Budget Seeks 75% of Awards for Damages

The trial lawyers say it is a horrible idea, but Gov. Arnold Schwarzenegger wants taxpayers to stake a claim to some of the whopping awards juries slap against negligent carmakers, deceptive cigarette companies and fast-food restaurants that serve coffee too hot.

In a proposal that took the Capitol by surprise, Schwarzenegger is suggesting the state collect 75% of the punitive damages awarded in civil lawsuits filed in California. After all, the governor says in the revised budget plan he released Thursday, plaintiffs in civil lawsuits already get a separate award to compensate them for their injury or loss.

“Punitive damages were never meant to be windfalls” for those who file lawsuits, said Richard Costigan, the governor’s legislative affairs secretary. “They are meant to punish the defendants. Society as a whole is impacted by those actions .... How does it benefit everybody when one plaintiff gets $100 million?”

Costigan says the money should go to the public good -- like closing California’s multibillion-dollar budget gap. The administration suggests that the state could rake in $450 million through this maneuver, although legal scholars who have done the math say that may be wishful thinking.

Trial lawyers say the whole idea is a mistake.

“The reason the award goes to the plaintiff is to incentivize the bringing of the lawsuit,” said Jim Sturdevant, president of the Consumer Attorneys of California. “The plaintiff is the person who takes the risk involved.”

What the administration is particularly eager to get in on is the money generated by headline-grabbing verdicts, like the one in New Mexico in which a 79-year-old woman was awarded $2.7 million -- though it was reduced on appeal -- when she scalded herself with coffee from McDonald’s. Or the ones involving smokers who are winning billions of dollars in verdicts against tobacco companies. Or the verdicts delivered to families of people who were killed or maimed as a result of car accidents involving defects that had been well known to automakers.

Eight other states are already trying it -- with mixed results -- and some California Democrats are intrigued by the idea.

“I find it interesting,” said Assembly Budget Committee Chairman Darrell Steinberg (D-Sacramento). “I think it is something we should be open to.”

He and others in his party are, however, suspicious of the fine print.

Especially since, to them, this part of the governor’s $102.8-billion budget came out of thin air. Few people had been consulted on it beforehand, and legislators were taken by surprise when they saw it buried at the bottom of Page 91 of his 96-page spending plan.

Many were alarmed by the proposal’s prohibition against assessing punitive damages against companies or individuals more than once for the same incident.

Steinberg notes that if “a large corporation commits an outrageous act” that results in dozens of people dying, a court could award punitive damages in only one of the cases. So that part of the proposal would have to go, he said.

Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon and Utah already collect as much as 75% of punitive awards -- as Schwarzenegger is proposing for California. Even though Ohio does not have such a law, judges there recently decided on their own to give one-third of a $27.5-million punitive award -- minus attorneys fees -- to a public university’s cancer research fund.

Some of the states have had their statutes in place since the mid-1980s. But there is little information on how much fiscal relief the laws have generated.

Academics say that’s because many of them were not intended to bring in money for the state but to discourage excessive lawsuits. Only a few studies of the laws have been published and they suggest no reduction in cases.

“Most states that have these don’t say explicitly their goal is to raise revenue,” said Catherine Sharkey, a law professor at Columbia University. “There have been problems with these funds in some states. In some cases, the courts didn’t even know the state had them. Damages would come in, and no one would notify the state.”

Theodore Eisenberg, a law professor at Cornell University and an expert on punitive damage awards, questions the prediction that California could collect $450 million this way.

“Their numbers sound wildly optimistic,” he said, citing a U.S. Justice Department study that suggests California would be lucky to get even a quarter of that amount.

Administration officials say they relied on a study by the McGeorge School of Law that discovered nearly $6.4 billion in punitive awards from 1991 to 2000 in California. A footnote, however, says it did not account for awards that were reduced on appeal. In one case involving injuries suffered when the fuel tanks on certain General Motors vehicles burst into flames, the award was reduced from $4.2 billion to $1.2 billion.

There are also constitutional concerns about where California could place such money. It would be illegal to dump it right into the general fund, because such money is supposed to be used for something related to the offense, according to Costigan. So the governor is proposing to create a Public Benefit Trust Fund.

But Schwarzenegger acknowledges that is a backdoor way to help close the deficit: Any money that comes out of the special fund would be used to pay for programs already in the budget.

John H. Sullivan, president of the Civil Justice Assn. of California, a group seeking to bring what he calls “jackpot-happy” attorneys under control, said the governor’s proposal is a wonderful idea.

“It would discourage predatory speculative lawsuits,” he said. “At the same time, it is balanced because people would still be punished for excessive acts.”

Trial attorneys, however, say those lawsuits are what is needed to keep industry in check. And they warn that this law would also have a chilling effect on consumers.

Sturdevant says he is particularly appalled by the provision prohibiting the courts from assessing punitive damages against a defendant more than once.

He cites a recent case in which Ford Motor Co. knew SUVs had roofs at risk of collapsing but did not recall them, and three people died after one of the vehicles rolled over.

The jury delivered a $290-million punitive award, but the U.S. Supreme Court reduced it to $23 million. Sturdevant says he could see auto companies doing a cost benefit analysis in which they decide it is cheaper to just pay a one-time fine of $23 million than to pay for a costly recall.

“What incentive would they have not to sell the vehicles?” Sturdevant asked. “None.”

Costigan calls that argument illogical. He says companies would still be subject to multimillion-dollar judgments to compensate victims for their injuries. He notes that 11 other states already have such prohibitions on multiple punitive awards.

Costigan said he is surprised that the trial attorneys are so put off by the proposal -- even if that section was taken off the table. He notes that the state would not take its share of the money until after the lawyers get their fees.

“It’s surprising to see them have such a visceral reaction,” Costigan said. “This is a novel idea, but it is something other states do. It is not like California is trying to break new ground here.”