Efficiency and Vicarious Liability for Punitive Damages: Economic Implications of City of Newport v. Fact Concerts, Inc

In City of Newport v. Fact Concerts, Inc., the Supreme Court held that cities are not liable for punitive damages under the Civil Rights Act of 1871. Considerations of efficiency support the Court's conclusion. Punitive damages promote efficiency under a limited set of circumstances, but imposing them vicariously on an employer for the acts of employees is not necessary to achieve efficient outcomes. Since, under current law, a punitive damage assessment is likely to be larger if imposed on the employer than if assessed against an employee, vicarious liability produces inefficient results. This is especially true if the employer is a governmental entity, because of problems of control inherent in political, non-profit-maximizing organizations.