Two years ago, in the thick of his efforts to improve the state's budgetary posture, California Governor Arnold Schwarzenegger signed into law a statute under which 75% of all punitive damage awards became payable to the state rather than to the prevailing plaintiff. At the time, I noted the short lifespan set for the statute, and I was skeptical whether the plan would actually produce any benefit to the state's embattled coffers:
The statute remains in effect, unless it is later extended, only until July 1, 2006, and it only applies to cases filed on or after August 16 of this year [2004] that result in final judgments -- really final, with all appeals and post-trial motions concluded -- prior to the statutory expiration date. It is easy to predict right now that there will be a rash of motions to continue trial dates as that expiration date approaches, so that the judgments will be free of the State's claim. In fact, given that it takes most of a year to get a typical case to trial, and that any post-trial motions and appeals will likely consume most of another year -- and let us not forget that the U.S. Supreme Court has found that there is a constitutional right to independent appellate review of any punitive damage award -- it is not particularly clear whether any punitive damage awards will find their way into the State's coffers before the statute disappears by its own terms.
Now that the statute has expired, a new bill (Senate Bill 832 [PDF]) sits atop the Governor's desk awaiting signature, veto or veto by inaction by September 30. If signed, the bill will reinstate the "punitives tax" for an additional five years, until July 1, 2011.
So, if the Legislature is fired up to extend the state's claim on punitive damage awards, the idea must have been a good one, right? Apparently not so. Writing in Capitol Weekly, John Howard confirms this weblog's remarkable predictive powers:
Two years later, [the promised] $450 million still hasn't materialized. Amazingly, not even a penny has flowed into the state Public Benefit Trust Fund, which was expressly set up to handle the punitive-damage money. This gap between the administration's promise and pocketbook reality is remarkable, even in the smoke-and-mirrors world of state budgeting that, in the end, is based on sophisticated expectations of revenue and expenses.
As Howard notes, SB832 began life as an environmental protection bill before being hijacked in committee in the waning days of the legislative session, rewritten to eliminate every word of its original text and re-tooled as an extension of the punitives-to-the-state (or, as the legislators termed it, "split recovery") statute. Why go to so much trouble to extend a statute that seems to have produced no discernible benefit to anyone?
'I think the feeling is, why not? Let it go another five more years to see if money comes in,' said one Capitol staffer familiar with the issue.
There is no indication yet whether the Governor will sign the extension in to law. The usual public voices on subjects such as this are mixed: The California Trial Lawyers Association is Consumer Attorneys of California are officially neutral. Insurers are vocally opposed, even though they are prohibited outright under California law from covering punitive damage awards against their insureds. The concern, perhaps, is that jurors' knowledge that the lion's share of punitive damages will go to the state will cause the size of those awards to increase in, for example, "bad faith" suits against insurers.
Strangely enough, the insurers are joined in their opposition by The Foundation For Taxpayer & Consumer Rights (FTCR), brainchild of Proposition 103 author Harvey Rosenfield, and no friend whatever of the insurance industry or the Governor. (FTCR is at least consistent: it was against the idea in 2004 as well.)
When the original bill passed in 2004, Walter Olson expressed at least tentative support for the idea, citing what has long struck me as a reasonable argument for passing all punitive damages on to the public, if one is going to permit punitive damage awards at all:
Lawyers who sue for a living talk a great deal about how the general public has a stake in the success of their endeavors. Here's their chance to show they mean it.
Governor Schwarzenegger has ten more days to decide whether to continue this interesting, if thus far ineffectual, experiment. This post will be updated when news comes in on his decision.
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UPDATE [100306]: Governor Schwarzenegger chose to veto the proposed extension of the "punitives tax." In his veto message (PDF), he indicates he is not opposed to an extension of the tax in principle, but was concerned because the bill "was amended late in the legislative session and did not provide an opportunity for sufficient hearings to determine whether this policy has been effective or not." He encourages reintroduction of the bill in the next legislative session for purposes of havein a "full debate" on its merits.
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