Penalizing Punitive Damages: Why the Supreme Court Needs a Lesson in Law & Economics

Abstract:     
Last fall’s landmark Supreme Court decision addressing punitive damages in the infamous Exxon Valdez oil spill case has brought the issue of punitive awards back into the legal limelight. Modern Supreme Court jurisprudence, most notably BMW, State Farm, Philip Morris, and now Exxon Valdez in 2008, have concluded that such judgments are justified to punish morally reprehensible behavior and to 'send a message' to evildoers. However, the Court has increasingly emphasized that the U.S. Constitution’s Due Process Clause presumptively limits punitive awards, drawing an arbitrary line in the sand of no more than ten times actual damages.

This paper critically examines modern punitive damages jurisprudence using a law & economics lens. From that standpoint, there is no justifiable basis for tort law’s requirement of morally reprehensible or intentional conduct before punitive damages may be awarded. Indeed, punitives should be imposed (nay, must for deterrence purposes) even in the absence of egregious behavior when a defendant has escaped liability previously, either intentionally or serendipitously. In this manner, the punitive award 'makes up' for the occasions in which the defendant avoided liability and failed to compensate victims for harm caused. On the other hand, sound economic analysis dictates that imposing enormous punitive damages simply because a tortfeasor’s behavior was morally offensive can inadvertently lead to overdeterrence, prices up beyond optimal, quantity of goods purchased far below optimal, and a significant reduction in overall social welfare. In sum, the Supreme Court must drastically revise its approach to punitive damages jurisprudence: such awards should not be arbitrarily based on a gut reaction to how 'reprehensibly' we feel a defendant acted. Rather, punitive damages should be granted only where tortfeasors have the potential to escape liability for their actions, and they should be awarded in that case even if the defendant in no way meets the modern requirements of egregious behavior necessary. Moreover, the Supreme Court’s arbitrary litmus Due Process test of 'ten times compensatory damages' as a ceiling on punitive damages makes zero sense from an economic analysis point of view, and needs to be summarily abolished.

Number of Pages in PDF File: 48

Keywords: punitive damages, Exxon, torts, remedies, damages, BMW, State Farm, Philip Morris

Accepted Paper Series