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Constitutional or Contradictory? Why “Inability to Pay” Is the Only Reasonable Cap on Punitive Damages

Kira Small

Edited by Nikita Nair, Jia Lin, and Vedanth Ramabhadran


Punitive damage law fills a vital gap between civil and criminal litigation in America. While its implementation differs from state to state, its purposes remain consistent: to punish wrongdoing and to dissuade potential wrongdoers [1]. If state legislatures want to fulfill these goals without imposing punishment, they ought to implement caps on punitive damages based only on a defendant’s inability to pay.

Aside from vindicating the plaintiff, punitive damages uphold society’s values and ensure accountability beyond simple, measurable harm. The most well-known cases—Palmer v. AH Robins Co. (1984), Grimshaw v. Ford (1981), Liebeck v. McDonald’s (1994), State Farm v. Campbell (2003), and Carroll v. Trump (2022), among others—feature negligent or outright malicious defendants for whom compensatory damages are not a deterrent but rather the predicted price of cutting corners. In the case of Grimshaw, Ford Motor Company sold a dangerous car model because the cost of fixing deadly defects had outweighed estimated compensatory damages [2]. Ford isn’t unique. According to Emily Gottlieb, Deputy Director for Law and Policy at NYU Law, “precisely budget[ing] liability as a cost of doing business” is fairly common [3]. In the face of companies that sacrifice safety for profit, punitive damages are (as the Grimshaw Court stated) “the most effective remedy for consumer protection” because they carry an element of unpredictability that their compensatory counterparts cannot [4]. Far from the image of individuals left destitute by bad faith punitive claims, American citizens most frequently seek punitive damages against government actors and businesses—parties with a greater ability to absorb punishments, less incentive to change their behavior without financial enforcement, and more opportunities to spot simple negligence than an individual [5]. State Farm, for instance, generated almost fifty billion dollars in 2003 alone [6]. The 145-million-dollar payment contested in its case against the Campbells risked a mere 0.29 percent of the company’s annual revenue; the worst-case scenario for State Farm was not “unconstitutional” property deprivation but a bare-minimum punishment for recklessness [7]. In practice, limitations on punitive damages obstruct America’s best tool for corporate accountability. 

The Supreme Court has suggested establishing a ratio between punitive and compensatory damage rulings, but its refusal to defend a specific cap reveals shaky theoretical ground. Justice Kennedy’s reasoning in State Farm v. Campbell that “few awards exceeding a single-digit ratio…to a significant degree, will satisfy due process” [emphasis added] contains two separate qualifiers [8]. The Court’s so-called “conclusion” that “an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety” is equally noncommittal. Kennedy doesn’t try to distinguish the huge gap between a 4 to 1 ratio and a 9 to 1 ratio; he addresses both with the same indecision. That’s because there’s very little basis for attaching compensatory and punitive damages at all. Compensatory damages, both economic and non-economic, center on plaintiffs. Punitive damages center on defendants and their failure to uphold societal obligations. When determining punitive damages, therefore, the plaintiff’s specific loss is far less relevant than the defendant’s failure. Moreover, proving that a party acted with “intentional malice, trickery, or deceit” as opposed to “mere accident” requires examining a pattern of behavior outside the compensatory damages awarded to one specific plaintiff. The predictability problem also appears here: companies can take a compensatory damage estimate, multiply it by nine—or any other number—and see if the worst-case scenario is worth the profit of releasing a defective item. As Kennedy himself said, compensatory damages might be “instructive” for a jury, but they cannot be binding. The defendant’s ability to pay is a more objective indicator that can apply to any case.

Beyond theoretical issues, punitive damage caps also neglect empirical data. Punitive damages have been “rare, reasonable, and limited” for decades, and jurors award them fairly without having to seek permission [9]. Taxes apply to punitive but not compensatory damages, ensuring that only around 5 percent of winning plaintiffs ever even file for them [10][11][12] .According to the Department of Justice’s most recent nationwide survey, only approximately 1.2 percent of winning plaintiffs were awarded punitive damages that exceeded a 3:1 punitive-compensatory ratio [13]. When these higher ratios do occur, it’s typically due to low compensatory damages, not exorbitant punitive damages [14]. States that fail to account for this evidence overcorrect into corporate leniency. Chapter 41, which Texas added to its civil code in 2003, significantly remitted the punishments for a company that discriminated against a pregnant employee, a hospital that destroyed a doctor’s career, and a business that defrauded its partner [15]. Under the chapter’s “clear and convincing” standard, “negligence, bad faith, [and] deceptive trade practices” don’t automatically allow a plaintiff to file for punitive damages [16]. This restriction discourages righteous litigation and raises “many unanswered questions” for scholars [17]. Far from protecting due process, unfounded limitations on punitive damages allow egregious behavior to go unchallenged.

Legal analysts are already hammering out the details of a more just system, including the standards for evaluating defendants. Many have found that “ability to pay,” for instance, is a much better measurement for civil damages than “net worth.” In Bankhead v. ArvinMeritor (2012), the liable company hid behind its negative net worth, claiming that a 4.5-million-dollar payout would send it into bankruptcy [18]. The plaintiffs won by proving that net worth was a terrible evaluation of ArvinMeritor’s “ability to pay.” 4.5 million dollars amounted to a mere 1.3 percent of ArvinMeritor’s available annual funds, and was much less than the CEO’s salary. Extending Bankhead, loans, investments, cash on hand, online accounts, salaries, and other financial documents are all essential elements of overall wealth [19]. Resorting to simple net worth, “one of the least reliable financial metrics or statistics,” limits corporate accountability as much as Texas’ Chapter 41 [20]. 

While prior cases, penalties for equivalent crimes, and compensatory fees can guide juries, none of these factors should definitively obstruct punitive damage awards. Instead, establishing a statewide cap based on a defendant’s ability to pay ensures proportionate—and constitutional—accountability.

 

[1]Restatement (Second) of Torts § 402A cmt. b (Am. Law Inst. 1965).

[2]Grimshaw v. Ford Motor Company 119 Cal. App. 3d 757, 174 Cal. Rptr. 348 (1981).

[3]Emily Gottlieb, “What You Need to Know About... Punitive Damages,” Center for Justice and Democracy, White Papers 22, September 2011, https://www.centerjd.org/system/files/PunitiveDamagesWhitePaper2011.pdf.

[4]Grimshaw v. Ford Motor Company.

[5]Thomas Cohen and Kyle Harbacek, “Punitive Damage Awards in State Courts, 2005,” Bureau of Justice Statistics. March 2011, https://bjs.ojp.gov/content/pub/pdf/pdasc05.pdf: 3.

[6]“FORTUNE 500: 2003 Archive Full List 1-100,” CNN, 2014, https://money.cnn.com/magazines/fortune/fortune500_archive/full/2003/.

[7]State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003).

[8]State Farm Mut. Automobile Ins. Co. v. Campbell.

[9]Center JD, “Fact Sheet: Punitive Damages: Rare, Reasonable and Limited (2011),” Center for Justice and Democracy, April 2011, https://www.centerjd.org/content/fact-sheet-punitive-damages-rare-reasonable-and-limited-2011.

[10]Internal Revenue Service, “Tax Implications of Settlements and Judgments | Internal Revenue Service,” Irs.gov, 2020, https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments.

[11]Mia Fisness, “Punitive damages: Facts, fictions and feasibility of obtaining insurance coverage,” Markel, February 2021, https://www.markel.com/insights-and-resources/insights/punitive-damages.

[12]Cohen and Harbacek, “Punitive Damage Awards,” 5.

[13]Cohen and Harbacek, “Punitive Damage Awards, 4-5. The 1.2 percent statistic was taken by multiplying the percentage of winning plaintiffs who filed for punitive damages by the percentage of punitive damages that exceeded a punitive:compensatory ratio of 3:1.

[14]Cohen and Harbacek, “Punitive Damage Awards, 4-5.

[15]Thomas H. Cook, Jr. and Shannon M. O’Malley, “Caps and Cap Busting: An Update on Exemplary Damages in Texas,” 2008 Page Keeton Civil Litigation Conference, October 2008, https://www.mcminnlaw.com/wp-content/uploads/2021/11/caps_and_cap_busting.pdf. [16]Cook, Jr. and O’Malley, “Caps and Cap Busting,” 1.

[17]Cook, Jr. and O’Malley, “Caps and Cap Busting,” 1.

[18]Bankhead v. Arvinmeritor, Inc., 139 Cal. Rptr. 3d 849 (2012).

[19]Solange Ritchie, “Punitive Damages: Defendant’s Ability to Pay,” Plaintiff Magazine, September 2013, https://plaintiffmagazine.com/images/issues/2013/09-september/reprints/Ritchie_Punitive-damages_Defendants-ability-to-pay_Plaintiff-magazine.pdf

[20]Solange Ritchie, “Punitive Damages: Defendant’s Ability to Pay,”

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