An uncharacteristically wishy-washy editorial in today’s Los Angeles Times appears to mildly support, or at least not clearly oppose, Gov. Schwarzenegger’s proposal to tax punitive damages at a rate of 75%. However, it notes the political difficulties that may arise due to its lack of a sharks eat pay lawyers first provision, and decries as consumer-unfriendly the proposed limit of one punitive damage award per defendant.

My view is that a “sharks eat first” provision may be politically necessary, but otherwise makes no sense whatsoever. If your boss went insolvent and was unable to pay you all the wages you were owed, you would not be permitted to withhold the difference in income tax. Instead, you’d be taxed at the regular rate for whatever portion of your wages were actually paid. Why should the unsatisfied portion of punitive damages award be treated any differently? Surely a lawyer and his client are not entitled to their windfall profits than you are to your paycheck, which you’ve actually earned! So I no reason why the state should not be entitled to 75% of whatever punitive damages are actually paid to the plaintiff and/or his attorney.

As to the single-defendant limit, I think the Times has a legitimate concern, but takes it too far. Obviously, there would be a problem if one punitive damage award against Company X were to insulate it against any punitive damage awards for any subsequent conduct, or for any blameworthy conduct unrelated to the conduct that was the subject of the first punitive damages award. This distinction is not made clear in the governor’s proposal, which consists only of a two-paragraph sketch. I have no doubt, however, that it will be clear in any legislation that may seek to implement the proposal. On the flip side, multiple punitive damages awards for substantially the same conduct are eerily similar to multiple fines, and violate the spirit, though not the letter, of the double-jeopardy rule. So rather than throw out the baby with the bathwater, let’s tweak the “most consumer-unfriendly clause” to make it better.

Schwarzengger’s proposal is a bit difficult to find, as it’s buried at the bottom of page 91 of the Governor’s Budget May Revision (PDF File). For the convenience of the reader, I’ve reproduced the text below.

Compensatory damages are awarded by the court to compensate for loss or injury sustained by the complaining party. Punitive damages are awarded in addition to the award of compensatory damages, and are awarded for the sake of example, to punish a defendant who has been found to have acted maliciously, and to deter future such actions. Since the award of compensatory damages compensates the complaining party for their loss or injury, the award of punitive damages as intended to punish the defendant and set an example, should more appropriately be awarded to the State where it can be used for public good purposes that are consistent with the nature of the award. At least eight states (Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon and Utah) have split-award statutes in which a share of the punitive damage award goes to the state to be used to benefit society.

The May Revision proposes trailer bill language to amend existing law related to punitive damages by limiting the number of punitive damages that may be recovered from a defendant to one. It would also allow the State to receive 75 percent of the punitive damage awards. The annual revenue is estimated to be $450 million, and is proposed to be deposited in a special fund, the Public Benefit Trust Fund. A control section is proposed to allow the revenue to be appropriated annually, up to the balance of the fund, for State programs and purposes consistent with the punitive nature of the award. Savings are estimated to be $450 million in 2004-05.