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The Economics of Deterrence

To read the full story about 1-to-1 damage ratios, click here.

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Mayer Brown partner Andrew Frey, who filed briefs in Exxon Shipping Co. v. Baker, talks more about punitive damages ratios:

Q: Why was a 1-to-1 ratio an appropriate limit to the punitive damages in Exxon Shipping Co. v. Baker?

A: First of all, Exxon did not set out to de-foul Prince William Sound. It was an accident. They were careless. They were reckless, maybe. But they suffered. They had $2 billion in cleanup costs and compensatory costs they had to pay. They had fines of another billion dollars or so. They had a huge public relations disaster. When you put all that together, if that didn't deter them from letting captains with alcohol problems man the ship, tacking on punitive damages isn't going to make any difference.

Q: When is it fitting to award larger punitive damages?

A: There's no general hard and fast rule. There are certain kinds of cases where [a 1-to-1 ratio] is not going to be adequate. If somebody's dumping toxic waste in the middle of the night or doing things they're likely going to get away with, you may need a bigger award to deter them.

Q: What role does the size and power of the defendant have to do with determining the award?

A: One of the fallacies is the idea you need more liability to deter a large company than a small one. That's a complete economic fallacy. I don't think there's a respectable economist who agrees with that. You have to look at the actual economics of the transaction. It gets into questions like who is more risk averse. Big companies are risk averse. I can't charge Microsoft $10,000 an hour for my time just because it's small in relation to their net worth.

Associate Editor

Lauren Williamson

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