Torts - Cases, Principles, and Institutions Fifth Edition, 2016a

Witt & Tani, TCPI 10. Damages
average wealth. Pension trusts and mutual funds, aggregating the investments of
millions of average persons, own the bulk of many large corporations. Seeing the
corporation as wealthy is an illusion, which like other mirages frequently leads
people astray.
Corporate assets finance ongoing operations and are unrelated to either the injury
done to the victim or the size of the award needed to cause corporate managers to
obey the law. Net worth is a measure of profits that have not yet been distributed
to the investors. Why should damages increase because the firm reinvested its
earnings? Absolute size, like net worth, also is a questionable reason to extract
more per case. If L’Oréal introduces 10,000 products, perhaps 10 of these infringe
someone else’s trademark. Awards of ordinary damages in all 10 cases deter
wrongful conduct. The net judgment bill of the firm will increase with its wrongs,
without the need for punitive damages. If a larger firm is more likely to commit a
wrong on any given transaction, then its total damages will increase more than
proportionally to its size without augmentation in any given case; if a larger firm is
equally or less likely to commit a tort per transaction, then the court ought to praise
the managers rather than multiply the firm’s penalty. Consider: General Motors is
much larger than Chrysler, and so makes more defective cars, but the goals of
compensation and deterrence are achieved for both firms by awarding as damages
the injury produced per defective car. Corporate size is a reason to magnify
damages only when the wrongs of larger firms are less likely to be punished; yet
judges rarely have any reason to suppose this, and the court in this case had none.
Zazu Designs v. L’Oreal, 979 F.2d 499 (7th Cir. 1992) (citations omitted). Does this give
corporate actors a special advantage over natural persons in punitive damages litigation? Should
the rule be the same for publicly held firms and close corporations?
2. A concealment model. Judge Posner’s fourth consideration is the risk of concealment.
Professors Polinsky and Shavell formalized this rationale in a leading article that articulated a socalled
multiplier basis for punitive damages:
When an injurer has a chance of escaping liability, the proper level of total damages
to impose on him, if he is found liable, is the harm caused multiplied by the
reciprocal of the probability of being found liable. Thus, for example, if the harm
is $100,000 and there is a twenty-five percent chance that the injurer will be found
liable for the harm for which he is legally responsible, the harm should be multiplied
by 1/.25, or 4, so total damages should be $400,000. Because the injurer will pay
this amount every fourth time he generates harm, his average payment will be
$100,000 (= $400,000/4).
A. Mitchell Polinsky & Steven Shavell, Punitive Damages: An Economic Analysis, 111 HARV. L.
REV. 869, 874 (1998). Polinsky and Shavell make punitive damage safe for the world of Learned
Hand’s cost-benefit test. On this theory, punitive damages are a way of prompting actors to take
the social costs of their activities seriously even where the probability that those costs will be
detected is less than 100%.
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