Among the various sanctions used to deter corporate wrongdoing, how effective is the punitive damages system? We examine the effectiveness and controversy of this system.
The more likely members of society are to commit illegal acts in pursuit of economic gain, the more effective monetary sanctions are in deterring them. These monetary sanctions are intended to serve as a social warning against illegal acts and to prevent their recurrence, thereby contributing to the realization of social justice.
Under current law, the means of monetary sanctions for illegal acts include civil remedies such as damages, criminal penalties such as fines, and administrative penalties such as fines. Each is designed to make the victim whole, punish the wrongdoer, and correct the violation of the law. For example, if companies are found to have conspired to raise the price of a product, they may be sued for damages by the victim, or fined by the court and surcharged by the administrative agency. Thus, three monetary sanctions may be imposed for one illegal act, but the court has ruled that the sanctions are not redundant because they have different purposes.
In reality, however, cases in which damages or fines are imposed for illegal corporate activities are rare in Korea, and administrative sanctions such as fines often serve as a deterrent. This is because administrative agencies can impose sanctions relatively quickly and efficiently. In this situation, increasing the severity of administrative sanctions such as fines can increase the deterrent effect of illegal activities. However, in the case of illegal acts that are highly unlikely to be detected, increasing fines alone is not sufficient to maintain deterrence. Moreover, unlike damages, which are imputed to the victim, fines and penalties are imputed to the state, so increasing fines does not directly benefit the victim. This calls for measures that can increase deterrence against illegal acts with a very low chance of being caught, while at the same time providing more substantial compensation for damages. One such measure is the system of punitive damages.
This system allows victims of illegal acts to receive compensation in the form of an amount equal to the amount of damages plus a punitive amount intended to serve as a punishment for the offender. It is unusual in that the general tort system does not allow the victim to receive compensation in excess of the amount of damages, but the punitive damages system does. This motivates victims to more actively report illegal acts and file lawsuits. This motivation can increase the likelihood of detecting illegal acts and contribute to strengthening deterrence.
However, this system is a civil remedy for damages, but because the compensation received by the victim includes a penalty similar to a fine, there are mixed opinions about the occurrence of overlapping sanctions, leading to pros and cons of the system itself. Opponents of the system see punitive damages as a windfall for the victim. They also argue that punitive damages, when imposed in conjunction with criminal penalties such as fines, result in double sanctions against the offender. On the other hand, proponents see punitive damages as fair compensation for the time and effort victims have put into litigation. Therefore, even if punitive damages and fines are imposed together, it is argued that they are not redundant sanctions because the punitive damages should also be considered civil sanctions for the purpose of compensating the victim.
Furthermore, proponents argue that the punitive damages system also contributes to strengthening corporate social responsibility. This system is effective in encouraging companies to fulfill their social responsibilities beyond the mere legal liability. This encourages companies to operate more ethically, which in the long run can have a positive impact on society’s confidence and economic development.
