Vicarious Windfalls

• Author: Justin Sevier
• Position: Charles Ehrhardt Assistant Professor, Florida State University College of Law
• Pages: 651-707

Vicarious Windfalls Justin Sevier * ABSTRACT: The vicarious liability doctrine, which holds third parties responsible for the legal obligations of their duly authorized agents, was designed in part to ensure that tort victims are not undercompensated by insolvent agent wrongdoers. But many legal scholars are highly critical of the doctrine and suggest that fact finders’ systematic biases—particularly with respect to corporate third parties—cause unworthy tort plaintiffs to be overcompensated at the expense of innocent, deep-pocket corporate defendants. These scholars have offered little empirical evidence for these claims and, in fact, behavioral research suggests that their predictions are incorrect. This Article introduces the concept of the vicarious windfall. A vicarious windfall describes the conditions—contrary to our intuitions—under which lay fact finders are significantly less inclined to assign vicarious tort liability to a corporate employer, compared to their willingness to assign liability to the employee–agent who directly causes the harm. The vicarious windfall rests on insights from construal level theory and moral psychology, which suggest that laypeople perceive indirect wrongdoers as more psychologically distant from themselves, which causes fact finders to perceive indirect actors as less morally culpable for harm. This Article reports the results from three original experiments, in which the theory of the vicarious windfall is tested in the context of a toxic tort lawsuit. The experiments reveal that, regardless of the fact finders’ business experience: (1) jurors are less likely to assign tort liability to corporate actors vicariously (in contravention of popular wisdom); and (2) jurors award significantly lower punitive damages against vicarious defendants compared to the agent who harmed the plaintiff directly. Vicarious windfalls have significant implications for the future direction of corporate tort doctrine, for the debate regarding juror competency, and for attorneys’ strategic decisions in civil litigation. * Assistant Professor, Florida State University College of Law. Ph.D. Candidate in Psychology, Yale University (2016); J.D., Harvard Law School (2006). I thank Shawn Bayern, Avlana Eisenberg, Mark Seidenfeld, Mark Spottswood, Kip Viscusi, Joni Hersch, Arden Rowell, Tom R. Tyler, the Florida State University College of Law Faculty and the Yale University Department of Psychology for their guidance and for helpful oral and written comments regarding the contents of this Article. I also thank Vincent Fernandez and Amanda Qadri for their excellent research assistance. 652 IOWA LAW REVIEW [Vol. 102:651 I. INTRODUCTION ............................................................................. 653 II. VICARIOUS LIABILITY AND THE CORPORATE EMPLOYER ............... 657 A. R ESPONDEAT S UPERIOR ........................................................... 657 B. L AW , E CONOMICS , AND T HE ‘A NTI -C ORPORATE ’ B IAS ............... 660 III. THE SOCIAL PSYCHOLOGY OF DISTANCE ....................................... 662 A. C ONSTRUAL L EVEL T HEORY ..................................................... 662 B. D ISTANCE AND M ORAL B LAME ................................................. 665 IV. STUDY 1: TORT LIABILITY ............................................................. 668 A. P ARTICIPANTS ......................................................................... 669 B. P ROCEDURE AND M EASURES ..................................................... 671 C. R ESULTS ................................................................................. 674 1. Preliminary Matters ..................................................... 674 2. Main Analysis ............................................................... 677 3. Serial Mediation Analysis ............................................ 679 D. D ISCUSSION ............................................................................. 682 V. STUDY 2: PUNITIVE DAMAGES ....................................................... 682 A. P ARTICIPANTS ......................................................................... 683 B. P ROCEDURE AND M EASURES ..................................................... 683 C. R ESULTS ................................................................................. 685 1. Main Analysis ............................................................... 686 2. Mediated Moderation Analysis ................................... 687 D. D ISCUSSION ............................................................................. 690 VI. STUDY 3: EMPLOYER ATTRIBUTES ................................................. 691 A. P ARTICIPANTS , P ROCEDURES , AND M EASURES ........................... 691 B. R ESULTS ................................................................................. 693 1. Punitive Damages ........................................................ 694 2. Employee Selection ..................................................... 696 C. D ISCUSSION ............................................................................. 699 VII. IMPLICATIONS, OBJECTIONS, AND CONCLUSIONS .......................... 700 A. R ESEARCH AND P OLICY I MPLICATIONS ...................................... 702 B. O BJECTIONS AND F UTURE D IRECTIONS ...................................... 705 VIII. CONCLUSIONS ............................................................................... 707 2017] VICARIOUS WINDFALLS 653 “Windfall (n.) Originally literal, in reference to wood or fruit blown down by the wind, and thus free to all.” 1 I. INTRODUCTION Turing Pharmaceuticals CEO Martin Shkreli made headlines in 2015— and aroused the nation’s collective ire—when he hiked the price of a life-saving HIV treatment drug, Daraprim, by over 5000%, from $13.50 per tablet to $750.00 per tablet. 2 Rather than developing its own drugs for the market, Turing targeted out-of-patent medicines—for which there are small markets and few competitors—obtained the licenses for the drugs, and then raised the price of these medicines in pursuit of windfall profits. 3 Shkreli pursued this strategy with respect to several pharmaceuticals, including anti-parasitic and toxoplasmosis medications. 4 Shkreli’s actions caused a public backlash in which several prominent news organizations published stories critical of his decisions. 5 The public outcry against Shkreli’s business model was swift and severe. Several news outlets dubbed Shkreli the “most-hated man in America” and called for congressional investigations in addition to civil and criminal penalties under various state and federal statutes. 6 It is uncontroversial that the general public 1. Windfall , ONLINE ETYMOLOGY DICTIONARY, http://www.etymonline.com/index.php? allowed_in_frame=0&search=windfall (last visited Oct. 28, 2016). In medieval England, commoners were forbidden from chopping down trees for fuel. But if a strong wind broke the branches or blew down the trees, the debris was a legitimate find. It was to the commoner, literally, a windfall. See WILLIAM MORRIS & MARY MORRIS, MORRIS DICTIONARY OF WORD AND PHRASE ORIGINS 605 (1977) (explaining the etymology of the word “windfall”); see also generally Eric Kades, Windfalls , 108 YALE L.J. 1489 (1999) (citing the Morris Dictionary and discussing a varying array of public and private legal windfalls). 2. See, e.g. , Hazel Sheffield, Martin Shkreli, the CEO that Hiked Price of HIV Treatment Drug, Arrested on Securities Fraud Charges , INDEPENDENT (Dec. 17, 2015), http://www.independent.co.uk/news/ business/news/martin-shkreli-the-ceo-that-hiked-price-of-hiv-treating-drug-arrested-on-securities-fraud-charges-a6776756.html. 3. See id. ; see also James Surowiecki, Taking on the Drug Profiteers , NEW YORKER (Oct. 12, 2015), http://www.newyorker.com/magazine/2015/10/12/taking-on-the-drug-profiteers; Arlene Weintraub, Gadfly Pharma Investor Shkreli Starts Anew After Ousting from Retrophin , FORBES (Feb. 27, 2015, 9:10 AM), http://www.forbes.com/sites/arleneweintraub/2015/02/27/gadfly-pharma-investor-shkreli-starts-anew-after-ousting-from-retrophin/#32c99304359d. 4. See, e.g. , Dave Muoio, Daraprim Price Jump Raises Concerns Among ID Groups, Providers , HEALIO (Sept. 17, 2015), http://www.healio.com/infectious-disease/hiv-aids/news/online/%7B745d9cc5-df37-4139-b1ac-6dde7b8ae463%7D/daraprim-price-jump-raises-concerns-among-id-groups-providers. 5. Id. ; see also Andrea Mitchell & Phil Helsel, Drug CEO Will Lower Price of Daraprim After Hike Sparked Outrage , NBC NEWS (Sept. 23, 2015, 6:43 AM), http://www.nbcnews.com/news/usnews/drug-ceo-will-lower-price-daraprim-after-outrage-n431926; Andrew Pollack, Drug Goes from $13.50 a Tablet to $750, Overnight , N.Y. TIMES (Sept. 20, 2015), http://www.nytimes.com/ 2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html. 6. Heather Long & Matt Egan, Meet the Guy Behind the $750 AIDS Drug , CNN: MONEY (Sept. 22, 2015, 7:50 PM), http://money.cnn.com/2015/09/22/investing/aids-drug-martin-shkreli-750-cancer-drug. Prominent critics of Shkreli included Hillary Clinton, Donald Trump, and Bernie Sanders. Id. ; see also Ariana Eunjung Cha, CEO Who Raised Price of Old Pill More than $700 Calls Journalist 654 IOWA LAW REVIEW [Vol. 102:651 found Turing Phamaceuticals’ actions morally blameworthy—perhaps civilly and criminally so—and that they found Shkreli, in particular, to be the agent who caused the company’s blameworthy actions. 7 Now imagine a variation on these facts, which occurred a decade earlier in 2005. Merck & Co., a leading pharmaceutical company, was faced with sluggish sales of two anti-cancer medications. 8 Merck then sold the rights to these medications to another company, Ovation, whom Merck may have known would raise the price of the drugs. 9 Ovation did, in fact, raise the price of the drugs, such that users’ monthly drug costs skyrocketed; a two-week supply went from $77.50 to...