Schwarzenegger’s Punitive Damage Proposal Called Red Herring;

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Consumer Activist Calls For Taxing Convicted Wrongdoers’ Payouts To Fill Budget Hole

In commentaries published today in the State Bar Journal and in the San Diego Union Tribune, consumer advocate Jamie Court explains why Governor Arnold Schwarzenegger‘s proposal to revert 75% of punitive damage awards to the state will not produce income for California.

He also calls on Schwarzenegger to reform tax policies so that convicted wrongdoers, not victims, pay taxes if held “accountable by a court for fraud, intentional wrongdoing, bad faith, extreme and outrageous conduct, and civil rights violations.” Such payments by convicted wrongdoers are not taxed currently.

The California Assembly Judiciary Committee will debate the Governor’s proposal at hearings today.

“The irony of current tax policy is that while the innocent victims who receive punitive damages must pay taxes on them, the payors — those who commit malice and oppression — can write off the payments as a tax deduction,” writes Court, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights and author of Corporateering (Tarcher/Putnam). “If Schwarzenegger is the man of the people he says he is, he will balance his budget on the backs of wrongdoers, not innocent victims of malice.”

Court notes, “First, there simply are not super-sized punitive damages any more after a recent ruling by the U.S. Supreme Court in State Farm v. Campbell” — the court ruling limited punitive damages to no more than 9 times compensatory losses. Court’s research found that in the year prior to the ruling $28.5 billion in punitive damage awards were recorded by California courts in cases with total compensation of $29.1 billion. In the year following the ruling, judges and juries awarded only $1.03 billion in cases worth $1.24 billion.

“In practice, however, punitive damage awards like these typically are not paid,” Court writes. “The reason is that defendants’ insurance policies in California do not cover punitive damage payouts. As a result, a settlement is usually reached after the verdict and the payout is not categorized as punitive damages, so the defendants’ insurance kicks in.”

In the State Bar Journal column, Court notes “The real game seems to be to make it even less likely that big business ever faces punitive damages, which is why the proposal also takes away contingency fees paid on the 75 percent of punitive damages that go to the state. That would make attorneys a lot less likely to bring cases involving punitive damages on a contingency fee basis.”

Court cites in the State Bar Journal Schwarzenegger donors held accountable for punitive damages during the last three years. These include biotech giant Genentech, which was slammed by a jury with $200 million in punitive damages in June 2002 for failing to pay for royalties for technology invented by two scientists that the company used. The jury found Genentech breached its contract with City of Hope hospital by concealing licensed sales of protein products (i.e., hepatitis vaccines) over a 15-year period. Bank of America was slapped with a $3 million punitive damages award after a 28-year employee was fired when she criticized certain appraisal practices as a violation of banking regulations. A court told America Online to pay $3.5 million in punitive damages for defaming and firing the vice president of Netscape by alleging he knowingly allowed an assistant to falsify time cards.

“Terminating tax breaks for convicted wrongdoers in California could be a real boon for the state treasury, if the governor is willing to take on the special interest groups that will want to keep their write offs,” Court writes. “Let’s start with the notion that any corporation or individual that is held accountable by a court for fraud, intentional wrongdoing, bad faith, extreme and outrageous conduct or civil rights violations should pay taxes on any payout or settlement resulting from the case.”

As a dramatic example of the loss to the government from not taxing damages paid by convicted wrongdoers, Court notes a famous snapshot of the problem. Exxon‘s $1.1 billion settlement with the U.S. government over the Exxon Valdez oil spill litigation cost Exxon a maximum of $524 million after the oil company’s tax deductions. The Congressional Research Office found that more than half of the civil damages totaling $900 million could be written off on Exxon‘s federal tax return.

The columns can be read at


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For more about the Foundation for Taxpayer and Consumer Rights visit or read about Corporateering at

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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