Among various sanctions to prevent corporate illegal acts, how effective is the punitive damages system? We examine the effectiveness and controversies surrounding this system.
The greater the likelihood of individuals committing illegal acts while pursuing economic gains, the more effective monetary sanctions become in deterring such behavior. These monetary sanctions aim to serve as a social warning against illegal acts and prevent recurrence, thereby contributing to the realization of social justice.
Under current law, monetary sanctions for illegal acts include civil remedies like damages, criminal penalties like fines, and administrative penalties like surcharges. These respectively aim to compensate victims, punish offenders, and rectify violations of the law. For example, if companies are caught colluding to raise product prices, they may face a damages lawsuit from victims, be sentenced to fines by the court, and also be subject to administrative penalties from government agencies. While three different monetary sanctions can be imposed for a single illegal act, the courts have ruled that this does not constitute double punishment because the purposes of the sanctions differ.
However, in reality, cases where damages lawsuits are filed or fines are imposed against companies for illegal acts are rare in Korea. Consequently, administrative sanctions like administrative fines often serve the deterrent function. This is because administrative agencies can impose sanctions relatively quickly and efficiently. In such situations, increasing the severity of administrative sanctions like fines can enhance the deterrent effect against illegal acts. However, for illegal acts with a very low probability of detection, relying solely on increasing administrative fines has limitations in maintaining deterrence. Furthermore, unlike damages awarded to victims, fines and administrative penalties accrue to the state, meaning increasing administrative fines does not directly benefit the victims. Consequently, there is a need for measures that can both enhance deterrence for illegal acts with very low detection rates and more fully compensate for damages. One such measure is the ‘punitive damages system’.
This system allows victims of illegal acts to receive compensation that includes not only damages equivalent to the amount of loss but also an additional amount intended to punish the perpetrator. This is exceptional because, unlike the general damages system where victims cannot receive compensation exceeding their actual losses, the punitive damages system allows for such compensation. Consequently, victims gain greater motivation to report illegal acts and file lawsuits. This increased motivation can heighten the likelihood of detecting illegal acts, thereby contributing to stronger deterrence.
However, this system, while a civil remedy, incorporates compensation with a punitive nature within the damages awarded to the victim. This has led to divergent opinions regarding the occurrence of double punishment and sparked debate for and against the system itself. Opponents view the punitive-natured compensation awarded to the victim as a windfall. They further argue that when punitive damages are imposed alongside fines, which are criminal sanctions, it constitutes double punishment for the perpetrator. Conversely, proponents view punitive damages as just compensation for the time and effort victims invest in litigation. They argue that punitive damages should be regarded as a civil sanction aimed at victim redress, meaning that imposing both punitive damages and fines does not constitute double punishment.
Furthermore, proponents argue that the punitive damages system also contributes to strengthening corporate social responsibility. They contend this system effectively encourages companies to go beyond merely bearing legal liability and fulfill their social responsibilities. Through this, companies pursue more ethical management, which can positively impact society’s overall trust and economic development in the long term.
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