In business litigation, without a framework for determining punitive damages, judges and juries could potentially award damages that are either excessive or inadequate. By educating triers of fact about a defendant’s financial structure and condition, damages experts can provide the necessary context for a reasonable award.
Appropriate punitive damages depend on several factors, including the level of “reprehensibility” of the defendant’s conduct and the ratio of punitive damages to compensatory damages. (Typically, anything more than 10-to-1 is considered excessive.) In addition, federal or state laws may prescribe, or place caps on, punitive damages in certain types of cases. Within these confines, a defendant’s financial condition is relevant in determining whether a punitive damages award will deter similar conduct in the future.
Damages experts can help judges and juries make this determination by:
Identifying the party being punished. If a specific division within a company is responsible for plaintiffs’ damages, a punitive damages award generally only needs to be large enough to punish that division, even if it won’t have a significant impact on the company as a whole.
Calculating profits. A judge or jury may consider the extent to which a defendant profited from its wrongful conduct. A damages expert can assist the jury in distinguishing profits vs. revenues and accounting for the defendant’s expenses.
Putting net worth in perspective. Judges and juries often view a high net worth as a justification for a large punitive damages award. But net worth isn’t necessarily an accurate measure of a defendant’s ability to pay. For example, a company that’s financed primarily by debt may have a relatively low net worth, even though its resources may be comparable to companies financed primarily by equity.
Analyzing liquidity and cash flow. Even if a company is considered wealthy, it may not have sufficient liquid assets or cash flow to pay a large punitive damages award, and converting illiquid assets into cash could make it difficult for the company to continue operating. A damages expert can help the judge or jury set punitive damages at a level that will punish the defendant without putting it out of business.
Defining value. A damages expert can educate the trier of fact about different measures of value, such as book value, fair market value and market capitalization. These measures may or may not reflect a defendant’s financial condition, depending on economic conditions and the defendant’s particular circumstances.
In cases involving punitive damages, expert financial testimony is key to ensure that judges and juries have the proper framework within which to set damages at a reasonable level.