Skip to main content
SpringerLink
Log in

Incentive effects of class actions and punitive damages under alternative procedural regimes

  • Published:
European Journal of Law and Economics Aims and scope Submit manuscript

Abstract

In an economic perspective, punitive damages and class actions can be viewed as sharing a common economic function—creating optimal deterrence. Building on Parisi and Cenini (Class actions for Europe: perspectives from law and economics, ELGAR, 2010), we study the effect of alternative procedural regimes on the effectiveness of punitive damages and class actions. Specifically, we compare the workings of punitive damages and class actions in the American and English (“loser-pays”) regimes. Our findings help explain the limited use and late adoption of class actions and punitive damages in Europe.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Generally, punitive damages can be awarded when the defendant’s behaviour is malicious, oppressive, gross, wilful and wanton, or fraudulent and are damages given to the plaintiff as a way of punishing the defendant.

  2. See Polinsky and Shavell (1998), Shavell (2004), Craswell (1996), Mesulam (2004).

  3. See Cassone and Ramello (Cassone and Ramello 2010), Ulen (2010), Epstein (2003), Miller (1998), Silver (2000). See also Di Nola et al. (2005), Giuggioli (2006).

  4. See also Deffains and Langlais (2010).

  5. See Parisi and Cenini (2010) for an analytical proof.

  6. In addition to the imperfect enforcement due to the lack of action of prospective plaintiffs, torts may be left unpunished due to court errors. We will introduce the possibility of some margin of error by courts in the folloowing analysis.

  7. In the interest of simplicity and without loss of generality, we assume that courts never mistakenly impose liability in the absence of an actual accident.

  8. The case of perfect enforcement corresponds to e = 1.

  9. Analytically, the enforcement error under the American rule should be sufficiently lower than the one under the English rule, such that 1/e AR − 1/e ER > αc/A.

  10. See Dobbs (1989). Ending Punishment in Punitive Damages: Deterrence Measured Remedies’, Alabama Law Review, 40, 831–917, who suggested that in some cases punitive damages award should be equal to a reasonable attorney fee or litigation cost; Comment (1990), ‘Critical Reappraisal of Punitive Damages Encompassing Attorney’s Fees: Normative Analysis and Pragmatic Concerns’, Baylor Law Review, 42, 737. For further references, Benatti (2008), 71. See also Trimarchi (1962), Sacco (1959), Pardolesi and Tassone (2003).

  11. The analysis in the case of class action coincides with the one in case of punitive damages under the assumption of constant returns to scale in the effectiveness of care.

  12. A famous class action verdict was rendered in Florida State Court against the tobacco industry: punitive damages were assessed at $ 144.87 billion, more than seventeen times the combined net worth of all major cigarette manufacturers. For further references, see Nagareda (2001a, b).

  13. See Parisi and Cenini (2010).

  14. Roginsky v. Richardson—Merrel Inc., 378 F. “d 832, 839 (2d Cir. 1967). See also Benatti (2008).

  15. Alabama, Alaska, Arkansas, Colorado, Connecticut, Florida, Georgia, Idaho, Indiana, Kansas, Mississippi, Montana, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Texas, Virginia. A proposal of reform of the way in which punitive damages are awarded, named Model Uniform Punitive Damages Act, was issued in 1996.

  16. See for instances Honda Motor Co., Ltd. v. Karl L. Oberg, Supreme Court of the United States, 512 U.S. 415 (1994). The first time that it has been raised the question of violation of the Eight Amendment in front of the Supreme Court of United State was in Aetne Life Insurance Co. v. Lavoie, 475 U.S. 813 (1986) where the Alabama Supreme Court had liquidated $ 3.500.000 as punitive damages, while the actual damages were $ 1.378. For further references, see Benatti (2008), 61.

  17. Thompson v. Commissioner of Police of the Metropolis (1998) Q.B., 498 (C.A.).

  18. See Huckley v. Money, 95 E. R. 768 (K.B. 1763); Wilkes v. Wood, 98 E.R. 489 (K.B. 1763). For further references, see Benatti (2008).

  19. For the contrary view that victims of physical injuries may sometimes receive too much compensation, see again Arlen (2000), §11. See also Avraham (2003).

  20. Philip Morris USA Inc. v. Williams. The U.S. Supreme Court vacated the first decision of the Oregon Supreme Court upholding this award and instructed the lower court to apply its standard of prohibiting punishment of a defendant for damage to nonparties. The Court of Appeals again reinstated the $79.5 million judgment. On appeal, the Supreme Court of Oregon affirmed.

  21. Cassel v. Broome, 1 All. e.R., 801 (1972).

References

  • Arlen, J. (2000). Tort damages. In B. Bouckaert & G. De Geest (Eds.), Encyclopedia of law and economics (Vol. 2, pp. 682–734). Cheltenham: Edward Elgar.

    Google Scholar 

  • Avraham, R. (2003). Pain-and-suffering damages in tort law: Revisiting the theoretical framework and empirical data. Michigan law and economics research paper no. 03-001, Northwestern Law & Econ Research Paper 03-03. Available at http://www.ssrn.com/abstract=382120.

  • Benatti, F. (2008). Correggere e punire. Dalla law of torts all’inadempimento del contratto. Milano: Giuffrè.

    Google Scholar 

  • Bittle, L. F. (1987). Punitive damages and the eighth amendment: An analytical frame-work for determining excessiveness. California Law Review, 75, 1433–1450.

    Article  Google Scholar 

  • Bronsteen, J. & Fiss, O. M. (2003). The class action rule. Notre Dame Law Review, 78(5), 1419–1454. Available at http://www.ssrn.com/abstract=895093.

    Google Scholar 

  • Cassone, A., & Ramello, G. B. (2010). The simple economics of class action: Private Provision of club and public goods. European Journal of Law and Economics (forthcoming)

  • Comment. (1990). Critical reappraisal of punitive damages encompassing Attorney’s Fees: Normative analysis and pragmatic concerns. Baylor Law Review, 42, 737.

    Google Scholar 

  • Craswell, R. (1996). Damage multipliers in market relationships. Journal of Legal Studies, 25, 463–492.

    Article  Google Scholar 

  • Deffains, B., & Langlais E. (2010). Informational externalities and settlements in mass torts litigations. European Journal of Law and Economics (forthcoming).

  • Di Nola, S., Porrini, D., & Ramello, G. (2005). Class action, mercati finanziari e tutela dei risparmiatori. In X Rapporto sul sistema finanziario italiano. Fondazione Rosselli (pp. 459–475).

  • Dobbs, D. B. (1989). Ending punishment in punitive damages: Deterrence measured remedies. Alabama Law Review, 40, 831–917.

    Google Scholar 

  • Epstein, R. (2003). Class actions: Aggregation, amplification, and distortion (pp. 475–517). The University of Chicago Legal Forum.

  • Jeffries, J. C., Jr. (1986). A comment on the constitutionality of punitive damages. Virginia Law Review, 72, 139–158.

    Article  Google Scholar 

  • Giuggioli, P. F. (2006). Class action e azioni di gruppo. Padova: Cedam.

    Google Scholar 

  • Mesulam, S. (2004). Collective rewards and limited punishment: Solving the punitive damages dilemma with class. Columbia Law Review, 104(4), 1114–1149.

    Article  Google Scholar 

  • Miller, G. (1998). Class action. In P. Newman (Ed.), The new palgrave dictionary of economics and the law (Vol. 1, pp. 257–261). New York: Stockton Press.

    Google Scholar 

  • Nagareda, R. A. (2001a). Engle v. R.J. Reynolds Tobacco Co.: lessons in state class actions, punitive damages, and jury decision-making. Wake Forest Law Review, 36, 1129–1155.

    Google Scholar 

  • Nagareda, R. A. (2001b). Punitive damages class actions and the baseline of tort. Wake Forest Law Review, 36, 943–968.

    Google Scholar 

  • Pardolesi, R., & Tassone, B. (2003). I giudici e l’analisi economica del diritto privato. Bologna: Il Mulino.

    Google Scholar 

  • Parisi, F. & Cenini M. (2010). Punitive damages and class actions. In J. G. Backhaus, A. Cassone, & G. Ramello (Eds.) Class actions for Europe: Perspectives from law and economics (ELGAR, 2010).

  • Polinsky, A. M., & Shavell, S. (1998). Punitive damages: An economic analysis. Harvard Law Review, 111, 869–962.

    Article  Google Scholar 

  • Sacco, R. (1959). L’arricchimento ottenuto mediante fatto ingiusto. Torino: UTET.

    Google Scholar 

  • Shavell, S. (2004). Foundations of economic analysis of law. Cambridge: Press of Harvard University.

    Google Scholar 

  • Silver, C. (2000). Class actions—representative proceeding. In P. Boukaert & G. De Geest (Eds.), Encyclopedia of law and economics (Vol. 2, pp. 194–240). Chetenham: Edward Elgar.

    Google Scholar 

  • Trimarchi, P. (1962). L’arricchimento senza causa. Milano: Giuffrè.

    Google Scholar 

  • Ulen, T. S. (2010). An introduction to the law and economics of class action litigation. European Journal of Law and Economics (forthcoming)

  • Wheeler, M. E. (1983). The constitutional case for reforming punitive damages procedures. Virginia Law Review, 69, 269–356.

    Article  Google Scholar 

Case references

  • Aetne Life Insurance Co. v. Lavoie, 475 U.S. 813 (1986)

  • Browning-Ferris Industries of Vermont, Inc., et al. v. Kelco Disposal, Inc., et al., Supreme Court of the United States, 492 U.S. 257 (1989)

  • Cassel v. Broome, 1 All. e.R., 801 (1972)

  • Gertz v. Robert Welch Inc., Supreme Court of the United States, 418 U.S. 323; 41 L. Ed. 2d 789 (1974)

  • Grimshaw v. Ford Motor Company, Court of Appeal of California, Fourth Appellate District, Division Two, 174 Cal. Rptr. 348 (1981)

  • Honda Motor Co., Ltd. v. Karl L. Oberg, Supreme Court of the United States, 512 U.S. 415 (1994)

  • Huckley v. Money, 95 E. R. 768 (K.B. 1763)

  • Pacific Mutual Life Ins. Co. v. C. Haslip, Supreme Court of the United States, 499 U.S. 1 (1991)

  • Philip Morris USA v. Williams, 549 U.S. 346 (2007)

  • Roginsky v. Richardson—Merrel Inc., 378 F. “d 832, 839 (2d Cir. 1967)

  • State Farm Mut. Auto. Ins. Co. v. Campbell, Supreme Court of the United States, 538 U.S. 408 (2003)

  • Thompson v. Commissioner of Police of the Metropolis Q.B., 498 (C.A.) (1998)

  • Wilkes v. Wood, 98 E.R. 489 (K.B. 1763)

Download references

Author information

Authors and Affiliations

  1. Faculty of Law, University of Milan, Milan, Italy

    Marta Cenini

  2. Faculty of Economics, University of Modena and Reggio Emilia, Emilia–Romagna, Italy

    Barbara Luppi

  3. Law School, University of Minnesota, Minneapolis, MN, USA

    Francesco Parisi

  4. Faculty of Economics, University of Bologna, Bologna, Italy

    Francesco Parisi

Authors
  1. Marta Cenini
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Barbara Luppi
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Francesco Parisi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Francesco Parisi.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Cenini, M., Luppi, B. & Parisi, F. Incentive effects of class actions and punitive damages under alternative procedural regimes. Eur J Law Econ 32, 229–240 (2011). https://doi.org/10.1007/s10657-011-9241-z

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10657-011-9241-z

Keywords

JEL Classification

Search

Navigation