Academic journal article Journal of Legal Economics

To Deter, Punish, but Not Destroy: Forensic Economic Analysis of Jury Factors for Punitive Damages

Academic journal article Journal of Legal Economics

To Deter, Punish, but Not Destroy: Forensic Economic Analysis of Jury Factors for Punitive Damages

Article excerpt

Introduction

The difference between compensatory damages and punitive damages, from the perspective of a forensic economist contemplating both dimensions of damages, is straightforward. Except for certain commercial cases, the focus of compensatory damages, and of any calculations leading to loss conclusions, is the plaintiff. The plaintiff is to be made whole. This focus is the same for very tangible damages, such as lost earning capacity, and for such less tangible damages as pain and suffering. In punitive damages, the focus is on the defendant, whether a person or company. Little else about punitive damages is simple, or uncontroversial. Even the purpose of punitive damages is subject to debate, but three motives for the award of punitive damages form a thread through the case law and the literature. Punitive damages exist to deter, to punish, but not to destroy the defendant (see Landes and Posner 1987; Pohlman 1996; and Bruce 2000).

A review of popular business publications, newspapers, and the law and economics literature suggests a significant increase in the importance of punitive damages over the past two decades. The asbestos litigation was an early impetus to a rising level of debate on the topic (Broder 1985). Much has been made in the press about large, punitive verdicts and a trend of more and larger punitive verdicts in the future (see, for example, Daynard and Gottlieb 2001; Glaberson 1999; and Peck 2001). However, it is also noted that many punitive verdicts are substantially reduced or reversed by appellate courts (Hastie, et al. 1998), and some dispute an increasing likelihood or social significance of punitive awards (Eisenberg 1997).

A first purpose of this article is to establish a baseline of where forensic economists now stand in contemplating calculations and testimony regarding the amount of punitive damages. The relevant literature in law and economics is reviewed. Relevant law is briefly discussed. Finally, the past use and reasons for nonuse of forensic economists in punitive damages testimony is addressed.

The second purpose of this article is to suggest a substantially expanded role for forensic economists in expert testimony on the amount of punitive damages. Six factors to be considered by juries in assessing the amount of punitive damages are used for specific descriptions of appropriate, economic testimony. For example, a methodology is described which emanates from the economic definition of the destruction of a business; it results in a punish-but-not-destroy continuum that is founded in established, economic theory and should make common sense to a trier of fact. Toward this second purpose, a new terminology applying to punitive damages calculations is necessarily described: apportionment, scaling, reputation effects, regulation effects, anchoring effects, and hindsight bias, as examples.

It should be noted that no attempt is made to deal with legal guidelines, or jury decision-making, on whether or not punitive damages should be awarded. If a trier of fact is to award punitive damages, this paper deals with how an amount of punitive damages is determined. The paper focuses upon cases where the defendant is a corporation or other business entity. It is likely to raise more questions than it answers about individual methods, but it offers specifics and is intended as a pathway toward both further research and immediate, expert help to triers of fact.

The Law and Economics Literature

The focus of those who write in this area differs from the focus of practicing forensic economists, and the subject of punitive damages is a good example of this difference. Those writing in law and economics may be professors of law, or economics, or law and economics; they may be attorneys, or judges, or economists. They typically publish in law reviews and other legal journals. As will be seen below, they might be addressing what the factors to be considered by juries in determining an amount of punitive damages should be and why. …

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