Stephen Yelderman

The law often permits us to impose substantial harm on others without incurring liability. Once liability is triggered, compensatory damages require a defendant to pay for the harm caused by his wrongful conduct. Calculating these damages requires consideration of the harm that the defendant could have caused without incurring liability in the first place. This harm is “privileged,” in the sense that the defendant would have been free to impose it in a counterfactual universe in which he complied with the substantive law. Having transgressed that law, he is responsible for damages. But the question is whether these damages should be reduced to account for the harm he could have imposed without owing damages at all.

The treatment of privileged harm is fundamental to the calculation of compensatory damages. Nonetheless, it has received little scholarly attention and has been the subject of conflicting decisions in the courts. In some areas of law, damages are routinely reduced to account for privileged harm; in others, this credit is given only sporadically, or not at all. Critically, there is not yet any sound theoretical explanation for why the rule ought to be different in one set of cases than another.

This Article begins by exploring the effects of crediting or not crediting privileged harm. It then relates the treatment of privileged harm to several well-known questions of remedial design. Finally, it proposes several general principles that a court or policymaker might follow in determining whether to reduce damages to account for privileged harm.

Introduction

Compensatory damages are meant to restore a plaintiff to the position she would have enjoyed absent the defendant’s wrong.¹ 1.See Restatement (Second) of Torts § 903 cmt. a (Am. L. Inst. 1979) (“When there has been harm only to the pecuniary interests of a person, compensatory damages are designed to place him in a position substantially equivalent in a pecuniary way to that which he would have occupied had no tort been committed.”); 1 Theodore Sedgwick, A Treatise on the Measure of Damages § 30, at 25 (9th ed. 1920) (“In all cases . . . of civil injury and breach of contract, the declared object of awarding damages is . . . to put the plaintiff in the same position, so far as money can do it, as he would have been if the contract had been performed or the tort not committed.”) (footnotes omitted).Show More Their amount is typically figured by way of a counterfactual. We ask the factfinder, “How much worse off is the plaintiff compared to the position she would have occupied in a hypothetical universe in which the defendant did not wrong her at all?” In theory, damages equal to this amount will “redress the concrete loss that the plaintiff has suffered by reason of the defendant’s wrongful conduct.”² 2.Cooper Indus., Inc. v. Leatherman Tool Grp., Inc., 532 U.S. 424, 432 (2001).Show More

In many cases, it is simple and true to imagine this alternative, wrong-free universe as one in which the defendant does no harm to the plaintiff. For example, rather than negligently swerving into oncoming traffic, the defendant simply stays in his lane. In a case like that, the defendant’s role in the counterfactual universe is so trivial that he can be imagined out of it completely. Instead of asking what the plaintiff’s condition would have been if the defendant had driven safely, we could just as well ask what the plaintiff’s condition would have been if the defendant had not driven at all. This works because the world in which the defendant commits no tort is also a world in which the defendant imposes no harm.

But sometimes things are more complicated. In some cases, the truth is that the defendant would have imposed some harm on the plaintiff even if he had acted lawfully. This is possible because the law often leaves certain injuries to lie where they fall. As Oliver Wendell Holmes put it, some harm is “privileged,” in the sense the defendant was free to impose it, even intentionally, only subject to conditions set by the substantive law.³ 3.Oliver Wendell Homes, Jr., Privilege, Malice, and Intent, 8 Harv. L. Rev. 1, 3–4 (1894). Note that the term “privilege” later took on a somewhat narrower, more technical meaning in tort law: “conduct which, under ordinary circumstances, would subject the actor to liability, [but that] under particular circumstances, does not subject him thereto.” Restatement (First) of Torts § 10 (Am. L. Inst. 1934); see also Francis H. Bohlen, Incomplete Privilege To Inflict Intentional Invasions of Interests of Property and Personality, 39 Harv. L. Rev. 307, 308 (1926) (consciously reappropriating the term “privilege” to refer to excuses and justifications). Throughout this Article, I use the term “privileged” in the broader sense that Holmes used it—to describe harm that may be imposed on another without incurring legal liability.Show More Holmes was never known for timid examples:

[A] man has a right to set up a shop in a small village which can support but one of the kind, although he expects and intends to ruin a deserving widow who is established there already. He has a right to build a house upon his land in such a position as to spoil the view from a far more valuable house hard by. He has a right to give honest answers to inquiries about a servant, although he intends thereby to prevent his getting a place. . . . In these instances, the justification is that the defendant is privileged . . . to inflict the damage complained of.⁴ 4.Holmes, supra note 3, at 3.Show More

In cases involving damages, the defendant has, by hypothesis, not complied with the strictures of the substantive law, making the plaintiff’s injuries actionable rather than privileged. But the possibility of privileged harm forces us to confront a choice in counterfactuals. When measuring compensatory damages, do we work from a baseline in which the defendant imposes no harm on the plaintiff, or one in which the defendant imposes only privileged harm on the plaintiff?

The difference between these two conceptions can have significant consequences for the defendant’s ultimate liability, and courts have come down both ways. To pick just one example among many, consider the landmark due process case of Carey v. Piphus.⁵ 5.435 U.S. 247 (1978).Show More The plaintiff in that case, Piphus, was a freshman at a Chicago high school who had been summarily suspended after a principal observed him smoking what appeared to be marijuana. Piphus brought suit under 42 U.S.C. § 1983, alleging that this suspension without pre-deprivation process violated the Fourteenth Amendment.⁶ 6.Id. at 248–50.Show More The school district argued that, whether or not the afforded process was constitutionally sufficient, Piphus would be unable to prove any actual damages, since Piphus deserved his suspension either way.⁷ 7.Id. at 260.Show More At heart, this was an argument rooted in privileged harm. Piphus sought the value of the school days lost to his unconstitutional suspension; the school district sought to reduce its damages by invoking a hypothetical suspension it could have imposed constitutionally.

In a terse section of its opinion, the Supreme Court accepted the school district’s argument for privileged harm. If it was really true that the school could have suspended Piphus in a counterfactual world in which it also afforded him due process, then “the failure to accord procedural due process could not properly be viewed as the cause of the suspension[].”⁸ 8.Id.Show More To hold otherwise, the Court suggested, would afford Piphus a windfall rather than compensation.⁹ 9.Id.Show More

Carey’s damages rule has had far-reaching consequences for plaintiffs invoking their federal constitutional right to procedural due process. But some courts have blunted its practical import by treating privileged harm differently for claims arising out of state law. Following Carey, a terminated government employee alleging that her firing violated the U.S. Constitution will typically receive zero compensatory damages unless she can show that the constitutionally required procedure would have actually prevented her termination.¹⁰ 10.See infra notes 45–48 and accompanying text.Show More But when that same employee alleges that she was denied the procedural protections promised by her employment contract, a number of state courts have refused to credit privileged harm. For example, in Piacitelli v. Southern Utah State College,¹¹ 11.636 P.2d 1063 (Utah 1981).Show More the Utah Supreme Court explicitly declined to follow Carey, holding that the State was liable for back pay until the contractually specified process had been substantially performed. If credit were given for privileged harm, the Court reasoned, “the employer could discharge an employee summarily and then omit or delay the contractual termination procedures with impunity so long as it was in possession of evidence which, when ultimately provided, would justify the discharge.”¹² 12.Id. at 1069.Show More The State was thus liable for the privileged harm, even if it could have terminated the employee by following the contractually specified procedures in the first instance.¹³ 13.See id. A number of Western states have followed Utah’s lead. See, e.g., Hom v. State, 459 N.W.2d 823, 826 (N.D. 1990) (adopting same rule for North Dakota); Bowler v. Bd. of Trs., 617 P.2d 841, 849 (Idaho 1980) (“[I]n order to prevail, appellant must allege and prove either that his employment contract was breached by the board or that he was unjustifiably discharged.”); Brown v. Ford, Bacon & Davis, Utah, Inc., 850 F.2d 631, 633–34 (10th Cir. 1988) (applying Piacitelli in case arising under Utah law). But see Nzomo v. Vt. State Colls., 411 A.2d 1366, 1367–68 (Vt. 1980) (applying Carey rule in case involving contractual claims).Show More

As we will see, variants of this question arise in many areas of law, from torts to contracts, intellectual property, antitrust, defamation, and constitutional litigation. Perhaps surprisingly, a search across these disparate fields reveals there is not yet a clear theoretical or consistent doctrinal answer to what seems like a very basic remedial question. As a pair, Carey and Piacitelli capture the dilemma succinctly. On the one hand, a court must consider the possibility of privileged harm to measure the injury actually caused by the defendant’s wrongful conduct; to do otherwise seems to afford the plaintiff a windfall rather than compensation. On the other hand, reducing damages to account for privileged harm risks leaving violations unpunished, creating no particular incentive for the defendant to comply with the substantive law. Carey and Piacitelli are outliers in acknowledging these policy concerns so explicitly, but the same basic tradeoff lurks beneath the surface in countless compensatory damages cases.

This Article explores when and how damages should be reduced to account for privileged harm. It begins with an introduction to prior doctrinal treatment of this question—an apparent morass of inconsistent rules and unreasoned conclusions.¹⁴ 14.See infra Part I.Show More It then models the effects of privileged harm on marginal incentives, both for prospective plaintiffs and prospective defendants.¹⁵ 15.See infra Sections II.A, II.B, II.C.Show More This analysis reveals that the treatment of privileged harm closely tracks a well-known question of remedial design: whether damages ought to operate as prices or sanctions.¹⁶ 16.See Robert Cooter, Prices and Sanctions, 84 Colum. L. Rev. 1523, 1523 (1984).Show More At its core, a decision to deny credit for privileged harm is a decision to erect sanctions-like damages around the threshold of liability, with increased marginal deterrence for defendants and wealth transfer to plaintiffs following as a result.¹⁷ 17.See infra Sections II.B, II.C.Show More In this way, there is a previously unrecognized commonality between the question of how to measure compensatory damages and the question of whether to impose punitive damages.¹⁸ 18.See infra Section II.D.Show More

Building on this theoretical account, this Article turns to the specifics of how courts should handle arguments for privileged harm. In addition to the first-order question of whether damages should operate as prices or sanctions,¹⁹ 19.See infra Section III.A.Show More there are a number of practical, second-order concerns that may influence the decision to account for privileged harm. In identifiable categories of cases, the magnitude of any privileged harm will be small enough that the question can be safely ignored in the interest of remedial simplicity.²⁰ 20.See infra Section III.C.Show More In other cases, incautious crediting of privileged harm has the potential to leave entire classes of plaintiffs with no remedy.²¹ 21.See infra Section IV.A.Show More As these and other examples will illustrate, the treatment of privileged harm might look like a simple calculation detail, but in fact it can significantly affect the ability of the substantive law to achieve its ends. For that reason, it is a question better confronted than avoided.

1. * Professor of Law, Notre Dame Law School. For very helpful feedback on prior drafts, I thank A.J. Bellia, Sam Bray, Bernard Chao, Thomas Cotter, John Duffy, John Golden, Bert Huang, Dan Kelly, Andrew Kull, Douglas Laycock, Saul Levmore, Mark McKenna, Collen Murphy, Jeff Pojanowski, Henry Smith, Jay Tidmarsh, and Stephen Waddams. ↑
2. See Restatement (Second) of Torts § 903 cmt. a (Am. L. Inst. 1979) (“When there has been harm only to the pecuniary interests of a person, compensatory damages are designed to place him in a position substantially equivalent in a pecuniary way to that which he would have occupied had no tort been committed.”); 1 Theodore Sedgwick, A Treatise on the Measure of Damages § 30, at 25 (9th ed. 1920) (“In all cases . . . of civil injury and breach of contract, the declared object of awarding damages is . . . to put the plaintiff in the same position, so far as money can do it, as he would have been if the contract had been performed or the tort not committed.”) (footnotes omitted). ↑
3. Cooper Indus., Inc. v. Leatherman Tool Grp., Inc., 532 U.S. 424, 432 (2001). ↑
4. Oliver Wendell Homes, Jr., Privilege, Malice, and Intent, 8 Harv. L. Rev. 1, 3–4 (1894). Note that the term “privilege” later took on a somewhat narrower, more technical meaning in tort law: “conduct which, under ordinary circumstances, would subject the actor to liability, [but that] under particular circumstances, does not subject him thereto.” Restatement (First) of Torts § 10 (Am. L. Inst. 1934); see also Francis H. Bohlen, Incomplete Privilege To Inflict Intentional Invasions of Interests of Property and Personality, 39 Harv. L. Rev. 307, 308 (1926) (consciously reappropriating the term “privilege” to refer to excuses and justifications). Throughout this Article, I use the term “privileged” in the broader sense that Holmes used it—to describe harm that may be imposed on another without incurring legal liability. ↑
5. Holmes, supra note 3, at 3. ↑
6. 435 U.S. 247 (1978). ↑
7. Id. at 248–50. ↑
8. Id. at 260. ↑
9. Id. ↑
10. Id. ↑
11. See infra notes 45–48 and accompanying text. ↑
12. 636 P.2d 1063 (Utah 1981). ↑
13. Id. at 1069. ↑
14. See id. A number of Western states have followed Utah’s lead. See, e.g., Hom v. State, 459 N.W.2d 823, 826 (N.D. 1990) (adopting same rule for North Dakota); Bowler v. Bd. of Trs., 617 P.2d 841, 849 (Idaho 1980) (“[I]n order to prevail, appellant must allege and prove either that his employment contract was breached by the board or that he was unjustifiably discharged.”); Brown v. Ford, Bacon & Davis, Utah, Inc., 850 F.2d 631, 633–34 (10th Cir. 1988) (applying Piacitelli in case arising under Utah law). But see Nzomo v. Vt. State Colls., 411 A.2d 1366, 1367–68 (Vt. 1980) (applying Carey rule in case involving contractual claims). ↑
15. See infra Part I. ↑
16. See infra Sections II.A, II.B, II.C. ↑
17. See Robert Cooter, Prices and Sanctions, 84 Colum. L. Rev. 1523, 1523 (1984). ↑
18. See infra Sections II.B, II.C. ↑
19. See infra Section II.D. ↑
20. See infra Section III.A. ↑
21. See infra Section III.C. ↑
22. See infra Section IV.A. ↑