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Saturday, August 16, 2003

Judgment Math

I started to write a response to Will in the feedback section, but I decided it might as well go in the main body of the blog.

Punitive Damages

Punitive damages come from Chapter 41 of the Civil Practice and Remedies Code, so the full details could best be gleaned by trying to read the statute itself. Punitive damages are a form of damages imposed by a jury not to compensate the plaintiff, but to deter the defendant and others like him from engaging in such activities in the future. Despite the lack of a compensation rationale, they're paid to the plaintiff -- though several commentators have suggested that punitives should be paid to the State instead.

Juries can only award punitive damages when they find clear and convincing evidence (i.e. without a doubt) that the defendant acted with "malice," which is a term of art meaning "knew of the dangers yet still wanted the result to occur." Because of that limitation, punitive damages can only be awarded in certain egregious tort situations, and are not an everyday occurrence.

Punitive damages are capped in Texas, as in the majority of states. If the defendant didn't commit a serious crime (such as murder or assault), the cap is the greater of (a) $200,000 or (b) 2 x (economic damages) + (non-economic damages up to $750,000). Prop. 12 and House Bill 4 didn't add a new cap on punitive damages, therefore, but they were already capped.

Doing the Math

Will also asks about the way that a judgment is calculated, and the actual take-home amount.

First, a plaintiffs' lawyer will be hired (almost always) on a contingent fee basis. This means that a plaintiff doesn't have to pay $150-300 an hour for at least a hundred hours, plus several thousand dollars up front for expert witness fees. (Medical malpractice cases are especially expensive to try.) The plaintiffs' attorneys agree to shoulder this burden -- and to get nothing if they lose -- because the reward is so great. The typical contract these days is for 40% of the gross return, though 30 or 33% is also negotiable. (Sometimes, attorneys use a sliding scale -- 30% if we settle, 35% if we go to trial, 40% if I have to defend the case on appeal.) And this is gross -- so if you only recover your out of pocket expenses, you have really only recovered 60% of your out-of-pocket expenses. If you don't like it, feel free to pay by the hour.

Second, damages are partially taxable. Physical injury damages are not taxable, because they are compensation for the loss of bodily integrity -- which isn't "income." Similarly, damages for emotional distress caused by physical injury are not taxable, nor are wages lost because of physical injury. But punitive damages and interest are always taxable. Non-physical injuries -- like harassment -- are taxable, except for money spent on medical treatment (such as for mental health providers). And legal fees are not deductible unless they can be seen as a "business expense."

So, to examine Will's hypothetical physical injury: $2M for past and future medical expenses, $2M for past and future lost wages, $250,000 for pain and suffering. $4.25M. You would also get prejudgment interest of 10%, or $4.68M. Your attorney takes 40%, leaving $2.8M. Uncle Sam only takes tax on the prejudgment interest, because it was all caused by physical injury, so that's another $125,000 gone. If you invested the remainder at a 5% rate of return -- which is generous in the current market -- that would make about $135,000 per year without touching the principal. But you should also remember that some of that money goes to compensate you for your out-of-pocket expenses, so it's not like it's a new windfall for you. And to the extent that your medical expenses were paid by your insurance company, your insurer has the right to be paid back out of your judgment. (They're the ones who are out of pocket, after all.)

I'm not sure what this all shows, except that there are a lot of issues going on in a judgment. It gets even more fearsome when there are multiple defendants with varying levels of risk, or defendants who have already settled, or other plaintiffs, or...

 11:35 PM

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