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December 28, 2002

Bravo: Court Gives Punitive Damage to Charity

The Ohio Supreme Court has upheld the payment of punitive damages to a cancer charity, instead of the plaintiff in a case. The plaintiff was awarded "only" $2.5 million in compensatory damages (award for actual losses) and $10 million of punitive damages, while $20 million of a jury's punitive damages was awarded to a cancer charity (because the defendant insurance company had denied coverage to the plaintiff's wife dying of brain cancer.)

A lot of legal scholars are up in arms over this decision, since plaintiffs usually receive all punitive damages awards. But it is actually nonsensical to give the plaintiff that money. Punitive damages are usually awarded based not on harm to the plaintiff but because a pattern of malfeasance by a defendant shows widespread harm to the public more generally. The punitive damages award is supposed to deter that broader antisocial behavior.

In that sense, punitive damages are more equivalent to a a regulatory fine assessed against the defendant by the jury. There is absolutely no reason for the plaintiff to receive such a fine, except possibly as a "finders fee" to encourage the litigation in the first place.

In this case, the plaintiff received a third of the punitive damages award, a quite reasonable finders fee to encourage other litigants to hold corporate malefactors to account.

Whether individual judges should determine where such punitive damages go is a more interesting issue. It might make more sense to either have the jury itself decide where to allocate the punitive damages or have a special judical panel evaluate all punitive damage awards to make sure they are being distributed rationally, not just to judge's pet charities. Or, like many other regulatory fines, they could just go to the state treasury.

As I've noted, an even better solution is to tighten public regulatory agencies, so we don't need to use lottery punitive damages awards as our system of corporate regulation. Until we do so, making sure punitive damages serve the public interest is a good first step.

Posted by Nathan at December 28, 2002 09:23 AM

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The Plaintiffs wife dying of Brain Cancer is worth 'A Finders Fee'? Sounds fairly cold to me. The importance of Punitive damages is punishment, reguardless of who gets the money. While a charity may put the money to a greater use, we should never diminish the real loss of any individual.

Posted by: Robert Marmorstein at December 28, 2002 11:06 AM

Sorry if the term 'finders fee' sounded cold, but the $2.5 million in compensatory damages is supposed to be the compensation for the admittedly harsh loss of the man's loved one.

Punitive damages are not supposed to be a form of vengeance-- if that was the goal we should have criminal sanctions against those who made the decision to deny insurance coverage. The idea is to deter socially irresponsible behavior for the benefit of society as a whole.

Some people refer to plaintiffs pursuing socially broad goals as "private attorney generals" where the actual government prosecutors may miss malfeasance. Since private individuals have neither the expertise nor full-time pay for holding wrong-doers accountable, "finders fees" need to be available so such plaintiffs can find lawyers willing to front the costs and risks of such litigation.

The point is that punitive damages exist because many people no doubt lost loved ones due to the insurance company's repulsive conduct. And the $30 million penalty should go to benefit not just this successful plaintiff but a broad part of society that might suffer due to this kind of corporate irresponsibility.

Posted by: Nathan Newman at December 28, 2002 11:16 AM

But according to NY Times:

Under Oregon law, 60 percent of punitive damage awards goes to the state crime victims assistance fund.

Posted by: Kristjan at December 28, 2002 12:10 PM

Sorry, my mistake - saw the O state name, and then didn't notice that it was Ohio instead of Oregon. Different case all-together.

Need to read the whole stuff before commenting in the future.

Posted by: Kristjan at December 28, 2002 12:12 PM

But you do emphasize that other states are trying to deal with this issue systematically. Oregon apparently has taken the route of creating a general crime victims fund-- a bit detached from the harms from civil malfeasance but not an unreasonable approach.

I will note that you see attempts at real judicial activism by corporations seeking to have federal courts overturn such programs as "takings" or on some other theory. I linked to the whole upcoming Supreme Court deciding whether to regulate punitive damages overall by judicial fiat.

Posted by: Nathan Newman at December 28, 2002 12:20 PM

Seems to me that the issues of who decides what charity the money is to go, what percentage of the damages should go to a public good, and which public good it should go to are all quite distinct yet complicated issues that are difficult to rationally determine in an easy, much less widely acceptable manner, yet exactly how you answer each of these questions individually influences how you answer the other two. Is it really a good policy idea to have some percentage of these damages go to a state treasury if the people deciding these issues are governmental representatives (judge or panel of judges) of some sort? Is a jury of one's peers well suited to determine where exactly this money should go, or what percentage is fair? Has there been any coherent justification of the percentages set by these state laws, and are the percentages fixed or flexible or what exactly?

Posted by: Erick at December 28, 2002 12:49 PM

As I said, I think the whole "regulation through litigation" process of punitive damages and class action settlements is a problem that exists because we have such a weak regulatory system.

In the ideal, we would beef up the staff of insurance regulators, attorneys general offices, the SEC, and so on, then prosecute all these corporate criminals before so many people are harmed. And when they are harmed, instead of punitive damages, they would be hit with regulatory fines to pay for compensation funds and deter wrong-doing.

As for how to allocate the money collected, that's an important and ongoing democratic debate. Juries are one form of democracy for making such decisions but it probably makes more sense, as Oregon goes at it, to put all the funds into a compensation fund with a broader social mechanism for allocation of the fines/punitive damages collected.

Posted by: Nathan Newman at December 28, 2002 02:12 PM

I agree wholeheartedly that the best strategy is a better regulatory system with enhanced powers.

But two quick follow-up questions:

What is this "broader social mechanism" you refer to regarding the allocation of damage fines? I'm not familiar with the law so I can't quite follow you here.

Since I don't know really anything about these laws and you do, I really am wondering how the percentages of damages dedicated to a public good (however that is defined)are determined. Is there a fixed rate, a variable rate determined by type of damage? Do you know anything about this or how I could find out?

Posted by: Erick at December 28, 2002 02:21 PM

I'm actually not claiming to know much at all about the Oregon law, but anytime you have a general fund run by a state, you have to have some social mechanism to distribute the money. It may be a good one, it may be a bad one, but it's got to be broader than a judge deciding to hand money over to a charity he thinks is appropriate in a specific case.

Although, there is something deeply satisfying to a judge making "the punishment fit the crime" as in this case of having the insurance company funding cancer research to the tune of $20 million. One reason people like court-driven decisions is that, at their best, they have that specificity that is lost in more bureaucratic democratic decisions and rule-making.

But then such individualistic decisions can be more capricious and, because they happen in isolation from other decisions, can fail to comprehensively and fairly deal with broad social problems.

BTW I did a Google search on the Oregon victims compensation fund and couldn't find anything.

Posted by: Nathan Newman at December 28, 2002 02:31 PM

Nathan - you're right.
How many times have we seen it - when the plaintiff gets all the money, it's so easy for the talk radio jocks and the rest of the Wurlitzer to spin the thing as simple greed.

If I've heard it once, I've heard it a thousand times. "What, they gave this stupid woman 28 Gazillion dollars? Couldn't she read the label on the friggin cigarette pack?"

The point of punishing the corporate wrongdoer gets completely lost that way. Giving the lion's share to the appropriate charity is much better and fairer.

Posted by: Steve Cohen at December 28, 2002 09:26 PM

This was a nifty decision IMHO. If that's true about Oregon, I wish it would be instituted it in all states immediately. Its flaws seem pretty minor to what we have now, which is a greed-driven lottery system with an insanely skewed distribution w.r.t. needs.

The victim should be compensated as best as possible, period. The "finder's fee" is really what you need to get a law firm interested, since they shoulder the costs in these cases. (Which is why capping damages is a backhanded way to just kill the little guy's ability to sue. What law firm is going to spend 50K chasing a doctor's paper trial in the hope of maybe splitting a 250K verdict?).

So done this way:
1) The victim gets compensated for his losses
2) The law firms still have plenty of incentives to go after the baddies full-out.
3) There's a pot of money for some poor kid whose dad got wacked night-clerking at the 7-11 by a druggie.

And yeah, decent regulation would be nice too.

Posted by: a different chris at December 30, 2002 05:54 PM

Whatever you think the law *ought* to be, the question now raised by this case is whether the Supreme Court of the state has the right to take away property belonging to the plaintiff. And the property did belong to the plaintiff from the moment the jury awarded it to him.

On the other hand, if the state legislature (as in Oregon) had decreed in advance that 60% would go to a charitable fund, then the plaintiff would at least have notice of what was going to happen.

Posted by: Ed Still at December 31, 2002 12:21 PM

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