Behind-the-scenes shell game marked punitive-damages plan

When Gov. Arnold Schwarzenegger wrote his first state budget, he floated an
unusual idea to collect nearly a half-billion dollars: Let the state take 75
cents of every dollar that juries award in punitive damages. The Legislature
eagerly bought into the idea for the cash-strapped state, and the budget was
written on the assumption that the money would be there.

It wasn’t. In fact, it never has been.

Two years later, that $450 million still hasn’t materialized. Amazingly, not
even a penny has flowed into the state Public Benefit Trust Fund, which was
expressly set up to handle the punitive-damage money. This gap between the
administration’s promise and pocketbook reality is remarkable, even in the
smoke-and-mirrors world of state budgeting that, in the end, is based on
sophisticated expectations of revenue and expenses.

Capitol sources, including one familiar with the negotiations, say the idea
was hatched toward the end of the 2004-05 budget talks to specifically close
a half-billion-dollar hole. They said the key participants knew that no
punitive-damage dollars had actually changed hands in recent years, but they
offered the plan anyway because they believed it would go over well with the

“A U.S. Justice Department study suggests that it would be unlikely for the
state to receive even a quarter of the amount projected by the
Administration,” noted an Assembly budget-subcommittee analysis. An
assessment by the nonpartisan Legislative Analyst’s Office estimated the
state’s take at $60 million–less than a one-seventh the figure predicted by
the administration. But even that estimate was wildly optimistic. The
reason, in part, stemmed from a U.S. Supreme Court ruling limiting the size
of punitive-damage awards.

But the larger reason is that punitive-damage verdicts rarely, if ever,
translate into punitive-damage dollars. That’s because the opposing parties
reach settlement agreements, and those agreements cannot be tapped by the
state. Also, punitive-damage awards often are dramatically reduced on
appeal. Publicly traded companies, sensitive to stock values, typically
settle, rather than pay punitive damages, in order to avoid disclosing the
details of the award to the Securities and Exchange Commission.

Despite that track record, last week the Democrat-controlled Legislature
approved legislation that would extend Schwarzenegger’s program for five
more years. The bill, SB 832, began life as a housing-environmental proposal
by Sen. Alan Lowenthal, D-Long Beach. But it was hijacked in the final days
of the session, its contents completely refigured, and it emerged as the
punitive-damages bill with a new author–Senate President Pro Tem Don Perata,
D-Oakland. The bill, also known as the “split recovery” bill, was sent to
the governor’s desk just hours before the session ended on a party-line,
24-14 vote. It sits on his desk awaiting action.

“I think the feeling is, why not? Let it go another five more years to see
if money comes in,” said one Capitol staffer familiar with the issue.

The bill affects any punitive-damage awards approved after August 16, 2004,
and before June 30, 2011. Among its provisions is a requirement that juries
not be told about the 75-25 split. The bill was sponsored by state Attorney
General Bill Lockyer, a Democrat and candidate this year for state
treasurer. At least eight other states have similar statutes.

Lockyer and other Democratic backers of the bill see it as a benefit for the
public. “Since the plaintiff has already been compensated for his or her
actual damages, the punitive damages should benefit the common good rather
than serve as a windfall to the plaintiff. However, the intent language of
[the original trailer bill] makes it clear that the bill was at that time
considered a unique action taken in response to budgetary needs,” noted an
Assembly analysis just two days before the end of the session.

The group that represents California’s trial lawyers, the Consumer Attorneys
of California, was officially neutral on the bill, although some individual
trial attorneys were supportive. Those included Sen. Joe Dunn, D-Garden
Grove, a prominent litigator, who voted in favor of Perata’s bill. Some
lawyers are skeptical, believing that split recovery could discourage juries
from approving large awards, and thus reduce the incentive for top-flight
lawyers to get involved in the critical cases.

Others, however, such as the California Chamber of Commerce, are flatly
opposed. They have a different perspective: They contend that jurors could
easily learn of the split-recovery statute. That, in turn, could boost the
level of punitive damages–either to give more to the plaintiff, or to give
more to the state, which has well-known budget problems.

“There is a concern that the bill would hurt efforts at punitive-damage
reform by making the state dependent on them as a revenue source,” said
Chamber spokesman Vince Sollitto. It would “interfere with the integrity of
court proceedings by encouraging juries to award punitive damages as a means
of financing government.”

Insurers also are opposed, although they note that under California law
punitive damages are uninsurable, because they believe that punitive-damage
awards already have been wildly inflated.

In rare agreement with the Chamber and the insurers, the head of the Santa
Monica-based Foundation for Taxpayer and Consumer Rights (FTCR) also opposed
Schwarzenegger’s punitive-damages plan–but for different reasons. The payer
of punitive damages can write off a hefty chunk on their federal income
taxes and the awards already are limited by a 2003 U.S. Supreme Court
decision, State Farm v. Campbell, FTCR noted.

Generally, a plaintiff who proves his or her case may receive two kinds of
damages. The first, compensatory damages, is intended to cover the
plaintiff’s documented, out-of-pocket losses. The second, punitive damages,
can be many times the compensatory damages and are intended to punish the
defendant for egregious or deliberately malicious conduct. Punitive damages
also are intended to deter others from doing the same thing.

Noting that the issue has drawn fire from some in the trial bar as well as
deep-pocket defendants, one legal expert said the proposal should be given
serious consideration.

“Gov. Schwarzenegger should, at a minimum, be commended for creating the
opportunity to consider an intriguing tort-reform measure that has, to date,
too often been ignored. Split-recovery schemes aren’t perfect, but neither
is our current punitive-damages system,” wrote Catherine Sharkey, a Columbia
University law professor.

But others have noted that the courts may not be disposed to agree, such as
in Colorado, where a split-recovery law was struck down as an invasion of
property rights. Also, if the public-benefit fund doesn’t get any money
anyway, the whole legal dispute may be a tempest in a teapot.

In the end, there was a clear partisan divide over the issue, with Democrats
favoring it and Republicans opposing.

“We knew it was probably not going to generate the kind of money that they
were expecting. Punitive-damage awards may never get paid, and on appeal
they almost always are cut down. We are very leery of punitive damages,”
said Senate GOP leader Dick Ackerman.

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