Shaw v. U.S.

• Citation: 741 F.2d 1202
• Decision Date: 31 August 1984
• Docket Number: No. 83-3759,83-3759
• Parties: Raymond A. SHAW and Karen L. Shaw, husband and wife, individually, and as Guardians Ad Litem of Richard Scott Shaw, a minor, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. . Argued &
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1202

741 F.2d 1202

Raymond A. SHAW and Karen L. Shaw, husband and wife individually, and as Guardians Ad Litem of Richard Scott Shaw, a minor, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 83-3759.

United States Court of Appeals Ninth Circuit.

Argued & Submitted June 6, 1984.

Decided Aug. 31, 1984.

Richard J. Kelley, Tenino, Wash., for defendant-appellants.

Eloise E. Davis, Dept. of Justice, Washington, D.C., for plaintiffs-appellants.

Appeal from the United States District Court for the Western District of Washington.

Before ANDERSON, POOLE and NELSON, Circuit Judges.

NELSON, Circuit Judge:

The United States appeals the damages component of a judgment under the Federal Torts Claims Act, 28 U.S.C. Secs. 1346(b), 2674 ("FTCA"). We reverse and remand.

FACTS AND PROCEDURAL BACKGROUND:

Karen Shaw gave birth to Richard Scott Shaw ("Scotty") at the Madigan Army Medical Center in Tacoma, Washington on July 4, 1979. The baby suffered severe brain damage during delivery. On March 1, 1982, Mr. and Mrs. Shaw ("the Shaws") filed suit against the United States under the FTCA in their own behalf, and as guardians ad litem for Scotty. The action was tried to the district court without a jury as required by 28 U.S.C. Sec. 2402. The court found that Scotty's injuries, which include spastic quadraparesis, blindness, a seizure disorder, and profound mental and physical retardation, were caused by the negligence of the hospital medical staff. On appeal, the United States has conceded liability.

The district court awarded damages of $11,732,345.43. First, the court found that Scotty was entitled to pecuniary damages--for future medical expenses, full-time attendant care, and lost earnings--of $4,780,147. It calculated the discount rate ¹ as follows "17. Special damages received by the guardian for the minor plaintiff shall be reduced to present value by 1% (9% interest minus 8% inflation = 1%)."

The court then applied this rate by deducting 1%, or $47,801.47, from total pecuniary damages. The government contends that both the selection of the discount rate and its application were erroneous.

Second, the court awarded Scotty non-pecuniary damages of $5 million for mental anguish, pain and suffering, and destruction of his ability to enjoy life. Third, the court granted the Shaws $2 million for the loss of love and companionship of their child, and injury to the parent-child relationship. The government challenges the amounts of these last two awards.

STANDARD OF REVIEW:

In FTCA cases the clearly erroneous standard governs our review of factual determinations, including damages. Felder v. United States, 543 F.2d 657, 664 (9th Cir.1976); Fed.R.Civ.P. 52(a). Although that standard contemplates deference to the trial judge's opportunity to see and hear the witnesses, our review is not restrained by the statutory and constitutional limitations applicable to our review of a jury's verdict. We judge a trial court's finding to be clearly erroneous when, after reviewing the entire evidence, we are "left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948).

DISCUSSION:

The components and measure of damages in FTCA claims are taken from the state where the tort occurred, which in this case is Washington. DeLucca v. United States, 670 F.2d 843, 844 (9th Cir.1982); see 28 U.S.C. Sec. 1346(b). The FTCA also provides, however, that the United States "shall not be liable ... for punitive damages." 28 U.S.C. Sec. 2674. The Act does not specify whether federal or state standards determine which damages are punitive and which are compensatory. In United States v. English, 521 F.2d 63, 70 (9th Cir.1975), we stated that "[i]f the local law provides for punitive damages, or permits application of standards which result in plaintiffs getting more than compensatory damages, only compensatory damages may be awarded." The government concedes that Washington law does not provide for punitive damages except where expressly authorized by statute. See Barr v. Interbay Citizens Bank, 96 Wash.2d 692, 697, 635 P.2d 441, 443 (1981), amended in 649 P.2d 827 (1982). Instead, it argues that the district court applied state law in a punitive manner by (1) failing to discount properly the pecuniary award to Scotty, and (2) awarding excessive non-pecuniary damages to Scotty and his parents.

I. The Pecuniary Award to Scotty

Our cases have established basic steps for calculating pecuniary damages under the FTCA: (1) compute the value of the plaintiff's loss according to state law; (2) deduct federal and state taxes from the portion for lost earnings; and (3) discount the total award to present value. See DeLucca, 670 F.2d at 844; English, 521 F.2d at 76.

The propriety of the district court's first computation is not at issue. A tort plaintiff in Washington may recover future earnings and medical expenses as components of a pecuniary award. See, e.g., Herskovits v. Group Health Co-op, 99 Wash.2d 609, 664 P.2d 474, 479 (1983). We have never held, and the government does not argue, that these categories of damages are punitive as a matter of federal policy. See English, 521 F.2d at 70. Nor is the amount of the award, as the government concedes, unsupported by the evidence. Id. Scotty will never be able to work, and will always require special equipment, medication, and therapy. Nevertheless, we cannot affirm this part of the judgment, because the district court did not consider the effect of taxes or properly discount these damages.

A. Deduction of Income Taxes

The district court found that a normal, healthy individual with a high school education could expect to work 40.2 years and earn $961,687 in wages and fringe benefits. The Supreme Court of Washington has held that no deduction for income taxes need be made from such an award except where "extremely high income is involved." See Hinzman v. Palmanteer, 81 Wash.2d 327, 334, 501 P.2d 1228, 1233 (1972). There was no proof of high prospective income in the instant case, and the district court made no findings with respect to taxes.

However, in Felder, supra, we held that, as a matter of federal law, income taxes should be deducted from an FTCA award for lost compensation. A failure to do so will result in the imposition of punitive damages against the government, even if the state has decided not to require deduction in suits between private parties. Id. We reasoned that:

The effect is especially punitive where, as under the Act, the federal government is the defendant. By its tortious activity the Government loses the income taxes the decedents would have paid over the years. If the Government were nevertheless required to pay the survivors an amount estimated to equal those lost taxes, it would be doubly sanctioned.

Id. at 670 n. 17. ²

The United States has not requested reduction of Scotty's pecuniary award on this ground, although it has called the district court's omission to our attention. The government believes the error does not merit reversal because the taxes Scotty will pay on the investment earnings from his discounted award may offset the taxes which the court should have deducted immediately.

We have indeed noted that, since income taxes on lost compensation should be deducted, a lump sum damage award should correspondingly be increased by the amount of income tax that would have to be paid on the earnings of the total award. See DeLucca, 670 F.2d at 845. Otherwise, when the court discounts the award to its present value, the plaintiff would be penalized. Because of taxes, he would not receive a portion of the income which is imputed to him from investing the proceeds of his award. Id. at 845-46. Inflating the lump sum award to compensate for this effect is, therefore, a necessary analogue to the deduction from lost earnings mandated by Felder. See Sauers v. Alaska Barge, 600 F.2d 238, 247 (9th Cir.1979).

But the district court may not assume that the failure to deduct taxes on lost compensation will offset the taxes on the income generated by the lump sum award unless two conditions are met. Id. First, the state whose law otherwise applies must also have adopted the offset approach. See Hollinger v. United States, 651 F.2d 636, 641-42 (9th Cir.1981). Second, the district court must be unable to arrive at its own reliable estimates of future inflation and interest rates from the testimony of expert witnesses. Id.

In this case, however, the offset approach was not available because Washington courts do not use it. Nor do we believe that trial courts may simply ignore these calculations as speculative--"so are most predictions courts make about future incomes and expenses." English, 521 F.2d at 75. Where the award is large, the possible adjustments involved in taking taxes into account are significant. See Hollinger, 651 F.2d at 642. We therefore remand to the district judge to adjust the lost earnings award and the total pecuniary damages for income taxes.

B. Discounting to Present Value

In English, supra, this court reversed a portion of an FTCA award on the ground that the district court had failed to discount a deceased's projected earnings to present value. See 521 F.2d at 72. We found that the failure to discount gave the widow more money than she could have expected from her spouse's future earnings had the accident not occurred. Id. at 76. English did not specify, however, whether discounting was required as a matter of state law or supervening federal policy. We noted that California law, which applied in other respects, considers the effect of inflation and interest rates on damage awards, but we also mentioned two other policy concerns which influenced our decision. Id. at 74-75. Recently we resolved this question, stating that in English "we were applying the law of California." Hollinger, 651 F.2d at 641-42....