Shifting the Fat‐Tailed Distribution of Blockbuster Punitive Damages Awards

• Author: W. Kip Viscusi,Benjamin J. McMichael
• Published date: 01 June 2014
• DOI: http://doi.org/10.1111/jels.12043
• Date: 01 June 2014

Shifting the Fat-Tailed Distribution of

Blockbuster Punitive Damages Awards

W. Kip Viscusi and Benjamin J. McMichael*

The distribution of blockbuster punitive damages awards has fat tails similar to the distri-

butions of losses from natural disasters. Extremely large awards occur more often and are

more difficult to predict than if blockbuster awards were distributed normally. The size and

predictability of awards are important factors in the U.S. Supreme Court’s decisions on

punitive damages. This article examines the effect of the Court’s decision in State Farm v.

Campbell on blockbuster punitive damages awards. State Farm shifts the fat tail of the distri-

bution of blockbuster awards down (or “thins” the tail), which is consistent with a restraining

effect on award size. State Farm reduces the size of blockbuster awards in general, but this

reduction is most salient in the upper half of the distribution of awards. State Farm also has

a negative influence on the probability of exceeding a single-digit ratio between punitive and

compensatory damages. This article also examines the largest awards and considers why

defendants may not pay large punitive damages awards.

I. Introduction

Punitive damages share with natural disasters the property that there are often extremely

large outliers that are not consistent with a normal distribution. More specifically,

extremely large punitive damages awards are characterized by a fat-tailed distribution. For

natural disasters, these outliers take the form of extremely large losses. In the case of

punitive damages, it is the magnitude of the awards that may be especially great.

In this article, we focus specifically on what Viscusi (2004), Hersch and Viscusi

(2004), and Del Rossi and Viscusi (2010) have termed blockbuster punitive damages

awards, that is, punitive damages awards of at least $100 million. Much like losses from

significant natural disasters, these awards are extreme outliers and potentially pose cata-

strophic financial risks to defendants. However, courts can limit the economic impact of

these awards in two principal ways. First, U.S. Supreme Court decisions and state punitive

damages limits can affect the magnitude of the awards. Second, courts can reduce or

overturn these awards on appeal or through other postverdict procedures. This article

*Address correspondence to W. Kip Viscusi, University Distinguished Professor of Law, Economics, and Management,

Vanderbilt University Law School, 131 21st Ave. S., Nashville, TN 37203; email: kip.viscusi@vanderbilt.edu.

McMichael is JD/PhD Student, Vanderbilt Law and Economics Program.

We acknowledge a variety of helpful comments from two referees.

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Journal of Empirical Legal Studies

Volume 11, Issue 2, 350–377, June 2014

350

examines the distribution and determinants of blockbuster awards and the ways in which

the courts have restrained their economic impact.

Punitive damages serve a unique function in the U.S. civil justice system. They are

essentially the only civil remedy that exists to punish defendants and deter future wrong-

doers as opposed to compensating plaintiffs for specific harms or preventing those harms

from recurring in the future. The U.S. Supreme Court has repeatedly held that states may

authorize punitive damages only for the limited purposes of punishment and deterrence.

Because these awards exist to punish and deter, the amount that any individual plaintiff may

receive does not adhere to a well-defined formula. Unlike compensatory damages, which

must be calibrated to a specific harm, adjudicators must decide what amount of damages

will adequately achieve the more nebulous social goals of punishment and deterrence.

When deciding what amount to award plaintiffs, adjudicators often receive very little

guidance regarding the amount of punitive damages that is appropriate, leading some

observers to question extremely large awards.1

The U.S. Supreme Court has never instructed lower courts on exactly how they

should award punitive damages, despite the potential for extremely large awards, but it has

provided some general guidance on what awards are unconstitutionally large. After author-

izing punitive damages under the Constitution in its earlier cases,2the Court began to limit

the size of awards and the process by which they are awarded in the 1990s and 2000s under

the Due Process Clause of the Fourteenth Amendment. Currently, three main cases state

the constitutional doctrine on punitive damages: BMW of North America, Inc. v. Gore (1996),

State Farm v. Campbell (2003), and Philip Morris USA v. Williams (2007). All three cases

consistently hold that the only legitimate purposes for which states may authorize punitive

damages are punishment and deterrence. In all three cases, the Court seeks to limit “grossly

excessive” awards that violate notions of fundamental fairness, do not provide adequate

notice to parties that they may be subject to large awards, and do not further the legitimate

interests of the state. In limiting these excessive awards, the Court in BMW provided three

general guideposts that lower courts must consider when determining whether a given

punitive award is “reasonable” under the Fourteenth Amendment: (1) the reprehensibility

of the defendant’s conduct, (2) the “disparity” between the harm inflicted on the plaintiff

and the punitive damages award, and (3) the difference between the award and civil

penalties authorized for similar cases.3

State Farm clarified the Court’s decision in BMW by explaining that the reprehensi-

bility of the defendant’s conduct is the most important factor in evaluating the reasonable-

ness of a particular punitive damages award. State Farm will also play a central role in our

1For a discussion of the types of guidance received by adjudicators, see Sunstein et al. (2002). In general, awarding

punitive damages may be efficient from the standpoint of deterrence, depending on the relationship between the

probability of detecting the defendant’s wrongful behavior and the amount of compensatory damages. Polinsky and

Shavell (1998) provide a thorough overview of the economic theory of punitive damages, but there is little evidence

that courts have adhered to the economic prescriptions for efficient levels of punitive damages.

2Pacific Mutual Life Ins. v. Haslip, 499 U.S. 1 (1991).

3These guideposts were initially announced in BMW of North America v. Gore, 517 U.S. 559 (1996).

Shifting the Fat-Tailed Distribution of Blockbuster Awards 351