State Profit in Punishment

The fingerprints of California business leaders are all over Gov. Arnold Schwarzenegger’s proposal to help balance the state’s budget by giving Sacramento a slice of punitive damage awards. Just because special interests are at work doesn’t mean the idea is without merit. But the plan does need to have its most consumer-unfriendly clause removed.

The unusual proposal, which was buried near the end of the governor’s 97-page budget, suggests that the state could generate $450 million during the coming fiscal year by changing state law. Plaintiffs in civil suits would keep all cash that directly compensates for their losses, but Sacramento would claim 75% of the money awarded when a defendant’s actions were deemed so malicious that punishment was merited. For example, a Northern California jury recently awarded $3.5 million in compensatory damages to a woman who was fired by drug wholesaler McKesson Corp. after she developed a mental illness; it then slapped the company with $15 million in punitive damages.

Business leaders are pleased with the idea because it would discourage lawsuits involving big punitive awards. After all, if the state claims most of the windfalls, there is less incentive to file such suits.

On the other side, though, are trial lawyers and corporate watchdog groups. Only a handful of states have similar laws on the books, and in most of them the state takes a percentage of the award after lawyers have taken their cut. That doesn’t seem to be the case with Schwarzenegger’s proposal, meaning it could attract heavy opposition from the powerful trial lawyers’ lobby.

Questions remain about the fiscal effect. An annual Justice Department survey of civil trial verdicts makes the governor’s $450-million estimate sound wildly optimistic.

The most unpalatable part of the proposal -- the clause that should be removed -- is that it would allow only one punitive damage award to be levied against a defendant. That would let the worst of the worst, companies whose actions kill, injure or defraud many people, off the hook. “It’s not fair to say, ‘The courts already have hit them once, so you can’t punish them again,’ ” said Assembly Budget Committee Chairman Darrell Steinberg (D-Sacramento). He’s right. Sometimes it takes more than one award to make a really bad player take notice.

Punitive damages are a hot button. Businesses argue that the allure of massive awards drives frivolous lawsuits. Trial attorneys counter that the awards send a message that society won’t tolerate malicious behavior. Steinberg, a trial attorney, nonetheless describes the proposal as an “interesting idea” and encourages others to keep an open mind.

There is merit to the idea that a portion of punitive damages should benefit the public, instead of all the money going to lawyers and to plaintiffs who have already been compensated for their suffering.