Nonlegal sanctions have never enjoyed such glory days. Dare you misbehave in a social or commercial relationship, your misdeeds are likely to be recorded, posted, and eventually aggregated with other feedback by a rating platform. Businesses are graded by their customers on Yelp, landlords and guests review each other on Airbnb, drivers are rated by their auto insurers, and borrowers are scored by credit agencies. These reputations determine people’s access to services, the prices they pay, and the friends they meet.
The sharp teeth of nonlegal sanctions pose a challenge: how to make sure that they are levied when proper, and in the right magnitude? More generally, how should the frequent presence of reputational sanctions and rewards affect the design of legal sanctions, and in particular the damage measures awarded in private law for the breach of contract or the commission of a tort?
In recent years, scholars in law and economics began to develop a theoretical framework for the optimal blend of legal and nonlegal sanctions. Many have noticed that legal sanctions have the potential to trigger informal reputational penalties. In an interesting article, Bob Cooter and Ariel Porat asked how to optimally combine the two. If the wrongdoer already suffered reputational ruin, should this fact be a reason—as they argued—to moderate their legal sanction, for example by reducing the legally-assessed damages? Later, in examining the effect legal sanctions have on informal penalties, Ed Iacobucci usefully distinguished between two types of third party responses: the conscious (and privately costly) propensity to ostracize bad actors who were found to be legally liable, and the self-interested motivation to refrain from dealing with those revealed by the legal sanction to be unattractive or dangerous trading partners. To this literature, Sadie Blanchard recently added a wonderful contribution in Nominal Damages As Vindication, nesting it in a discussion of the law of nominal damages.
Nominal damages are awarded in cases in which the plaintiff demonstrated a violation of a right but did not prove compensable harm nor seek an injunction. Why does the law permit plaintiffs to bring a suit for nominal damages? If there is no compensable injury, why use the fiction—or the symbolism—of nominal damages and allow parties to fight their expensive battles in court?
It is obvious that there is a difference between a $1 nominal damage for the victorious plaintiff versus $0 in the event of a defendant victory, and that this difference is much more than one dollar. But what exactly is this difference? What is the mechanism that determines its magnitude? Blanchard’s article thickens the texture of the bare bones law-and-econ model of nonlegal sanctions. Courts, Blanchard says, “function as producers of presumptively reliable information that is used in reputation-based private governance.” An audience of third parties observe the ruling, and it is the hard fought-over certification of liability, not the puny magnitude of damages, that rallies this audience to participate in informal punishing of the wrongdoer. Because the information comes from courts, and not from solicited Yelp reviews or from a journalistic hatchet job, it is credible. And because it is credible, it triggers justified informal sanctions.
From the perspective of the nominal-damages-seeking plaintiff, inflaming nonlegal sanctions through a judgment for nominal damages could be restorative, satisfying the desire for justice or retribution and rehabilitating their reputation. Think of a defamation suit, or an action for false arrest, where Blanchard correctly suggests that being right could be more significant than being compensated. No less importantly, the ensuing informal sanctions that third parties pile on provide much needed protection of rights which are important even though their violation does not create measurable pecuniary harm. We live in an era in which emotional interests like dignity, privacy, personal fulfillment, and reputation are central to individual wellbeing and widely attended to by public law. It is key that private law—historically stingy in compensating violations of these interests—offer tools for their protection. Nominal damages are one such tool. And as Blanchard points out, “[t]he threat of being publicly exposed in this way could also improve the plaintiffs’ position in negotiating with the defendant to make amends for the breach.” In other words, nominal damages that trigger nonlegal sanctions are, in equilibrium, much more than nominal. Their anticipation fuels significant settlements. They provide redress, but it is not the $1 that counts as the remedy. Redress comes from the nonlegal sanctions, or from the monetary settlement to avert them.
Blanchard’s insight—that the private value of suits for nominal damages comes primarily from the social value of the information they generate—allows her to discuss a rich set of nonobvious implications. For example, and somewhat counterintuitively, despite the fact that plaintiffs do not recoup much of the social value arising from their successful pursuit of nominal damages, it is not necessary to subsidize or otherwise incentivize such suits. Plaintiffs will pursue claims if they believe these claims produce information to which there is an interested and responsive audience, ready to inflict nonlegal sanctions. Hence, instead of courts ascertaining the social value of a nominal damages suit, it would be “determined organically” by plaintiff’s anticipation of its audience’s demand for information. Another implication is important for contract law. The widely share sense that expectation damages are systematically undercompensatory resulting in excessive incentive to breach fails to capture the reputational sanctions that liability may trigger. If, say, a hypothetical billionaire is found to have willfully breached a contract to purchase a hypothetical social network, the harm to their reputation among the public and future potential sellers of companies may dwarf the otherwise undercompensatory liquidated damages.
