Halt the misuse of punitive damages.

• Author: Booth, Richard A.

Bloated awards will continue to provide incentive to sue until the courts reassume their duty to make the punishment fit the offense.

DESPITE several appeals to the Supreme Court, the law of punitive damages seems to be as confused as ever. While courts and commentators agree that punitive damages are intended to deter wrongdoing or to punish the wrongdoer, few go on to consider what deterrence really means.

Consider the decision in connection with the Exxon Valdez oil spill. In September, 1994, an Alaska jury found Exxon liable for $5,000,000,000 in punitive damages. The result was hailed as just what was needed to make the company change its ways. Mere compensatory damages would be inadequate, it was argued, to deter Exxon from recklessness. The payment simply would be viewed as part of the cost of doing business.

However, what would be so wrong with that? If anything, society should be elated when corporations treat environmental damages (and indeed all sorts of damages) as part of the cost of doing business. Aside from compensating the victim, it is the very purpose of damages to make the wrongdoer internalize the full "social cost" of its product. After all, what rational firm would rather pay damages than spend the same amount on prevention?

Why have punitive damages? The answer is that simple compensatory damages do not always work to encourage businesses to do the right thing. If the perpetrator often gets away with the wrongful act and escapes the need to pay for some or many misdeeds, punitive damages may make sense. If it is difficult to detect the misdeed in question, or if victims do not always seek compensation for some reason, then the wrongdoer will not be forced to consider the full cost of such activities and only will invest in safety up to the point that it is cheaper than paying the fraction of claims that are pursued. Simple Dr. Booth is professor of law, University of Maryland School of Law, Baltimore. compensatory damages have a deterrent effect. Other things being equal, a rational firm would rather invest in safety than pay damages. Punitive damages are different. They are--or should be--intended only to deter.

Perhaps the most important rationale for punitive damages arises in cases in which the perpetrator is likely to repeat the offense despite the payment of compensation. For example, if the act is one that holds out the prospect of profit for the wrongdoer, then a ruling of simple compensatory damages means...