Punitive damages are damages that may be awarded to a successful plaintiff in a civil suit in addition to actual or compensatory damages upon a showing of a higher degree of culpability on the part of the defendant.
Merely causing harm to the plaintiff through a breach of a legal duty is not enough to award punitives.
Normally, in order to obtain punitive damages, a plaintiff must prove by a preponderance of the evidence that the unlawful injury caused by the defendant was intentional, reckless (as opposed to mere negligence), or that the defendant acted with intent to defraud. States vary in their formulations, but requirements that a plaintiff prove "fraud, malice, wilful or wanton conduct" are common. Punitive damages are reserved for cases in which the plaintiff is not only entitled to compensation, but the defendant deserves punishment.
The theory behind punitive damages is simple. Tortfeasors — corporate and otherwise — can generally estimate the amount of a settlement or jury verdict for compensatory damages, and thus are able to figure the cost of unlawfully injuring others into a "cost-benefit analysis." A particularly striking example of this sort of calculation came to light in the Ford Pinto products liability litigation. There, an internal memo was discovered in which the company had calculated the approximate cost to the manufacturer of deaths resulting from the Pinto's exploding gas tank. Having determined the cost of "compensating" consumers for being burnt to a crisp, the manufacturer decided that the cost was worth the savings in R&D and production costs. A defendant who has already figured out that compensating its victims is a reasonable expenditure has no incentive to follow the law.
This is where punitive damages come in. People and corporations who have already figured out that they have no reason not to break the law and harm others will generally continue to do so, thus rendering the civil justice system an utter farce. Punitive damages fill the "deterrence gap" by adding an unpredictable variable into the equation. Unlike compensatory damages, which are calculated based on the estimated pecuniary value of the plaintiff's loss, punitive damages are based solely on the defendant's assets and the blameworthiness of the defendant's conduct. A tortfeasor may be able to say "I can deal with a $2 million compensatory award," and opt to break the law. An unfixed, unpredictable potential punitives award, however, cannot be figured into a cost-benefit analysis. The only real criterion in assessing punitive damages is deterrence: will the defendant and others think twice about this conduct in the future? The possibility of punitive damages makes it clear that one breaks the law at one's own risk.
Punitive damages are rarely awarded in the first place, and are frequently reduced either by the trial judge ("remittitur") or on appeal. The U.S. Supreme Court has recently begun to take a particularly active role in policing punitive damages awards. In one recent case, BMW of North America, Inc. v. Gore, __ U.S. __ (1996), the Court struck down a jury verdict that awarded the plaintiff, Gore, $4000 in compensatory damages and $4 million in punitives1 for failing to inform customers of predelivery damage to new cars. In finding the punitive damages award to be "grossly excessive" and thus unconstitutional, the Court noted that the punitives award was 500 times the actual damage found by the jury. While declining to tie the constitutionality of a punitive damages award to a strict mathematical formula, the Court's opinion noted that "[w]hen the ratio is a breathtaking 500 to 1, however, the award must surely 'raise a suspicious judicial eyebrow.'" (quoting TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443, 482, O'CONNOR, J., dissenting).
1 The trial judge later remitted the punitive damages award to $2 million.