An Economist Defends Against Punitive Damages

While punitive ' or exemplary ' damages are rarely imposed in product liability matters, they do sometimes occur. One strategy to minimize the risk of a punitive damages award is to present a robust defense against economic-damages claims: Punitive damages are often measured in relation to the economic harm suffered by plaintiffs. Rigorous analysis of the actual harm may be the best defense against exemplary punishment, especially in light of such recent decisions as BMW of North America v. Gore, 517 U.S. 559 (1996) and State Farm v. Campbell, 538 U.S. 408 (2003), establishing that a punitive damages award cannot be “grossly excessive” in light of, inter alia, the ratio of punitive damages to compensatory damages and the state statutory penalties for similar conduct.

Arguments Against Punitive Damages

Many argue that the imposition of punitive damages in product liability matters does not make much sense in light of strict liability, which should be deterrent enough against willfully placing harmful products into the stream of commerce. (Hoenig, Product Liability and Punitive Damages, 65 Ins. L.J. 198 (1980)). Others have argued that where punitive damages are imposed, the costs would simply be passed along to consumers. (Carsey, The Case Against Punitive Damages, 11 Forum 57 (1975)). One other argument is that punitive damages imposed in one occurrence of harm may leave later claimants without recourse. Roginsky v. Richardson-Merrell, Inc., 378 F.2d 832 (1967).

Frequency and Size of Punitive Damages Awards

Awards of punitive damages are infrequent and, when they are imposed, are usually not very high. In fact, studies consistently show that punitive damages awards in product liability matters are not increasing either in frequency or in size. Saks, Do We Really Know Anything About the Behavior of the Tort Litigation System ' And Why Not? 140 U. Pa. L.R. 1147 (1992).

A 2001 Department of Justice (DOJ) study showed punitive damages were imposed in only 2% of product liability matters that reached a verdict. Bureau of Justice Statistics, Selected Findings, Civil Justice Survey of State Courts, 2001, Punitive Damages Awards in Large Counties 2001, NCJ 208445 (March 2005). The same study indicates that punitive damages are not increasing in frequency; Punitive damages were imposed in 5.6% of all civil matters, including product liability matters, down from 6.1% in 1992.

A large comprehensive study of all product liability actions involving punitive damages has shown that, with the exception of asbestos matters, the frequency of punitive damages awards in product liability matters fell in the last six years of the study, the median size of punitive damages awards in product liability matters was $625,000. Punitive damages awards are highly likely to be reduced on appeal or post-trial through settlement, and in 36% of the cases, actual damages were greater than the punitive damages imposed. Punitive damages were more than ten times compensatory damages only 13% of the time. Rustad and Koenig, Punitive Damages in Products Liability: A Research Report, 2 Prod. Liab. LJ 85 (1992).

Measurement of Punitive Damages

There is no absolute rule for the measurement of punitive damages. The U.S. Supreme Court held in TXO v. Alliance, 509 U.S. 443, 454 (1993), that there is no mathematical “bright line” separating acceptable from unacceptable measures of punitive damages.

In a majority of states, the wealth of the defendant is admissible as an aid to the jury in determining the amount of punitive damages. Newport v. Fact Concerts, Inc., 453 U.S. 247 (1981). The term “net worth” is often used in discussing the imposition of punitive damages, but it is an imprecise term, easy to manipulate, and is not the sole standard for measuring punitive damages. Zaxis Wireless Communications, Inc. v. Motor Sound Corp. 89 Cal.App.4th 577 (2001). “Net worth” is generally defined as assets less liabilities, from the current balance sheet. Sprague v. Waller, 441 Pa. Super 1995.

A better term than “net worth” might be “financial condition,” which reflects the defendant's ability to pay. Herman v. Sunshine Chemical Specialties, 133 N.J. 329, 342 (1993). The term “financial condition” encompasses a wide range of measurements of wealth. It can mean “net assets,” Miller v. Elite Insurance Co., 100 Cal.App.3d 739, 161 Cal.Rptr. 322; and it can mean “gross assets,” Walker v. Signal Companies Inc., 84 Cal.App.3d 982, 1001, 149 Cal.Rptr. 119 (1978).

In Zimmerman v. Direct Federal Credit Union, 262 F.3d 70, 81 (1st Cir. 2001), a spreadsheet showing the office salaries of the defendant was sufficient to show the defendant's economic condition for the purposes of determining punitive damages. Construction contracts held by the defendant in the amount of $3.4 million were sufficient to show the defendant's economic condition and the basis for $1 million in punitive damages. Hunio v. Tishman Construction Corp., 24 Cal. App. 4th 792, 801, 18 Cal. Rptr. 2d 253, 256 (1993).

However, evidence of the defendant's profits may prejudice the jury, which should not punish merely for greed. LaPlante v. American Honda Motor Co., Inc., 27 F.3d 731 (1st Cir. 1994). Moreover, at least one court found that lack of evidence on the defendant's financial condition is not a bar to the imposition of punitive damages. Flippo v. CSC Associates III, LLC, 547 SE 2d 216 (Va. 2001).

Challenging Punitive Damages Awards

Courts generally agree that punitive damages must hurt the defendant, but not kill him. Washington Gas Light Company v. Lansden, 172 U.S. 535, 554 (1899); Miller v. Schnitzer, 78 Nev. 301, 309, 371 P.2d 824, 829 (1962). In perhaps the most famous case dealing with excessiveness of punitive damages, the U.S. Supreme Court held that a punitive damages award cannot be “grossly excessive” in light of the reprehensibility of the defendant's conduct, the ratio of punitive damages to compensatory damages and the state statutory penalties for similar conduct. BMW of North America v. Gore, 517 U.S. 559 (1996). In Philip Morris USA v. Williams, 549 U.S. 346 (2007), the Supreme Court held that the Due Process clause of the Fourteenth Amendment bars punitive damages for harm caused to individuals not involved in the litigation, overturning a $79.5 million award to a smoker's widow.

However, “economic bankruptcy” is not always an absolute bar to punitive damages. Welch v. Epstein, 342 S.C. 279, 536 S.E.2d 408 (2000) ($3 million in punitive damages was not excessive in a legal-malpractice matter). Similarly, an Illinois court of appeals ruled that a $1.6 million punitive-damages award in a product liability matter involving $75,000 in compensatory damages was not excessive where the defendant knew of the defect and failed to warn. The court noted that conduct may be so reprehensible that putting the defendant out of business is not a bar to punitive damages. Loitz v. Remington Arms Co., 117 Ill. App. 3d. 1034; 532 NE 2d. 1091 (1988).

In judging whether an award for punitive damages is “overkill,” a court may consider whether the award would bar future plaintiffs from recovery. Dunn v. Hovic, 1 F.3d 1362, 1367 (3rd Cir.1993). A court may reduce an award that shocks judicial conscience, as in the famous Ford Pinto defective gas tank case Grimshaw v. Ford Motor Company, 119 Cal. App. 3d 757; 174 Cal. Rptr. 348 (1981).

Ratio of Punitive toCompensatory Damages

Courts now look at the ratio of punitive to compensatory damages as an indication of “excessiveness,” but no court has yet established a “bright line” test.

In BMW of North America v. Gore, the U.S. Supreme Court indicated that a ratio of punitive damages to compensatory damages of 10-to-1 or more would suggest excessiveness, rejecting a ratio of 500%. However, contrast this with the Court's earlier decision in TXO Products Corp. v. Alliance Resource Corp., where the Court affirmed an award of $10 million in punitive damages when actual damages were only $19,000. The Supreme Court reiterated the 10-to-1 guideline of Gore in State Farm Mutual Auto Insurance v. Campbell, and also held that juries cannot punish defendants for incidents that occurred outside the state.

Economic Testimony

While the data suggests that in a majority of the cases punitive damages will not be an issue, an economist can provide critical assistance in any product liability matter by measuring and testifying on the actual damages suffered by the plaintiff. This can be critical in the analysis of punitive damages, especially in light of the punitive-to-compensatory ratio considerations voiced in Gore and State Farm.

An economist can provide a range of assistance to the defense, including:

• Testimony as to a defendant's financial condition;
• A critique of the plaintiff's assessment of the defendant's net worth/financial condition;
• Testimony as to the defendant's economic status in place of an officer of the defendant (this tactic may be warranted where the matter involves a subsidiary corporation and testimony from an officer of the parent corporation may not be in the best interests of the defense);
• Guidance as to the range and depth of response to discovery; Testimony as to irreparable harm; and
• Testimony on the economic dynamics of the defendant's industry.

In addition, an economist is uniquely capable of measuring and testifying as to the actual economic harm suffered by the plaintiff and the plaintiff's family, considering such issues as:

• Lost future income;
• Lost retirement benefits;
• Future medical costs;
• Value of lost household services;
• The economic effect of limitations on employment capabilities; and
• Any economic harm to a plaintiff's business.

An economist's testimony can be invaluable in analyzing the plaintiff's damages claim. In this regard, the economist can assist the defense in crafting cross examination of the plaintiff's economic expert.

Conclusion

It is clear that punitive damages are intertwined inextricably with the actual damages suffered by the plaintiff. By retaining a competent economist early in the case-preparation process, the defendant has taken a significant step toward limiting punitive damages ' the best defense against excessive punitive damages is an accurate assessment of the actual damages suffered by the plaintiff.

Chad L. Staller, Esq., MBA, MAC, AV, is a senior economist at the Center for Forensic Economic Studies, a Philadelphia-based national firm providing economic and statistic analysis and litigation support. He can be reached at 1-800-966-6099 or [email protected].

While punitive ' or exemplary ' damages are rarely imposed in product liability matters, they do sometimes occur. One strategy to minimize the risk of a punitive damages award is to present a robust defense against economic-damages claims: Punitive damages are often measured in relation to the economic harm suffered by plaintiffs. Rigorous analysis of the actual harm may be the best defense against exemplary punishment, especially in light of such recent decisions as BMW of North America v. Gore , 517 U.S. 559 (1996) and State Farm v. Campbell , 538 U.S. 408 (2003), establishing that a punitive damages award cannot be “grossly excessive” in light of, inter alia , the ratio of punitive damages to compensatory damages and the state statutory penalties for similar conduct.

Arguments Against Punitive Damages

Many argue that the imposition of punitive damages in product liability matters does not make much sense in light of strict liability, which should be deterrent enough against willfully placing harmful products into the stream of commerce. (Hoenig, Product Liability and Punitive Damages, 65 Ins. L.J. 198 (1980)). Others have argued that where punitive damages are imposed, the costs would simply be passed along to consumers. (Carsey, The Case Against Punitive Damages, 11 Forum 57 (1975)). One other argument is that punitive damages imposed in one occurrence of harm may leave later claimants without recourse. Roginsky v. Richardson-Merrell, Inc. , 378 F.2d 832 (1967).

Frequency and Size of Punitive Damages Awards

Awards of punitive damages are infrequent and, when they are imposed, are usually not very high. In fact, studies consistently show that punitive damages awards in product liability matters are not increasing either in frequency or in size. Saks, Do We Really Know Anything About the Behavior of the Tort Litigation System ' And Why Not? 140 U. Pa. L.R. 1147 (1992).

A 2001 Department of Justice (DOJ) study showed punitive damages were imposed in only 2% of product liability matters that reached a verdict. Bureau of Justice Statistics, Selected Findings, Civil Justice Survey of State Courts, 2001, Punitive Damages Awards in Large Counties 2001, NCJ 208445 (March 2005). The same study indicates that punitive damages are not increasing in frequency; Punitive damages were imposed in 5.6% of all civil matters, including product liability matters, down from 6.1% in 1992.

A large comprehensive study of all product liability actions involving punitive damages has shown that, with the exception of asbestos matters, the frequency of punitive damages awards in product liability matters fell in the last six years of the study, the median size of punitive damages awards in product liability matters was $625,000. Punitive damages awards are highly likely to be reduced on appeal or post-trial through settlement, and in 36% of the cases, actual damages were greater than the punitive damages imposed. Punitive damages were more than ten times compensatory damages only 13% of the time. Rustad and Koenig, Punitive Damages in Products Liability: A Research Report, 2 Prod. Liab. LJ 85 (1992).

Measurement of Punitive Damages

There is no absolute rule for the measurement of punitive damages. The U.S. Supreme Court held in TXO v. Alliance , 509 U.S. 443, 454 (1993), that there is no mathematical “bright line” separating acceptable from unacceptable measures of punitive damages.

In a majority of states, the wealth of the defendant is admissible as an aid to the jury in determining the amount of punitive damages. Newport v. Fact Concerts, Inc. , 453 U.S. 247 (1981). The term “net worth” is often used in discussing the imposition of punitive damages, but it is an imprecise term, easy to manipulate, and is not the sole standard for measuring punitive damages. Zaxis Wireless Communications, Inc. v. Motor Sound Corp. 89 Cal.App.4th 577 (2001). “Net worth” is generally defined as assets less liabilities, from the current balance sheet. Sprague v. Waller, 441 Pa. Super 1995.

A better term than “net worth” might be “financial condition,” which reflects the defendant's ability to pay. Herman v. Sunshine Chemical Specialties , 133 N.J. 329, 342 (1993). The term “financial condition” encompasses a wide range of measurements of wealth. It can mean “net assets,” Miller v. Elite Insurance Co. , 100 Cal.App.3d 739, 161 Cal.Rptr. 322; and it can mean “gross assets,” Walker v. Signal Companies Inc. , 84 Cal.App.3d 982, 1001, 149 Cal.Rptr. 119 (1978).

In Zimmerman v. Direct Federal Credit Union , 262 F.3d 70, 81 (1st Cir. 2001), a spreadsheet showing the office salaries of the defendant was sufficient to show the defendant's economic condition for the purposes of determining punitive damages. Construction contracts held by the defendant in the amount of $3.4 million were sufficient to show the defendant's economic condition and the basis for $1 million in punitive damages. Hunio v. Tishman Construction Corp. , 24 Cal. App. 4th 792, 801, 18 Cal. Rptr. 2d 253, 256 (1993).

However, evidence of the defendant's profits may prejudice the jury, which should not punish merely for greed. LaPlante v. American Honda Motor Co., Inc. , 27 F.3d 731 (1st Cir. 1994). Moreover, at least one court found that lack of evidence on the defendant's financial condition is not a bar to the imposition of punitive damages. Flippo v. CSC Associates III, LLC , 547 SE 2d 216 (Va. 2001).

Challenging Punitive Damages Awards

Courts generally agree that punitive damages must hurt the defendant, but not kill him. Washington Gas Light Company v. Lansden , 172 U.S. 535, 554 (1899); Miller v. Schnitzer , 78 Nev. 301, 309, 371 P.2d 824, 829 (1962). In perhaps the most famous case dealing with excessiveness of punitive damages, the U.S. Supreme Court held that a punitive damages award cannot be “grossly excessive” in light of the reprehensibility of the defendant's conduct, the ratio of punitive damages to compensatory damages and the state statutory penalties for similar conduct. BMW of North America v. Gore , 517 U.S. 559 (1996). In Philip Morris USA v. Williams , 549 U.S. 346 (2007), the Supreme Court held that the Due Process clause of the Fourteenth Amendment bars punitive damages for harm caused to individuals not involved in the litigation, overturning a $79.5 million award to a smoker's widow.

However, “economic bankruptcy” is not always an absolute bar to punitive damages. Welch v. Epstein , 342 S.C. 279, 536 S.E.2d 408 (2000) ($3 million in punitive damages was not excessive in a legal-malpractice matter). Similarly, an Illinois court of appeals ruled that a $1.6 million punitive-damages award in a product liability matter involving $75,000 in compensatory damages was not excessive where the defendant knew of the defect and failed to warn. The court noted that conduct may be so reprehensible that putting the defendant out of business is not a bar to punitive damages. Loitz v. Remington Arms Co. , 117 Ill. App. 3d. 1034; 532 NE 2d. 1091 (1988).

In judging whether an award for punitive damages is “overkill,” a court may consider whether the award would bar future plaintiffs from recovery. Dunn v. Hovic , 1 F.3d 1362, 1367 (3rd Cir.1993). A court may reduce an award that shocks judicial conscience, as in the famous Ford Pinto defective gas tank case Grimshaw v. Ford Motor Company , 119 Cal. App. 3d 757; 174 Cal. Rptr. 348 (1981).

Ratio of Punitive toCompensatory Damages

Courts now look at the ratio of punitive to compensatory damages as an indication of “excessiveness,” but no court has yet established a “bright line” test.

In BMW of North America v. Gore, the U.S. Supreme Court indicated that a ratio of punitive damages to compensatory damages of 10-to-1 or more would suggest excessiveness, rejecting a ratio of 500%. However, contrast this with the Court's earlier decision in TXO Products Corp. v. Alliance Resource Corp., where the Court affirmed an award of $10 million in punitive damages when actual damages were only $19,000. The Supreme Court reiterated the 10-to-1 guideline of Gore in State Farm Mutual Auto Insurance v. Campbell, and also held that juries cannot punish defendants for incidents that occurred outside the state.

Economic Testimony

While the data suggests that in a majority of the cases punitive damages will not be an issue, an economist can provide critical assistance in any product liability matter by measuring and testifying on the actual damages suffered by the plaintiff. This can be critical in the analysis of punitive damages, especially in light of the punitive-to-compensatory ratio considerations voiced in Gore and State Farm.

An economist can provide a range of assistance to the defense, including:

• Testimony as to a defendant's financial condition;
• A critique of the plaintiff's assessment of the defendant's net worth/financial condition;
• Testimony as to the defendant's economic status in place of an officer of the defendant (this tactic may be warranted where the matter involves a subsidiary corporation and testimony from an officer of the parent corporation may not be in the best interests of the defense);
• Guidance as to the range and depth of response to discovery; Testimony as to irreparable harm; and
• Testimony on the economic dynamics of the defendant's industry.

In addition, an economist is uniquely capable of measuring and testifying as to the actual economic harm suffered by the plaintiff and the plaintiff's family, considering such issues as:

• Lost future income;
• Lost retirement benefits;
• Future medical costs;
• Value of lost household services;
• The economic effect of limitations on employment capabilities; and
• Any economic harm to a plaintiff's business.

An economist's testimony can be invaluable in analyzing the plaintiff's damages claim. In this regard, the economist can assist the defense in crafting cross examination of the plaintiff's economic expert.

Conclusion

It is clear that punitive damages are intertwined inextricably with the actual damages suffered by the plaintiff. By retaining a competent economist early in the case-preparation process, the defendant has taken a significant step toward limiting punitive damages ' the best defense against excessive punitive damages is an accurate assessment of the actual damages suffered by the plaintiff.

Chad L. Staller, Esq., MBA, MAC, AV, is a senior economist at the Center for Forensic Economic Studies, a Philadelphia-based national firm providing economic and statistic analysis and litigation support. He can be reached at 1-800-966-6099 or [email protected].