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01/16/2005

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Wes

On the subject of "compensatory" versus "punitive" damages, I am under the impression that both are given to the plaintiff (and their lawyers) but it has never been clear to me why the plaintiff would be entitled to "punitive" damages. Of course, if the punitive damages are not given to the plaintiff then there is the question of who they should be given to. Giving them to the government could potentially create conflicts of interest.

Ron

The plaintiff is rarely "entitled" to punitive damages, except, for instance, where there is a statute so providing, such as in antitrust cases. One reason why the plaintiff (or a defendant who has brought a counterclaim) should receive the punitive damages is because in some cases (how many I don't know) absent the chance of recovering punitive damages a lawsuit won't be brought. Why? Because the compensatory damages are too small either to attract a lawyer to take the case or too small to overcome the natural disinclination to sue. A lawsuit, after all, is not a very happy venture for most people, even to those who are in the right.

Sampo Syreeni

Becker brought up class action suits and mentioned Posner's reasoning on widely dispersed costs and high punitive damages. As I understand it, these are part of the same general mechanism which allows tort law to deal with the high transaction costs inherent to litigating actions which result in thinly spread harm or risk. I'm not entirely sure that limitations on class action suits would be a good idea, because unlike punitive damages which only deter, they would seem to allow efficient torts (e.g. pollution after Coasian bargaining has proven too costly) even with risk-averse individuals.

Secondly, it would seem that class action suits preserve incentive compatibility better than punitive damages awarded to the plaintiff. If total damages paid equal just compensation times the inverse probability of getting caught for all the real harm in both cases, the only difference is that punitive damages concentrate the sum and so award litigiousness. This mostly happens because punitive damages too have to be awarded to someone, and in the adversarial system this someone is the individual plaintiff, even if compensation would be due to those who never sued as well.

As for Ron's comment above, I think the easiest, incentive compatible way of lowering the transaction costs of litigation would be to always require the losing side pay them in full, separately from compensatory damages. After that different kinds of private insurance ought to be able to take care of the rest of the problem.

Charles R. Williams

The federal government has a role in limiting liability because the federal taxpayer foots a large part of the medical bill. Also, consumers of drugs and medical devices pay costs of litigation that have no relation to local liability practices. This creates an incentive to loot corporations for the benefit of local consumers and trial lawyers with the costs born by all of us.

Implicit in your argument is the assumption that it is medical malpractice that is penalized in tort litigation rather than medical practice itself. The fact that premiums have little relation to past claims suggest that negative outcomes are being penalized rather than negative performance by doctors. I am afraid most of us outside the legal profession consider the notorious McDonald's case as the rule rather than the exception. We bear the costs of this legalized piracy every day in every aspect of our lives.

ngrover

Re: McDonald's Coffee Case

A largely over-maligned case. The headline sounds ludicrous of course but if you read the details, you see that there was indeed some liability on McDonald's part. The biggest portion of the settlement was punitive damages over business practices. You see, the plaintiffs got their hands on documents showing that McDonalds had run a cost-benefit calculation of the cost to brew coffee at a lower, safer, tempurature vs. PAYING OFF VICTIMS OF 3rd DEGREE BURNS. That's right, the coffee was brewed hotly enough to cause third degree burns.


This is obviously an unconscionable approach to customer safety. Furthermore, they brewed the coffee at this temperature without warning customers. A reasonable expectation of the coffee being at a typical hot-coffee temperature was not unwarranted. If you've ever spilled coffee in your lap, it's unpleasant but does not warrant a trip to the hospital. This woman had burns that required multiple skin grafts. It's not reasonable to expect your customers to know this about your coffee. The key to the case was twofold: 1. McDonalds failed to warn customers about the unusual danger, and 2. they willfully engaged in a dangerous practice in order to save money.

The jury awarded the plaintiff punitive damages equal to 1 day's worth of McDonald's coffee sales, or 5 mil.

And Mcdonald's now has clear warnings on its cups about the unusually hot temperatures and, if I'm not mistaken, they've lowered the temp. But the headline sure grabbed a lot of attention.

ngrover

ngrover

Re: requiring the losing party to pay in full

This would only end up eliminating anyone's ability to seek redress for damages. It would put most plaintiff attorneys out of business and create an atmosphere where people are intimidated by big, powerful companies with armies of defense attornies. They would be pressured to take unfair settlements or avoid litigation altogether. This proposal would be the end of anyone's ability to a get a fair resolution to a real bona fide tort.

The system has problems, but this solution will only kill the little guy in the end.

ngrover

Paul H. Rubin

In their blogs, Posner and Becker both rely on the standard economic model of the tort system. In this model, a tort has the following properties:
1. It is an accident between legal strangers, with no prior relationship before the accident.
2. The acts of one party (the injurer) impose risk on the other party (the victim).
3. The harm suffered by the victim is largely economic (medical costs, lost wages), so that monetary compensation can make the victim whole and such compensation is like insurance.
4. The system works without error.

They apply this model to medical malpractice, but in medical malpractice none of these assumptions is met.
1. The parties are not strangers; a doctor and his patient have a prior relationship. Therefore, the parties could agree on the terms which would govern in the event of a mishap if the courts would enforce the agreement. Moreover, since the parties are not strangers, we would expect in the general case that any compensation in the event of malpractice would be added to the fees charged by the doctor, so that the patient pays up front for any expected compensation.
2. While the acts of the doctor may impose some risk as an unwanted byproduct, overall the acts of the doctor reduce the risk of the patient, else he would not seek out medical care.
3. Much of the harm suffered by the patient (and the harm that Becker specifically deals with) is nonmonetary, in the form of pain and suffering or lost pleasure of life, measured by what Becker calls what individuals are willing to pay to avoid death or the injuries in question. This class of damages has many peculiar properties; one is that it does not raise the marginal utility of wealth, so that people generally do not want to insure against this form of loss. Thus, any compensation received by the patient is a form of insurance that is not worth its actuarial cost. For every dollar in the system, about $.50 is the cost of operating the system, and of the rest, about $.25 is unwanted compensation for pain and suffering. Only about $.25 is for desired compensation for harmed individuals. For nonmonetary damages, the link between prevention and desired insurance is broken.
4. The system operates with errors; in many cases, doctors will be found liable for occurrences such as unpreventable birth defects. This means that an experience rating system such as Posner advocates might harm the wrong doctors. Moreover, it would probably lead to many doctors refusing to undertake risky procedures (which is already happening).

These characteristics together mean that an important effect of the malpractice system is to increase the costs of medical care (to pay for the compensation for pain and suffering) and therefore to actually reduce the amount of medical care people receive and to increase the risk they bear. Moreover, if Beckers proposal for increased compensation were adopted, this problem would become much worse. Since the parties are in a pre-accident relationship, the best solution would be to allow free contract over the terms that will govern in the event of a mishap. Failing this, a cap on non-pecuniary damages would probably approximate what they would agree to, and is a useful public policy.

Corey

"I was surprised to see the common misconceptions about that case repeated in Becker's description"

I think that can teach us two things:

1) We should never assume that a person is
speaking truth based solely on their adacemic or other "credentials". Even Nobel prize winners
are capable of repeating misconceptions as truth.

2) Economists, professing to rely on statistics and numerical analysis and claiming the same as justification for their conclusions, are at the same time not above using emotional anecdotes when they support those conclusions. When we see this happening, it should remind us that the primary goal of the speaker is to promote a specific ideology (in this case, neo-con, pro-corporate "personal responsibility" doctrine) rather than to analyse in the interests of truth.

James B.

: McDonald's Coffee Case

A largely over-maligned case. The headline sounds ludicrous of course but if you read the details, you see that there was indeed some liability on McDonald's part. The biggest portion of the settlement was punitive damages over business practices. You see, the plaintiffs got their hands on documents showing that McDonalds had run a cost-benefit calculation of the cost to brew coffee at a lower, safer, tempurature vs. PAYING OFF VICTIMS OF 3rd DEGREE BURNS. That's right, the coffee was brewed hotly enough to cause third degree burns.

This is obviously an unconscionable approach to customer safety. Furthermore, they brewed the coffee at this temperature without warning customers. A reasonable expectation of the coffee being at a typical hot-coffee temperature was not unwarranted. If you've ever spilled coffee in your lap, it's unpleasant but does not warrant a trip to the hospital. This woman had burns that required multiple skin grafts. It's not reasonable to expect your customers to know this about your coffee. The key to the case was twofold: 1. McDonalds failed to warn customers about the unusual danger, and 2. they willfully engaged in a dangerous practice in order to save money

Interesting. I am trying to imagine what the costs to McDonalds would have been incur to serve coffee at a lower temperature and how they could outweigh the costs of litigation and settlements. I would think McDonalds would a timy amount on electricity by serving the coffee at a lower temperature.

Of course, the analysis could have shown that McDonalds would have lost coffee sales by serving the drink at a lower temperature, and those lost sales might have been greater than the litigation costs, and that was the conclusion of their cost benefits analysis.

But then we would have to assume that customers recognized that McDonalds' coffee was hot (hotter than the competitors) and thus the argument against resonable expectation of coffee temperature fails precisely because people are coming to McDonalds because coffee is hot.

Scott Minneman

As a further comment on requiring the losing party to pay all costs of litigation, such a system is exactly what is found in England and many other European countries. The result is as another commenter indicated; there is far less litigation. While some would view this as good, I view it as bad. Europe's non-litigious system is one of the major reasons that companies introduce test products, products that are not proven safe, or even products that have been proven to be unsafe into European markets rather than American. There is far less risk to a company if they get sued in Europe than if they get sued in the United States, because plaintiffs are less likely to sue in the first place, and the company's high-priced lawyers can often intimidate the plaintiffs that do choose to risk losing and being responsible for a large litigation bill.

Blar

I don't see what's so great about caveat emptor. Some kids will get into dangerous medicines and get sick, and if the bottles are easier to open then this will happen to more kids. Some people will get hot beverages spilled on them and get burned, and if these beverages are hotter than they need to be then their injuries will be more severe. It seems to me that companies that sell dangerous medicine or hot beverages should have an incentive to reduce the predictable harm caused by their products, regardless of whether their customers' mistakes played a role in bringing about that harm.

Court cases that impose punitive damages are one way to set up the proper incentives and they should not be dismissed out of hand. If you'd like to argue that these harms could be more effectively reduced through some other method, like providing consumers information about the safety of products and letting them take this into account when making purchases, then make that case. If you'd like to claim that these harms are irrelevant to policy because the harmed people brought the harm on themselves, then you should explicitly make that more controversial claim.

Of course parents should try to keep their kids out of the medicine cabinet and people should try to keep from spilling hot beverages on themselves, but these individual responsibilities do not necessarily preclude government efforts to reduce the harm that results when fallible people make mistakes.

Daniel Chapman

McDonalds served the coffee hot because hot water brews more flavor out of the beans. They were aware that their practice drew more customers, and if I remember right, there had been about 700 previous incidents warning them that their coffee was too hot. Perhaps someone else has better details.

Customers went to McDonalds because they liked the coffee better, and McDonalds was willing to forgo safety for profits. I agree that the spill case gets a raw deal in the press.

Mackenzie

If the goal of punitive damages is to punish and deter, then why not decide the amount of punitive damages based on the economic position of a tortfeaser? If I (a poor student) were to be punished, a couple hundred dollars would have a large effect. For any large corporation, it is pretty easy to write off large sums of money.

In order to serve the purpose, shouldn't punitive damages be enough to hurt, the determination of which would largely be based on their financial position?

Eric Johnson

Has no one considered the possibility that hot coffee could be an efficient tort? That society is better off with better tasting coffee and a few more burn victims?

Lowrie Glasgow M.D.

Medicine is not a free market as
in your model.The market pricing must be free on both sides of the equation.Professional medical fees must be free to respond to the tort cost or we will get an inefficient marketplace (delivery of goods).Offer this to providers to keep the status quo.

nick

Judge Posner makes a basic error when he asserts that "there may be offsetting benefits, to the extent that defensive medicine actually improves outcomes for patients; and surely it does for at least some." By that reasoning, why not require all pedestrians to use walkers, because it would prevent falls and injuries for at least some? The fact that doctors will on occasion make mistakes based on their best judgments doesn't mean it's efficient for them to behave as though their every judgment is likely to be mistaken.

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Anonymous

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I am from Oman and know bad English, give true I wrote the following sentence: "You an ideal and small refrigerator capable of freezing anything."

Thank you so much for your future answers :D. Roderick.

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