An LA Times report today starts with this headline: "Budget Seeks 75% of Awards for Damages: Governor hopes system being tried in eight other states will curb shortfall with money from lawsuits. But experts call proposal too optimistic." Some quotes:
SACRAMENTO — The trial lawyers say it is a horrible idea, but Gov. Arnold Schwarzenegger wants taxpayers to stake a claim to some of the whopping awards juries slap against negligent carmakers, deceptive cigarette companies and fast-food restaurants that serve coffee too hot.And what of Indiana? Indiana's punitive damages allocation statute, IC 34-51-3-6, provides that an award of punitive damages is to be paid to the clerk of the court, who is then to pay 75% to the State's Violent Crime Victims' Compensation Fund and 25% to the plaintiff. This law was enacted in 1998. The law was challenged and upheld by the Indiana Supreme court in the case of Cheatham v. Pohle (5/30/03). Access the Indiana Law Blog coverage of the opinion here. The 7th Circuit recently relied on Cheatham in its opinion in Juarez v. Menard, Inc. (April 2004). See Indiana Law Blog coverage here. A quote from the 7th Circuit opinion:In a proposal that took the Capitol by surprise, Schwarzenegger is suggesting the state collect 75% of the punitive damages awarded in civil lawsuits filed in California. After all, the governor says in the revised budget plan he released Thursday, plaintiffs in civil lawsuits already get a separate award to compensate them for their injury or loss.
"Punitive damages were never meant to be windfalls" for those who file lawsuits, said Richard Costigan, the governor's legislative affairs secretary. "They are meant to punish the defendants. Society as a whole is impacted by those actions …. How does it benefit everybody when one plaintiff gets $100 million?"
Costigan says the money should go to the public good — like closing California's multibillion-dollar budget gap. The administration suggests that the state could rake in $450 million through this maneuver, although legal scholars who have done the math say that may be wishful thinking.
Trial lawyers say the whole idea is a mistake. "The reason the award goes to the plaintiff is to incentivize the bringing of the lawsuit," said Jim Sturdevant, president of the Consumer Attorneys of California. "The plaintiff is the person who takes the risk involved." * * *
Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon and Utah already collect as much as 75% of punitive awards — as Schwarzenegger is proposing for California. Even though Ohio does not have such a law, judges there recently decided on their own to give one-third of a $27.5-million punitive award — minus attorneys fees — to a public university's cancer research fund.
Some of the states have had their statutes in place since the mid-1980s. But there is little information on how much fiscal relief the laws have generated. Academics say that's because many of them were not intended to bring in money for the state but to discourage excessive lawsuits. Only a few studies of the laws have been published and they suggest no reduction in cases.
"Most states that have these don't say explicitly their goal is to raise revenue," said Catherine Sharkey, a law professor at Columbia University. "There have been problems with these funds in some states. In some cases, the courts didn't even know the state had them. Damages would come in, and no one would notify the state."
Punitive damages, however, go beyond compensating a tort victim for a cognizable wrong. They are designed to deter and punish wrongful activity, and as such, are quasi-criminal in nature. Cheatham v. Pohle, 789 N.E.2d 467, 471 (Ind. 2003). Under Indiana law, which we must apply in this diversity action, (see Erie R.R. Co. v. Tompkins, 304 U.S 64, 78 (1938)) civil plaintiffs have no right to receive punitive damages. Cheatham, 789 N.E.2d at 472. And, in fact, the Indiana General Assembly has demonstrated a disinclination toward allowing unchecked punitive damages awards by enacting legislation that limits the amount of money a plaintiff may receive from a punitive damages award (Ind. Code § 34-51-3-6) and by requiring that a plaintiff establish the facts warranting an award of punitive damages by clear and convincing evidence rather than the usual preponderance of the evidence standard. Ind. Code § 34-51-3-2. Thus in Indiana, before a court may award punitive damages, a plaintiff must demonstrate by clear and convincing evidence that the defendant acted with malice, fraud, gross negligence or oppressiveness that was not the result of mistake of fact or law, honest error of judgment, overzealousness, mere negligence, or other human failing. [cites deleted] Moreover, a trier of fact is not required to award punitive damages even after finding all of the facts necessary to justify the award. Cheatham, 789 N.E.2d at 472. The requirements for an award of punitive damages, therefore, go far above and beyond those required for a finding of negligence.The Indiana Supreme Court also ruled, in the case of Stroud v. Lints (6/25/03), issued a few weeks after Cheatham, that "the amount of punitive damages awarded by a trial court is subject to appellate review de novo." In Stroud the Court remanded "so that the trial court may enter an award of punitive damages in an amount reflecting proper consideration of the defendant’s financial status."
Two points. First, Gov. Schwarzenegger's proposal, to use a law like Indiana's as a way of turning the assessment of punitive damages into a revenue raising measure, would seem to encourage the continuation of massive damages assessments; the larger the award, the more money for the State's general fund. Gov. Schwarzenegger's business backers may not be happy with his proposal.
Second, if you have read this far, I would refer you also to this Nov. 29, 2003 Indiana Law Blog entry, titled "Punitive Damages, Bedbugs, and the 7th Circuit." The case is Mathias v. Accor Economy Lodging. A quote from Judge Posner's opinion:
A defendant’s wealth is not a sufficient basis for awarding punitive damages. That would be discriminatory and would violate the rule of law, as we explained earlier, by making punishment depend on status rather than conduct. Where wealth in the sense of resources enters is in enabling the defendant to mount an extremely aggressive defense against suits such as this and by doing so to make litigating against it very costly, which in turn may make it difficult for the plaintiffs to find a lawyer willing to handle their case, involving as it does only modest stakes, for the usual 33-40 percent contingent fee.Although Judge Posner here is discussing the ratio of punitive damages to compensatory damages, he seems to be on the same track as some of the trial lawyers in the LA Times story, who argue that the "reason the award goes to the plaintiff is to incentivize the bringing of the lawsuit." If 75% of the "incentive" award goes to the State, then awards might need to be that much higher. Otherwise the case will not be brought (as no plaintiff's attorney will finance it) and the state treasury will be no better off.
[Update 5/17/04] See this story today via Law.com, titled "California's Governor Wants State to Pocket Punitives."
Posted by Marcia Oddi at May 15, 2004 08:24 PM