If a limit is ever to be imposed on the growing tendency of juries to render outrageously costly verdicts, don't count on Washington for much help. Instead, it's state courts and state legislatures that will have to do the job.
That much should be clear from this week's ruling in which the U.S. Supreme Court upheld the verdict of a lower tribunal in awarding $1 million to an Alabama woman over an unpaid $3,000 medical claim.Though the result is a travesty, there are limits to how much the Supreme Court can be blamed. Properly, an increasingly conservative high court is reluctant to tamper with the decisions of state courts and state legislatures. What's more, the Supreme Court was being asked to apply the Constitution to a case on which the Constitution is silent.
Even so, the upshot is still a verdict that rankles because it upholds punitive damages more than four times the amount of what it took to compensate the Alabama woman for her injuries and more than 200 times her out-of-pocket expenses.
Up to a point, punitive damages serve a useful purpose by acting as a deterrent to irresponsible behavior. Even so, money awards ought to bear a reasonable relationship to actual loss. When awards are as exorbitant as they were in the Alabama case and many others, the results can be:
- Instant bankruptcy for small, marginal firms.
- Higher insurance costs for all firms and, consequently, high prices for customers.
- Greater reluctance of firms to undertake risky but potentially beneficial ventures.
Consequently, the cost of verdicts like the one this week must be counted not just in terms of the money immediately involved but also in terms of reduced innovation and competition.
A few years ago, the non-partisan, non-political Committee for Economic Development suggested that the states should start formulating guidelines aimed at limiting the tendency to juries to render ever more exorbitant awards in liability cases.
An even better idea would be to try to avoid courts, where legal costs can consume 42 cents of each dollar paid to defendants, and settle more disputes by mediation.
But such reforms won't materialize unless the states now take up where the U.S. Supreme Court has left off.