THE SHADOW EFFECT OF PUNITIVE DAMAGES ON SETTLEMENTS
THOMAS KOENIG*
I. Introduction ...... 170 A. The Tort Reformers' View ...... 172 B. The Plaintiffs' Attorneys' View ...... 176 II. The Impact of Punitive Damages on Pre-Verdict Settlements 178 A. Research on Punitive Damages Claims ...... 178 B. Florida ...... 178 C. California ...... 179 D. Alabama ...... 180 1. Professor Priest's Study of Alabama Claims ..... 181 2. State-Wide Data on Alabama Punitive Damages Filings ...... 182 E. Texas Public Policy Foundation Study ...... 184 F. Texas Department of Insurance Closed Claim Study... 187 1. Methodology ...... 187 2. Texas Verdicts ...... 189 3. Punitive Damages Settlements Under $25,000 ... 190 4. The Shadow Effect in Larger Settlements ...... 192 5. The Shadow Effect By Type of Injury ...... 195 6. The Financial Impact of Texas Tort Reform ..... 197 G. ISO 27-State Study ...... 201 III. Studies of Post-Trial Dispositions of Punitive Awards ..... 202 A. RAND's Study of Post-Verdict Settlements ...... 202 B. Landes and Posner Study ...... 204 C. GAO Study ...... 205 D. Post-Verdict Adjustments of Product Liability Awards 205 E. Post-Verdict Adjustments of Medical Malpractice .... 207 F. The Washington Legal Foundation Study ...... 207 IV. Conclusion ...... 208
* Thomas H. Koenig, Professor of Sociology and Law, Policy and Society doctoral program, Northeastern University; B.A., University of California at Santa Cruz, 1971; Ph.D., University of California at Santa Cruz, 1979. I wish to thank Paul Vestal and Clare Pramuk of the Texas Board of Insurance's technical analysis division for providing statistical information utilized in this Article. Professor Michael Rustad also provided valuable data and invaluable comments. WISCONSIN LAW REVIEW
I. INTRODUCTION
For the past decade, the punitive damages debate has focused on the frequency, size, ratios and predictability of verdicts.' Tort reformers argued that punitive damages verdicts, particularly in personal injury cases, were a lottery which threatened American competitiveness by crippling United States corporations. Academic researchers testing these claims have consistently concluded, in contrast, that punitive damages verdicts are rare, predictable, employed responsibly, and subject to vigorous post-verdict review.2 Recent empirical research finds that "[flar from picking numbers out of the air, jurors and judges across dozens of jurisdictions and many case categories determine punitive damage award levels with a startling consistency." 3 However, the fact that large punitive damages are very unusual is of little comfort to risk-averse business executives who worry that their firm might be an exception to the general pattern. Fear of the occasional runaway jury may lead to an inflated settlement.'
1. See generally Marc Galanter, Real World Torts: An Antidote to Anecdote, 55 MD. L. REV. 1093 (1996) (reviewing empirical studies on punitive damages); Michael Rustad & Thomas Koenig, The Supreme Court and Junk Social Science: Selective Distortion in Amicus Briefs, 72 N.C. L. REV. 91 (1993) (discussing and evaluating dueling studies of punitive damages). 2. See Michael L. Rustad, Unraveling Punitive Damages: Current Data and FurtherInquiry, 1998 Wis. L. REv. 15; see also Theodore Eisenberg & Martin T. Wells, Punitive Awards After BMW, a New Capping System, and the Reported Opinion Bias, 1998 Wis. L. REV. 387. 3. Theodore Eisenberg et al., The Predictability of Punitive Damages, 26 J. LEGAL STUD. 623, 649 (1997). The authors note: This result may surprise both defenders and critics of punitive damages. Much of the recent debate about award levels focuses on whether the frequent appellate reductions of punitive damages are a sufficient check. Defenders claim that posttrial and appellate reductions impose a rationality on award levels while critics assert that such review is insufficient. Our data, which consist of judgments entered by judges after jury verdicts, suggest an essential rationality and connection to compensatory damages at the trial court level. Id. (citations omitted). 4. Senator Orrin Hatch, in hearings to examine the effect of punitive damages on the legal system, noted: [M]any critics of the current system argue that punitive damages are often awarded haphazardly and excessively. Some say that large punitive awards are an important factor in the decline of our civil justice system. In fact, the very risk of bloated awards can scare defendants into settling for excessive sums rather than risking the determination of an unsympathetic jury. The costs of excessive punitive damage awards or unnecessary settlements ultimately are passed on to the consumer; in effect, to each and every one of us as Americans in the form of higher prices for the products 1998:169 Shadow Effect of Punitive Damages 171
The punitive damages debate is now shifting from disputes over verdicts to the "shadow effect"' of the remedy-the use of punitive damages verdicts as a reference point for parties bargaining over settlement dollars in the "shadow" of the law.6 Since ninety-seven percent of all cases settle out of court,7 an understanding of punitive damages awards is of less practical significance than knowledge of the impact of these verdicts on claim settlement.' This Article will review the existing empirical information to provide insight into the largely unexplored shadow effect of punitive damages on settlement.
and services we buy. These costs create inflation, unemployment, and even harm our Nation's competitiveness in the global economy. Manufacturers and other businesses are often forced to discontinue products or scrap research and development projects out of fear of facing excessive punitive damage awards in court. Punitive Damages in Financial Injury Cases-The RAND Report: Hearing Before the Comm. on the Judiciary, 105th Cong. 1 (1997) [hereinafter RAND Report Hearing] (statement of Senator Orrin G. Hatch). 5. The term "shadow effect" is used because the parties are negotiating in the shadow of the legal system. The major purpose of verdict reporters is to assist settling parties in setting lower and outer limits of possible exposure. 6. See Dan L. Goldwasser, State Legislative Initiatives on Behalf of the Accounting Profession, in ACCOUNTANTS' LIABILITY 1994, at 143 (PLI Litig. & Admin. Practice Course Handbook Series No. 506, 1994) (noting that punitive damages verdicts may be infrequent in many states, but nevertheless there is an important "shadow effect" caused by the presence of punitive damages claims). 7. Many claims are filed, but few are chosen for trial. The National Center for State Courts estimates that 86.5 million cases of all kinds were filed in 1994 in state courts. See NATIONAL CENTER FOR STATE COURTS, EXAMINING THE WORK OF STATE COURTS, 1994, at 10 (1996). About half of the cases relate to traffic violations. See id. Less than one in five filings are civil. See id. The declining state of the American family is reflected in domestic filings, which constitute 4.7 million out of the 86.5 million state court filings. See id. at 10. Tort litigation accounted for about 17% of civil litigation filings. See id. at 8. Only about 2.9% of the tort cases ever reach a jury trial. See id. at 34. Fewer than 3 % of tort filings ever reach the verdict stage. Of the 3 % of cases reaching trial, plaintiffs win roughly 1 in 2 times (49%). See id. at 36. Punitive damages are awarded in only about 4% of the plaintiff victories. See id. at 37. 8. As Ruth Gastel of the Insurance Information Institute explains: Lawsuits represent only a small portion of total liability claims, however. Only 2 percent of such claims are settled by verdict and only one third of claims become lawsuits. Nevertheless, lawsuit verdicts are important because they influence the damage amount sought by plaintiffs and the size of out-of- court settlements. Ruth Gastel, The Liability System, INS. INFO. INST. REP. 1 (Feb. 1998). 9. As Michael Saks has noted, little is known about the settlement process: "Although pre-trial settlements are the principal stage at which tort disputes are resolved, they inspire little more than a footnote in the policy debate and research on the litigation system." Michael J. Saks, Do We Really Know Anything About the Behavior of the Tort Litigation System-and Why Not?, 140 U. PA. L. REv. 1147, 1212 (1992). WISCONSIN LAW REVIEW
This Article is the first systematic examination of the existing state of knowledge about a largely unknown dimension of the litigation system. Part II presents a secondary analysis of the empirical studies of punitive damages claims in Florida, California, Alabama, Texas and a 27-state overview. Part III reviews the growing body of empirical research on a second aspect of the shadow effect-post-verdict settlements of punitive damages awards. My thesis is that even though the empirical research consistently shows that punitive damages are rare and well-controlled by the judiciary, this remedy plays a significant role in driving settlements. The empirical evidence suggests that the business community's fear of runaway punitive damages is exaggerated. However, what litigators "define as real, becomes real in their consequences. "10 A belief that punitive damages are "out of control" and randomly assessed may create a self-fulfilling prophesy as parties negotiate claims according to their perceptions of the populist behavior of juries." Anecdote, hyperbole and simple confusion may shape settlements in a more powerful way than empirical truths.
A. The Tort Reformers' View
Many tort reformers now concede that the incidence of punitive damages awards "remains quite low and in some states [is] virtually non-existent." 2 Still, verdicts are merely the tip of the litigation iceberg.' 3 The tort reformers' hypothesis is that cases are overvalued
10. Sociologists often refer to "The Thomas Theorem," a famous aphorism which states: "If men define situations as real, they are real in their consequences." WILLIAM I. THOMAS & DOROTHY SWAINE THOMAS, THE CHILD INAMERICA 572 (1928). This insight clearly applies to parties valuing cases in the shadow of the civil litigation system. 11. In interviews with Michael Rustad and me, defense attorneys who had litigated punitive damages cases in products liability complained that juries and even judges were infected with an anti-corporate populist bias. One typical defense attorney, who requested anonymity, reported that in his view "inflammatory facts are likely to lead, one way or another, to bad results for a large and wealthy defendant, particularly where the plaintiff ...casts himself as the 'little guy.'" Thomas Koenig, Punitive Damages-Defense View, in PRODUCTS LIABILITY PRACTICE GUIDE 19-1 (John F. Vargo ed., 1992). 12. Id. 13. Few researchers have described the actual settlement procedures for resolving punitive damages claims. The natural history of a punitive damages claim would likely begin with some -wrongdoing that leads to an accident or commercial loss. Typically, a notice of a claim is made to an insurer. The determination of potential liability is made by claims adjusters. Negotiations by the parties lead to an offer or demand. Different perceptions of the value of a claim may lead to the filing of a lawsuit. The settlement process for punitive damages claims is often complex. When there are multiple defendants, the settlement process may face increased difficulties. Settlement make take 1998:169 Shadow Effect of Punitive Damages because punitive damages are seen as a dangerous wild card, rather than as based on a predictable pattern of wrongdoing. 4 The remedy is said to be over-deterring corporations because the possibility of a random devastating award makes punitive damages litigation a "bet the company" proposition. 5 One advocacy organization, for example, argues that the growing percentage of products liability trials won by the defense is due to American corporations' increasing fear of an irrational verdict, which leads the defense to settle all but the most easily winnable cases." Tort reformers blame punitive damages for inflating settlements of dubious claims, a social cost ultimately borne by corporations, consumers, employees and stockholders."7 Punitive damages claims are viewed as place either pre- or post-verdict. 14. Mitchell Polinsky argues that data on punitive damages on verdicts tells us little about the role this remedy plays in our legal system since the intimidating power of a claim may skew the settlement process: "[E]ven if punitive damage awards at trial are on average insignificant, it does not follow ... that the effect of punitive damages on settlements is minimal as well." A. Mitchell Polinsky, Are Punitive Damages Really Insignificant, Predictable, and Rational? A Comment on Eisenberg et al., 26 J. LEGAL STUD. 663, 671 (1997). 15. Victor Schwartz, a Washington defense-bar lobbyist, acknowledges that punitive damages awards are rare, but he argues that "'punitive damages still have a Russian roulette quality to them. . . .The chamber may be larger than we thought. Maybe there aren't six holes in the chamber. Maybe there are 10. But there's still that one bullet, and who wants to take a chance of being hit?'" Edward Felsenthal, Punitive Awards Are Called Modest, Rare, WALL ST. J., June 17, 1996, at B4 (quoting Schwartz). 16. The American Tort Reform Association (ATRA) argues that the fact that the defense has been winning a higher percentage of products liability cases in recent years shows that defendant firms are increasingly reluctant to proceed to trial. ATRA's unproven assumption is that the defense is settling a larger number of weak claims than they had in the past. No empirical evidence is offered to support ATRA's argument that the percentage of settlements has been rising. ATRA maintains that: The number of product liability cases which are tried, however, represents a small minority of the total number which are filed. The vast majority of product liability cases-approximately 95 percent-are settled before trial. Product liability cases are very expensive to defend and may easily cost a defendant a quarter of a million dollars, at a minimum, to try. For that reason, over the past two decades, manufacturers have become more reluctant to take cases to trial unless they are virtually certain of winning. This change in attitude is reflected in a 1995 study by Jury Verdict Research, which showed that a plaintiff's chance of winning a product liability suit dropped by 4 percent between 1989 and 1995. AMERICAN TORT REFORM ASSOCIATION, FACT OR FICTION? You BE THE JUDGE: ATRA's RESPONSE TO ABA's "FACTS ABOUT THE AMERICAN CIVIL JUSTICE SYSTEM" 14-15 (1997) (citations omitted). 17. See Brief of Amici Curiae Product Liability Advisory Council, Inc. et al. in Support of Petitioners at 2, Honda Motor Co. v. Oberg, 512 U.S. 415 (1994) (No. 93- WISCONSIN LAW REVIEW
exerting unfair bargaining power against corporate defendants. 8 A Washington lobbyist for a coalition of business and manufacturing groups, states that: "'[tihe biggest problem we have with punitive damage claims is that they are used as a lever for out-of-court settlements.""' 9 The argument of tort reformers is that our civil litigation crisis is due in part to marginal cases that would never be brought without the possibility of punitive damages.' Tort reformers assert that "lawsuits now routinely include multimillion dollar claims for punitive damages, and such punitive damage counts skew the entire course of litigation, increasing both costs and settlement demands." 2' Plaintiffs are depicted as filing needless suits for the chance of winning a "lightning strike" punitive damages payout.' Unnecessary trials are said to result from the difficulty of
644) (arguing that "commercial entities . . . have suffered directly from the surge of arbitrary, discriminatory, and excessive punitive damages judgments in recent years") (citing MARK PETERSON ET AL., INSTITUTE FOR CIVIL JUSTICE (RAND), PUNITIVE DAMAGES: EMPIICAL FINDINGS 53 (1987)). 18. See id.; see also Brief of Amici Curiae The New England Council and New England Legal Foundation in Support of Petitioner, BMW of N. Am. v. Gore, 517 U.S. 559 (1996) (No. 94-896). 19. Milo Geyelin, Product Suits Yield Few Punitive Awards, WALL ST. J., Jan. 6, 1992, at BI (quoting William Fay). 20. Launie, Jennings and Witt write: Critics point especially to the economic and social damage from excessive deterrence. In cases where the penalty is greater than optimal, the use of punitive damages may lead to excessive avoidance of activities associated with punitive damages. When the anticipated cost is too high, firms can be expected to avoid making products or engaging in activities, including socially desirable ones.... Punitive damages have been criticized for leading to excessive litigation and misallocation of legal resources. Because punitive damage awards are typically shared with the plaintiffs' attorneys and frequently serve as a pot of gold, additional lawyers may be attracted to the area. This potentially suboptimal allocation "may push the rate of such litigation above the socially optimal rate and crowd courts with marginal cases." J.J. LAUNIE ET AL., TEXAS PUB. POLICY FOUND., THE ECONOMIC IMPACT OF PUNITIVE DAMAGES IN TEXAS: CARPET-BOMBING THE STATE'S PROSPERITY 5 (1994) (citations omitted). 21. Brief of the Pharmaceutical Manufacturers Association and the American Medical Association, as Amici Curiae in Support of Petitioner at 4, Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991) (No. 89-1279). 22. Richard Mahoney, Chairman of Monsanto Corporation's Executive Committee, argues that settlements are now being driven by runaway punitive damages. See Richard J. Mahoney, Punitive Damages, Good Intentions and the Road to Hell, 33 SOCIETY, Jan./Feb. 1996, at 26, 28-29. Mahoney maintains that "[b]ecause of their unpredictability, the threat of punitive damages has caused excessive settlements passed on to consumers in higher prices." Id. at 26. He reports that forty-five U.S. corporations 1998:169 Shadow Effect of Punitive Damages predicting punitive damages awards. 23 Both sides "develop a fairly sophisticated approach to evaluating the 'value' of cases and in most cases they are able to reach a settlement. One pernicious effect of unpredictable, unquantifiable punitive damage awards is to hamper lawyers' ability to engage in that process."'
paid $4.5 billion in punitive damages driven settlements. in 1995. See id. at 28. Two billion dollars of this was paid by a single firm. See id. 23. See RICHARD K. WILLARD & ROBERT L. WILLMORE, TORT POLICY WORKING GROUP, AN UPDATE ON THE LIABILITY CRISIS 47-51 (1987); see also Amicus CuriaeBrief of the Chamber of Commerce, et al. in Support of Petitioner at 12, Haslip (No. 89-1279) (citing this United States Department of Justice study as stating that prevailing punitive damages systems also "serve as a significant obstacle to the settlement process by giving the plaintiff unrealistic expectations of the value of his case even where the defendant has made a generous settlement offer"). 24. Brief of Amici Curiae The New England Council and New England Legal Foundation in Support of Petitioner at 4, BMW (No. 94-896). The New England Council argues: Once again the record in this case provides the best evidence on this point.
[What should defense counsel] make of the possibility that a jury might award $4,000,000 in punitive damages when that same jury found that the plaintiff's actual damages were only one thousandth of that amount and another Alabama jury would award no punitive damages at all? Equally, how should the plaintiff's counsel respond to a "reasonable" settlement offer given the unquantifiable possibility of a punitive award a thousand times as large as plaintiff's total loss? The result of that uncertainty, of course, was to compel both sides to invest substantial amounts of litigation energy into a simple tort case .... Id. at 5. Johnson & Higgins and the Defense Research Institute argue: A principal obstacle to fair settlements is that in many jurisdictions, there is no effective constraint on the size of such awards. There the only standard for settlement is sheer speculation as to what a jury may or may not award. Thus, punitive damages exert a "shadow effect" on awards and settlements which permeates the civil justice system. Defense trial lawyers daily see this effect in action .... Brief of Amici Curiae Johnson & Higgins and the Defense Research Institute in Support of Petitioners at 3-4, Browning-Ferris Indus., Inc. v. Kelco Disposal, Inc., 492 U.S. 257 (1989) (No. 88-556). WISCONSIN LAW REVIEW
B. The Plaintiffs'Attorneys' View
Plaintiffs' attorneys acknowledge that punitive damages claims provide important leverage to their clients. In interviews,' many litigators maintained that the defense would not come to the bargaining table with "a fair settlement" unless punitive damages were a real possibility.' Several respondents asserted that the impact of the punitive damages threat varies depending upon the type of case.' Attorneys prosecuting securities fraud cases maintain that punitive damages are key to just and prompt settlement.' These lawyers argue that if defendants do not face the possibility of a large punitive damages verdict, corporations have little or no incentive to settle for fair compensatory damages1
25. Professor Michael Rustad and I interviewed plaintiff and defense counsel who were the counsel of record in nearly all of the 355 punitive damages verdicts in product liability awarded between 1965 and 1990. For a general view of the methodology of this study, see Michael Rustad, In Defense of Punitive Damages in ProductsLiability: Testing Tort Anecdotes with EmpiricalData, 78 IOWA L. REv. 1 (1992). More than one hundred attorneys involved in medical malpractice punitive damages cases were also interviewed. The interview methodology and sample is described in Michael Rustad & Thomas Koenig, Reconceptualizing Punitive Damages in Medical Malpractice: Targeting Amoral Corporations, Not "Moral Monsters," 47 RUTGERs L. REv. 975 (1995) (reporting interviews with plaintiffs' attorneys nationwide in medical malpractice punitive damages cases). 26. Several plaintiffs' counsel in interviews said that punitive damages played a negligible role in products liability settlements unless there was some "smoking gun" that made the award a real possibility. Still, this remedy is widely viewed as extremely important. One plaintiff's counsel stated that "doing away with punitive damages will destroy a large part of the judicial system. Fear of punitive damages makes firms more responsive to settlement." Telephone Interview with John Haley, plaintiff's counsel in Alabama Power Co. v. Cantrell, 507 So. 2d 1295 (Ala. 1986) (Sept. 1990). 27. One respondent stated: "Punitive damages are not viewed seriously in product liability cases; they are better in medical malpractice cases." Telephone Interview with Alan Schwartz, plaintiff's counsel in Cloroben Chem. Corp. v. Comegys, 464 A.2d 887 (Del. 1983), (July 1990). 28. See Brief of Amicus Curiae Public Investors Arbitration Bar Association in Support of Petitioners at 19-20, Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995) (No. 94-18). 29. Not surprisingly, the securities defense bar has quite a different perspective on the role that punitive damages play in settlements. It charges that punitive damages are a threat that can "increase the parties' costs and prolong the [settlement] process, significantly diminishing the value of arbitration as an efficient and speedy means of settling disputes." Brief for the Securities Industries Association as Amicus Curiae Supporting Respondents at 13-14, Mastrobuono (No. 94-18). The securities defense bar argues that "innocent parties may be forced to settle out of fear of unjustified liability." Id. The defense view is that "[t]he additional incentive to settlement provided by [the threat of punitive damages] comes at too high a price in unfairness." Id. (quoting McDermott, Inc. v. AmClyde, 511 U.S. 202, 215 (1994)). 1998:169 Shadow Effect of Punitive Damages
Plaintiffs' attorneys trying products liability cases believe that punitive damages are most effective in facilitating the expeditious settlement of mass torts.30 In this context, the first award plays a key role in settling hundreds, even thousands, of cases based upon the same facts. A plaintiff's attorney reported that he "settled hundreds of asbestos cases where punitive damages played a role in the settlement."3' This same pattern was observed in Copper-Seven, Dalkon Shield and asbestos litigation where thousands of plaintiffs received "full compensation" only after a punitive damages award had been assessed and there was the possibility of many other similar awards.32 Freedom from potential punitive damages is the first concession that the tobacco companies have sought in forging a global settlement to the hundreds of thousands of tobacco claims.33 Neither plaintiff nor defense attorneys believe that punitive damages are insignificant in settlement negotiations. The dispute is over the fairness of the leverage provided by punitive damages. The plaintiffs' attorneys overwhelmingly agreed that punitive damages play an integral role in settling cases fairly and expeditiously. In contrast, defense counsel typically view the presence of punitive damages as skewing and delaying a just settlement.
30. The counsel for the victims of the Copper-Seven IUD observes: Kociemba was one of more than 130 cases which our firm handled on behalf of women injured by the Cu-7 IUD manufactured by G.D. Searle & Co. Our firm spent more than $10 million in time and $3 million in out-of-pocket expenses in pursuing the Cu-7 cases. Much of the time and expense was spent in intensive discovery-opposed at every step of the way by Searle-to uncover the evidence of punitive conduct ...Subsequently, all of our firm's Cu-7 cases-including Kociemba-settled for a confidential amount. We strongly believe that the punitive damages verdict in Kociemba and the subsequent discovery during McCarthy [Cu-7 case] which settled the day before closing arguments for a confidential amount [were related]. Subsequently, all of our firm's 130-plus Cu-7 cases were settled. Without this evidence of punitive conduct, our clients would remain uncompensated for their injuries. Interview Questionnaire of Roberta Walbrun, plaintiff's attorney in Kociemba v. G.D. Searle & Co., 707 F. Supp. 1517 (D. Minn. 1989) (July 1990). 31. Telephone interview with Michael Brickman, plaintiffs attorney in Amos v. Celotex Corp., No. C-87431-G (M.D. N.C. 1989) (July 1990). 32. See Interview with Bruce Finzen, plaintiffs attorney in Kociemba v. G.D. Searle & Co., 707 F. Supp. 1517 (D. Minn. 1989) (applying Minnesota law) (July 1992). 33. See RAND Report Hearing, supra note 4,at 3 (Statement of Senator Richard J. Durbin) ("If [the tobacco companies] were found guilty of these punitive awards down the line, they would have come right out of the bottom line .... That's why they sat down at the table-punitive damages."). WISCONSIN LAW REVIEW
These two conflicting views of punitive damages are irreconcilable and not susceptible to scientific inquiry. There is no objective test as to whether a given punitive damages-driven settlement is "equitable" or "excessive." No statistical formula can provide an exact amount of punitive damages necessary to properly punish and deter a defendant. Nevertheless, a review of the existing empirical research on the impact of punitive damages on settlements provides substantial insight into the operation of this remedy. Systematic social science analysis needs to replace the rhetorical claims and for-litigation "studies," which dominate the debate over the need for tort reform of punitive damages. 34
II. THE IMPACT OF PUNITIVE DAMAGES ON PRE-VERDICT SETTLEMENTS
A. Research on Punitive Damages Claims
The best available research on settlements of punitive damages claims has been conducted in four "hot spot" jurisdictions: Florida, California, Alabama and Texas. The patterns observed in these states are not necessarily representative of the nation as a whole. If there is a problem with the over use of punitive damages in settlement, the effects should be most visible in these jurisdictions.
B. Florida
Two small insurance industry-sponsored studies of Florida closed claims suggest that state tort reform of punitive damages has a minimal impact on settlements. In 1986, Aetna Life & Casualty Company (Aetna) submitted a study on the impact of punitive damages on settlement in support of its argument that Florida's limitations on this remedy would have little negative effect on plaintiffs. 3 Aetna concluded that the limitations on punitive damages would have no impact on the 105 cases in its sample. 6 St. Paul Fire and Marine Insurance Company conducted a parallel study and concluded that only four of the 313 closed claims it examined would have been impacted by any of Florida's five different tort
34. See Rustad & Koenig, supra note 1 (documenting dueling studies on numbers of verdicts were used in Supreme Court constitutional litigation). 35. See Jay Angoff, Perspective on the Insurance Crisis: Insurance Against Competition: How the McCarran-FergusonAct Raises Pricesand Profits in the Property- Casualty Insurance Industry, 5 YALE J. ON REG. 397 (1988) (discussing the context and details of these insurance company studies on the impact of Florida's tort reform). 36. See id. at 401. 1998:169 Shadow Effect of Punitive Damages reforms, "for a total effect of about 1 % savings."37 These insurance industry studies imply that punitive damages claims have little impact on the settlement process due to their high mortality rate.
C. California
A recent study by a California tort reform advocacy group casts doubt on the Florida findings about the relative insignificance of the shadow effect. The Pacific Research Institute (PRI) conducted a study of California punitive damages claims on behalf of the Association for California Tort Reform (ACTR).3 The PRI asserts that punitive damages are very important in driving settlements despite the rarity of these awards." The PRI charged that punitive damages claims were filed at "'shockingly high percentages, given the law's attempt to reserve punitive damages for cases that involve fraud and malice.' "" The researchers concluded that "'[tihere's more than a strong suggestion that lawyers are climbing onto a big settlement band wagon.'"' The PRI assumes that punitive damages claims filed in increasing percentages provides plaintiffs with substantial leverage. However, if naming and claiming are unrelated steps, an increasing number of punitive damages claims will have little impact on settlement payouts. No evidence is provided for the PRI's assertion that claiming punitive damages permits plaintiffs to "extort higher settlements."42 What is needed is a longitudinal study of what happens to these punitive damages claims.
37. Angoff, supra note 35, at 415 n.26. 38. See John H. Sullivan, New Evidence of Lawyer Misuse of Punitive Damages (Ass'n for Cal. Tort Reform, Sacramento, Cal.) Feb. 26, 1996 (reporting PRI study on behalf of ACTA). In PRI's sample of "1,024 cases filed in San Francisco Superior Court for a one month period," more than one-third of tort and contract lawsuits against businesses and governmental units included a punitive damages claim. Id. The shadow effect is clearly important since, like the other studies, PRI found that 98% of the cases settled prior to verdict. See id. The Association for California Tort Reform (ACTR) reports a high rate of punitive damages claims: "The [PRI] study revealed that punitive damages are demanded in 39% of the tort and contract suits filed against businesses and 35 % of those suits filed against government agencies." Id. 39. See id. 40. Id. (quoting John H. Sullivan, President of ACTR). 41. Id. (quoting John H. Sullivan, President of ACTR). 42. Id. WISCONSIN LAW REVIEW
D. Alabama
Alabama has gained nationwide attention as "a tort hell."43 This state is a punitive damages hot spot in the fields of product liability and medical malpractice." It is noteworthy that Alabama punitive damages awards have been challenged in two of the last four U.S. Supreme Court cases on the constitutionality of punitive damages.45 The Business Council of Alabama (BCA) found that: "In the most recent calendar year, punitive damage verdicts in Alabama totaled more than $200 million. In the four years since Haslip was announced, such verdicts exceeded $700 million dollars. A ten-year survey yields more than $1 billion dollars. "' The BCA argues that the occasional large punitive damages award unfairly increases the settlement value of cases.47 BCA argues that cases such as BMW of North America v. Gore" have "created a substantial disincentive" to settle49 because of "punitive awards that are often grossly disproportionate to the actual harm."50
43. A study by Tillinghast-Towers Perrin found that Alabama awards far more in punitive damages than neighboring states. See Richard Thornburgh, Want to Win a Big Suit? Go to Alabama, USA TODAY, June 27, 1996, at 13A. Between 1987 and 1993 Alabama punitive damages verdicts totaled $101,390,144, while Georgia awarded $7,489,023, Tennessee $5,086,020 and Mississippi $3,750,268. See id.; see also Linda Himelstein, Jackpots from Alabama Juries, BUSINESS WEEK, Nov. 28, 1994, at 83; Gregory Jaynes, Where the Torts Blossom, TIME, Mar. 20, 1995, at 38 (discussing large number of Alabama punitive damages awards); Richard Thornburgh, 'Tort Hell' Outlandish GM Case Solidifies Alabama's Reputation, MONTGOMERY ADVERTISER, Aug. 1, 1996, at 13A [hereinafter Thornburgh, Tort Hell]; As Alabama Juries Punish Business, Business Seeks to Punish the Judge, WALL ST. J., Nov. 2, 1994, at S1. 44. See Rustad, supra note 2. 45. See Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991); BMW of N. Am. v. Gore, 517 U.S. 559 (1996). 46. Brief of the Business Council of Alabama as Amicus Curiae in Support of Petitioner at 5, BMW of N. Am. v. Gore, 517 U.S. 559 (1996) (No. 94-896). 47. The BCA notes that: "scores of [other cases] settle before trial for amounts dictated in large part by verdicts in previous similar cases. Recent Alabama statistics indicate that pretrial settlements occur in 97 percent of all civil cases." Id. 48. 517 U.S. at 559. 49. Brief of the Business Council of Alabama as Amicus Curiae in Support of Petitioner at 6, BMW (no. 94-896). 50. Id. 1998:169 Shadow Effect of Punitive Damages
1. PROFESSOR PRIEST'S STUDY OF ALABAMA CLAIMS
George Priest's recent study of Alabama verdicts was conducted to challenge a large punitive award in an insurance bad faith case."' His examination of three rural counties in Alabama shows that in these counties punitive damages were claimed in the vast majority of cases.52 Even the most routine accident filings invariably included a demand for punitive damages. This high rate of claiming punitive damages has accelerated in the most recent years surveyed. Almost every case included a punitive damages claim in 1993-1994 in Bullock County. 3 Priest argues that this extraordinary rate of punitive damages claims provides evidence that the remedy is out of control.' He believes that Alabama is unique in its overuse of the punitive damages remedy.5 Priest's data on claiming is striking, but it does not provide any evidence that claiming punitive damages has an impact on settlement. A high rate of claims may not present a problem if punitive damages demands are not taken seriously or are screened out by pre-trial controls.56 Professor Priest moved beyond his published data when he
51. See Gallant v. Prudential Ins. Co., No. CV 93-50 (Ala. Cir. Ct. Barbour County). 52. Priest studied punitive damages claims in three rural Alabama counties with small populations and almost no industry: Bullock, Lowndes and Barbour Counties. Punitive Damages: Tort Reform and FDA Defenses: Hearings Before the Senate Comm. on the Judiciary, 104th Cong. 86 (1995) (statement of George L. Priest, Professor, Yale Law School) [hereinafter Priest, Testimony]. His research team found that in 1992-1993, 76.5 %of all tort cases included a claim for punitive damages in Bullock County. See id. at 87-88. Punitive damages were claimed in 65.1% of the cases in Lowndes County; and 78.3% in Barbour County. See id. By 1994, these percentages had risen to an astonishing 95.6% in Bullock County. See id. at 86. 53. See id. 54. Priest found that in these three counties: "65 to 78 percent of all tort actions over a fiscal year include punitive damages claims [which] starkly challenges the notion that punitive damages are an infrequent and seldom invoked remedy in American civil law." Id. at 88. 55. Priest states: "There is nothing like Alabama in the history of the American legal system . . . . I have studied jury verdicts for the past 20 years, and I believe the situation in Alabama is very close to being out of control." Thornburgh, Tort Hell, supra note 43, at 13A. 56. Priest is presenting an important hypothesis-that a high rate of punitive damages claims distorts settlements. However, this assumption is neither "obvious" nor "indisputable." He simply expresses his personal opinion when he asserts that: Alabama numbers show . . . that the availability of unlimited punitive damages affects the 95 to 98 percent of cases that settle out of court prior to trial. It is obvious and indisputable that a punitive damages claim increases the magnitude of the ultimate settlement and, indeed, affects the entire settlement process, increasing the likelihood of litigation. Thus, as shown in WISCONSIN LAW REVIEW
testified that "[t]hese [punitive damages] claims affect the settlement process, both increasing the litigation rate and, necessarily, increasing the ultimate magnitude of settlements even in cases that are settled out of court."57 If these claims have no effect on the settlement process, they may be merely a symbolic local practice rather than an indication of crisis. As in Florida, more information is needed about the vast majority of cases that do not reach the verdict stage. Punitive damages are frequently claimed but they have an extremely high mortality rate, even in "tort hell." Data from the Alabama Administrative Office of Courts suggest that a high rate of claims may have less impact on verdicts than Priest believes.
2. STATE-WIDE DATA ON ALABAMA PUNITIVE DAMAGES FILINGS
The best data on Alabama punitive damages verdicts was collected in 1992 by Alabama's Administrative Office of Courts.5" The Administrative Office uncovered a total of fifty-four punitive damages verdicts state-wide in all areas of the law.59 Punitive damages were awarded in only six percent of Alabama civil verdicts in 1992. The remedy was applied in only about one percent of total civil bench and jury trials in Alabama circuit courts. Punitive damages constituted .026 % of total civil dispositions in district and circuit court and a mere .007% of all court dispositions.' Alabama also had a high rate of post-verdict adjustments. Table One reveals that one-third of the punitive damages
the Bullock, Lowndes, and Barbour County figures, our modern rules with respect to punitive damages impose these effects on 95.6 and 72.1 percent of even settled cases. Priest, Testimony, supra note 52, at 88-89. 57. Id. at 87 (citation omitted). 58. The data on Alabama awards were collected by all insurers doing business in Alabama and compiled by the Circuit Clerk in each Alabama county. In 1992, there were 168,803 total dispositions in Alabama Circuit Courts. Civil filings constituted 44,489, or 26 percent of the filings. Civil filings decreased three percent from 45,888 to 44,489 from 1991 to 1992. Of the 44,489 civil cases, only about 21 percent were tort actions (9,178). The shortcoming of the Alabama data is that many of the final dispositions are unknown and unknowable. See Unpublished data collected by Alabama's Administrative Office of Courts [hereinafter Office of Courts Data] (on file with author). 59. Wrongful death cases were excluded because of Alabama's unique provision that does not permit juries to award compensatory damages in such cases. See ALA. CODE § 6-5-410 (1997). 60. A total of $27,198,100 in punitive damages was awarded versus $17,857,570 in compensatory damages in 1992 punitive damages cases. See Office of Courts Data, supra note 58. The Alabama Supreme Court reviewed twenty-one cases between October 1, 1991 and September 30, 1992 where punitive damages were at issue. See id. 1998:169 Shadow Effect of Punitive Damages awards in Alabama were reversed or reduced. In the post-BMW era, there has been a significant further increase in judicial activism in reversing or reducing awards.61
TABLE ONE THE ALABAMA SUPREME COURT'S PUNITIVE DAMAGES DECISIONS OCTOBER 1, 1991 TO SEPTEMBER 30, 1992
CASE DISPOSITION NUMBER OF PERCENTAGE PUNITIVE AWARDS Punitive Damages 14 66.7% Awards Affirmed Punitive Damages 6 28.6% Awards Reversed Punitive Damages 1 4.8% Awards Affirmed Based upon Remittitur Total # of Cases with 21 100% Punitive Damages I I
The rarity of Alabama punitive damages verdicts compared to the extraordinary number of claims casts doubt on Priest's contention that a high rate of punitive damages claims indicates that the remedy is out of control. Even though Alabama is well-known as a punitive damages hot spot, the vast majority of claims never mature into verdicts. The settlement process can be viewed as a funnel with a variety of screens that eliminate the vast majority of claims.' Further inquiry should focus on
61. See, e.g., BMW of N. Am., Inc. v. Gore, 701 So. 2d 507 (Ala. 1997) (reducing a $2 million punitive damages award to $50,000 on remand from the U.S. Supreme Court); Foremost Ins. Co. v. Parham, 693 So. 2d 409 (Ala. 1997) (reducing to $348,000 a $15 million punitive damages award); Union Sec. Life Ins. Co. v. Crocker, No. 1931672, 1997 Ala. LEXIS 367 (reducing a $2 million punitive damages verdict because it exceeded ten percent of the defendant's net worth). 62. The Texas Department of Insurance describes the basic components of the claims settlement process as a series of stages beginning with an accident or injury. The next stages include: Notice of claim to insurer; Verification of coverage; Investigation of injuries; Determination of exposure; Initial reserves set for indemnity, expenses; WISCONSIN LAW REVIEW why there are so few punitive damages awards resulting from so many punitive damages claims.
E. Texas Public Policy FoundationStudy
Texas led the nation in products liability actions resulting in punitive damages verdicts between 1965 to 1990.1 Texas tied with California for the largest number of punitive damages awards rendered in medical malpractice cases between 1963 and 1993.1 Texas has enacted two rounds of tort reform aimed at limiting punitive damages. In 1987 Texas capped punitive damages at "four times the amount of actual damages or $200,000 whichever is greater" unless the harm resulted from "malice or an intentional tort."' Another round of tort reform in 1995 capped punitive damages at the greater of $200,000 or two times economic damages plus non-economic damages not to exceed $75 0,000.1 Texas firms are concerned about their vulnerability to punitive damages despite the rarity of large awards.67 Tort reform of Texas punitive damages is seen as critical to prevent plaintiffs from extorting settlements of frivolous claims.' In contrast, groups opposing tort
Determination of liability; Contributors, other defendants contacted; Negotiation leading to offer or demand; Lawsuit filed; Reserves reviewed; Depositions and other discovery undertaken; Trial or final settlement reached; Payment of indemnity and expenses; and, Claim closed and reported to TDI. TEXAS DEPARTMENT OF INSURANCE, THE 1993 TEXAS LIABILITY INSURANCE CLOSED CLAIM ANNUAL REPORT 3 (1993). 63. See MICHAEL RUSTAD, DEMYSTIFYING PUNITIVE DAMAGES IN PRODUCTS LIABILITY CASES: A SURVEY OF A QUARTER CENTURY OF TRIAL VERDICTS 26 (Lee Hays Romano ed., 1991). 64. See Rustad & Koenig, supra note 25, at 1004. 65. TEX. CIv. PRAC. & REM. CODE ANN. § 41.00 (West 1987). 66. See Kent D. McClure et al., Exemplary Damages; Many 'Changes' Just Common Law; A Tougher Burden of Proof and a Lower Cap Highlight the 1995 Amendments, TEX. LAW., Aug. 21, 1995, at 28. 67. The American Bar Foundation found that of the 529 punitive damages awards in Dallas County trial courts between 1970 and 1990, only 17 exceeded the limits set by the Texas Omnibus Tort Reform Act of 1987. See STEPHEN DANIELS & JOANNE MARTIN, CIVIL JURIES AND THE POLITICS OF REFORM 237 (1995). 68. Professor Frank Cross argues: The [Texas] reforms give defendants additional tools (leverage) for use in settlements. The modifications to punitive damages and joint and several liability reduce the risk of "bet the company" litigation. Under the old law, plaintiffs could pressure defendants into significant settlements by holding out the threat of enormous damages at trial. Risk averse businesses consequently would make settlement payments, even when the plaintiff's case on the merits was weak. Frank B. Cross, Texas Tries Tort Reform, TEX. Bus. REV., Feb. 1996, at 1. 1998:169 Shadow Effect of Punitive Damages reform deny that there is a litigation crisis, pointing to Texas's thriving economy.' However, if firms perceive that Texas faces a punitive damages crisis, they can be harmed by a self-fulfilling prophesy. Misperceptions of vulnerability to random punitive damages verdicts may lead corporations to misallocate resources into excessive preventative measures. 70 The Texas Public Policy Foundation (TPPF), a tort reform advocacy organization, sponsored a study of the impact of punitive damages in Harris and Dallas counties in Texas. The TPPF researchers concluded that, "the frequency of claims seeking punitive damages is high and increasing." 7' Runaway Texas punitive damages are "'carpet-bombing' to hurt the whole state's prosperity. "72 The TPPF's randomized telephone interviews of 100 Texas small business owners and 100 corporate counsel found a widespread belief that the fear of punitive damages increases the size of settlements.' The TPPF researchers report that: "[flifty percent of small business owners and 38 percent of
69. See Interview with Tom Smith, Texas Public Citizen (Apr. 14, 1996). 70. Peter Kinzler notes that the fear of large punitive damages awards harm the business community even if the firm's apprehensions are unfounded: To the extent these findings [of fear of punitive damages] reflect the perceptions of business management, they force resources into insurance and self-insurance and away from new products and innovations. Moreover, the costs of excessive punitive damage awards affect more than defendants in suites [sic]. They raise prices for customers, lowering pay to employees, and reducing stock prices to shareholders. Of greatest significance to insurance regulators are: 1) the impact on the availability and affordability of commercial insurance coverages, 2) the alteration of claims adjudication of insurers to defend against bad faith liability, 3) the avoidance of insurers in writing personal or business insurance in states that have been notorious for producing excessive punitive damage awards, and 4) the threat of new insurer insolvencies. Peter Kinzler, Recent Studies of Punitive Damage Awards: The Tale of the Tape, 15 J. INS. REG. 402, 419 (1997). 71. LAUNIE ET AL., supra note 20, at Executive Summary. The authors find that in their random sample: Between 1980 and 1992, 25 percent of civil cases filed in Harris County District Court and 37.7 percent of cases filed in Dallas County District Court sought punitive damages. In Harris County the average was 20.8% from 1981-1986 and 30.4% from 1987-1992. In Dallas County the average was 33.3% from 1981-1986 and 43.2% from 1987-1992. Id. 72. Id. 73. The authors report that: "The survey employed a stratified random sample of corporate counsel and managers or owners in small and medium size businesses throughout Texas. A total of 100 executives and 100 in-house counsel interviews were conducted." Id. at Introduction. WISCONSIN LAW REVIEW corporate counsel in Texas responded in a survey that the threat of punitive damages has led to higher out-of-court settlements. This threat increases the amount of out-of-court settlements by an estimated 13 percent." 74 The TPPF found that twenty-nine percent of the Texas firms stated that punitive damages "had affected [their] plans to expand in Texas or relocate to another state." 75 As in Alabama, the evidence for a punitive damages crisis lies in a high rate of punitive damages claims and a widespread belief in the business community that the remedy is out of control. While TPPF finds a punitive damages crisis in Texas, others argue that the remedy's impact is declining. An examination of 42 verdicts over $45,000 in Texas in 1995 concludes that "most Texas juries are 76 conservative when . . . awarding punitive damages."' The researcher observes that:
Russell B. Serafin, president of the Texas Association of Defense Counsel, says he has noticed a definite "downward spiral" in jury verdicts over the past three to five years. "I think it's a sign of the times," says Serafin, a partner in Houston's Vinson & Elkins. "There has been a real effort by tort reform groups and lawsuit-abuse groups to educate the public, and I think they've been effective in getting their message across."77
A recent qualitative study of Texas plaintiffs' attorneys by researchers from the American Bar Foundation (ABF) also finds that the tort reformer's public relations campaign is making juries increasingly pro- corporate.7" Plaintiffs are said to receive smaller settlements in recent years: "As juries become more reluctant to make awards, or they reduce the value of certain types of injuries, insurance companies and adjusters,
74. Id. at Executive Summary. 75. Id. 76. Rich Reecer, Monster Punitives:A Thing of the Past?, TEXAS TRIAL LAWYER 1, 5 (Feb. 19, 1996)
F. Texas Department of Insurance Closed Claim Study
1. METHODOLOGY
The Texas State Legislature passed a bill in 1987 requiring insurers to submit quarterly closed claim reports of bodily injury indemnity settlements over $10,000 to the Texas State Department of Insurance (TDI).80 Since 1988, the TDI has routinely gathered information on all types of liability insurance claims."1 Claims adjusters must report the components of all closed claims settled without a court verdict or different from the verdict. 2 Each insurance closed claim is categorized by the adjusters into the four component elements: (1) direct economic losses such as lost wages and medical expenses; (2) non-economic losses, including pain and suffering; (3) prejudgment interest; and (4) punitive damages. 3 Claims adjusters estimate the amount by which each payout of $10,000 or more was inflated by the potential availability of punitive damages .1
79. Id. at 30. The researchers quote an Austin attorney specializing in auto crash cases who believes that insurance companies coordinate their settlement offers according to the industry's assessment of public attitudes: We know we're going to get unfair offers [from insurance companies]. The [companies] will deny this till their dying breath, but we talked about it at our trial lawyers meeting. We know the month, . .. about two years ago they were paying basically three times your specials. They changed it to two and one-half. Id. (first two alterations in original). 80. See TEXAS STATE BOARD OF INSURANCE, THE 1988 TEXAS LIABILITY INSURANCE CLOSED CLAIM SURVEY 1-2 (1988). 81. In 1986, Texas's Governor and House Speaker appointed a committee to study the liability crisis. See id. at 1. All sides of the .debate concluded that the data on settlements was unreliable. See id. Texas amended its Insurance Code requiring "all insurers authorized to do business in the state of Texas to submit quarter closed claim reports." Id. at 2. 82. A closed claim means that an insurer has paid money to a claimant and no further action remains to settle the case. See id. at 6. 83. The Texas Legislature labels punitive damages as "exemplary damages." For clarity, the term "punitive damages" will be used throughout this Article. 84. The Texas researchers note: WISCONSIN LAW REVIEW
Although relying of the subjective perception of adjustors has obvious limitations,8 the Texas Closed Claims data provides by far the best available information for assessing the impact of punitive damages on settlements.' The unique strength of the Texas Closed Claims data is its large and diverse database of tens of thousands of settlements over several years. One of the great difficulties of verdict research is that there are so few punitive damages awards in the sample that outliers may
The breakdown of damages reflects the influence of each category of damages upon the total settlement amount; therefore, this study recognizes not only the actual assessment of damages by verdict but also the "shadow effect" in settlement of claimants' demands in the various categories. For example, if an adjuster increased the insurer's offer due to a demand for punitive damages, this increase ("shadow effect") in the settlement amount would be categorized as punitive damages. TEXAS STATE BOARD OF INSURANCE, supra note 80, at 34. 85. The "most candid expert opinion" of the claims adjuster as to the role of punitive damages is still ultimately a "guesstimate." The Insurance Department researchers note that the data "should be viewed as indicative of general settlement trends and not relied on as exact dollar amounts." TEXAS DEPARTMENT OF INSURANCE, supra note 62, at 6. The Texas Department of Insurance has enacted measures to ensure data accuracy. The TDI states that it has instituted procedures such as: 1. Appointment of closed claim "coordinator" at each reporting company to respond to questions and oversee company submissions. 2. Manual review of each report by a TDI staff technician. - Inaccurate or incomplete reports are either corrected in consultation with the company coordinators or returned to them for correction. 3. The data is subjected to a computerized test containing 96 data validity or "edit" checks which review the data for completeness, credibility and arithmetic errors .... 4. TDI conducts an annual reconciliation where companies are asked to balance their submitted claims .... Id. at 1. 86. The decomposition of settlement dollars is by its very nature a subjective process. When a consumer purchases a new car, he may find it difficult to breakdown the purchase into dollar amounts for styling, color, reliability, and status. Settlement is different in that adjusters are valuing injuries according to their sense of what a jury might award. Claims adjustors are repeat players and have a shared knowledge base in classifying injuries and claims. Jury verdict reporters provide the adjustors with a view of worst-case scenarios. The researchers warn that: Some of the information collected represents the subjective opinion of the claims personnel completing the report. The classification of damages [into economic damages, non-economic damages, punitive damages and prejudgment interest] ... calls for "your most candid expert opinion." Id. at 5. 1998:169 Shadow Effect of Punitive Damages distort or obscure the overall pattern. 7 This database is not merely a snapshot of the shadow effect; it allows longitudinal assessment of trends.
2. TEXAS VERDICTS
Table Two reveals no discernible trend over the years 1990 to 1993 in either the percentage of Texas personal injury verdicts containing a punitive damages component or in the amount of money awarded in the typical verdict. Just over 10% of the awards during these four years contain a punitive damages component, typically between $100,000 and $200,000. A large percentage of these punitive damages verdicts were appealed.8
TABLE TWO NUMBER OF TEXAS VERDICTS CONTAINING PUNITIVE DAMAGES 1990-1993
YEAR NUMBER OF PUNITIVE %WITH PUNITIVE COURT DAMAGES PUNITIVE DAMAGES VERDICTS VERDICTS COMPONENT MEDIAN $
1990 186 18 9.7% $103,010
1991 203 22 10.8% $100,000
1992 203 19 9.4% $200,000
1993 164 20 12.2% $101,750 AVERAGE 189 20 10.6% $126,190
Table Three reveals that the punitive damages component of Texas personal injury verdicts averaged about 14% of the total award between 1990 and 1993. Economic and non-economic damages were by far the
87. The $5 billion Exxon Valdez punitive damages award eclipses the total amount paid in all punitive damages verdicts in product liability cases nationwide over a quarter century. In the Rustad and Koenig empirical study of punitive damages in product liability, the largest payout was less than one percent of the Exxon Valdez verdict. (Data compilation on file with author). By using median awards, no single outlying settlement in the Texas Closed Claim study can eclipse the thousands of other settlements. 88. In 1991, 50% of these awards were appealed. See TEXAS DEPARTMENT OF INSURANCE, THE 1991 TEXAS LIABILITY INSURANCE CLOSED CLAIM ANNUAL REPORT 49 (1991). In 1992, 32% were appealed. See TEXAS DEPARTMENT OF INSURANCE, THE 1992 TEXAS LIABILITY INSURANCE CLOSED CLAIM ANNUAL REPORT 57 (1992). In 1993, 45 % were appealed. See TEXAS DEPARTMENT OF INSURANCE, supra note 62, at 57. WISCONSIN LAW REVIEW largest components of the court awards, suggesting that the impact of punitive damages on the litigation system has been overestimated by tort reformers. Punitive damages are significant but do not appear to be out of control. The punitive damages component of the awards varies randomly over time.
TABLE THREE COMPONENTS OF TEXAS COURT VERDICTS 1990-1993
YEAR ECONOMIC NON- PUNITIVE PREJUDGMENT DAMAGES ECONOMIC DAMAGES INTEREST DAMAGES
1990 41% 41% 4% 14%
1991 29% 47% 15% 9%
1992 34% 45% 6% 15%
1993 37% 22% 30% 11%
AVERAGE 35% 38% 14% 12%
3. PUNITIVE DAMAGES SETTLEMENTS UNDER $25,000
TABLE FOUR INFLUENCE OF PUNITIVE DAMAGES ON TEXAS SETTLEMENTS OF $10,000 TO $24,999 1990-1993
YEAR NUMBER OF NUMBER % PUNITIVE % THAT PRE-VERDICT WITH INFLUENCED PUNITIVES SETTLEMENTS PUNITIVE INFLATED COMPONENT PAYOUT
1990 3739 267 7.1% 14%
1991 4839 273 5.6% 16%
1992 5546 297 5.4% 9%
1993 5747 250 4.4% 11%
TOTALS 19,871 1087 5.5% 12.5%
Table Four shows that punitive damages plays only a small role in Texas bodily injury cases which settle for less than $25,000. Claims adjusters report that they were influenced by the possibility of punitive damages in only 5.5 %of these garden-variety settlements during the years 1990-1993. This percentage declines year by year from 7.1 % in 1990 to 1998:169 Shadow Effect of Punitive Damages
4.4% in 1993. This may be due to the compliance actions of the TDI during this period, which resulted in a higher percentage of the settlements being reported, or it may indicate that the leverage provided by punitive damages is declining.9 Nothing in this table suggests that Texas's growing rate of punitive damages claims is creating a crisis. In the 5.5% of cases in which insurance adjusters were influenced by punitive damages, the payout was inflated by an average of only 12.5%. This suggests that the role of punitive damages in the settlement of these garden-variety claims is radically less than the 13% increase estimated in the average case by respondents in the TPPF study.
TABLE FIVE DISTRIBUTION OF PAYOUTS ON SETTLEMENTS OF $10,000 TO $24,999 WHICH WERE INFLUENCED BY PUNITIVE DAMAGES 1990-1993
YEAR ECONOMIC NON- PUNITIVE PREJUDGMENT DAMAGES ECONOMIC DAMAGES INTEREST DAMAGES
1990 36% 47% 14% 3%
1991 35% 48% 16% 1%
1992 37% 52% 9% 2%
1993 37% 51% 11% 1%
AVERAGE90 36% 50% 13% 2%
Table Five shows that even when only the small minority of under $25,000 settlements that were influenced by punitive damages are included in the analysis, non-economic damages account for half of the payout. Non-economic damages are almost four times as important as- punitive damages, even in a sample selected to demonstrate the maximum impact of punitive damages in garden-variety settlements. This suggests that the attention paid to punitive damages may be misplaced. Further
89. The radical increase in the number of reported settlements between 1990 and 1993 is not due to an explosion of litigation but to the time it took for the Insurance Board to get so many adjusters to comply with the state's requirements. Since it should logically be easier to gather information about the kind of dramatic, atypical cases, which would be influenced by punitive damages, the decline may be due to the increasingly complete reporting of the garden variety settlements. 90. The totals equal 101% because of a rounding error. WISCONSIN LAW REVIEW analysis is needed on the factors that juries consider when awarding non- economic damages. Table Five also indicates that non-economic damages are increasing slightly over time while the punitive damages component declines, although the relationship is too slight to permit any definitive conclusions.
4. THE SHADOW EFFECT IN LARGER SETTLEMENTS
TABLE SIX PERCENTAGE OF PRE-TRIAL TEXAS SETTLEMENTS OF $25,000 OR MORE CONTAINING ONLY ECONOMIC DAMAGES 1990-1993
YEAR SETTLED FOR SETTLED SOLELY FOR % ONLY $25,000 OR THE ECONOMIC ECONOMIC MORE DAMAGES DAMAGES 1990 5212 2582 50%
1991 6153 3478 57% 1992 6858 3979 58% 1993 6975 4217 60%
AVERAGE 6300 3564 57%
Table Six shows a trend toward settling personal injury cases of $25,000 or more solely for the economic damages. Adjusters reported that these settlements were not influenced by non-economic damages, punitive damages or prejudgment interest. In the majority of large Texas settlements, the injured party receives nothing for pain and suffering much less a punitive damages bonus. This provides some additional evidence that far from spinning out of control, the Texas settlement system is becoming increasingly difficult for personal injury claimants. 1998:169 Shadow Effect of Punitive Damages
TABLE SEVEN DISTRIBUTION OF PAYOUTS ON TEXAS SETTLEMENTS OF $25,000 OR MORE INFLUENCED BY NON-ECONOMIC DAMAGES, PUNITIVE DAMAGES OR PREJUDGMENT INTEREST 1990-1993
YEAR ECONOMIC NON- PUNITIVE PREJUDGMENT DAMAGES ECONOMIC DAMAGES INTEREST DAMAGES
1990 30% 56% 10% 4%
1991 30% 53% 12% 5%
1992 26% 57% 12% 5%
1993 30% 56% 10% 4%
AVERAGE' 29% 56% 11% 5%
Table Seven examines the minority of claimants who received more than economic damages as part of their $25,000 or greater settlement. The table reveals a remarkable consistency in the cases above $25,000 influenced by exemplary damages for the period. Adjustors attribute from 10% to 12% of the settlement dollars to punitive damages. The economic or actual damages component of the settlement dollar also shows little volatility, ranging from 26% to 30% over the years 1990- 1993. Similar patterns of stability are found in profiles of non-economic damages (53% to 57%) and prejudgment interest (4% to 5%). This pattern suggests that claims adjusters and plaintiffs' attorneys have some consistent mental picture of the ordinary composition of claims around which to negotiate settlements. Jurors and judges, on the other hand, have less experience in setting the value of punitive damages when entering a verdict. This finding supports the view of the business community that it is prudent to settle most larger claims because the payout is relatively predictable. By far the largest percentage of these payouts is compensation for pain and suffering. Punitive damages account for an average of only 11 % of the final settlement. Non-economic damages in these cases are more than five-times larger than the punitive damages, again showing that more attention needs to be paid to the influence of non-economic damages in settlements. Economic and non-economic damages are driving settlement, not punitive damages.
91. The totals equal 101% because of a rounding error. WISCONSIN LAW REVIEW
Table Eight reveals that Texas settlements above $200,000 are inflated by an average of 4.8% by punitive damages. Claims adjusters report that only 5.2% of these large settlements are affected by punitive damages. The amount of money paid out in these large settlements because of punitive damages is almost $50 million per year. This is not a trivial sum, but as a percentage of the total payouts, punitive damages claims are of relatively small importance.
TABLE EIGHT SETTLEMENT $ AND PUNITIVE DAMAGES FOR TEXAS NON-VERDICT SETTLEMENTS OF $200,000 OR MORE 1990-1992
YEAR SETTLEMENT OF PUNITIVE PERCENTAGE $200,000 PLUS DAMAGES
1990 $936,867,516 $54,025,885 5.6% N = 1275 N=96
1991 $967,648,710 $63,698,447 6.6% N=1430 N=91
1992 $1,180,297,786 $29,673,174 2.5% N=1648 N=40
TOTALS $3,084,814,012 $147,397,506 4.8% N=4353 N=227
Table Nine reveals that non-verdict settlements of over $1 million, the payouts most feared by the business community, are not being driven by punitive damages. There were only seventy of these large punitive damages payouts over the three-year period examined, an average of $23 million in punitive damages verdicts per year. Only two of these seventy punitive damages settlements were over $3 million-one for $4 million and one for $9.7 million. Million dollar settlements were overwhelmingly based on non- punitive damages. Still, the existence of even a single punitive damages settlement of almost $10 million is sufficient to frighten much of the business community. It is the high-stakes, headline-making case where punitive damages play the key role, not the garden-variety tort case. The 1995 Texas reform capping punitive damages will affect only a very small percentage of the cases in the Texas litigation system, but it will impact the cases that create the greatest anxiety. 1998:169 Shadow Effect of Punitive Damages
TABLE NINE TEXAS PRE-VERDICT SETTLEMENTS AND PUNITIVE DAMAGES OF $1 MILLION OR MORE 1990-1992
YEAR PRE-VERDICT PUNITIVE PERCENT RANGE OF SETTLEMENT- DAMAGES- PUNITIVE $1 MILLION $1 MILLION AMOUNT PLUS PLUS
1990 $510,441,957 $27,005,321 5.3% $1,000,000- N=237 N=19 $4,000,000
1991 $492,275,356 $34,235,000 7.0% $1,000,000- N=240 N=19 $9,790,000
1992 $615,537,944 $47,444,000 7.7% $1,000,000- N=285 N=32 $2,900,000 TOTALS $1,618,255,257 $108,684,321 6.7% N=762
5. THE SHADOW EFFECT BY TYPE OF INJURY
In 1988 the TDI explored the relative contribution of punitive damages in settlements classified by "type of injury." One of the best predictors of the size of punitive damages verdicts is the "severity of injury."' TDI gives some indication of the type of personal injury claim settlement most likely to be impacted by the shadow effect.
92. See Eisenberg et al., supra note 3, at 647-49. Roselle Wissler and her University of Iowa colleagues examined the factors that determine the size of personal injury jury awards. The Iowa research team performed jury simulations which led them to conclude that: Contrary to popular belief, pain and suffering awards were far from random. Instead, they were strongly affected by the severity and duration of the harm suffered by the plaintiff .... Information about the cause of the injury and the defendant's responsibility for it, as well as the participants' assessments of the parties' fault, had essentially no effect on awards. Roselle L. Wissler et al., Explaining "Pain and Suffering" Awards: The Role of Injury Characteristicsand Fault Attributions, 21 LAW & HUM. BEHAV. 181, 202-03 (1997). Rustad and Koenig also found a systematic relationship between the severity of injury and the level of punitive damages in their national surveys of punitive damages in product liability and medical malpractice. See generally Rustad, supra note 2. WISCONSIN LAW REVIEW
TABLE TEN ROLE OF PUNITIVE DAMAGES IN 1988 TEXAS TORT CLOSED CLAIMS BY INJURY TYPE93
TYPE OF INJURY ECONOMIC NON- PUNITIVE PREJUDG- DAMAGES ECONOMIC DAMAGES MENT INTEREST
BACK INJURY 60.0% 32.2% 4.6% 3.3%
MULTIPLE 58.6% 33.1% 5.5% 2.8% INJURIES
OTHER 47.1% 42.1% 7.1% 3.6%
DEATH 55.8% 31.4% 9.4% 3.4%
SCARRING 47.3% 38.2% 12.9% 1.6%
BRAIN DAMAGE 58.1% 32.7% 4.1% 5.1%
NERVOUS 60.4% 31.9% 5.1% 2.5% CONDITION
BURNS (HEAT) 46.8% 40.3% 10.9% 2.0%
AMPUTATION 39.7% 45.3% 11.5% 3.5%
EYE INJURY 54.2% 38.8% 5.3% 1.7%
Table Ten shows that punitive damages were perceived by adjusters to be less significant than other components of a settlement for all types of injuries. Actual damages and non-economic damages eclipse punitive damages in the settlement process of personal injury claims. The claims adjustors attributed at least 30% of all personal injury settlement dollars to the subjective assessment of compensation for pain and suffering. The percentage of the settlement amount attributed to punitive damages varies sharply between types of injury, ranging from less than 5% in back injury cases to 13% in scarring cases. Scarring, amputation, and burn victims received the largest percentage of their settlement in punitive damages, suggesting that insurance companies consider punitive damages most important when the injuries are dramatic and highly visible to the jury. As with punitive damages, there was substantial variation in the amount of non-economic damages depending upon injury type. Death cases have the lowest percentage of payout for "pain and suffering" and amputation the highest.
93. See TEXAS STATE BOARD OF INSURANCE, supra note 80, at 36 fig.25. The Texas Department of Insurance classified closed claim data as consisting of four components: (1) economic losses; (2) non-economic losses; (3) exemplary (punitive) damages; and (4) prejudgment interest. 1998:169 Shadow Effect of Punitive Damages
As Table Eleven illustrates, explosions and fires, the kind of events likely to produce highly visible injuries, were the types of accidents which receive the largest percentage of settlement in punitive damages (14.1% and 13.7%, respectively).' Less visible harms such as brain damage, back injuries and nervous conditions resulted in the smallest percentage of payout in punitive damages. This suggests again that claims adjustors believe juries are most likely to award punitive damages if the plaintiff has suffered a distinct and obvious physical injury.
TABLE ELEVEN95 CATEGORIES OF DAMAGES IN 1988 TEXAS TORT CLOSED CLAIMS BY INJURY-RELATED ACTIVITY
HOW INJURY ECONOMIC OR NON- PUNITIVE PREJUDG- OCCURRED ACTUAL ECONOMIC DAMAGES MENT DAMAGES INTEREST
MOTOR 59.1% 31.3% 7.3% 2.3% VEHICLE
FALLS 57.4% 32.1% 7.1% 3.5%
MEDICAL 56.1% 35.5% 3.8% 4.5% CARE
OTHER 54.3% 32.3% 10.4% 3.0%
DEFECTIVE 63.0% 27.2% 6.3% 3.5% PRODUCT
FIRE 35.4% 50.0% 13.7% 0.9%
OFF ROAD 74.8% 19.1% 5.2% 0.9% VEHICLE
EXPLOSION 37.9% 43.0% 14.1% 5.0%
OIL & GAS 42.7% 40.7% 11.3% 5.4%
DROWNING 52.3% 38.9% 6.0% 2.8%
6. THE FINANCIAL IMPACT OF TEXAS TORT REFORM
The Texas data suggest that tort reform of punitive damages will not affect most settlements. TDI calculated the savings to Texas insurance companies that would have resulted if the 1995 punitive damages cap and
94. See id. 95. See id. fig.26. WISCONSIN LAW REVIEW
other reforms had been in effect earlier.' As Table Twelve illustrates, savings were substantial on a dollar basis but relatively small as a percentage of payouts. TDI estimated that the savings to the insurance industry from the reduced cap on punitive damages resulting from the change from a gross negligence standard to a standard of malice and from the new clear and convincing evidence requirement would total over $400 million. 7
TABLE TWELVE 98 TEXAS INSURANCE COMMISSIONER'S ESTIMATED PREMIUM REDUCTION BY LINE OF INSURANCE IN THOUSANDS OF DOLLARS
PREMIUM PREMIUM % OF RANGE OF AFFECTED REDUCTION REDUCTION SAVINGS LINE OF (in $ thousands) (in $ thousands) FROM INSURANCE PUNITIVE DAMAGES CAP
PRIVATE $2,695,900 $160,500 6.0% 0.2 TO 0.4% PASSENGER AUTO
HOMEOWNERS $2,148,100 $0 0% 0.1 - 0.3%
FARM OR $53,000 $800 1.5% 0.6- 1.0% RANCH OWNER
PERSONAL $35,400 $2200 6.2% 0.2 -.0.4% UMBRELLA
GENERAL & $708,200 $73,700 10.4% 0.9- 1.5% FARM
COMMERCIAL $408,800 $39,400 9.6% 0.9- 1.5% MULTI-PERIL
96. See Texas Department of Insurance, Special Data Call for Closed Claim Information (June 16, 1995) (gathering data "to assist the Commissioner of Insurance in determining the potential impact of recent Texas tort reform legislation on insurance claims"). 97. See Thomas Koenig & Michael Rustad, The Quiet Revolution Revisited: An Empirical Study of the Impact of State Tort Reform of Punitive Damages in Products Liability, 16 JUST. SYS. J. 21 (1993) (providing a description of tort reforms such as .clear and convincing evidence" and a survey of reforms in the fifty states). 98. The last column includes the ranges of estimated savings from punitive damages reform compiled by the Texas Insurance Board. The staff's best estimate would approximate the mid-point of these ranges. See Texas Board of Insurance, Commissioner's Order Estimated Premium Reduction by Line of Insurance, exhibit J (1996). 1998:169 Shadow Effect of Punitive Damages
PREMIUM PREMIUM % OF RANGE OF AFFECTED REDUCTION REDUCTION SAVINGS LINE OF (in $ thousands) (in $ thousands) FROM INSURANCE PUNITIVE DAMAGES CAP
COMMERCIAL $623,500 $61,100 9.8% 1.1 - 2.1% AUTO
DOCTOR $224,600 $22,400 10.0% 0% MALPRACTICE
HOSPITAL $41,900 $5500 13.0% 1.4 - 2.2% MALPRACTICE
PRODUCTS $85,000 $8700 10.3% 0.5- 1.1%
EMPLOYER'S $1,977,800 $0 0% 19.5- 19.5% WORKER COMP.
COMMERCIAL $200,700 $30,100 15.0% VARIES BY UMBRELLA TYPE"
OTHER $59,000 $5900 10.0% 0.3 - 0.7% PROFESSIONAL
POLLUTION $59,000 $2900 5.0% 0.2- 0.4%
GARAGE $65,600 $3200 4.9% 0-0.1%
FIRE, LEGAL & $35,400 $3700 10.4% 0- 0.5% CONTRACTUAL
OWNER & $82,600 $8600 10.4% 1.4 - 2.2% CONTRACTORS RAILROAD AND LIQUOR
TOTAL $9,504,700 $428,700 9.5%
The largest savings were in general and farm insurance, commercial auto policies and commercial multi-peril coverage. As a percentage of the premium dollar, the greatest reductions are in commercial umbrella and hospital malpractice insurance. The punitive damages cap is estimated by TDI to have the strongest impact on employers liability of worker's compensation, owners and contractors protective railroad, and liquor liability and hospital malpractice.
99. Commercial excess and commercial umbrella insurance can apply to a wide range of verdicts that exceed the payment limits of other policies. Therefore, the savings from punitive damages reform has been broken down by line of insurance. Savings from punitive damages reform in General Liability is estimated at 15.5 %;Commercial Liability 9.2%; Selected General Liability and Commercial Multi-Peril Liability 13.4%; Products Liability 8.4%; Medical Professional 10.1%; and Other Professional 4.5%. 200 WISCONSIN LAW REVIEW
TABLE THIRTEEN TDI ESTIMATED TEXAS INSURANCE COMPANY'S ANNUAL SAVINGS FROM 1995 PUNITIVE DAMAGES CAP
TYPE OF BODILY 1991 1992 1993 TOTAL INJURY INSURANCE
GEN. LIABILITY 1.9% 2.5% 2.0% 2.1%
COMMERCIAL 2.2% 1.6% 1.2% 1.6% AUTO
COMMERCIAL 1.7% 0.8% 1.4% 1.3% MULTI-PERIL
OTHER PROF. 3.9% 3.2% 2.3% 2.8% LIABILITY
PRODUCTS 2.3% 0.5% 1.0% 1.2% LIABILITY
ENVIRONMENTAL 0.9% 0.4% 0.6% 0.6% LIABILITY
Texas's stringent new punitive damages limitations are estimated by TDI to save insurers less than two percent of their premium dollars. The relative insignificance of punitive damages in product liability is shown by the predicted 1.2% savings in payouts. The Texas data suggest that punitive damages were far less significant in the litigation system than the tort reformers acknowledge." °° These figures provide no support for the Texas Public Policy Foundation researchers' assertions that punitive damages have been "'carpet-bombing' to hurt the whole state's prosperity."101
100. Interviews with Texas plaintiffs' attorneys also suggest that the effect of tort reform is relatively small compared to the impact of the hardening of public attitudes toward the injured. The ABF researchers report that the plaintiffs' attorneys they surveyed generally indicated that "although they are concerned about the loss of the deterrent strength that the legislative cap on punitive damages might cause, the effect of this formal change has been relatively minor." Martin & Daniels, supra note 78, at 28. 101. LAUNIE ET AL., supra note 20, at 1. 1998:169 Shadow Effect of Punitive Damages
G. ISO 27-State Study
A 1988 study by the insurance industry of the impact of the shadow effect on closed claims reached conclusions similar to the TDI findings. ISO Data examined "commercial liability claims other than medical malpractice with a bodily injury indemnity . ..of $25,000 or more" written in 1983 in 27 states."u° The plaintiffs "sought punitive damages in 10% (316 claims) of the closed claims.""' 3 In these 316 cases "the 'shadow effect' of punitive damages was reported to b 8%. Across all claims, the effect was measured at slightly more than 1%" in the opinion of claims adjusters. 14 In the 41 cases in which the shadow effect played a significant role in settlement, "the total loss would have been an average of 55 % lower" if punitive damages had not been claimed."~ In a parallel study of claims of all sizes closed during the first week of August 1987, the ISO researchers concluded that in cases in which punitive damages claims were made, the payout was increased by 11%. " Again, total payouts were inflated by only about 1%." Both ISO studies suggest that merely claiming punitive damages does not guarantee that the settlement will be enlarged. Eighty-seven percent of the punitive damages claims did not impact the settlement. ISO concludes that, "respondents indicated that tort reforms regarding punitive damages would affect a small percentage of claims. " " Still, when the fact patterns cause claims adjusters to fear a punitive damages verdict, they may agree to a more generous settlement.
102. ISO DATA, INC., CLAIM FILE DATA ANALYSIS: TECHNICAL ANALYSIS OF STUDY RESULTS 2 (Dec. 1988). 103. Id. at 86. 104. Id. 105. Id. 106. ISO concludes: Of the 109 claims with payment where the claimant sought punitive damages, 15 showed some "shadow effect" on the total loss. Survey respondents reported that for these 15 claims, the total loss would have been an average of 63 % lower if the claimants had not sought punitive damages. Among all 109 claims with payment where claimants sought punitive damages, the "shadow effect" of punitive damages was reported to be 11 %. Across all claims, the effect was measured at less than 1%. Id. at 87. 107. See id. 108. Id. at 118. WISCONSIN LAW REVIEW
III. STUDIES OF POST-TRIAL DISPOSITIONS OF PUNITIVE AWARDS
A second aspect of the shadow effect of punitive damages lies in post-trial negotiations over the amount of the punitive damages trial award that will be paid. Research on post-trial settlements of punitive damages awards show that winning a punitive damages verdict does not mean that it will be collected. Post-verdict adjustments reduce or eliminate a large proportion of punitive damages verdicts. A number of studies have shown that the largest punitive damages awards are the least likely to be paid in full.
A. RAND's Study of Post-Verdict Settlements
The RAND Institute for Civil Justice (RAND) conducted the first post-verdict assessment of the fate of punitive damages awards. RAND surveyed all lawyers of record in 129 trials in which punitive damages were awarded between 1979 and 1983 in Cook County, Illinois and San Francisco County, California."° These verdicts were assessed in diverse areas of the law including personal injury, business contorts, and intentional torts. The rate of punitive damages recovery was relatively small. 110 RAND demonstrated that punitive damages are difficult to collect, noting that: "Jury verdicts are not the last word in cases involving punitive damages. Remittitur, post-trial motions, appeals, and even settlements may reduce the award amount." 1I Roughly one out of two punitive damages awards were reversed or reduced in the post-verdict period."' RAND found that the largest awards had the highest post- verdict mortality rate. RAND's post-verdict history revealed that "[n]early every large award received some reduction-nine of 10 cases with a punitive award greater than $50,000. " Post-verdict reductions took place in the high stakes cases that "involved nearly 90 percent of the total money. "114
109. Complete data was obtained from 53% of the lawyers who litigated these cases. See MARK PETERSON ET AL., INSTITUTE FOR CIVIL JUSTICE (RAND), PUNITIVE DAMAGES: EMPIRICAL FINDINGS 26 (1987). 110. Less than 3 % of the jury verdicts in Cook County, Illinois included punitive damages, compared to 8.3 % of the verdicts handed down in San Francisco County. See id. at 9-10. 111. Id.at 26. 112. RAND found 35 of 68 punitive damages awards were collected in full. See id. at 27. 113. Id.at 30. 114. Id.at 28. 1998:169 Shadow Effect of Punitive Damages
TABLE FOURTEEN RAND'S STUDY OF POST-TRIAL ACTIONS ON 115 PUNITIVE AWARDS
EFFECT ON NUMBER OF AVERAGE AVERAGE RATIO OF AWARD TRIALS JURY AWARD AMOUNT PAID WHAT IS PAID ($ THOUSAND) ($ THOUSAND) VERSUS WHAT WAS AWARDED
REDUCED 32 $958 $428 0.45
UNCHANGED 35 $102 $102 1,00
INCREASED 1 $7 $16 2.29
TOTAL 68 $503 $254 0.50
Tables Fourteen and Fifteen show that large punitive damages awards were the most likely to be scaled back by post-verdict adjustments. As RAND reports:
Less than a quarter of the defendants with a punitive award of less than $10,000 had that award reduced (six of 26); nearly half of those with punitive awards between $10,000 and $50,000 achieved a reduction (11 of 24); and over 80 percent of those with even larger punitive awards ultimately paid less (15 of 18).116
The largest punitive damages awards, in either amount or ratio, were the most vulnerable to post-trial reduction. When the ratio of punitive to compensatory damages was high, the defendants were most successful in evading the full payment. Even though punitive awards are vulnerable to post-verdict reduction, in "16 of the 25 cases in which punitive damages exceeded twice compensatory damages, the original full trial award was 17 paid." 1
115. See ld. at 28 tbl.2.13. 116. Id.at 28. 117. Id.at 30. WISCONSIN LAW REVIEW
TABLE FIFTEEN RAND'S STUDY OF PUNITIVE AWARD OUTCOMES BY VERDICT SIZE"'
SIZE OF PUN. NUMBER OF AVERAGE JURY AVERAGE AMOUNT RATIO AND COMP. TRIALS AWARD PAID PAID/A AWARD ($ THOUSAND) ($ THOUSAND) WARD
LESS THAN 42 $20 $18 .90 $50,000
$50,000- 16 $212 $144 .68 $500,000
GREATER 10 $3000 $1424 .47 THAN $500,000
PUNITIVES 26 $17 $16 .94 LESS THAN $10,000
PUNITIVES 24 $99 $91 .92 $l0,000-$50,000
PUNITIVES 18 $1745 $817 .47 GREATER THAN $500,000
In punitive awards of all sizes and ratios, the defendant paid roughly half of what the jury originally awarded. The rate of post-verdict reduction varied sharply by jurisdiction. 19 Plaintiffs in San Francisco County received 87% of the original verdict while Cook County defendants paid only 40%."
B. Landes and Posner Study
William Landes and Richard Posner empirically examined all federal appellate product liability cases reported between 1982 and 1984.121 Punitive damages were not even at issue in the vast majority of federal product liability appellate decisions. There were only 10 punitive damages awards out of the 172 federal product cases in the sample. Appellate judges are far more likely to substitute their assessment for a jury verdict when punitive damages are present. Six out of the ten
118. See id. at 29 tbl.2.14. 119. See id. 120. See id. 121. See WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT LAW (1987). 1998:169 Shadow Effect of Punitive Damages punitive damages awards were reversed by appellate review. Appellate panels reduced only one in three products liability verdicts when punitive damages were not involved.'I Landes and Posner expanded their sample because they originally had too few cases to analyze. This additional research uncovered only seven more punitive damages cases out of 359 jury verdicts, about 2% of the product liability actions. These awards were not only rare, but highly vulnerable to post-verdict adjustment. Only four of the punitive damages awards in product liability cases were ultimately upheld by federal appellate courts.
C. GAO Study
A five-state study of punitive damages in product liability conducted by the U.S. Government Accounting Office (GAO) also examined post- verdict settlements. The GAO located a total of 23 punitive damages awards out of 305 product liability verdicts in Arizona, Massachusetts, 1 Missouri, North Dakota and South Carolina between 1983 and 1985.' 3 Twelve of the 23 punitive damages awards were resolved through appeal. Not one of the punitive damages verdicts survived intact. As with the other studies, judges were far more likely to upset verdicts which included punitive damages than those with purely compensatory awards." In cases where verdicts included both compensatory and punitive damages, compensatory damages were almost never vacated."z
D. Post-Verdict Adjustments of ProductLiability Awards
Professors Rustad and Koenig interviewed attorneys to study post- verdict adjustments of a nationwide sample of punitive damages awards in products liability litigation. As Table Sixteen illustrates, Rustad and Koenig found that punitive damages trial awards and the amount actually paid in products liability cases differed sharply. For seventy-eight awards, or 23% of the sample, the award was upheld on appeal and paid in full. For ninety of these verdicts, the punitive damages award was reversed in whole or partially reduced after post-verdict judicial review.
122. See id. at 304. 123. See U.S. GENERAL ACCOUNTING OFFICE, GAO/HRD-89-99, PRODUCT LIABILITY: VERDICTS AND CASE RESOLUTION IN FIVE STATES 2 (1989). 124. See id. at 36. This pattern was also found by Professor W. Kip Viscusi who examined 108 punitive damages awards between 1970 and 1989. Viscusi found that plaintiffs received on average only about 29% of their original award. See W. Kip VISCUSi, REFORMING PRODUCTS LIABILITY 94 (1991). 125. See U.S. GENERAL ACCOUNTING OFFICE, supra note 123, at 37. 206 WISCONSIN LAW REVIEW
TABLE SIXTEEN POST-VERDICT HISTORY OF PUNITIVE AWARDS IN PRODUCT LIABILITY"2
FINAL CASE DISPOSITION NUMBER OF PERCENTAGE OF TOTAL CASES SAMPLE
PUNITIVE DAMAGES AWARD 78 23% UPHELD IN WHOLE BY STATE OR FEDERAL APPELLATE COURT
PUNITIVE DAMAGES AWARD EITHER 90 25% REVERSED OR REDUCED BY STATE OR FEDERAL APPELLATE COURT
CASE SETTLED AFTER TRIAL OR 128 36% WHILE APPEAL WAS PENDING
CASE STAYED IN BANKRUPTCY OR 37 10% OTHERWISE UNCOLLECTIBLE
APPEAL PENDING AS OF 22 6% JANUARY 1991
TOTALS 355 99%127
Three out of four punitive damages verdicts reviewed by appellate courts in the 1960s were reversed or adjusted downwards. Since the 1960s, roughly one in two punitive damages awards in products liability have been reversed or reduced. In the 1970s, appellate courts affirmed 47% of the decisions reviewed (14 of 30 verdicts). In the 1980s, appellate courts affirmed 46% of trial verdicts and adjusted the others downward. The largest punitive damages awards were the least likely to survive the post-verdict period intact. Only 11 % of the amount of punitive damages verdicts was ever collected when $10 million or more in punitive damages was awarded. The media rarely report that punitive damages awards have been reduced or reversed in the post-verdict period. We read of $100 million punitive damages awards. We never read of these enormous awards being collected, at least not in products liability. This picture of post-verdict adjustments is similar to that found by the prior studies.12 Slightly less than half of the cases reviewed by
126. See Rustad, supra note 25, at 57. 127. The totals equal 99% because of a rounding error. 128. Like RAND, we interviewed attorneys who tried punitive damages in product liability. We had usable post-verdict data from 276 of 355 verdicts. We found that the full punitive damages award was paid in four of ten cases. A reduced portion of the punitive damages were paid in 14% of the cases. In 37% of the verdicts, plaintiffs did not receive a single dollar of punitive damages. The median punitive damages award 1998:169 Shadow Effect of Punitive Damages appellate courts were affirmed in their entirety (48%), which is virtually identical to RAND's conclusion. Punitive damages were scrutinized more closely than compensatory damages. Although compensatory damages were affirmed in 73 % of these cases, punitive damages were affirmed in only 55%.129
E. Post-Verdict Adjustments of Medical Malpractice
Punitive damages in medical malpractice were also likely to be reversed or remitted, however at a slightly lower rate than in products liability according to a second Rustad and Koenig nationwide study.130 The researchers found that "[o]nly 58 % of the verdicts reviewed post-trial were affirmed. Twenty-six of the cases were reversed on appeal. Reversals were rarely based on 'excessiveness,' though much of the " policy debate focuses on this issue. 1 The vast majority of punitive damages dollars awarded were uncollectible due to post-trial reversals, 32 settlements, and insolvency claimed by defendants.
F. The Washington Legal Foundation Study
The Washington Legal Foundation (WLF) conducted an empirical study of the final disposition of all 284 punitive damages verdicts appealed to state and federal courts in 1993.133 One-fourth of the punitive awards in the study were federal cases. WLF found that slightly more than half of jury punitive awards appealed to state or federal courts were reversed, reduced, or modified. " In summary, all studies agree that appellate courts strictly scrutinize punitive damages awards. The business community's fears of out of control punitive damages are not supported by empirical data.
received was only $135,000 or 23 % of the original punitive damages awarded at trial. See Rustad, supra note 25. 129. See id. at 30-32. 130. See Rustad & Koenig, supra note 25, at 1012. 131. Id. 132. See id. at 1010. 133. The Washington Legal Foundation submitted its research findings to the Court. See Brief of the Washington Legal Foundation as Amicus Curiae in Support of Petitioner, Honda Motor Co. v. Oberg, 510 U.S. 1068 (1994) (No. 93-644). 134. Fifty-four percent of the punitive damages awards were reversed or reduced. See id. at 2a of Appendix A ("Survey Overview of Post-Verdict Review of Jury Punitive Damages Awards for Cases Decided in 1993"). WISCONSIN LAW REVIEW
IV. CONCLUSION
This Article has presented the existing research on the shadow effect of punitive damages both pre- and post-verdict. Although the studies are diverse, they present a coherent picture. In the hot spot jurisdictions, a large and growing number of punitive damages claims suggest that plaintiffs' attorneys are requesting the remedy in some garden-variety litigation. However, only a minuscule percentage of these claims survive to become punitive damages awards. Even when a punitive damages award is made, it is difficult to collect. Punitive damages verdicts, especially the largest awards, are frequently reduced or eliminated post- trial. Plaintiffs may settle for less than their award because of their justified fear of appellate review. The Texas Board of Insurance data suggest that the growing number of punitive damages filings has little impact on routine cases. Punitive damages may be claimed, but adjusters dismiss their significance. The proof is in the payouts. In only 5.5%-slightly more than one twentieth-of the cases which settled for $10,000 to $24,999 did the threat of punitive damages play any role in enlarging the settlement. This finding suggests that tort reforms capping punitive damages are more valuable to the business community than restrictions on punitive damages filings. However, without more information on the settlement process, it is hard to predict the impact of punitive damages tort reforms. Before and after studies of settlements in jurisdictions which have enacted various reforms would be invaluable. Mass torts provide the clearest example of settlement leverage produced by punitive damages. Firms or whole industries facing the threat of numerous punitive damages awards based on the same behavior are under tremendous pressure to settle. The rarity and predictability of punitive damages verdicts and the difficulty of collecting them post-trial suggest that the fears of the business community are exaggerated. Ironically, the leverage produced by a potential punitive damages award is increased by the belief that the remedy is out of control. I tell my Ph.D. students that the best research raises more questions than it answers. This Article clearly succeeds by such a standard. Further research must focus on what we still do not know about the shadow effect of punitive damages on settlement. The interesting questions posed by Priest, Honda Motor Company, the Pacific Research Institute, the Texas Public Policy Foundation and Washington Legal Foundation have not been adequately addressed by empirical examination. George Priest's Alabama data, for example, needs to be supplemented by a longitudinal study to examine how claims fare in the settlement stage. Punitive damages cold spots should be contrasted to states such as Florida, California, Alabama and Texas. Little is known about such basic 1998:169 Shadow Effect of Punitive Damages 209 issues, much less about more complex issues such as the effect of joint and several punitive liability on settlement or the impact of an insolvent co-defendant on negotiations. Almost no systematic knowledge exists about under what conditions punitive damages encourage early settlement and when the difficulty of valuing a punitive damages case delays or even prevents settlement. With at least 97% of cases settling out of court, negotiating parties seem to be able to reach agreement in the vast majority of cases, but very little is known about the process. Qualitative studies are needed to examine such issues as under what conditions the possibility of punitive damages leads a plaintiff's attorney to accept a case that would otherwise have been refused. Insurers play a key, but little understood, role in settlement negotiations, a topic which also cries out for systematic examination. Does the type of insurance policy and coverage impact the role of punitive damages? More study is needed on the role of claims adjustors and whether the negotiation process differs in jurisdictions in which punitive damages are not insurable. The apprehensions of the business community may create more leverage for plaintiffs without the presence of repeat players such as insurance adjustors at the bargaining table. Settlements vary by substantive field of law and further studies should focus on the area of the greatest activity, business torts. Do punitive damages play a different role in a commercial loss case versus a personal injury case? Are deep-pocket or unpopular defendants victimized by the punitive damages remedy? Are foreign product manufacturers at greater risk than domestic firms? The areas requiring systematic investigation seem endless. Our principal need is for a study of the punitive damages through the life cycle of the claim. Like Erik Erikson's "eight ages of man," 3 ' there are different stages in the life of a punitive damages claim. Studies that generalize from the number of punitive damages claims or from the number of verdicts are valuable but present a limited picture. We need comprehensive, cradle-to-grave empirical studies of how settlement operates in a variety of litigation settings.
135. See ERIK H. ERIKSON, IDENTITY AND THE LIFE CYCLE (1959).