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Punitive : Divergence in Search of a Rationale

Bruce Chapman and Michael Trebilcock

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Citation Bruce Chapman & Michael Trebilcock, "Punitive Damages: Divergence (published version) in Search of a Rationale" (1989) 40 Alabama Review 741

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This article was made openly accessible by U of T Faculty. Please tell us how this access benefits you. Your story matters. PUNITIVE DAMAGES: DIVERGENCE IN SEARCH OF A RATIONALE

Bruce Chapman* Michael Trebilcock**

TABLE OF CONTENTS

1. INTRODUCTION: THE GENERAL PUZZLE OF PUNITIVE DAMAGES'...... 742 II. THE EVOLUTION OF THE LAW ON PUNITIVE DAMAGES.. 745 A. Developments in the United Kingdom: Restricting Punitive Damages ...... 745 B. Canadian Developments: A Cautious Expansion of Punitive Damages ...... 750 C. Developments in the United States: Substantial Expansion of the Scope of Punitive Damages. 758 D. Divergence in Search of a Rationale...... 761 III. THE COMPENSATION RATIONALE ... .. 761 A. First-Order Issues...... 761 1. Types of Proscribed Conduct ...... 761 2. Quantum of Punitive Damages 769 B. Second-Order Design Issues...... 774 ~, 1. Vicarious and Corporate Liability...... 774 I 2. Insurability...... 777 3. The Relevance of Defendant's Wealth. .. .. 777 4. Special Procedural Protections '. 778 IV. THE RETRmUTIVE RATIONALE...... 779

* Assistant Professor of Law, University of Toronto. ** Professor of Law and Director of the Law and Economics Program, University of Toronto. This study was sponsored by the Ontario Law Reform Commission, whose financial assistance is gratefully acknowledged. However, the views expressed herein are not to be attributed to the Commission. In addition to the invaluable research assistance of James Penner and Paula Hurwitz, we gratefully acknowledge helpful comments from Alan Brudner, John Jeffries, John Palmer, Harold See, and Stephen Waddams.

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Electronic copy available at: http://ssrn.com/abstract=1156859 742 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 743

A. First-Order Issues...... 779 what the defendant pays as damages must go to the plaintiff as 1. Proscribed Conduct : . .. 779 compensation, and adequate activity level incentives to avoid ex a. A Third Kind of Wrongdoing? ...... 780 ante the costly interactions between the two parties require some­ b. Private Enforcement of Retribution: thing other'than the zero sum game that law characteristically The Argument from Administrative provides ex post? This strictly economic approach to a problem is Efficiency ...... 786 one that presupposes only the singular policy concern of optimal 2. Quantum of Damages : ...... 797 accident deterrence in the very particular context of tort law." We B. Second-Order Design Issues...... 7.98 should expect these difficulties to be that much greater if we are 1. ...... 798 trying to combine within a single action for punitive damages the 2. Insurability...... 801 quite different types of concerns that typically inform tort and 3. The Relevance of Defendant's Wealth. .. .. 801 . 4. Special Procedural Protections 804 The specific puzzle in an action for punitive damages is in ex­ V. THE DETERRENCE RATIONALE : .. .. 805 plaining the characteristic focus of the action on the quality of the A. First-Order Issues: Types of Conduct Addressed defendant's conduct, and in particular on whether the defendant's and Sanctions Imposed...... 806 conduct was "wilfully," "maliciously," or otherwise "outrageously" 1. Criminal Conduct 808 wrong, while at the same time providing an explicit role for the 2. Tortious Conduct...... 811 plaintiff as an enforcer of the law." Sometimes we find ourselves a. Intentional ...... 811 b. ...... 812 c. ...... 817 1. See S. SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW (1987) [hereinafter S. SHAVELL, ECONOMIC ANALYSIS]; Shavell, Strict Liability versus Negligence, 9 J. LEGAL STUD. 3. Breach of 818 1, 19 (1980) (Proposition 5). According to Shavell, B. Second-Order Design Issues...... 819 one is led to ask whether there exists any conceivable liability rule that always results 1. Vicarious Liability...... 819 in optimal levels of activities. The answer is no.: The reason, in essence, is that for injurers to choose the correct level of their activity they must bear accident losses, 2. Insurability...... 821 whereas for victims to choose the correct level of their activity they too must bear 3. The Relevance of Defendant's Wealth. .. .. 822 accident losses. Yet injurers and victims cannot each bear accident losses. 4. Special Procedural Protections 825 S. SHAVELL, ECONOMIC ANALYSIS, supra, at 29. VI. CONCLUSION...... 826 Of course, alternatives to tort law litigation, which provide for negative sum games ex post (e.g., regulatory fines or taxes), could help to solve this problem. 2. We do not mean to suggest that economic analysis of law is unconcerned with the other possible goals of tort law. It has much to say, for example, about the optimal provision 1. INTRODUCTION: THE GENERAL PUZZLE OF PUNITIVE DAMAGES of insurance for accident costs that cannot be avoided. Our point here is only to argue that whatever further goals are added, a single action in tort will in general be unable to provide Punitive damages lie at the interface between torts and crimi­ adequately for deterrence of both the victim and the injurer at the activity level. As it hap­ pens, combining deterrence with insurance only compounds the difficulties for tort. See nallaw. While the separation between any two substantive areas of generally Trebilcock, The Social Insurance-Deterrence Dilemma of Modern North Ameri­ law is always somewhat artificial, there is, nevertheless, good rea­ can Tort Law: A Canadian Perspective on the Liability Insurance Crisis, 24 SAN DIEGO L. son to be skeptical that any single legal institution can provide us REV. 929 (1987) [hereinafter Trebilcock, The Social Insurance-Deterrence Dilemma]. with a coherent response to the quite different concerns that ani­ 3. It is commonplace to point to the anomaly of allowing the plaintiff to recover as damages what the defendant must pay as a penalty. See, e.g., J. FLEMING, THE LAW OF mate the law relating to tort and crime. In fact, economists have TORTS 566-68 (7th ed. 1987); S.M WADDAMS, THE LAW OF DAMAGES para. 985 (1983); Cooter, recently argued that a'single tort action is incapable of providing Economic Analysis of Punitive Damages, 56 S. CAL. L. REV. 79, 90 & n.9 (1982) [hereinafter, adequate incentives, at both the care and activity levels, for both Cooter, Economic Analysis]; Ellis, Fairness and Efficiency in the Law of Punitive Damages, 56 S. CAL. L. REV. 1, 10-11 (1982) [hereinafter Ellis, Fairness and Efficiency]. For judicial the defendant and the plaintiff to avoid the costly interactions that articulation of the anomaly, see Lord Reid's opinion in Cassell & Co. v. Broome, [1972] App, happen to link them. This is because in a private law tort action, Cas. 1027, 1086 (H.L.).

Electronic copy available at: http://ssrn.com/abstract=1156859 744 Alabama Law Review [VoL 40:3:741 1989] Divergent Rationales 745 looking at the defendant, and sometimes at the plaintiff, but rarely Cooter in his earlier article on punitive damages" can be usefully at the two together as the private law form of the action really' dissected into subcomponents to reveal a richer array of very par­ requires. It all depends, it seems, on whether we emphasize the ticular implications that vary according to context. At the action as one for punitive damages, or as one for punitive dam­ conclusion of our analysis of punitive damages under the different ages. While these two are obviously the same in some sense, the rationales, we will provide a summary matrix of the different im­ different points of emphasis reveal them to be very different, too. plications of all the rationales for both the first and second-order And therein lies the source of our continued puzzlement. issues." This matrix, we think, provides some understanding for This puzzle takes on a different complexion depending upon why it is generally believed that the law on punitive damages is not which of the various rationales or perspectives one uses to under­ now developing in a sufficiently single-minded or coherent fashion. stand .punitive damages. In this Article, after a general No single legal institution can be responsive to the requirements of comparative review of the law on punitive damages in the United all three rationales, and. a choice must be made among them. We Kingdom, Canada and the United States," a review that shows a hope that our analysis helps to inform that choice. significant divergence of thinking on the matter among these dif­ ferent legal systems, we shall look more. closely at the II. THE EVOLUTION OF THE LAW ON PUNITIVE DAMAGES compensatory," retributive," and deterrence? rationales for punitive damages specifically. We shall see that these different rationales A. Developments in the United Kingdom: Restricting Punitive imply different ways of looking at the general puzzle of conjoining Damages a punitive focus on the defendant with a compensatory role for the plaintiff, and so have quite different implications for such first-or­ Punitive, or exemplary, damages are an exception to the gen­ der issues as the type of conduct addressed and the quantum of eral rule that damages are compensatory. The award of punitive damages to be prescribed. We shall also see that the different ra­ damages by English courts can be traced back over 200 years to tionales imply very different legal responses at a second-order level the case of Wilkes v. Wood.ll The plaintiff brought a successful of institutional detail, including whether or not punitive damages action against agents of the Secretary of State for illegal should be insurable, whether vicarious liability is appropriate, or searches and seizures under general warrants." Lord Chief Justice whether certain criminal law type procedural protections (e.g., a Pratt held as follows: higher burden of proof) are required. Thus, our argument differs [A] jury have it in their power to give damages for more than the significantly from that advanced by Dorsey Ellis, an earlier seminal injury received. Damages are designed not only as a satisfaction to contributor to the field," in that, first, the compensatory rationale the injured person, but likewise as a punishment to the guilty, to for punitive damages survives our analysis as a quite separate and deter from any such proceeding for the future, and as a proof of the . distinct rationale, and that, second, all three rationales have very detestation of the jury to the action itself." particular and divergent implications for the treatment of punitive Later cases extended the principle to cover .v' mali­ damages. Ellis, by contrast, had claimed that the deterrence (or cious prosecution" and trespass." Early dicta regarding punitive efficiency) and retributive (or fairness) rationales for punitive dam­ ages yielded very similar normative conclusions. Our argument also 9. See Cooter, Economic Analysis, supra note 3. will reveal that the deterrence perspective advanced by Robert 10. See infra Appendix. 11. 98 Eng. Rep. 489 (C.P. 1763); see also Huckle v. Money, 95 Eng. Rep. 768 (C.P. 1763). 4. See infra notes 11-124 and accompanying text. 12. Wilkes, 98 Eng. Rep. at 490. 5. See infra notes 125-70 and accompanying text. 13. Id. at 498-99. 6. See infra notes 171-250 and accompanying text. 14. See, e.g., Tullidge v. Wade, 95 Eng. Rep. 909 (C.P. 1769). 7. See infra notes 251-333 and accompanying text. 15. See, e.g., Hewlett v, Cruchley, 128 Eng. Rep. 696 (K.B. 1813); Leith v. Pope, 96 8. See Ellis, Fairness and Efficiency, supra note 3. Eng. Rep. 777 (C.P. 1779); Chambers v. Robinson, 93 Eng. Rep. 787 (K.B. 1726). ;~ ,

746 Alabama Law Review [VoL 40:3:741 1989] Divergent Rationales 747 damages can be found in the case of Bell v. Midland Railway CO. 17 awarded exemplary damages as they found deliberate illegality." In this case the plaintiff brought an action against the railway for In reversing the punitive damages award, Lord Devlin held that wrongful obstruction of the access to his wharf. 18 The court only three categories of cases permit an award of punitive awarded damages beyond the pecuniary loss based on the fact that damages: the railway prevented all access to the plaintiff's wharf for the pur­ The first category is oppressive, arbitrary or unconstitutional pose of extinguishing his trade and advancing their own profit." action by the servants of the government. ... In the early punitive damages cases, affront to the honor of Cases in the second category are those in which the defendant's the victim was considered a central determinant of liability." Since conduct has been calculated by him to make a profit for himself honor was highly esteemed it had to be restored in order to fully which may well exceed the compensation payable to the compensate the plaintiff. Furthermore, the courts wished to reduce plaintiff.... the likelihood of duelling and private vengeance." Consequently, To these two categories which are established as a part of the courts felt justified in awarding punitive damages where defend­ there must of course be added any category in which ants acted "outrageously" according to social consensus." exemplary damages are expressly authorised by statute." However, in the leading modern punitive damages case, Lord Devlin indicated that he may have preferred to abolish alto­ Rookes v. Barnard." the House of Lords held that the rationales gether the "anomaly" of punitive damages, but he felt constrained for punitive damages were problematic and that such damages by existing case-law and statutes." Thus, the compromise he ar­ should be confined to a narrowly defined domain. In this case the rived at was to limit the awards to cases where "exemplary plaintiff was a skilled draughtsman, employed by the British'Air­ damages can serve a useful purpose in vindicating the strength of ways Corporation in the design office at London airport. He the law and thus affording a practical justification for admitting resigned from the trade union due to differences of opinion with into the civil law a principle which ought logically to belong to the the union officers. The collective agreement included a "closed­ criminal. "29 shop" provision. The union informed the corporation that if the Lord Devlin made it clear that category one was not to extend plaintiff was not fired the union members would strike.24 The cor­ poration complied with their demands in order to avoid a strike. to an action against private corporations, unions, or individuals. The plaintiff brought an action against the union officials for using He held that if one man bullies another and it results in humilia­ tion, this is cause for aggravated, not punitive, damages. Lord unlawful means to induce the corporation to terminate his services and for conspiring to have him dismissed through threats to Devlin held that these two types of damages were in fact very dif­ strike." ferent in nature. While aggravated damages are compensatory in nature, punitive damages are not. Aggravated damages are in­ . The jury found a , that each defendant was a part tended to compensate for the additional injury caused to the of It, that the threats had resulted in the plaintiff's dismissal, and plaintiff due to the humiliation and distress suffered by reason of the defendant's conduct. Furthermore, Lord Devlin felt that many 16. See, e.g., Sears v. Lyons, 171 Eng. Rep. 658 (K.B. 1818); Merest v. Harvey, 128 past cases of so-called punitive damages, which did not fit into his Eng. Rep. 761 (C.P. 1814). categorizations, could better be described as cases of aggravated 17. 44 Eng. Rep. 1429 (Ch. 1859). damages." 18. Bell, 44 Eng. Rep. at 1429-30. 19. [d. at 1433. 20. Ellis, Fairness and Efficiency, supra note 3, at 15. 26. [d. at 1134. 21. J. FLEMING, supra note 3, at 567. 22. Ellis, Fairness and Efficiency, supra note 3, at 17. 27. [d. at 1226-27. 23. [1964] App, Cas. 1129 (H.L.). 28. [d. at 1225-26. 24. Rookes, [1964] App, Cas. at 1133. 29. [d. at 1226. 25. [d. 30. [d. at 1229. 748 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 749

Category two contemplates the situation where the defendant which is to compensate, with that of criminal law, which is to im­ has calculated that the money to be made out of his wrongdoing pose deterrent and punitive sanctions: would exceed the damages at risk. "Exemplary damages can prop­ I think that the objections to allowing juries to go beyond com­ erly be awarded whenever it is necessary to teach a wrongdoer that pensatory damages are overwhelming. To allow pure punishment in tort does not pay.":" However, it was held in Cassell & Co. v. this way contravenes almost every principle which has been evolved Broome" that it is not necessary to show that the defendant had for the protection of offenders. There is no definition of the offence made any precise financial calculations in order to bring a case except that the conductpunished must be oppressive, high-handed, within this category." malicious, wanton or its like-terms far too vague to be admitted to In Cassell & Co., a retired naval officer brought .libel actions any criminal code worthy of the name. There is no limit to the pun­ against the publishers and author of a book presented as ail au­ ishment except that it must not be unreasonable. The punishment is thentic account of a wartime disaster when a convoy under naval not inflicted by a judge who has experience and at least tries not to escort to Russia suffered destruction following an ill-founded ad­ be influenced by emotion: it is inflicted by a jury without experience miralty signal to scatter the convoy. The plaintiff claimed that of law or punishment and often swayed by considerations which passages in the book intimated that he, as commander ofthe con­ every judge would put out of his mind. And there is no effective voy's destroyer escort, bore a share of the responsibility for the appeal against sentence. All that a reviewing court can do is to disaster. The defendants knew at a very early stage that the plain­ quash the jury's decision if it thinks that the punishment awarded is tiff objected to the passages relating to his conduct and that high­ more than any twelve reasonable men could award. The court can­ ranking naval experts considered the account libelous, but the not substitute its own award. The punishment must then be decided book proceeded to publication with only minor modifications to by another jury and if they too award heavy punishment the court is the offending passages: virtually powerless. It is no excuse to say that we need not.waste Lord .Reid held that exemplary damages could be justified sympathy on people who behave outrageously. Are we wasting sym­ under the second category in Rookes. It was sufficient that the de­ pathy on vicious criminals when we insist on proper legal safeguards for them? The right to give punitive damages in certain cases is so fendant had deliberately published a book in the hope of a profit, firnily embedded in our law that only Parliament can remove it. But knowing that the plaintiff complained of it, and knowing that the I must say that I am surprised by the enthusiasm of Lord Devlin's book defamed him, or not caring whether it did or not." Moreover, critics in supporting this form of palm tree justice." it was held that it does not matter if exemplary damages in this category greatly exceed any amount that the plaintiff might re­ In Rookes, Lord Devlin employed several epithets to charac­ cover on a restitutionary basis." It is the defendant's calculation, terize the conduct attracting exemplary damages: wilful, wanton, not the accuracy of it, that entitles the plaintiff to an award. ' high-handed, oppressive, malicious and outrageous." He held that In Cassell & Co. v. Broome, the defendant made nothing out no one of these terms could be viewed as definitive. But he felt of the book, but a £25,000 exemplary damages award was upheld." there was clear authority to justify exemplary damages in cases This was despite Lord Reid's reservations about punitive damages, ~here the injury to the plaintiff is aggravated by malice or by the which he saw as anomalous in confusing the function of civil law, msolence or arrogance by which it is accomplished." Finally, Lord Devlin outlined three considerations to bear in 31. Id. at 1227. mind when considering awarding exemplary damages: 32. [1972] App. Cas. 1027 (H.L.). 33. Cassell & Co., [1972] App. Cas. at 1078-79. 34. See id. at 1088-89. 37. Id. at 1087. 35. See id. at 1090 ("before it can interfere [the court] must be well satisfied that no 38. Rookes v. Barnard, [1964] App. Cas. 1129, 1221-22 (H.L.). other'jury would award so large a sum"). [1964] App. Cas. at 1221. 36. Id. at 1065. 39. Rookes, 750 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 751

(1) The plaintiff cannot recover exemplary damages unless he Australian precedent." Consequently, Rookes was explicitly re­ or she is the victim of the punishable behavior. This is to reduce jected. This decision was affirmed by the Privy Council, which the anomaly of the plaintiff's "windfall." determined the issue to be "whether the High Court were in error (2) Exemplary damages must be applied with restraint. .They in choosing to re-affirm Australian law as they had held it to be should not exceed criminal law sanctions, and rather than to adopt this view proclaimed by the House of Lords (3) The means of the parties, which are irrelevant in assessing in Rookes v. Barnard."47 The court concluded in the following way: compensation, are material in the assessment of exemplary dam­ ages. This is because anything which aggravates or mitigates the Had the law developed -by processes of faulty reasoning, or had it defendant's conduct is relevant." . been founded on misconceptions, it would have been necessary to In sum, the House of Lords has expressed strong circumspec­ change it. Such was not the case. In the result in a sphere of the law tion about the appropriateness of punitive damages awards. The where its policy calls for decision, and where its policy in a particu­ judges do not believe, however, that it is within their power to lar country is fashioned so largely by judicial opinion, it became a question for the High Court to decide whether the decision in abolish these awards. Consequently, punitive damages awards are Rookes v. Barnard compelled a change in what was a well settled confined to three types of cases where defendants engage in "out­ judicial approach in the law of libel in Australia. Their lordships are rageous" conduct. not prepared to say that the High Court were wrong in being uncon­ In England, Rookes has had less of an effect on limiting the vinced that a changed approach in Australia was desirable." availability of punitive damages than was at first anticipated." This is predominantly due to the expansion of the second category In Fogg v. McKnight,49 the New Zealand Supreme Court also indi­ of cases. As was held in Cassell & Co., no explicit calculation of the cated that it did not consider the case binding, although later cases profit of tort need be made by the defendant. This position is also have left the question open. 50 In the recent decision of Vorvis v. adopted in later cases." Nonetheless, although the restrictions set Insurance Corp.F" the Supreme Court of Canada also rejected the out in Rookes have been described as illogical, they have been de­ limitations on punitive damages enunciated in Rookes/" Neverthe­ fended as a "second best" solution on the assumption that the less, the distinction between exemplary and aggravated damages total abolition of punitive damages is impractical," and they have has been accepted by Canadian courts, generally been adhered to." For example, Justice Robins in Walker v. CFTO Ltd.53 de- scribed aggravated damages as follows: B.' Canadian Developments: A Cautious Expansion of Punitive Aggravated damages are damages which take into account the addi­ Damages tional harm caused to the plaintiff's feelings by such reprehensible or outrageous conduct on the part of the defendant. Their purpose Generally, the dicta in Rookes have not been well received by is compensatory and, being compensatory, they properly form part Commonwealth courts. In Australian Consolidated Press Ltd. v. of a general damage award. Aggravated damages, it should be under­ Ureru": the High Court of Australia examined Australian authority scored, are not punitive-punishment is not the function of a and concluded that the law set out in Rookes did not accord with compensatory award. They must be distinguished from "punitive"

40. ld.at 1227-28. 46. Uren, 40 Austl. L.J.R. at 143. 41. S.M. WADDAMS, supra note 3, at para. 995. 47. Uren, [1967] 3 All Eng. Rep. at 533. 42. See, e.g., Drane v. Evangelou, [1978] 1 W.L.R. 455 (C.A. 1977). 48. ld. at 538. 43. See Lord Reid's opinion in Cassell & Co., [1972] App. Cas. at 1086-87. 49. [1968] N.Z.L.R. 330 (S. Ct. 1967). 44. See, e.g., Hayes v. Dodds, [1988] N.L.J. 259 (C.A.); Bliss v. South East Thames 50. See, e.g., News Media Ownership v. Finlay, [1970] N.Z.L.R. 1089 (C.A.). Regional Health Auth., [1987] I.C.R. 700 (C.A. 1985); . 51. No. 18,844 (Can. May 4, 1989). 45. 40 Austl. L.J.R. 142 (Austl. 1966), appeal dismissed, [1967] 3 All Eng. Rep. 523 (P.C.). 52. Vorvis, slip op. at 17. 53. 59 O.R.2d 104 (C.A. 1987). 752 Alabama Law Review [Vol. 40:3:741 1989] . Divergent Rationales 753

or "exemplary" damages ... which are non-compensatory and have arrest, trespass to ships, of goods, , conspir­ as their object punishment and deterrence.54 acy to defraud, and deceit. "[In Canada t]hese are still the most He went on to distinguish exemplary damages from aggravated common types of cases where such damages are awarded, but damages in the following manner: awards in other cases are starting to increase in the percentage they represent of punitive damages awards. "62 Anglo-Canadian Exemplary damages bear no relation to what the plaintiff ought -courts have long held that punitive damages could not be awarded to receive as compensation. They form a separate and distinct head in negligence cases, as intent was a prerequisite to such an award. 63 of damage. Unlike aggravated damages which represent a real loss However, in Denison v. Fauicett." the Ontario Court of Appeal ex­ suffered by the plaintiff and are intended to put him, so far as tended both aggravated and exemplary damages beyond the realm money can do so, in the position he would have enjoyed but for the extra harm inflicted by the defendant's bad conduct, their function of intentional torts: "Generally ... such damages may be awarded is not compensatory. 55 in actions of tort such as , trespass, negligence, , libel, slander, seduction, and false imprison­ Furthermore, Justice Robins noted that, although objectionable ment."65 The court does not cite any authority for its inclusion of behavior on the part of the defendant might give rise to either or negligence and nuisance, and since this case was based on deceit both types of damages, exemplary and aggravated damages serve the comments were obiter." Thus, it is not a strong authority for distinct purposes: the proposition that punitive damages are appropriate in the case Misconduct of the type described by such terms as "insulting," of negligence. "high-handed," "malicious," "oppressive," "outrageous," "reprehen­ However, in Robitaille v. Vancouver Hockey Club Ltd.,67 the sible" or "in contumelious disregard of the plaintiff's rights" may in British Columbia Court of Appeal rejected the defendant's conten­ the circumstances of any given case give rise to one or the other or tion that punitive damages may not be awarded in actions based both of these forms of damage. But it must be recognized that ag­ on negligence." The court held that the only reason why awards of gravated and exemplary damages serve fundamentally different exemplary damages in negligence cases are rare is because in most functions and fall under separate classifications in a damage cases the defendant's conduct is not sufficiently blameworthy." It assessment." held that exemplary damages could be granted in all cases where Despite the seemingly clear language used by the courts, it is not "the conduct of the defendants was such as to merit condemnation easy in practice to distinguish exemplary from aggravated dam­ [by the court]."70 In this case, the plaintiff, a professional hockey ages.?" However, the Supreme Court of Canada in Vorvis 58 has player, suffered a slight spinal injury in a hockey game. He asked recently accepted the distinction. to see the team doctor, but his request was denied. The plaintiff The earliest Anglo-Canadian awards of exemplary damages suffered further similar injuries ten days later. Again he was not were for intentional torts such as ." trespass to examined because the team management believed that all of land," and trespass to the person (i.e., assault)." Intentional torts, Robitaille's injuries were psychological. Two days later the plaintiff where punitive damages have been awarded, also include unlawful suffered permanent spinal cord damage. The hockey club was held

54. Walker, 59 O.R.2d at 111. 62. Cherniak & Morse, supra note 57, at 169. 55. [d. at 120. 63. [d. at 173. 56. [d. at 119-20. 64. [1958] O.R. 312 (C.A.). 57. See Cherniak & Morse, Aggravated, Punitive and Exemplary Damages in Canada 65. Denison, [1958] O.R. at 319. in TORTS IN THE 80s, at 151, 155-57 (Law Society of Upper Canada 1983). 66. Cherniak & Morse, supra note 57, at 173. 58. No. 18,844 (Can. May 4, 1989). 67. 124 D.L.R.3d 228 (B.C.C.A. 1981). 59. See, e.g., Huckle v. Money, 95 Eng. Rep. 768 (C.P. 1763). 68. Robitaille, 124 D.L.R.3d at 250. 60. See, e.g., Wilkes v. Wood, 98 Eng. Rep. 489 (C.P. 1763). 69. [d. 61. See, e.g., Benson v. Frederick, 97 Eng. Rep. 1130 (K.B. 1766). 70. [d. at 251. 754 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 755 in breach of its duty to exercise reasonable care in the circum­ complained of, or such conduct amounted to reckless disregard for stances, in failing to subject the plaintiff to a thorough medical the legal consequences flowing therefrom, the defendants were sub­ examination after the earlier injuries and in failing to keep him ject to punitive damages awards." from playing in the final game." This question recently arose for the first time in a Canadian In Coughlin v. Kuntz": the Supreme Court of British Colum­ products liability case: Vlchek v. Koshel:" The case was an appli­ bia awarded punitive damages in a case of negligence involving cation to determine the question of the availability of punitive medical . The defendant, an orthopaedic surgeon, was damages in a tort action for products liability. The plaintiff was held negligent for using an experimental surgical procedure not seriously injured when she was thrown from a Honda All-Terrain used by other orthopaedic surgeons despite the request of his col­ cycle on which she was riding as a passenger. She alleged that leagues that he stop doing SO.73 This was done after a negligent Honda was negligent as (1) it had designed and manufactured a diagnosis and without informed . As a result of the physi­ vehicle which, by reason of its high centre of gravity, was known to cian's negligence, the plaintiff underwent three unnecessary be unsafe (2) it failed to warn users of the dangers involved in us­ operations and suffered twenty-five months of pain, disability, and ing the vehicle on uneven ground, and (3) it failed to recall or substantial anxiety. The court held that this was a proper case for redesign the vehicle even after numerous serious accidents made punitive damages because "[t]he defendant's diagnosis and treat­ its deficiencies apparent." Counsel for the defendant submitted ment of the plaintiff demonstrated not only a lack of care that, as a matter of law, exemplary damages cannot be awarded in amounting to negligence but a wanton disregard for the safety and a products liability case since the acts of the manufacturers are not health of the plaintiff."?" Twenty-five thousand dollars~in punitive specifically or intentionally directed at the injured party. damages were awarded." The Supreme Court of British Columbia held that the negli­ In one sense, these negligence cases were simplified by the fact gent or intentional act need not be directed at a specific individual that the tortious conduct was aimed directly at the plaintiff. A in order to trigger an award of exemplary damages." However, the question often arising in negligence cases, as well as in product lia­ act must be malicious or reckless to such a degree as to indicate bility cases, is whether conduct in the absence of an intent directed complete indifference to the consequences that might flow there­ at the plaintiff warrants exemplary or punitive damages. In Kaytor from, including the welfare and safety of others." In other words, v. Lion's Driving Range Ltd.,76 the Supreme Court of British Co­ the intention to cause injury need not be present; it will suffice if lumbia held that "in order to attract exemplary damages, the act there was an intention to engage in the act which eventually of the wrongdoer must have been consciously directed against the caused injury. Thus, punitive damages have been extended to cases person, reputation, or property of the plaintiff."77 This is inconsis­ of negligence, even when the behavior is not expressly directed at tent with Lord Hailsham's position in Cassell & Co. v. Broome." the plaintiff. This position, however, is not unqualifiedly accepted. which was that so long as the defendant intended the conduct It has traditionally been held by Anglo-Canadian courts that punitive damages cannot be recovered in actions for breach of con­ tract; this continues to be the position of the United Kingdom.s­ 71. [d. at 233. 72. 17 B.C.L.R.2d 365 (S. Ct. 1987). The only exception was that punitive damages were recoverable in 73. Coughlin, 17 B.C.L.R.2d at 381. 74. [d. at 399-400. 79. See Cassell & Co., [1972] App, Cas. at 1057-58. 75. [d. 80. 44 C.C.L.T. 314 (B.C. 1988). 76. 35 D.L.R.2d 426 (B.C. 1962). 81. Vlchek, 44 C.C.L.T. at 315-16. 77. Kaytor, 35 D.L.R.2d at 430. A similar position was adopted by British Columbia 82. [d. at 320. courts in the cases of Nichols v. Guiel, 44 B.C.L.R. 155 (S. Ct. 1983), and British Columbia 83. [d. Lightweight Aggregate Ltd. v. Canada Cement Laf'arge Ltd., 26 B.C.L.R. 292 (C.A. 1981) 84. See, e.g., Guildford v. Anglo-French S.S. Co., 9 S.C.R. 303 (1883); Addis v. Gramo­ (per curiam). But see Vlchek v. Koshel, 44 C.C.L.T. 314, 320 (B.C. 1988). phone Co., [1909] App, Cas. 488 (H.L.); Hayes v. Dodds, [1988] N.L.J. 259 (CA); Bliss v. 78. [1972] App. Cas. 1027 (H.L.). South East Thames Regional Health Auth., [1987] I.C.R. 700 (C.A. 1985). 756 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 757 an action for breach of the promise to marry." Moreover, where a traditionally attracts modest punitive damages awards. The range plaintiff has concurrent claims in contract and tort, he or she may is from $200 to $7500. be able to recover punitive damages by claiming in tort." In other "I'he following chart illustrates the awards in the balance of words, traditionally the law has not held persons liable for punish­ cases as of 1983:92 ment because of the way in which they broke a contract. The Amount arrogant, wanton, or malicious contract breaker is treated on the Number of Cases Where same basis as the victim of circumstances who is unable to fulfill Amount Awarded his obligations." $50,000 Recently, there has been a movement in some Canadian cases 2 $35,000 towards recognizing the availability of punitive damages for some 3 $30,000 1 breaches of contract, principally wrongful dismissal cases. The Su­ $25,000 preme Court of Canada has recently affirmed, in Vorvis,88 that 3 $20,000 1 both aggravated and punitive damages are in principle available in $16,000 1 breach of contract, including wrongful dismissal, cases, but in the $15,000 2 majority's view these cases will be rare and will typically require $12,000 1 proof of an independently actionable wrong." The minority would $10,000 1 have allowed aggravated and punitive damages claims for breach of Under $10,000 "numerous" contract in a wider range of circumstances. Moreover, the Supreme Court of Ontario has also, in a different contractual context, re­ It seems that employers are vicariously liable for an em­ cently awarded punitive damages against an insurance company ployee's behavior that attracts exemplary damages if the employee that had adopted an "antagonistic and aggressive attitude" against was acting in the course of his employment." For example, restau­ an insured seeking recovery under one of its policies." Thus, in rants have been held liable for employees who wrongfully detain contract as in tort, Canadian courts have shown themselves to be customers for failing to pay for items ordered on the menu," more open to punitive damages than courts in the U.K. houses of entertainment have been held liable for the conduct of Cherniak and Morse provide a concise summary Of the scale of boisterous private security guards;" finance corporations have Canadian punitive damages awards up until 1983.9 1 They divide been held liable for their employees who engaged in false imprison­ the cases into two categories: assault and cases and the bal­ ment. and assault or trespass in order to secure ,96 trade . ance of the cases. The of assault and battery unions have been held liable for the conduct of local officers in trying to destroy another union.s? and banks have been held liable

85. Venour, PunitiueDamages in Contract, 1 CAN. J.L. & JURISPRUDENCE 87, 88 (1988). 92. This chart is based on information contained in Cherniak and Morse, supra note 86. Id.; see, e.g., Denison v. Fawcett, [1958] O.R. 312, 319 (C.A.). 57, at 216-217. 87. Venour, supra note 85, at 88. . ~3. Se:, e.g., Munro v, Toronto Sun, 21 C.C.L.T. 261 (Ont. H.C.J. 1982) (newspaper 88. Vorvis v. Insurance Corp., No. 18,844 (Can. May 4, 1989). vicariously liable for unsubstantiated article of its reporters); Dalsin v. T. Eaton Co. Can., 89. Voruis, slip op. at 19. 63 D.L.R.3d 565 (Alta. D. Ct. 1975) (store vicariously liable for defamation and false impris­ 90. Donovan, Firm Held Liable for Damage in '84 Blaze, Toronto Star, March 26, onment by its clerks). 1989, at C16, cols. 4-6. . 94. See, e.g., Bahner v, Marwest Hotel Co., 12 D.L.R.3d 646 (B.C.C.A. 1970); Perry v. 91. See Cherniak & Morse, supra note 57, at 216-18. A more recent empirical study of Fried, 32 D.L.R.3d 589 (N.S. S. Ct. 1972). punitive damages claims and awards in Canada (or more particularly, in Middlesex and 95. See, e.g., Lakatosh v. Ross & Victoria Hotel Ltd., [1974] 3 W.W.R. 56 (Man. Q.B.). York counties in Ontario) suggests that there is little reason to think that there has been 96. See, e.g., Holowaty v. Ford Motor Credit Co. of Can., [1974] 1 W.W.R. 225 (Alta. significant change in the data since 1983. See Vidmar & Feldthusen, An Empirical Profile of D. Ct. 1972); Eagle Motors Ltd. v, Makaoff, 17 D.L.R.3d 222 (B.C.C.A. 1970). Litigation Involving Exemplary Damage Claims in Ontario (Apr. 1989) (unpublished manu­ 97. See, e.g., Canadian Ironworkers Union No.1 v, International Ass'n of Bridge script) (on file at the University of Western Ontario, Faculty of Law). Structural & Ornamental Ironworkers Union, Local No. 97, 31 D.L.R.3d 750 (B.C. 1972). 758 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 759 for bank managers engaging in unconscionable transactions." dian approach is somewhat wider. Punitive damages have been There has been little discussion of whether employer corporations awarded in cases of negligence, and, more recently, breach of are liable for all employees' actions or only employees of a certain contract.v'" level of seniority. This more permissive approach by Canadian courts has been Canadian courts have yet to deal with the question of whether carried much further by American courts. Punitive damages have defendants should be entitled to insure against punitive damages been used in wide-ranging areas of civil litigation, such as insurer awards." The Supreme Court of Canada does deny coverage for bad faith,business torts. and unfair business practices, drunk driv­ compensatory liabilities incurred for harm intentionally inflicted; it ing, and professional malpractlce.'?" Moreover, unlike in Canada or therefore seems unlikely that the Court would permit coverage for the United Kingdom, punitive damages verdicts for very large punitive awards arising from the same set of circumstances.i'" In amounts have been rendered or upheld in a variety of products other cases, the matter is an open question. liability contexts.':" In Rookes, Lord Devlin held that "the means of the parties" The standard of behavior required for an award of punitive were relevant in the assessment of punitive damages.'?' This is un­ damages in the United States is ostensibly similar to that used in like the case of compensatory damages. In Cassell & Co. v. Canada and the United Kingdom. The Restatement (Second) of Broomer'" the fact that the corporate defendant was a large pub­ Torts indicates that punitive damages are appropriate when the lishing company was likely an important factor in fixing upon the ~ef~ndant displays "conduct involving some element of outrage large. sum of damages. Some Canadian courts have also relied on similar to that usually found in crime. "109 Most courts have opted the means of the defendant in their assessment of an award.'?" to apply broad liability standards, such as "wilful," "wanton," "malicious," "conscious," or "reckless" disregard of the rights of others. 110 . C. Developments in the United States: Substantial Expansion of the Scope of Punitive Damages The quantum of punitive damages awards in the United States is typically much larger than that of Canadian or English Courts in the United Kingdom, Canada, and the United States awards. A RAND Study examined punitive damages awards in have taken divergent views on the scope of punitive damages civil jury trials in California and Chicago for the years 1980-84.111 awards. In general, the U.K. approach has been the most circum­ Based on this RAND Study, the American Bar Association notes scribed. The admonitions of Lord Devlin in Rookes v. Barnardr" that the typical punitive damages award was $51,000 in Chicago and Lord Reid in Cassell & Co. v. Broome's" have generally been and $75,000 in California.P" According to the ABA, the typical heeded. With few exceptions, punitive damages are only awarded award in the Los Angeles area was $90,000.113 As of 1983, in Ca- in the very narrow range of cases outlined in Rookes. The. Cana-

lOq. See supra notes 88-90 and accompanying text. 98. See, e.g., McKenzie v, Bank of Montreal, 55 D.L.R.3d 641 (Ont. H.C.J. 1975). 107. Owen, Foreword: The Use and Control of Punitive Damages, 11 WM. MITCHELL 99. See Cherniak & Morse, supra note 57, at 199-200. L. REV. 309 (1985). 100. Veitch, Punitive Awards in Canada-A Neighbour's Experience, 55 N.C.L. REV. 108. Id. at 310. . 181, 195 (1977). 109. RESTATEMENT (SECOND) OF TORTS § 908 comment b (1977). 101. Rookes v. Barnard, [1964] App. Cas. 1129, 1228 (H.L.) .110. Owen, Problems in Assessing Punitive Damages Against Manufacturers of De­ 102. [1972] App. Cas. 1027 (H.L.). [ectioe Products, 49 U. CHI. L. REV. 1, 21 (1982) [hereinafter Owen, Problems in Assessing 103. See, e.g., Johnston Terminals & Storage Ltd. v. Miscellaneous Workers Wholesale Punitive Damages]. and Retail Delivery Drivers & Helpers, Local 351, [1976] 1 W.W.R. 341 (B.C. 1975) (where 111. M. PETERSON, S. SARMA & M SHANLEY, PUNITIVE DAMAGES: EMPffiICAL FINDINGS defendant was rich); Borza v. Banner, 60 D.L.R.3d 304 (Nanaimo County Ct., B.C. 1975) (RAND, The Institute for Civil Justice 1987). (where defendant was poor). 112. ABA, PUNITIVE DAMAGES: A CONSTRUCTIVE EXAMINATION 2-7 (Special Committee 104. For a discussion of Rookes, see supra notes 23-31 & 38-40 and accompanying on Punitive Damages, Section of Litigation 1986>' (basing its analysis on M. PETERSON, S. text. SARMA & M SHANLEY, supra note 111) [hereinafter ABA, PUNITIVE DAMAGES]. 105. For a discussion of Cassell & Co., see supra notes 32-37 and accompanying text. 113. Id. 760 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 761 nada, there had been only two punitive damages awards amounting punished.P" According to Owen, "[s]everal courts that recently to $50,000. 11 4 The typical award was far lower than that. This is have approved for the first time awards of punitive damages in one of the major areas of divergence between Canadian and Ameri­ products liability cases have emphasized the importance of firm can courts. trial and appellate court control to reduce ... the threat of over­ The other main difference between Canadian and American punishment from multiple awards for a single product mistake.">' courts is that the latter have more clearly articulated their opin­ ions on various issues of importance in the area of punitive D. Divergence in Search of a Rationale damages. For example, while Canadian courts have not articulated the basis for vicarious liability for exemplary damages, American The major divergences that the United Kingdom, Canadian, courts are about evenly divided between two approaches. Some and American punitive damages law exhibit on key parameters of courts follow the rule under which employers the doctrine suggest a need to clarify the competing normative ra­ are liable for any acts committed by employees in the course of tionales for punitive damages and to trace out the different legal their employment.P" The competing view is the "complicity rule" rules that each rationale implies. This is the task to which the bal­ whereby the corporation is liable only where the act was commit- . ance of this Article is devoted. ted, authorized, or ratified by a managerial agent, or was committed by an unfit employee who was recklessly employed.P" Moreover, the issue of insurability of punitive damages has III. THE COMPENSATION RATIONALE also been directly addressed in the United States.P? Most Ameri­ A. First-Order Issues can courts allow defendants to insure against exemplary damages.P" Almost all courts allow corporations to insure against 1. Types of Proscribed Conduct.-Under a compensatory ra­ vicarious liability for punitive damages.P" The courts that do not tionale for punitive damages, the puzzle is not to explain the allow defendants to insure do so on the public policy ground that plaintiff's role, but rather to understand why so much attention is insurance defeats the purpose of the award.P" given to the particular qualities of the defendant's conduct. In:" Finally, American courts have addressed the issue of multiple deed, when the usual compensatory arguments in tort truly run plaintiffs. The general practice in the United States is not to re­ free, it is hard to appreciate why the defendant has much of a role strict the potential for awarding multiple punitive damages.i'" In in the action at all. The traditional compensatory focus is on what Wangen v. Ford Motor CO.,m the court recommended that defend­ has happened to the plaintiff, and the issue as to whether there is ants indicate to the jury whether they had been pre\l'i0usly a defendant somehow close at hand who is a cause ~d is somehow at fault seems altogether beside the point. More important might be whether one can find someone to pay for the damages who has a 114. Cherniak & Morse, supra note 57, at 216. 115. Ellis, Fairness and Efficiency, supra note 3, at 63. "deep pocket," and so can easily absorb them, or is in a position to 116. Id. "spread the losses" so that no single individual is grossly affected. 117. See generally id. at 71; Priest, The Current Insurance Crisis and Modern Tort Small wonder, then, that conventional compensation theorists find Law, 96 YALE L.J. 1521 (1987). 118. Ellis, Fairness and Efficiency, supra note 3, at 71. themselves more naturally inclined towards schemes of strict lia­ 119. Id. bility or publicly provided social insurance than traditional tort 120. Id. Compare Northwestern Nat'l Casualty Co. v. McNulty, 307 F.2d 432 (5th Cir. law.12 5 1962) (deciding against insurance coverage for these kinds of awards) with Ohio Casualty Ins. Co. v, Welfare Fin. Co., 75 F.2d 58 (8th Cir. 1934), cert. denied, 295 U.S. 734 (1935) (favorable towards insurance for vicarious liability). 123. Wangen, 294 N.W.2d at 459-60. 121. ABA, PUNITIVE DAMAGES, supra note 112, at 7-1. But see JU2Win v. Amtorg Trad­ 124. Owen, Problems in Assessing Punitive Damages, supra note 110, at 50. ing Corp., 705 F. Supp. 1053 (D.N.J. 1989), vacated, Civ. No. 87-3876 (Sept. 5, 1989). 125. For a leading example of compensation concerns fueling strict liability, see Jus­ 122. 294N.W.2d 437 (Wis. 1980). tice Traynor's opinion in Escola v. Coca Cola Bottling Co., 24 Cal. 2d 453, 150 P.2d 436 762 Alabama Law Review [Vol. 40:3:741 1989] DivergentRationales 763 However, the defendant's fault can be a real concern; even ture of tort law litigation.v" Consistent with this focus on the under a compensation theory, if the point is only to compensate s~ructure.of the private law action, we call this the corrective jus­ the plaintiff for wrongfully imposed injury. Indeed, that much is tice version of the theory of plaintiff compensation. Corrective tautological. But the notion of wrongdoing that a traditional tort justice, after all, is that form of justice that focuses on, and at­ action typically requires still falls well short of that special form of tempts to restore, the antecedent equality between the two parties wrongdoing that is highlighted by a claim for punitive damages. who happen to be linked by a wrongful transaction. Mere negligence, or a failure to meet an objective standard of rea­ However, while this analysis helps to explain the particular sonable care, will suffice for a successful tort action so long as the n~tion of objective fault in tort law and in private law generally, it other elements of duty, causation, and legally recognized damages still falls short of providing any understanding as to why a higher are in place. standard of fault should have a role in the tort action, and why That the standard of liability is objective rather than subjec­ breach of that standard should provide grounds for punitive dam­ tive is always somewhat puzzling, at least on any ethical theory of ages. This inquiry into a higher standard of fault, more akin to tort law. In ethics "ought" is typically thought to imply "can," what occurs in a criminal law prosecution, seems unable to explain meaning in this context that one cannot-at least as a matter of the plaintiff's continued and essential role in the action, and the ethics-have breached some objective standard of conduct that payment of punitive damages seems to imply a windfall for the one is subjectively incapable of meeting in any event. However, an plaintiff rather than something necessary for compensation. appreciation of the fact that we are dealing here with a tort action, . ~owever, .t~ere may be a very special kind of injury to dignity where both the defendant and theplaintiff have an equal standing m bemg maliciously, outrageously, or vindictively wronged by in court, more naturally leads us to the conclusion that while a someone.P? Where there is already injury in place that the law rec­ subjective standard of liability is apparently more fair or more ognizes as damages, this added "insult". to injury would count "ethical" to the defendant, it is small comfort to the plaintiff who more accurately as "aggravated," than as punitive, damages.P" is also innocent of fault. Thus, where strict liability attends exclu­ Lord Reid pointed to the importance of distinguishing "aggra­ sively to the fortunes of the plaintiff, and seems unable to vated" from "punitive" damages in Cassell & Co. u. Broomevv when he said: coherently provide a role for the defendant as an active cause of plaintiff's damages, a subjective liability standard commits the op­ The only practical way to proceed is first to look at the case from posite but comparable error of providing an ethical focus on the the point of view of compensating the plaintiff. He must not only be peculiar and particular capacities of the defendant, but ignores the compensated for proved actual loss but also for any injury to his obvious implications of that type of focused concern for the plain­ feelings and for having had to suffer insults, indignities and the like tiff's prospects of recovery. The objective standard of liability [namely, aggravated damages]. And where the defendant has be­ stands somewhere between the two, giving equal, or at least par­ haved outrageously very full compensation may be proper for that. So the tribunal will fix in their minds what sum would be proper as tial, consideration to each party. Thus, the objective standard compensatory damages. Then if it has been determined that the seems to be a standard of liability more appropriate to the struc- case is a proper one for punitive damages the tribunal must turn its

(1944). For examples of compensation theorists who would prefer social insurance to tort . .126. .Th!s argument for the objective standard of negligence is developed in more de­ law, see Sugarman, Doing Away with Tort Law, 73 CALIF. L. REV. 558 (1985); Hutchinson, tail in Weinrib, Liberty, Community, and Corrective Justice, 1 CAN. JL. & JURISPRUDENCE Beyond No-Fault, 73 CALIF. L. REV. 755 (1985). For a penetrating critique of the insurance 3, 10-16 (1988) [hereinafter Weinrib, Liberty]. Also, see Weinrib, Understanding Tort Law, justifications in tort law adjudication, see Weinrib, The Insurance Justification and Private 23 VAL. D.L. REV. 485, 519-20 (1989). Law, 14 J. LEGAL STUD. 681 (1985) [hereinafter Weinrib, Insurance Justification]. For an 127. See Ellis, Fairness and Efficiency, supra note 3, at 15-17. argument that no responsible scheme of compensation can sensibly ignore conduct issues, 128. Judge Robins describes aggravated damages in Walker v. CFTO Ltd., 59 O.R.2d see Trebilcock, Incentive Issues in the Design of 'No-Fault' Compensation Systems, 39 U. 104, 111 (C.A. 1987); see supra notes 53-56 and accompanying text. TORONTO L.J. 19 0.989). 129. [1972] App. Cas. 1027 (H.L.). 764 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 765

attention to the defendant and ask itself whether the sum which it recovery for pure dignitary loss (resulting in punitive damages, or has already fixed as compensatory damages is or is not adequate to in aggravated damages in the more usual case) on such a view. serve the second purpose of punishment or deterrence.P? It is also easy to see why for the normal or paradigmatic case of overlap between criminal and tortious wrongdoing, there is no We shall have reason to consider the alternative rationales ofpun­ special role for a dignitary tort enforced by a special damages rule. ishment (or retribution) and deterrence later in the Article.':" As A car thief, for example, typically treats his or her victim as fungi­ Lord Reid's remarks suggest, we shall have to deal there with the ble; anyone's car (or, at least, anyone's shiny new Mercedes) is as problem of explaining a continued.role for the plaintiff once we good a target for theft as anyone else's. While there is actual loss have turned our attention to the defendant under those perspec­ and inconvenience, there is no special indignity in having one's car tives. However, for the moment it is sufficient to appreciate only that there is something closely analogous to genuine "punitive stolen, especially if it were insured. Thus, where in addition to the damages," namely "aggravated damages," which, under a compen­ criminal law remedy against the thief, there might also be a tort satory rationale that normally would allow recovery for losses action for conversion or return of the car, there would not properly caused by mere negligence objectively considered, must a fortiori be a remedy for dignitary loss, or punitive or aggravated daniages, allow recovery for the special sense of dignitary loss a plaintiff feels as well. when a defendant has harmed him or her "maliciously," "vindic­ However, in those cases where punitive damages typically at­ tively" or otherwise "outrageously." This special focus on a tach to the defendant's conduct, at least in much of the Anglo­ particular kind of subjective fault on the part of the defendant, Canadian law, one can sense the special injury that is the source of insult for the plaintiff and for which the standard limited tort law therefore, is not to be explained as the grounds. for his- or her liabil- ity (as, for example, would be true for a criminal law prosecution), remedy might prove inadequate as compensation. Cassell & Co. v. but rather is the explanation for the aggravated sense of loss which BroomeP" for example, is a case of defamation, the sort of wrong the plaintiff feels and for which in the more general cases of tor­ that goes deeply to reputation, honor, and personality, and one tious loss mere negligence would be sufficient. On this view, that cannot properly be understood merely as giving rise to a loss therefore, the rules of punitive damages are damages rules, going of human capital.':" The latter understanding of the private law to the extent of plaintiff's recovery, rather than rules providing wrong takes us no further than the analogy of car theft. Moreover, grounds for there being any liability at all. one can understand why a criminal law remedy, which might em­ Of course, one can imagine cases where the only source of phasize the subjective state of mind of the defendant, would be damages is the special dignitary loss or insult that arises out of the inadequate if it treated the matter merely like intentional theft, defendant's behavior-cases where the term "aggravated" is out of and gave no role to the plaintiff whose particular dignity is the place since there are no other damages that the defendant's behav­ focused object of the defendant's intentional wrongdoing. Punitive ior could be thought to have exacerbated. For example, where or, more accurately, aggravated, damages have a special role here there is no legal damage in competing someone out of business by that cannot be filled by the more usual remedies in criminal law the usual means, there may be special injury worthy of thesame and tort. kind of damages remedy as that' which is implied by aggravated The kind of indignity or insult that is the source of aggravated damages if one is competed out of business maliciously or vindic­ damages under the compensatory rationale might tend to arise tively. Thus, Tuttle v. Buck1 3 2 could be thought of as a case of

133. [1972] App. Cas. 1027 (H.L.). 130. Cassell & Co., [1972] App. Cas. at 1089 (bracketed material added). 134. This is Jack Carr's interpretation of a dignitary loss. See Symposium Discussion, 131. See infra notes 171-333 and accompanying text. 56 S. CAL. L. REV. 155, 159 (Spitzer ed. 1982) (quoting remarks by Jack Carr). Malcolm 132. 119 N.W. 946 (Minn. 1909) (defendant attempted to drive plaintiff out of busi­ Wheeler responds to Carr with a Kantian interpretation of dignity which is consistent with ness by establishing a competing business and engaging in a number of malicious activities). the view we present here. See id. at 160 (quoting remarks by Malcolm Wheeler). 766 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 767 most often in cases of an intentional breach of a fiduciary duty.!" riage.v" In both contexts, the relationship that is intentionally There is, after all, a special sense of wrong in being "used" by breached is more than a merely contractual one for which the someone one trusts. An extreme example is marital rape. Ordinary ­ usual contract remedies would be adequate. Here the relationships rape might properly be thought of as the-exclusive concern of crim­ are built on trust and dependency, and the victims of breach are inal law, with an additional and separate private law remedy for particularly vulnerable to a sense of being "used." It should not be damages confined to recovery for the severe sort of emotional and surprising, therefore, that punitive or aggravated damages have physical distress that commonly attaches to this kind of wrongdo­ often attached to such cases.':" ing. But the wrong in "stranger" rape is in part to be explained by One of the three categories of cases that Lord Devlin specified the idea that the victim is fungible (i.e., any woman would have as appropriate for punitive damages in Rookes u. Barnard'< might satisfied the criminal wrongdoerj.l'" something that, while it ex­ alsoexemplify a case of intentional breach of trust. Abuse of power plains the deep emotional distress of the victim who is accustomed by a government or public official, at least on some theories of gov­ to being loved as a unique individual rather than being treated as a ernment,':" amounts to more than just the arbitrary or oppressive substitutable object of sexual gratification, does not require special action of a private party that is equally powerful, a point Lord damages for the added victimization of being wronged by someone Devlin emphasized in Rookes.r" Where our relationships with pri­ one trusts. In marital rape, by contrast, there is this added sense of vate parties might be governed by the usual conceptions of victimization which might properly be a source of aggravated abstract bargaining or tortious wrongdoing, victimization at the damages.':" - hands of those we elect or appoint to serve us as our fiduciaries Less extreme forms of intentional breach of the sorts of obli­ carries with it a very special sense of violation of trust.':" gations that arise out of special relationships, and which might This is not to say, of course, that we should not be able to find properly provide grounds for a special sense of being "used" by the same sort of intentional fiduciary breach by private parties. In­ someone one trusts, could be found in cases of wrongful dismissal deed, the increasing number of American punitive damages cases from an employment relationship':" or of mar-

be appropriate. Vorvis v. Insurance Corp., No. 18,844, slip op. at 23 (Can. May 4, 1989) 135. See, e.g., G.E. Cox Ltd. v. Adams, 26 N.B.R.2d 49 (App, Div. 1979). (Wilson, J., dissenting). 136. Catharine MacKinnon has effectively argued that it is the fungibility of victims 139. See S.M. WADDAMS, supra note 3, at para. 1002 and cases cited therein. to the rapist (or, more generally, the perpetrator of sexual assault or harassment), that . 140. The trust in the relationship can flow in both directions. For example, an em­ makes it permissible to admit of his other such sexual assaults or harassments into ployee might reasonably be subject to a punitive damages action for stealing goods or trade a given case. Evidence on the other assaults truly informs the case if victims are thought to secrets from an employer. Punitive damages have also been awarded against a defendant­ be fungible. MacKinnon contrasts this with admitting evidence of the prior sexual history of employee who breached his employment contract by incorporating his own company and the victim. Such evidence should not be admissible, according to MacKinnon, because the doing business in competition with his employer while still on the staff as a salesman. See victim typically does not see sexual experience, and in particular the partners she selects, as Edwards v, Lawson Paper Converters Ltd., 5 C.C.E.L. 99 (Ont, H.C.J. 1984). fungible. See-C. MAcKINNON, FEMINISM UNMODIFIED 113-14 (1987). 141. [1964] App. Cas. 1129 (H.L.). 137. We should not be thought of as suggesting that there is no dignitary loss in stran­ 142. See, e.g., J. LOCKE, THE SECOND TREATISE OF GOVERNMENT 84 (T. Peardon ed. ger rape, only in marital rape. Our point is only that there may be an additional sense of 1956) (describing a legislature as a "fiduciary power to act for certain ends"). Even Edmund dignitary loss in marital rape that calls for additional compensation, namely aggravated Burke, who argued for the. idea that a representative legislator should exercise his or her damages. own judgment rather than merely follow instructions, recognized that'the failure to do that 138. The American Bar Association reports this as one of the major areas where puni­ involved a betrayal of trust given to the legislator: "Your representative owes you, not his tive damages have increasingly become available. ABA, PUNITIVE DAMAGES, supra note 112, industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to at 5-4. In Canada, the Supreme Court of Ontario has also recently awarded $10,000 punitive your opinion." Speech to the Electors of Bristol by Edmund Burke, reprinted in BURKE'S damages for a dismissal of a bank employee which it deemed "brutal," "shocking" and "mis­ SPEECHES & LETTERS ON AMERICAN AFFAIRS 68, 73 (1919). erable." See Ribeiro v, Canadian Imperial Bank of Commerce, 67 O.R.2d 385, 441 (H.C.J. 143. See Rookes, [1964] App. Cas. at 1226. 1989). Moreover, the'Supreme Court of Canada, in a recent dissenting opinion, indicated 144. See, e.g., Ross v, Lamport, 9 D.L.R.2d 585 (Ont. C.A. 1957) (where a mayor of that "the very closeness engendered by some contractual relationships, particularly em­ Toronto was ordered to pay punitive damages for defaming a taxi driver). The Ontario ployer/employee relationships in which there is frequently a marked disparity of power Court of Appeal pointed to the fact that the jury making the award was entitled to consider between the parties," is a context in which punitive damages for contractual breach might the fact that abuse of power by a public official was involved. 768 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 769 in the context of insurance contracts might be such an instance.':" targeting of the victim will be because there is an intentional According to the American Bar Association's special report on pu­ breach of a special relationship of trust already existing between nitive damages, the California courts first developed the ru1e, now the defendant and the plaintiff, a relationship that makes the followed in a majority of American jurisdictions, that an insured plaintiff feel especially vu1nerable to being used and that helps to can sue in tort and recover punitive damages when an insurer characterize the defendant's conduct, at least when it is inten­ breaches the "covenant of good faith" implied by law in the con­ tional, as particu1arly outrageous. Moreover, since it is so often a tract.':" Originally, these cases of "bad faith breach" involved special relationship between the two parties that is the source of third-party liability insurers who rejected settlement offers within upset, it makes sense for any remedy of that wrong to combine-the policy limits, knowing that there was no reasonable basis for doing two parties in a single action, and for the defendant in particu1ar so, with the resu1t that the insured- was forced to pay personally a to pay damages for the wrong to the plaintiff. How these damages liability award in excess of the policy limits.':" Now the majority of are to be quantified, however, has still to be considered. courts hold the insurer liable in tort for bad faith breach, permit­ 2. Quantum of Punitive Damages.-In the traditional com­ ting the insured to recover the "extra-contractual"· amount of pensatory theory of tort law, tort awards for damages are said to liability as tort damages.':" While such a remedy can quite plausi­ have the purpose of "making the victim whole"-of restoring (as bly be explained as a deterrence ru1e aimed at a particu1ar kind of far as is possible to do so with money) the victim to his or her pre­ principal-agent problem (namely, the limited liability of the in­ injury position. However, with the growth of law and economics surer under the contract induces the insurer to take litigation risks scholarship, and a corresponding increased appreciation that the that are excessive from the insured's point of view),':" it is also plaintiff-victim may end up paying for this level of compensation reasonable to suggest that the insured has suffered a special type (for example, in a higher product price), this traditional full com­ of injury by virtue of the fiduciary nature of the relationship be­ pensation view of tort awards has increasingly been replaced by tween insurer and insured, a relationship where the insurer something closer to an insurance approach. The question now is occupies a position of trust and power and where the insured is less what award wou1d make the victim whole ex post, but rather dependent and vu1nerable. The latter analysis wou1dexplain a what amount of insurance the average risk-averse victim wou1d comparable reluctance, now to be found in a literature critical of voluntarily have purchased ex ante.151 the idea of efficient breach, to allow other fiduciaries, such as Now for the relatively simple cases of single activity accidents banks and pension funds, to escape their contracts merely by pay­ where a potential injurer's activity only imposes a risk of pecuni­ ing damages.P" ary loss on a potential victim, a victim wou1d typically insure for In summary, therefore, the compensation rationale, while it fo­ full compensation in the event of injury. Thus, there is no differ­ cuses on the plaintiff, can nevertheless explain why in an action for ence in quantum in treating the tort award from an ex post punitive or, more accurately, aggravated damages there is a need to compensatory or ex ante insurance point of view. However, when consider the nature of the defendant's conduct, There is a special the accidents or torts involve nonpecuniary losses, and in particu­ kind of loss, namely a dignitary loss, in being maliciously targeted lar when the loss, given the accident, does not resu1t in the victim by the defendant as a victim. More often than not this particu1ar putting any additional value on money than he or she wou1d have done had the accident not occurred, then the insurance rationale 145. See generally Priest, supra note 117. for tort awards will imply a lower award than the compensatory 146. ABA, PUNITIVE DAMAGES, supra note 112, at 5-2. 147. Id. at 5-2 to -3. rationale. This is because a nonpecuniary loss is the sort of loss for 148. Id. at 5-3. which a victim wou1d not insure at all ex ante, but is nevertheless 149. Ct. Easterbrook & Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89, 107-08 (1985) (describing rationale behind corporations' acquisition of insurance). 150. See, e.g., Friedmann, The Efficient Breach Fallacy, 18 J. LEGAL STUD. 1, 23-24 151. See generally A.M.POLINSKY, AN INTRODUCTION TO LAW AND ECONOMICS (1983); S. (1989). SHAVELL, ECONOMIC ANALYSIS, supra note I, at ch. 10. 770 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 771 a real loss for which the victim might seek compensation ex dignitary loss; the proper award under the compensation rationale, post. 152 therefore, would be reduced to the award implied by the insurance The sorts of dignitary loss referred to above that are funda­ theory.l'" This might explain why, until relatively recently, puni­ mental to actions for. punitive or aggravated damages are tive damages were generally unavailable in actions for breach of paradigmatic instances of nonpecuniary 10ss.153 There is no market contract.P" for replacing lost dignity, nor could there ever be. Dignity simply However, one must be careful not to overplay the contractual cannot be bought and sold. Indeed, being "bought" often carries forces that tend to reduce the compensatory awards for dignitary with it a loss of dignity. That is not to say that it might not be loss to the levels prescribed by the insurance theory. The one his­ worth it to lose one's dignity. One can imagine, for example, being torical exception to the general rule of nonavailability of punitive compensated, perhaps richly, for the loss of one's dignity ex post. damages in actions for breach of contract, namely actions for But it is harder to think of insuring for this loss of dignity ex ante, breach of promise to marry, is suggestive of the reasons why.157 since money is of so little use in replacing it.1M Imagine what it would mean in pre-marital negotiations for a po­ This suggests that the insurance rationale would imply a zero tential defendant to price the possibility of liability for dignitary quantum of aggravated or punitive damages. A full compensation loss into the marriage contract. Such behavior clearly signals to the rationale, by contrast, would imply a quantity sufficient to make other party a lack of reliability or, worse, bad intentions. It is hard the victim indifferent about the actual occurrence of the dignitary to believe that such pricing behavior in prior negotiations would loss-quite possibly a very large amount. However, this contrast is not endanger the contract's very existence. overdrawn if one recognizes that awards under the compensatory The same holds true for comparable contractual negotiations rationale have a tendency to become reduced to those more appro­ in the other special relationships of trust referred to above.!" A priate to the insurance rationale, at least in cases where the two potential defendant employer, for example, would find it difficult parties are already in a contractual relationship. In a products lia­ to price for the possibility that he or she might be held liable for bility situation, for example, rich compensatory awards for imposing loss of dignity on a potential employee by way of some dignitary loss, or aggravated damages awards, would tend to be kind of outrageous or vindictive dismissal. Mere mention of the passed on to the consumer-victims in higher prices. But these possibility again endangers the contract and the trust upon which higher prices would indicate premia for the kinds of losses for the relationship depends. Moreover, since the source of the indig­ which consumers would rather not insure. Thus, in a perfectly nity in these types of losses is in the intentional breach of a special functioning market one would expect consumers to have some in­ relationship of trust, other potential employers can easily avoid centive to contract out of any fully compensatory protection for having to price for the possibility of liability for such losses if they have no such intentions. Thus, problems both of priornegotiation and effective competition should lead one to expect that contracts 152. See generally Cook & Graham, The Demand for Insurance, and Protection: The Case of Irreplaceable Commodities, 91 Q. J. ECON. 143 (1977); Rea, Nonpecuniary Loss and would not effectively reduce full compensatory awards for digni- Breach of Contract, 11 J. LEGAL STUD. 35 (1982). . 153. C]. 1. KANT, FUNDAMENTAL PRINCIPLES OF THE METAPHYSIC OF MORALS 51 (T. Ab- bott trans. 1981) ("In the kingdom of ends everything has either value or dignity. Whatever 155. See supra note 154 (stating Cooter's argument for this general result). has a value can be replaced by something else which is equivalent; whatever, on the other 156. See Venour, supra note 85, at 88. hand, is above all value, and therefore admits of no equivalent, has a dignity."). 157. Our analysis accepts the common claim that breach of promise to marry involves 154. Robert Cooter provides a clear graphical representation of the difference between nonpecuniary loss in that it is loss primarily to honour, dignity, and reputation. Rosemary insurance and compensation for nonpecuniary loss in a recent article. See Cooter, Towards Coombe has effectively argued that it may be more appropriate to view the original cases of a Market in Unmatured Tort Claims, 75 VA. L. REV. 383 (1989) [hereinafter Cooter, Unma­ breach of promise to marry as having had an enormous impact on a woman's future wealth tured Tort Claims]. Cooter is also careful to distinguish loss of business reputation from the and, therefore, as largely involving pecuniary loss. See Coombe, "The Most Disgusting, Dis­ loss of reputation that comes from defamation. Id. at 392 n.21. The latter is nonpecuniary graceful and Inequitous Proceeding in our Law": The Action for Breach of Promise of and would not attract insurance coverage. C]. supra note 134 and accompanying text (re­ Marriage in Nineteenth-Century Ontario, 38 U. TORONTO L.J 64, 93-94 (1988). marking on Jack Carr's viewpoint). 158. See supra notes 138-40 and accompanying text. 772 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 773 tary loss to the near zero level implied by the insurance argument. ance and would contract out of it if they could. Our analysis In the particular context of liability for intentional breach of trust suggests, however, that victims cannot effectively be forced to pay leading to dignitary loss, the insurance argument for little or no for the expected liability costs of intentional breach of relation­ quantum of damages simply has less bite than it usually does. This ships of trust leading to dignitary loss, the sort of conduct that is should not be surprising, since the insurance perspective holds best the focus of many punitive or aggravated damages awards. That is, in contexts of strict liability where intentional breaches of a stan­ the victims cannot be forced contractually to take the ex ante per­ dard of behavior are not at issue.P" spective. Nevertheless, one can still ask the following insurance­ Does this mean that it is simply inappropriate to ask what the like question of a potential victim of dignitary loss: given that ex ante insurance-type perspective might imply for the quantum there is some real danger of dignitary loss, what sort of legal rule of damages given a loss of personal dignity? Not entirely. Some and, in particular, what sort of compensation award would you sort of ex ante insurance-like perspective (some might want to call choose ex ante to govern such cases? The pure insurance theorist it a Rawlsian perspective'?") is still appropriate for the assessment would again argue that since the loss is nonpecuniary, an expected of legal rules in general, and for the assessment of appropriate utility maximizer would choose a zero damages rule. Such a rule rules as to quantum of damages in particular. The following argu­ can easily be shown to maximize expected utility if the victim ment suggests that this ex ante perspective implies a quantum of takes into account the expected costsof awarding damages.l'" And punitive or aggravated damages greater than zero (in contrast to surely some consideration of these costs does seem appropriate as a that implied by the economist's pure insurance perspective dis­ normative matter, even if as a matter of fact in contract the poten­ cussed above),l6l but less than that required for full compensation tial victim cannot be forced to bear those costs ex ante as ex post. The latter limitation follows from some continued but insurance premia. partial acceptance of the idea that a dignitary loss isa nonpecu­ However, the ex ante insurance-like perspective would go fur­ niary loss for which individuals would not fully insure. ther than the pure insurance theorist, who seeks only to maximize Consider again the insurance rationale for a zero quantum of expected utility. From the ex ante perspective the pure insurance damages for nonpecuniary loss. The argument typically goes that theorist's rule of zero damages in the event of nonpecuniary loss consumers would rather not be forced to pay for excessive insur- still exposes the victim to a real loss of utility for which there is no compensation ex post. Thus, while the pure insurance theorist's 159. ct. Ellis, Fairness and Efficiency, supra note 3, at 30-31 (considering the argu­ rule might maximize expected utility ex ante, it leads to greater ment that punitive damages are awarded in some cases because the losses cannot be variance, or risk, in the possible utilities one might enjoy ex post. adequately translated into monetary terms). However, Ellis suggests that the difficulty of From an ex ante perspective, surely there is reason to think that measuring losses is also endemic to cases of negligence and strict liability. Id. at 30. Thus, he argues that this kind of analysis cannot explain the cases of intentional wrongs where puni­ individuals would worry about this risk of ex post variable utility tive damages are generally made available. However, if the problem is not so much that the and "insure" against it by choosing a legal rule that pays some loss cannot be measured in money, but is rather that one would not give up money to have compensation for nonpecuniary 10ss.163 Thus, while one might not insurance against the loss, then our argument suggests why insurance contracts might un­ ravel compensation for nonpecuniary loss in cases of strict liability or negligence, but not in cases of intentional torts. Further, our analysis also explains another feature of punitive 162. See s. SHAVELL, ECONOMIC ANALYSIS, supra note I, at 230. damages that Ellis finds puzzling, namely that difficulties of measuring nonpecuniary losses 163. We recognize that this argument commits us to accepting a social welfare func­ should always mean punitive damages in excess of compensatory damages. Why, Ellis asks, tion which is nonlinear in utility (i.e., that there is some "good" prior to utility). For some; is the measurement bias that punitive damages serve to correct always downward? Our an­ this is as senseless as accepting (from an ex ante point of view) the possibility of a diminish­ swer is that it is not a measurement bias, but is rather a bias (in nonintentional tort cases) ing marginal utility of utility. However, for those who believe that the distribution of utility for insurance contracts to reduce full compensation for nonpecuniary loss towards zero. across persons is of ethical significance (and even some utilitarians believe that) the idea 160. See generally J. RAWLS, A THEORY OF JUSTICE (1971). Rawls's method asks us to should not be difficult to accept. See H. SIDGWICK, THE METHODS OF ETHICS 416-17 (1981). fairly assess legal rules and institutions from an ex ante point of view before we know our For excellent debate on this point, see Harsanyi, Nonlinear Social Welfare Functions: A particular stakes in any given choice. Rejoinder to Professor Sen, in 10 FOUNDATIONAL PROBLEMS IN THE SPECIAL SCIENCES 293 (R. 161. See supra p. 770. Butts & J. Hintikka eds. 1977) [hereinafter FOUNDATIONAL PROBLEMS]; Harsanyi, On the 774 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 775 expect risk-averse individuals to choose a rule of full compensation ted by their agents or employees.l'" Corporate liability can arise for dignitary loss (these losses remain nonpecuniary after all), one vicariously (under this respondeat superior rule) so long as the should not expect them to choose a zero damages rule either. In wrongful act is committed by an employee in the course of his or the final analysis, therefore, the compensatory rationale for aggra­ her employment.l'" But corporate liability can also arise directly, vated damages awards for dignitary loss, once it is informed by the under what is sometimes called the "complicity rule" or "identifi­ insights provided from the ex ante insurance perspective, argues cation theory" in those situations where the wrongful act is for some positive (i.e., nonzero) damages award that is less than committed or authorized by some managerial agent ("a directing fully compensatory ex post.164 mind and will") of the corporation, or if it is committed by an unfit employee who was negligently employed or retained.l'" While there . is obviously some greater sense of corporate fault in the latter kind B. Second-Order Design Issues of direct liability, in the final analysis the fact remains that all cor­ porate liability is vicarious liability in that it holds an artificial Because punitive damages awards are usually thought to lie at person (and its underlying owners) liable for what must necessarily the border between the concerns of criminal and tortlaw, it should be the acts of its natural agents. Thus, corporate liability in either not be surprising that the different rationales for such damages of its forms, and vicarious liability generally, is a version of strict have tended to come out differently on more than just the kinds of liability in that it typically entails the faultless liability of one per­ conduct that are proscribed under punitive damages and the quan­ son for the fault of another. It is this aspect of strict liability that tum of damages that are to be awarded. The different rationales is often thought to be problematic in tort, given that tort in gen­ also prescribe differences in treatment under such second-order in­ eral, under the compensatory theory developed above, turns on stitutional design issues as whether vicarious liability for punitive objective negligence, and in cases of punitive. damages in particu­ damages is permissible, whether punitive damages liability can be lar, focuses on very particular and subjective versions of a insured for, and whether certain criminal law types of proced:ural defendant's fault. protections are required. One might also expect the different ratio­ However, there is no reason to think that vicarious liability is nales for punitive damages to have different implications for problematic in tort. If the employee acts in the course of his or her whether the wealth of the defendant is relevant to quantum. We employment so as to negligently injure the plaintiff, then the em­ now turn to how these different second-order matters of institu­ ployee has acted merely as the employer's instrument or tool. The tional detail are treated under the compensatory rationale employee in such circumstances is identified with the employer. developed above. The plaintiff reasonably sees the driver of the truck that injured 1. is important to be­ Vicarious and Corporate Liability.-It her as a driver for the Acme Trucking Co., not just as "a driver." gin with some definitions and distinctions. Vicarious liability is the This accident might be viewed differently if it occurred after work­ liability of principals and employers for the wrongful acts commit- ing hours and outside the scope of employment. Then, the plaintiff would do better to sue the driver directly than the employer vicari­ Rationale of the Bayesian Approach: Comments on Professor Watkins's Paper, in FOUNDA­ ously. Whatever the plaintiff might actually have thought, the TIONAL PROBLEMS, supra, at 381; Sen, Welfare Inequalities and Rawlsian Axiomatics, in point of view that is most fair as between the plaintiff and the FOUNDATIONAL PROBLEMS, supra, at 271; Sen, Non-linear Social Welfare Functions: A Reply to Professor Harsanyi, in FOUNDATIONAL PROBLEMS, supra, at 297; Watkins, Towards a Uni­ fied Decision Theory: A Non-Bayesian Approach, in FOUNDATIONAL PROBLEMS, supra, at 165. This relationship is governed by agency law. See 3 C.J.S. Agency §§ 390-391 345. (1973) (discussing the liability in this context); cf. 2A C.J.S. Agency § 16 (1972) (noting the 164. A nonzero damages award that is less than fully compensatory is consistent with lack of synonymity between the terms "principal and agent" and "master and servant" or having "caps" on such nonpecuniary losses as pain and suffering. Such a cap was introduced "employer and employee"). by the Supreme Court of Canada in Andrews v. Grand & Toy Alberta Ltd., 83 D.L.R.3d 452 166. See J. FLEMING, supra note 3, at 349-51; 3 C.J.S. Agency § 393 (1973). (Can. 1978). 167. See P. ATIYAH. VICARIOUS LIABILITY IN THE LAW OF TORTS 382-83 (1967). 776 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 777 employer defendant is one which views accidents occurring after a vindictive wrong to be a wrong committed by an employee in the hours as the employee's concern, not the employer's. Thus, there course of his or her employment on the employer's behalf. This would be no vicarious employer liability in such a case. ' would allow the plaintiff to recover punitive or, mote accurately, It might be objected that this view of the employee as a mere aggravated damages from the employer if the conduct was other­ instrument of employer wrongdoing fails to explain the right of in­ wise of the kind we have described above. As between the demnification that an employer typically has against a negligent employer and employee a different understanding might be reason­ employee. Surely it is odd, it might. be suggested, to allow the able, and might well ground recovery for an employer in an action plaintiff to recover from the employer in the first action because for indemnification. '. the employee is a mere tool or "limb" of the employer, but to allow 2. Insurability.-A contractual overlay on conceptually prior the employer to recover indemnity from the employee in the sec­ principles of compensatory liability does no conceptual violence to ond action as if the employee is somehow an independent those principles themselves. Rather, it is only evidence that the wrongdoer (this time causing injury to the employer by way of em­ parties might seek to shift prior burdens of liability to others more ployer liability in the first action). But this objection ignores what capable of bearing them. If anything, this only helps to ensure that is fundamental to understanding the compensatory theory of tort compensatory damages are paid when appropriate. One might not in its corrective justice version as developed above. What is fair or expect as a matter of fact that insurance companies will be willing reasonable between the parties in the first action, or how the plain­ to write policies for liability arising out of the sort of intentional tiff-victim should fairly look upon the interaction that happens to wrongs that characterize the conduct for which punitive damages link him or her with the employer, need not necessarily be what is are awarded (because of the severe "moral hazard" problem), but fair or reasonable in an action between the parties in the second that is no argument for such insurance contracts to be prohibited action, namely the employer and employee. It may be quite reason­ as a matter of law.16B able or fair to adopt the plaintiff's view in the first action that the 3. The Relevance of Defendant's Wealth.-As argued above, employee is reasonably to be construed as the instrument of the compensatory theories of tort law that focus only on the plaintiff's employer (anything less would be unfair to the plaintiff-victim as injury as such have great difficulty in explaining why it is that lia­ compared to the defendant-employer), and yet equally reasonable bility attaches to the particular defendant who somehow caused, or fair to adopt the employer's view in the second action that the let alone "wrongfully" caused, the injury.?" It makes moresense to employee had acted independently (anything less would be unfair allow the plaintiff to recover from some "deepest pocket" or best to the plaintiff-employer as compared to the defendant-employee). "loss spreader." Hence the initial attraction of such theories to On the corrective justice view, the conception of reasonableness schemes of strict liability or public insurance. Such theories do and equality is a conception particular to the tort action that hap­ make the wealth of the defendant relevant. pens to link the two parties. The objection being considered here However, once one appreciates that there is a very particular makes the mistake of seeking out a generaloverarching conception type of compensatory theory, namely the corrective justice version of equality or reasonableness that is appropriate to all the actions of that theory, which attempts to understand the equal standing of taken together. But that is not private law adjudication; the con­ plaintiff and defendant in the private law action, and which as a ception of equality or reasonableness should be particular to the consequence can understand the objective standard of negligence parties who have standing to make arguments in the action in as the appropriate grounds for liability, then it becomes more ap­ question. parent that it is only the conduct of the defendant that is relevant, None of this should be treated differently in the context of not his or her status prior to the conduct. After all, that status punitive damages, at least if punitive damages are only a particular form of compensatory damages going to the specialsense of injury 168. Cooter, Economic Analysis, supra note 3, at 96 & n.13. that attaches to dignitary loss. A plaintiff can reasonably construe 169. See supra p. 761. 778 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 779

(e.g., that the defendant is wealthy) was in place before the acci­ IV. THE RETRffiUTIVE RATIONALE dent occurred; why wait for something like an accident which only A. First-Order Issues contingently links the defendant to the plaintiff to target that wealth?':" Why not tax the defendant's wealth in advance, and 1. Proscribed Conduct.-The puzzle of punitive damages build up an adequate compensation fund for all plaintiffs? But manifests itself somewhat differently when one adopts the retribu­ then that would be public insurance, not tort law. Surely, there­ tive perspective. Now the puzzle is not to explain the focus on the fore, it cannot be wealth as such that grounds the defendant's defendant's conduct (indeed, that seems to be required), but liability in tort to a particular plaintiff. And this must be true rather to explain why there is any special role for the plaintiff in whether the action is for purely compensatory damages or for ag­ the action against the defendant. After all, retribution is one of the gravated damages as well. We conclude, therefore, that the wealth paradigmatic theories of the criminal law, and the criminal law prosecution is typically a state action against the accused. There is of the defendant is an irrelevant consideration in the awarding of a real danger that a private law action against the accused will take punitive damages in a private law action, at least on the compensa­ on the appearance more of revenge than retribution.'?' tory rationale outlined above. We advance two suggestions here that might explain why the 4. Special Procedural Protections.-Since an action for pu­ plaintiff should have a role in what is essentially a punitive or re­ nitive damages is, under the compensatory rationale, only an tributive action against the defendant. The first suggestion is that action for compensation for a special kind of loss, the usual private the traditional categorization of wrongdoing into what is criminal law procedures are all that is required. Attention is given to the and what is tortious is inadequate. There is a third kind of wrong­ defendant's conduct under such a rationale only to determine doing, it might be suggested, that involves a subjective or whether compensation for such loss is appropriate. It is a confusion advertent denial of rights, traditionally a requirement for a crimi­ nallaw response, but which is insufficiently general in its denial of to think that this attention to a special problem of damages those rights to require state action against the accused. We suggest changes in any way the fundamental private law nature of the ac­ that an action for punitive damages might be understood as a legal tion. In particular, it would be a mistake, just because the focus response to this third type of wrongdoing. While this first sugges­ has shifted to a very subjective account of the defendant's wrong­ tion appears at first sight to be promising, in the final analysis we doing, to forget that the plaintiff is still an integral part of the find it unacceptable as an explanation of punitive damages. action. For example, it would do violence to the plaintiff's equal The second suggested rationale for punitive damages under standing in the action to insist on a burden of proof beyond a mere the retributive approach involves our recognizing that there are balance of probabilities. Such a standard treats the defendant only the two traditional categories of wrongdoing, one of which is more favorably than the plaintiff, and is out of place in a private advertent or criminal wrongdoing, but also that there are problems law action for compensation. For analogous reasons; there is no is­ with public or state enforcement of the requisite penalties against sue of double jeopardy here. The action throughout is one of the wrongdoer. We argue in particular that there may be serious compensation and can, as easily as any other tort action, be com­ budgetary constraints on public enforcement, or that there are in­ herent difficulties with public enforcement that might generally be bined with a criminal law action against the same defendant if that described as principal-agent problems. In a second-best world, is otherwise appropriate. therefore, we concede that there might be a role for the private enforcement (and capture) of what are ideally state penalties. This

170. ct. Weinrib, Insurance Justification, supra note 125, at 687 (UA coherent pattern of state action hardly seems likely to emerge from the judicial grafting of a public purpose 171. See Brudner, Retributivism and the Death Penalty, 30 U. TORONTO L.J. 337 onto a series of fortuitous relationships between pairs of litigants."). (1980). 780 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 781 argument for the private enforcement of law has, of course, been Consider, for example, the facts of Regina u. Shymkowich.175 duly recognized in the literature on deterrence. We suggest that a A beachcomber, after removing two logs from a logging company's retributive theory allowing for private enforcement has quite dif­ booming ground, was charged with theft. In his defence he claimed ferent implications, particularly as these concern the quantum of that he believed that the two logs had drifted into the boom and punitive damages. that, as drifting logs, he had a right to salvage them. If one accepts a. A Third Kind of Wrongdoing?-In the retributive view, the beachcomber's story, it seems that thecase only involves a mis­ the justification of any punishment is backward-looking and de­ take about entitlements, that is, a confusion as to where the line is sert-based rather than forward-looking and consequentialist.P" drawn between the rights of the company and the rights of the Moreover, Kant, the paradigmatic retributive theorist, was ada­ beachcomber. The beachcomber by his action is not denying that mant that even if punishment could be seen as advancing some the company's rights are relevant. Rather he accepts that the com­ other good extrinsic to the desert-based justification of punish­ pany has rights, but simply disputes that they extend to the logs in ment, the pursuit of this good must always be constrained by the question. The appropriate response by the logging company is a requirement that punishment first be deserved: private action against the beachcomber's conversion of the two logs.'?" Judicial punishment can never be used merely as a means to pro­ mote some. other good for the criminal himself or for civil society, However, if one does not accept the beachcomber's story as .but instead it must in all cases be imposed on him only on the true, then the character of his transaction and our response to it is ground that he has committed a crime; fora human being can never . changed. Then it seems that he has intentionally stolen the logs be manipulated merely as a means to the purposes of someone else and is rightly charged with, and convicted of, theft. His actions and can never be confused with the objects of the Law of things .... amount to more than a denial that the company has any rights to He must first be found to be deserving of punishment before any these logs; instead, they amount to a denial of the relevance of consideration is given to the utility of this punishment for himself or rights altogether.'?" Since the infringement is of rights in general for his fellow citizens. The law concerning punishment is a categori­ (or, as Kant or Hegel would have it, since the infringement is of cal imperative, and woe to him who rummages around in the the category of Right), correction of the transgression is more than winding paths of a theory of happiness looking for some advantage to be gained by releasing the criminal from punishment or by reduc­ 175. [1954] S.C.R. 606. ing the amount of it ... .173 176. In G. HEGEL, PHILOSOPHY OF RIGHT (T. Knox trans. 1967), Hegel argues that such a dispute should be settled civilly, not criminally: It is, moreover, generally accepted among retributivists that the Each person may look upon the thing as his property on the strength of the particu­ sort of criminal culpability that attracts punishment on a desert­ lar ground on which he bases his title. It is in this way that one man's right may clash based view is to be distinguished from that kind of fault that with another's. might attract.liability in a private law tort action. The former in­ This clash ... which comprises the sphere of civil suits at law, entails the recog­ nition of rightness as the universal and decisive factor, so that it is common ground volves intentional, or at least reckless, wrongdoing whereas the that the thing in dispute should belong to the party who has the right to it. The suit latter might only imply some kind of inadvertent transgression on is concerned only with the subsumption of the thing under the property of one or the rights of others. Some examples should help to illustrate the other of the parties-a straightforward negative judgement, where, in the predicate 'mine', only the particular is negated. general point and show why the former implicates punishment and [d. at paras. 84-85 (emphasis added) (paragraph number omitted). state action in a way that the latter does not. 174 177. Hegel makes the point in the following way: The initial act of coercion as an exercise of force by the free agent, an exercise of force which infringes the existence of freedom in its concrete sense, infringes the 172. See Goldman, The Paradox of Punishment, 9 PHIL. & PUB. AFF. 42(1979). right as right, is crime-a negatively infinite judgement in its full sense, whereby 173. 1 KANT, THE METAPHYSICAL ELEMENTS OF JUSTICE 100 (J. Ladd trans. 1965). not only the particular (i.e. the subsumption under my will of a single thing . . .) is 174. The text of the following account of criminal law wrongdoing is largely extracted negated, but also the universality and infinity in the predicate 'mine' (i.e. my ca­ from Chapman, A Theory of Criminal Law Excuses, 1 CAN.J.L._& JURISPRUDENCE 75, 83 pacity for rights)• ... This is the sphere of criminal law. Id. para. 95 (emphasis (1988). added) (footnote omitted). 782 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 783 just the private affair of those (no matter how many) whose partic­ liability for wrongdoing to be objective and non-cognitive, since ular rights have been infringed. The state, as guardian of the anything else does conceptual violence to the fundamentally equal category of Right, and not just some private individual as a rights­ standing of plaintiff and defendant in the action. holder, must take public action against the thief.178 It might now be objected that there are some kinds of inten­ But recognition of the public law nature of the criminal law tional or cognitive wrongdoing which are not the subject of state action can achieve a better understanding of the nature of criminal action against the wrongdoer. An intentional breach of contract, wrong itself. For a thief to deny the category of Right, he must for example, is typically only a private law matter between the engage that category as a category, that is, conceptually. This contracting parties.' However, this objection fails to fully appreci­ means that his denial of Right must be cognitive, involving con­ ate to what matter the wrongdoer's intention, or cognitive sense, scious or advertent indifference to the relevance of rights. Thus, must attach if the state, as guardian of the category of Right, is the public form of the criminal action not only makes sense of, but properly to respond in the form of a criminal law action. In the more strongly positively requires, subjective mens rea on the part standard breach of contract case, and in particular in the inten­ of the accused. Anything less, such as mere negligence or mistake, tional (often 'efficient') breach of contract case, the breaching cannot explain why the state, as guardian of the category of Right, party is not really denying the relevance of rights to the dispute. is a party to the action, That is, anything less cannot explain the Rather, the breaching party is at all times prepared to pay com­ public law nature of the criminal law.179 pensation' and thus to recognize the category of Right if a breach It is worth noting how this argument for a subjective standard of the contract or damages flowing from that breach can be proved. of liability appropriate to the structure of criminal law action com­ In this respect, she is quite unlike the thief who, at the time the pares with our earlier discussion of how an objective negligence impugned transaction takes place, steals without any intention of standard is appropriate to a private law action in tort.P" In con­ paying compensation. Thus, the usual case of breach of contract, trast to the subjective negligence or strict liability standards, we even a case of intentional breach of contract, is properly enforced argued that the objective negligence standard made sense of the by way of a private law action for damages. The thief, on the other equal standing of both the plaintiff and the defendant in the pri­ hand, challenges the very idea of rights as protected spheres of au­ vate law action.l'" Thus, our arguments for the different standards tonomy or liberty. Moreover, in doing so, the thief negates any of liability in the criminal law and tort law actions are comparable claim that he can make to liberty himself. The necessary implica­ in the following respect. In the criminal law action, the public law tions of the thief's own conduct, therefore, is the denial of the form determines that the standard must be subjective and cogni­ thief's own liberty, a denial that ultimately manifests itself in the tive, because that is the only kind of wrongdoing that can make thief's own punishment by the state.i'" sense of the state as a party to the action. In tort law, on the other Next, we must consider whether this dual categorization of hand, the private law form of the action requires the standard of wrongdoing into the advertent and inadvertent denial of the cate­ gory of Right is sufficiently rich to accommodate all the possible 178. Again, compare Hegel: "Instead of the injured party, the injured universal now comes on the scene, and this has its proper actuality in the court of law. It takes over the cases. In particular, is there not a third type of wrongdoing that pursuit and the avenging of crime ... and is transformed into the genuine reconciliation of adverts to rights but is so particular or targeted in its advertent right with itself, i.e, into punishment." Id. at para. 220 (emphasis in original). denial of rights that it does not fully implicate the complete cate­ 179. Thus, of the four categories of mens rea Identified in the Model Penal Code, gory of Right? If this conduct exists, such a form of advertent usually only actions done "purposely," "knowingly" or "recklessly," and not those done "negligently," form the foundation for a criminal law prosecution. The Law Reform Com­ wrongdoing might require punishment, but punishment only at the mission of Canada agrees with this position. See LAW REFORM COMMISSION OF CANADA, THE hands of that injured party whose particular rights were targeted GENERAL PART-LIABILITY AND DEFENCES 25 (1982). There is, however, the crime of negligent homicide. See MODEL PENAL CODE § 210.4 (1980). 180. See supra pp. 762-63. 182. See Prichard & Brudner, Tort Liability for Breach of Statute: A Natural Rights 181. See Weinrib, Liberty, supra note 126, at 10-16. Perspective, 2 LAW & PHIL. 89, 96 (1983). 784 Alabama Law Review [Vol. 40:3:741 19891 Divergent Rationales 785 for denial. This kind of wrongdoing might require something like a idea is .to punish the accused defendant for wrongful conduct, the private action for punitive damages.P" punishment could be meted out even if the accused's conduct only Consider, for example, a case of intentional defamation, the amounted to an unsuccessful attempt or where damages to the vic­ sort of behavior that attracted punitive damages in Cassell & Co. tim could not be shown. u. BroomeP" Intentional defamation is a highly targeted form of However, this brief comparison to the compensatory rationale wrongdoing. Indeed, the definition of an intentional defamatory shows how the retributive rationale for punitive damages based on statement as one which has as its end the lowering of a person in the idea of a third kind of wrongdoing distinct from crime and tort the estimation of her fellows by making them think less of her 185 must finally prove inadequate. There are at least two significant suggests that it is the kind of wrong which is not generally threat­ difficulties. First, even if the argument properly identifies a third ening to rights-holders. After all, it is the views of this general kind of wrongdoing, that alone is not sufficient reason for the population that will be used to provide a measure of the relative plaintiff to capture the required penalty as damages. Moreover, decline of the defamed person. Arguably, such a form of wrongdo­ without an identifiable plaintiff, a single instance of this kind of ing, although an advertent denial·of the relevance of rights, wrongdoing might attract an obligation to pay the penalty.to a nevertheless only implies an advertent denial of the relevance of whole series of plaintiffs. The multiple payments wouldbe out of the very particular rights or relative standing of the person de­ all proportion to the wrongdoing and, therefore, violative of the famed. Consequently, while punishment of some kind may be in retributive requirement that all punishment be deserved. Suppose, order, punishment is really more the business of a particular plain­ for example, that the defendant is in a special relationship of trust tiff who must seek punitive damages in a private action than it is with three persons, and maliciously or vindictively acts to breach the business of the state acting in a public action on behalf of the her relationship with one of these three. Indifferent to which one whole category of Right. of the three persons' lives is destroyed by her action, she cannot The requisite particularity of an advertent denial of rights determine in advance which of the three will actually suffer. In characterizing this alleged third kind of wrongdoing might also be such a situation all three have been equally targeted by the de­ found in an intentional breach of a relationship of special obliga­ fendant for a vindictive but very particular denial of rights. Does tion linking the accused with a plaintiff. Again the argument might this mean that each can recover punitive damages from the de­ be that the advertent denial of the relevance of rights calls for fendant? Nothing in the argument seems to identify one of the punishment in a way that an inadvertent denial does not. How­ possible plaintiffs as having a special standing to sue the defend­ ever, the particularity of the advertent denial does not require ant, but if all can sue for the penalty, then what the accused must punishment at the hands of the state, or upon behalf of the whole pay is disproportionate to her wrongdoing. This would violate the category of Right. Thus, this special kind of retributive theory requirements of retributive desert!" and, in all probability, attract would closely track the compensatory theory outlined above, al­ some kind of constitutional challenge. 187 lowing punitive damages to have a special role, for example, in The second difficulty with an argument for a third kind of cases of marital rape or, more generally, in cases of intentional wrongdoing as grounds for a punitive damages action is that there breach of relationships of trust. One difference might be that since simply is no such beast. The difference between a subjective or ad- this rationale is not essentially compensatory, there would be no need to await actual damages befalling the plaintiff. Because the 186. See ABA, PUNITIVE DAMAGES. supra note 112, at 7-1 ("[I]t is unfair to expose a defendant who has done but one wrong to multiple punitive damages. The cumulative im­ pact of all such awards ... may in effect overpunish the defendant"). 183. C]. Kaytor v. Lion's Driving Range Ltd., 35 D.L.R.2d 426, 430 (1962) ("in order 187. See Jeffries, A Comment on the Constitutionality of Punitive Damages, 72 VA. L. to attract exemplary damages, the act of the wrongdoer must have been consciously directed REV. 139 (1986) (suggesting infringement of the eighth and fourteenth amendments by re­ against the person, reputation, or property of the plaintiff"). petitive punitive awards in mass tort litigation); see also Juzwin v. Amtorg Trading Corp., 184. [1972] App. Cas. 1027 (H.L.). 705 F. Supp. 1053 (D.N.J. 1989) (rejecting double jeopardy and eighth amendment chal­ 185.J. FLEMING, supra note 3, at 501. lenges to multiple punitive damages, but upholding a fourteenth amendment challenge). 786 Alabama Law Review [Vol. 40:3:741 1989] _ Divergent Rationales 787 vertent denial of the category of Right, against which the state proportionality and desert requirements set severe limits on the must take some public action, and an objective or inadvertent use of punitive damages as a method of privately enforcing the law transgression into the protected sphere of some particular rights­ against advertent wrongdoing. Additional methods of raising the holder, for which the rights-holder must seek some private remedy, level of enforcement, although subject to their own difficulties, is not the difference between what is generally harmful to the pub­ might have to be considered. lic at large and what is specifically harmful to some smaller It is easy to appreciate that a retributivist should be interested number of persons. That is a quantitative distinction that at most in the levels of punitive enforcement that are achieved under state distinguishes a class action by many particular rights-holders from action. After all, under the retributivist rationale individuals are a single private law- action by just one or, at most, a few. Rather, supposed to get what they deserve, and failures of enforcement are the distinction between a public action by the state against an ad­ failures in precisely that respect. Thus, the retributivist should be vertent denial of Right and a private action by any number of prepared to consider the possibility that private enforcers may rights-holders for an inadvertent transgression over the particular bring more wrongdoers to justice. However, the greater efficiency boundaries of Right encompasses the qualitative difference be­ of enforcement should never be allowed to overshadow the require­ tween denying the category of Right and denying its instances. ments of retributive justice. Retribution must not be replaced by However, the distinction between a category, or universal, and its privately motivated revenge, proportionality of punishment to of­ particulars is not a difference that opens up some space between fense must be preserved, and the administrative cost of the two into which a third related concept can fit as if along a prosecution should not be allowed as an excuse for consciously tol­ continuum. There are just categories and their particulars, and erating lower than possible levels of enforcement action against these are immediately related, the latter as instances of what the certain defendants. Thus, while the retributivist state might be former provide asintelligibility.v" prepared to delegate some enforcement of public sanctions to the We conclude, therefore, that both for ethical reasons going to private sector, it must at all times maintain its control over how the proportionality requirement of retribution, and for conceptual that enforcement is carried out. reasons limiting the essential categories of wrongdoing to two, no There are at least two reasons for anticipating why there third kind of wrongdoing exists that, on a retributive theory, sup­ might be low levels of public enforcement of state sanctions.v" One ports a private action for punitive damages. b. Private Enforcement of Retribution: The Argument from Administrative Effi,ciency.-If we accept that only two types of ishment is exacted only contingently, i.e., at the whim of a private enforcer who violates no duty to enforce the if he or she chooses not to. Rather, private enforcement and cap­ wrongdoing exist-the advertent and inadvertent denial of ture of the penalty should operate as an overlay on the continued duty of public enforcers to rights-and even if we accept that the state must take action enforce, a duty which (only contingently) happens not to have been met in the problematic against the former, there is still the question of whether the state's cases we are about to identify. Perfect enforcement of retributive penalties by privately motivated enforcers, if that was all there was, would only have the appearance of retribu­ obligation is only a prima facie one that is capable of being "con­ tion; real retribution requires that the state still have its duties to fulfill. One way to tracted out" to more efficient private enforcers. Here we argue that institutionalize this state duty of enforcement through private enforcement is to reward the such contracting out is acceptable as .Iong as certain requirements victim with private capture of any penalty the defendant must pay when the victim brings a writ of mandamus for state enforcement of the law. This effectively captures what we mean of the retributive rationale are not sacrificed to the demands of by private enforcement without endangering the key principles requiring public or state administrative efficiency.l'" In particular, we shall argue that the duties of retribution. Weare grateful to Alan Brudner for encouraging us to consider this point more carefully. 190. The amount of literature on the relative advantages and disadvantages of public 188. Weinrib, Legal Formalism: On the Immanent Rationality of Law, 97 YALE L.J. versus private enforcement of the law is now quite extensive. See, e.g., Becker & Stigler, 949 (1988). Law Enforcement, Malfeasance, and Compensation of Enforcers, 3 J. LEGAL STUD. 1 (1974); . 189. The exact details of the institutional design of private enforcement will, of course, Coffee, Rescuing the Private Attorney General: Why the Model of the Lawyer as Bounty be important to the retributivist. In particular, it will not do if the state's duty to exact Hunter is Not Working, 42 MD. L. REV. 215 (1983); Friedman, Efficient Institutions for the punishment for advertent wrongdoing is completely replaced by a scheme where such pun- Private Enforcement of Law, 13 J. LEGAL STUD. 379 (1984); Landes & Posner, The Private 788 Alabama Law Review [Vol. 40:3:741 1989] . Divergent Rationales 789 is simply the presence of serious budget constraints in the public bureaucrats, the greatest possible advantage might be in allowing sector. The state has a variety of obligations beyond law enforce­ these private monitors or enforcers to become the "residual claim­ ment, and the allocation of monies to enforcement falls well short ants" in any law enforcement action.':" That is, the state may find of that required for full enforcement, including monitoring of that the best motivation for private enforcement is not some new wrongdoing as well as effective prosecution. The second reason for salaried arrangement, but rather the "contracting out" to the pri­ failures of public enforcement also implicates this first one. Public vate enforcer of the actual right to capture the state penalty in a enforcers are typically paid a fixed salary to enforce the law. Thus, private law action for punitive damages. Indeed, this is the second they have little incentive, at the margin at least, to enforce against real advantage of the private enforcement of law as we convention­ all infractions. In this respect they are to be contrasted with pri­ ally understand it. If the private law enforcer captures the full vate enforcers of the law, at least if private enforcers have a penalty that would otherwise go to the state, a potential defendant private interest in the law being enforced.(perhaps because an in­ has a great deal less incentive to bribe the enforcer to look the fraction of the law injures them) or they recover damages on a other way. Under public enforcement of the law, and even under case-by-case rather than a salaried basis. This suggests that the private enforcement contracted out for a fixed salary, the defend­ problems of public enforcement of the law might be particularly ant pays a much larger penalty than the enforcer receives as acute in cases of "crimes without victims," in which no private . remuneration. This difference opens up a bargaining range for party has an incentive to monitor for effective public law enforce­ bribery and corruption of the enforcer as the enforcer and defend­ merit,':" or when the harm from the intentional wrongdoing is so ant attempt to contract around the state.19 5 However, if the entire disparate in its impact on victims thatthere is a comparable "free penalty is ultimately to be captured by the enforcer, no such bar­ rider" problem in the private monitoring of effective public law en­ gaining range exists.i'" forcement.v" In such cases an advantage may lie in seeking These arguments might help to rationalize private enforce­ alternatives to the public enforcement of law. Examples of prob­ ment of the law, but do not necessarily explain why private lematic areas of public enforcement might include mass consumer enforcement is to be rewarded with more than compensatory dam­ or fraud on the market, such as occurs in instances of insider ages. After all, the standard tort action is a form of private law trading or predatory pricing.v" enforcement. However, the point of privately enforced punitive Against the background of these public enforcement problems, damages is not to compensate at all, at least on the retributive ra­ one can easily see possible advantages of private enforcement. tionale. It is, rather, to punish. Thus, the private law action for First, private enforcers are likely to be more efficient. In business punitive damages must operate as an "add on" to whatever an ac­ for themselves, and subject to the pressures of competition from tion for compensation might allow on compensatory principles.l'" others, private enforcers are likely to be more motivated and more cost conscious. While this only means that there may be some ad­ 194. The advantage of allowing a private monitor to capture the residual claim on an vantage to employing private monitors rather than state investment is characteristic of arguments for the optimal nature of the classical firm. See Alchian & Demsetz, Production, Information Costs, and Economic Organization, 62 AM. ECON. REV. 777 (1967). Enforcement of Law, 4 J. LEGAL STUD. 1 (1975); Polinsky, Private Versus Public Enforce­ 195. See Becker & Stigler, supra note 190, at 5-7. ment of Fines, 9 J. LEGAL STUD. 105 (1980). 196. C]. id. at 6 (stating that corruption can be averted by "rais[ing] the salaries of 191. Sisk, Police Corruption and Criminal Monopoly: Victimless Crimes, 11 J. LEGAL enforcers above what they could get elsewhere, by an amount that is inversely related to the STUD. 395, 396 (1982). probability of detection, and directly related to the. size of bribes and other benefits from 192. Free rider problems arise when a new party benefits from investigations or litiga­ malfeasance") (emphasis omitted). tion instituted by prior parties. The new party may not have contributed substantially to 197. In this respect, therefore, our analysis suggests an approach to combining puni­ the work, but will share the award. See Coffee, supra note 190, at 220-26 (explaining the tive and compensatory damages which is different from that recommended by Lord Reid in problem of private litigants free riding on government investigators in class action suits). Cassell & Co. v. Broome, [1972] App, Cas. 1027, 1089 (H.L.). Lord Reid was of the view that 193. See, e.g., Browning-Ferris Indus., Inc. v. Kelco Disposal, Inc., 109 S. Ct. 2909 the compensatory damages award should be considered part of the punitive damages award. (1989) (predatory pricing). However, this fails to appreciate that punitive and compensatory actions relating to the 790 Alabama Law Review [Vol. 40:3:741 1989]. Divergent Rationales 791 The real question, therefore, is not why punitive damages are This is not to say that the contingently injured plaintiff is, in added to compensatory damages on the retributive view, but the final analysis, necessarily the best or most efficient private law rather why it is that the plaintiff seeking compensatory damages enforcer of punitive damages. Third parties may be preferred. should be the party to receive the punitive damages as well. Ad­ However, this only argues for' making the right to recover punitive ministrative convenience is one explanation. Punitive damages damages transferable, an arrangement already permitted in part in permit the issue of punishment to be decided in the same trial as the form of contingency fees for matured tort claims, but some­ the issue of compensation.t'" The costs of one trial, even if compa­ thing that could more generally be permitted even in cases, of rable criminal law protections are provided, are likely to be lower unmatured tort claims.t'" than separate private law actions for compensatory and punitive It remains to be considered whether the mere privatizing of damages. These savings are likely to be enjoyed by both the state public law enforcement in. the form of punitive damages recover­ and the,different private parties to the action. ' able by plaintiffs is sufficient to effectively raise levels of Another explanation for allowing the• tort plaintiff to be the enforcement to those a retributivist would prefer to see. Recall private law enforcer of the punitive damages is that it conveniently that one of the reasons public law enforcers might be, able to get privatizes the action. Without some, device to limit the possible away with inefficient levels of enforcement is that the crimes in question might be victimless or so disparate in their impact on vic­ plaintiffs, many different enforcers are likely to .be chasing the tims that no single private party would have an incentive to penalty.P" Until enforcement is complete, the penalty is a common monitor for effective enforcement of the law. If an action for puni­ property resource which, consistent with the usual sort of tive damages is structured so that it only accompanies a "overfishing" predictions, should attract too many enforcers. Even conventional private law action for compensation, then the puni­ if the state chooses to privatize the enforcement process quite tive action will only be as strong as the seemingly weak foundation early, that decision is itself common property until it becomes fi­ upon which it rests. If the crime in question is genuinely vic­ nal, and we would expect an excess of lobbying comparable to that timless, then the state will have to appoint, ombudsman-like, some which is observed for the procurement of any government contract private enforcer. Presumably, these will be unusual cases. How­ or benefit. By automatically giving the enforcement right to the ever, in the more common sort of case where the impact of the injured plaintiff, the state effectively controls these .kinds of advertent wrongdoing is spread over many victims, it may be es­ problems. sential to combine the method of private law enforcement of Moreover, the plaintiff is, prima facie at least, a very effective punitive damages with some further private law devices designed enforcer of the law. When a third party would have to actively seek to encourage litigation and enforcement. As we shall see, the re­ out occurrences of the advertent denial of rights, the plaintiff in tributive rationale for punitive damages has some special concerns certain cases has the objective fact of a rights denial visited upon about the use of these additional devices. him or her in the form of an injury. All that remains to be discov­ Recall that the retributive rationale for punishment is retro­ ered is whether the rights transgression is advertent and, therefore, spective and desert-based. Whatever good punishment might appropriate for punishment. accomplish, pursuit of this good is always to be constrained first by the idea that punishment is deserved. This has two implications for how retributivists view certain private law devices to encourage same conduct are typically launched separately and independently, i.e., that one is an "add on" to the other. Lord Reid surely needs to argue why the same general approach should not litigation. First, if the device not only encourages the initial filing be used in an action for punitive damages. , of a suit but also promotes settlement of that suit before trial, this 198. Cooter argues thatthe one justification behind the damages going to the plaintiff may be a problem for the retributivist. After all, unlike the con- is that the plaintiff requires a reward for undertaking the additional burden of proving that the injurer's fault was intentional. Cooter, Economic Analysis, supra note 3, at 90-91 n.9. 199. See Landes & Posner, supra note 190, at 21-24. 200. Cooter, Unmatured Tort Claims, supra note 154. 792 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 793 ventional private law tort action (in which negotiation seems of initial suits than does the American no-way costs rule in those .entirely appropriate because individuals are seeking to secure what cases where the plaintiff believes he or she is relatively unlikely to they find privately acceptable to themselves), individuals punished succeed.v" These are the low probability plaintiff victory cases in the criminal law context are supposed to get what they deserve, which, if litigated, would tend to generate the false positive that not what they bargained for. It is this difference that explains the the retributivist worries most about. Thus, from the retributivist general discomfort typically felt by the retributivist towards plea point of view, the Anglo-Canadian rule operates as an appropriate bargaining."?' In such bargains, even if the defendant is punished sorting device at the initial point where the plaintiff makes the de­ for a wrongdoing with greater certainty than if he or she had gone cision to file suit. to trial, there is still the sense that what punishment is inflicted is Furthermore, if we continue to ignore risk aversion, the Anglo­ not what is deserved. Second, the retributivist is concerned that Canadian rule also encourages more litigation, as opposed to settle­ even if private law devices can be arranged to encourage more ex­ ment, in those cases that the plaintiff decides to sue. As argued tensive litigation and enforcement, the issue of proper sorting in above, on the retributivist view this too is an advantage. This is litigation remains. In sorting, the retributivist wants to avoid find­ because, for litigation to be a possibility at all, the plaintiff's esti­ ing the guilty innocent (false negatives or type' I errors) and the mate of the probability of prevailing must exceed the defendant's innocent guilty (false positives or type II errors). If more litigation estimate of that probability. But when this is true, the Anglo-Ca­ and enforcement only meant that there were fewer false negatives, nadian system tends to reduce the sum of the expected legal costs but more false positives, the retributivist would find little comfort. for both parties, and thus tends to make trial relatively more at­ Indeed, our standard rules of criminal law procedure suggest that tractive as compared to settlement.t'" Thus, for the retributivist, retributivists probably consider a false positive to be a worse result the Anglo-Canadian costs rule is to be preferred both because- it than a, false negative.t'" Thus, private law enforcement devices, encourages the plaintiff to sue in the right sorts of cases and be­ considered as a supplement to punitive damages to further en­ cause, once suit is brought, it encourages the parties to litigate courage litigation and enforcement, would also have to show some those cases to trial where defendants will get what they deserve proper sorting capabilities to satisfy the retributivist. rather than what they bargained for. One device that appears promising, as long as we ignore Risk aversion obviously complicates this analysis significantly. problems of risk aversion, is the Anglo-Canadian two-way costs Combining punitive damages with the Anglo-Canadian costs rule rule. Such a rule encourages a greater frequency of initial suit than increases risk in two respects. First, when punitive damages are does the American no-way costs rule in those cases in which the added to the action for compensatory damages, the stakes in the plaintiff believes he or she is relatively likely to prevail.203 These litigation are larger. Even if the possibility of compensatory recov­ are high-probability plaintiff victory cases if we can assunie the ery is conceptually separated from the possibility of punitive plaintiff has reasonably rational expectations. Thus, they are the damages, the fact remains that recovery under both headings still cases that the retributivist tends most to worry about as false might turn on a single issue of fact which is the subject of dispute negatives if they are not litigated. Furthermore, and for analogous between the parties. For example, the defendant might contest reasons, the Anglo-Canadian rule encourages a smaller frequency whether there was a special relationship intentionally breached by the defendant. These increased stakes again will increase the possi­ bility of litigating the issue if we ignore risk aversion. With 201. Kipnis, Criminal Justice and the Negotiated Plea, 86 ETHICS 93, 104-05 (1976). 202. Ellis, Fairness and Efficiency, supra note 3, at 40-43. increased stakes, a smaller disparity in the probability estimates 203. Shavell, Suit, Settlement, and Trial: A Theoretical Analysis Under Alternative between plaintiff and defendant will be sufficient for an expected Methods for the Allocation of Legal Costs, 11 J. LEGAL STUD. 55, 58-59 (1982) (when the plaintiff is optimistic about winning, the expected legal costs are low under the two-way costs rule; however, under the no-way rule, the'costs to the plaintiff are higher because he 204. Id. at 59-60. will bear them regardless of the outcome). 205. Id. at 65-66. 794 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 795 judgment at trial to exceed the combined costs of litigation.?" Risk fectively to diversify the risk away with a portfolio of his or her aversion on the part of the plaintiff should not change this in­ own cases, or by arranging to share cases with other Iawyers.s'? creased incentive to litigate, since the plaintiff faces no downside On the defendant's side a contingent fee arrangement is small risk in the availability of punitive damages as an add-on to com­ comfort. However, in a great number of cases, particularly in those pensatory damages. However, since a risk averse defendant does cases in which the defendant's conduct is likely to have a large but face a greater downside risk with punitive damages, he or she may disparate impact on many potential plaintiffs.s-' it is quite likely be more eager to settle.f" If this negative effect of risk aversion on that the defendant will be a corporation. If the corporation is the incentive to litigate is stronger than the positive effect of in­ widely held and its shareholders diversified in their portfolio of in­ creased stakes, then a retributivist's enthusiasm for punitive vestments, then the corporation should be considered risk damages will be somewhat attenuated. neutral.r'" Therefore, in such a case, the retributivist can advance Second, factoring in risk aversion, a two-way costs rule also the case for punitive damages and a two-way costs rule without increases the risk of litigation. After all, if one loses, one must pay concern for the effects of risk aversion on the defendant's decision the legal costs of the other party as well as one's own. This in­ to litigate to trial. This analysis may help to explain why some creased risk under the Anglo-Canadian rule both should discourage courts have attended to the wealth of the corporation as a feature initial suits by the plaintiff and promote settlement over litigation relevant to the award of punitive damages.f'" However, as we shall of those cases for which suit is initially brought.?" Thus, for the argue below,214 the wealth of the defendant is a poor proxy for risk retributivist, once risk aversion is introduced into the analysis, the neutrality and diversification, and should not be relevant on the advantages of combining punitive damages with an Anglo-Cana­ retributive view to a decision to award punitive damages. dian two-way costs rule are more ambiguous. While, if risk Private enforcement may nonetheless fail to serve the retribu­ neutrality is assumed, this combination of private law enforcement tivist's goals. It will be recalled that the case for private, as devices increases the prospects of litigation to trial of high opposed to public, enforcement of the law turns in large part on probability plaintiff victory cases, adding risk aversion to the anal­ the idea that some advertently wrongful conduct might have a dis­ ysis tends to reduce litigation and promote settlement under this parate impact on many victims, a fact that makes effective private combination of rules. monitoring of public law enforcement activity problematic. How­ ever, the same disparate impact may also make the private However, the compromising effect of risk aversion can be sig­ enforcement of claims for compensatory damages unlikely. Thus, nificantly reduced in certain contexts. Recall that on -the plaintiff's unless the penalty that is captured privately in punitive damages is side the only increased risk is in the possibility of having to pay large, there is a danger that private enforcement of the penalty, higher legal costs if one loses. However, if the plaintiff has a con­ piggy-backing as it does on an action for compensation, will still be tingent fee arrangement covering all legal costs with his or her inadequate to promote retributive goals. lawyer, then the risk to the plaintiff of paying these legal costs can be reduced or removed altogether.'?" The lawyer should be able ef- 210. See Coffee, supra note 190, at 282-83. 211. See supra text accompanying notes 191-93. 212. The managers of the corporation, of course, may have a largely undiversified in­ 206. Priest, Selective Characteristics of Litigation, 9 J. LEGAL STUD. 399, 417-18 (1980). vestment in the corporation. Thus, if they can decide whether or not the corporation will litigate a given case without having to attend to shareholder interests, their risk aversion 207. See Symposium Discussion, supra note 134, at 179 (quoting remarks by Robert might still be a problem. To some extent, however, this kind of principal-agent problem is Cooter). prevented by the market for corporate control. See generally Easterbrook & Fischel, Corpo­ 208. See S. SHAVELL, ECONOMIC ANALYSIS, supra note 1, at 262-70. rate Control Transactions, 91 YALE L.J. 698 (1982); Manne, Mergers and the Market for 209. Trebilcock, The Case for Contingent Fees: The Ontario Legal Profession Corporate Control, 73 J. POL. ECON. 110 (1965). Rethinks its Position, 15 CAN. Bus. L.J. 360 (1989). Contingent fees, however, generate their 213. See Kelco Disposal, Inc. v. Browning-Ferris Indus., Inc., 845 F.2d 404,410 (2d own sorts of problems, particularly in class action suits. See Coffee, supra note 190, at 266­ Cir. 1988), aff'd, 109 S. Ct. 2909 (1989). 68. 214. See infra text accompanying notes 238-45. 796 Alabama Law Review [Vol. 40:3:741 1989]. Divergent Rationales 797

Ata minimum this kind of analysis suggests that the penalty original bribery problem in the case ofpublic law enforcement. In paid out as punitive damages to the private enforcer should not a class action, the amount the defendant must pay if he is unsuc­ have to be shared with other victims of the wrongdoing. A non­ cessful will be greater than what the representative plaintiff and sharing rule will go some way to encouraging a plaintiff to bring his or her lawyer will receive. The plaintiff will have to share these suit and to break a litigation trail for other's compensatory claims. proceeds either with other members of the affected class or with Thus, it will help to solve the free rider problem.?" However, there other institutions, for example, under escheat to the state or cy" is now the reverse danger that a non-sharing rule will createan pres distribution.v" This again opens up the possibility of mutual incentive for plaintiffs to be the first to file and capture the pen­ gains through bargaining to some sort of settlement between the alty. If this means only that cases are hastily filed and poorly defendant and the representative plaintiff or class lawyer. Such prepared, there will be ineffective litigation and enforcement on settlements are always problematic because they come at the ex­ the retributive view. While contingent fee arrangements should pense of appropriate third-party compensation and deterrence. In somewhat control this behavior (in that it hardly advantages a law­ addition, for the retributivist, even if there were no such external yer to spend time and resources on a case that is unlikely to pay effects, settlements represent contractual interferences with a off because it is poorly prepared), there may still be some argu­ world of punishment that should be based on desert. This problem ment for publicly supervising the claim filing process. Although again argues for supervision by public officials, in this situation re­ this re-introduces a role for public officials in the enforcement pro­ view of the powers of final settlement.f'" However, in this case, in cess, it now is a role that will attract private scrutiny of its which the private returns to the alternative litigator are likely to effectiveness. Other potential litigants keen to capture the penalty be low because the penalty is small, there is less reason for being will have incentives to argue that theirs is a better-prepared confident that other private parties will monitor for effective su­ case.216 pervision of the settlement process by public officials. On the other hand, even if the full penalty is captured pri­ 2. Quantum of Damages.-On the retributive rationale the vately by a single litigant, with a small penalty the costs of quantum of punitive damages should simply be equal to the pen­ litigation may still preclude effective private law enforcement, This alty that would otherwise have been publicly enforced. If that argues for further economizing measures to control these costs, and publicly enforced penalty is non-monetary, the damages should be in particular for the sort of class action device that exploits the the monetary equivalent. In most cases the monetary fine will be economies of combining related plaintiffs' actions into a single ac­ easily discovered by examining the relevant criminal or regulatory tion spearheaded by a representative plaintiff and his or her legislation and sentencing practices. lawyer."? While the details of designing such a device clearly take One idea the retributivist will not entertain is the possibility of grossing up the penalty to reflect the fact that the probability of us beyond the special concerns of this Article, there is still a spe­ 221 cial difficulty with the typical class action mechanism that would its enforcement is less than one. This is a common recommenda- be of particular concern to the retributivist. This is the problem of collusive settlements between the defendant and the representa­ 219. See Dewees, Prichard & Trebilcock, An Economic Analysis of Cost and Fee Rules for Class Actions, 10 J. LEGAL STUD. 155, 162 (1981). tive plaintiff or class lawyer,218 a problem closely analogous to the 220. This is a standard feature of legislation allowing for litigation by a single party on behalf of a class. Consider, for example, the case of the derivative action by a single share­ holder on behalf of the corporation and, therefore, other shareholders. The usual corporate 215. See supra note 192. codes provide for judicial supervision of the settlement process. See, e.g., Canada Business 216. Cf. Coffee, supra note 190, at 277 (stating that one way for a court to choose Corporations Act, CAN. REV. STAT. ch. C-44, § 242(2) (1985); Ontario Business Corporations attorneys for private enforcement is to base it on merit). Act, ONT. STAT. ch. 4, § 248(2) (1982); . 217. See id. at 275-77; Dam, Class Actions: Efficiency, Compensation, Deterrence, 221.. See Goldman, supra note 172, at 50-51. By "grossing up," we mean multiplying and Conflict of Interest, 4 J. LEGAL STUD. 47 (1975). These articles discuss several problems the required penalty by the reciprocal of the probability of its enforcement. Thus if the and proposals for reform of class action litigation. probability of a penalty X being enforced was only .5, then the penalty meted out in cases of 218. Coffee, supra note 190, at 232-33 (discussing the dangers of collusion). actual enforcement would be 2X. This is done to insure that wrongdoers can expect ex ante 798 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 799 tion among deterrence theorists. However, for the retributivist, the promotion of any good extrinsic to punishment as desert, even the The sources of this division of opinion are not hard to dis­ promotion of deterrence, is unjust in that it treats that individual cover. The compensatory, retributive, and deterrent rationales for who is caught and obliged to pay the penalty as a mere means for punitive damages yield very different implications with respect to the good of others.f" The same sort of retributive concern would the issue of vicarious liability. Within a retributive framework, vi­ also preclude consciously choosing a low level of enforcement carious liability is much more problematic than within either the merely to avoid inconvenience or high administrative costs. These compensatory or deterrence frameworks. It is of the essence of types of retributive concerns go some way, we suggest, to explain­ traditional theories of retribution that individual wrongdoers are ing current American constitutional concerns about the high deserving of punishment but that, conversely, individuals who are quantum of punitive damages awards.f" innocent of wrongdoing are not. Vicarious liability, by definition, violates these precepts by imposing punishment on individuals on account of the conduct of others that was not expressly authorized B. Second-Order Design Issues or directed by the former. 226 In contrast to corrective justice ratio­ Recent challengesf" to the constitutionality of current puni­ nales for vicarious liability, which require equality of treatments of tive damage rules under the Eighth (excessive fine) and both plaintiff and defendant.f" retributive theories of liability fo­ Fourteenth (due process) Amendments of the United States Con­ cus solely on the conduct of the defendant. stitution have begun to highlight the implications of the While broader retributive theories of vicarious liability have retributive perspective for punitive damages law. Some of these recently been advanced.r" it remains true that criminal law has traditionally been hostile to the concept of vicarious liability, at implications are explored below. least in the case of natural persons. Courts have been 'reluctant to 1. Vicarious Liability.-According to Ellis: impose liability unless offenses are explicitly stipulated in a strict [U.S.] courts are almost evenly divided over the proper basis for vi­ or absolute liability form so as to give rise to liability on the part of carious punitive damage liability. Half follow the respondeat one actor for wrongdoing committed by another in the course of a superior ru1e and hold that an employer may be liable for punitive principal-agent relationship.v" In the case of corporate defendants damages for wrongfu1 acts committedby employees in the course of accused of mens rea offenses, Anglo-Canadian criminal law has their employment. The other half follow the "complicity ru1e" and sought to distinguish between vicarious corporate criminal liability limit vicarious punitive damage liability to those situations where wrongfu1 acts were committed or specifically authorized or ratified and primary corporate criminal liability by reliance on the so­ by a managerial agent, or were committedby an unfit employee who called "identification theory." This doctrine attributes the conduct was recklessly employed or retained. Legal scholars also disagree as and state of mind of corporate agents who are viewed as a part of 22 5 to the appropriate ru1e. . "the directing mind and will" of the firm."? Much convoluted case­ law has developed regarding which agents are to be regarded as satisfying this identification test in given contexts. British courts to pay a penalty equal to X (since 2X discounted by a .5 probability ofenforcement is equal to X). This ex ante perspective suggests why "grossing up" is more appropriate to the for­ ward-looking concerns of deterrence than the backward-looking concerns of retribution. 222. See id. 226. If the defendant authorized or directed the tortious conduct, then he is obviously 223. See, e.g., Browning-Ferris Indus., Inc., v. Kelco Disposal, Inc., 109 S. Ct. 2909 primarily, and not vicariously, liable. (1989); Juzwin v. Amtorg Trading Corp., 705 F. Supp. 1053 (D.N.J. 1989). 227. See supra pp. 775-77. 224. See, e.g., Browning-Ferris, 109 S. Ct. 2909; Bankers Life & Casualty Co. v. Cren­ 228. See. e.g., Fisse, Reconstructing Corporate Criminal Law: Deterrence, Retribu­ shaw, 108 S. Ct. 1645 (1988); see also Jeffries, supra note 187; Wheeler, The Constitutional tion, Fault, and Sanctions, 56 S. CAL. L. REV. 1141, 1167-83 (1983). Case for Reforming Punitive Damages Procedures, 69 VA. L. REV. 269 (1983); Note, The 229. Imposition of absolute liability may be open to constitutional challenge in Ca­ Constitutionality of Punitive Damages under the Excessive Fines Clause of the Eighth nada. See In re Constitutional Question Act, [1985] 2 S.C.R. 486. Amendment, 85 MICH. L. REV. 1699 (1987). 230. See, e.g., Leigh, The Criminal Liability of Corporations and Other Groups, 9 225. Ellis, Fairness and Efficiency, supra note 3, at 63 (footnotes omitted). OTIAWA L. REV. 247, 252-56 (1977). ,. . 800 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 801

have tended to impose more stringent standards on which type or the jurisdiction in which a punitive damages claim is brought, to level of corporate agent can be identified with the corporation.v" the extent that the latter is rationalized in retributive terms. In contrast, Canadian courts have been prepared to impose pri­ Hence, if the "complicity rule" -is the rule of liability in a criminal mary corporate criminal liability on the basis of middle-level 232 law context with respect to the type of wrongdoing in question, it managerial conduct. In most United States jurisdictions an even should also be the rule applicable to punitive damages claims justi­ less. demanding test is apparently applied: mens rea is vicariously fied in retributive terms. Unfortunately, because the compensatory attributed to a corporation on the basis of the mental state of an and deterrence rationales for punitive damages claims appear to agent acting with intent to benefit the corporation.v" yield rather different normative implications for the choice of vica­ Of ~o~s.e, t~e disti~ction between vicarious and primary cor­ rious liability rule, and because some types of conduct can porate liability IS, by ItS nature, a highly problematic one: all plausibly support punitive damages claims under all three ratio­ corporate liability is, in some sense, necessarily vicarious. Fisse nales, discerning the theory of the plaintiff's case in these contexts, states that the question of the attribution of criminal fault to a and holding it distinct from competing rationalizations, is likely to corporation "has proven to be the blackest hole in the theory of pose serious problems of indeterminacy. cor~ora~e. criminal law."234 Whatever attribution test is adopted, 2. Insurability.-From a retributive perspective, it seems retributivist theory would remain concerned that the principal clear that punitive damages should not be legally insurable, essen­ burden of punishment imposed on a corporation will in most tially for the same reasons that courts have long viewed fines for cases, fall on innocent parties, such as shareholders, e~ployees, criminal wrongdoing to be uninsurable. Insurability of punitive consumers, and suppliers.v" The larger the corporation the more damages is inconsistent with a retributive rationale for punitive likely this is to be true; to the extent that corporate wealth is a damages because it reduces the punishment of the wrongdoer. In ~actor to be weighed in determining the level of penalty, the costs addition, insurability imposes higher costs on other insureds in the Imposed on mnocent parties will be further exacerbated. same risk pool who are innocent of any wrongdoing but who face . ~ithout attempt~g to illuminate the "blackness" of corporate higher premia on account of others' wrongdoing.f" criminal law theory With respect to these issues,236 it seems clear 3. The Relevance of Defendant's Wealth.-From a retribu­ enough that if punitive damages actions are viewed within a re­ tive perspective, it might seem clear that.a defendant's wealth tributive framework, as a substitute for public enforcemsnt of should be irrelevant to the quantification of punitive damages, just .criminal law sanctions, with enforcement functions simply "con­ as the defendant's wealth is treated as irrelevant to the determina­ tracted out" or delegated by the state to private parties, the same tion . of fines for criminal wrongdoing. A retributive rationale norms should apply to both classes of enforcement action. Thus, focuses on the nature of a defendant's conduct and requires that ,,:hate~er rule of attribution of agent wrongdoing to corporate prin­ actors who are equally guilty of a given type of wrongdoing war­ cipals IS adopted by the criminal law, should apply to the latter in ranting retribution should be treated equally in terms of the punishment imposed.f" Imposing more severe penalties on wealth­

231. See, e.g., Tesco Supermarkets Ltd. v. Nattrass, [1972] App, Cas. 153 (H.L. 1971) ier actors than poorer actors for the same wrongdoing violates this (supermarket manager not a high official). tenet of the retributive rationale for punishment. . ~32. See, e.g., Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662 (sub­ However, there is a plausible argument for, in principle. at mISSIOn of bids). least, treating monetary sanctions (and thus punitive damages) dif­ 233. Fisse, supra note 228, at 1185; see also Commonwealth v. Beneficial Fin. Co. 260 Mass. 188, 275 N.E.2d 33 (1971). ' ferently from other types of retributive sanctions with respect to 234. Fisse, supra note 228, at 1183. 235. See Coffee, "No Soul to Damn, No Body to Kick": An Unscandalized Inquiry 237. Ellis, Fairness and Efficiency, supra note 3, at 74. Into the Proble~ of Corporate Punishment,79 MICH. L. REV. 386, 400-05 (1981). ~36: 238. See H. PACKER, THE LIMITS OF THE CRIMINAL SANCTION 9-11, 37-38 (1968); Abra­ . See Fisse, supra note 228 (ambitiously attempting to reconstruct corporate crimi­ ham & Jeffries, Punitive Damages and the Rule of Law: The Role of Defendant's Wealth, nal lIability based on failure to respond to prevent offenses by corporate agents). 18 J. LEGAL STUD. 415, 423 (1989). 802 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 803 this issue of defendant's wealth. Recall that it is the purpose of And any sense that "on average" this might be true is inconsistent retribution to manifest to the criminal the true or objective signifi­ with the retributive requirement that we punish the particular de­ cance of his or her conduct as a denial of the category of Right or fendant according to what he or she has done, not according to liberty. In certain types of non-monetary sanctions, such as impris­ some statistical group characteristic.>" onment, death, or corporal punishment, this denial of liberty can All of these problems are greatly exacerbated in the case of be objectively demonstrated to the criminal by meting out the corporate defendants. First, attending to the defendant's wealth in same punishment for all, since such sanctions are by their very na­ such contexts would seem to require that the wealth of individual ture coercive of personality and, therefore, directly implicate shareholders in the corporation be admitted into evidence in an liberty. Thus, there is no need to vary such sanctions according to action for punitive damages. This seems both highly impractical the different characteristics of the defendant. However; in the case and probably unnecessary; presumably, over a range of sharehold­ of monetary sanctions, we are dealing with a punishment that does ers with varying wealth the differences between them in their 243 not touch personality directly. Thus, for the sanction to have the utility for money would cancel out. Second, it has been pointed required objective significance for liberty and Right that it should, out from the retributivist's viewpoint that radically inequitable re­ we have to attend to the subjective characteristics of the defend­ sults are likely to be generated by weighing corporate defendants' ant. This suggests in particular that a wealthy defendant should wealth in assessing punitive damages.P" Consider the following pay a higher fine or punitive damages award than a poor d~fe?d­ example: ant. Otherwise, the objective significance of the criminal Suppose, for example, that two insurance companies-one ten wrongdoing will manifest itself differently to different times the size of the other-issue identical directives to their em­ defendants.f" ployees designed to reduce the number of claims that are paid. In However, while we can appreciate why the defendant's wealth response to these directives, examiners wrongfully deny claims. Be­ might be relevant for an assessment of punitive damages in princi­ cause of the greater volume of its business, wrongful denials (which, ple, we are persuaded that as a practical m~tter it is better to in some jurisdictions, give rise to punitive damages) will of course ignore wealth. To determine the objective significance of a mone­ occur ten times more often in the larger company. Thus in a given tary fine or payment of damages for different defendants woul~ period, there might be fifty punitive damages awards against the larger company and five against the smaller company. require courts to make highly problematic interpersonal compan­ If each punitive damages assessment is 1% of the. defendant's sons of the utility of money. As Friedman and Savage argued some assets, the large company, after this period, will have lost half its time ago,240 we cannot with any confidence assume that a $10,000 241 assets. The smaller company, which behaved in exactly the same loss means less to a given wealthy individual than a poor one. way, will still have 95% of its assets.v"

239. Immanuel Kant reasoned in the following way: great deal, even though you are getting little for your money. Does this mean that not only Now, it might seem that the existence of class distinctions w~uld not allow for the rich but also the elderly should pay higher fines or higher punitive damages? This seems the [application of the] retributive principle of returning like for like. Neverthel~ss, impractical if not normatively unattractive. However, for an argument that it is appropriate even though these class distinctions may not make it possible to apply this principle in certain contexts to take into account an individual's utility for money as conditioned by to the letter, it can still always remain applicable in its effects if regard is had to the his or her proximity to death, see Chapman, Pensions, Sex Discrimination, and the Value special sensibilities of the higher classes. Thus, for example, the imposition of a fine of Life After Death, 7 INT'L REv. L. & ECON. 193 (1987). for a verbal injury has no proportionality to the original injury, for someone who has 242. For an argument that one can, on some probabilistic basis, make the judgment a good deal of money can easily afford to make insults whenever he wishes. that the rich systematically value money less highly at the margin than do the poor, see A I. KANT, supra note 173, at 101. LERNER, THE ECONOMICS OF CONTROL: PRINCIPLES OF WELFARE ECONOMICS (1947). For a good 240. Friedman & Savage, The Expected-Utility Hypotheses and the Measurability of discussion of Lerner's point, see A SEN, ON ECONOMIC INEQUALITY 83-85 (1973). J. Utility, 60 J. POL. ECON. 463 (1952). 243. See Abraham & Jeffries, supra note 238, at 422. 241. Moreover, there are other reasons for thinking that some people might systemati­ 244. Brief for Navistar Int'l Transp. Corp. as Amicus Curiae, Browning-Ferris Indus., cally value money less than others. Proximity to death may be a case in point. Since money Inc. v Kelco Disposal, Inc., 109 S. Ct. 2909 (1989) (No. 88-556). is of no use to you when you are dead, your proximity to death may induce you to spend a 245. [d. at 13-14 (footnote omitted). 804 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 805 Given that the assets of a corporation ultimately belong to its the latter. action should be precluded/"? This would rule out shareholders, the disparate impact on the two bodies of sharehold­ "piggy-back" actions of the kind that have become common in an­ ers in the above example is obvious. titrust treble damage actions, where plaintiffs often initiate suit 4. Special Procedural Protections.-A retributive rationale' only after a prior criminal conviction.>" Moreover, it would seem for punitive damages claims essentially conceives of the latter as a to follow that once a public prosecution has been formally initi­ form of "contracting out" or delegation of the enforcement func­ ated, the initiation of subsequent private actions for punitive tion by the state to private agents acting on its behalf. On this damages should be barred.v" Where a private action for punitive view, it would seem that all the procedural protections that apply damages has been initiated and subsequently formal public en­ to public enforcement actions designed to serve retributive ends forcement proceedings are commenced, arguably either the private should apply, in principle, to private enforcement actions actuated suit should be stayed, or, at the very least, any private recovery of by the same rationale, that is, actions substituted for public en­ punitive damages should be credited against a subsequent public penalty.f" forcement actions. The implications of this view for the procedural norms that These constraints on private actions for punitive damages, ra­ should govern punitive damages actions, justified in retributive tionalized in retributive terms, seem to flow naturally from viewing terms, seem clear enough. First, potential violators should be given these actions as a substitute for public enforcement actions, and adequate prior notice of what forms of conduct will attract punish­ the enforcement function as simply contracted out, or delegated, ment. This partly explains why courts in most jurisdictions are by the state. Where the state takes enforcement action, the case prohibited by statute from creating common law crimes. Second, for private enforcement action, on retributive grounds, no longer the standard of proof with respect to liability should be the crimi­ holds. nal' not the civil, standard (i.e., one based on decisions made beyond a reasonable doubt rather than by a preponderance of V. THE DETERRENCE RATIONALE probabilities). Within a retributive rationale, false positives (unjus­ tified findings of guilt) are to be avoided, even at the expense of Deterrence rationales for punitive damages appear to yield false negatives (unjustified findings of innocence). Third, the de­ quite different implications from both compensatory and retribu­ termination of the sanction should be' the function of the trial tive rationales on both first-order issues (the types of conduct judge, not the jury, to ensure consistency in level of punishment. addressed and sanctions prescribed), and the second-order issues from one case to the next. Fourth, the issue of double jeopardy (vicarious liability, insurability, the relevance of the defendant's requires careful harmonization of public and private enforcement wealth, and procedural protections). As we trace through the de­ actions and of multiple private enforcement actions to ensure that sign implications of deterrence rationales for a punitive damages defendants are not exposed to the risk ofmultiple sanctions that regime, we will attempt to identify when these implications diverge may entail excessive punishment.r" from those suggested by the two alternative rationales. This last issue bears some elaboration. Where there has been a prior criminal conviction and penalty for the same conduct for which punitive damages are subsequently sought in a civil action, 247. Breit & Elzinga, Private Antitrust Enforcement: The New Learning, 28 J. L. & ECON. 405, 439-42 (1985) (discussing a range of proposals for limiting or barring private antitrust actions). 248. See Coffee, supra note 190, at 223 & n.17; Dam, supra note 217, at 66. 246. But see Juzwin v. Amtorg Trading Corp., 705 F. Supp. 1053, 1056-57 (D.N.J. 1989) (rejecting a double jeopardy challenge to successive punitive damages awards in multi­ 249. Dam, supra note 217, at 68. ple private actions). 250. [d. at 68-69. 806 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 807

A. First-Order Issues: Types of Conduct Addressed and forbidden zone.f" Thus, the average person will ensure that his or Sanctions Imposed her conduct remains within the standard even with relatively low probabilities of enforcement (henceforth low p's). There will be no In approaching this issue within a deterrence framework, a incentives to violate the standard by small degrees. Incentives to distinction drawn by Cooter in an insightful (although, in impor­ violate the standard will exist only for exceptional wrongdoers who tant respects, problematic) paper'"" between sanctions and prices face high subjective costs of compliance or derive substantial illicit provides a useful point of departure. Cooter views lawmakers in a gains from non-compliance.f" It is argued that they may face in­ wide range of policy contexts as facing a choice between sanctions centives to violate the standard by large degrees, apparently and prices in controlling conduct. He states: principally because they will be liable for all social costs associated with their activities, once the standard is violated at all, and not A sanction is a detriment imposed for doing what is forbidden, such as failing to perform an obligation. For example, a defendant in a merely those costs avoidable by compliance with the standard.v" tort dispute may be ordered to pay compensatory damages for an Where lawmakers are unable to fix the socially optimal stan­ injury caused by his negligence, or a convicted criminal may be sen­ dard of conduct with confidence, then obviously too permissive a tenced to jail. standard will encourage excessive amounts of socially undesirable In contrast, a price is a payment of money which is required in conduct, while too stringent a standard will discourage certain order to do what is permitted. For example, a company may buy amounts of socially desirable conduct. goods in the market place, but it must pay the' seller's price. Simi­ When there are uncertainties as to where to fix the standard, larly, individuals are permitted to earn income, but obliged to pay but less uncertainty regarding the social costs of an actor'sactivi­ taxes on their earnings.t'" ties, Cooter recommends the use of pricing mechanisms, such as strict liability.P'" With such mechanisms, there are no discontinui­ In tort law, a negligence regime is said to exemplify the use of ties in the cost functions facing actors-the more they engage in an sanctions, a strict liability regime the use of prices. Cooter argues activity, the greater their liability, this simply being a function of for the following decision rule for lawmakers: "If obtaining accu­ the social costs entailed at any given level of activity.f" Each actor rate information about external costs is cheaper for officials than will then decide for himself where the marginal private benefits to obtaining accurate information about socially optimal behavior, him of engaging in the activity equal the marginal social costs for then they should control the activity by pricing it; if the converse which he is liable, which point is also the social optimum. How­ is true, then they should control the activity by sanctioning it."253 ever, under a pricing regime, actors' conduct will be sensitive to When lawmakers are confident that they can identify the so­ tbe prices that they face. Cooter argues that "the amount of pre­ cially optimal standard that distinguishes between conduct in the caution an actor takes is more elastic with respect to changes in permitted and forbidden zones (for example, clear community or prices than to changes in levels of eanctions'?" Thus, if the level professional standards), Cooter argues that the advantage of a of external costs for which an actor is held liable is too high, the sanctions regime is that its efficient operation is not particularly actor will engage in too little activity; conversely, if the level of sensitive to the level of the sanction or the frequency of its appli­ costs for which he is held liable is too low, he will engage in exces- cation.t'" This argument is based on the abrupt jump in costs that a wrongdoer faces when he or she moves from the permitted to the 255. Cooter, Economic Analysis, supra note 3, at 82-85. 256. Cooter, Prices, supra note 251, at 1530-31. 257. Although unstated, this assumption is implicit that, once liability is found, the 251. Cooter, Prices and Sanctions, 84 COLUM. L.·REV. 1523 (1984) [hereinafter Cooter, Prices]. defendant is liable for all resulting damages. See, e.g., W. LANDES & R. POSNER, THE Eco­ NOMIC STRUCTURE OF TORT LAW 54-84 (1987). 252. Id. at 1524-25 (emphasis in original). 258. Cooter, Prices, supra note 251, at 1534-35. 253. Id, at 1533 (emphasis in original). 259. Id. at 1528-30. 254. Id. at 1538-39; Cooter, Economic Analysis, supra note 3, at 82-85. 260. Id. at 1529-30 (emphasis in original). [VoL 40:3:741 1989] Divergent Rationales 809 808 Alabama Law Review liab~e for the.less serious offense; this suggests some outside limit on sive activity; and even if the costs for which he .is held are how high fs for particular offenses can be raised without accurately estimated, incomplete enforcement will reduce hIS ex- .all . t 1 1261 causing a convergence of expected penalties for disparate pected costs below the SOCI y approprra e eve. . offenses;265 . What are the implications of this framework of analysis for the deterrent role of punitive damages, at least with respect to t~e (b) the problem of liquidity limitations-f cannot be raised so types of conduct that might appropriately attract their high as to exceed a defendant's wealth, because obviously a applicati IOn.? ...... penalty has no marginal deterrent effect beyond this point.f'" 1. Criminal Conduct.-In the case of criminal prohIbItIOns At this point, alternative sanctions to fines-for example, im­ (e.g., murder, theft, and rape), in which the st~dards ~e cl~ar and prisonment-may need to be invoked even though more no social utility is attached to the conduct In que~t~o~ (z.e., t~e costly to society. This may suggest that in a public enforce­ conduct is absolutely normatively proscribed), then initial analysis ment context less wealthy violators may face imprisonment would suggest that itis immaterial how high the sanction, or I (for more frequently than more wealthy violators with respect to fine) is set. Unlike the compensatory rationale for punitive dam­ whom it is socially less costly to impose higher monetary ages, where obviously demonstrable injury bounds I, ?r the penalties; retributive rationale for punitive damages, where moral notions of (c) the problem of increased incentives for bribery-obviously the just desert and proportionality bound I, no similar constraints ap- higher I is raised, the stronger the temptation,for wrongdoers ply to the deterrence rationale. . . to attempt to bribe law enforcement officials to suppress However further analysis suggests other Issues that require wrongdoing and waive enforcement.f'" Officials have corre­ resolution under the deterrence rationale. First, why is the imposi­ spondingly stronger incentives to accept such bribes, given tion of sanctions for criminal wrongdoing not the exclusive that they derive no personal benefits from the imposition of preserve of the criminal law? In response, a case must ?e made out the formal penalty; for private enforcement of criminal sanctions. ~he ~terature on private law enforcement suggests that the following kinds of con­ (d) the problem of risk aversion or overdeterrence-Polinsky and siderations should be addressed.t" It might be argued, on the one Shavell have arguedv" that the presence of risk aversion pre­ hand that for reasons canvassed in the previous section.f" public cludes lowering p and raising I beyond some range for anforcement will often be incomplete. However, this may simply offenses like parking violations without inducing socially in­ suggest that p will often be sub-optimally low, th~ ~tidote to appropriate modifications of conduct (e.g., declining to. park which is to raise I so that the expected costs of engaging In wrong­ illegally in order to get a critically ill person to a hospital doing (namely, p x f) ensures compliance with the s~andard.2~4The emergency ward). However, this tends to suggest that penal­ constraints on raising I in a public enforcement regime predicated ties for parking and like offenses should be seen as prices and on deterrence rationales are conventionally identified as follows: not sanctions.f'" and thus do not fall within the category of absolutely normatively proscribed conduct. (a) the problem of marginal deterrence-the expected penalty f?r theft cannot be as high as armed robbery, otherwise there WIll 265. Id. at 180-85. be incentives for wrongdoers to substitute the more serious 266. See Block & Lind, Crime and Punishment Reconsidered, 4 J. LEGAL STUD. 241, 242 (1975). 261. Id. at 1539-40. 267. Becker & Stigler, supra note 190, at 5-6. 262. See sources cited supra note 190. 268. Polinsky & Shavell, The Optimal Tradeoff Between the Probability and Magni­ 263. See supra notes 190-96 and accompanying text. tude of Fines, 69 AM. Ecox REV. 880 (1979). 264. See Becker, Crime and Punishment: An Economic Approach, 76 J. POL. EeON. 269. Cooter, Prices, supra note 251, at 1551. 169 (1968). 810 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 811

What might private enforcement of criminal laws, in particu­ "racing" problems akin to those identified in the patent liter­ lar the role of punitive damages, contribute to an optimal ature,273 where incentives are created to file poorly prepared sanctions regime? and perhaps weakly substantiated claims. In this and other (a) The problems of marginal deterrence and liquidity limitations scenarios, some combination of and would also require attention here; however, in a private en­ volenti defenses, with a duty to mitigate damages may also forcement context, imprisonment is not available to solve contain the misallocation problem. In the alternative, one liquidity limitations; might, as under the retributive rationale for punitive dam­ (b) The problem of risk aversion or overdeterrence would also be ages, focus more on mechanisms for raising p, rather than t. irrelevant here in the case of absolutely and clearly norma­ such as class actions, contingency fees, and fee shifting rules, tively proscribed conduct; but each of these mechanisms contains its own mix of en­ (c) The problem of bribery may be less acute in that the plaintiff forcement efficiencies and inefficiencies (some of which have has little incentive to settle for anything less than the ex­ been noted in Section IV),274 and moreover sacrifice the econ­ pected penalty, given that he obtains the entire benefit of this omies to be realized in enforcement resources from a low p, high { enforcement strategy. penaltyr'?" What does all of this suggest for the role of punitive damages (d) A new problem of overenforcement, rather than overdeter­ for enforcement of absolutely normatively proscribed conduct? renee, arises. Under a regime of public enforcement, raising t The balance sheet seems quite mixed relative to public enforce­ to reflect a probability of enforcement p of less than one, ment of such conduct. In any event, the general contours of such a often because of budget constraints, should yield the socially regime seem clear enough. The conduct addressed is that clearly optimal expected penalty. But under private enforcement, and absolutely normatively proscribed by law and the quantum of this will be treated (incorrectly, from a social point of view) punitive damages (subject to the difficulties noted) should reflect a as a signal for the allocation of additional private enforce- grossing-up of actual damages incurred to reflect any probability of ment resources to a given category of wrongdoi omg:271 Whil e enforcement p of less than one (i.e., the reciprocal of the enforce­ overdeterrence is not a concern in the case of clearly and ab­ ment short-fall).'?" solutely normatively proscribed conduct, by contrast wasteful 2. Tortious Conduct.-a. Intentional Torts.-Intentional misallocation of enforcement resources is a concern. Solving torts, such as assault, conversion, trespass, and deliberate defama­ this misallocation problem is unlikely to be easy. One could, tion, which are clearly and absolutely normatively proscribed, and for example, vest property rights in private enforcement ac­ which in many cases are crimes as well as torts, seem amenable to tions exclusively in victims who can demonstrate tangible much the same kind of analysis as criminal conduct and the role of harms from the wrongdoing rather than members of the pub­ punitive damages is much the same-to gross up { to offset low lic at large. However, this might create incentives for p's-and subject to all the same qualifications. However, with most individuals to become-or at least assert that they have be­ intentional torts, one would expect that the probability of appre­ come-victims, and to perpetuate their state ofvictimization, hension and enforcement is likely to be high. For that reason, we 272 in order to qualify for high { relief. In multiple victim sce­ would not expect punitive damages often to be warranted in large narios, one could perhaps mitigate this problem by conferring amounts, in contrast to the compensatory rationale for punitive an exclusive property right in private enforcement on the first victim to file suit or to receive an award, but this may create 273. See, e.g., Barzel, Optimal Timing of Innovations, 1968 REV. ECON. & STATISTICS 348; Dasgupta & Stiglitz, Uncertainty, Industrial Structure, and the Speed of R&D, 11 270. Becker & Stigler, supra note 190, at 13-16. BELL J. ECON. 1 (1979); Loury, Market Structure and Innovation, 93 Q.J. ECON. 395 (1979). 271. Landes & Posner, supra note 190, at 13-14. 274. See supra notes 209-19 and accompanying text. 272. Breit & Elzinga, supra note 247, at 430-33. 275. See S. SHAVELL, ECONOMIC ANALYSIS, supra note 1,. at 148. 812 Alabama Law Review [VoL 40:3:741 1989] Divergent Rationales 813 damages (where targeting of the plaintiff for deliberate victimiza­ articles."? Grady argues that as a matter of both economic theory tion may be precisely what triggers dignitary damages). To the and judicial practice, courts should not and do not first define the extent that there is a deterrence case for punitive damages in high relevant standard of care and then compare the defendant's con­ p intentional torts, it would need to rest on neutralizing illicit duct to it, holding him liable for all the consequences of his gains derived by exceptional violators from wrongdoing in order to activities in the event of departures from the standard, whether or discourage unilateral invasions of the plaintiff's autonomy without not all the consequences would have been avoidable by compliance consent, albeit with compensation. with the standard.f" Rather, economic theory and legal practice b. Negligence.-Assuming that negligence standards are require that the plaintiff bear the billden of identifying some un­ clearly defined and are socially optimal, the analysis offered above taken precaution available to the defendant with respect to which would seem largely applicable-conduct in violation of the negli­ precaution the expected benefits (in reduced accident costs) exceed gence standard is absolutely normatively proscribed. In this the expected cost of the precaution andwhich precaution, if taken, context, punitive damages may serve two functions: first, to gross would have avoided the injury in question.t'" On this view, the de­ up f (or d, for damages) where p is significantly below 1; second, to fendant faces no discontinuity in cost function as he crosses the sanction the exceptional or egregious violator (in Cooter's terms) standard into the proscribed zone. whose subjective costs of compliance are high or who derives sub­ On this theory of the tort of negligence, p's lower than one are stantial illicit benefits from violation.f" likely to generate underdeterrence for "normal" violators. Thus, Comments are warranted on both these functions. As to the punitive damages may promote deterrence goals by grossing-up first, it will be recalled from Cooter's distinction between prices damages to reflect p's of less than one. It might be noted here that and sanctions'"? that discontinuities in the cost functions facing vi­ many American punitive damages cases seem to be high p cases, olators under a sanctions regime (as they cross from the permitted because the compensatory damages at issue (e.g., in cases of per­ to the forbidden zone) ensure that most people will comply with sonal injury) are sufficiently high that suit is highly likely, in which the standard even if the level of sanction or frequency of its appli­ event there seems little or no role for punitive damages on deter­ cation are less than optimal. Thus, p, on this view, would need to rence grounds. As to Cooter's egregious violator.v" large departures fall substantially below 1 before any adjustment to the level of from standards of reasonable care (because they involve more "un­ sanction on deterrence grounds would be warranted.?" As to the taken precautions") will expose the defendant to greater expected second function, Cooter seems to assume, following Brownv" and liability, and this will not generate incentives to "go for broke" Landes and Posner.t'" that part of the explanation for the disconti­ once the standard is violated. This is not to say that violators with nuity in the cost functions facing potential violators is that once high subjective cost of compliance or who derive substantial illicit . the negligence standard is violated, a wrongdoer is liable for all the benefits from violation will not violate the standard more fre­ social costs associated with his activities, even those that due care quently than other violators. However, it is not entirely clear in could not have avoided, and thus faces incentives to "go for broke" such cases what triggers the right on the part of victims to punitive by committing large rather than small violations of the standard. damages. It is not necessarily a low p, as these egregious violations However, the discontinuity claim that motivates Cooter's anal­ might well be high p phenomena. Moreover, if victims are fully ysis has been persuasively criticized by Grady in a series of 281. Grady, A New Positive Economic Theory of Negligence, 92 YALE L.J. 799 (1983) [hereinafter Grady, New Theory]; Grady, Discontinuities and Information Burdens: A Re­ 276. See Cooter, Economic Analysis, supra note 3, at 86-89. view of The Economic Structure of Tort Law (Book Review), 56 GEo. WASH. L. REV. 658 277. See supra text accompanying notes 252-53. (1988) [hereinafter Grady, Book Review]; Grady, Untaken Precautions, 18 J. LEGAL STUD. 278. This follows from Cooter's argument that behavior is not very elastic with respect 139 (1989). to changes in sanctions. See Cooter, Prices, supra note 251, at 1529-30. 282. Grady, New Theory, supra note 281, at 814-29. 279. Brown, Toward An Economic Theory of Liability, 2 J. LEGAL STUD. 323 (1973). 283. Id. 280. W. LANDES & R. POSNER, supra note 257 (reflecting earlier writings). 284. See supra text accompanying note 276. 1989] Divergent Rationales 815 814 Alabama Law Review [Vol. 40:3:741 the enormously complex problems of causation which are, in many compensated for their losses, and the violator still finds it worth­ respects,as problematic as that of setting standards.P'" while to engage in the proscribed conduct, one might ask why This problem also arises in some criminal law contexts like an­ additional sanctions are required-the violation seems a Pareto-su­ titrust offenses, such as predatory pricing, in which the operative perior move.f" However, it might be rejoined that, as with standard is notoriously uncertain. Here again, it is not helpful to intentional torts, this is to confuse prices with sanctions and to suggest that the activity in question be priced rather than sanc­ allow unilateral takings without consent merely on payment of a tioned. Indeed, it is far from clear what could be meant by price. Moreover, the price may well not be able to capture with any "pricing" predatory pricing, rather than sanctioning it. degree of accuracy the tangible and intangible losses of the victim. In cases where standards are uncertain, and pricing is not a If this is accepted, it is difficult to know how to fashion a feasible option, punitive damages generate highly ambiguous im­ quantum of punitive damages to deter the egregious violator (given plications. By having the effect of raising the expected costs of that we are no longer primarily concerned with grossing-up low engaging in an activity, punitive damages (even if predicated on p's). In a corporate or business context, perhaps reference to the grossing-up damages to offset low p's) may either increase or de­ pecuniary gains from violation may be in order, although one crease social welfare.f" They will clearly lead to additional would expect in most cases that these would be less than the pecu­ precautions by defendants-reducing some activities such as high­ niary and nonpecuniary losses of the victims that are already risk obstetrical cases, increasing others such as laboratory tests, subject to compensation. In an individual context (e.g., the egre­ and restraining others such as vigorously competitive pricing-as giously drunk driver who drives into a child pedestrian and turns actors seek to avoid the uncertain zone of activity that may attract her into a paraplegic), it is hard to know how to begin defining the liability for not only compensatory, but also punitive, damages. appropriate quantum of punitive damages on deterrence grounds, Here, in addition to problems of overenforcement."? we also face an exercise further complicated by the near-certainty of criminal potential overdeterrence, precisely because we do not have clearly sanctions. and absolutely normatively proscribed types of conduct. Con­ versely, the additional sanctions entailed in punitive damages may At this juncture in our consideration of the relevance of puni­ be inducing socially desirable behavioral adaptations by defend­ tive damages to the tort of negligence, we have.been assuming ants, but because we do not know what the socially optimal contexts where the negligence standard is clear and conduct in vio­ standard is, by hypothesis we cannot know whether (and in what lation of it to be taken as absolutely normatively proscribed. amount) punitive damages are likely to move us towards or away However, in many contexts the standard will not be clear andcan­ from that standard. In addition, in cases of uncertain standards, not easily be clarified2B6 (e.g., some medical malpractice contexts). punitive damages may have ambiguous implications for the behav­ It is unhelpful to suggest as Cooter does2B7 that where lawmakers ior of victims. With very high variances in expected outcomes of cannot be certain of the socially optimal standard, they should re­ suit, and assuming risk aversion, plaintiffs may be induced to take sort to prices. In the medical malpractice context, this presumably excessive precautions of their own. From all perspectives, including implies strict liability for medical misadventure but assumes away

288. See D. Duff, Compensation for Medical Injuries: A Legal and Economic Analysis 285. A Pareto-superior move makes someone better off without making anyone worse ch. V (1989) (unpublished manuscripts) (on file at the University of Toronto, Faculty of off (perhaps because there has been compensation paid for all losses). For a good discussion, Law, Law and Economics Program); P. Weiler, Legal Policy for Medical Insurance 276 see Coleman, Economics and the Law: A Critical Review of the Foundations of the Eco­ (1988). nomic Approach to Law, 94 ETHICS 649, 650 (1984). 289. For more on uncertain standards, see generally Calfee & Craswell, Some Effects of Uncertainty on Compliance with Legal Standards, 70 VA. L. REV. 965 (1984); Craswell & 286. See Grady, Book Review, supra note 281 (for a criticism of Landes and Posner's Calfee, Deterrence and Uncertain Legal Standards, 2 J. L. Ecox & GRG. 279 (1986). failure to account for uncertainty in the negligence standard). 290. See supra p. 809. 287. Cooter, Prices, supra note 251, at 1533. 816 Alabama Law Review [Vol. 40:3:741 1989J . Divergent Rationales' 817 the deterrence perspective, the case for punitive damages standing alone seems highly problematic in these contexts. identified). Hence, whether Johnston's proposed regime is likely to However, Johnston argues in a recent article'?" that combining move conduct toward or away from the social optimum itself en­ punitive damages with a higher burden of proof (except in the case tail~ significant elements of uncertainty. In short, when the socially of information assymetriesls'" and a lower standard of care is likely optimal standard is uncertain, it is not obvious how one can make to move conduct towards the social optimum where the socially op­ judgments about the welfare implications of proposed reforms in timal standard is unclear.t'" His proposed regime attempts to the absence of such a benchmark. . eliminate false positives (and hence incentives for excessive pre­ . c.. Strict Liability.-Cooter presents strict liability as a para­ cautions) through the higher burden of proof and lower standard dlg~atIc example of pricing, in contrast to the negligence regime, of care (e.g., ), while offsetting false negatives (and v:h1ch employs sanctions.w" On this view, the only defensible ra­ hence incentives to inadequate precautions) by attaching very high tionale for punitive damages in a strict liability context is to gross­ penalties to violations of the lower standard, thus arguably induc­ up actual damages to reflect low p's, which would otherwise reduce ing all reasonable precautions to be taken so as to remove any an actor's expected private costs below the expected social costs ambiguity that this standard has been complied with. ' associ.ated with his activities. Again, it bears noting that many This proposal, while provocative, envisages a much more am­ American products liability cases in which punitive damages have bitious agenda for the reform of tort law than do conventional been awarded appear to be high p cases, because of the large quan­ reform proposals that focus on punitive damages alone. It also as­ ~ums of compensatory damages for personal injuries at issue. Even sumes a taxonomy of claims that is bound to pose complex m low p cases, the role of punitive damages is subject to the reser­ boundary questions: the distinction between certain and uncertain vation earlier noted of excessive allocation of private enforcement standards of conduct, the distinction between gross and-ordinary , resources in response to false signals from high fs and.to the con­ negligence, and the distinction between cases, where the defendant ce:~ elabo~ated by Polinsky and Shavell>" that high fs under possesses informational advantages over the plaintiff (e.g., prod­ pnc~ng reglmes.'may induce risk-averse individuals to engage in ex­ ucts liability, medical malpractice) on issues pertaining to cessrve precautions. compliance with the standard (where a less demanding burden of However, another reservation about the case for punitive dam­ proof may be warranted) and cases where no such information ages. in a strict liability context (such as in products liability) asymmetries exist. Johnston is also vague as to how the quantum ~eqUlres noting. Cooter's distinction between pricing and sanctions of punitive damages should be set, arguing that quantum matters IS surely too sharp. Under a pricing regime, lawmakers have to de- little in the case of gross violations which are unambiguously wel­ . ~ne what activities are to be priced, and this will almost invariably fare-reducing.t'" But, presumably, too Iowa quantum is unlikely to mvol~e something akin to the setting of a standard, in this case by move a defendant from the lower standard to the optimal stan­ definmg which activities attract the prescribed prices and which do dard, although, by assumption, this cannot be precisely defined. not. This is clear in the domain of products liability. Even under Conversely, too high a quantum, assuming any ambiguity at all the most expansive versions of United States strict product liabil­ about the nature of the.lower standard of care, and hence the pos­ ity, liability is not absolute but is centrally contingent on proof of a sibility of very expensive false positives, may induce excessive product "defect" (a construction, warning, or design defect). How­ precautions (which again, by assumption, cannot be confidently ever, w~at will constitute a "defect," especially a warning or design defect, IS a matter of notorious complexity and uncertainty in 291. Johnston, Punitive Liability: A New Paradigm of Efficiency in Tort Law, 87 many United States jurisdictions. In such cases, like uncertain COLUM. L, REV. 1385 (1987). standards in the tort of negligence or the criminal law, punitive 292. u. at 1399-400. 293. Id. at 1395-98. 294. u. at 1420-21. 295. See Cooter, Prices, supra note 251, at 1538-40. 296. See Polinsky & Shavell, supra note 268. 818 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 819 damages carry significant potential for overdeterrence in the form punitive .damages, on deterrent grounds, in this context would of excessive precautions. In any event, it will often be unclear ~ee~. to be cases of mass consumer fraud or product defects where whether punitive damages are moving us towards or away from the .IndlV1du~ ~osses are insufficient to warrant the costs of suit ex social optimum, given that by hypothesis we have been unable to post. ThIS IS also the class of case where class actions may offer define what that is. As in the case of uncertain standards in the e~o;~oement efficiencies, but these, along with associated inefficien­ tort of negligence or the criminal law, the case for punitive dam­ cies, would need to be weighed against the enforcement ages in this context seems highly problematic. resources co~served by a high t. low p, private enforcement strat­ 3. Breach of Contract.-Cooter argues that the proper way egy along WIth its associated inefficiencies.30l to conceive of the standard remedies for breach of contract (dam­ ages as the presumptive remedy; specific performance as an exceptional remedy) is that contract law has chosen to adopt a B. Second-Order Design Issues pricing regime rather than a sanctions regime.r" Subject to the standard categories of excuses (such as mistake or frustration), 1. Vicarious Liability.-Ellis argues that "efficient leveis of contractual liability also entails a form of strict liability. Cooter dete~re~~e are unlikely to be promoted by vicarious punitive dam­ argues that this choice of regime is defensible within his frame­ age liability, even assuming that the criteria for assessing punitive work because determining when it is or is not socially optimal to dam.ages can be made certain and predictable."302 He argues that perform a contract, given the myriad of contingencies that may im­ "[v]lCa;ious lia?ility for compensatory damages has existed for pact on contractual performance, would entail severe uncertainties, centuries, but It remains a rule in search of a rationale "303 and while damages (typically pecuniary) for breach are relatively easily fum ' assessed in the bulk of contractual settings.v" [ijt seems :.:n0re likely that efficient levels-of deterrence would This view of contractual liability (i.e., that a contractual obli­ ~mposing gation gives a promisor a right to elect between performing, on the be achieved by punitive damages on employees alone. The threat of punitive damages would then operate directly on those one hand, or breaching and paying damages, on the other) has not who know of their own potential for committing harmful acts and gone without challenge,'?" However, it seems accurately to de­ who contr?~ their own actions. Almost invariably, employers are in a scribe, for the most part, established contract law-that is to say, wo:se POSIt~o~ to anticipate which employee will commit an act for breaches of contract are not absolutely normatively proscribed, as which punitive damages may be assessed and to prevent its are crimes, intentional torts, and torts of negligence, and may have occurrence.304 positive social utility, at least in some cases (i.e., in cases of effi­ cient breach). On this view of contractual liability as a pricing There :e. reas~ns.for skepticism about these claims. As Sykes mechanism, the role for punitive damages would seem properly re­ has shown,. In ~ sIgn~cant range of situations, vicarious liability stricted to cases where low probability of enforcement (low p's) c~eates efficient InCentIves for loss-avoidance precautions by prin­ render it unlikely that the contract breacher will face ex ante the cipals and agen-t:s. !hese properties are particularly pronounced full expected social costs of his breach. Here, grossing-up damages where .personal lI~bility. of agents. alone poses serious problems of in individual cases to offset low p's may discourage inefficient agen.t In~olvency, In which event in.centives for loss-avoidance pre­ breaches (i.e., breaches that generate more costs for promisees cautions by both agents and principals may be socially sub- than gains for promisors). The prime candidates for the award of 300. See supra notes 217-20 and accompanying text. 301. See supra text accompanying notes 271-74. 297. See Cooter, Prices, supra note 251, at 1544-46. 302. 298. [d. at 1546. Ellis, Fairness and Efficiency, supra note 3, at 71. 303. [d. at 64 (footnote omitted). 299. See, e.g., Friedmann, supra note 150; Macneil, Efficient Breach of Contract: Cir­ 304. [d. at 70. cles in the Sky, 68 VA. L. REV. 947 (1982). 305. Sykes, The Economics of Vicarious Liability, 93 YALE L.J. 1231 (1984). 820 Alabama Law Review [Vol. 40:3:741· 1989] Divergent Rationales 821 optimal.P'" Sykes convincingly argues that a rule of vicarious liabil­ first rule is likely to be the efficient rule, The second rule reflects ity, under which the principal and agent are jointly and severally not dete~rence, but retributive considerations, and underscores liable for the agent's wrongs, is especially likely to lead to privately once again how the competing rationales for punitive damages and socially optimal agency contracts in terms of both allocation of carry very different legal implications. risk and loss-avoidance incentives in cases where there is a risk of Sykes's analysis of vicarious liability, of course, assumes nor­ agent insolvency, where the agent's loss-avoidance behavior is mal compensatory measures of damages. However, it is easy to cheaply observable by the employer, or where multiperiod agency extend his analysis to identify a role for vicarious punitive dam­ relationships make available a more extensive set of incentive de­ ages liability. In cases where the probability of enforcement is low vices to the principal.?" (low p cases), grossing-up damages under a vicarious punitive dam­ This is not to argue for vicarious liability instead of personal ages liability rule to offset low p's may be required in order to liability of the agent, but rather for both. As Coffee has shown, confront. the pr~ncipal with the full expected costs of his agent's making only the principal liable to an injured third party may at­ wrongdoing, ThIS enforcement strategy is, of course, subject to all tenuate loss-avoidance incentives confronting the agent. 3 08 This the qualifications noted above3 12-problems of wasteful overalloca­ could occur when the agent faces strong and immediate employ­ tion of private enforcement resources, problems of overdeterrence ment incentives to maximize returns to his principal and the in cases of uncertain standards, problems of risk aversion and repercussions for the agent of conduct that exposes his principal to hence overdeterrence in cases of pricing rather than standards re­ potential vicarious liability are longer-run and more remote and gimes. Presumably overdeterrence is a less severe problem with his role perhaps less readily identifiable ex post;309 in other words, corporate principals, because of diversification possibilities at both the competing incentives may be asymmetric. Nor is it to argue the firm and shareholder levels. that vicarious liability has superior deterrence properties to a 2. Insurability.-United States courts are apparently split range of other possible sanctions, especially in a corporate context ove: ~hether punitive damages are legally insurable, although a (e.g., equity fines and adverse publicityl.?" However, it is to argue ma~o!lty have concluded that they are. 31 3 Again, the compensation that as between personal liability of agents and vicarious liability r~t.lOnale for so-called punitive damages is promoted by the insura­ under a rule of joint and several liability, vicarious liability will bility of such damages, while the retributive rationale is often possess attractive incentive properties. undermined by permitting loss-spreading. Ellis argues that the de­ What is the appropriate deterrent role of punitive damages terrence rationale for punitive damages is similarly antithetical to under a vicarious liability regime? As earlier noted,"!' United ~er~i~ting loss-spreading through insurance.s> Cooter argues that States courts are divided over the proper basis for vicarious puni­ If victims and Injurers are rendered better off by insurance, there is tive damages liability. Some follow the respondeat superior rule, no need for the law to prohibit it, although insurers may be unwill­ while others follow the "complicity rule." Sykes's analysis shows ing to write such insurance, presumably for moral hazard reasons that in a wide range of cases, from a deterrence perspective, the and perhaps because of the high variances in potential claims.'?" ' Cooter's observations seem primarily relevant to the compen­ sation rationale for punitive damages, and do not address 306. [d. at 1234-36. 307. See id. at 1239-41. prospective incentive effects of insurance. Ellis is probably correct 308. Coffee, supra note 235, at 393-400. that insurance is unlikely to promote deterrence objectives. How­ 309. [d. ever, in a wide range of contexts (e.g., the tort of negligence, strict 310. See generally C. STONE, WHERE THE LAW ENDS: THE SOCIAL CONTROL OF CORPO­ RATE BEHAVIOR (1975); Stone, Choice of Target and Other Law Enforcement Variables in SANCTIONS AND REWARDS IN THE LEGAL SYSTEM: A MULTIDISCIPLINARY APPROACH (M. Fried­ 312. See supra pp. 808-09. land ed. 1989); see also Coffee, supra note 235; Fisse, supra note 228; Stone, The Place of 313. Ellis, Fairness and Efficiency, supra note 3, at 71. Enterprise Liability in the Control of Corporate Conduct, 90 YALE L.J. 1 (1980). 314. [d. at 74-76. 311. See supra text accompanying note 225. 315. Cooter, Economic Analysis, supra note 3, at 96. 1989] Divergent Rationales 823 822 Alabama Law Review [Vol. 40:3:741 products liability), the law has traditionally permitted potential in­ impression" on the defendant.!" Counsel for the plaintiff urged jurers to carry third-party liability insurance, recognizing the the jury to focus on the defendant's gross annual revenue and to i~ trade-offs between risk allocation and incentives inherent in these consider an award of $13 million punitive damages, which would contexts. Moreover, it may be argued that insurers with a.ccess to be the equivalent of only a $200.fine against a person earning efficient information on the conduct of many insureds may be good $20,000 per year. The jury awarded approximately $100,000 in ex ante monitors of the possibility of conduct leading to liability, compensatory damages and $6 million in punitive damages. This although one might still question how easy it is to monitor ex ante award was upheld by the Court of Appeals, which pointed out that for many forms of conduct that have traditionally attracted puni­ the punitive damages awarded by the jury amounted to less than tive damages, such as malicious or wilful wrongdoing. .5% of BFI's revenues, approximately .6% of its net worth, and In the case of mainstream crimes and intentional torts, pre­ less that 5% of its net income, for fiscal year 1986.320 sumably moral hazard and adverse selection problems will From a deterrence perspective, is there any justification for discourage most insurers from providing coverage. However in weighing a defendant's wealth in assessing punitive damages? sanction regimes entailing uncertain standards (e.g., medical mal­ First, let us consider the position of an individual, noncorporate practice), the availability of insurance may partly offset the defendant. Here, the argument is sometimes made that the theory incentives to overdeterrence (or excessive precautions) that liabil­ of the declining marginal utility of wealth means that wealthier in­ ity for damages and a fortiori liability for punitive damages may dividuals must be fined more heavily than poorer individuals in induce, and thus may be socially desirable. Similarly, in the case of order for the penalty to cause the same disutility to a wrongdoer, pricing regimes such as strict products liability or parking offenses, on the assumption that rich and poor wrongdoers have similarly where risk aversion may lead to overdeterrence and excessive pre­ shaped utility functions, and hence that interpersonal utility com­ cautions, in the face of low p, high I, enforcement strategies.?" the parisons are possible. While this assumption is regarded as highly availability of insurance may again be socially desirable, recogniz­ debatable in the welfare economics literature, even taking the the­ ing that insurers will attempt to structure the terms of the policies ory as given, it is far from clear that this requires higher penalties they offer so as to optimize risk-incentive trade-offs. Thus, on de­ for wealthy wrongdoers in order to achieve effective deterrence. In terrence grounds, the case against the insurability of punitive the case of economic wrongs, conventional economic theories of de­ damages awards is not clear-cut,and the implications are more terrence would suggest that rational wrongdoers, wealthy or poor, ambiguous than with respect to either the compensation or retrib­ will be effectively deterred from engaging in wrongdoing if the ex­ utive rationales. pected cost of so doingv" exceeds the expected gain from the 3. The Relevance of the Defendant's Wealth.-Courts in the wrong.322 In the case of noneconomic wrongs, in which wrongdoers United States apparently widely take account of the defendant's stand to gain nonmonetary benefits, perhaps from the .spiteful sat­ wealth in assessing punitive damages-the wealthier the defendant isfaction of assaulting or defaming an enemy, it might be argued the larger the punitive damages award that is justified.?" For ex­ that if money is worth less to a wealthy person, such a person may ample, in a predatory pricing case, recently decided by the United be willing to pay more for this satisfaction than a poor person. States Supreme Court, Browning-Ferris Industries, Inc. v. Kelco Therefore, the wealthy wrongdoer must be confronted with a Disposal, Inc.,3lB counsel for the plaintiff urged the jury to "send a message back to Houston" (the corporate defendant's headquar­ ters) by awarding punitive damages that would "make an 319. Brief for Navistar Int'l Transp. Corp. as Amicus Curiae, supra note 244, at 2-3. 320. Kelco Disposal, 845 F.2d at 410. 321. The penalty imposed multiplied by the probability of its imposition equals the expected cost. 316. Polinsky & Shavell, supra note 268. 317. Ellis, Fairness and Efficiency, supra note 3, at 61 and sources cited therein. 322. See Brief for Navistar Int'l Transp. Corp. as Amicus Curiae, supra note 244, at 12. 318. 109 S. Ct. 2909 (1989), aff'g 845 F.2d 404 (2d Cir. 1988). 824 Alabama Law Review [Vol. 40:3:741 1989] Divergent Rationales 825 higher penalty in order to be effectively deterred.f" This argument relationship. An investigation of the wealth of the ultimate share­ may have an element of truth to it, but as we have argued above holders is not an exercise in which the courts have indicated any with respect to the compensation rationale for punitive damages, willingness to engage, or as a practical matter, could ever usefully such cases of deliberate and malicious victimization may justify engage. special nonpecuniary damage awards in favor of victims.s'" It is not From a deterrence perspective, the incoherence ofweighing clear that more is required than this, or that the defendant's the defendant's wealth, particularly corporate defendant's wealth, wealth should be the particular focus of the inquiry. Instead, the in assessing- punitive damages inevitably entails high levels of un­ issue may properly be the special sense of grievance arguably en­ certainty in the scale of awards likely to be assessed. In the case of gendered in a plaintiff singled out for deliberate victimization by sanction regimes with highly uncertain standards (e.g., medical the defendant. malpractice, products liability requiring proof of a "defect,"-preda­ In any event, in cases in which the defendant is a corporation tory pricing), this uncertainty carries the serious potential for (an artificial legal entity), it seems clear that the theory of the de­ overdeterrence (or excessive precautions). For example, in the clining marginal utility of wealth can have no coherent application. predatory pricing context, given the notorious difficulties of defin­ Corporations as such feel no utility or disutility associated with in­ ing predation, it can persuasively be argued that the potential for creases or decreases in wealth. In the case of economic wrongs, the highly unpredictable punitive damages awards premised on a cor­ conventional economic theory of deterrence, noted above,325 sug­ porate defendant's wealth may well discourage socially desirable gests no role for corporate wealth in structuring an optimal forms of vigorous price competition as actors attempt to remove deterrence regime-if the expected costs of wrongdoing exceed the themselves as unambiguously as possible from the potential zone expected gains, wrongdoing will normally be deterred, whatever of liability."? Moreover, weighing a corporate defendant's wealth the corporation's wealth. In the case of noneconomic wrongs (mali­ in assessing punitive damages is likely to penalize larger corpora­ cious or spiteful victimization), the malice or. spite in question is tions more heavily than smaller corporations, and to the extent necessarily not that of the corporation, but that of some officer or that relative size is correlated with relative efficiency, this operates employee acting on its behalf, and thus corporate liability is vicari­ as a discriminatory "tax" on more efficient firms.328 On deterrence ous. In such cases, to weigh the corporation's wealth in assessing . grounds, the case for considering the defendant's wealth in most punitive damages on the theory of the declining marginal utility of contexts is as unpersuasive as it was shown to be under both the wealth makes no sense because corporations have no utility func­ compensation and retributive rationales. tions. The shareholders of a corporate defendant may be more or 4. Special Procedural Protections.-On the deterrence ra­ less wealthy, and this will be only fortuitously correlated with the tionale for punitive damages, the argument for special procedural size of the corporation. For example, a large corporation's shares protections of defendants (e.g., a more demanding burden of proof, may be predominantly held by pension funds or other institutional protection against double jeopardy) seems generally unpersuasive. investors representing shareholders of modest means; a small cor­ The compensation rationale also provides no support for such a poration's shares may be held by a few very wealthy individuals.f'" case,329 although the retributive rationale seems to require such Or, in both cases, the corporation's shareholders might comprise protections.330 some mix of more and less wealthy shareholders. Thus, a corpora­ On deterrence grounds, in contrast to retributive grounds, con­ tion's wealth is not a meaningful proxy for the wealth of its cerns over avoiding false positives or unjustified findings of ultimate owners who are the real principals in the principal-agent

327. Id. at 28. 323. Id. at 15. 328. Symposium Discussion, supra note 134, at 188 (quoting remarks by Professor 324. See supra p. 763. Walter Oi). 325. See supra notes 321-22 and accompanying text. 329. See supra p. 778. 326. Brief for Navistar Int'l Transp. as Amicus Curiae, supra note 244, at 7-8. 330. See supra p. 804-05. [Vol. 40:3:741 1989] Divergent Rationales 827 826 Alabama Law Review ness to compensatory (and, in particular, corrective justice) liability, even at the expense of increasing false negatives or unjus­ rationales for punitive damages and a strong circumspection, not tified findings of no liability, do not seem relevant. Ea~h type.of Howe~er, ma~or qu~­ to say aversion, to the retributive or deterrent rationales. This error is equally to be avoided, if feasible. a leads to tightly circumscribed, perhaps even under-inclusive cate­ cation to this proposition relates to sanctions regimes With gories of conduct, relatively modest levels of award, and no special uncertain standards in which punitive damages may mduce procedural protections for the defendant. In contrast, the much overdeterrence, and to pricing regimes in which risk aversion. in the broader range of conduct that may attract punitive damages in the face of a low p, high f enforcement strategy may also mduce United States and the much higher level of awards are not consis­ overdeterrence, most markedly for noncorporate defendants. In tent with either the compensatory or retributive rationales for these contexts, to the extent that a more demanding burden·of punitive damages, and while in some respects more consistent with proof reduces the risk of punitive damages liability on the part of the deterrence rationale, in other respects, especially quantum, defendants, this may be socially deairable."" Equally, in these con­ texts rules that reduce the risk of double jeopardy-for example, they are often inconsistent with any of the three rationales. In­ punitive damages being heaped on top of prior or sub~~quent crim­ deed, the compensatory rationale appears not to have been taken inal sanctions.t" or more plausibly, exposure to punitive dama~es seriously by most United States courts, legislatures, and commen­ liability to multiple or successive plaintiffs333-may reduce the risk tators. The lack of special procedural protections, while consistent with the compensatory and deterrence rationales, is inconsistent of overdeterrence. . with the retributive rationale. However, recent constitutional chal­ lenges to punitive damages rules, and state legislative reforms such VI. CONCLUSION as caps on awards, more demanding burdens·of proof, partial es­ cheat to the state of awards, and more stringent definitions of Our analysis leads to a straightforward, yet striking conclu­ proscribed conduct, all seem largely predicated on a retributive ra­ sion. As the appended matrix starkly reveals, punitive damages tionale, rather than a deterrent or compensatory rationale for reflect not one legal regime, but three. The compensation, retribu­ punitive damages. Canadian courts have espoused the compensa­ tion, and deterrence frameworks all yield defensible normative tory rationale favored by U.K. courts, but have shown a greater justifications for so-called punitive damages in some conte~ts, .but ~ingness both to interpret this rationale more broadly (e.g., to with respect to the rules considered (conduct, quantum, VlcarIO~s mclude wrongful dismissal cases) and to view some breach of con­ liability, insurability, relevance of defendant's wealth, and special tract and negligence cases as legitimately attracting the deterrence procedural protections), the three normative frameworks appear to converge clearly on only one rule~the irrelevance of the defend­ rationale favored by many United States courts. ant's wealth-and only there with some residual ambiguity in the The confusion in punitive damages law within each of these case of individual defendants. On all the other rules, the three jurisdictions on the various rules that should govern punitive dam­ frameworks yield divergent implications. . ages claims reflects an inability or unwillingness to make a meta­ In turn the divergences among U.K., Canadian, and United choi~e amo~g :he thre~ normative frameworks, or alternatively, to States punitive damages law tend to reflect the relative weight at­ ~eqUl~e plaintiffs seeking to pursue punitive damages claims to tached to each of the frameworks as justifying punitive damages. identify the theory of their case in terms of one or another of these United Kingdom punitive damages law reflects a strong receptive- three frameworks. Unfortunately, because some types of conduct may legitimately implicate more than one rationale, in these con­ :exts this may be a next to impossible task, unless the legal system 331. See Johnston, supra note 291. 332. This happens in antitrust predatory pricing cases, as well as other cases. See Cof- Imposes a meta-choice on the parties. The lesson from this discour­ fee, supra note 190, at 220-23 nn.15-17. . aging conclusion may be to reinforce a broader set of concerns 333. See, e.g., Juzwin v. Amtorg Trading Corp., 705 F. Supp. 1053 (D.N.J. 1989) (as- about the dangers and indeterminacies of assigning to a single legal bestos case). 1989] 828 Alabama Law Review [Vol. 40:3:741 Divergent Rationales 829 instrument-in this case, the tort system-a multiplicity of admit­ APPENDIX tedly desirable social goals which one instrument cannot coherently rationalize.f" PUNITIVE DAMAGES

RULES RATIONALES COMPENSATION RETRIBUTION DETERRENCE CONDUCT Conduct which Advertent Any normatively intentionally targets wrongdoing which is proscribed conduct a particular plantiff; either "victimless" (criminal or civil); intentional breaches or disparate in its also arguably of relationships of impact on victims conditionally trust (public enforcement proscribed conduct problems) (conduct permitted subject to payment of damages) QUANTUM Non-zero, but less Financial (damages) Gross-up actual than full equivalent of damages to reflect compensation for criminal or low probability of non-pecuniary regulatory penalty; enforcement (the (dignitary) loss no gross-up for low reciprocal of the probability of enforcement short- enforcement fall) VICARIOUS Tort standard Criminal law Tort Standard LIABILITY (Respondeat standard (Respondeat Superior) (complicity rule?) Superior) INSURABILITY Permissible Not permissible Ambiguous DEFENDANT'S Not relevant Not relevant in Not relevant in the WEALTH practice case of corporate defendants; debatable in the case of individual defendants SPECIAL No Yes Ambiguous PROCEDURAL PROTECTIONS

334. See Trebilcock, The Social Insurance-Deterrence Dilemma, supra note 2, at 994- 95.