A woman is awarded millions for spilling hot coffee in her lap at McDonalds.
Then a woman "finds" a human finger in her chili at Wendy's.
Do punitive damages work? What is the point of the "punishment" in the punitive damage? Why are they awarded to people?
KPMG's recent woes recently came home to me as a great example of the problem with punitive damages as currently implemented.
Here's a memo from Gregg Ritchie, a product developer at KMPG, which sent as a formal recommendation to Jeff Stein, head of KMPG's tax division:
http://www.pbs.org/wgbh/pages/frontline/shows/tax/schemes/3.html
In the memo, Ritchie says that his calculations show that if KPMG did not register its OPIS shelter with the IRS, the fees the firm would earn from the shelters would far outweigh any IRS penalties. He recommends to Stein that KPMG should make a business/strategic decision not to register the OPIS product as a tax shelter.'
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Punishing the Wrong Party
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This is the highest-profile example I could find of the problem with punitive damages. When individuals within a corporation break the law, they can do so with relative impunity because they know that 'the corporation' will bear the brunt of any legal consequences.
Imagine a pharmaceutical company that produces drugs with harmful side effects. Two researchers have reported their findings on the side effects, and the board is faced with a decision: do we cancel production of the drug, or suppress the findings and release the drug?
When a 'corporation' is allowed to serve as the whipping boy for a board of directors, punishment loses its power to persuade. Executives will protect their salaries and bonuses at the expense of the corporation, and make illegal decisions as long as the consequences will be nothing worse than early dismissal and a diminished exit bonus.
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Rewarding the Wrong Party
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Worse, though, than applying a punishment to the corporation, is allowing the money to flow to the "victims" of the corporate malfeasance when that money can do little good. Such misplaced compensation only serves as an incentive for people to allow themselves to be abused by corporations. The "Wendy's Finger" incident is only one example; there are countless others.
I learned this principle as a child. My parents assigned all the kids to do chores in teams. My sister and I were supposed to do the dishes each night. One night, we got in a fight over something and I quickly found myself facing two angry parents and a sister streaming exaggerated tears. That night I was assigned to finish doing the dishes by myself.
My sister, no slouch in the 'picking up on things' department, immediately learned that if she could goad me into hitting her, or providing any other semi-justifiable provocation to tears, she might not have to do the dishes. Our nightly ritual became a constant struggle until the next time I yielded to temptation. Kathryn started to cry, and my parents appeared in the kitchen.
"Tom, after the dishes are done, you go straight to your room," Dad said.
Kathryn started to walk away, with a glow of satisfaction no doubt spreading throughout her cunning soul.
"Kathryn, get back here. You're not allowed to leave the kitchen until the dishes are done."
Sorrow replaced the satisfaction as Kathryn realized that getting me to hit her would no longer release her from the onerous chore. From that night on, our work went more smoothly.
My parents understood that providing punishments for one party which benefit another can lead to unintended consequences. The courts need to understand this as well. Restitution is a separate, and valid, concept. Corporations whose executive officers commit crimes through their executive power should be involved in making direct restitution for those crimes. (Just as a company must honor a contract signed by one of its officers.)
Direct restitution does not mean, however, fourteen million dollars for a hot cup of coffee spilled in a lap. That is an amount blown out of proportion to serve as a punishment to the corporation. The violated individual should receive only enough to compensate for damage, not enough of a windfall to serve as an incentive to the rest of the community to start dumping hot beverages on themselves. If further punishment is to be levied against the corporation, let the money be put into the community generally.
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That's All
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I realize this is not a fully developed essay. I have not fully addressed the issue of corporate culpability in the wrongdoing of selected officers. But this is just my blog, so I only have to write what I want to write. (Of course, to the extent I do that I'm undermining what will be a future essay about the strengths of blogging, but that's okay.)
This just all grew out of a discussion with my brother-in-law, who worked for the SEC and felt rather differently than I about the validity of punitive damages.