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How to Solve the Tort Problem

Despite what Republicans would have you believe, the right to sue is an important one. People really do get screwed over all the time–by corrupt businesses, incompetent professionals, governmental entities with private agendas. “Tort reform” that makes life unpleasant for legitimate plaintiffs is simply unacceptable–the law is the last recourse of the little guy who’s exhausted all other pathways.

On the other hand, this isn’t to say that the sue-happy nature of the U.S. isn’t a problem. It is. There are lots of frivolous lawsuits (although somewhat less than the urban legends would have you believe). They make insurance more expensive, discourage people from entering important careers like medicine, make it impossible to find many good products that involve highly manageable risk, and so on.

But there is a way that we can keep the necessary functions that lawsuits serve while substantially cutting down on the frivolity, and that is to change the way punitive damages are handled.

The Two Kinds of Damages

Most of you probably know this, but in case you don’t, when a judgment is levied in a lawsuit, there are often two separate sums of money charged to the defendent and awarded to the plaintiff: compensatory damages, which are supposed to be just compensation (or as close to it as the state can come) for the actual wrong the plaintiff has suffered, and punative damages, which are primarily intended as punishment for the plaintiff.

It’s pretty important to keep in mind the distinction here. For one thing, compensatory damages don’t, or at least ideally shouldn’t, have any real relationship to who the defendent is. Suppose the state has decided (and I’m not even going to go in to how one does or should go about deciding on appropriate damages for a non-monetary harm; that’s a topic for a book, not a blog post, and I’m not the person to write that book) that just compensation for losing a finger is, say, $150,000. (This is a totally random number just pulled out of the air by me for purposes of example.)

This figure has absolutely nothing to do with who unjustly caused me to lose my finger. If GigaWidgetCo made a defective product that chopped off my finger, my just compensation (at least according to the state) is $150,000. If Ma and Pa’s Ole Time Widgets, located down the street and employing a grand total of 3 people, made a defective product that chopped off my finger, my just compensation (at least according to the state) is…$150,000.

But the purpose of tort law isn’t just to make sure I get the best approximation to just compensation for my wrong that I can. That might be enough to satisfy the plaintiff, but it’s not enough to satisfy justice or public safety. Torts are also meant to punish defendents (if they’re found against) for their action, and to¬†discourage them from doing what they did again.

In the case of Ma and Pa’s Ole Time Widgets, a $150,000 judgment is going to be very discouraging, all by itself. But making GigaWidgetCo pay $150,000 won’t even register as a blip on their bottom line. As a society, we don’t just want to compensate me for my finger, we want to make GigaWidgetCo pay an amount that will actually sting, so maybe they won’t be so cavalier about putting out dangerously defective products next time.

And that, usually, is where you get your huge, 7+-figure judgments against giant companies. They’re not supposed to be just compensation for the crime the company committed; they’re supposed to be punishments for that crime. And I think that’s entirely appropriate–the justification for punitive damages is a good one; we do need a way to make those with very deep pockets suffer a real consequence for their wrongdoings. But they create a big problem.

The Problem, and the Solution

The problem is this: The punitive damages paid to the plaintiff are, by definition, over and above just compensation for the wrongs the plaintiff has suffered. Assuming the state is right, and $150,000 is just compensation for the loss of a finger (and remember, we’re just stipulating it is, here; if you think it isn’t that’s a completely different issue), anything I get over and above that is actually a windfall for me. If the court, in addition to finding for me in the amount of $150,000 compensatory, also finds for me in the amount of $7,000,000 punative, I’m actually seven million dollars better off than I would have been if the whole thing never happened.

This gives me a lot of incentive to trump up charges against GigaWidgetCo. If I have a less-than ethical lawyer, it gives them a lot of incentive, too. It might even give me incentive to be deliberately stupid with my widget, hoping that the judge or jury will decide any injury I suffer was GigaWidgetCo’s fault. It turns personal injury law from a way to fight for the little guy into big, big business–which really isn’t very good for it.

The solution to this is, I think, pretty obvious. There’s fundamentally no reason why the judgment for the plaintiff has to be exactly equal to the judgment against the defendent. Defendents should, indeed, pay compensatory damages to the plaintiff, to come as close as possible to righting the wrongs they did to them, and they should also have to pay appropriate punitive damages, to keep them from just writing off the judgment as part of the cost of doing business and continuing with their bad behavior. But the punitive damages should be treated the way a criminal fine is: It’s confiscated money; neither the defendent nor the plaintiff gets it.

This satisfies all the desiderata we had for a tort system. It gives the unfairly harmed compensation for what they suffered, and it adequately punishes even the very big for their wrongs to even the very small. It does both of those just as easily as they’re done now. But it doesn’t turn a judgment into a windfall for the plaintiff, doesn’t create big incentives for frivolous lawsuits, and doesn’t turn the personal injury legal system into the sort of circus we have now.

2 Comments

  1. John Hopkins wrote:

    Your conclusions are not supported by any reliable statistical information. Rampant abuse through the filing of frivilous lawsuits happens in such a small percentage of cases that it is simply a “windmill to be tilted at”. If the state sits idly by (as it generally does) in the area of safety and a consumer brings a lawsuit that stops a manufacturer from ignoring a product defect, why should punitive damages go to the neglectful state. I do agree that some percentage of punitive damages should go to other than the plaintiff in a lawsuit. I am not convinced that the state is the entity to receive it; given its tendency toward waste.

    Friday, April 10, 2009 at 4:43 am | Permalink
  2. Avrom wrote:

    I do know that abuse of the tort system is a much exaggerated phenomenon (I’m aware, for example, of the real McDonald’s Coffee story, which is a must-read for anyone who gets hysterical about the tort system). But there is, nonetheless, some reason why malpractice insurance is so high (even for doctors with no history of problems), why products with highly manageable risks are pulled rather than labeled, why the labeling that does exist is so ridiculously CYA in nature, and why (let’s face it) fairly skeevy-seeming individuals start popping up on late-night television.

    There’s also something to be said for cleanly eliminating the windmill. Even if, in reality, there were extremely little abuse of the tort system, the fact that there is, without question, a serious incentive to try to abuse it (since an amount of money that will “sting” for a big corporation is almost guaranteed to be a massive windfall for an individual recipient) is almost certain to create a severe negative perception, which those who want to erode the legitimate right to sue will not hesitate to use politically. If it’s possible to clean up the image of tort law without hurting its purposes, even if this results in no substantial change to the actual movement of money, that’s a good thing.

    About the neglectful state–this is a far broader issue than tort law, and I think a fundamentally orthogonal issue to it. We give the state all sorts of rights–to receive our taxes, to collect fines in criminal cases, to confiscate assets generated through criminal behavior, and so on, that allow it to receive money of which it is not always an ideal steward. Even if the state fails to adequately screen potential drivers, it collects the money from speeding tickets. Even if the largely state-run education system fails to instill decent critical-thinking skills, making the country easy pickings for con-men, the state gets to keep any money they confiscate that they can’t return to the rightful owners. The solution here is to improve the state–after all, in a democratic society, the state is the representative of us, appointed by us, and if they are too often inadequate representatives, perhaps we need to reconsider our hiring practices. What it doesn’t mean is that speeding tickets or unreturnable confiscated money should go to various individual citizens with no more right to it than anyone else or that separately-compensated plaintiffs should receive punative damages.

    Friday, April 10, 2009 at 10:59 am | Permalink

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