Seek Punitive Damages

 

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The civil litigation system itself represents a significant risk factor and exposure to liability. Therefore, it is important that small business owners employ the various strategies that allow them to control the risk factors in litigation.

In most cases, the U.S. courts lack a loser pays system, meaning that bringing a suit will usually be costly for the small business owner, even if he wins.

The two main exceptions that allow for reimbursement of attorney's fees and costs to the party who prevails in a lawsuit are statutory and contractual. When one of the exceptions does not apply, a party may seek punitive damages, as an alternative way to effectively recover attorney's fees and related costs. Punitive damages can allow a plaintiff to bring an action that otherwise would not be economically justified. Punitive damages can more than offset a plaintiff's outlay for attorney's fees and related costs.

In a case involving misrepresentation in the purchase of insurance, an appellate court awarded each of the two plaintiffs approximately $1,500 in compensatory damages and $175,000 in punitive damages. The court specifically termed the plaintiffs' litigation costs as a significant factor in assessing the amount of punitive damages to award the plaintiffs. The $175,000 in punitive damages awarded to each plaintiff, in all likelihood, more than offset the plaintiffs' attorney's fees and court costs, thus effectively reimbursing them for these fees and costs.

Punitive damages generally are available in any action--except one based solely on breach of contract--when it is proven that the defendant acted willfully and maliciously. Small business owners who suffer losses due to fraud usually will be able to seek punitive damages under common law actions for fraud or under statutory actions based on the states' versions of the FTC Act and the federal RICO statute.

Further, a defendant can seek punitive damages against a plaintiff by way of a counterclaim. Thus, a defendant also can use a recovery of punitive damages to offset his attorney's fees and related costs.

Many states now have statutes that limit punitive damage awards, although the nature of the limits varies widely from state to state.

In some states, the limits apply only to certain causes of action (e.g., Connecticut's $250,000 limit in product liability actions). In some states, the limits apply to all causes of action (e.g., Virginia's limit of $350,000). In still other states, the limits apply to all causes of action, but are subject to exceptions (e.g., Florida's limit of three times the amount of compensatory damages, unless the party can show by clear and convincing evidence that a greater award is not excessive).

Work Smart States with limits on punitive damage awards, as of 2004, include: States Limiting Punitive Damage Awards Alabama Connecticut Indiana New Jersey Pennsylvania Alaska Florida Kansas North Carolina Texas Arkansas Georgia Maine North Dakota Virginia Colorado Idaho Nevada Oklahoma

These limitations generally favor the small business owner, by reducing the possibility that he will suffer an unreasonably large and unjustified award of punitive damages. At the same time, the option of punitive damages means that, when reimbursement of attorney's fees and related costs is not possible, the small business owner can seek punitive damages as a substitute way of recovering these fees and costs. This strategy might be used, for example, against another commercial party in a suit based on fraud.

Work Smart In April of 2003, the U.S. Supreme Court handed down a decision that could radically affect the awarding of punitive damages. In State Farm Mut. Auto. Ins. Co. v. Campbell, the High Court described the kinds of actions eligible for punitive damages awards and ruled that "few awards exceeding a single-digit ratio between punitive and compensatory damages . . . will satisfy due process" under the Fourteenth Amendment to the U.S. Constitution. In their decision, the Court ruled that the business practices of a company as a whole may not be used as the basis for these damages, but rather punitive damages may only be awarded for specific acts of harm caused to a specific plaintiff. This, then, led to their conclusion that punitive damage awards exceeding a 9-to-1 ratio (in relation to compensatory damages) would likely not pass constitutional muster. In the future, this ruling may severely limit a plaintiff's ability to get extraordinarily high awards from jury trials, preempting any state laws that may or may not limit punitive damages.

(See our case study on punitive damages awards for more information.)