Sequencing in Damages.

• Author: Cheng, Edward K.

Table of Contents Introduction I. Mitigation II. Damage Caps III. Collateral Sources A. The Problem of Collateral Sources B. An Explanation C. Recasting Collateral Sources D. An Extension: Settlement Rules IV. Discussion A. Why Courts Err B. The Cost of Erroneous Sequencing C. Developing a General Theory Conclusion Introduction

Back in algebra class, all of us encountered the "order of operations," the mathematical convention stating which operations take precedence in a calculation. (1) Some may even remember the mnemonic "Please Excuse My Dear Aunt Sally," which reminds us that (P)arentheses are first, followed by (E)xponents, then (M)ultiplication and (D)ivision, and finally (A)ddition and (S)ubtraction. The fundamental idea behind the order of operations is simple: The sequence of calculations matters. If you perform subtraction before multiplication, you will get a different value than when you perform multiplication before subtraction.

But what does the order of operations have to do with law? While at first sight this mathematical concept may seem unrelated to legal thinking, the question of sequencing is in fact fundamental to how the legal system calculates damages. Failing to account for the order of operations--or more precisely, failing to consider the proper sequence of calculations--often leads courts into trouble. Take, for example, Williams v. Jader Fuel Co. (2) In Williams, the Seventh Circuit faced a tricky damage calculation and attempted to offer the following instructive example:

[A] plaintiff who suffers $100,000 in damages because of an automobile accident for which he was forty-five percent at fault would recover $55,000. If the jury were also to conclude that the plaintiff's failure promptly to seek medical attention following the accident--perhaps the prototypical example of a failure to mitigate damages--was the cause of $15,000 of his injuries, it would reduce the award to $40,000. (3) Straightforward, right? Far from it. This sequence is wrong as a matter of logic. If the plaintiff's failure to seek medical attention caused an additional $15,000 in injuries, then the original, jointly caused accident involved only $85,000 in damages. Splitting this figure 55-45 based on comparative fault yields a reduced award of $46,750, not $40,000. The Seventh Circuit performed the multiplication for comparative fault before the subtraction for failure to mitigate. It should have done the subtraction before the multiplication. Any court following the Seventh Circuit's example would therefore shortchange the plaintiff.

Unfortunately, the Seventh Circuit is not alone in making this kind of sequencing error. As we discuss below, many courts have made this exact error when accounting for failures to mitigate. Furthermore, the problem of sequencing is much broader than the mistake made in Williams. The problem arises whenever courts face multiple steps in calculating damages. For example, should damage caps be applied before or after the reduction for comparative fault? What about collateral sources--third parties who have paid the plaintiff for an injury or the costs of injury? When do (and how should) they figure into the damage calculation?

Court behavior related to sequencing tends to be ad hoc and inconsistent. Sometimes, courts unwittingly follow precedent from other contexts but fail to see that context changes the appropriate sequence. Sometimes they incorrectly take their cues from the structure of trial, in which liability issues (for example, comparative fault) precede damages issues (for example, failures to mitigate and damage caps). Sometimes they seek precision in statutory language where none can be found. And sometimes, we suspect, courts simply forget that the order of operations matters.

But the order of operations can matter a lot. Courts and scholars spend countless hours developing principles to ensure accuracy and precision in legal outcomes. Yet courts' improper sequencing at the end can easily undo all of the effort that precedes it. Remarkably, this issue has escaped focused scholarly attention. (4)

In this Article, we investigate the problem of sequencing. We offer three contexts in which the problem arises in torts: failures to mitigate, damage caps, and collateral sources of funding. Each of these examples demonstrates a different way in which attention to sequencing can improve legal analysis, and through careful examination we provide new insights on the proper sequence in all three contexts. Together, the three examples also enable us to develop an overall theory of sequencing, which can help courts and scholars address the sequencing problem generally.

The Article proceeds as follows. Part I discusses failures to mitigate, also known as the "doctrine of avoidable consequences." Here, confusion reigns among courts, but as we show, attention to sequencing can help establish a uniform (and correct) procedure.

Part II considers damage caps of various kinds--not only the controversial noneconomic damage caps that are most salient today, but also less explored damage caps associated with government entities and charitable organizations. The case law on damage caps exhibits considerable uniformity, but an examination of sequencing reveals that courts could have reached a different, but equally legitimate, sequencing rule for caps. Which rule one chooses depends on one's theoretical view of caps, as well as one's policy preferences.

Part III analyzes how the law accounts for collateral sources given the abolition of the common law's collateral-source rule. Here, courts are split on the appropriate procedure. Paying attention to sequencing enables us not only to explain this split, but also to realize that both extant rules are in tension with basic tenets of tort law. In response, we propose a novel, alternative rule to account for collateral sources.

Based on these three examples, Part IV takes a broader view of the sequencing problem. It first investigates and explains why courts make sequencing errors. It then considers the various costs--both to individuals and to society--associated with the confusion over sequencing. In addition to raising fairness concerns, miscalculating damages can exacerbate existing inequities and interfere with proper incentives. Part IV finally brings some much-needed clarity to this messy area of the law. It develops a conceptual framework for thinking about the sequencing problem and proposes an "order of operations" for calculating damages in the legal context.

1. Mitigation

   The doctrine of mitigation, which diminishes recovery based on the failure to mitigate avoidable harm, plays an important role in tort litigation. Whether the case involves medical malpractice, a slip-and-fall, or a defective product, how the victim behaves after the accident and whether the victim seeks proper medical treatment can have a sizable impact on the ultimate harm. Similarly, in many property-harm cases, victims may reduce losses after an accident by replacing the damaged property, repairing it, or switching to a substitute. Because victims (just like injurers) do not always behave reasonably, cases involving claims of victims' failures to mitigate are commonplace. (5)

   As we already saw in Williams, when both comparative fault and mitigation apply, a sequencing problem emerges. Suppose a victim suffers $100,000 in injuries from a car accident. A jury finds the victim and the injurer equally at fault for the accident, but the jury also finds that the victim could have avoided $20,000 of the injuries if she had sought proper medical treatment immediately afterward. How much should the victim recover? That is, should a court apply comparative fault or the mitigation doctrine first?

   In this context, the correct sequence is to apply the reduction for failure to mitigate first and then apply comparative fault. The reason is that comparative fault operates on the amount of joint harm. Harm created by the victim's failure to mitigate is attributable to the victim alone, so it should be set aside before the court applies comparative fault. Thus, in this hypothetical, the joint harm is $100k - $20k = $80k. That amount is then divided 50-50 for comparative fault, yielding a recovery of $40,000. Reversing the order would yield a recovery of only $30,000, (6) shortchanging the victim $10,000. In other words, applying comparative fault before the doctrine of mitigation overcharges the victim. While the victim's failure to mitigate accounts for $20,000 of her injuries, the reverse sequence effectively charges her $30,000.

   Applying comparative fault prior to mitigation can lead to absurd results in some situations. Suppose in the hypothetical above that the victim's failure to mitigate accounted for $60,000 (rather than $20,000) of her injuries. Applied first, comparative fault would reduce the injurer's liability to $50,000. Further reduction for failure to mitigate would then lead the victim to owe $10,000 to the injurer (or, at the very least, drop her damages to zero). This result is clearly erroneous considering that the injurer is responsible for 50% of the initial harm of $40,000.

   Unfortunately, like the Seventh Circuit in Williams, many courts have incorrectly sequenced comparative fault and mitigation--at considerable cost to victims. The mistaken sequence can be found in cases involving different types of harm (bodily injury, property damage, pure economic loss) and different forms of mitigation (neglecting to obtain medical treatment, failing to perform an alternative transaction). Consider Truck Insurance Exchange v. Sullivan, Kelly & Associates, a case involving professional malpractice. (7) There, a California appellate court affirmed the reduction of the cross-complainant's $2.35 million in damages by 40% for comparative fault before subtracting the $440,000 "attributable to [the cross-complainant's] failure to mitigate." (8) This sequencing error...