Gain-based Damages


Gain-based Damages

1. Introduction

On what basis can damages for tortious conduct be measured by the defendant’s gain rather than the plaintiff’s loss? This question recently has received increasing attention for reasons that are not hard to see. Gain-based damages for torts implicate fundamental issues in our conception of private law. On the one hand, they open up the possibility of a more nuanced assessment of damages both by extending the long-established jurisprudence of waiver of tort and by linking tortious liability to the newly invigorated interest in restitutionary liability. On the other hand, they present an intellectual puzzle. If tort law is concerned with wrongful injury to the plaintiff, special arguments are required to explain why, as a matter of justice, the remedy should refer to the gains of the defendant. The reparation of injury seems satisfied by compensating the plaintiff for his or her loss. To place into the plaintiff’s hands the defendant’s gain in excess of that loss seems to confer a windfall.

My immediate excuse for revisiting this topic is to draw attention to the relevance of inquiring into the plaintiff’s entitlement to damages measured by the defendant’s gain. Many of the current treatments of gain-based damages for torts focus on the defendant’s desert in the aftermath of wrongdoing or on the social good that can be achieved by compelling the disgorgement of the wrongdoer’s gain. Hence commentators appeal to the idea that one should not profit from a wrong,1 that disgorgement of wrongful gain is an effective deterrence for potential wrongdoers,2 or that gain-based damages are directed toward the protection of legal facilities in whose integrity the community has an interest.3 However, the injustice or social inexpediency of the defendant’s retention of the gain indicates only the party from whom the gain should be taken, not the party to whom it should be awarded. Thus, such accounts fail to provide a reason for the law to transfer the defendant’s gain to the plaintiff, of all people.4 If the basic difficulty with an award of gain-based damages is the supposed windfall of the plaintiff, an adequate treatment must show either that the award is justified despite being a windfall or that the award, where appropriate, is not really a windfall but damages that the plaintiff may of right demand from the defendant. The latter is the strategy that I will essay here.

More broadly, my aim in this chapter is to situate gain-based damages within the theoretical framework of corrective justice. Like any remedy, an award of gain-based damages presupposes a conception of the injustice that it remedies. Because corrective justice views damages as undoing an injustice, it is particularly sensitive to the connection between the remedy that the plaintiff can claim and the injustice that is imputed to the defendant. The significance of that connection for gain-based damages is the subject of this chapter.

Corrective justice embodies a notion both of the relationship of the remedy to the injustice that it remedies and of the relationship between the parties to that injustice. The two parties are correlatively situated as the doer and sufferer of an injustice that is itself undone by the corresponding remedy. Correlativity is inherent in the notion of liability, which treats the injustice done by the former as the very injustice suffered by the latter. Correlativity is also inherent in the idea of damages, which treats the plaintiff as entitled to receive the very sum that the defendant is obligated to pay. These instances of correlativity are mirror images of each other, with the plaintiff’s entitlement to damages from the defendant reflecting the plaintiff’s entitlement to be free from suffering injustice at the defendant’s hands.

Because the remedy mirrors the correlative structure of the injustice, corrective justice disqualifies accounts of gain-based damages that focus solely on the wrongdoer. Among the accounts excluded on this basis are those that, under the banner of punishment and deterrence, focus on the past or future actions of defendants, thereby treating the plaintiff merely as a convenient conduit of social consequences rather as someone to whom damages are owed to correct the wrong suffered. Of course, this does not mean that explanations of gain-based damages must be oriented to the plaintiff as some are now oriented to the defendant. Corrective justice rejects all one-sided accounts, regardless of the particular side singled out. Rather, the parties must be seen as related through the injustice in such a way that the plaintiff can demand such damages as of right from the defendant. Accordingly, the justification for awarding such damages must include not only the reason for making the defendant pay but also the reason for entitling the plaintiff to receive them; indeed, the same reason must apply on both sides. Only then is the correlativity that marks the injustice carried forward into the account of the remedy.5

The corrective justice framework, then, makes salient the need to account for the plaintiff’s entitlement to gain-based damages as a response to the defendant’s having something, or having done something, inconsistent with the plaintiff’s right. This chapter attempts to satisfy this need in the following steps. Section 2 deals with the radical proposal that would allow the plaintiff gain-based damages for any wrongful gain. The problem with this proposal, that it does not adequately link the damages to the normative quality of the wrongful act, leads in section 3 to an examination of the more traditional connection of gain-based damages with dealings with another’s property. The virtue of the focus on dealings with another’s property is that the idea of property includes within the proprietor’s entitlement the potential gains from the property’s use or alienation. Section 4 generalizes from the property cases to the conclusion that gain-based damages ought to be available only insofar as they correspond to a constituent element in the wrong that the defendant has done to the plaintiff. Section 5 discusses the relevance of the willfulness of the wrong insofar as it entails a denial of the plaintiff’s right, not because of notions of punishment or deterrence. The final section deals with situations where, although the plaintiff’s interest is not, strictly speaking, a proprietary one, the analysis of the property cases nonetheless applies.

2. The Goff–Jones principle

Requiring tortfeasors to disgorge their wrongful gains is an intuitively appealing idea. The tortfeasor’s moral claim to retain the fruit of his or her own wrongdoing is a weak one. Permitting a wrongdoer to enjoy the benefits of the wrong might seem an additional victimization of the wronged party. Moreover, through the old “waiver of tort” cases, the law has long recognized the principle of disgorgement for certain torts, and the task of distinguishing torts that allow for disgorgement from those that do not has proved a difficult one. Indeed one might think that task misguided, on the ground that the morally relevant feature of the wrongdoer’s gain is the commission of the wrong, not the kind of wrong committed.

Presumably these considerations lie behind the radical proposal of Lord Goff and Professor Jones that the victim of a tort should be allowed restitution of all wrongful gains. They formulate their proposal as follows: “If it can be demonstrated that the tortfeasor has gained a benefit and that benefit would not have been gained but for the tort, he should be required to make restitution.”6 This suggestion has the advantage of simplicity, for it offers a comprehensive principle that obviates the need to distinguish between wrongs that do and wrongs that do not admit of gain-based damages.

Despite its simplicity and its intuitive appeal, the Goff–Jones principle has not been accepted by the courts. In the view of Professor Jones, this is because courts “fear the great unknown.”7 I would like to suggest a more charitable reason, arising out of an ambiguity in the notion of wrongful gain.

When we think of wrongful gains for restitutionary purposes, precisely how are the ideas of wrongfulness and gain connected? One possibility is that a gain is wrongful because of its history; that is, a gain is wrongful if it is the consequence of a wrongful act. Rather than pointing to a feature of the gain itself, “wrongful” is used to indicate that wrongful conduct by the defendant is a historical antecedent of the defendant’s gain. The wrongdoing that underlies ascription of wrongfulness stands to the gain as cause to effect. “Wrongful gain,” then, could be understood as shorthand for the more accurate description “gain resulting from a wrongful act.”

The other and more restrictive possibility is that we call a gain “wrongful” by virtue of its inherent normative quality. Here the significance of the wrongfulness is not merely that it produces the gain, but that it survives into the gain and informs it. The gain’s origin in wrong is a necessary condition for the gain’s having this normative quality, but something further is required. For the gain to take on the normative quality of wrongfulness, it must be the materialization of a possibility—the opportunity to gain—that rightfully belonged to the plaintiff. Because it is an incident of the plaintiff’s entitlement that the defendant has wrongfully infringed, the gain is not merely the result of a wrongful act, but is the continuing embodiment of the injustice between the parties.

The Goff–Jones principle rests on the assumption that the relevant understanding of wrongful gain is the historical one. Using language reminiscent of the factual causation test in negligence law (“the benefit would not have been gained but for the tort”), they formulate the relation between wrongfulness and gain solely in terms of cause and effect. In their view the fact that the plaintiff has been wronged by the defendant, plus the fact that the defendant has consequently realized a benefit, add up to the liability of the defendant to surrender the benefit to the plaintiff.

Why might one be reluctant, as Jones notes that courts are, to accept a principle that bases liability on the historical rather than the normative connection between wrongdoing and gain? I suggest that it is because the Goff–Jones principle challenges the internal coherence of private law. By this I mean not that the principle measures the plaintiff’s injury by the defendant’s gain (the waiver of tort cases show that this is not in itself unacceptable), but that the connection it posits between what the wrongdoer has done and what the victim recovers is at odds with the principle underlying the law’s treatment of wrongful loss.

The phenomenon of compensatory damages for wrongful loss is the counterpart to gain-based damages for wrongful gain. In wrongful loss the same two conceptions of wrongfulness present themselves. A loss is wrongful by reference to its history if the occurrence of the loss was the result of the defendant’s wrong. A loss is wrongful by reference to its normative quality if the potential for such loss is a reason for considering the defendant’s conduct to have been wrongful in the first place.

The cases on duty and proximate cause in negligence illustrate the difference between these two ways of connecting wrongfulness and loss. In the famous case about duty, Palsgraf v. Long Island Railroad,8 the plaintiff was injured by an act that negligently imperiled the property of someone else. The plaintiff’s loss was wrongful in the historical sense, in that one of the historical antecedents of the loss was a wrongful act by the defendant. However, because the plaintiff was beyond the ambit of reasonably foreseeable injury, the prospect of her being harmed was not a reason for thinking that the defendant’s conduct was wrongful. The conduct was thus not a wrong relative to her. Similarly, the Wagon Mound case holds that the requirement of proximate cause is not satisfied when the defendant negligently exposes the plaintiff to the risk of one kind of injury, but the plaintiff suffers an injury of a different kind.9 Such losses are historically connected to the wrongful conduct, in that they would not have occurred without it, but they do not partake of the conduct’s wrongful quality since they are not the losses by virtue of which the conduct is regarded as wrongful.

These doctrines show that in the context of compensatory damages for negligence, liability exists only when the connection between the wrongfulness and the loss is normative and not merely historical. That the negligent conduct is factually caused by the loss is not sufficient. To be recoverable, the loss must be within the risk the creation of which rendered the defendant’s act unreasonable.

From the perspective of corrective justice, negligence law has good reason for insisting, through the doctrines of duty and proximate cause, that a loss should be considered wrongful by virtue of its normative quality rather than merely its history.10 In negligence law, wrongdoing consists in the creation of unreasonable risk. When the plaintiff’s loss is within the ambit of the very risk that renders the defendant’s conduct wrongful, the parties stand to each other as the active and passive poles of the same injustice. Because freedom from this kind of loss is both the content of the plaintiff’s right and the object of the defendant’s duty, the parties are normatively linked through the wrongfulness of the defendant’s risk-creation. Liability then obligates the defendant to eliminate the loss wrongfully imposed on the plaintiff, and thus to restore (to the extent that monetary damages can) the freedom from loss which was the plaintiff’s original entitlement. In contrast, when the plaintiff’s loss, although caused by the defendant’s wrongdoing, is not within the ambit of what makes it wrongful, the defendant’s conduct cannot be said to be wrongful with respect to that plaintiff’s loss. Because the parties are then not related to each other as doer and sufferer of an injustice, the plaintiff lacks the normative standing to call upon the defendant to make good the loss.

Negligence law’s treatment of wrongful loss undermines the Goff–Jones proposal concerning wrongful gain. To highlight the parallel between the two, one may say (echoing the Goff–Jones formulation) that negligence law rejects the principle that the tortfeasor must pay compensation “if it can be shown that the victim suffered a loss and that loss would not have been suffered but for the tort.” The compensatory principle that negligence law rejects has the same structure as the gain-based principle that Goff and Jones propose. Both principles use factual causation as a sufficient condition for the damage award. The only difference between them is that whereas the compensatory principle deals with loss and compensation, the Goff–Jones principle deals with gain and restitution. Since it is the significance of factual causation that is at issue in each, the fact that one deals with compensation for loss and the other with restitution for gain is unimportant. If the law has good reason for rejecting factual causation as a sufficient condition of liability for wrongfully caused loss, then it also has good reason to reject it as the test for wrongfully caused gain. Accepting the Goff–Jones principle would introduce the inconsistency of allowing factual causation to be sufficient for restitution when it has been found to be insufficient for compensation.

The corrective justice analysis of compensation for wrongful loss applies, mutatis mutandis, to restitution for wrongful gain. If the wrongfulness consists in creating the prospect of a loss (as, let us assume for the moment, is the case with negligence), the fact that the defendant has realized a gain as well adds nothing to the plaintiff’s case. Because the gain lies beyond the wrong done to the plaintiff, the plaintiff suffers no injustice through the existence of the gain. The parties do and suffer injustice only with respect to the loss, not the gain; the gain remains external to their relationship.

Accordingly, from the standpoint of corrective justice, factual causation no more suffices for liability on the gain side than it does on the loss side. What matters is not the historical connection of gain to wrong, but rather the nature of the wrong as an inconsistency with the plaintiff’s right and whether the gain partakes of that inconsistency. Gain-based damages are justified when the defendant’s gain is of something that lies within the right of the plaintiff and is therefore integral to the continuing relationship of the parties as the doer and sufferer of an injustice. Then the gain stands not merely as the sequel to the wrong but as its present embodiment, and the plaintiff is as entitled to the gain as he or she was to the defendant’s abstention from the wrong that produced it. A gain that thus embodies the injustice done by the defendant to the plaintiff immediately implies restitution of that gain.

The Goff–Jones principle has the twin virtues of simplicity of formulation and comprehensiveness of application, but it also has the corresponding vices. On the one hand, the proposed principle obviates the need to distinguish among wrongs by using the simple test of whether the wrong factually caused the gain. On the other hand, the principle is insensitive to the limited significance of factual causation and to the need to forge a normative link between the wrong and the gain. Given that the restitution of the gain depends on the gain’s normative quality, and that quality varies with the nature of the wrong, there is no alternative to the difficult task of distinguishing between the wrongs that do and the wrongs that do not admit of the restitution of their resulting gains.

Aside from highlighting the necessity for a normative connection between the defendant’s wrong and the plaintiff’s entitlement to the gain, the parallel between wrongful loss and wrongful gain suggests a more particular point: gain-based damages are especially appropriate when property rights are violated. The reason that negligence law requires the defendant to compensate the plaintiff for wrongful loss is that such loss is the materialization of an adverse possibility—the unreasonably created risk of harm—to which the defendant ought not rightfully to have exposed the plaintiff. Because the defendant then inflicts a loss from which the plaintiff is entitled to be immune, the loss constitutes an injustice between the parties that an award of compensatory damages reverses. Similarly, gain-based damages should be available when the defendant’s gain is the materialization of a favorable possibility—the opportunity to gain—that rightfully belonged to the plaintiff. Then the gain to be nullified by the award of gain-based damages represents an injustice both committed by the defendant and suffered by the plaintiff. Since a proprietary right includes the opportunity to gain from what one owns, one may plausibly regard the defendant’s dealings with the plaintiff’s property as an occasion for gain-based damages. That, at any rate, is the argument of the next section.

3. Dealing with another’s property

As has often been noted, the misappropriation of another’s property is the paradigmatic example of an event that gives rise to gain-based damages.11 Because property rights give proprietors the exclusive right to deal with the thing owned, including the right to profit from such dealings, gains resulting from the misappropriation of property are necessarily subject to restitution. Gains from dealings in property are as much within the entitlement of the proprietor as the property itself.

The disgorgement of these proprietary gains fits readily within the correlativity of corrective justice. Property consists simultaneously in a right of the proprietor and in a correlative duty on others to respect that right. Just as the owner’s right to set the terms on which property is used or transferred implies a correlative duty on others to abstain from using or selling it, so the owner’s right to the profits from the use or transfer of the property imports a correlative duty on others to abstain from such profits. This correlativity of the proprietor’s right and the wrongdoer’s duty means that the realization of an unauthorized gain is an injustice as between them. The gain is the continuing embodiment of this injustice, and the injustice is undone when the gain is restored to the owner of the object from which the gain accrued.

Gain-based damages for dealing with another’s property mirror the wrong and illuminate its nature. The law’s focus on the benefits of ownership at the remedial stage presupposes the defendant’s intention to act on the owned object at the stage of wrongdoing. In appropriating the benefits from using or alienating the object, the defendant implicitly asserts the ownership that alone would entitle the defendant to those benefits. Gain-based damages reverse the wrong by showing, through the return of the benefits, that the law considers the defendant’s implicit assertion of ownership to be a nullity whose consequences are to be undone. The remedy is conditioned, therefore, not merely on the defendant’s realization of a benefit but on the defendant’s having treated the object as if it were his or her own. One treats an object in this way when one so directs one’s attention to the object that its use or alienation can be regarded as an execution of one’s purposes. In contrast, action that inadvertently produces an effect on the object does not qualify as an expression of one’s will with respect to the object, and so is not the basis for gain-based damages. Thus, gain-based damages are available for intentional torts against property and not for harm to property that results from negligence.

From the perspective of corrective justice, gain-based damages for proprietary wrongs are an entitlement of the proprietor, and not merely a mechanism for protecting the integrity of property as a facilitative institution.12 The argument for referring to property as a facilitative institution is that, because damages measured by the defendant’s gain do not reflect an injury to the plaintiff personally, they must be justified by pointing to an institutional harm. The premise of this argument is false. The fact that the damages are gain-oriented does not exclude their reflecting an injury to the plaintiff personally. One’s rights provide the baseline for measuring injury. If those rights include the possibility of gain, then the defendant’s gain measures the extent of the plaintiff’s injury. The relevance of property is not that it is a facilitative institution, but that it connects the parties in such a way as to make the object owned—and thus the gain that dealings in that object can produce—the locus of a right and a correlative duty.