Testimony Before California Senate Judiciary Committee A.B. 1862 (Morrow/Goldsmith) June 25, 1996

Can't support legislation since 501(c)(3), but as matter of public policy, these merit the serious consideration of this panel and the members of both chambers.

INTENT: If trier of fact determines that defendant is liable for exemplary (punitive) damages, separate proceeding conducted by trial court to determine the amount of damages to be imposed.

Amount of damages shall not exceed 3 times the amount of compensatory damages Damages are based on:

• reprehensibility of defendant’s conduct
• profits that D has gained by virtue of wrongful course of conduct
• intentional concealment of misconduct

Financial condition of defendant shall be considered only to assure that punitive damages are not disproportionate to defendant’s ability to pay - only at D's request

THREE PRI STUDIES:

PRI STUDY ANALYZED 539 PUNITIVE DAMAGE JURY AWARDS OF $100,000 OR MORE BETWEEN 1984 - 1994 as reported in Jury Verdicts Weekly

Total punitive damages awarded - 1984 - 1994, over $3 billion. Net amount of punitive damages actually levied following appeals, $2.5 billion

Average punitive award grew from less than $1 million in 1984 to $6.6 million in 1994

Overwhelming majority of punitive damage awards during 1990 - 1994 period were fully upheld by judges or on appeal. Contrary to claims that punitive damage awards are frequently reduced or vacated, 90% of punitive damage awards survived post trial motions and appeals without being reduced.

CONCLUSION - amount of punitive damages fluctuates widely, providing prima facie evidence that punitive damages are unpredictable and arbitrary.

SEPARATE WASHINGTON LEGAL FOUNDATION STUDY

Washington Legal Foundation compared punitive awards in business related cases in four large states (CA, TX, IL, NY) b/w 1968-1971 and 1988-1991.

Total punitive damages grew from less than $800,000 between 1968-1971, to more than $312 million b/w '88-'91. While punitive damages in this comparison grew 117 times, GDP had only doubled.

The average award in ttio of punitive damages to compensatory damages in 1990 - 1994 sample of cases - supporting conclusion that punitive damages are unpredictable and arbitrary. Range of punitive awards runs from 710 times compensatory damages, to .0001 times compensatory damages. (In one case, a D who was not assessed any compensatory damages, was still levied with $62,000 in punitive damages.)

While there is a declining number of verdicts that include punitive damages, the increasing trends of the aggregate amount of punitive damages and the size of the average award casts a chilling effect on the incentives and decision making of individuals and businesses.

Between 1/2/91 and 2/1/91, roughtly 1000 lawsuits filed in S.F. County Superior Court - 27% of cases included punitive damages being sought.

Business and government defendants are four times as likely to face punitive damages than individual defendants. Lawsuits that include punitive damage demands take an average of six months longer than non-punitive damage cases. Average lawsuit takes 15 months to resolve, cases with punitives take average of 21 months.

Punitive damages play a role in the out of court settlement process, where the vast majority of lawsuits are settled. Punitive damage demands tilt the playing field in favor of demanding parties, and increase the number of out of court settlements.

Focusing only on trial verdicts understates the scope and nature of the problem because the overwhelming majority of all lawsuits are resolved out of court. Some studies show that only 2% of all cases go to jury.

What is occurring in the other 98% of cases that are resolved out of court? Punitive damage demands in lawsuit filings have a significant effect on out of court settlements. Used as a weapon to generate out of court settlements that are favorable for plaintiffs, especially against business and government defendants.

Between January 2, 1991 and February 1, 1991, Civil Division of CA Superior Court for County of San Francisco, study was done on the 1,024 lawsuits filed. 1991 chosen because over 98% of cases from this time period had been resolved either by trial, settlement, or dismissal, and most could be traced down to their conclusion.

HIGHLIGHTS:

• 78% of all punitive damage demands were filed against a business defendant
• Government defendants face punitive demands in more than one-third of lawsuits filed against government agencies
• Lawsuits that include punitive damage demands take about six months longer to resolve than lawsuits that do not include punitive damage demands.
• The probability of a punitive damage award if a case proceeds to trial is 14% or higher. For business defendants, the probability is more than 20 percent.

1,024 cases - (9) were sealed by the court and unavailable for study, leaving 1,015 lawsuits for analysis.

537 / 1015 (52.9%) were based on one of the three probable causes of action where punitive damages are recoverable:

Common law tort, statutory tort or other statutory civil action, contract (bad faith claims)

145/537 lawsuits sought punitive damages (27%) Very high!!! 112/145 were filed against a business defendant (78%).

The remaining 478 cases, consisted of civil law categories where punitive damages are not available or only very rarely (equity causes of action - T.R.O.’s, family law matters, divorce, civil petitions - name changes etc.)

Duration: Punitive cases take longer to resolve

Duration of cases showed that lawsuits that did not include a punitive damage demand were concluded in an average of 15 months. Punitive damage lawsuits required an average of 21 months to conclude.

Unavoidable fact: Both the uncertainty posed by the prospect of unlimited punitive damages, combined with the relative probability of a punitive damage award if a case goes to jury trial, provide litigants who demand punitive damages with potent leverage against risk averse defendants , and tip the balance in settlement bargains in favor of litigants with weak or even frivolous cases.

• Conche first period '68-'71, was only $1,080 while the average award in the second period '88-'91, was $778,000, nearly equal to the entire amount of punitive damages awarded during the first four year period.

Very few punitive damages awards during the 1990-1994 period were vacated or reduced by judges on appeal. Of the 269 punitive damage jury awards ID’d from 1990 - 1994, only 13 punitive awards were vacated in their entirety, only 18 punitive awards were reduced through post-trial motion, appeal, out of court negotiation. The full punitive award judgments awarded by jury were upheld in 93% of cases. Juries awarded total of $1.78 billion in punitive damage awards during this period. Although some very large awards were vacated or reduced through post trial motions and appeals, defendants were still liable for $1.16 billion in punitive damages.

There is no consistency in the raentrating on trial verdicts overlooks one important aspect -

OUT OF COURT SETTLEMENTS

A defendant facing a suit without merit is often willing to pay an amount that is less than his prospective defense costs to settle the case and "make it go away." The RAND orporation’s Institute for Civil Justice found that the cost of defense in an average tort lawsuit ranges from $6,000 - $10,000, depending on the kind of suit.

Absent Congressional reform seeking uniform liability reform, it is imperative that the state establish new guidelines and limitations on punitive damages. While some states, such as Washington, prohibit punitive damages entirely, others have passed laws restricting the amount of such awards.

FACT: California is host to punitive damages that are larger and more frequent than in other states.

• California's median punitive damage award is between three and six times higher than the national average. Median punitive damage awards have doubled over the last decade.

John C. Liu is a Policy Analyst at the Pacific Research Institute, a California-based think tank.