Punitive Damages: Bonanza or Disaster?Author(s): Grant P. DuBoisSource: Litigation, Vol. 3, No. 1, PROVING AND DISPUTING DAMAGES (Fall 1976), pp. 35-38Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/29758291 .

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Punitive Damages:

Bonanza or Disaster?

by Grant R DuBois On February 21, 1967, Ray Rosendin of the Rosendin Electric Company of San Jose, Calif., invited friends to

fly in a company-owned twin-engine plane to Lake Tahoe for the evening. He hired a young but experienced pilot. It was sunset when the plane descended on the downwind

leg of its approach to the Lake Tahoe Airport. At about 1,000 feet the right engine quit. The left one

was still working, though, and the plane continued due north toward the lake, parallel to the runway. The pilot spent perhaps 10 to 15 seconds trying to restart the

engine. By this time, the plane was well beyond the

airstrip and flying toward the lake. A mile or so beyond the field the pilot turned left onto

the base leg. When he turned onto the final approach, his altitude was about 500 feet. At that point the stall horn sounded and the pilot gave the good engine full

power. The aircraft turned over and crashed. Rosendin's wife and friends and the pilot were killed.

Rosendin lost both legs and most of the use of one arm and suffered other injuries.

At trial, Rosendin contended not only that the manufacturers of the engine and its magnetos had been

negligent but that they had willfully violated Federal

regulations pertaining to rebuilding engines of the kind that had failed. There was also evidence that the engine manufacturer had not acted on reports of magneto failures until a certain percentage of them had occurred.

After a three-month trial, the jury returned a verdict of more than a million dollars for Rosendin's personal injuries and of more than $1,200,000 for the death of

Mrs. Rosendin. In addition, Rosendin was awarded $10,500,000 in punitive damages against the engine

manufacturer alone.

At that time, in 1972, the Rosendin verdict

represented the largest award in the history of the United States for a single plaintiff for personal injuries. It was

The author is a member of the California Bar and of the San Francisco firm of Bronson, Bronson & McKinnon. The address on which this article is based has also appeared, in somewhat different form, in the Insurance Counsel Journal, July 1976.

not the first multi-million dollar verdict for punitive damages, however, and in this age of the consumer, the

punitive damage doctrine is being used more and more

frequently. Properly so, perhaps, but when punitive verdicts reach the tens of millions of dollars in a single case, and a pattern of awards in the millions develops, it is time to re-examine the effectiveness of the jury system, in light of the purpose of punitive damages.

Generally speaking, there have been no recent changes in the law?proof of fraud, malice or oppressive conduct is still required in most states to support an

exemplary verdict. What have changed are the size of the verdicts and the frequency of those enormous amounts. For this reason, I question the social utility of the jumbo award?the blockbuster multi-million dollar verdict that creates a windfall bonanza for an individual plaintiff, and an economic disaster for the defendant.

My purpose is not to indict the doctrine of punitive damages. It is to examine causes of these gigantic verdicts and question whether our juries are properly performing their function in awarding multi-million dollar verdicts.

Predecessor Case

A predecessor to the Rosendin case was Pease v. Beech

Aircraft Corp., 113 Cal. Rptr. 416 (1974), also an

aviation-products case, in which four actions for

wrongful death and one for loss of the aircraft were filed after a Beech Baron crashed at Fullerton, Calif, in 1968. All four passengers were killed after the plane took off, climbed about 600 feet, turned to the right and suddenly spun into the ground.

The jury awarded compensatory damages totaling more than $4,000,000 and punitive damages of $17,250,000 after hearing evidence that Beech had been on notice since 1961 of an alleged design defect in the fuel tank but had failed to inform purchasers of the aircraft, continuing instead to certify the plane as air?

worthy. In both Rosendin and Pease, the trial courts granted

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new trials on the issue of punitive damages, the Pease

judge noting that "punishment, and not annihilation" was their object. On appeal the trial courts were both affirmed.

Within a year after the Rosendin verdict the doctrine of punitive damages in California was expanded to first

party actions against insurers that maliciously violate their implied covenants of good faith and fair dealing with policyholders. This occurred in Silberg v. California Life Insurance Company, 521 P.2d 1103 (1974) in which the plaintiff was awarded $75,000 in compensatory damages and $500,000 in punitive damages. The defendant carrier's refusal to pay medical expenses under a hospital care policy (while waiting for two years to see if workmen's compensation covered the claim) had led, according to plaintiffs evidence, to the loss of his business, the ruin of his credit, and even the repossession of his wheelchair. The compensatory award was upheld on appeal, but the trial court's granting of a new trial on

punitive damages was affirmed.

Any hope within the insurance industry that it might be spared enormous penalties like those levied in the

products cases was further dashed in November, 1975 when another bad-faith action arising from a denial of disability benefits resulted in a punitive damage award of $5,000,000 by a Superior Court jury in Los Angeles. This case, Egan v. Mutual of Omaha Ins. Co., was on

appeal at this writing. In the past few years, other punitive verdicts have

ranged from $4,000,000 to $8,000,000, and in California there have been more than 100 punitive verdicts in smaller but often still staggering amounts. Defendants in these cases range from utilities and insurance companies to property owners and repossessers?a cross-section of the business community. Many verdicts represent condemnations of question?

able business practices, which would go unpunished were it not for some means of recourse in the civil courts. There seems no question that punitive damage awards serve this purpose. These awards, however, give rise to

many new questions, add new dimensions to constitutional and other legal issues previously considered by the appellate courts, and call for thorough analysis of their far-reaching effects.

Bonanza and Disaster

The fact is that punitive verdicts in the millions of dollars are providing both a bonanza and sl disaster. The

question is, for whom? At present, the sole distinction is whether one is a plaintiff or defendant. But if the trend continues, the economic effects will be visited upon society as a whole.

The concept of exemplary or punitive damages originated in the 18th century English courts as a rationale for justifying jury damage awards that were

manifestly in excess of the tangible harm to the plaintiff. There was widespread reluctance of the courts to reduce or set aside such verdicts. Many courts recognized that the juries' purpose was to compensate for the expense and trouble of litigation and for intangible harm and emotional distress. It was not until the 18th century, when some English courts ruled that intangible, non

physical harm was not compensable, that an alternative rationale for upholding excessive jury verdicts emerged.

The problem facing the English courts in the 17th and 18th centuries concerning excessive jury verdicts found its genesis in the English jury selection procedure. A

juror was required to be at least an acquaintance of the defendant, and preferably the plaintiff as well, and was familiar with their financial station. Judges were not local villagers, and were thus understandably reluctant to overturn or tamper with a verdict of a local jury.

Perhaps the recent pattern of awards is attributable in

part to a lack of jurors' understanding of the actual economic effects of their verdicts, combined with a

judicial grant of unlimited discretion to determine the

severity of the punishment.

Firmly Established The doctrine of punitive damages is firmly established

in 46 of the 50 United States. In most of them, statutes

permit the award of punitive damages for conduct amount to fraud, oppression or malice. Many of the recent multi-million dollar verdicts have involved a

finding of malice or oppression. These are two concepts of conduct that have proved most difficult of legal defini? tion. In Searle v. Superior Court, 49 Cal. App. 3rd 22

(1975), a California appellate court expressed its concern with the vague and indefinite legal standards upon which

juries have been instructed. The court noted that:

It is only upon some showing, regarded by the law as

adequate, to establish the presence of malice in fact, that is, the motive and willingness to vex, harrass, annoy or injure that punitive damages have ever been awarded . . . the malice of evil motive ... is

the essential element of the malice which justified exemplary awards. . . .

In at least one pending appeal, the Searle case has been cited as support for the contention that a defendant is entitled to ask the jury for a specific finding of evil

motive for punitive damages to be awarded. Some of the potential effects of these multi-million

dollar verdicts are startling. It has been argued many times that it should be unconstitutional for a defendant who cannot be criminally fined more than, say $10,000, to be civilly punished for a much larger amount without the legal safeguards present in a criminal proceeding. This issue has generally been resolved in favor of

constitutionality. But the excessive punitive award presents new

constitutional questions. In the appeal of Egan v. Mutual of Omaha, it has been contended that verdicts of such great magnitude, far beyond any statutory penalties authorized for a criminal's conduct, constitute cruel and unusual corporate punishment under the 8th Amend? ment of the United States Constitution.

In addition, the Egan appeal presented another new constitutional question, that the enormity of the award demonstrates that the California statute for punitive damages is unconstitutionally "void for vagueness" because it contains no standard by which a trier of fact can determine whether and in what amounts punitive damages should be levied. California's standard jury instruction actually states:

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The law provides no fixed standard as to the amount of such punitive damages, but leaves the amount to the jury's sound discretion, exercised without

passion or prejudice. One problem that has never been resolved is aggra?

vated by the gigantic verdict. Should a defendant in

multiple actions arising from a single punishable act be faced with economic annihilation by successive punitive verdicts?

In Reginsky v. Richardson-Merrill Inc., 378 F.2d 832 (C.A. 2, 1967), the court considered one of several hundred suits arising from use of the drug MER 29, which primarily caused cataracts. The court noted that:

The legal difficulties engendered by claims for puni? tive damages on the part of hundreds of plaintiffs are

staggering. If all recovered punitive damages in the amount here awarded these would run into tens of millions, as contrasted with the maximum criminal

penalty of "imprisonment for not more than 3 years, or a fine of not more than $10,000 or both. ..." We have the gravest difficulty in perceiving how claims for punitive damages in such a multiplicity of actions

throughout the nation can be so administered as to avoid overkill. . . .

Still 'Double Jeopardy' This case was decided in 1967. Today we still have the

"double jeopardy" problem of multiple punitive suits for the same conduct, but now one verdict alone can reach the tens of millions.

In Pease v. Beech Aircraft the court held that although a corporation is made up of innocent stockholders, it is a person punishable in the eyes of the law. But the bonanza verdict may affect more innocent people than mere stockholders and policyholders. If a corporation is required to pay a multi-million dollar verdict from cash flow, the reduction in earnings can cause loss of jobs, not only to the defendant's employees but to other trades and businesses in the defendant's community that depend upon the prosperity of that industry. Consumers may be affected by increased prices, and innocent creditors of the corporations may be affected as well. The ultimate effect of a blockbuster punitive award upon these various segments of the public at large may also depend upon the defendant's ability to obtain liability insurance coverage of punitive damages.

There has been a much-discussed split of authority on whether such coverage is against public policy. Multi-million dollar verdicts add a new dimension to this controversy. A simple reflection on the problems of medical malpractice insurance makes it apparent that even in states where defendants may someday obtain insurance coverage for punitive damages, premiums would be prohibitive.

Another side effect to an overdose of punitive damages is that the possibility of a multi-million dollar penalty will affect handling of claims in which punitive damages are

alleged but not factually supported. Claims that are not clear-cut about whether punishable conduct has occurred may have to be settled for much higher amounts than normally would be negotiated with a consideration of only compensatory damages.

Large punitive damage verdicts also raise the question of whether an individual plaintiff should receive millions in excess of his actual damages, when the punishable conduct is also detrimental to society as a whole. We have all accepted the incongruous fact that the plaintiff and his attorney are the recipients of a windfall. The real

question, however, is whether bonanza verdicts, with their far-reaching effects, create a conflict between the

plaintiffs interests and those of society. Plaintiffs interest is understandably in maximizing the size of the verdict, not adjusting it to meet the interests of society. Perhaps it is time for our legislators to try to resolve these conflicts and eliminate unconscionable windfalls created by huge verdicts.

If the trend continues, defendants will have problems of proof in the trial court that have never been con? fronted. Without judicial control of the amounts of ver?

dicts, major financial institutions may feel compelled to introduce expensive and time-consuming evidence in an attempt to convince a lay jury of the complex economic ramifications of a disaster verdict. Large cash

payments can cause reductions of earnings that reduce the market value of securities. This can result in a much

greater financial penalty to the defendant than the

punitive award itself. A corporation's line of credit and its ability to pay dividends can be greatly affected. Plaintiffs counsel may argue that improved company practices will offset the loss and that a loss in value of securities will only affect the future of the potential of the company. The controversy will rage on, and so will the

length and expense of punitive trials.

Some Common Ingredients The recent cases reveal some common ingredients of

the bonanza or disaster verdict. One is sympathy for the

plaintiff, who has suffered either devastating personal injuries or the death of a close relative, or perhaps has been made destitute and emotionally disturbed by callous treatment. Another is a natural instinct of

outrage against the defendant for needlessly permitting tragedy to occur. There is usually great disparity between the parties' financial status, which may create a Robin Hood state of mind in the jury room.

These emotional factors are superimposed upon jurors' natural desires to compensate a sympathetic plaintiff. What jurors can resist these emotions? We ask that they do so, but we give them no firm legal guidelines with which to exercise their discretion in determining the amount of punishment. Whether constitutional or not, legal standards given jurors are so vague that juries have no concept of what their approach should be. Is there any wonder that multi-million dollar verdicts are now

becoming commonplace?

Perhaps it is too much to ask of jurors that they remain

objective and unemotional when they have heard evidence of outrageous conduct that would enflame the

feelings of any human being. Persuasive authority and clinical data support the view

that the urge or willingness of one human being to

punish another can be irresistible in circumstances where the opportunity is reinforced by an institution of society,

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such as the jury system. Psychological aspects of a jury's use of its "power to punish" may be significant in

explaining the gigantic verdicts of the past few years. Psychological research has shown that, given a range

of alternatives, a composite group judgment tends to be more accurate than that of a single individual. Thus, the

jury system, when it is scrutinized from a psychological point of view, is generally satisfactory. But when the

group dynamics of the jury system operates in the

emotionally charged context of considering evidence of a defendant's reprehensible conduct, having been given the court's authority to punish if necessary, a far less desirable pattern has emerged.

Recent studies indicate that groups make more daring decisions than would individual members of the group acting separately. Cartwright, Risk-Taking by Individ? uals and Groups, 20 J. Personality & Social Psychol. 361 (1971). Furthermore, psychological experiments have shown that a person who makes the most daring decisions in private tends to dominate discussions when he becomes a member of a group. Cartwright, Detriments of Scientific Progress, 28 Am. Psychologist 222 (1973).

Because responsibility is more diffuse within a group, members are less inhibited about making risky or

extravagant choices. After all, they can always decline individual responsibility. How far will a person go when he is given the means to

punish without restriction? In one study (Milgrim, Behaviorial Study of Obedience, 67 J. Abnormal & Social Psychol. 115 (1969)) 50 percent of the subjects were persuaded to give what they thought were lethal electric shocks to people whom they thought were

repeatedly making mistakes in response to questions from the person controlling the experiment. The unseen

recipient of shocks would scream in pain and beg that he not be shocked any more, while the subject would plead with the controller to stop the experiment. The controller would coldly state that the research was important and had to continue despite the discomfort of the recipient (who, unknown to the subject, was play-acting).

These studies may reveal still another ingredient of

large punitive verdicts. While a civil jury expresses its

aggressions in a less violent way, the opportunity to assess punitive damages with society's reinforcement

may be irresistible. In a given case, the inventive

arguments of plaintiffs' counsel, coupled with apparent judicial permission to punish, may be one reason juries have exercised their discretion to annihilate defendants with multi-million dollar verdicts.

Our legacy at the moment is a series of gigantic punitive verdicts which, uncontrolled by legislatures or trial courts, is continuing to soar in a vague legal atmosphere. To determine whether these awards are the result of jurors' reactions to their own emotions?rather than an objective consideration of the defendant's conduct under standards of law?one need only look at the record of the jackpot winners in the courts. In California, few such verdicts have been permitted to stand without a new trial or substantial remittitur.

Plaintiffs' counsel in a given case enjoys the argument that jurors should make it their mission to not only

punish the defendant but to set an example of it and, in

effect, "make your verdict heard in every director's boardroom across the country." If this is a socially valuable mission for our juries, how loud must the jurors' voices be? It seems reasonable to assume that it should not take a fine of hundreds of thousands of dollars to alert any competent businessman that a certain abuse of

company practice is rapidly becoming unprofitable. Accepting punitive damages as a valuable social device, our problem really is whether there should be some limit

upon the enormity of the sanction selected by twelve

people. We must, therefore, consider the possibility that we are now using the wrong forum for an exercise of

discipline. Considering the psychological aspects of juror reaction and the imprecise state of the law, it seems more sensible to permit the jury to make only the threshold determination of whether the evidence supports a

punitive verdict?but not to decide the amount. The trial court?and the trial court alone?should make that decision.

In criminal cases, it is unthinkable to ask the same

jury that a prosecutor has persuaded to convict the defendant to simultaneously decide his sentence. And yet our civil juries are not only convicting but severely punishing major institutions with virtually no apprecia? tion of what the effects of their verdict might be.

Many Advantages There are many advantages to transferring the "power

to punish" from the jury to the trial judge. He has also heard the evidence but will be much less

apt to succumb to the psychological tendency to punish with abandon. The court can compartmentalize evidence of the defendant's financial status, minimizing the risk of enforcing a Robin Hood philosophy. Evidence of the

potential economic effects of a punitive verdict may be better understood by a trial judge, who has the

advantage of understanding the judicial history of the

purpose of punitive damages. The defendant can fully try the economic issues without feeling prejudiced by conceding that an exemplary award may be a possibility.

Finally, as in a criminal case where the trial judge fixes the sentence, the court is by experience and training better able to compare the defendant's conduct with that of its contemporaries, and to better appreciate the effects. And there remains the remedy of appellate review, which should be simplified and assisted by the trial judge's written statement of the reasons for his decision.

In short, the jury should decide if the defendant should be punished, and the court should fix the amount of damages. The purpose of deterrence will again be

served, but the innocent public need not bear the burden of another's outrage.

In most states this reform can be achieved only through legislative enactment. Perhaps our legislatures should heed a message from a familiar quotation:

My object all sublime I shall achieve in time To make the punishment fit the crime, The punishment fit the crime.

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