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Do Corporate Fines and Punitive Damage Awards Serve Their Purpose?

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Corporate fines and punitive damage awards are meant to punish and deter wrongful conduct. Pfizer agreed to pay $2.3 billion to settle fraud claims regarding its marketing practices. According to the New York Times, it is the largest criminal fine of any kind ever. But whom does it punish and does it deter? Usually when corporate fines are imposed, the corporate officers who authored and implemented the fraudulent conduct either remain and continue to receive their salaries, options and other benefits, or if they have left the company, their pensions and benefits remain intact.

Shareholders are the ones truly punished. Those that held the shares during the wrongful conduct may have benefited indirectly by an increase in the value of their shares, but it would be very difficult to attribute such conduct to a specific rise in the price of the stock. They, of course, are innocent of any wrongdoing. However, many of the stockholders may not have owned their shares during the wrongful conduct, and they, nonetheless, are punished for the past misconduct of others. It is also likely that the fines are merely passed on to the consumers in the form of increased prices.

The same is true of punitive damage awards. I presided over cases in which punitive damage awards did not become final until five or even 10 years after the wrongful conduct. The persons responsible are long gone, taking with them the benefits of their misconduct and leaving the fine to be paid by persons who had no interest in the company at the time of the misconduct.

As to deterrence, it is one of those mystical concepts about which we can never be sure -- like the death penalty. There is no way to measure whether the death penalty stops anyone; nor can we determine whether corporate fines or punitive damage awards change behavior. Apparently in the case of Pfizer, this was its fourth settlement over illegal marketing activities since 2002. So much for deterrence!

When I read the Times article, I was excited to read that Mr. Kopchinski's share of the settlement is expected to exceed $50 million, thinking he was an officer contributing to the settlement, but a careful reading revealed that he was one of the whistle-blowers (for which I am still excited). If we truly wish to have corporate fines and punitive damages serve their intended purpose, then they should be imposed upon those individuals responsible for the wrongful acts rather than innocent shareholders and consumers.