Wednesday, February 21, 2007

New Supreme Court Case Limits Punitive Damages

WASHINGTON - The Supreme Court threw out a $79.5 million award that a jury had ordered a cigarette maker to pay to a smoker's widow, a ruling that could bode well for other businesses seeking stricter limits on big-dollar verdicts.

The 5-4 decision Tuesday was a victory for Altria Group Inc.'s Philip Morris USA, which contested an Oregon Supreme Court decision upholding the jury's verdict.

Yet the decision did not address a key argument made by Philip Morris and its supporters across a wide range of businesses - that the size of the award was unconstitutionally large. They had hoped the court would limit the amount that can be awarded in punitive damage cases.

Instead, Justice Stephen Breyer wrote in his majority opinion that the award to Mayola Williams could not stand because a jury may punish a defendant only for the harm done to the person who is suing, not to others whose cases were not before it.

"To permit punishment for injuring a nonparty victim would add a near standardless dimension to the punitive damages question," Breyer said.

What concerns me about this principle is that in the financial torts area, it is possible for a business to "overcharge" for it's services or product and then make out like bandits after paying the damages that are limited to the actual plaintiffs. For example: credit card company charges customers an $85 annual fee when they only should be charging $30.

Most people never notice the charge and pay it -- not knowing that they have been overcharged.

Others notice and call to complain, but the $85 charge puts them over their credit limit and they are charged an overlimit fee of $49. When they don't pay, they are charged a $49 late fee. When they cancel the card, the fees run their balance up to thousands of dollars. Credit card company sues customer. By the time the case goes to an overcrowded small claims court, the judge is not even the slightest bit interested in the defendant customer's complaint of how they were overcharged. Credit card company gets a judgment for the entire amount and collects.

Of those that complain, some will make the minimum payment, but the $85 charge doesn't get corrected for several months "due to computer glitches." In the meantime, the credit card company makes money in interest "on the float." That is, by the time the error gets corrected, they have been able to collect 18-30% APR interest (with an APY -- annual percentage yield -- even greater than that) on the $85 for several months which, in the aggregate, amounts to millions of dollars.

Of those that complain and pay their bill in full, the credit card company makes money "on the float" because they have had the use of the aggregate $85 from all those customers and invest it in short term securities and they have the use of $55 (the overcharged $85 - $30 legitimately owed) of the customer's money to invest in the market or short-term securities. The use of the money nets millions of dollars in interest gained from the use of that money.

Assume for the sake of argument that a lawsuit ensues. If damages are limited to actual plaintiffs, how can the credit card company be discouraged from repeating the practice?

If you think this example is just a fantasy, see this. The Supreme Court needs to recognize that if you put too many limits on punitive damages, you get abuses that are profitable from the other direction.

I think the Supreme Court may have forgotten the old principle in the law: no one should be allowed to benefit from his own tortious or criminal conduct. That is why punitive damages could be assessed at the level they were. Oftentimes, plaintiffs are able to show that the defendant has profited off of the suffering they have inflicted on others. Limiting punitive damages in this regard can lead to perverse results where tortfeasors (or even criminals) can learn to benefit from their wrongful acts.

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