(if I were the) King of the Forest

This is a variant on a theme that I’ve been sending to various advocates of “tort reform” as I hear of them for over ten years. I’ve never gotten a response. That may mean the idea is, for some reason that I’m missing and no one has yet explained to me, impractical. It may also mean that no one has ever bothered to read it.

This version was sent to my Senator, John Sununu, after I read in the paper that the Congress was again going to take up tort reform as a legislative issue. I got an automated e-mail reply promising a written response, but I never received that response.

20 December 2004

I read today in the New York Times online that the Senate will soon (again) take up the subject of tort reform (specifically malpractice reform), and I want to offer a suggestion I’ve been making to whomever would listen – which has, it turns out so far, been no one – for several years. Please consider this when the issue again comes before Congress for debate.

Although outrageously high punitive damage awards are in and of themselves a problem for American businesses and providers of services like doctors, especially when coupled with an ever-broadening and irrational conception of ‘liability’, the larger problem with American torts is that they have come to resemble a lottery: the potential size of awards to plaintiffs (and their lawyers) have skyrocketed at the same time that the legal conceptions of liability has been in flux, which leads to great uncertainty about the outcome of a tort case even when the facts and the law seem clear. All of this generates an incentive to roll the dice in court on a huge windfall even in the flimsiest of cases rather than to settle on a reasonable compensation based on the underlying merits; and occasionally that roll of the dice pays off in an irrational verdict and award which not only costs society in monetary terms but encourages further rolls of the dice and undermines our faith in the justice of the system itself.

It seems to me that there are two relatively simple steps – steps that should be politically palatable and morally defensible in the electoral arena even if they are vigorously opposed by trial lawyers – to get at the underlying counter-incentives that are driving the decay of the tort system:

1. Change the rules so that monetary punitive damage awards do not accrue to the plaintiff. Punitive damages are awarded as punishment; they are not intended as compensation. In criminal trials we do not expect that the punishment of the miscreant should benefit the victim – punishment is a matter of social compact between the criminal and society, not matter of personal justice between the criminal and his victim – and there is no reason why the situation should be different in civil matters.

   Compensatory damages are awarded to make the victim whole, and should satisfy our desire for justice. Since compensatory damages are awarded as compensation for demonstrable losses, there is inherently some limit to how high they can go; we may debate how high they may go for non-financial losses (like “pain and suffering”), and may want to restrict their size to some reasonable multiple of the actual financial damage (rather than to some arbitrary dollar amount, which is just a band- aid guaranteed to be unjust in some fraction of current cases and to become increasingly so as inflation devalues the upper limit of the award), but generally compensatory damages are not where the outrageously large numbers come from – those come from juries’ desire to “punish” the bad guys who caused such suffering.

   If, because punitive damages are a matter between the miscreant and society, punitive damages are not awarded to the victim then the victim’s lawyer also has no claim on them, which limits the incentive of the trial lawyer along with that of his client to play the lottery on a large verdict. Thus the disincentive to settle cases is reduced, and the number of cases at trial which could generate a disproportionately large punitive award is reduced as well.

   An obvious question is where such damages should go if not to the victim. The obvious answer is to the government (as the representative of society in legal matters), just as criminal fines do, but that is not necessary and is not desirable specifically in cases where the government is the plaintiff (for instance in environmental lawsuits). Thus it would be wise to provide for alternatives – for example, to assign such awards to “public interest” organizations outside of government working on issues related to the case at hand. It would be just indeed if punitive damages for medical malpractice went to support free health clinics in poor communities, or if damages for environmental offenses went into a conservation fund to protect endangered species habitats. The one safeguard that is essential is that no one involved in any way with bringing the lawsuit to court should be a beneficiary of the punitive damage award, for that is the source of the current perverse incentive that is destroying the system.

2. Put the determination of punitive damages in the hands of judges, rather than juries. Again, in the criminal justice system we do not allow juries to debate and assign punishments, especially open-ended ones. In capital murder cases we sometimes require a jury decision on the death-penalty, but even there we only allow a choice between two well-defined punishments and therefore a judgment merely on a threshold – did the crime rise to the level necessary to justify the death penalty? – not a judgment on the range of possible punishments available. And that is the exception within the system, reserved for only the most extreme crime we can imagine.

   We arrange the criminal justice system that way in deference to the understanding that punishment is an emotional issue and that leaving such decisions to juries would open the system to the kind of passions and prejudices that result in over-reaction and gross unfairness. If the purpose of punitive damages in civil cases is punishment then there is no particular reason to treat those punishments differently merely because they are assigned in a civil rather than a criminal context.

   As an added safeguard, we might specify guidelines for judges in making such punitive awards, either as a proportion of the compensatory damages awarded (on the theory that large punishments are inappropriate for small injuries) or as a proportion of the benefit accrued by the miscreant as a result of their injurious practice (for example estimate the incremental profit generated by corporate malfeasance and force the company to disgorge it). In the latter case we must ensure that there is a cumulative limit to the punishment – that a company should not be forced to disgorge the same profits multiple times as a result of multiple lawsuits for the same underlying behavior.

There are many other small changes that could tweak the tort system to eliminate some of its modern irrationalities and injustices, but the two steps described above – steps which require no major overhaul of the system and which are morally defensible against charges of injustice to victims of negligence and malice – would re-align the incentives in the system to the original purpose of the system – allowing just compensation for damages at minimum cost to society.

Thank you for your consideration.

© Copyright 2004, 2005, Augustus P. Lowell

This entry was posted on Monday, December 20th, 2004 at 3:00 pm and is filed under Remedies, Law, Liberty, and Responsibility. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.