Risk & Compliance

The Tortinator

Gov. Schwarzenegger targets punitive damages.
Tim ReasonJuly 7, 2004

Can California governor Arnold Schwarzenegger stem excessive jury awards against corporations? In May, his latest budget revision included an unexpected proposal to generate $450 million in state revenue by taking a 75 percent slice of punitive-damage awards from individual lawsuits.

Punitive damages have long been controversial, because the punishment meted out to the defendant is also an outsized windfall to the plaintiff, who in theory has already been “made whole” through compensatory damages. Currently, eight states have so-called split-recovery statutes mandating that some percentage of punitive damages goes to state treasuries or victims’ funds, says Catherine M. Sharkey, an associate professor at Columbia Law School. Schwarzenegger’s plan would create one of the strictest statutes in terms of the percentage seized. It would also allow punitive damages for corporate behavior to be levied only once, even if multiple lawsuits were filed.

Corporations hope both measures will limit suits. But don’t say “Hasta la vista, baby” to your corporate counsel anytime soon. There is no empirical evidence that split recovery actually works, and it’s significant that the California proposal first appeared in a budget.

“It’s difficult to see how [California] could discourage punitive-damages claims and raise revenue at the same time,” says Sharkey. Indeed, the California Legislative Analysts Office says Schwarzenegger is already shooting too high; a “more realistic estimate” of revenues from lawsuits would be $200 million, it says.

Moreover, says Sharkey, “if the state’s recovery is 75 percent, that leaves a lot of room for defendant and plaintiff to settle, both pre- and postverdict.” Even Victor Schwartz, general counsel at the American Tort Reform Association, sees the proposal as a mixed blessing. Since judges and juries will know the state’s involvement up front, he says, “some believe that will make awards go higher.”

Taking Their Cut
Eight states already have split-recovery laws.
State % taken Who takes first Where state funds go
Alaska 50 Lawyers Treasury
Georgia* 75 Lawyers Treasury
Illinois ** ** Unclear
Indiana 75 State Special Fund
Iowa 75 Lawyers Special Fund
Missouri 50 Lawyers Special Fund
Oregon 60 State Special Fund
Utah 50 Lawyers Treasury
*Product-liability cases only.
**Determined case-by-case at court’s discretion.
Source: Catherine M. Sharkey, Columbia Law School