct shows:
willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.
Third, the standard of proof is higher for an award of punitive damages than for an award of compensatory damages. Compensatory damages must be proved by a preponderance of the evidence. For the non-lawyers in the audience, that means “more likely than not.” Evidence to support an award of punitive damages requires “clear and convincing evidence,” a standard that is somewhere in between a preponderance of the evidence and the “beyond reasonable doubt” standard of criminal cases.
Fourth, in Georgia, the proceeding are bifurcated so that the jury is not permitted to hear evidence on the amount of punitive damages until after it has decided that such an award is justified.
At the end of the trial, but before evidence on the amount of punitive damages is presented, the jury retires to deliberate on the issues of whether the plaintiff is entitled to recover compensatory damages and the amount of such compensatory damages. The verdict form also asks the jury whether or not an award of punitive damages is justified.
The jury gets to go home unless it checks the box saying that punitive damages are justified. If they do check that box, they get to go back to the courtroom to hear the lawyers present additional evidence.
After a long hard trial, the jury (none of whom wanted to be there in the first place) can either decide to hear lawyers talk some more or can decide to go home. It takes a very compelling case to convince a weary group of 12 to request that the trial be extended.
Finally, even if the plaintiff meets all of those hurdles, Georgia limits the amount of punitive damages to $250,000 except in product liability cases, cases in which the defendant had the specific intent to harm or cases in which the defendant was under the influence of drugs or alcohol. In any event the Supreme Court frowns (pdf) upon awards of punitive damages exceeding 10 times the amount of compensatory damages. For more on that Supreme Court decision see Like a Good Neighbor at PLA.
All in all, it is difficult to get an award of punitive damages. For folks who think that that there are a lot of large punitive damages in frivolous cases, you are mistaken. There may be a few such cases out there but especially since the rise of Daubert and its state court progeny, I haven’t seen any.
As I understand the California proposal, it applies to all punitive damage claims and not to just product liability cases. As such, it will no doubt raise more revenue than the Georgia experiment (it is hard to go below $0.00).
Nonetheless, I doubt that it will reach its projected revenue because the State will not be present in settlement negotiations.
When the state takes the bulk of any punitive damage award, settlement negotiations are held in the circumstance that a trial may result in the defendant paying an amount greater than the plaintiff will receive. It will not be hard to structure any settlement in such a way to minimize or eliminate the amounts paid to the state.
Under the Georgia statute, the state’s right to recover is triggered by the entry of a judgment. That is not the same thing as the rendering of a verdict. After the verdict and before the entry of judgment, the parties may settle on any terms they see fit.
Take as an example a Georgia products liability case in which the jury returns a verdict for $500,000 in compensatory damages and $250,000 in punitive damages. Under a typical 1/3 contingency arrangement, if that verdict goes to judgment, the position of the interesting parties will be as follows:
The defendant will pay $750,000.The plaintiff’s lawyer will receive 1/3 of the total award or $250,000 (plus litigation expenses but I will ignore those expenses for the purpose of simplicity).
The plaintiff will receive 2/3 of the compensatory damages or about $333,000 plus 2/3 of ¼ of the punitive damage award or about $42,000 for a total of about $375,000.
The state will receive ¾ of 2/3 of the punitive damage award or about $126,000.
Under that settlment, the position of the parties would be as follows:
The defendant would pay $687,000 thereby saving itself $63,000.The plaintiff would receive 2/3 of $687,000 or $458,000 increasing his or her take by $83,000.
The plaintiff’s attorney would lose about $21,000 in fees but is obligated to do so as part of the fiduciary relationship between attorney and client.
The state of course would get nothing.
Update:
I mentioned above that I had called the Georgia Treasury Department to determine how much money had been paid to the state pursuant to the punitive damage statute. Today I received an email from Steve Caffarelli, the Assistant Director of Georgia's Office of Treasury and Fiscal Services. Mr. Caffarelli writes:
According to our records, over the last several years we haven’t received any funds pursuant to this statute.
The problem seems to lie in the ability of the plaintiff and defendent to arrange settlement terms after a judgement has been entered. Can that loophole be removed safely, or does it play some role that I'm not understanding? (I'm not a lawyer, and don't even play one on TV.)
On the surface, it sounds to me like allowing a criminal defendent to take a plea bargain after having been found guilty. I thought the settlement process was supposed to give the parties a chance to work things out before going to court, to save the time and expense, rather than allowing them to cheat the system in the way you have described.
-- Skip
P.S. Glad you're back. Hope all is well.
Posted by: Skippy X at May 27, 2004 01:47 PMWe have just gone through the foolishness of capping medical malpractice awards to reduce the cost of malpractice insurance in Florida. Having passed this mess, the insurance companies passed large increases in malpractice premiums, because law suits were never the problem, despite all of the anecdotal evidence to the contrary.
If both parties know that the state is going to take all of the money they are going to structure the case not to pay it. All California will do by passing this law in somewhat increase the payout to defendents.
All you have to do is look at the hoops people jump through now to avoid paying taxes to understand that this is going to happen.
Posted by: Bryan at May 28, 2004 01:12 AMThe real "problem" isn't the ability of the parties to settle. This won't raise much money because there simply aren't that many punitive damages awards anywhere, and of the few that exist, even fewer go to judgment, and of those, even fewer are affirmed on appeal and actually collected. The whole proposal is premised on the existence of a large mass of punitive damages awards, when in fact they are about as common as hen's teeth. Hey, there's something you can tax!
Posted by: Donald at May 29, 2004 10:57 PMDetermining what the "problem" is requires determining what the objective is.
If the objective is discovering a new income stream for the state, then yes, non-existence of punitive damage awards would be one problem. Ability to evade paying those damages through the loophole Dwight has identified would still be a problem.
If the objective is to make the punitive damage process more "fair" according to the standards Dwight has espoused, by diverting part of the award to the state, then non-existence of awards is not a problem. But the ability to evade those awards that do actually exist (and Donald does allow that there are a few) would still be a problem.
One issue that Dwight has not addressed is the reason for Georgia not collecting any money from its statute. Has Georgia not collected because Georgia has not had any punitive damage awards that have gone to verdict, or none that have gone to judgement? Verdicts with no judgement would show that Dwight is on to something.
And how about California? Without their statistics regarding punitive damage awards, it's difficult to really discuss how this proposed statute might affect them.
As I am one who is awaiting a malpractice case having almost died and has been left physically deformed, I do not feel as though the state should be allowed to tax ANY damages. Having a cap on damages is bad enough but to take away from the victim is wrong. Unfortunately no one can forsee the problems and medical expenses that may occur in years to come and by placing a cap sometimes may not even be enough to last the rest of a persons life time. I seriously feel that the state needs to find other means of making money instead of taking from victims.
Posted by: gail at June 24, 2004 09:53 AM