Vice Squad
Tuesday, February 20, 2007
 
US Supreme Court on punitive damages in Philip Morris v. Williams


Earlier today, in a 5-4 decision, the US Supreme Court set aside a $79.5 million punitive damages determination that a jury in Oregon awarded to a smoker's widow in a case against Philip Morris. The court returned the case, or rather the determination of the award, to the Oregon Supreme Court that earlier upheld it. You can read about this case and today's decision here and here, for example. The Supreme Court majority's reasoning seemed to be confused and confusing, as was pointed out by the dissenters. Justice Ginsburg, with whom Justice Scalia and Justice Thomas joined, used rather strong language in her dissent (e.g., "The Court's order is ... all the more inexplicable..." and "The answer slips from my grasp"). Other dissenters seemed similarly amazed at the majority's opinion. I do not think, however, that I am qualified to judge the details of legal reasoning. What surprised me was how far this reasoning seemed to be from anything that economists have to say about punitive damages.

I do not have much time tonight and so my explanations are going to be rather sketchy. (I might write more about this later though.)

A typical economics argument is that social efficiency (defined roughly as maximization of social wealth) requires that damage awards in tort cases be equal to the damage caused by the tortfeaser. This way, the potential injurers would have the incentives to take the socially efficient amount of precaution. Making damages too high (low) would result in too much (little) precaution. All that sounds reasonable -- but why then do we have punitive damages? There is no settled view on this issue. David Friedman in his book Law's Order (starting on p. 207) lists several potential reasons. (This book is available on the web in its entirety, so you can read the details at the address above.) Here is a rundown on his list and its (non-)applicability to today's decision (the italics below are quotes from Friedman):

1. Punitive damages do not exist. What are misinterpreted as punitive damages are simply damages for hard-to-measure injuries. This clearly doesn't work as $79.5 million is obviously much greater than any reasonable valuation of the smoker's injuries.

2. Punitive damages serve to express public condemnation. This might very well be the case, but it has nothing to do with economic analysis of law.

3. Punitive damages are a probability multiplier to compensate for the chance that a tortfeasor may never be sued or the victim may be unable to win his case. Personally, I like this explanation (although Friedman has reservations about it). For example, this particular case was about one smoker, but chances are that many other Oregonians were in a similar situation and were similarly harmed by Philip Morris. Since those other smokers haven't (and presumably won't) sue, punitive damages are imposed on Philip Morris to match its costs with social costs. This sounds reasonable to me, but this reasoning was expressly rejected by the Supreme Court (because, the argument goes, it violates due process).

4. Punitive damages are a way of playing it safe if damage is hard to measure but efficient offenses are unlikely. As with #1, it is hard to imagine injuries to one person being almost $80 million, so this cannot be "playing it safe" and erring on the high side. This is clearly above and beyond any reasonable measure of compensation for injury to one person.

5. When we correctly take account of the costs of litigation in calculating efficient danages, it turns out that more deterrable torts should be punished more severely than less deterrable torts relative to the damage they do. Punitive damages are for a class of particularly deterrable torts. This is a tricky argument, but it boils down to saying that we might award punitive damages when the supply of offenses is rather elastic (i.e., very responsive to the size of the damage award) because that would reduce the number of such offenses and reduce litigation costs, so that the inefficiency of a very large damage award (due to making potential injurers take too much precaution) is balanced by lower litigation costs. Again, hard to imagine litigation costs of the size that would need to be balanced by an $80 million damage payment.

6. Punitive damages are designed to deter strategic torts. (Strategic torts are torts that are meant to affect the behavior of others in the future such as, for example, beating up your rival for the favors of a girl. Your goal might be not only to punish this particular rival but to deter others from competing with you for girls in the future.) This explanation does not seem to be applicable to this case at all.

In short, today's Supreme Court decision seems to run counter to any economic view of punitive damages. Not the end of the world, of course -- but perhaps such decisions make it more difficult to convince students of the relevance of the economic analysis of law.

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