THE INFORMATION-FORCING DILEMMA IN DAMAGES LAW.

• Jurisdiction: United States
• Author: Chiang, Tun-Jen
• Date: 01 October 2017

TABLE OF CONTENTS INTRODUCTION 84 I. THE INFORMATION-FORCING DILEMMA 88 A. Damages as an Information Problem 88 B. The Burden of Proof as an Information-Forcing Rule 91 C. The Dilemma in Forcing Damages Information 94 D. An Example from Patent Law 99 II. MORE EXAMPLES OF THE DILEMMA IN ACTION 104 A. Contract Law 104 B. Tort Law 108 C. Antitrust Law 112 D. Nineteenth-Century Patent Law 116 III. SECOND-LEVEL REACTIONS TO THE DILEMMA 120 A. The Fact/Amount Rule 121 B. Reversing the Burden of Proof 123 C. Intermediate Award Amounts 127 D. Statutory Benchmarks and Caps 129 IV. PAYOFFS AND A SOLUTION 132 A. The Cost-Effectiveness Criterion 133 B. The Cheaper-Producer Criterion 138 C. Implementing the Cheaper Cost-Effective Producer Principle 141 CONCLUSION 144 INTRODUCTION

Compensatory damages awards are a matter of controversy in many areas of law, ranging from torts to contracts to patents. (1) Courts and commentators devote much attention to the problem, yet much of the debate is under-theorized and misdirected. Specifically, the literature often treats the problem as a matter of insufficiently clear damages standards, (2) and efforts at reform generally focus on devising better legal standards for calculating damages. (3) Such a diagnosis, however, misses the deeper problem, which is that courts lack the information to apply whatever legal standards might be devised. The literature has sometimes noted the paucity of information that courts possess in regard to damages; (4) but it has not considered in much depth why this problem persists, or, in other words, why courts cannot obtain better damages evidence.

One immediate answer to this question might be that courts cannot collect better damages information because better information does not exist--in other words, that human knowledge is inherently limited and courts are doing the best they can. A belief that the low quality of damages information is due to inherent epistemic limits, and is therefore uninteresting and not amenable to policy solutions, may explain why there is little discussion about the topic. As this Article will explain, however, inherent epistemic limits are not the only cause of low quality damages evidence. Another reason--one that better policy can improve--is that courts face an unappreciated dilemma when attempting to obtain better information about the value of many types of losses.

Specifically, the most obvious way for a court to obtain better damages information is to impose a rigorous burden of proof on the plaintiff--that is, to hold that the plaintiff must prove the true value of the loss with precision using rigorous evidence. But courts will often face a situation in which it is clear that the plaintiff has suffered some loss, but the plaintiff cannot prove the amount of the loss with any precision. (5) A court that strictly enforces the burden of proof would give zero damages in such a case, producing a harsh result. (6) A court that relaxes the rule--awarding the court's best guess at the correct amount--reaches a better result in the individual case, but undermines incentives for future plaintiffs to produce rigorous evidence.

One can vary the basic setup, but doing so does not escape from the tradeoff described. For example, a court could award an intermediate amount--more than zero, but less than the court's best guess at the correct amount. (7) This does not escape the dilemma but simply results in a mix of both negative consequences. Awarding an intermediate amount produces a somewhat unfair result that under-compensates the plaintiff, though not as severely as awarding zero, and it somewhat undermines incentives for future plaintiffs to produce rigorous evidence, though not as severely as fully awarding the court's best guess at the correct amount.

Another variation is to place the burden of proof on the defendant rather than the plaintiff--holding that the defendant must prove the correct amount of damages with precision, or be faced with a massive award (say, $1 billion). (8) But this merely changes who gets saddled with the potential harsh result without diminishing the dilemma: there will be many cases in which it is clear that the value of the loss is less than $1 billion, but the defendant cannot prove the exact number. A court that awards $1 billion will create an unjust result. A court that blinks--awarding its best guess at the correct amount--will reveal the threat to be empty, undermining incentives for evidence production in future cases.

Understanding the dilemma leads to three payoffs. First, it provides a framework to bring together doctrinal debates in many different areas--ranging from torts to contracts to patents--as manifestations of a common problem. Second, it explains why the doctrine surrounding damages throughout the law is messy and confused. The reason is that courts reacting to the dilemma will naturally oscillate between strict and loose approaches, depending on which side of the dilemma is more salient at a particular moment and in a particular case. A court facing complaints about speculative evidence and runaway juries will favor strictly enforcing the burden of proof to force plaintiffs to provide better evidence to support their claims. (9) A court facing outcries about deserving plaintiffs being denied compensation will favor loosening the burden of proof to avoid harsh outcomes. (10) The result is inconsistent and messy doctrine. Contrary to common portrayal, the difficulty of damages calculation is not caused by vague doctrinal standards; (11) rather, the inherent dilemma that courts face in collecting damages information causes messy and vague doctrine.

Third, once the dilemma is understood, a solution emerges. The solution comprises two principles. First, courts should only require a party to produce information when the social benefit of the information (in enhancing the accuracy and precision of a damages calculation) exceeds the costs of producing the information. (12) Second, courts should impose the burden of proof on the party that can produce the required evidence at lower cost. (13)

This "cheaper cost-effective producer" principle is obviously hard to implement in practice. My point is not to say that implementing this solution is easy or even feasible, but to articulate it as an organizing principle to understand what courts should be, and to some extent are, aiming to do. (14) Viewed from this perspective, the vagueness and inconsistency that characterizes damages doctrine across the law is not just aimless flailing around by courts, but represents clumsy attempts to arrive at a coherent principle. Articulating the cheaper cost-effective producer principle therefore provides a unifying lens with which to understand, interpret, and bring coherence to the messy doctrine that characterizes damages law. (15)

This Article is organized into four Parts. Part I first provides a description of the dilemma. Part II then provides several examples of how the dilemma underlies problems in damages calculation across many different fields, such as contracts, torts, patents, and antitrust. Part III takes the analysis further and explains that the dilemma not only directly manifests itself in damages doctrine, but can also be seen in various doctrinal reforms that attempt to solve the dilemma--all of which have severe shortcomings because courts and legislatures do not fully understand the underlying problem they are trying to solve. Part IV then presents a solution.

1. THE INFORMATION-FORCING DILEMMA

   This Part will provide a description of the information-forcing dilemma and the dynamics by which it operates. Section A will first set the background by characterizing compensatory damages as an information problem. Section B will then describe how courts generally overcome information problems through the mechanism of information-forcing rules, specifically through imposing burdens of proof. Section C will then explain why, unlike other issues in litigation, obtaining information through burdens of proof leads to problems when it comes to assessing compensatory damages. Specifically, courts face a dilemma when a plaintiff who has clearly suffered some loss cannot prove the exact amount. A court in these circumstances must choose between strictly enforcing the burden of proof and giving the plaintiff nothing (a harsh result), or relaxing the burden of proof and undermining its information-forcing effect. Section D then more concretely illustrates how this dilemma operates by examining a pair of patent cases.

   1. Damages as an Information Problem

      Before explaining the difficulties courts face in collecting information, we must first frame the nature of the problem. It may seem obvious to state that courts need information to calculate damages, and that uncertainty in damages law today fundamentally traces to a lack of adequate information. But I will begin by defending this premise because much of the literature focuses on a somewhat different theory. Specifically, much of the literature treats the problem of unpredictable compensatory dadsmages awards as arising from the vagueness or inadequacy of substantive legal standards. (16) The literature accordingly focuses less on improving judicial information, such as by helping courts collect better evidence, and more on devising better and clearer substantive legal standards. (17)

      To see why vague or defective substantive legal standards are not the fundamental problem, it is useful to remember that, although damages awards are often controversial in many areas, there are also many circumstances when they are not controversial. For many run-of-the-mill tort and contract cases involving goods that are transacted on a readily observed market, such as if X negligently damages Y's car while it is parked on the street without physically injuring Y, the correct amount of damages is not difficult to determine and is not commonly subject...