Punitive damages as societal damages.

• Author: Sharkey, Catherine M.

CONTENTS INTRODUCTION I. EXISTING CONCEPTIONS OF PUNITIVE DAMAGES AND PLAINTIFFS' WINDFALL GAINS A. Punishment and Retribution: The Individual Harm Paradigm B. Deterrence: The Societal Harm Paradigm 1. Economic Theory: The Internalization of Full Costs 2. The Punitive Damages "Multiplier" and Its Limitations C. The Plaintiff's Windfall as a Necessary Consequence II. NASCENT DEVELOPMENTS IN THE STATES FOCUSING ON DISTRIBUTION OF PUNITIVE DAMAGES AWARDS A. Split-Recovery Legislation B. Judicial Experimentation C. In Search of a Justifying Theory III. A NEW CATEGORY OF COMPENSATORY SOCIETAL DAMAGES A. Societal Compensation 1. Specific Harms a. Absent Plaintiffs b. Quasi-Plaintiffs 2. Diffuse Harms B. Ex Post Class Action C. Punitive-Damages-Only Class Action IV. REALIZATION OF THE SOCIETAL DAMAGES CONCEPT A. Legislative Realm 1. Specific Harms: The Iowa Split-Recovery Statute as a Model 2. Diffuse Harms: Establishing Specialized Proxy Funds B. Judicial Realm: Court Action Absent Enabling Legislation V. SOCIETAL DAMAGES: BETTER IN THEORY THAN IN PRACTICE? A. Due Process Challenges Based on Extraterritorial Conduct and Risk of Multiple Punishment 1. Extraterritoriality 2. Multiple Punishments and Preclusion B. Constitutional Challenges to Split-Recovery Schemes 1. Excessive Fines 2. Takings 3. Due Process C. Compounding the Problems That Plague Class Actions? 1. Risk of Overdeterrence 2. Incentives for Litigation 3. Collusive Settlements and Sham Litigation D. Jurors as Decisionmakers 1. Disadvantages 2. Advantages a. Pursuit of Efficiency-Based Goals Through Democratic Decisionmaking b. Potential Rationalizing Effect on Punitive Awards CONCLUSION INTRODUCTION

Large punitive damages awards get attention. (1) Witness, for example, the latest punitive damages case decided by the Supreme Court: State Farm Mutual Automobile Insurance Co. v. Campbell. (2) At issue was a $145 million punitive damages award won by the Campbells, individuals who had sued their automobile insurer, State Farm, for bad faith refusal to settle within policy limits an underlying automobile accident lawsuit brought against them. The Court struck down the $145 million award, holding that, where plaintiffs had obtained "full compensatory damages" of $1 million, such an additional punitive award was excessive under the Due Process Clause. (3)

At trial, plaintiffs' counsel had asked Utah jurors to punish State Farm for its nationwide business practices, admonishing the jurors that they were '"going to be evaluating and assessing, and hopefully requiring State Farm to stand accountable for what it's doing across the country, which is the purpose of punitive damages.'" (4) In upholding the $145 million punitive damages award, the Utah Supreme Court similarly emphasized that State Farm's nationwide insurance fraud "scheme" had "far-reaching negative effects" not only on the Campbells, but also upon other insureds and "society in general." (5)

But with its decision in State Farm, the U.S. Supreme Court has seemingly put the brakes on such nationwide assessment of damages for widespread harms that courts like the Utah Supreme Court have sustained "under the guise" of punishment, the predominant traditional justification for punitive damages. (6) Specifically, the Court has declared that due process protects against the possibility of multiple punitive damages awards to different plaintiffs for the same conduct, "for in the usual case nonparties are not bound by the judgment some other plaintiff obtains." (7) Moreover, compensation for harms to individuals other than the plaintiff before the court, or to "society" more generally, would seem to fall outside the confines of the doctrine of punitive damages, which, according to the Court, "serve the same purposes as criminal penalties." (8)

But what if--as is certainly the case--not all states share this view of the purpose of punitive damages? After all, in BMW v. Gore, the U.S. Supreme Court made it clear that "the federal excessiveness inquiry [into the magnitude of punitive damages] appropriately begins with an identification of the state interests that a punitive award is designed to serve." (9) Moreover, what should one make of the Court's discussion in State Farm of the relevance of evidence of "harm to the people of Utah," at least in cases where such an "adverse effect on the State's general population" could be shown? (10) Contradictions seemingly abound in State Farm. A more contextualized and nuanced reading of the opinion, however, suggests that the Court was primarily concerned with limiting the extraterritorial or out-of-state reach of punitive damages. In other words, the assessment of damages to compensate for widespread harm may be appropriate--or at least constitutional--so long as it occurs within the confines of a single state. Perhaps unwittingly, then, State Farm legitimated a nonpunitive justification for punitive damages that, until now, has been submerged within the concept of punitive damages: compensatory damages for harms to individuals other than the plaintiff before the court. If that is the implicit thrust of the opinion, however, the Court stopped short of offering any constructive guidance on how our civil litigation system should treat these damages.

This is not a trivial oversight. State Farm represents an emerging paradigm in punitive damages cases: a single or multiplaintiff case in which, in effect, "classwide" punitive damages are assessed on a statewide or nationwide scale. Such paradigm cases, moreover, frequently arise in states that have endorsed a "public" purpose for punitive damages. Evidence of this modern phenomenon can be found not only in the large, headline-grabbing punitive damages awards such as State Farm, but also in the general mine of cases. And although punitive damages are awarded in a relatively small percentage of all civil trial cases (both jury and bench), they are awarded in significantly larger percentages of certain categories of cases. (11) While one such category comprises what might be characterized as the "historical" or "traditional" cases in which punitive damages have always been awarded--intentional torts and libel/slander--more recently, nontraditional categories such as fraud, employment discrimination, and products liability have also exhibited such a trend. With increasing frequency, punitive damages are being awarded in the kinds of cases where defendants are most likely to have inflicted harms upon individuals beyond the plaintiffs named in the complaint. (12)

What emerges from this picture is that punitive damages have been used to pursue not only the goals of retribution and deterrence, but also to accomplish, however crudely, a societal compensation goal: the redress of harms caused by defendants who injure persons beyond the individual plaintiffs in a particular case. The class action mechanism is, of course, often posited as the preferred solution to aggregate cases where the collective harm is widespread, such as in certain products liability, fraud, civil rights, and employment discrimination cases. But an increasingly common phenomenon is a jury's award of significant punitive damages in single-plaintiff (i.e., non-class action or consolidated multiparty) cases. These non-class action cases are similar to class action cases in that punitive damages are in essence assessed on a putative "classwide" basis for harms actually or potentially inflicted upon numerous individuals. Two significant differences exist, however: (1) the absence of procedural and substantive protections accorded to a class action defendant, and (2) a windfall to an individual plaintiff (or group of plaintiffs).

Over the last decade, in a series of cases culminating with State Farm, the Supreme Court has expressed concern that punishment is being meted out without sufficient procedural protections to ensure fair and proportionate punishment in light of the misconduct alleged. Yet over the same period (and even in the preceding decade), several states' efforts to address the "windfall" aspect of punitive damages--and, in particular, to experiment with alternative punitive damages distribution mechanisms--stayed below the Court's radar screen. Indeed, over time the plaintiff's ensuing windfall has come to be generally accepted as "simply a side effect of our common law system for punishing and deterring wrongdoers." (13) In limiting the extraterritorial scope of permissible punishment, State Farm has addressed the windfall problem to some extent. But as long as statewide "class" damages can still be awarded in single-plaintiff cases, the problem, though it may have been circumscribed, will persist.

The time is thus ripe for reconceptualizing the civil damages landscape. In this Article, I propose explicit recognition of a new category of damages--compensatory societal damages--that hitherto has comprised one significant, albeit insufficiently acknowledged, component of punitive damages. In so doing, I attempt to interject into the debates surrounding punitive damages the concept of distribution of damages and its theoretical and practical consequences. (14)

Part I presents a critical examination of the existing academic and judicial conceptions of punitive damages and plaintiffs' windfall gains. First, I summarize the predominant individual-harm paradigm of retributive punishment, most recently espoused by the Supreme Court in State Farm. Next, I consider the broader economic deterrence perspective advocated in the law-and-economics literature: the notion that compensatory damages should be "multiplied" in situations where the defendant conceals its wrongdoing, and accordingly, is likely to be detected only in some fraction of instances of lawbreaking. Neither approach is animated by, or concerned with, who receives the punitive damages award.

Part II canvasses nascent legislative and judicial developments in states that have focused...