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Contingency fees: format, links down

August 17, 2004 10:52 AM

Our second Featured Discussion brings together two of the nation's leading experts on legal ethics, Lester Brickman and Richard Painter, to discuss potential ways to improve the legal system through reforming the way lawyers charge contingency fees. For a fuller introduction to their views, see my entry on the main forum page.

Also, in contrast to the usual weblog format, new entries in this Featured Discussion are posted at the bottom rather than the top of the page. So scroll down. Thanks!

Table of contents of the discussion: August 17 Brickman; August 18 Painter; August 19 Brickman; August 20 Painter; August 26 Brickman.

On fees and markets

August 18, 2004 3:54 PM | No Comments

Professor Brickman makes several very good points, and his proposal to link contingent fees to the work that lawyers actually do for their clients to improve upon settlement offers, is theoretically sound. I am concerned, however, about how his proposal might work in practice, and more importantly that his proposal might never get implemented because voters and legislators believe it to be too complex and to interfere too much with lawyer and client autonomy. I thus suggest below that an alternative proposal, the so called �New American Rule�, be considered as well.

A few general observations:

1. We should not go overboard in our criticism of price gouging by the plaintiffs� bar. Personal injury lawyers serve a useful purpose when they loyally and competently represent their clients, as I believe most do. The vast majority of personal injury lawyers also do not earn outrageously high fees when their annual incomes are measured as a whole. In many communities, lawyers representing businesses and other defendants earn as much as, and sometimes more than, their counterparts in the plaintiffs� bar.

2. There is, however, considerable price gouging by some (by no means all) plaintiffs� lawyers. The tobacco lawyers who sought fees running into the billions of dollars from Texas, Florida, Massachusetts and other states because of �arm�s length� contingent fee contracts they entered into with state attorney general�s offices (or more accurately in some cases with their friends in state attorney general�s offices) are the most blatant example of price gouging at the public�s expense. Contingent fee lawyers who demand hundreds of thousands of dollars from individual plaintiffs for doing little or no work (e.g. attorney Dowd in the Corcoran case) are also abusing the public trust (as Corboy & Demetrio recognized when it voluntarily waived its fee in that case even though it did considerably more work for Corcoron than Dowd had done, but nonetheless without improving upon the settlement offer that Corcoron had before her attorneys got involved).

3. To the extent possible, the market should be allowed to solve the contingent-fee-abuse problem itself, free of regulatory interference. This is why I suggested in a 1995 law review article that the answer might be less regulation not more. See Richard W. Painter, Litigating on a Contingency: A Monopoly of Champions or a Market for Champerty?, 70 Chicago Kent Law Review 625 (1995) (Symposium on Fee Shifting). The contingent fee I argued is in essence a form of champerty that lawyers are allowed to provide for their clients, while traditional prohibitions on champerty prevent non-lawyers from funding and insuring lawsuits (with some exceptions). Allowing third-party insurers to offer the same champertous product that is embodied in the contingent fee (litigation insurance and financing) in return for a portion of any judgment might help some clients hire hourly rate lawyers and, where contingent fees are excessive, drive those fees down to more reasonable levels. There has since been some experimentation with such arrangements in jurisdictions that allow them, but for the most part only with advances against plaintiffs� awards on appeal. Furthermore, ethical standards in the litigation financing industry, and its reputation, will have to improve substantially before it becomes a realistic competitor with contingent fee arrangements offered by the plaintiff�s bar.

4. Even when lawyers still dominate the market for litigation financing and insurance (the essential services being offered with a contingent fee), existing market mechanisms work sometimes. This is exactly what happened with respect to 60% of the fee in the Corcoron case, which was waived. Corboy & Demetrio is one of the most well respected plaintiffs� law firms in the country and has far more to lose by way of reputation than it has to gain by taking fees from Ms. Corcoron on the basis of a dubious contractual claim. Other potential clients having more lucrative claims than hers might be deterred from going to Corboy & Demetrio if they heard that the firm had charged her a �contingent� fee without getting her a penny more than she had before she talked to her lawyers. The firm�s economic interests, and its partners� social and professional reputations, dictated that the firm should do the right thing, which it did.

5. The question in that case then is how to deal with the other 40% and Mr. Dowd. The market itself may help here as well. Enough publicity surrounding this incident could make this one of the most costly fees Mr. Dowd has ever earned (unless people in Des Plaines really enjoy the prospect of paying a lawyer for doing no work). Furthermore, contract law should have come to the aid of Ms. Corcoron. The Illinois courts simply got this one wrong, because fee reasonableness (required under Rule 1.6) is an implied-in-fact covenant in any contract between a lawyer and a client (as are other rules of professional ethics). In many jurisdictions, a lawyer who practice law unethically for a client has no right to be paid at all, and at a minimum a lawyer should be held to his end of the bargain when he contractually obligates himself to practice law according to rules of professional responsibility (including the rule that a fee must be �reasonable� in relation to, among other factors, the work done by the lawyer for the client). Finally, the Corcoron case illustrates a subset of abuses arising out of referral fees (which normally are paid to attorneys who do little or no work on a case) rather than out of contingent fees as a whole. This problem could be addressed with narrowly tailored measures, for example an amendment to state ethics rules providing that a referring lawyer shall not receive an amount in excess of the amount actually collected from the client by the lawyer doing the majority of the work on a case. Under such a rule, Corboy & Demetrio�s determination of its ethical obligations (and of its contractual rights) would have been binding on Dowd as well.

6. The �early offer� proposal designed by Lester Brickman, Michael Morowitz and Jeffrey O�Connell is a good one (so good as to receive praise from former Harvard President Derek Bok and Judge John T. Noonan, Jr. in forwards to the 1994 Manhattan Institute publication). The proposal is, however, complex in its procedural aspects because of the discovery rights that its authors rightly perceive to be a necessary precondition to an �early offer� being meaningful. Collateral litigation between plaintiff and defendant over pre-offer discovery could make the tort system more rather than less expensive for all concerned. The proposal also interferes with market mechanisms perhaps more than is necessary to address the underlying problem (excessive contingent fees charged by lawyers who do little or no work for a client). The proposal also does not address other related problems (such as the tobacco lawyers and other lawyers who do a lot of work but still charge an effective hourly rate far in excess of that which is reasonable � in some cases in excess of $20,000 per hour). Finally, the bulk of the �early offer� proposal�s rules are not triggered at all unless the defendant makes a settlement offer, which puts the defendant in the unique position of being able to determine through its own settlement strategy the ethical obligations of the plaintiff�s lawyer to the plaintiff. A proposal that was more independent of a triggering mechanism controlled by the defendant might better withstand political arguments that contingent-fee reform is more about protecting defendants from plaintiffs� lawyers than it is about protecting plaintiffs themselves.

I will now make a few observations about the alternative �New American Rule� for contingent fees that I drafted with Jim Wooton and then analyzed in a 2000 publication for the Manhattan Institution (see Richard W. Painter, The New American Rule: A First Amendment to the Client�s Bill of Rights, 2000 Civil Justice Report (Manhattan Institute 2000) ):

1. We call our proposal the �New American Rule� because we believe it would be a useful corollary to a unique aspect of the American justice system that supposedly improves access to the courts: the contingent fee. The contingent fee is banned in most other countries but helps ordinary plaintiffs sue without fear of being stuck with large lawyers� bills if they lose (another uniquely American rule that supposedly helps impecunious litigants is the rule that losing parties do not have to pay the other party�s legal fees, which contrasts with the �loser pays� approach followed in many other countries). Our intent with the New American Rule is to assure that, while plaintiffs lawyers are allowed to charge their clients a premium above a normal hourly rate for the risk they assume with a contingent fee instead of an hourly fee, this premium will be disclosed to the client in terms that the client can most easily compare with the hourly rate that they otherwise would have to pay if the fee were not contingent.

2. In essence, the New American rule requires the lawyer charging a contingent fee to say to the client in advance that �my fee will be X% of any judgment or settlement in this case but will be no higher than Y dollars per hour.� Under the proposal, the lawyer and client are free to agree on any numbers for X and Y that they want (subject of course to the existing provision in ethics rules and thus implied in the retainer agreement that a lawyer�s fees must ultimately be reasonable). X and Y have nothing to do with whether there is a settlement offer in the case or any other decision made by the defendant. Instead, these numbers are determined by what plaintiffs will pay in a market for legal services that is unregulated except for the requirement that the lawyer who chooses to charge on a contingency must specify both X and Y. After the case is over, the client has the option of paying the lower of X or Y.

3. Of course a lawyer can �evade� the rule by choosing a ridiculously high number for Y. Plaintiffs who are told by their lawyer that Y is $10,000 per hour (or higher), however, should know that something is wrong (they will know enough to look for another lawyer, even if they don�t� know the details -- for example that within minutes of their leaving a lawyer�s office their �complex case that will require a lot of hard work� may instead be settled with a quick call to the insurance company) . The purpose of the rule is to force the lawyer in fee negotiations to signal to the client something about the lawyer�s estimate of the strength of his own hand, thus leveling the information gap between lawyer and client concerning the admittedly uncertain factors that determine a reasonable contingent fee (the size of the client�s claim, the probability of success and the amount of lawyer work likely required). Instead of being told that X is 33% or 40% simply because that is the �industry standard�, the client will at least get a hint as to what the lawyer actually thinks about important aspects of the client�s case, and about what the lawyer will do for the client, when the lawyer names his number for Y.

4. The New American Rule imposes some regulation on the market for lawyer�s fees (it requires the lawyer to choose a number Y that, unless extraordinarily high, could in some cases cap his percentage fee X). The interference with market mechanisms, however, is minimal, particularly compared with the �early offer� proposal, which allows an agreed upon contingent fee percentage X to be applied only to a portion of the client�s judgment or settlement amount that is itself determined not by the autonomous decisions of the lawyer or client, but by the size of an early settlement offer from the defendant.

5. Finally, I will suggest two useful corollaries for the New American Rule. First, because contingent fees are designed for clients of limited means, large governmental entities (such a states seeking to sue tobacco companies or gun manufacturers) should not hire contingent-fee lawyers at all (they can self insure against the risk of losing by paying an hourly rate, just as governmental entities usually self insure against a host of other losses � including negligence lawsuits brought against them by plaintiffs� lawyers) . The game in which officials in some states passed contingent-fee business on to their friends, and lawyers sought billions of dollars in fees arguing that these arrangements constituted �freedom of contract� would, under this new restriction come to an end. Second, courts should take more seriously ethics rules requiring that a lawyer�s fee be �reasonable.� Courts should also recognize that clients like Ms. Corcoron, when they hire lawyers, do so with the understanding that, when their case is over, the fee charged will in fact be reasonable in view of such factors as the risk involved, the size of their recovery and the amount of lawyer work involved.

Professor Brickman responds

August 19, 2004 6:25 PM

Professor Painter expresses basic agreement with my core thesis but disagrees on a number of issues. Although our areas of agreement far outweigh our disagreements, in this response, I will focus on two areas of disagreement: contingency fee practices and the relative merits of the �early offer� proposal versus the �New American Rule.�

While Professor Painter agrees that there is considerable price gouging by some lawyers, he believes that this is not true for the �vast majority.� I disagree. Contingent fee lawyers routinely charge standard contingency fees even though there is already a settlement offer on the table at the time they begin representation as well as in other cases without meaningful risk. As I indicated in a recent article:

A frequent abuse in personal injury representation occurs when lawyers routinely charge standard contingency fees of one-third or more even though the insurance company has either already offered to pay policy limits to the injured party or claimant before the lawyer was retained or would have offered to do so, if approached, and, in fact did do so after the claimant retained counsel. For example, a former insurance adjuster in Missouri has stated under oath:
From 1962 until January 1, 2002, I was employed by State Farm Insurance Company . . . as an adjuster. . . [and] supervised other adjusters. Over the years I witnessed many examples of attorneys charging their clients (people with a claim against State Farm) a contingency fee of one-third or more when State Farm had already or would have offered to pay that client all that State Farm was obligated to pay under the policy of insurance in force.
Quoted in: Lester Brickman, Effective Hourly Rates of Contingency-Fee Lawyers: Competing Data and Non-Competitive Fees, 81 Wash. U.L.Q. 653, 660-61 (2003).

Price gouging is thus the norm, not the exception. Price gouging and price fixing largely account for the 1400% inflation-adjusted increase in the effective hourly rates of contingency fee lawyers over the past 40 years. See id. at 707. Corboy & Demetrio�s declination to apply their contingency fee to the pre-representation settlement offer was both ethical and honorable--and extremely rare. Mr. Dowd�s action in taking a percentage of the offer that he did nothing to generate is both commonplace and well within the standards that courts and disciplinary agencies apply to contingencies fees. Therein lies the problem. Professor Painter�s observation that the Dowd case is a referral fee problem and not a contingency fee problem is off the mark. Mr. Dowd�s action in taking a percentage of a settlement that he did little or nothing to generate is replicated every day by hundreds of contingency fee lawyers. Professor Painter is certainly correct that what is different about the Dowd matter is that it has attracted some publicity and may yet attract more. Beyond that, however, it is a run-of-the-mill commonplace occurrence � and an indictment of these contingent fee practices.

Of course, I agree with Professor Painter that the Illinois courts� decisions are at best regrettable. To be sure, Illinois courts have been in the forefront of the movement to depreciate clients� fiducial and co-relative ethical rights in favor of the rights of lawyers. See Lester Brickman, The Continuing Assault On the Citadel of Fiduciary Protection: Ethics 2000�s Revision of Model Rule 1.5, 2003 Ill. L. Rev. 1181 (2003). Even so, the Illinois courts� treatment of Mr. Dowd�s claim is consistent with the practices of other courts in other jurisdictions.

�Early Offer� vs. the �New American Rule�

Professor Painter�s proposal is a commendable effort to deal with contingency fee lawyers� price gouging. It is a variant of a proposal I set forth 15 years ago. See Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without The Prince of Denmark?, 37 UCLA L. Rev. 29, 115 (1989). There, I also attempted to empower clients to bargain with contingency fee lawyers over fees. Over the years, however, I came to realize that the impediments to price competition erected by the bar, including ethical rules designed to preclude price competition, were simply too formidable to overcome without more direct intervention. See Lester Brickman, The Market For Contingent Fee-Financed Tort Litigation: Is It Price Competitive?, 25 Cardozo L. Rev. 65 (2003). A summary version of this article is set forth in 27 Regulation 30 (Summer 2004). In light of that insight, I set out, with others, to devise the �early offer� proposal.

Professor Painter criticizes the proposal because it �interferes with market mechanisms more than is necessary.� In my view, the �early offer� proposal replicates the market bargain that would be concluded if consumers of legal services were able to do what businesses and corporations do when they hire lawyers on a contingent fee basis in commercial litigation. In these instances, corporations bargain out terms that identify the underlying value of the claim, agree to a set fee for the legal effort to assert the claim and agree to pay a percentage of any recovery in excess of the agreed upon underlying value of the claim. This is precisely the market bargain that the �early offer� proposal seeks to extend to consumers of legal services.

Professor Painter also identifies as a defect in the �early offer� proposal that it is only triggered if the defendant makes a settlement offer. The latter is true but is this a defect?

Consider the ethical substructure upon which the proposal is constructed. We both agree that lawyers are charging standard contingency fees in cases devoid of meaningful risk and that this is or should be considering unethical. That is, such conduct violates the ethical rule that fees be limited to �reasonable� amounts. In the contingency fee context, I previously established that risk is the ethical underpinning of the ethical validity of contingency fees and that such fees must be commensurate with the risk being undertaken by the lawyer. See Contingent Fees Without Contingencies, id. A contingent fee includes a risk premium for assuming risk. When lawyers charge standard and substantial contingency fees in cases without meaningful risk, they are charging risk premiums though not assuming risk. That is price gouging. But how then to breath life into the dormant ethical rule that lawyers cannot charge risk premiums if they are not assuming any remotely commensurate risk?

The practical problem this poses is how to measure the existence of risk without creating a bureaucratic structure or imposing new burdens on judges who already shirk their responsibility to apply ethical rules to lawyer�s fees. The �early offer� proposal presents an elegant solution to this conundrum. It identifies as a marker of the absence of risk, the amount, if any, offered by an allegedly responsible party to settle a tort claim, before any substantial value adding efforts have been contributed by the lawyer. Against such amounts offered in settlement, the lawyer may not charge a risk premium.

Thus, the �early offer� proposal depends upon a marketplace assessment of the underlying value of a tort claim by an allegedly responsible party putting its money on the line. That decision, however, is guided by the same invisible hand that �regulates� competitive markets: self-interest. Consider the financial incentives that motivate an allegedly responsible party to make an early offer of settlement.

Allegedly responsible parties will only make early settlement offers if they believe that they will likely be found liable for an injury suffered by the claimant. Currently, because of the time value of money and for other reasons, such parties have financial incentives to delay paying claims until the last possible moment. This raises transaction costs and lowers efficiency.

The �early offer� proposal changes those incentives as follows:

1) It allows allegedly responsible parties to offer settlements in dollars worth 90-95 cents versus the current value of such settlement offers to claimants of 66 2/3 cent dollars. They will allow both lower settlement costs and higher in-pocket receipts for claimants.

2) It allows allegedly responsible parties to save on defense costs which consume a formidable 14% of the total amounts spent by defendants and their insurers for tort claim costs.

3) It allows allegedly responsible parties to avoid medical costs �build-up� which amounts to tens of billions of dollars a year in inflated and fraudulent medical care costs incurred by tort claimants. Under contingency fee �math,� each $1 in medical care costs incurred by a claimant generates $1 in legal fees for the contingent fee lawyer. (For an explanation of this process, see Effective Hourly Rates, id. at 673-74). It is because of contingency fee �math� that someone who suffers a weight-bearing bone break in an automobile accident will incur $14,165, mostly in medical care costs, compared to $5,228 in such costs incurred by someone identically injured, who does not hire a lawyer to press her claim.

To avoid such medical care cost �build up,� and to realize the other savings identified, allegedly responsible parties have an financial incentive to make early settlement offers that are sufficiently substantial to gain acceptance. This will lead to earlier settlements and considerably lowered transaction costs.

To be sure, the �early offer� proposal will prove costly to constituencies that own shares in Litigation, Inc., including: plaintiff lawyers, defense lawyers, doctors, chiropractors, expert witnesses, court reporters and process servers. Indeed, the only group that will benefit is consumers through lowered insurance and product costs.

One final point is Professor Painter�s assertion that political arguments weigh in favor of the �New American Rule� over the �early offer� proposal.

Unlike most tort reform proposals, �early offer� is not susceptible to the sound bite-sized criticism that the proposal takes away victims� rights to seek redress from the courts for their injuries. �Early offer,� instead of playing the �take away� game, is designed to protect consumers of legal services from price gouging by lawyers. It is for this reason that Ralph Nader, in referring to a variant of the �early offer� proposal that was on the California ballot, termed the proposal �diabolical.�

The essence of the �New American Rule� is that consumers of legal services get to choose, at the conclusion of their representation, whether to pay a contingency fee or an hourly rate fee instead. Lawyers will claim that the proposal is a Trojan Horse designed to do away with contingency fees � the poor man�s �key to the court house.�

I will leave it to readers of this discussion to determine which proposal wins the �political� debate.

Less complexity, more information

August 24, 2004 9:30 AM

Professor Brickman once again makes cogent and well reasoned arguments in favor of the �early offer� proposal. While I am not opposed to that proposal, I am concerned that it will continue to run into political obstacles not just because it is opposed by the plaintiffs� bar, but because other features undermine its appeal to voters and legislators normally predisposed to favor contingent fee reform. Chief among my concerns are:

* Early offers under the proposal are preceded by a moderately complex early discovery procedure that could itself be the subject of disputes between the parties. Disputes over �early offer� discovery could bog down settlement negotiations and make resolution of tort claims more difficult. These early discovery provisions also make the proposal more difficult for legislators and voters to understand, and make it vulnerable to �what if� questions in which opponents of the proposal demand that its supporters describe what would happen under various scenarios in which early discovery rules are not complied with in letter or spirit. It is important to recognize that the existing system in which many tort claims are settled early, without much discovery or dispute over discovery, saves time and expense. This system arguably should not be changed simply because early discovery allows parties to negotiate settlement on a more informed basis. In any event, the timing of discovery is a separate issue from the reasonableness of legal fees, and the two issues arguably should not be entangled as they are in the early offer proposal.

* Professor Brickman makes compelling arguments that the risk assumed by a plaintiff�s lawyer in litigating a contingency case is directly linked to the amount the defendant is willing to pay to settle the case early on (the higher that amount, the lower the lawyer�s risk). Professor Brickman�s answer is to tie the lawyer�s fee to improvement on this amount as the case moves along after a settlement offer is rejected. While theoretically sound, the problem with this approach is that it allows defendants, by making or not making settlement offers within the framework of the proposal, to determine the size of plaintiffs� lawyers� fees. This gives rise to possible collusion between defendants and plaintiffs� lawyers (e.g. defendants who do not make early settlement offers that trigger the proposal, or who make very low offers, and plaintiffs� lawyers who return the favor by recommending that their clients accept low settlement offers later on). Linkage between contingent fees and defendants� settlement posture also makes the proposal politically vulnerable because it injects defendants into plaintiffs� relationships with their lawyers (opponents will run political ads saying that �when you are injured, under this proposal the other driver�s insurance company, not you, gets to decide how much your lawyer gets paid�). This bolsters claims of those who argue that contingent-fee reform is really about helping defendants rather than helping plaintiffs avoid paying too much to their lawyers.

A few more general observations:

* Contingent fee abuse could be pervasive throughout the plaintiffs� bar, as Professor Brickman argues, or, as I believe, a serious problem that arises in a relatively small portion of cases and that unfairly inflates the incomes of a relatively small portion of plaintiffs� lawyers. This debate largely turns on statistics, and I have seen statistics that support each side. I should only point out that most statistics on median incomes of plaintiffs� lawyers (which I cite in my report for the Manhattan Institute on the New American Rule) do not reveal figures that are particularly shocking or that plaintiffs� lawyers as a whole are overpaid for the role they perform in our civil justice system. It is, however, telling that some statistics (also cited in my report) show mean incomes for plaintiffs� lawyers that are significantly higher than the median, meaning that there is a lot of money being made by relatively few lawyers on the high end. Some of this mean/median differential is because some very good lawyers earn a lot (e.g. Corboy & Demetrio), but the mean is also driven up when contingent fees are excessive in a small but significant number of cases, unfairly enriching some lawyers (e.g. Dowd). Regardless of our disagreement over the breadth of the contingent fee abuse problem, Professor Brickman and I agree about its depth and the injury that it does to the reputation of the legal profession.

* If most plaintiffs� lawyers do in fact make relatively modest incomes, or legislators and voters perceive most plaintiffs� lawyers to make relatively modest incomes, contingent fee reform will be difficult to accomplish if cast as part of a general attack on plaintiffs� lawyers� fees. This is particularly true in today�s environment where corporate lawyers, not plaintiffs� lawyers, have been characterized as enriching themselves at the public�s expense, and plaintiffs� lawyers argue that their work is necessary to protect the public. Whether true or not, such arguments have political resonance. My own view is that contingent fee reform does not require a general attack on levels of compensation for the plaintiffs� bar, and if carefully implemented would not drive down the annual incomes of most plaintiffs� lawyers. The target is instead a select one: unfair practices that allow some lawyers to take too much money from their clients in some cases. These relatively few lawyers who are unjustly enriched may be politically powerful if they also make large campaign contributions, but they are not necessarily popular. Once it is understood that contingent fee reform would benefit not only plaintiffs but also most lawyers by improving the reputation of their profession, opposition to reform should be easier to overcome.

* Professor Brickman points to a number of factors that may impede fair pricing of contingent fees, but in my view the most salient factor is information asymmetry. Plaintiffs� lawyers know more than their clients do about the admittedly uncertain factors that determine the reasonableness of a contingent fee: the size of a likely judgment or settlement if a case is successful, the chances of success and the amount of lawyer time likely to be required. The New American Rule addresses this information asymmetry by requiring lawyers to disclose an hourly rate above which their fee will not go. This rule applies regardless of whether the defendant offers to settle the case, keeping the defendant away from the outcome of lawyer-client fee negotiations. The proposal instead allows the plaintiff to decide, after hearing how high the lawyer�s fee could go on a per hour basis, whether to hire that lawyer or a different one. Finally, the proposal cannot possibly be characterized as doing away with contingent fees, except of course those charged by a lawyer who wants fees that would translate into an extraordinarily high amount of money per hour and cannot justify this amount to his client. That lawyer should not be representing the client to begin with.

Once again, the early offer proposal is in many ways a good one, despite its disadvantages. The New American Rule, however, is less complex in its procedural aspects, is not contingent on discovery, involves bilateral negotiations between the plaintiff and the lawyer alone rather than triggering mechanisms controlled by the defendant, and limits contingent fees in all cases, not just those in which a settlement offer is made. For these reasons, the New American Rule also is worthy of serious consideration.

A brief rejoinder

August 26, 2004 11:39 AM

I think Professor Painter and I have covered most of the salient points. I offer only a brief rejoinder to three of Professor Painter�s arguments in his latest response.

1. Professor Painter identifies as a defect of the �early offer� proposal that alleged responsible parties (�ARPs�) may make �very low [settlement] offers.� The fact is true but not the characterization. The �early offer� proposal has a built-in self-effectuating mechanism to discourage defendants from gaming the system by making a �very low� settlement offer. If an ARP makes a derisorily low settlement offer in order to reduce the fee that the plaintiff lawyer will ultimately receive, this will deprive the ARP of the financial benefits made available by the proposal. Self-interest dictates that when ARPs believe that they will ultimately have to compensate the plaintiff, they will make settlement offers that are calculated to be sufficient (but not more) to deprive the plaintiff�s attorney of the incentive to go forward and continue the litigation through trial if necessary. If the ARP fails to make a sufficient early offer and it is turned down, it loses most of the benefits that the �early offer� proposal offers, including substantial savings on medical care cost �build up� and defense costs. To be sure, the sufficiency incentive already exists in tort litigation where the dominant determinant of whether a plaintiff will accept a settlement offer is usually plaintiff lawyer�s self-interest. What the �early offer� proposal does is move up the timing of such a settlement offer from much later to near the very beginning of the claiming process because of the benefits that an ARP can realize for doing so. The effect is to significantly reduce transaction costs.

2. Professor Painter again cites to statistics on tort lawyers� income which he says belies the level of windfall fees that I indicate are commonplace. I have devoted an entire article to the subject. See Effectively Hourly Rates of Contingency Fee Lawyers: Competing Data And Non-Competitive Fees, 81 Wash. U.L.Q. 653 (2003). In that article, I conclude that the leading data on tort lawyers� earnings ranges from the trivial to the unreliable to the unrepresentative. The Manhattan Institute has published a study, Trial Lawyers, Inc., concluding that tort lawyers� gross $40 billion a year in revenues. A significant percentage of this revenue is in the form of windfall fees as I have explained previously. Effective hourly rates of tort lawyers range from $350 in auto tort claiming to multiples of that in product liability, medical malpractice and other specialty areas. A top echelon of tort lawyers commands effective hourly rates of $5,000 - $10,000.

3. With regard to the political context, it is interesting to note that in survey after survey, the American public, by wide margins, believes that lawyers charge too much. If the political merits of the respective proposals are compared, there is compelling reason to believe that a proposal that seeks to curb unethical price gouging by lawyers would be overwhelming endorsed by the electorate.

A final note. The �early offer� proposal has been widely reported in the media and is discussed in most legal ethics casebooks. Professor Painter�s New American Rule is also worthy of serious consideration and hopefully will also come to gain such attention.

Well, it is an honor and a pleasure for this lawprof to be featured along with his illustrious student. I suppose this should make me feel quite old, but it doesn't! My only complaint is that, after my earlier featured discussion on firearm liability, "Smoking Guns" (and a book I wrote on tobacco and firearms, entitled "Fire and Smoke") this featured discussion is entitled "Smoke and Mirrors." Enough with the smoke already, it is clouding my eyes!! Nonetheless, I hope I will be able to see clearly through the maze that our Supremes have set up for us in Philip Morris USA v Williams.

The plaintiff in Williams was the widow of a long-time smoker. This widow alleged that Philip Morris deceived her husband into not quitting smoking. According to the wife, the late Mr. Williams said that ��the tobacco companies don�t even say they�re cancer sticks, so I can smoke them.�� Although his wife helpfully pointed to the warning labels on cigarette packages and told her husband that cigarettes would kill him, Mr. Williams allegedly responded: �This is what the Surgeon General says, it�s not what [the] tobacco company says.� According to his wife, Williams gave no credence to the Surgeon General�s warnings because he believed that the tobacco companies would simply not sell a harmful product. �[H]e would say �Well, honey, you see I told you cigarettes are not going to kill you, because I just heard this so-and-so guy on TV, and he said that tobacco doesn�t cause you cancer!�� Now, I don't know about you all, but I know of no one on earth who talks like the decedent allegedly did, and I know of no one who thinks that no seller could possibly fib about the quality of the product he was selling. Of course, the jury can choose to believe whom it will, and to no one's surprise it chose to believe Ms. Williams. [Is the jury interested in buying a bridge in Brooklyn from me?] What possible motive could the plaintiff have to "embellish", after all?

That said, tobacco companies' behavior over the years has certainly been reprehensible on many different levels. Thank You For Smoking is a nice caricature of Big Tobacco's awful behavior. But awful behavior does not tort damages merit! Tort damages are awarded following proof of wrongdoing, causation, and damages. Causation was established when the jury believed the astounding rendition by Ms. Williams. As to damages, well, punitive damages are essentially awarded in cases of intentional tort. Here, I guess, fraud is the intentional tort du jour.

Are there limits on punitives? My own writings, which David likely knows, claim that punitive damages cross the line between private ordering [tort, contract, property, self-determination among and between individuals] and public ordering [relations between Big Brother and lil' ol' citizens, criminal law and the like]. Not for nothing is the state subject to constitutional limitations when public ordering is involved.

As to the constitutional limitation of "due process", I like David think it is phoney-baloney (but he put this in a much more scholarly way -- since I am not a constitutional scholar, but just a torts guy, I will resort to plain English). I personally preferred "excessive fines", considered but (in my opinion very unwisely) rejected by the Supreme sages in Browning Ferris v Kelco some years back. I think the Supremes have been atoning for their sins ever since, trying desperately to find a constitutional measure to rein in out-of-control punitives after they had rejected the most obvious candidate. [And in a future installment I will explain why Williams was tailor-made for this.] At least Justice Stevens, dissenting, expressed regret about the rejection of the Excessive Fines theory.

So that's my initial volley. Like David, I think states have police power to regulate and do all sorts of silly things. Perhaps unlike David, I don't think those things include taking money from (out-of-state) corporations without providing constitutional protections.

But I don't think the Supremes in Williams gave any real guidelines about what is verboten and what is allowed. Much more litigation to follow, I'm afraid, with no one gaining but we lawyers. More on all this anon.

Till tomorrow, David.

Michael I. Krauss
Professor of Law
George Mason University

Where is the tort/crime boundary?

March 14, 2007 12:49 PM

Browning-Ferris is a case that only recently came within my ken. One admirable aspect of it is that both the majority and the partial dissent relied on original intent, historically recovered. They reach different conclusions, of course, but no one ever said originalism always provides an easy answer: only that it provides legitimacy.

The dissent in B-F argued that "amercements" were within the range of what Magna Carta limited, and therefore also of what the English Bill of Rights and our Eighth Amendment limited, and that amercements were civil rather than criminal. This claim is worth researching further. (Beyond that, all I can say right now about B-F is that the majority scores by having Scalia on its side, but the dissent wins the Shakespeare-cite event by quoting one of my favorite characters, the Prince of Verona in Romeo and Juliet.)

All of this is a bit to one side of Philip Morris v. Williams, which bypasses the Eighth Amendment altogether and bases its holding directly on 14th Amendment Due Process. Michael and I probably agree that it would be more constitutionally legitimate (assuming the incorporation doctrine!) to curb punitive damages through the "excessive fines" clause of the Eighth Amendment than to do so through Due Process tout court.

Michael has rightly moved a key issue into center place: just what is the tort/crime boundary, and do punitive damages defy it? They are awarded in tort cases, but a common-lawyer of the time of, say, Coke could easily figure that whatever is designed to "punish" must pertain to the criminal justice system.

There is a case for deconstructing the tort-crime boundary. The modern administrative state these days often lays heavy hands on citizens through procedures that are outside the criminal justice system, and therefore, outside the constraints that the Constitution places on that system. Perhaps punitive damages are of this nature, and perhaps we should rethink the assumption that criminal-procedure restraints apply only when the government is willing to admit that a given cases is "criminal."

But, as the old Alka-Seltzer commercial said, that's a spicy meatball. The criminal justice system evolved from the early-medieval tort system for good reasons as well as bad: yes, kings wanted to be in charge of justice. But also, people wanted to be able to rely on the king's peace, not just their own ability to sue their tortfeasors. Browning-Ferris can be read as a refusal to reverse this evolution, and until the issue is thought out further, I can't quite say the majority was wrong about this.

The Tort/Crime boundary in general

March 14, 2007 3:09 PM

Thanks for the thoughtful comments, David. Let me address the way I see the general boundary between private and public ordering in today's edition, then tomorrow perhaps I will indicate why the Philip Morris case was an excellent candidate to establish that boundary.

[NB These thoughts replicate to some extent a much more extensive discussion in Engage, the Federalist Society's academic journal. That article can be found here (scroll to page 118).]

Wrongful behavior without damages creates no corrective justice requirement. Driving home while drunk is negligent, and exposes others on the road to undue danger. It is good, I think, that DUI is a crime and that the state sanctions misbehavior with fines and/or imprisonment. So, if a drunk driver makes it home without hitting anyone, he has no tort liability toward anyone. Note that he may have committed a crime � but that is a matter for public ordering, with all the protections provided when the power of the state is involved (constitutional protection against self-incrimination, double jeopardy rule, strong presumption of innocence). The drunk who makes it home safe owes compensation to no one, because his conduct, though wrongful, did not harm anyone. It is the precise conjunction of wrongfulness and harm caused thereby that creates the tort obligation. Typically, that tort obligation consists of compensation, of righting the wrong and making good the loss - no more, no less. Compensation, moreover, has to be full. This is a definitional requirement of corrective justice, and a fundamental proposition of the common law of tort. Thus a man who negligently burns down a house worth $50,000 is liable in tort to pay $50,000 to make the home-owner whole. If the house and its contents were worth $1 million dollars, then he is liable in tort to pay $1 million to make the home-owner whole. This is not because tort favors the rich, but because tort equally respects poor and rich. All must be returned to their former state - that far but no further - when they are wrongfully harmed. Punitive damages do not fit the scheme of tort law because, by definition, punitive damages are overcompensatory. Nevertheless, in one superficial and one real form, punitive damages were present at the conception of tort law. Both of these forms can be usefully summarized here:

Superficial - In medieval days criminal and tort trials were held at the same time. For what we today call intentional torts, such as battery and trespass, there was at the same time a crime committed and a tort suffered, and both of these were adjudicated in the same judicial proceeding. So, a battery may have caused $10 in harm, payable to the plaintiff, but in the days before police forces and criminal tribunals the plaintiff could also pursue the equivalent of a criminal fine. He was in a sense the private attorney general, prosecuting the criminal case, and the fine went into his coffers. Today, though, we have county proscecutors, and fines are collected solely in a criminal setting. Those fines are subject to cherished American constitutional protections such as:

-Double jeopardy prohibition of more than one fine for the same offense;
-5th amendment protection against self-incrimination;
-8th amendment protection against excessive fines.

A tort trial offers none of those protections (compulsory discovery is self-incrimination, one tort committed against many people leads to many lawsuits, etc.). So in this superficial form, punitive damages are an anachronism with no place in tort today, having been replaced by public ordering via criminal law with all its apparatus.

Concrete - Punitives were granted as symbolic damages when there was deliberate wrongdoing but de minimis damages. If A slandered B, but B could not prove that she had lost any business because of the slander, A might nonetheless be condemned to pay B $1. If A deliberately and flagrantly trespassed on B�s land, but didn�t trample any of B�s crops, B could still sue A for nominal, symbolic damages. The damages in this case were symbolic � they recognized that one party was in the right, had been wronged by the other party, and won the suit. Suits like this might be filed both to vindicate one�s self and one�s rights, and because a �loser-pays rule� (in effect
outside America) means that the tortfeasor would have to pay his victim�s lawyer�s costs. It would not cost much to vindicate one�s rights in this way. Thus "punitives" classically were either disguised criminal fines (before the state criminal apparatus was organized), or small symbolic sums meant to vindicate inconsequential violations of a plaintiff�s rights. Since criminal fines require constitutional protections, all that should logically remain are the small symbolic vindication sums.

The survival of large punitive awards is a product of confusion between private and public ordering. That is why four states� supreme courts (Louisiana, Nebraska, Washington and Massachusetts) have declared that their common law of tort does not permit punitive damages today. A fifth state (New Hampshire) has abolished punitives by statute. Any state in the union could abolish punitive damages if it wished. Many states, like Virginia, allow punitive damages for intentional torts and gross negligence, but have a statutory cap on punitive damages. Other states have no limitation on punitives at all. Yet in all states punitive damages were not really a problem, in that they were mostly symbolic until the great torts explosion of the 1980s. Up to 1976, the highest punitive damages award in the entire country was $250,000, a sobering observation in light of recent billion-dollar judgments.

I've likely bored readers enough. David, perhaps in tomorrow's edition we can sketch the way the Supremes dealt with punitives from Pacific Mutual v Haslip through State Farm v Campbell. Then on Friday we can get into the nitty gritty of the Williams.

Back at GMUSL, Prof. Bill Bishop used to warn us that, despite his open-book rule, "those who attempt original research in the exam-room will be at a disadvantage." I think I'm under that disadvantage as I weigh Michael's arguments in light of both the majority and dissenting historical analyses in Browning-Ferris.

Michael and Justice O'Connor (who includes her former clerk, Peter Huber, in her cites) make persuasive points about the incomplete (to say the least) distinction between tort and crime during the Common Law's earliest formative era, i.e. from the Conquest to Magna Carta. Since we're all originalists on the day B-F was decided, the question becomes, which is the correct historical mise-en-scene for solving the question? If the equation U.S. Bill of Rights = English Bill of Rights = Magna Carta is more or less correct, at least where the "excessive fines" language is concerned, then the relevant understanding is the one that prevailed at the time of Magna Carta, and therefore Justice O'Connor and Michael are right.

But when push comes to shove it's the U.S. Constitution that we're construing, not the documents on which some its text is admittedly based, so perhaps the correct historical moment for capturing its meaning is the period in which it was drafted and ratified. And as to that, the majority has produces persuasive authority to the effect that the the fines/damages distinction had solidly taken hold well before 1791, and that the word "damage" was available to the drafters if they had wanted to include it alongside "fines" in the Eighth Amendment.

It always risky to predict the counter-arguments of people smarter than oneself, but I'll take that risk and imagine Michael replying something like this: look again at the historical development of punitive damages as described in the previous post, and now imagine that we could assemble every drafter and ratifier of the Eighth Amendment today and show them the meshugass that's going on today in the name of punitive damages, they would say "Well OF COURSE that's part of what we meant by 'excessive fines'!" This argument is strengthened by the fact that (as Michael points out) this is very RECENT meshugass, and therefore scores lower (because less rooted in tradition) on the standard Scalian scale (see Michael H. v Gerald D).

But for text-based originalists, it's always a stretch to base a decision on what the Framers "surely would have" said, instead of what they actually said. (Cf. Justice Thomas's concurrence in U.S. v. Lopez, rejecting the argument that the Framers surely would have blessed the "substantial effects" test for Congress's interstate commerce power, since the clause they actually wrote can be shown from originalist evidence not to have had any such broad range.) That's the ground of my caution on the "excessive fines" clause as a limitation on punies. Yet I could be persuaded that the dissent was right on the "excessive fines" issue in B-F; as to the Due Process holding in Philip Morris, not so much.

As to Haslip -- I'll probably have more to say about it later, but short take: it's regrettable that the challenge there sounded only in Due Process, rather than attempting to revive the Eighth Amendment/excessive fines argument. The late-19th century railroad lawyers were not so timid: they kept nudging the Court toward substantive due process until they got it. Advocates of "excessive fines" limitations on punitive damages should be no less persistent, the more so since their argument is better than mere substantive due process. I note with pleasure the state legislative developments that Michael cites: we originalists nearly always prefer state legislation to federal litigation!

Since Browning-Ferris had not made a timely Fourteenth Amendment claim (who knew that was the hook the Supremes would hang their hat on?), the Supreme Court expressly reserved ruling on the due process argument. In fact, Justices Brennan and Marshall hinted strongly that they thought this kind of punitive award did violate due process. But these Justices would soon leave the court.

Subsequent to the Browning Ferris decision, several states modified their statutes to provide that a certain percentage of punitive damages (up to 60% in some instances, notably in Oregon, home of Philip Morris v Williams, according to a recent Washington Post report) must henceforth be payable to the state government, not to the plaintiffs. Gee, sort of undercuts the majority's view in Browning Ferris that punitives cannot be paid to the state, so cannot be fines, doesn't it? This makes the state an explicit accomplice in the increasing acceleration of punitive awards, and puts the lie to the claim that punitives are not fines.

This set the stage for act 2 of the Supremes' Punitives Saga: Pacific Mutual Life Ins. Co. v. Haslip.

Lemmie Ruffin (I am not making that name up) was an insurance agent. He worked for a lot of insurance companies, including Pacific Mutual Life. As a Pacific Mutual agent, Lemmie sold �major medical� health insurance policies to a group of female civic employees in Alabama. They paid monthly premiums to Lemmie, and he was to forward these premiums to the company. The employees thought they had health insurance. In reality, Lemmie stopped sending money to Pacific Mutual Life, and kept the money for himself. So the insurance company gave Lemmie warning letters to give to the women (to pay their overdue premiums or have their policies cancelled) � of course Lemmie never transmitted those letters, he just kept deceiving the insurance company and the employees. Finally the women�s policies lapsed, and when one got very sick, she found she was not covered anymore. Needless to say, she sued Pacific Mutual Insurance for its �bad faith.� An Alabama jury found bad faith and inadequate supervision of Lemmie by the (out-of-state�) insurance company. The jury held that Pacific Mutual Life had to pay Ms. Haslip $230,000 to cover her hospital bills. But Ms. Haslip was not yet done with Pacific Mutual � she asked for punitive damages. Alabama�s punitive damages scheme gave a jury virtually complete discretion: it merely required a jury to make two distinct decisions: (1) whether or not to impose punitive damages against the defendant, and (2) if so, in what amount. It provided no standard for decision (1), and no method of calculation for decision (2). On the threshold question of whether to impose punitive damages, the trial court instructed the jury as follows: �Imposition of punitive damages is entirely discretionary with the jury, that means you don�t have to award it unless this jury feels that you should do so.� There was, in my opinion, absolutely no law here. Can there be "due process of law" when there is NO law? Do you agree on this theoretical point, David?

The jury condemned Pacific Mutual to $1 million in punitives. The company appealed all the way to the US Supreme Court, on the grounds that it was deprived of due process by the standardless discretion invested in the hometown jury, and by the huge amount of punitives when clearly the company had had no malice whatsoever � it was just as tricked by Lemmie Ruffin as the plaintiff had been. Pacific Mutual lost its appeal, 7-1. Again only Justice O�Connor dissented. The due process claim that everyone had thought so promising after the Browning Ferris case flubbed, as the two Justices who had espoused it had left the court. The Alabama jury instruction was deemed precise enough (!) that the jury would have legal guidance about what to do. The punitive award of 4 times compensatory damages was not so exorbitant as to violate due process standards, said the majority. They did say it was �close to the line,� however. This is utterly unprincipled, sez me -- rejecting the sound "no law" argument while intimating that higher damages might somehow violate Due Process. After the rejection of the Excessive Fines rationale in Browning Ferris, Haslip represents a further slide into unintelligibilty as regards punitives.

But the darkest hour had not yet been reached. It would come, in 1993. That is act 3, TXO Production Corp. v. Alliance Resources Corp.

TXO and Alliance were engaged in a complex series of negotiations so that TXO could get oil and gas rights to land owned by Alliance. They were bickering back and forth over what royalty rate would be paid to Alliance. During these negotiations, a third party claimed that it owned the rights to Alliance�s land by virtue of an obscure deed. TXO expressed concern that any title it might get to the oil and gas rights was vulnerable; because of this it asked for a reduction in its royalty rate to cover itself from possible claims by this third party. After more complex and ambiguous declarations on both sides, TXO claimed that a deal had been reached, but Alliance denied it. TXO sought a declaratory judgment from the West Virginia Circuit Court that, through all these negotiations, it had finally acquired resource rights over the land.

Alliance defended against this claim, and countersued for what Alliance called �slander of title,� (an old English tort that had never once been recognized in West Virginia�s entire history), asserting that TXO was falsely diminishing public belief that Alliance had full property rights. At bottom, this suit was little more than an episode in rather hardball contractual dispute about royalty rates. That is, until the West Virginia courts got through with it. The trial judge rejected TXO�s claim that a deal had been reached. The judge let a jury decide whether Alliance�s title had been slandered. The jury accepted Alliance�s slander of title suit, and condemned TXO to pay $19,000 to Alliance for damages, which represented its lawyer�s costs in defending against the declaratory suit by TXO. Alliance had no other losses.

So far, so good, I guess � the case was a close call in a hardball contracts dispute. I have not mentioned that Alliance was a local West Virginia company, while TXO was a fully-owned subsidiary of U.S. Steel. That explains, perhaps, why the jury also condemned TXO to ten million dollars in punitive damages, or 526 times the compensatory award. TXO appealed, and had great confidence in the appeal. Recall that in Haslip punitives were �only� 4 times compensatories and the court said that was �close to the line.� Moreover, West Virginia�s instructions to the jury on punitives were so totally devoid of standards as to make a mockery of the Supreme Court�s pious command to the states in Haslip to henceforth guide the jury with some precision. Here was the standard as stated by the West Virginia Supreme Court, when it heard the TXO appeal: we know we are now compelled by the United States Supreme Court to set punitive damages standards if our decision is to pass constitutional scrutiny, so we hereby distinguish between the �really mean� defendant and the �really stupid� defendant. For the really stupid defendant, punitives can be 10 times compensatories. For the really mean defendant, punitives can be 500 times compensatories. Since this defendant �failed to conduct [itself] as a gentleman�, the �really mean� standard applies, and 526 times punitives is close enough to 500, so we uphold the award.

[pause to allow readers to gasp]

The Supreme Court affirmed the West Virginia Supreme Court, 6-3, saying that its standard passed constitutional scrutiny. Justices White and Souter joined Justice O�Connor in dissent this time. On the one hand, O�Connor was no longer alone in thinking that there were some punitive damage awards that could not pass constitutional muster. On the other hand, this case looked like MOPA (the mother of all punitive awards), and if six Justices found it constitutional, one wondered what could possibly fail to pass muster. Again, in my opinion, the WV court called the Supremes on their incoherent Haslip jurisprudence.

Tomorrow I will deal with Gore and Campbell, wherein the Supremes seemed to decide to rescue tort law from the abyss perhaps approached through its poor Browning Ferris and Haslip jurisprudence.

Where has this left us? Are there any disagreements between David and me? Perhaps we disagree about whether "condemn the defendant to any amount you please" satisfies Due Process of Law requirements? And as David suggested, we may disagree (though David's jury seems still out on this onw) about the Excessive fines issue. But we surely agree that by TXO the Supremes were in it up to here...

Haslip: Lemmie Ruffin. The excessive fines issue: Lemmie See. The Due Process analysis by the majority in Haslip: Lemme Attem! But first, let me clarify a side-issue that keeps coming up: the out-of-state impact of punitive damages. I and all MI fans, I'm sure, are convinced by Walter Olson's argument that the interstate impact of punitive damages creates an interstate commerce issue without coming anywhere close to the Wickard frontier, and therefore, Congress can enact tort reform under the Intersate Commerce Clause.

Whether out-of-state impact is relevant to a Due Process analysis of punitive damags, I'm not so sure. The constitutional remedy that tort reformers need may better be found in the "negative commerce power" doctrine, or for those who share Scalia's scepticism about the negative commerce doctrine, then perhaps in Article IV privileges and immunities. Michael's frequent references to out-of-state defendants being turned over and shaken for loose change by state courts suggest that those courts are engaging in a sort of protectionism that would be clearly unconstitutional if done by a state legislature. This should be further explored. (Btw, what prevents defendants in such cases from removing to federal court on diversity grounds? Perhaps because of Erie the advantage of doing so is limited, but at least they might get less biased jury instructions.)

OK now, about the Haslip instruction and verdict. Michael says: "There was, in my opinion, absolutely no law here. Can there be "due process of law" when there is NO law? Do you agree on this theoretical point, David?" I want to, but: the presence of discretion, w/o more, is not lawlessness. Prosecutors have discretion in bringing cases; federal administrative agencies (sometimes) get Chevron deference; the Supreme Court insists (perhaps wrongly) that no unconstutional delegation of lawmaking power has occurred when Congress gives agencies no guidance more specific than "fairness," or when it tells EPA to give us clean air but allows that to mean (re particulate matter) "anything from zero to the London Killer Fog," as Doug Ginsburg memorably put it.

How this applies to punitive damages, and to instructions about them, depends on the state of the law in 1868. Scalia, in his Haslip concurrence (which rejects the majority's reasoning as solidly as Michael does), concedes that punitive damages had their vigorous critics. One notices, moreover, that many of the criticisms Scalia cites are similar to the one Michael makes: that punitive damages belong in the criminal justice system (public ordering) and not in the tort system (private ordering). But he also concludes (and I know nothing to the contrary -- perhaps Michael does) that these critics lost: they were in the minority. "In 1868, therefore, when the Fourteenth Amendment was adopted, punitive damages were undoubtedly an established part of the American common law of torts. It is just as clear that no particular procedures were deemed necessary to circumscribe a jury's discretion regarding the award of such damages, or their amount."

So, back to the question: can there be "due process of law" when there is NO law?" But there was a trial, a judge, a jury, and an appeals process. So I can't agree that there was NO law (as distinct from BAD law, which there assuredly was). Due process of law entitles defendants to those PROCEDURES that are part of the law of the land, and Pacific Mutual got those.

Scalia's critique of the majority opinion in Haslip parallels Michaels: the Court decides only "that Alabama's particular procedures (at least as applied here) are not so 'unreasonable' as to 'cross the line into the area of constitutional impropriety[.]' This jury-like verdict provides no guidance as to whether any other procedures are sufficiently 'reasonable,' and thus perpetuates the uncertainty that our grant of certiorari in this case was intended to resolve." The Court is being coy with millions of dollars and incalculable downstream economic effects at stake. It flutters its eyelids in Haslip over SOME punitive damages being perhaps too much for Due Process. But then the TXO decision comes along and says, nope, 526 x compenatories still doesn't get you to the limit.

It's like the pre-Smith Free Exercise regime: your religiously motivated conduct is protected by the compelling state interest test -- and when we find a state interest that isn't compelling, we'll let you know. Same here with punitive damages: supposedly there's a Due Process limit; somewhere over the rainbow....

I'd say these cases ask the wrong question: How much is too much? To an opponent of substantive due process, the only question is: What part of no don't you understand?

Let me suggest some ways to break the impasse. As Michael has noticed, I for one may be willing to buy the doctrine of the Browning-Ferris dissent. As a medievalist (which I was before I took up law), the appeal of a Magna-Carta-based opinion is undeniable; and when you have a clause (excessive fines) that can be dated back earlier than the tort-crime division, simply announcing the tort-crime division may not be an adequate answer.

But I have another suggestion to make: the Scalia view in Haslip and TXO is heavily grounded in history: "text and tradition." But earlier in this thread, Michael pointed to the historically anomalous nature of modern punitive awards. Could a case be made that there is a principled distinction, and not just a distinction of degree, between the punitive damages that were part of American tort law in 1868, and the kind that debuted only in the 1980s? If it's only a distinction of degree, Scalia won't buy, as his Haslip concurrence shows. But perhaps it's a distinction of kind...? Of course, whether Scalia buys may be irrelevant if a solid majority of the Court now believes there are Due Process limits (w/o regard to the Eighth Amendment) on punitive damages. But a principled answer to "how much is too much" would be desirable for its own sake, and for predictability in tort law.

In this, my closing comment, I first pay tribute to David. I think he HAS identified a Due Process claim on originalist grounds (since, as he almost concedes, modern punitives are qualitatively different from the symbolic damages of yore; and "bet the company" damages based on jury whim is standardless and lawless). Diversity jurisdiction is easy to defeat (just sue the local retailer), so that out doesn't exist. So Due Process is available, though not for the reasons given in the cases dealt with in my last comment.

Let's see if the Court did any better Post-TXO. That case was perhaps the Supremes' darkest hour concerning punitives. The dam broke in Gore. But did it break in a good way?

BMW of North America, Inc. v. Gore

Mr. Gore purchased a new BMW from an authorized Alabama dealer. He loved his car. But when he took it in for service, he was informed by one of the mechanics that a panel of the car had been repainted. It turned out the car had been scratched during boat transport from Germany. BMW had followed a nationwide policy of repairing predelivery paint chips and scratches to new cars, so long as the cost of repair did not exceed 3% of the car�s suggested retail price. [If repairs cost over 3% of the value of the car, it was removed from new vehicle inventory and given to the sales team to use as a demonstrator, then sold at auction.] This particular paint job cost way under the 3% limit, and it was also under the Alabama consumer protection limit, as that law had always been understood. So BMW shipped the car to its Alabama dealer, who sold it new.

Gore brought this suit for compensatory and punitive damages against BMW, alleging, inter alia, that his car had a lower resale value because of the repainted part; he considered himself a victim of the tort of fraud. Again, local plaintiff, out-of-state defendant. The jury returned a verdict finding BMW liable for compensatory damages of $4,000, the alleged difference in resale value between a �concourse� car and one that had a repainted panel [But wait -- did BMW sell the car for "concourse" purposes? Sigh...] . The jury also assessed $4 million in punitive damages, on the grounds that BMW had likely repainted 1000 cars over the years and should pay $4K for each. Alabama appellate courts reduced the punitive award to $2 million, which they decided was not �grossly excessive� under TXO, because that amount constituted a mere 500 times compensatories (less than the 526 multiple that passed muster in TXO).

A bare majority of the court had had enough. By a 5-4 margin (Stevens, O�Connor, Souter, Breyer, and Kennedy) the court held that a combination of the lack of real wrongdoing by BMW, the lack of notice that any punitive award was possible or even that BMW's practice was illegal in Alabama, the jury's consideration of non-Alabama touch-ups which were surely not violations of Alabama law, and the huge discrepancy between compensatories and punitives all combined to make this award unconstitutional. The court didn�t give any boundaries as to what would be a maximum limit, but said this case was beyond that limit. Three dissenters, Chief Justice Rehnquist, Justices Thomas and Ginsburg, essentially held that the federal constitution did not place any limits on states in determining punitives. Justice Scalia denied that due process could ever affect damages, in federal or state court. Hmmm... it's unconstitutional, we don't know exactly why, it's a "multi-factor test", but this one is beyond the pale. Unless punitives are like obscenity (as opposed to saying "unless punitives are obscene), this decision appears rather lawless.

State Farm Insurance v. Campbell (Utah 2003)

In 1981, Curtis Campbell was driving with his wife in Cache County, Utah. He decided to pass, all at once, six vans traveling ahead of him on a two-lane highway. Todd Ospital was driving a small car approaching from the opposite direction, at a speed in excess of the speed limit. Campbell did not have enough space to pass all six vans. He was headed right toward Ospital. To avoid a head-on collision with Campbell, Ospital swerved onto the shoulder, lost control of his automobile which came back onto the road, and collided with a vehicle driven by Robert G. Slusher. Ospital was killed, and Slusher was rendered permanently disabled. The Campbells escaped unscathed; in fact, they never even collided with anyone � they got back in their lane safe and sound just in the nick of time thanks to Ospital�s sacrificial decision to leave the road.

In the ensuing tort suits against Campbell by Ospital�s estate and by Slusher, Campbell insisted he was not at fault since he never collided with anyone (!) and since Ospital was speeding. Campbell�s insurance company, State Farm Mutual Automobile Insurance Company (State Farm), decided to contest liability and declined offers by Slusher and Ospital to settle their suits for the measley policy coverage limit of $50,000 (i.e., $25,000 per plaintiff). State Farm also ignored the advice of one of its own investigators and took the case to trial, assuring the Campbells that �their assets were safe, that they had no liability for the accident, that [State Farm] would represent their interests.� To the contrary, a jury determined that Campbell was 100 percent at fault, and a judgment was returned for $185,849, way more than the amount of Campbell�s coverage. At first State Farm refused to cover the $135,849 in excess liability (recall that Campbell had purchased only $50,000 of coverage). State Farm�s lawyer told the Campbells, �You may want to put for sale signs on your property to get things moving.� Nor was State Farm willing to post the required bond to allow Campbell to appeal. Campbell thus hired his own lawyer to appeal the verdict. While this appeal was pending, in late 1984, Slusher and Ospital's estate contacted Campbell. The three reached an agreementwhereby Slusher and the estate agreed not to execute their judgment against the Campbells� property. In exchange the Campbells agreed to pursue a bad faith tort suit against State Farm and to be represented by Slusher�s and Ospital�s attorneys. The Campbells also agreed that Slusher and Ospital would have a right to play a part in all major decisions concerning the bad faith suit. No settlement between Campbell and State Farm could be concluded without Slusher�s and Ospital�s approval, and Slusher and Ospital would receive 90 percent of any verdict Campbell obtained against State Farm. In some jurisdictions this might be seen as a fraud on the court.

In 1989, the Utah Supreme Court denied Campbell�s appeal. State Farm then decided to pay the entire $185 thousand. There were now NO pecuniary damages suffered by the Campbells.

The Campbells nonetheless filed (as they had promised the Slushers and the Ospital estate they would) a complaint against State Farm alleging the torts of fraud and intentional infliction of emotional distress. The trial court initially granted State Farm�s motion to dismiss that suit because State Farm for lack of damages, but that ruling was reversed on appeal. Now State Farm had to defend itself. In the first phase the jury determined that State Farm�s decision not to settle for $50,000 was unreasonable. The second phase of the trial would determine damages. Remember that there were NO pecuniary damages (because State Farm had paid all the excess award). There was arguably emotional distress during the short period when the Campbells thought they were going to lose their home. Emotional distress, however, is not usually recoverable unless it was intentionally inflicted, and no one can seriously claim that State Farm is a sadistic company bent on inflicting emotional distress on its clientele. State Farm argued during phase II of the trial that its decision to take the case to trial was, in retrospect, an �honest mistake,� and that it certainly did not warrant punitive damages. The Campbells introduced evidence that State Farm�s decision to take the case to trial was a result of a national scheme to meet corporate fiscal goals (read, O HORROR, TO MAXIMIZE PROFITS) by capping payouts on claims.

Just before the second phase of the trial the Supreme Court decided Gore. Based on that decision, State Farm moved for the exclusion of evidence of all out-of-state conduct. The trial court denied State Farm�s motion. The jury then, amazingly, found $2.6 million dollars in emotional distress for the Campbells, who (to repeat) had not lost one cent. Likely the jury knew that 90% ($2,340,000) of this amount was going to the Slusher and Ospital families, and it wanted to give $260,000 to the Campbells � but this would be totally illegal if done explicitly, because the other two families had settled their suit and had no cause of action against State Farm. In addition the jury awarded $145 million in punitives, to punish State Farm for its aggressive practices throughout the country. The trial court reduced the compensatories to $1 million and the punitives to �only� $25 million, under the
TXO �really mean� standard. The Utah Supreme Court then reinstated the original $145 million punitives award. State Farm appealed to the Supreme Court.

This time the decision was 6-3. Chief Justice Rehnquist abandoned his previous position and joined the majority, leaving Justices Scalia, Thomas, and Ginsburg alone in dissent. The majority this time tried to provide an indication that certain trial court activity would no longer be tolerated:
-Don�t ever again use legal out-of-state behavior to calculate punitive damages. Out-of-state behavior can be invoked to establish a pattern of bad faith or maliciousness, but in that case it has to be the same behavior as the behavior being impugned;
-Don�t ever give more than nine times compensatories as punitive damages, the court said, unless there is a �particularly egregious act that has resulted in only a small amount of economic damages.�
-Moreover, in cases like this one, where the compensatory damages adjudged by the jury are extremely generous, do not let punitives exceed compensatories.

Philip Morris v Williams [Oregon 2007]

As is now well known, Justice Breyer (writing for four others) held that the Due Process Clause does not permit a jury to award punitive damages for harm caused to individuals other than the plaintiff, even in a case of egregious conduct (fraud -- yet see my very first comment in this series -- if you believe there was fraud I have that bridge for sale...). Yet in Gore the Supremes had apparently allowed a jury to award punitive damages for harm caused to individuals other than the plaintiff (so long as the other individuals were in-state). Without this rule, the Court held, defendants would be subjected to a �standardless� damages determination, without fair notice of the punishment to be imposed, and without the opportunity to fully refute the alleged harm to nonparties. But why were the Supremes suddenly concerned about "standardless" interpretation -- this issue had not troubled them in Haslip, TXO and maybe even Gore. Harm to others would be allowed in evidence to ALLOW FOR punitives, but not to CALCULATE punitives. How would the court know that the jury had danced this delicate dance correctly? We just don't know, the Supremes never tell us. Coyly Justice Breyer at one point lets slip that if the punitives were LOWER, we might know that juries were correctly instructed and followed their instructions. But clearly there was no majority to cap punitives once and for all --

Courts will now have to craft jury instructions on this issue. We can look forward to years of litigation and circuit splits trying to sort out what the Court hath wrought.

And so we come to the end of a very rocky and unsettled road. The Supremes have no coherent view of punitive damages. Justice Stevens seemed to admit as much when he harkened for the good ol' days of Excessive Fines (recall that Oregon takes 60% of Williams' booty). This is a mess, a royal mess, and we're in for much more to come. Stay tuned folks, and thanks for reading this far.

Opening thoughts and questions

April 13, 2011 6:08 AM

I'm  excited to see what some of our guests have to say on the pending Supreme Court case, Wal-Mart v. Dukes, which is in essence the mother of all employment-law class actions. Richard's piece is a good start, fleshing out how two areas of law -- employment discrimination law and class actions -- come together here. I'll start with a few questions, pulling out the key issues as I see them:

  1. The class action rule at play. When I wrote about this case after initial reports that it was certified at the trial-court level, I noted how it didn't fit under a traditional 23(b)(3) schema. Of course, as is now obvious, the certification rule at play isn't (b)(3) but rather (b)(2). It would seem to me that using (b)(2) here is disingenuous. To begin with, it's hard for me to see how the damages at issue here don't force this case into a (b)(3) framework. Even Justice Ginsburg -- hardly a critic of litigation generally or employment-discrimination litigation specifically -- seemed to recognize in oral argument that there's a pretty serious issue about how to handle the damages phase in a way that doesn't adversely affect the interests of many (realistically thousands or hundreds of thousands) of class plaintiffs. Doesn't using (b)(2) here swallow the (b)(3) rule? And if so, wouldn't (b)(3) be somewhat superfluous, at least in similar types of cases? And even under a (b)(2) rationale, the injunctive remedy isn't at all clear here; it's a far cry from the nuisance abatement scenario Richard describes, and short of Wal-Mart completely centralizing and reconstructing its hiring practices, under court supervision, how exactly is an injunction supposed to work?   I'd be very interested in hearing more about these issues from some of our experts more versed in class-action practice.
  2. Expert evidence at the class certification stage. A key question before the Court is of course the degree to which it's proper to rely on the plaintiffs' expert evidence to establish their theory of the case, both to establish that discrimination exists and to tie it somehow back to Wal-Mart, with respect to all of its female employees. If Daubert review isn't appropriate at the class-certification stage, I don't see how any court could evaluate claims in a case like this: effectively, any employer likely has some gender or race or other disparity in its hiring or promotion patterns, and it's always possible to concoct some theory to explain such disparities. Don't we have to have some standard to evaluate such claims before launching a class-action claim that could leave an employer's hiring practices under court control?
  3. How this case intersects with "disparate impact" in employment discrimination cases. I think Richard is right to focus on disparate impact here. As some of the justices suggested at oral argument, there's some tension in the plaintiffs' theory: on the one hand, Wal-Mart is responsible for gender disparities in promotion and pay across all its stores nationwide; but it's responsible under the theory that its promotion and pay practices are too decentralized, leaving decisions up to individuals who are, at least in some cases, likely to be governed by prejudice. Isn't this rationale just a backdoor way to solidify a disparate-impact standard -- requiring that large employers centralize decision-making to avoid disparities in hiring, pay, and promotions? How does the theory here jibe with the Supreme Court's rulings on disparate impact, such as the recent (race) case Ricci v. DeStefano?

So, at the outset, I have lots of questions. I look forward to fleshing them out.




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.