Double Deterrence: Restitution and Punitive Damages in Trust and Fiduciary Law

Abstract

Trustees and other fiduciaries manage, invest, and distribute trillions of dollars in assets, subject to fiduciary duties. But the remedies for fiduciary breach, and their justifications, are convoluted. The conventional view, especially in law and economics, is to characterize most fiduciary relationships, including trusts, as contractual and most fiduciary duties as implicit contract terms. One might suppose, then, the optimal remedy for fiduciary breach would be the same as the remedy for contractual breach: damages. But the traditional equitable remedies and modern remedies in fiduciary law allow a plaintiff to elect either damages based on plaintiff’s harm or disgorgement based on defendant’s gain. Moreover, some courts now allow punitive damages for fiduciary breach, even though, historically, punitive damages were unavailable in contract and fiduciary law.

Applying insights from optimal deterrence theory and agency costs theory, this Article provides a framework for analyzing remedies in trust law, fiduciary law, and beyond. It argues that disgorgement and punitive damages serve distinct purposes and that both remedies may be necessary to achieve the deterrence and disclosure functions of fiduciary law and other situations involving the stripping of ill-gotten gains. If a defendant’s gain exceeds the harm and there is no possibility of the defendant’s escaping liability, then an election of damages or disgorgement may be necessary to deter breach, but punitive damages are not. Conversely, if there is no concern about ill-gotten gains but the defendant may escape liability, punitive damages are necessary to deter, but disgorgement is not. In both cases, a single type of remedy is necessary to deter wrongdoing.

However, if there is a concern about both ill-gotten gains and a defendant’s escaping liability, then an election of punitive damages or punitive disgorgement is necessary. A damages multiplier, set equal to the inverse of the probability of escaping liability, forces a party to internalize the harm by paying average damages equal to expected harm. In addition, because a defendant may escape liability when the gain exceeds the harm as well when the harm exceeds the gain, there is a justification for punitive disgorgement. Under this remedy, a court not only would strip ill-gotten gains but also impose a disgorgement multiplier to ensure that a defendant forfeits the entire expected benefit by paying average disgorgement equal to the expected benefit. In these cases, double deterrence is necessary to prevent wrongdoing.

Keywords: Trust, Trustees, Fiduciary Duty, Deterrence, Remedies, Damages, Disgorgement, Punitive Damages

JEL Classification: K00, K36