July 29, 1998 Contact: Jeanne Lopatto, 202/224-5225
STATEMENT OF SEN. ORRIN HATCH
SENATE JUDICIARY COMMITTEE
S. 1554, THE FAIRNESS IN PUNITIVE DAMAGE AWARDS ACT
Good morning. Today’s hearing examines S. 1554, the “Fairness in Punitive Damage Awards Act.” This bill was introduced by myself and Senator Joseph Lieberman on November 13, 1997. This narrowly tailored legislation simply establishes proportionality between the amount of punitive damages and the amount of economic loss experienced in cases involving primarily financial loss, such as disputes involving insurers, realtors, securities firms and banks, or among businesses.
More specifically, this bill will provide for relief from excessive punitive damages in cases where the claimant seeks to recover punitive damages on any theory of harm that did not result in death, serious and permanent scarring or disfigurement, or loss of limb or organ. Thus, the bill would limit the amount of punitive damages awarded in financial injury -- mostly contract and insurance cases -- where punitive awards have been disproportionately high and have harmed American productivity and the amount and type of goods and services distributed to the public.
Punitive damages, under the bill, would be limited to the greater of three times economic loss or $250,000 -- or if a small business -- the lesser of three times economic loss or $250,000. A small business is defined as an entity having a net worth of $500,000 or less.
The bill also prohibits punitive damage awards against 501(c)(3) charities, except in the rare circumstance where the charity itself inflicted an intentional tort. To me the concept of punitive or exemplary damages -- which is designed to deter bad business behavior -- should not apply when dealing with churches and other nonprofit charities. After all, imposing punitive damages on these institutions is literally like taking food from the mouths of the poor.
Let me emphasize that America today faces a dramatic increase in both litigation and in the awarding of punitive damages. This crisis has harmed the economy by resulting in increased prices for goods and services, increased insurance premiums, and the unavailability of necessary products -- such as medical devices -- because they are too expensive to produce.
But perhaps more important, the litigation crisis has almost destroyed the legitimacy of our judicial system in resolving public and private disputes. Litigation, now in many eyes, more resembles a crap shoot than a search for justice as litigants and the bar are irresistibly drawn to those with “deep pockets.”
As such, there has been a dramatic increase of claims filed in the federal courts. In fact, federal filings increased three-fold between 1960 and 1990. The largest single category of new federal lawsuits consists of contract disputes between businesses, reflecting the new corporate and legal professional dogma of settling disputes almost solely through litigation. Other categories of new suits include civil rights and prisoner claims, personal injury and class action suits, and social security cases.
Adding fuel to the fire is the incendiary outburst of punitive damage awards. Throughout the nineteenth century until the mid-twentieth century, punitive damages were quite rare. For example, the highest punitive damages award affirmed on appeal in California through the 1950s was $10,000.
But the punitive damage landscape began to change dramatically in the 1960s. California’s record for punitive damages award affirmed on appeal soared to $15 million in the 1980s, an increase of 1,500 fold in just 30 years. I must point out that what happens in California -- our nation’s most populous state and largest market -- has a significant impact on the economy of the rest of the states -- particularly neighboring Western states such as my own Utah.
Furthermore, punitive damage lawyers have largely succeeded in taking over the civil justice compensation system. In 1960, according to a RAND study, punitive damages accounted for just 2% of total damages in civil cases in San Francisco, California. Thirty years later, according to the latest RAND study, punitive damages accounted for an amazing 59% of all damages in financial injury cases.
This most recent RAND study was the subject of a Senate Judiciary Committee hearing on June 24, 1997. That study found that the average punitive damage award in financial injury cases rose from $3.4 million to $7.6 million between 1985-89 and 1990-94; and that the total amount of punitive damages awarded nearly doubled during this time, from $1.2 billion to $2.3 billion.
This study clearly demonstrates that under the present legal system, punitive damages all too often bear no rational relationship to the injury suffered. And just as devastating, according to RAND, untenable jury verdicts create a "shadow effect" whereby verdicts totaling tens of billions of dollars send signals as to what other juries might do. Attorneys, litigants, and potential litigants look to these signals to determine whether to settle cases or not. Thousands of cases are settled -- regardless of their merits -- for fear of irrational verdicts. This "shadow effect" ought to be termed "shadow extortion."
Indeed, the very efficacy of the American market has been weakened by these trends. Certainly, increased litigation and unnecessarily large punitive damage awards have increased the price of doing business. Undoubtedly, these insidious costs have been passed on to consumers and have led to adverse effects on productivity and employment.
This is supported by a fairly recent study done by Representative and law professor Tom Campbell and other scholars, under the aegis of Stanford University, which demonstrated that in jurisdictions that reform the civil liability process -- including placing caps on punitive damages -- productivity and employment rise.
From coffee spills at McDonald’s to medical malpractice, in the words of Morton Kondracke in an article in Roll Call, “trial lawyers reap exorbitant profits by trolling for clients and convincing juries to sock it to supposedly deep-pocketed defendants. Consumers pay the bill as companies pass on their massive insurance premiums through higher prices.”
These absurdities demonstrate the need for restraint by the legal profession. They also cry out for legislative reform.
There are two other reasons that underlie the need for legislative reform. First, the Supreme Court’s decision limiting punitive damages in BMW of North America v. Gore, [116 S. Ct. 1589 (1996)], has unfortunately not resolved the problem. In this case, the Court held that punitive damages that are grossly excessive in relation to the harm suffered violated the due process clause of the Fourteenth Amendment.
The Court recognized that excessive punitive damages “implicate the federal interest in preventing individual states from imposing undue burdens on interstate commerce.” While that decision for the first time recognizes some constitutional limits on punitive damage awards, the Court’s decision does not diminish the need for legislative action. As we will hear today by many of our witnesses, the awarding of unnecessarily large punitive damages is still widespread. Legislative reforms are now-- more than ever before-- desperately needed to set up the appropriate boundaries.
Another reason for this national legislation is the sad fact that civil justice reform has been stalled on the state level by the power and influence of the trial attorneys. In the past several years, civil justice reform measures -- many of which include limitations on punitive damages -- have passed 22 states. These most recently include Illinois, Wisconsin, Ohio, Michigan, Indiana, New Jersey, North Carolina, Oklahoma, Texas, Louisiana, and Kentucky. But in many of these states -- Illinois, Alabama, and Kentucky being the latest -- state courts have nullified needed reform measures because they were viewed as violative of the respective state constitutions, even though state legislatures have been modifying the common law of contracts and torts since after the American Revolution.
These court decisions represent the very worst of unbridled judicial activism. Indeed, former Attorney General Dick Thornburgh recently stated that, “state judiciaries [now] aggressively substitute their own notions of what the law should be for the will of the people expressed by their elected representatives.”
Finally, I want to one again point out that this legislation applies only to financial injury cases, as well as cases involving minor physical injuries. It does not apply to cases that, in the words of the bill, “result in death, serious and permanent scarring or disfigurement, loss of a limb or organ, or serious and permanent impairment of an important bodily function.” Serious physical injury cases, such as those involving burns, death and loss of limbs, are not covered by the bill. There would be no punitives ceiling in such cases.
In addition to death and serious injury cases, the bill exempts from its coverage cases where the defendant has been convicted of a crime of violence for his actions, an act of terrorism, a hate crime or a felony sexual offense, or was driving under the influence of alcohol or an unlawful drug. These exemptions are specifically designed to meet the concerns of the White House made during the product bill’s debate that limitations on punitive damages, for instance, will create an incentive for drunk driving or sexual assault. Although, I believe that these concerns are unfounded, we have removed the issue by limiting the scope of the bill.
I want to welcome the distinguished witnesses, especially Senator Lieberman, who I know shares my belief in the need to reform our civil justice system. I am delighted to have him as a cosponsor on this very worthwhile bill.
STATEMENT OF SEN. ORRIN HATCH
SENATE JUDICIARY COMMITTEE
S. 1554, THE FAIRNESS IN PUNITIVE DAMAGE AWARDS ACT
Good morning. Today’s hearing examines S. 1554, the “Fairness in Punitive Damage Awards Act.” This bill was introduced by myself and Senator Joseph Lieberman on November 13, 1997. This narrowly tailored legislation simply establishes proportionality between the amount of punitive damages and the amount of economic loss experienced in cases involving primarily financial loss, such as disputes involving insurers, realtors, securities firms and banks, or among businesses.
More specifically, this bill will provide for relief from excessive punitive damages in cases where the claimant seeks to recover punitive damages on any theory of harm that did not result in death, serious and permanent scarring or disfigurement, or loss of limb or organ. Thus, the bill would limit the amount of punitive damages awarded in financial injury -- mostly contract and insurance cases -- where punitive awards have been disproportionately high and have harmed American productivity and the amount and type of goods and services distributed to the public.
Punitive damages, under the bill, would be limited to the greater of three times economic loss or $250,000 -- or if a small business -- the lesser of three times economic loss or $250,000. A small business is defined as an entity having a net worth of $500,000 or less.
The bill also prohibits punitive damage awards against 501(c)(3) charities, except in the rare circumstance where the charity itself inflicted an intentional tort. To me the concept of punitive or exemplary damages -- which is designed to deter bad business behavior -- should not apply when dealing with churches and other nonprofit charities. After all, imposing punitive damages on these institutions is literally like taking food from the mouths of the poor.
Let me emphasize that America today faces a dramatic increase in both litigation and in the awarding of punitive damages. This crisis has harmed the economy by resulting in increased prices for goods and services, increased insurance premiums, and the unavailability of necessary products -- such as medical devices -- because they are too expensive to produce.
But perhaps more important, the litigation crisis has almost destroyed the legitimacy of our judicial system in resolving public and private disputes. Litigation, now in many eyes, more resembles a crap shoot than a search for justice as litigants and the bar are irresistibly drawn to those with “deep pockets.”
As such, there has been a dramatic increase of claims filed in the federal courts. In fact, federal filings increased three-fold between 1960 and 1990. The largest single category of new federal lawsuits consists of contract disputes between businesses, reflecting the new corporate and legal professional dogma of settling disputes almost solely through litigation. Other categories of new suits include civil rights and prisoner claims, personal injury and class action suits, and social security cases.
Adding fuel to the fire is the incendiary outburst of punitive damage awards. Throughout the nineteenth century until the mid-twentieth century, punitive damages were quite rare. For example, the highest punitive damages award affirmed on appeal in California through the 1950s was $10,000.
But the punitive damage landscape began to change dramatically in the 1960s. California’s record for punitive damages award affirmed on appeal soared to $15 million in the 1980s, an increase of 1,500 fold in just 30 years. I must point out that what happens in California -- our nation’s most populous state and largest market -- has a significant impact on the economy of the rest of the states -- particularly neighboring Western states such as my own Utah.
Furthermore, punitive damage lawyers have largely succeeded in taking over the civil justice compensation system. In 1960, according to a RAND study, punitive damages accounted for just 2% of total damages in civil cases in San Francisco, California. Thirty years later, according to the latest RAND study, punitive damages accounted for an amazing 59% of all damages in financial injury cases.
This most recent RAND study was the subject of a Senate Judiciary Committee hearing on June 24, 1997. That study found that the average punitive damage award in financial injury cases rose from $3.4 million to $7.6 million between 1985-89 and 1990-94; and that the total amount of punitive damages awarded nearly doubled during this time, from $1.2 billion to $2.3 billion.
This study clearly demonstrates that under the present legal system, punitive damages all too often bear no rational relationship to the injury suffered. And just as devastating, according to RAND, untenable jury verdicts create a "shadow effect" whereby verdicts totaling tens of billions of dollars send signals as to what other juries might do. Attorneys, litigants, and potential litigants look to these signals to determine whether to settle cases or not. Thousands of cases are settled -- regardless of their merits -- for fear of irrational verdicts. This "shadow effect" ought to be termed "shadow extortion."
Indeed, the very efficacy of the American market has been weakened by these trends. Certainly, increased litigation and unnecessarily large punitive damage awards have increased the price of doing business. Undoubtedly, these insidious costs have been passed on to consumers and have led to adverse effects on productivity and employment.
This is supported by a fairly recent study done by Representative and law professor Tom Campbell and other scholars, under the aegis of Stanford University, which demonstrated that in jurisdictions that reform the civil liability process -- including placing caps on punitive damages -- productivity and employment rise.
From coffee spills at McDonald’s to medical malpractice, in the words of Morton Kondracke in an article in Roll Call, “trial lawyers reap exorbitant profits by trolling for clients and convincing juries to sock it to supposedly deep-pocketed defendants. Consumers pay the bill as companies pass on their massive insurance premiums through higher prices.”
These absurdities demonstrate the need for restraint by the legal profession. They also cry out for legislative reform.
There are two other reasons that underlie the need for legislative reform. First, the Supreme Court’s decision limiting punitive damages in BMW of North America v. Gore, [116 S. Ct. 1589 (1996)], has unfortunately not resolved the problem. In this case, the Court held that punitive damages that are grossly excessive in relation to the harm suffered violated the due process clause of the Fourteenth Amendment.
The Court recognized that excessive punitive damages “implicate the federal interest in preventing individual states from imposing undue burdens on interstate commerce.” While that decision for the first time recognizes some constitutional limits on punitive damage awards, the Court’s decision does not diminish the need for legislative action. As we will hear today by many of our witnesses, the awarding of unnecessarily large punitive damages is still widespread. Legislative reforms are now-- more than ever before-- desperately needed to set up the appropriate boundaries.
Another reason for this national legislation is the sad fact that civil justice reform has been stalled on the state level by the power and influence of the trial attorneys. In the past several years, civil justice reform measures -- many of which include limitations on punitive damages -- have passed 22 states. These most recently include Illinois, Wisconsin, Ohio, Michigan, Indiana, New Jersey, North Carolina, Oklahoma, Texas, Louisiana, and Kentucky. But in many of these states -- Illinois, Alabama, and Kentucky being the latest -- state courts have nullified needed reform measures because they were viewed as violative of the respective state constitutions, even though state legislatures have been modifying the common law of contracts and torts since after the American Revolution.
These court decisions represent the very worst of unbridled judicial activism. Indeed, former Attorney General Dick Thornburgh recently stated that, “state judiciaries [now] aggressively substitute their own notions of what the law should be for the will of the people expressed by their elected representatives.”
Finally, I want to one again point out that this legislation applies only to financial injury cases, as well as cases involving minor physical injuries. It does not apply to cases that, in the words of the bill, “result in death, serious and permanent scarring or disfigurement, loss of a limb or organ, or serious and permanent impairment of an important bodily function.” Serious physical injury cases, such as those involving burns, death and loss of limbs, are not covered by the bill. There would be no punitives ceiling in such cases.
In addition to death and serious injury cases, the bill exempts from its coverage cases where the defendant has been convicted of a crime of violence for his actions, an act of terrorism, a hate crime or a felony sexual offense, or was driving under the influence of alcohol or an unlawful drug. These exemptions are specifically designed to meet the concerns of the White House made during the product bill’s debate that limitations on punitive damages, for instance, will create an incentive for drunk driving or sexual assault. Although, I believe that these concerns are unfounded, we have removed the issue by limiting the scope of the bill.
I want to welcome the distinguished witnesses, especially Senator Lieberman, who I know shares my belief in the need to reform our civil justice system. I am delighted to have him as a cosponsor on this very worthwhile bill.
Good morning. Today’s hearing examines S. 1554, the “Fairness in Punitive Damage Awards Act.” This bill was introduced by myself and Senator Joseph Lieberman on November 13, 1997. This narrowly tailored legislation simply establishes proportionality between the amount of punitive damages and the amount of economic loss experienced in cases involving primarily financial loss, such as disputes involving insurers, realtors, securities firms and banks, or among businesses.
More specifically, this bill will provide for relief from excessive punitive damages in cases where the claimant seeks to recover punitive damages on any theory of harm that did not result in death, serious and permanent scarring or disfigurement, or loss of limb or organ. Thus, the bill would limit the amount of punitive damages awarded in financial injury -- mostly contract and insurance cases -- where punitive awards have been disproportionately high and have harmed American productivity and the amount and type of goods and services distributed to the public.
Punitive damages, under the bill, would be limited to the greater of three times economic loss or $250,000 -- or if a small business -- the lesser of three times economic loss or $250,000. A small business is defined as an entity having a net worth of $500,000 or less.
The bill also prohibits punitive damage awards against 501(c)(3) charities, except in the rare circumstance where the charity itself inflicted an intentional tort. To me the concept of punitive or exemplary damages -- which is designed to deter bad business behavior -- should not apply when dealing with churches and other nonprofit charities. After all, imposing punitive damages on these institutions is literally like taking food from the mouths of the poor.
Let me emphasize that America today faces a dramatic increase in both litigation and in the awarding of punitive damages. This crisis has harmed the economy by resulting in increased prices for goods and services, increased insurance premiums, and the unavailability of necessary products -- such as medical devices -- because they are too expensive to produce.
But perhaps more important, the litigation crisis has almost destroyed the legitimacy of our judicial system in resolving public and private disputes. Litigation, now in many eyes, more resembles a crap shoot than a search for justice as litigants and the bar are irresistibly drawn to those with “deep pockets.”
As such, there has been a dramatic increase of claims filed in the federal courts. In fact, federal filings increased three-fold between 1960 and 1990. The largest single category of new federal lawsuits consists of contract disputes between businesses, reflecting the new corporate and legal professional dogma of settling disputes almost solely through litigation. Other categories of new suits include civil rights and prisoner claims, personal injury and class action suits, and social security cases.
Adding fuel to the fire is the incendiary outburst of punitive damage awards. Throughout the nineteenth century until the mid-twentieth century, punitive damages were quite rare. For example, the highest punitive damages award affirmed on appeal in California through the 1950s was $10,000.
But the punitive damage landscape began to change dramatically in the 1960s. California’s record for punitive damages award affirmed on appeal soared to $15 million in the 1980s, an increase of 1,500 fold in just 30 years. I must point out that what happens in California -- our nation’s most populous state and largest market -- has a significant impact on the economy of the rest of the states -- particularly neighboring Western states such as my own Utah.
Furthermore, punitive damage lawyers have largely succeeded in taking over the civil justice compensation system. In 1960, according to a RAND study, punitive damages accounted for just 2% of total damages in civil cases in San Francisco, California. Thirty years later, according to the latest RAND study, punitive damages accounted for an amazing 59% of all damages in financial injury cases.
This most recent RAND study was the subject of a Senate Judiciary Committee hearing on June 24, 1997. That study found that the average punitive damage award in financial injury cases rose from $3.4 million to $7.6 million between 1985-89 and 1990-94; and that the total amount of punitive damages awarded nearly doubled during this time, from $1.2 billion to $2.3 billion.
This study clearly demonstrates that under the present legal system, punitive damages all too often bear no rational relationship to the injury suffered. And just as devastating, according to RAND, untenable jury verdicts create a "shadow effect" whereby verdicts totaling tens of billions of dollars send signals as to what other juries might do. Attorneys, litigants, and potential litigants look to these signals to determine whether to settle cases or not. Thousands of cases are settled -- regardless of their merits -- for fear of irrational verdicts. This "shadow effect" ought to be termed "shadow extortion."
Indeed, the very efficacy of the American market has been weakened by these trends. Certainly, increased litigation and unnecessarily large punitive damage awards have increased the price of doing business. Undoubtedly, these insidious costs have been passed on to consumers and have led to adverse effects on productivity and employment.
This is supported by a fairly recent study done by Representative and law professor Tom Campbell and other scholars, under the aegis of Stanford University, which demonstrated that in jurisdictions that reform the civil liability process -- including placing caps on punitive damages -- productivity and employment rise.
From coffee spills at McDonald’s to medical malpractice, in the words of Morton Kondracke in an article in Roll Call, “trial lawyers reap exorbitant profits by trolling for clients and convincing juries to sock it to supposedly deep-pocketed defendants. Consumers pay the bill as companies pass on their massive insurance premiums through higher prices.”
These absurdities demonstrate the need for restraint by the legal profession. They also cry out for legislative reform.
There are two other reasons that underlie the need for legislative reform. First, the Supreme Court’s decision limiting punitive damages in BMW of North America v. Gore, [116 S. Ct. 1589 (1996)], has unfortunately not resolved the problem. In this case, the Court held that punitive damages that are grossly excessive in relation to the harm suffered violated the due process clause of the Fourteenth Amendment.
The Court recognized that excessive punitive damages “implicate the federal interest in preventing individual states from imposing undue burdens on interstate commerce.” While that decision for the first time recognizes some constitutional limits on punitive damage awards, the Court’s decision does not diminish the need for legislative action. As we will hear today by many of our witnesses, the awarding of unnecessarily large punitive damages is still widespread. Legislative reforms are now-- more than ever before-- desperately needed to set up the appropriate boundaries.
Another reason for this national legislation is the sad fact that civil justice reform has been stalled on the state level by the power and influence of the trial attorneys. In the past several years, civil justice reform measures -- many of which include limitations on punitive damages -- have passed 22 states. These most recently include Illinois, Wisconsin, Ohio, Michigan, Indiana, New Jersey, North Carolina, Oklahoma, Texas, Louisiana, and Kentucky. But in many of these states -- Illinois, Alabama, and Kentucky being the latest -- state courts have nullified needed reform measures because they were viewed as violative of the respective state constitutions, even though state legislatures have been modifying the common law of contracts and torts since after the American Revolution.
These court decisions represent the very worst of unbridled judicial activism. Indeed, former Attorney General Dick Thornburgh recently stated that, “state judiciaries [now] aggressively substitute their own notions of what the law should be for the will of the people expressed by their elected representatives.”
Finally, I want to one again point out that this legislation applies only to financial injury cases, as well as cases involving minor physical injuries. It does not apply to cases that, in the words of the bill, “result in death, serious and permanent scarring or disfigurement, loss of a limb or organ, or serious and permanent impairment of an important bodily function.” Serious physical injury cases, such as those involving burns, death and loss of limbs, are not covered by the bill. There would be no punitives ceiling in such cases.
In addition to death and serious injury cases, the bill exempts from its coverage cases where the defendant has been convicted of a crime of violence for his actions, an act of terrorism, a hate crime or a felony sexual offense, or was driving under the influence of alcohol or an unlawful drug. These exemptions are specifically designed to meet the concerns of the White House made during the product bill’s debate that limitations on punitive damages, for instance, will create an incentive for drunk driving or sexual assault. Although, I believe that these concerns are unfounded, we have removed the issue by limiting the scope of the bill.
I want to welcome the distinguished witnesses, especially Senator Lieberman, who I know shares my belief in the need to reform our civil justice system. I am delighted to have him as a cosponsor on this very worthwhile bill.