Splitting Punitive Damages With the State

August 2009

Author: Lee Katherine Goldstein

The Colorado Lawyer

In today’s society, punitive damages provide a vital means of punishing and deterring wrongful conduct.  In our  world of lax regulation and corporation-friendly legislation, punitive damages provide a mechanism for jurors to punish defendants that have crossed the line by engaging in conduct that society will not tolerate when the regulators and criminal justice system fail to do so. Punitive damages: "elevate the jury as a responsible instrument of government, discourage private reprisals, restrain the strong, influential, and unscrupulous, vindicate the right of the weak, and encourage recourse to and confidence in the courts of law by those wronged or oppressed by acts or practices not cognizable in or not sufficiently punished by the criminal law." (fn1)

Punitive damages have a long and well established history in American jurisprudence. Punitive damages were recognized in common law as early as 1763, and the practice of awarding punitive damages was well recognized when the U.S. Constitution was adopted. (fn2) Punitive damages are intended  to be punishment of the wrongdoer and an example to others to deter similar conduct. (fn3) As explained  by the Wisconsin Supreme Court, punitive damages serve an important  and unique role in our society:

"Suffice it to say that whatever shortcomings the award of punitive damages may have, it must be remembered that it has the effect of bringing to punishment types of conduct that though oppressive and hurtful to the individual almost invariably go unpunished by the public prosecutor." (fn4) Punitive damages statutes recognize the principle that certain types of violations will not be prosecuted unless the injured party's judgment is increased by the equivalent of punitive damages. (fn5)

In his counterpoint article, my colleague Doug McQuiston has described the difficulties encountered by the courts in controlling punitive damages awards against the dangers of excessiveness and unpredictability. However, his proposal to require plaintiffs to split awards with the state will not decrease the amount or frequency of these awards or render them any more predictable than they currently are.

Split-Recovery Statutes

Numerous states have enacted so-called "split-recovery" statutes, which provide for some percentage of every punitive damages award to be paid to the state rather than to the plaintiff. (fn6) The seemingly innocuous  idea of diverting some or all of a punitive damages award to the state not only fails to achieve  the often stated goal of preventing a windfall  to the plaintiff, but also fails to achieve the driving force behind such statutes the desire to reduce the size and frequency of punitive damages awards.

The "Windfall" Myth

First, the myth that plaintiffs who receive a punitive damages award necessarily receive a "windfall" must be dispelled.  People unfamiliar with the  intricacies of personal injury litigation fail to appreciate the  many obstacles that plaintiffs in Colorado face in recovering the full measure of their damages all in the name of "tort reform."  These obstacles include statutory limits on recovery of damages for pain and suffering (fn7), statutory limits on recovery of damages in medical malpractice cases (fn8), insolvency of responsible parties combined with pro rata fault statutes (fn9), and limitations on the available amount of coverage under insurance policies.

In addition, once the award is obtained, the recovery is eroded further by statutory and contractual claims, including attorney fees and litigation costs, uncovered medical expense claims, insurance subrogation claims, and Medicare (fn10)  and Medicaid (fn11) claims. Although punitive damages are not intended to be compensatory, as a practical matter, an award of punitive damages sometimes may be the only way for plaintiffs to actually recover the full cost of their injuries. Split-recovery statutes provide yet another means to deprive plaintiffs’ recovery of all of their damages and to balance the hardships plaintiffs endure in the litigation process. (fn12)

Additional Shortcomings

Split-recovery statutes also fail to achieve the goal of reducing the size and frequency of punitive damages awards.  The idea behind these statutes is that the plaintiff's inability to receive the portion  of the award representing punitive damages will make him or her less likely to pursue punitive  damages  claims. This may not be true. Commentators believe that many plaintiffs will continue to pursue these claims out of a desire to punish the defendant and deter similar conduct in the future, as well as out of the potential for punitive damages claims to increase the settlement value of the case. (fn13)

These statutes not only fail to deter plaintiffs from pursuing punitive damages, but also may increase pursuit of damages directly by the states. (fn14) Split-recovery statutes provide the states an interest in furthering the plaintiff's lawsuit. (fn15) State attorneys general may attempt to intervene in private civil actions to pursue the punitive damages aspect. (fn16) In addition, state regulators may piggyback on civil litigation as an additional means of regulation. (fn17)

Moreover, allowing punitive damages awards to become additional revenue to the state may push lawmakers and judges toward loosening   laws on recovery of punitive damages. (fn18) State citizens who become jurors also may be more inclined to award punitive damages, knowing that  the  damages will provide additional revenue to the state. Commentators suggest that jurors are more reluctant to award punitive damages when they believe that the damages will provide a windfall to a single plaintiff. (fn19) Knowing that the money will be used for broader societal good for example, by compensating many victims or funding education and highway projects may make the awards more palatable to jurors. (fn20) Although most states that enact these laws provide that jurors are not to be informed of the damages allocation to the state, we should not presume that jurors are ignorant of these laws.

Commentators also assert that split-recovery statutes present a whole host of additional problems. For example, they have the potential to create a conflict of interest between lawyer and client (fn21) and may present additional constitutional challenges to punitive damages awards by both plaintiffs and defendants. (fn22)

Moving Beyond Split Recovery

If limiting punitive damages awards is a laudable goal, there are better ways to meet this goal than through split-recovery statutes. (fn23)Colorado already has in place one of the most effective mechanisms for limiting the size of punitive damages awards a statutory cap on the amount of the judgment that may be recovered by the plaintiff. (fn24) Concerns over the impact at trial of arguments and evidence relating solely to punitive damages can be met by bifurcating the proceedings into separate trials on liability and punitive damages. Split-recovery statutes will not effectively limit the size of punitive damages awards and may in fact cause such awards to be more frequent, larger, and more unpredictable. Split-recovery statutes are an idea whose time has passed.

Footnotes:

1. Wangen v. Ford Motor Company, 97 Wis.2d 260, 294 N.W.2d 437, 448 (Wis. 1980).

2. Kirk v. Denver Publishing Company, 818 P.2d 262, 266 fn.5 (Colo. 1991) (en banc).

3. Seaward Construction Company, Inc. v. Bradley, 817 P.2d 971 (Colo. 1991).

4. Wangen, supra note 1 at 445, citing Kink v. Combs, 28 Wis.2d 65, 135 N.W.2d at 798 (Wis. 1962).

5. Id.

6. Alaska,  California,  Georgia,  Illinois,  Indiana,   Iowa, Missouri, Oregon, and Utah have enacted split-recovery statutes. See Alaska Stat. § 09.17.020(j) (2004); Cal. Civ. Code § 3294.5(b) (2006); Ga. Code Ann. § 51-12-5.1(e)(2) (2000); 735 Ill. Comp. Stat. Ann. 5/2-1207 (2003);  Ind. Code Ann. § 34-51-3-6 (1999); Iowa Code Ann. § 668A.1(2) (1998); Mo. Ann. Stat.  § 537.675(g) (2005);  Or. Rev. Stat.  § 31.735 (2003);  and Utah Code Ann. § 78B-8-201 (2004). Colorado's statute, CRS § 13-21-102(4), was declared unconstitutional by the Colorado Supreme Court in Kirk, supra note 2.

7. CRS § 13-21-102.5. Damages for pain and suffering are meant to compensate a plaintiff for intangible loss to his or her quality of life. Although these losses are hard to value, it is indisputable that they exist and are worthy of compensation. The statutory cap imposed on these damages is arbitrary because it is unrelated to the plaintiff's actual losses.

8. CRS § 13-64-302.

9. CRS § 13-21-111.5.

10. Medicare as Secondary Payer Statute, 42 U.S.C. §1395y(b)(2)(A).

11. Medicaid Recovery Statute, CRS § 25.5-4-301.

12. See White, "The Practical Effects of Split Recovery Statutes and Their Validity as a Tool of Modern  Day`Tort Reform,'" 50 Drake L.Rev. 593, 603-04 (2002) (arguing that compensatory damages do not, and are not designed to, compensate the plaintiff for the pain and suffering of the long, arduous trial process; and that the plaintiff who endures the hardship of litigation is more deserving of punitive damages than the government that does nothing).

13. See Garrity, "Whose Award is it Anyway? Implications of Awarding the Entire Sum of Punitive Damages to the State,"  45 Washburn  L.J. 395 (Winter 2006) (arguing that split-recovery statutes may encourage both plaintiffs and defendants to settle punitive damages claims prior to trial for a figure greater than the plaintiff's estimated award under the split-recovery statute, but less than the estimated total punitive damages award).

14. Schwartz  et al., "I'll Take That: Legal and Public Policy   Problems   Raised   by   Statutes   That   Require Punitive Damages Awards to be Shared With the State," 68 Mo. L.Rev. 525, 538-39 (Summer 2003).

15. Id.

16. Id.

17. Id. at 543, citing  as an example,  the state attorneys general Medicaid recoupment litigation against the tobacco companies, which resulted in a $248 billion global settlement and the creation of a $50 million enforcement fund to be used by the National Association of Attorneys General.

18. Id. at 540.

19. Id. at 545-46.

20. Id.

21. Id. at 544-45 (2003); Garrity, supra note 13 at 412-13.

22. See Rabe, “The Constitutionality of Split-Recovery Punitive Damages Statutes: Good Policy but Bad Law," Utah L.Rev. 333 (2008) (detailing the various constitutional  challenges to split-recovery  laws); Schwartz, supra note 14 at 548-57.

23. Not everyone agrees that reducing the size and frequency of punitive damages is a good idea. In White, supra note 12 at 610, the author explains that the justifications for split-recovery statutes are based on faulty reasoning, and the use of split-recovery statutes to deter punitive damages litigation would of necessity have the effect of allowing egregiously tortuous defendants to escape punishment, thereby encouraging like behavior.

24. See CRS § 13-21-102(1)(a)  ("The amount  of such reasonable exemplary damages shall not exceed an amount which is equal to the amount of the actual damages awarded to the injured party.").