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Monetary compensation awarded to an injured party that goes beyond that which is necessary to compensate the individual for losses and that is intended to punish the wrongdoer.
Punitive damages, also known as exemplary damages, may be awarded by the trier of fact (a jury or a judge, if a jury trial was waived) in addition to actual damages, which compensate a plaintiff for the losses suffered due to the harm caused by the defendant. Punitive damages are a way of punishing the defendant in a civil lawsuit and are based on the theory that the interests of society and the individual harmed can be met by imposing additional damages on the defendant. Since the 1970s, punitive damages have been criticized by U.S. business and insurance groups which allege that exorbitant punitive damage awards have driven up the cost of doing business.
Punitive damages have been characterized as "quasi-criminal" because they stand halfway between the criminal and civil law. Though they are awarded to a plaintiff in a private civil lawsuit, they are noncompensatory and in the nature of a criminal fine.
Punitive damages were first recognized in England in 1763 and were recognized by the American colonies almost immediately. By 1850, punitive damages had become a well-established part of civil law.
The purposes of punitive damages are to punish the defendant for outrageous misconduct and to deter the defendant and others from similar misbehavior in the future. The nature of the wrongdoing that justifies punitive damages is variable and imprecise. The usual terms that characterize conduct justifying these damages include bad faith, fraud, malice, oppression, outrageous, violent, wanton, wicked, and reckless. These aggravating circumstances typically refer to situations in which the defendant acted intentionally, maliciously, or with utter disregard for the rights and interests of the plaintiff.
Unless otherwise required by statute, the award of punitive damages is left to the discretion of the trier of fact. A small number of states refuse to award punitive damages in any action, and the remaining states have instituted various ways of determining when and how they are to be awarded. In some states, an award of nominal damages, which acknowledges that a legal right has been violated but little harm has been done, is an adequate foundation for the recovery of punitive damages. In other states, the plaintiff must be awarded compensatory damages before punitive damages are allowed.
In the absence of statutory authorization, punitive damages usually cannot be recovered in breach-of-contract actions. Punitive damages are sometimes recoverable in tort actions in which breach of contract is tangentially involved.
Punitive damages will not be awarded in tort actions based on the defendant's negligence alone. The conduct must have been willful, wanton, or reckless to constitute an intentional offense. Willfulness implies a plan, purpose, or intent to commit a wrongdoing and cause an injury. For example, if an automobile manufacturer knows that the gas tank in its car will likely explode on impact but does not change the design because it does not wish to incur additional costs, the behavior could be classified as willful. Conduct is considered wanton if the individual performing the act is cognizant that it is likely to cause an injury, even though specific intent to harm someone does not exist, such as when an individual shoots a gun into a crowd. Although the individual does not have the intent to injure anyone in particular, injury is a natural and probable consequence of the act. Recklessness is an act performed with total disregard of its foreseeable harmful consequences. Punitive damages can be awarded on the basis of an injurious act done with ill will, a wrongful or illegal motive, or without any legal justification, but a wrongful act performed in good faith is an inadequate basis for such an award. For example, if a grocery sold canned goods that later turned out to be tainted, and the store did not know of the problem before selling the canned goods, it would be liable for compensatory damages to the victims who ate the food but would not be liable for punitive damages.
The measurement of punitive damages has been controversial because, traditionally, the amount to be awarded is, for the most part, within the discretion of the trier of fact. To determine the amount, the jury or court must consider the nature of the wrongdoer's behavior, the extent of the plaintiff's loss or injury, and the degree to which the defendant's conduct is repugnant to a societal sense of justice and decency. In some states, the financial worth of the defendant can properly be considered.
Ordinarily, an award of punitive damages by a jury will not be upset as excessive or inadequate. If the trial court believes that the jury award is excessive or unwarranted by the facts, it can remove punitive damages from the final judgment, or it can reduce the amount through a procedural process called remittitur.
Since the 1980s, appellate courts have been called on to review punitive damage awards and to assess the procedural fairness involved in awarding such damages. State legislatures and the courts have attempted to craft ways of ensuring reasonable punitive damage awards, but there is no uniform approach.
The U.S. Supreme Court, in Pacific Mutual Life Insurance v. Haslip, 499 U.S. 1, 111 S. Ct. 1032, 113 L. Ed. 2d 1 (1991), upheld a large punitive damage award on the grounds that the Alabama jury had received adequate jury instructions and the Alabama Supreme Court had applied a seven-factor test to assess the reasonableness of the award.
Two years later, the U.S. Supreme Court shifted its stance on how it would assess whether a punitive damage award was excessive. In TXO Productions Corp. v. Alliance Resources Corp., 509 U.S. 443, 113 S. Ct. 2711, 125 L. Ed. 2d 366 (1993), the Court stated that the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution prohibits a state from imposing a "grossly excessive" punishment on a person held liable in tort. Whether a verdict is grossly excessive must be based on an identification of the state interests that a punitive award is designed to serve. If the award is disproportionate to the interests served, it violates due process.
The Court further defined the issues surrounding excessive awards in BMW of North America v. Gore, 517 U.S. 559, 116 S. Ct. 1589, 134 L. Ed. 2d 809 (1996). In this case, the plaintiff, Ira Gore, was sold a purportedly new automobile. In fact, the car had been repainted because of damage during shipping. When Gore found out, he sued BMW. During the litigation, he discovered that for many years BMW had routinely repainted cars and sold them as new. The jury awarded Gore $4,000 in compensatory damages and punitive damages of $4 million. The Alabama Supreme Court reduced the punitive damages to $2 million but upheld the reduced award.
On appeal, the U.S. Supreme Court overturned the punitive damage award. First, the Court identified the "degree of reprehensibility of defendant's conduct" as the most important indication of reasonableness in measuring a punitive damage award under the Due Process Clause. In the Court's view, the damages imposed should reflect the enormity of the defendant's offense and may not be grossly out of proportion to the severity of the offense. In Gore's case, the award was excessive because BMW's conduct did not demonstrate indifference or reckless disregard for the health and safety of others. The minor repairs it made to the cars did not affect their performance, safety features, or appearance.
Second, the Court applied the most commonly used indicator of excessiveness, the ratio between the plaintiff's compensatory damages and the amount of the punitive damages. Even though the state court reduced the punitive damages by half, the Court found the ratio of 500 to 1 to be outside the acceptable range.
Finally, the Court examined the difference between the punitive damage award and the civil or criminal sanctions that Alabama could impose for comparable misconduct. The fact that the $2 million verdict was substantially greater than Alabama's $2,000 civil fine for deceptive trade practices was another ground for finding the punitive damages excessive, according to the Court.
This decision had important consequences in civil litigation. The decision "sent a message" about punitive damages to the lower courts, strongly implying that they should do more to rein in juries that award excessive amounts. Courts have the power to reduce or throw out punitive damages. In the wake of BMW, many federal courts carefully applied the Supreme Court's standards and reduced punitive damages awards. State courts have been less uniform in following these standards, with some courts distinguishing the decision in order to sustain large punitive awards. However, in 2003, the Supreme Court reaffirmed the BMW decision and three-part analysis in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 123 S. Ct. 1513, 155 L. Ed. 2d 585. The court made clear that state courts must employ this analysis or risk reversal.
Though the decision reassured some in the insurance industry, the industry has continued to pursue "tort reform" legislation at the state and federal level. President George W. Bush proposed his own tort reform package in 2002, which included a limit on punitive damages. This proposal would cap punitive damages at whichever is less: $250,000 or twice the economic damages.
Daughety, Andrew F., and Jennifer F. Reinganum. 2003. "Found Money? Split-Award Statutes and Settlement of Punitive Damages Cases." American Law and Economics Review 5 (spring).
Kircher, John J., and Christine M. Wiseman. 2000. Punitive Damages, Law and Practice. 2d ed. St. Paul, Minn.: West Group.
Owen, David G. 1994. "Punitive Damages Overview: Functions, Problems and Reform." Villanova Law Review 39 (March).
Schlueter, Linda L., and Kenneth R. Redden. 2000. Punitive Damages. 4th ed. New York: LEXIS.
Wood, Robert W. 2003. "Proposed Nondeductibility for Punitive Damages: Will It Work?" Tax Notes (July 7).