1) Because Nationwide Horizons insurance company will not help pay for punitive damage awards, the directors are concerned whether an award of $20,000,000 would be compensatory, punitive, or some of each.

As part of your analysis, you will need to consider the time value of money and use an interest rate for discounting. You remember reading that corporate bond rates are appropriate for discounting workers earnings to present value. Suppose the current rate is 7%. However, you also remember that since the losses are in terms of real dollars, you will need to adjust the interest rate to an approximately real rate by subtracting the inflation rate.

Real interest rate: 4.50

CASE:

Comfort Now LA (CNL) was a small business that manufactured bleacher seat pads that sports fans or picnickers could use to make wooden outdoor seating (or even convenient rocks) a bit warmer and more comfortable. The primary markets for CNLs product were college bookstores (to be sold to students and alumni) and specialty advertising firms (for use as corporate give-a-ways). The firm was organized in the second half of 2001 and began selling products in 2002.

CNL had a policy of providing an annual cost of living increase for its assembly workers to maintain a constant annual cost of $25,000 per worker (1984 dollars). The production process requires one worker for every sixteen tons manufactured. As of January 2005, up to ten of the assembly workers were provided by a local Sheltered Workshop facility (a facility that provided and supervised disabled workers for product assembly and piece-work). This facility also rented the necessary manufacturing space to CNL. Nationwide Horizon Enterprises, a local manufacturing conglomerate with some excess capacity, provided the remaining workers and production space when more than ten disabled workers were required. Nationwide Horizon was also paid $25,000 (inflation-adjusted) apiece for its workers plus an additional fee for the rental of equipment and space.

In addition to manufacturing labor, CNL employed a clerical worker and a general manager but no sales staff. Through December 2005, sales were generated primarily by manufacturers representatives who received a standard 5% of sales as their commission.

In January 2005, Nationwide Horizon Enterprises purchased CNL. Nationwide Horizons management team immediately began supplementing sales efforts by adding the CNL products to their own manufacturer's representatives lines. Otherwise, they operated CNL without significant changes. The Nationwide Horizon Enterprises managers soon found that while sales were growing, profits were shrinking. The management responded for the second half of 2005 by increasing the commission to their manufacturers representatives from 5% to 6%. The salesforce responded quickly and sales boomed.

By July 2006, Nationwide Horizons board of directors expressed some concern to management. Even though sales were up, the deal was not proving to be profitable. At the end of July 2006, the board of directors was informed that Nationwide Horizons management team had decided to reduce CNLs production staff by letting go of those employees provided by the Sheltered Work Facility.

It is now in autumn 2007. Nationwide Horizon has been sued by a noted civil rights attorney claiming that closing down the Sheltered Work Facility manufacturing operation was a wrongful termination of the workers in the Sheltered Work Facility. Her court filings say that there was no valid business reason for selecting the disabled workers for layoff rather than the nondisabled workers; in part, the court filings claim that the layoff was wrongful because there was no economic justification for dismissing these workers who had been at least as productive, and profitable, as their non-disabled counterparts for so many years. The attorney claimed that this was obvious discrimination against the disabled and because of the discrimination, her ten clients will be unemployed for an average of 20 years each.

The attorney is asking the court for a verdict of $20,000,000 as an appropriate award to her ten clients if she prevails in her action. She estimated this figure by computing 20 years x 10 clients x $25,000 = $5,000,000, doubling it to account for her fees, then doubling that to account for future inflation.