Special levies on punitive damages: Decoupling, agency problems, and litigation expenditures

Abstract

This article extends the economic model of “decoupling” the damage award payable by a defendant and the award received by a plaintiff in the context of recently enacted “special levy” statutes. These statutes require plaintiffs to hand over portions of their punitive damage awards to the state. The basic model of decoupling is expanded by incorporating the effect of levies on litigation expenditures and settlement and by examining the effect of agency problems between plaintiff and his attorney. Consistent with the basic model, we find that, in the absence of agency problems, if a case goes to trial, levies reduce the expected award payable by the defendant and the plaintiff's litigation expenses. However, the effect of levies on settlement is indeterminate. In the presence of agency problems, certain forms of levies will have no effect on the defendant's expected payments, on litigation expenses, or on settlement; and other forms will either be equally ineffective as the former forms or less effective than they are in the absence of agency problems.