What Are Punitive Damages?

On Friday a Florida jury ordered five tobacco companies to pay $145 billion in “punitive damages.” This is by far the biggest punitive damage award ever. (The previous record was $5 billion for the Exxon Valdez oil spill.)

What are punitive damages? Punitive damages are money the defendant in a lawsuit is sometimes ordered to pay when the behavior at issue is held to be especially egregious. Each state makes its own rules, but typically the defendant is supposed to have acted knowingly and with malicious intent, not just negligently. Punitive damages are assessed on top of “actual damages,” which are supposed to include compensation for all of the victim’s actual losses, including hard-to-measure ones such as pain and suffering.

Who gets the money? The victim gets the money, minus the lawyers’ share (generally one-third, though usually less in huge class actions like the tobacco case).

If actual damages are supposed to make up for all the harm done by the defendant, why should it have to pay more than that? The theory is that if the price for gross misbehavior is just enough to make up the victims’ losses, the defendant may not be sufficiently punished or discouraged from misbehaving again. Punitive damages are supposed to guarantee that the wrongdoer gets the message.

Who decides whether there will be punitive damages, and how much? Sometimes the judge, sometimes the jury. Jury awards are usually reviewed by the judge and often reduced (as most people expect them to be in the Florida smoking case). The standard of how much is vague: enough to deter future misbehavior but not enough to put the wrongdoer out of business.

If punitive damages are not about compensating the victim, who supposedly has been fully compensated by actual damages, why does the victim get the money? The theory is that deterring bad behavior through lawsuits is socially useful activity and that victims and their lawyers need an incentive and reward for bringing such suits. Critics of the tort litigation system believe that punitive damages are one of its central flaws and that encouraging lawsuits is one of the main things wrong with them.

Can other states recover punitive damages too? Yes, in theory, although the tobacco companies claim that paying $145 billion even once will wipe them out. One criticism of punitive damages is that they can be assessed again and again in lawsuits by different victims of the same misbehavior. Meanwhile, though, the judge or jury in each case is supposed to measure punitive damages as if this case were the only one.

Next question?