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May 01, 2017 Articles

Understanding Split-Recovery Punitive Damages Statutes

Familiarity with the nuances can help you manage client expectations and reach a meaningful settlement

by Michael K. Robertson

Depending upon one's perspective, the prospect of a punitive damages award in a civil action can dramatically shape one's approach to litigation. Most attorneys, therefore, are intimately familiar with the efforts by state legislatures over the past few decades to pursue comprehensive tort reform, in particular, with respect to punitive damages awards. While statutory maximums on punitive damages awards may receive the most attention, attorneys should also remember an often overlooked aspect of punitive damages reform: "split-recovery" statutes.

Split-recovery statutes, also known as apportionment or allocation statutes, provide that in the event a plaintiff is awarded punitive damages, a percentage of that award must go to the state. Today, a handful of states maintain split-recovery statutes, including Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon, and Utah. The amount of the punitive damages award that must be paid to the state is not insignificant. In fact, most states with split-recovery statutes require that 50–75 percent of the punitive damages award be paid to the state. Some states require that the money be paid into the state treasury, while others require that the money be designated for specific recipients. Most often, recipients are state-operated funds that provide for victim compensation, indigent representation, or similar state services.

As always, attorneys should stay up to date on proposed changes in their state's punitive damages regime, including whether split-recovery statutes will be added or removed. In addition to this commonsense practice, attorneys also should be aware of some of the unique benefits and challenges presented by split-recovery statutes.

First, the primary effect of most split-recovery statutes is not to fill state coffers, but to drive down overall punitive damages awards—one of the overarching goals of recent tort reform measures. This is due in large part to statutory language that often limits the state's ability to intervene or claim a present interest in the award. For example, if a jury awards a plaintiff punitive damages in the amount of $1 million, and the applicable state law provides for 75 percent of punitive damages to go to the state, the defendant may not need to simply write checks for $250,000 and $750,000, respectively. Rather, the state law may permit the parties to negotiate a different settlement post-verdict, post-judgment, or even post-appeal. The parties may reach an agreement whereby they vacate the $1 million award and the plaintiff receives only $300,000 in punitive damages by virtue of their settlement. The plaintiff receives more than he or she otherwise would have received, and the defendant is out-of-pocket far less than the original punitive damages award. While the timing and requirements of each state's split-recovery statutes are different, overall they serve to encourage settlement and reduce windfall judgments.

Second, given the frequency of settlements encouraged by split-recovery statutes, there often is little case law concerning the application of these statutes. This is not surprising; a civil action has a number of hurdles to cross before a court may issue an opinion on the state's split-recovery statute, effectively insulating these statutes from repeated and searching judicial review. The case must (1) apply the law of one of the few states with a split-recovery statute on the books; (2) be one in which punitive damages are even available; (3) then proceed to trial; (4) result in a finding of liability against the defendant, accompanied by an award of punitive damages; and (5) involve no independent settlement, as outlined above. In other words, when considering the contours of your state's split-recovery statute in your particular case, the case law—even outside your jurisdiction—may be limited.

Third, while most split-recovery statutes, in the rare instances when they have been challenged on state or federal constitutional grounds, have survived such challenges, the permissible reach of split-recovery statutes is largely unknown. Over the years, the most common attacks on split-recovery statutes have been based on takings and due process grounds. Those attacks have largely been unsuccessful on the theory that plaintiffs do not have vested property rights in punitive damages awards, but even if they do, the statutes operate to limit the award before the interest vests at the time of judgment. Both state and federal courts have reached this conclusion. See, e.g., Engquist v. Or. Dep't of Agric., 478 F.3d 985 (9th Cir. 2007); Cheatham v. Pohle, 789 N.E.2d 467 (Ind. 2003); DeMendoza v. Huffman, 51 P.3d 1232 (Or. 2002).

Fourth, like punitive damages caps, federal courts have recognized that split-recovery statutes represent the substantive law of the state in which they sit, and therefore can be applied in federal court. Likewise, although there have been no published opinions on this issue, it would follow that a federal court sitting in one state may apply the split-recovery statute of another state when the court has determined that the substantive law of the other state applies under Erie principles. This question has gone unanswered not only because of the aforementioned factors decreasing the potential for review, but also because of the added factor that a federal court would have to have jurisdiction over the case and apply the substantive law of another state. From a review of federal cases analyzing split-recovery statutes, it appears this circumstance has arisen at least once in the multidistrict litigation (MDL) context. The case, In re C.R. Bard, Inc., 810 F.3d 913 (4th Cir. 2016), involved an MDL in which the Southern District of West Virginia and the U.S. Court of Appeals for the Fourth Circuit addressed the constitutionality of Georgia's split-recovery statute under the Takings Clause and Equal Protection Clause. But neither court appears to have addressed the broader question of whether a federal court sitting in one state may apply the split-recovery statute of another state. While the question has not been asked head-on, practitioners should be prepared to see these statutes invoked even in federal courts as split-recovery statutes have been recognized as the substantive law of their respective states.

In addition to being aware of the operation and limitations of split-recovery statutes in general, practitioners should be cognizant of certain aspects of the particular split-recovery statute that may apply. Does the statute only apply when certain types of claims are brought? How does the statute allocate damages and how might that allocation affect settlement negotiations? How late in the litigation have courts permitted the parties to reach independent settlements? Does the statute have a notice requirement, requiring either the plaintiff or the defendant to notify the appropriate state authority of the punitive damages award? How does the statute take account of attorney fees? Has the opposing party tried to reference this statute in proposed jury instructions? As the legal landscape continues to shift and state legislatures continue to pursue tort reform measures, these are just a few of the questions practitioners should prepare to face when tackling the nuances of state split-recovery statutes.

Keywords: litigation, commercial, business, punitive damages, split-recovery statute, settlement

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