Nearly ten years ago, Justice Sandra Day O’Connor observed that "punitive damages are a powerful weapon. Imposed wisely and with restraint, they have the potential to advance legitimate state interests. Imposed indiscriminately, however, they have a devastating potential for harm."

Punitive damages are intended to protect society by punishing unlawful conduct or serious wrongs and deterring their repetition. Usually, legislatures define such conduct and prescribe penalties. Where punitive damages are concerned, however, this task has been assigned to the judicial system, where juries determine whether certain conduct warrants punishment and, if so, how much.

Unfortunately, people who serve on juries are not given much help in performing this task. Legislatures have extensive investigative resources to identify societal problems and craft solutions. By contrast, a jury’s ability to obtain information is limited. It hears only evidence introduced by the litigants — private parties pursuing private goals. Indeed, the jury is prohibited from seeking additional information. As a result, juries frequently lack the information needed to fully define the public interest and assess punitive damages.

Further, juries receive little guidance from the courts. Justice O’Connor observed that "rarely is a jury told anything more specific than ‘do what you think best.’ " In fact, many large punitive damage awards are later overturned or significantly reduced. Like a "product recall," this is a clear indicator that something is wrong with what the judicial system is "producing."

The true cost of punitive damages, however, does not lie in the occasional blockbuster award. That is the tip of the iceberg. A more serious problem is the increasingly pervasive presence of punitive damage claims. Cases that previously would have been pursued as simple breach of contract actions now frequently include an additional claim for punitive damages.

This trend has a destabilizing effect on the legal process and the conduct of legitimate business affairs. All fifty states have substantially adopted the Uniform Commercial Code in recognition of the need for uniformity, stability and predictability in business dealings. But a claim for punitive damages introduces a "wild card" by raising the financial stakes enormously. The resulting uncertainty makes disputes more difficult to settle. The important social goals of uniformity, stability and predictability are subverted. And the costs of litigation and excessive settlements are ultimately passed on to customers in higher prices.

Does the present system produce a just and rational result? Certainly there is much room for improvement. The most important first step would be to establish objectively measurable criteria and limits for assessing punitive damages. This would permit more disputes to be settled before trial. Juries could decide the remainder and wield this powerful weapon "wisely and with restraint," without misguidingly inflicting devastating harm.

Ellis J. Horvitz
Horvitz & Levy, LLP