The recent landmark Supreme Court decision addressing punitive damages in the infamous Exxon Valdez oil spill case has brought the issue of punitive awards back into the legal limelight. Modern Supreme Court jurisprudence, most notably BMW of North America, Inc., State Farm, Philip Morris, and now Exxon Shipping Co. in 2008, has concluded that such judgments are justified to punish morally reprehensible behavior and to send a message to evildoers. The Court, however, has increasingly emphasized that the U.S. Constitution’s Due Process Clause presumptively limits punitive awards, drawing an arbitrary line in the sand of no more than ten times actual damages.
This Article critically examines modern punitive damages jurisprudence using a law and economics lens. From that standpoint, there is no justifiable basis for tort law’s requirement of morally reprehensible or intentional conduct before punitive damages may be awarded. Indeed, punitives should be imposed—must for deterrence purposes—even in the absence of egregious behavior, when a defendant has escaped liability previously, either intentionally or serendipitously. In this manner, the punitive damages award makes up for the occasions in which the defendant avoided liability and failed to compensate victims for harm caused. On the other hand, sound economic analysis dictates that imposing enormous punitive damages simply because a tortfeasor’s behavior was morally offensive can inadvertently lead to overdeterrence, price inflation beyond optimum, quantity of goods purchased below optimum, and a significant reduction in overall social welfare. In sum, the Supreme Court must drastically revise its approach to punitive damages jurisprudence: such awards should not be arbitrarily based on a gut reaction to how reprehensibly we feel a defendant acted. Rather, punitive damages should be granted only where tortfeasors have the potential to escape liability for their actions, and they should be awarded in that case even if the defendant in no way meets the modern requirements of egregious behavior. Moreover, the Supreme Court’s arbitrary due process litmus test of ten times compensatory damages as a ceiling on punitive damages makes zero sense from an economic analysis point of view, and needs to be summarily abolished.
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