United States: Governor Taps Punitive Damage Awards For Budget Shortfall

As part of his revised budget package presented to the Legislature, Governor Schwarzenegger recently proposed to increase state revenues by changing existing law to require that 75 percent of future punitive damage awards be paid to the State. Eight other states already have such "split-award" statutes. The Governor projects that this proposal would generate $450 million for California.

The Governor unveiled his proposal in the "May Revision" to his January budget proposal, and explained, "Since the award of compensatory damages compensates the complaining party for their loss or injury, the award of punitive damages … 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."

The Governor also proposes to change the law so that a defendant would not be required to pay punitive damages in more than one lawsuit raising the same claim. Punitive damage awards against a small business would also be limited to two percent of its annual income.

It is unclear how this change would impact the size of punitive damage awards. Although the Governor proposes to prohibit the parties or the court from informing the jury that any portion of the punitive damage award would go to the state, jurors will likely be generally aware of the change in the law. Jurors may award larger damages if they believe the state will benefit. Or, they may be less inclined to award damages if they know the injured party will not benefit from the award.

Under the Governor’s proposal, the plaintiff would receive the remaining 25 percent. There are conflicting reports about whether attorney’s fees would be paid before the award is split or would be paid out of the plaintiff’s share. Attorney’s fees would be limited to a reasonable amount set by the judge for work performed proving the punitive damage portion of the case.

The Governor’s proposal will be included in a budget trailer bill which should be signed into law with the passage of the state Budget Act.

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