Exemplary or Illusory? -- The State of California Claims 75% of Punitive Damage Awards

The Southern California Law Blog reported on this interesting development several days ago, but perhaps you missed it: As of August 16, when Governor Arnold Schwarzenegger signed the legislation as an "urgency" matter [meaning it becomes effective immediately instead of on January 1 of next year], the State of California is effectively imposing a 75% tax on awards of punitive damages.

New Civil Code §3294.5 provides that any defendant against whom a judgment for punitive damages is entered is required to pay 75% of those damages to the state's Public Benefit Trust Fund, from which the state can withdraw for purposes, other than the funding of the courts, "consist[ent] with the nature of the award." The remaining 25% is payable to the prevailing plaintiff through his or her attorney; and lest you should wonder how that attorney is going to be paid, the Public Benefit Trust Fund will disburse 25% of whatever sums are paid into the Fund by the defendant back to the prevailing lawyer, meaning the attorney effectively receives a contingent fee of 18.75% -- that's 25% of 75% -- on the punitive damage award in addition to any other fee. Juries are not to be told during trial about the allocation of any portion of the punitive damages award to the State.

The statute remains in effect, unless it is later extended, only until July 1, 2006, and it only applies to cases filed on or after August 16 of this year that result in final judgments -- really final, with all appeals and post-trial motions concluded -- prior to the statutory expiration date. It is easy to predict right now that there will be a rash of motions to continue trial dates as that expiration date approaches, so that the judgments will be free of the State's claim. In fact, given that it takes most of a year to get a typical case to trial, and that any post-trial motions and appeals will likely consume most of another year -- and let us not forget that the U.S. Supreme Court has found that there is a constitutional right to independent appellate review of any punitive damage award -- it is not particularly clear whether any punitive damage awards will find their way into the State's coffers before the statute disappears by its own terms.

The official rationale for the statute is strictly fiscal, as stated in its opening sentence:

The Legislature finds and declares that extraordinary and dire budgetary needs have forced the enactment of this extraordinary measure to allocate temporarily for the state's Public Benefit Trust Fund a substantial portion of any punitive damages paid from a judgment during the limited time period specified in the statute.

An article in Business Insurance (that link is probably for subscribers only - sorry) discloses some of the contortions the legislation was put through prior to passage. Among other things, a number of tort reform advocates who originally favored the bill dropped their support as their preferred terms were withdrawn:

Tort reform advocates had supported the initial split-verdict proposal offered by Republican Gov. Arnold Schwarzenegger because it contained significant tort reform provisions, including permitting only one punitive damage award for any single 'act or omission.' Tort reform proponents held that the provision would help curb litigation costs.

The original proposal also held that plaintiffs attorneys' fees could be based only on the 25% of the award granted to their clients. The state would have received its entire share of the punitive damage award.

But the measure underwent significant changes in the legislative process before receiving the governor's signature last month. Lawmakers stripped the measure-which was contained in a wide-ranging appropriations bill, S.B. 1102-of all significant tort reform provisions. The limit on multiple awards for a single act vanished, and attorneys were granted the right to receive up to 25% of the state's portion of the awards as their fee on top of what they received from their own clients.

Representatives of the plaintiffs' bar are quoted as being reasonably favorable to the statute, if a bit self-satisfied:

An organization representing the plaintiffs' bar hailed the governor and lawmakers for having 'publicly recognized and embraced the valuable function punitive damage awards play in punishing and deterring malicious or despicable corporate conduct,' but called for a balance between the interest of consumers and the state.

'Over the years, Consumer Attorneys of California has advocated and supported the concept of allocating a fair portion of punitive damages to the state to help ensure access to justice; however, such an allocation involves a delicate balance between maintaining consumers' ability and incentive to fight malicious corporate conduct against the interest of the state in reaping part of the award,' said the Sacramento-based Consumer Attorneys of California in a statement released before the law went into effect.

UPDATE: Dan Walters of the Sacramento Bee looks at the statute and expresses skepticism: "Even Gray Davis wouldn't buy a turkey this lame."

Comments

[So Cal Lawyer]

I am not necessarily for or against this new law but I was shocked at how little news coverage/debate this law received.

p.s. Thanks for the link.

[UCL]

For the first time in my life, I finally see why the founders drafted the non-interference with contracts clause of the Constitution. Why don't we just take all lawyers and put them under a State-controlled regulatory mechanism to ensure that all profits are distributed fairly to the proletariat... oops, I mean, people of California?

Expect constitutional challenges to this law.

[Onita Lee]

This "underhanded" New Civil Code" is nothing short of "evil". What better way to victimize the victim who has a legitimate reason to sue the State of California.

At present, there are several lawsuits filed against the CDC because of the untimely deaths of inmates which are/were the direct result of neglect/abuse purpetrated by the prison facilities. These grieving families are now going to be "punished for taking the proper action (a lawsuit) against the CDC, by having the "GREATEST PORTION" of any damage award they may receive "GIVEN BACK" to the State of California!!

THIS IS DEPLORABLE!!

Then to be even sneakier with this disgusting new Civil Code, should a lawsuit go to trial, the jurors are not allowed to know of the existance of this code! Should a "victim" be awarded a settlement which the jurors deem "fair", they are not allowed to know that the majority of the monies goes directly back to the State of California and the "victim" does not get the amount these jurors thought he/she was actually receiving. This is "unfairness" at it's best!

If the CDC were "FORCED" to "clean up it's act" and these enforcement rules were followed through, as they should have been many years ago, lawsuits over preventable deaths caused by the negligence of the CDC would not be necessary. It's totally wrong to allow these State run facilities, to break all the rules, cause preventable deaths to occur, then get "PAID BACK" for their misdeeds!!

SHAME ON YOU, GOVENOR SCHWARZENNEGER AND YOUR LEGISLATORS!!!

Onita Lee

[Mrs Linda J Burley]

This is a rolling concern... to the insurance buyer, to the physician with his malpractice insurance and for the physicians office cost when you go for an office call (ultimately we have to offset the cost!).....

I am in favor of limitations,......This is my opinion alone as I am not a resident of California, but I am a Health Care Professional....and I am involved in health care services.

The Patient Advocate