Academic Literature on the Impact of Punitive Damages
Academics and practitioners have examined the relationship between punitive damages and settlement amounts in litigation in general and in asbestos litigation in particular. For example, Shadow Effect of Punitive Damages on Settlements from the University of Wisconsin Law School Digital Repository states, “Mass torts provide the clearest example of settlement leverage produced by punitive damages. Firms or whole industries facing the threat of numerous punitive damages awards based on the same behavior are under tremendous pressure to settle.” Similarly, in 2002, the RAND Institute for Civil Justice noted with respect to several mesothelioma verdicts with large punitive damage awards, “Even though very large awards may be reduced by remitter or appeal, they reverberate through settlement negotiations. . . .”
A 2003 academic study found that “when companies pay higher damage awards and more frequently are defendants at trial, their average settlement costs increase and they attract additional claims—both of which raise their asbestos litigation costs.” Similarly, a 2010 article in the Louisiana Law Review states:
Although most legal research has revealed that punitive damages are awarded relatively infrequently and amounts are often reduced by appellate courts, the “shadow effect” of punitive damages has had a major effect on settlement values: defendants tend to settle compensatory damages at a higher level in order to avoid the risk of large punitive damages being awarded at a jury trial.
A 2012 article in the Michigan Law Review provides a financial economic theory of punitive damages. The article states:
When faced with a catastrophic liability, a corporate defendant can manage the risk by eliminating the risk. Settlement eliminates litigation risk. In effect, a defendant pays a premium to eliminate the risk of a “small probability of an immense judgment,” which is predicted by and consistent with financial economic principles. Since settlement is an essential aspect of the tort and litigation systems, these factors of value must also affect the theory of punitive damages.
The author further states, “The basic idea is that plaintiffs can use the risk of a severe punitive damages award, however unlikely that award is, to extract a risk premium in settlement, and thus settlement values deviate upwards from expected judicial outcomes.”
Jurisdictions That Allow for Punitive Damages
Most states allow for punitive damages alongside compensatory damages in trial verdicts. However, there are a few states and jurisdictions that do not allow or have deferred punitive damages awards, particularly for asbestos litigation. Wilson Elser’s 2018 review of punitive damages by state shows that states disallowing punitive damages include Michigan, Nebraska, and Washington, and it identifies Louisiana and New Hampshire as allowing punitive damages only by statute. See Figure 1. However, the circumstances in which punitive damages may be applied in the latter two states can be limited. For instance, in both Louisiana and New Hampshire, punitive damages are not allowed for product liability cases. In addition, a Florida statute states that “[p]unitive damages may not be awarded in any civil action alleging an asbestos or silica claim.”
Figure 1: States that Allow Punitive Damages Awards in Asbestos Cases
Past articles on asbestos litigation by Behrens and Parsons (subscription required) and by Landin et al. show there are certain jurisdictions within some states that do not allow punitive damages. These include Baltimore, Maryland; Bethlehem, Pennsylvania; Easton, Pennsylvania; and Philadelphia, Pennsylvania; as well as cases on the federal asbestos multidistrict litigation docket based in the Eastern District of Pennsylvania. In Baltimore, to preserve assets and ensure that future claimants can receive the compensatory damages they are entitled to, punitive damage awards have been stayed in asbestos cases until compensatory claims are satisfied. In Northampton County in Pennsylvania, which covers the cities of Bethlehem and Easton, a judge has ordered that discovery, pretrial motions, and trial for punitive damages be deferred until after a plaintiff obtains a verdict on compensatory damages. In Philadelphia, the Court of Common Pleas has historically deferred punitive damages in asbestos cases. Cases on the asbestos multidistrict litigation docket 875 have also deferred punitive damages. The analysis of the impact of punitive damages on settlements takes into account the states and jurisdictions where punitive damages are allowed, as discussed below.
Trial Verdicts in Asbestos Litigation
To assess the impact of punitive damages, we manually compiled a database of asbestos trials for mesothelioma based on publicly available sources including articles and opinions in Mealey’s and Law360 publications in 2019. For each asbestos trial verdict, we compiled data on the alleged diseases, the court, the state, the date of the verdict, whether the verdict was in favor of the plaintiffs or the defendants, and the total amount of compensatory and punitive awards. We also reviewed court dockets to track the possible reversal of or change in the awards for cases with punitive awards.
Figure 2 presents a summary of the 44 mesothelioma trial verdicts in jurisdictions that allow awards for punitive damages, as reported in 2019. Our sample includes cases that are under appeal and we have tracked the status of the cases in 2020 and updated the information based on the case dockets to reflect the appeal decisions. The list of verdicts consists of cases in Arkansas, California, Delaware, Georgia, Illinois, Kansas, Kentucky, Missouri, North Carolina, New Jersey, New York, South Carolina, and Texas. Across those 44 trial verdicts, there are 30 plaintiffs’ verdicts (68 percent). Of the 30 plaintiffs’ verdicts, 12 (40 percent) awarded punitive damages.
Figure 2: Number of Mesothelioma Trial Verdicts in Jurisdictions that Allow Awards for Punitive Damages as Reported in 2019
The trial verdicts in claims filed against asbestos defendants are evidence of the importance of punitive damages in mesothelioma cases. The plaintiffs’ verdicts include $308 million in compensatory and $335 million in punitive damages awards, as shown in Figure 3. The $335 million in punitive damages represents about 52 percent of the $643 million in total damages that were awarded in plaintiffs’ verdicts for mesothelioma trials. If we exclude Olson v. Brenntag North America, Inc., which awarded $15 million in compensatory damages and $105 million in punitive damages after appeal, punitive damages account for 44 percent of total damages.
The 52 percent ratio of punitive-to-all damages in plaintiffs’ trial verdicts also could represent the fraction of settlement amounts explained by the threat of punitive damages if one assumes that defendants would be willing to pay the expected value of the trial judgment to settle the case (see Cooter and Rubinfeld, 1989). The intuition behind the estimated effect of the threat of punitive damages can be explained by examining the expected value of a trial outcome. The expected value of a trial judgment depends on the probability of the plaintiff winning at trial and the estimate of total damages to be awarded if the plaintiff wins at trial. Assuming symmetry in information and costs for defendant and plaintiff, the defendant would be willing to pay the expected value of the trial judgment to settle the case. The fraction of settlement amount explained by the threat of punitive damages would then be represented by the ratio of punitive-to-all damages in plaintiffs’ trial verdicts.
Figure 3: Compensatory and Punitive Damages in Mesothelioma Trial Verdicts in Jurisdictions that Allow Awards for Punitive Damages as Reported in 2019
Of the 44 mesothelioma trial verdicts reported in 2019, 18 are talc cases and 26 are non-talc cases. The outcomes are reported separately for talc and non-talc cases, given the notable difference in the punitive damages’ awards in the talc cases.
Talc Mesothelioma Verdicts
Talc claims are a newer set of asbestos claims. Talcum powder is used in baby powder and many cosmetics. A 2018 Reuters study shows that there is a risk of cross-contamination between talc deposits and asbestos and that some tests will not detect asbestos even when present in talc.
Our database includes 18 talc mesothelioma trial verdicts as of 2019 in jurisdictions that allow for punitive damages, of which there are 8 plaintiffs’ verdicts (44 percent). Of the 8 plaintiffs’ verdicts, 5 trials (63 percent) awarded punitive damages. Overall, 5 of the 18 talc verdicts (28 percent) awarded punitive damages.
The ratio of punitive-to-all damages in plaintiffs’ trial verdicts is greater in talc cases. In total, plaintiffs were awarded $134 million in compensatory damages and $292 million in punitive damages for talc mesothelioma cases in jurisdictions that allow awards for punitive damages in asbestos litigation. Therefore, punitive damages represent about 69 percent of total damages that were awarded in plaintiffs’ verdicts for talc mesothelioma trials.
Non-Talc Mesothelioma Verdicts
The database also includes 26 non-talc mesothelioma verdicts in jurisdictions that allow for punitive damages, of which 22 (85 percent) are plaintiffs’ verdicts. Of the 22 plaintiffs’ verdicts, 7 trials (32 percent) awarded punitive damages. Overall, 7 of the 26 non-talc verdicts (27 percent) awarded punitive damages.
In total, plaintiffs were awarded $174 million in compensatory damages and $44 million in punitive damages for non-talc mesothelioma cases in jurisdictions that allow awards for punitive damages in asbestos litigation. This means that punitive damages represent about 20 percent of total damages that were awarded in plaintiffs’ verdicts for non-talc mesothelioma trials.
Uncertainty of Punitive Damages Awards
In addition to potentially increasing total damages awards, punitive damages also increase the uncertainty around the trial verdict outcome. Academics Robert J. Rhee and Steven B. Hayward noted that the “stark unpredictability of punitive awards” provides litigants “with potent leverage” against defendants reluctant to take risks. Based on the data of the mesothelioma trial verdicts that awarded punitive damages in 2019, punitive damages ranged from a low of $1 million to a high $105 million, while compensatory damages ranged from $3 million to $15 million.
The allowance of punitive damages awards introduces the risk of a “small probability of an immense judgment” that may even lead the defendant to consider bankruptcy in some cases. Notably, the verdict of the talc case Olson v. Brenntag North America, Inc., included a punitive damages award of $105 million. The case was tried in the New York City Asbestos Litigation (NYCAL) after the July 9, 2015, decision that reinstated previously deferred punitive damages in New York City for asbestos cases.
Conclusions
Using public sources of information on asbestos-related verdicts in 2019, our analysis demonstrates that the threat of punitive damages represents 52 percent of trial verdict awards in mesothelioma cases. If we exclude the verdict of the talc case Olson v. Brenntag North America, Inc., which had the largest punitive damages award, punitive damages would represent 44 percent of trial verdict awards. The impact is larger for talc cases, where punitive damages account for 69 percent of the trial verdict awards, and smaller for non-talc cases, where punitive damages account for 20 percent of the trial verdict awards. The reasons behind the disparity between talc and non-talc verdicts are not yet clear, given the size of our current sample and the fact that talc cases are relatively new. The risk of a verdict with punitive damages in talc and non-talc mesothelioma cases is about the same—28 percent for talc verdicts and 27 percent for non-talc verdicts. The analysis is based on verdicts in one year of data and indicates the impact of the threat of punitive damages on settlements. Punitive damages are uncertain and vary significantly more than compensatory damages and, therefore, may be used to negotiate higher settlements.
The authors would like to thank Tanvi Jindal and Graham Hanchet for their insightful comments and research.
