NEW STATE DATA CONFIRMS RUNAWAY ABUSE OF PUNITIVE DAMAGES

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1 Originally Published in The Legal Backgrounder, a publication of the Washington Legal Foundation, February 7, NEW STATE DATA CONFIRMS RUNAWAY ABUSE OF PUNITIVE DAMAGES By John H. Sullivan The debate over punitive damages continues. In both appellate and legislative venues, state and federal, the question continues to be asked: Have punitive or exemplary damages become foremost a moneyproducing tool for plaintiffs lawyers and secondarily a special device for punishing defendants whose tortuous acts were so far in excess of ordinary negligence that a dollar sanction beyond compensation for the harm caused is in the public interest? Since 1985, twelve state legislatures have concluded the former and have limited punitive damages. 1 Opponents of this legislation -- supporters of statutorily unconstrained availability of punitive damages -- continue to argue that no problem exists. They often rely on statistics comparing the number of jury verdicts including punitive damages to the total number of tort suits filed. This provides a huge denominator and a relatively small numerator, and the resulting small percentage produced is presented as evidence that "punitive damages aren't a problem because they are so seldom awarded." Proponents of punitive damage reform have countered with data showing year-to-year increases in total, average, and median awards that greatly exceed corresponding increases in benchmark indices such as population, the Consumer Price Index, and Gross Domestic Product. More recently, studies in Alabama and California have produced a new and powerful indicator of punitive damages' paramount use as a revenue raiser. Both states are notorious for their examples of skyrocketing punitive damage awards and allegations, and for the fact that their legislatures have remained indifferent to this serious and growing problem. 1 Colorado (1986), Florida (1986), Illinois (1995), Indiana (1995), Kansas (1988), Nevada (1989), New Jersey (1995), North Dakota (1993), Oklahoma (1995), Ohio (1996), Texas (1995), Virginia (1987); in addition, punitive damages are prohibited by common law in Massachusetts, Nebraska, and Washington, and by statute in Louisiana and New Hampshire. American Tort Reform Association, Dec. 31, 1996.

2 This new study data looks at incidence of punitive damage demands, that is, the percentage of lawsuits filed for damages which include a request for punitive damages. The results confirm statistically what has been anecdotally argued -- that punitive damage claims are asserted almost routinely in any case where they are theoretically possible, but often without regard to the facts of the particular case. This phenomenon is important to the current debate because the overwhelming majority of suits involving a punitive damage demand -- like all other civil suits -- are settled or otherwise concluded without reaching the jury verdict stage. Thus the demand itself, which always involves initially an open-ended amount potentially many times larger that the actual damages at issue, operates as a major factor in increasing the settlement value of a case and in some instances giving strength to what otherwise would be a barely viable allegation. This LEGAL BACKGROUNDER reviews that new information, with an emphasis on California. 2 Incidence of Punitive Damage Claims in California San Francisco. The first California punitive damage claim incidence study was conducted in the San Francisco superior court and published in February 1996 by the Pacific Research Institute for Public Policy (PRI). The Role of Punitive Damages in Civil Litigation: New Evidence from Lawsuit Filings, Pacific Research Institute for Public Policy, Feb It revealed that punitive damages were claimed in 27% of all cases where they are conceivably recoverable. Breaking the data down by defendant type, the study found that punitive damages were demanded in 39% of the tort and contract suits filed against businesses and 35% of those suits filed against government agencies. The study analyzed 1,024 cases filed during a one-month period January 2, 1991, to February 1, This period was selected because it was the most recent in which nearly all the cases filed had been resolved by settlement, dismissal, or trial by the time of the study, thereby permitting data to be collected on their ultimate disposition. Of the 1,024 cases examined, 9 were sealed by the court and unavailable. Of the remaining cases, 537 (53%) were based on one of three causes of action where punitive damages were potentially recoverable: common law tort, 2 Further information on the empirical data for each study referenced in this LEGAL BACKGROUNDER can be obtained from those who performed each respective study.

3 statutory tort, and contract. (Although punitive damages are ordinarily not available in contract actions, many contract suits also include a fraud or similar cause of action which can include a claim for punitive damages.) The tort cases included automobile negligence actions in which punitive damages are permitted only in those rare situations involving extreme recklessness or an actual intent to injure. The other 478 (47%) of the cases reviewed involved injunctions, family law matters, civil petitions, and other actions in which punitive damages are not even theoretically possible. The study found that 98% of the cases reviewed were settled or otherwise concluded prior to going to a jury verdict, a percentage in the range usually found by similar studies. Other California Counties. A four-county study funded by the Association for California Tort Reform (ACTR) and conducted in mid-1996 provided more evidence of a high frequency of claims for punitive damages. Overall, the study found that nearly a third of all contract and tort cases involved demands for punitive damages. The ACTR study analyzed 2,528 superior court cases filed during 1995 and 1996 in Los Angeles, San Diego San Joaquin, and Sacramento counties. Punitive damages were sought far more frequently in Southern California counties. In San Diego, punitive damages were demanded in 60% of the tort and contract suits against government entities, 41% of the suits against businesses, and 26% of the suits filed against individuals. In Los Angeles county, the percentages were 36% in lawsuits filed against government entities, 50% in suits against businesses, and 20% in suits against individuals. In the more northern counties, the results were as follows: Sacramento, 28% in lawsuits filed against government entities, 30% in suits against businesses, and 11% in suits against individuals; San Joaquin, 30% in lawsuits filed against government entities, 28% in suits against businesses, and 9% in suits against individuals. The four counties were selected to achieve variety in geography and demographics. Researchers looked at every filing in each county beginning with October 1, This date was selected as the most recent date that would ensure that basic pleadings would be finalized before research was undertaken. The research was conducted in May and June All filings were examined in the order they were filed with a goal of reaching at least 500 "study pool" cases in which punitive damage

4 claims were at least theoretically possible based on the case's basic classification (common law tort, statutory punitive damages, contract cases). In all, 3,825 filings were examined, resulting in study pool cases as follows: Los Angles, 484; Sacramento, 674; San Diego, 540; San Joaquin, 830. In each county cases were not included in such cases were pure equity matters and miscellaneous civil petitions, such as requests for injunctive relief or requests of name change. Incidence of Punitive Damage Claims in Alabama In 1995 testimony before the Senate Committee on the Judiciary, George L. Priest, John M. Olin Professor of Law and Economics at Yale Law School presented research findings on the incidence of punitive damage claims in three Alabama counties. Testimony of George L. Priest Before the Senate Committee on the Judiciary on Punitive Damages Tort Reform, Apr, 5, This research found that punitive damage claims as a percentage of all tort cases filed in fiscal were: Barbour County, 78%; Bullock County, 76%; and Lowndes County, 65%. Looking at the same counties in 1994, the incidence figures were: Barbour, 72%; Bullock, 96%; and Lowndes, 79%. Continuing research by Professor Priest shows increases in these already-incredible figures. George L Priest, The Punitive Damages Phenomenon in Alabama: A Preliminary Report, Oct 24, For calendar 1995 the numbers are Barbour County, 84%; Bullock County, 88% and Lowndes County, 90%. And for the first six months of 1996 the numbers are: Barbour County, 86%; Bullock County, 98%; and Lowndes County, 92%. Thus, in these jurisdictions punitive damage claims are extremely common and becoming almost an automatic inclusion in tort cases. Observations on the Data It is generally observed that California courts and juries in metropolitan areas are more prone to favor civil plaintiffs than in small cities and rural areas. Conversely, Alabama's national reputation is that of small county courts and juries more than ready to find for plaintiffs, especially against out-of-state defendants. (In fact, Professor Priest points

5 out that over his two-year study period, total punitive damage verdicts in the three small Alabama counties have constituted roughly 40% of all trial court punitive damage verdicts in the state.) In this light, a comparison of the incidence of punitive damage claims between Alabama and California and between California's largest metropolitan counties (San Francisco, Los Angeles, San Diego) and smaller urban jurisdictions (Sacramento and San Joaquin) shows differences that make sense. In all counties, Professor Priest's Alabama observations apply: "These numbers show that the role of punitive damages has changed dramatically in our civil jury system, from an occasional remedy invoked against outrageous action to a commonplace of tort law practice." Although California law permits unlimited punitive damages, its statutory criteria for awarding punitive damages are, on their face, relatively rigorous: Proof by "clear and convincing" evidence that the defendant has been guilty of "oppression, fraud, or malice," with "malice" defined as "conduct which is intended to cause injury, " or "despicable conduct" which is carried on by the defendant with a "willful and conscious disregard of the rights or safety of others." "Oppression" is defined as "despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights." CIVIL CODE (A), (C) (A) (2). It is simply not plausible that attorneys actually find in this large percentage of cases, especially against governments and businesses, evidence to accuse organizations and individuals of the "despicable" actions necessary to justify seeking punitive damages. The motivation for these very common demands is clear. They raise the stakes, tilt the negotiating balance toward the plaintiff, and thereby increase the ultimate settlement value of the case and the verdict risk tot he defendant if the case does not settle. This pressure is achieved with very little, if any, additional financial or strategic exposure to the plaintiff's attorney and his or her client. Under the current civil justice system, there is little or no downside to adding to a tort claim an allegation that were it made unfounded in virtually any other context could subject both the attorney and his or her client to action for libel. Thus one must return to restating the harm that this current process is causing. First, and not directly an economic issue, is the lack of fairness in the practice of accusing individuals and organizations of

6 serious misdeeds based on conclusions rather that evidence. Second, is the unjust extraction of a higher settlement based on the accusation. Third is the added cost to the courts (and the taxpayers) of an increased volume of litigation brought about by the manner in which the prospect of a punitive damage award makes it more likely that a case with a marginal basis will be pursued. One cannot help but recall the words of Justice Lewis Powell, who wrote: The grant of standardless discretion to punish has no parallel in our system of justice... a jury imposing punitive damages acts as a legislator and judge, without the training, experience, or guidance of either... the plaintiff in a punitive damage case has every incentive to seek to inflate the award in any way possible, since the award will go into his pocket. It is long past time to bring the law of punitive damages into conformity with our notions of just punishment, and with the tradition of other nations that also protect their citizens against arbitrary deprivations. Draft opinion circulated March 6, 1986 by Justice Lewis Powell to his associates in Aetna Life Insurance Co. v. Lavoie (draft in papers of Justice Thurgood Marshall at the Library of Congress, excerpts published in The Wall Street Journal, Mar. 8, 1995).

7 Association for California Tort Reform 100 RUNAWAY ABUSE OF PUNITIVE DAMAGES Los Angeles San Diego San Francisco San Joaquin Sacramento Primary Defendant Individuals Governments Businesses Percent of contract and tort cases which include a demand for punitive damages. 2/97

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