United States District Court, Eastern District of Pennsylvania
July 31, 2000
RICHARD P. O'NEILL
SEARS, ROEBUCK AND COMPANY.
The opinion of the court was delivered by: Hart, United States Magistrate Judge.
MEMORANDUM AND ORDER
On January 25, 2000, after a five day trial, the jury returned a
verdict for the plaintiff in this age discrimination suit. The jury
awarded $106,736 in backpay, $130,596 in front pay, and $175,000 in
compensatory damages provided for by the Pennsylvania Human Relations
Act, ("PHRA"). In addition, the jury found the defendant's violation of
the Age Discrimination in Employment Act, "ADEA," willful. Therefore, the
court doubled the award for backpay, resulting in a total award of
$519,068. The Plaintiff has filed a Motion to Mold the Verdict to
prejudgment and post-judgment interest and damages resulting from the tax
consequences of receiving the economic damages in a lump sum, rather than
over the number of work years plaintiff would have worked, but for his
premature termination.*fn1 For the reasons that follow, the plaintiffs
Motion will be granted in part and denied in part.
I. Prejudgment Interest
"The Third Circuit has stated that there is `a strong presumption in
favor of awarding prejudgment interest, except where the award would
result in unusual inequities.'" Shovlin v. Timemed Labeling Systems,
Inc., No. 95-4808, 1997 WL 102523 *1 (E.D.Pa., Feb.28, 1997) (quoting
Booker v. Taylor Milk Co., Inc., 64 F.3d 860, 868 (3d Cir. 1995)). The
plaintiff seeks prejudgment interest on the backpay portion of the award,
only. The defendant argues that an award of prejudgment interest would be
inequitable because the plaintiff received an award of liquidated damages
and an award of compensatory damages. (Defendant's Response, at 2). The
Third Circuit's decision in Starceski v. Westinghouse Electric Corp.,
54 F.3d 1089 (3d Cir. 1995), directly addressed the relationship between
liquidated damages and prejudgment interest and provides guidance in
assessing the propriety of awarding prejudgment interest when an award of
compensatory damages was made.
In Starceski, the Third Circuit, relying on the Supreme Court's
decision in Trans-World Airlines v. Thurston, 469 U.S. 111, 105 S.Ct.
613, 83 L.Ed.2d 523 (1985), concluded that the purposes of liquidated
damages and prejudgment interest did not overlap. Therefore, an award of
prejudgment interest was appropriate in an ADEA case when liquidated
damages had previously been awarded.
We think the Supreme Court's decision in Thurston, 469
U.S. at 125, 105 S.Ct. at 623-24, guides us in
answering [the] question [whether prejudgment interest
may be awarded along with liquidated damages]. There
it stated that liquidated damages are punitive in
nature and designed to deter willful conduct. . . . We
have also recognized that the purpose of an award of
prejudgment interest is to reimburse the claimant for
the loss of the use of its investment or its funds
from the time of the loss until judgment is entered.
We are unable to reconcile Thurston's statement that
liquidated damages are punitive with a denial of
prejudgment interest designed to compensate for loss
of the time value of money.
Starceski, at 1101-02 (internal citations omitted).
Hence the court found that the purposes of the two awards were
different and concluded that an award of prejudgment interest was
appropriate when an award of liquidated damages had been made.
If awards of prejudgment interest are compensatory,
and liquidated damages are punitive, a concomitant
grant of both is appropriate because prejudgment
interest serves the statutory goal of making [the
Plaintiff] whole, i.e., it compensates him for the
discriminatory wrong that he has suffered, while
liquidated damages would punish [the Defendant] for
its willful violation of the ADEA.
Id., at 1101. See also, Shovlin v. Timemed Labeling Systems, Inc., No.
95-4808, 1997 WL 102523 *2 (E.D.Pa. Feb.28, 1997) ("In Starceski, the
Third Circuit made clear that in an ADEA case the district court may
award prejudgment interest to back pay loss even though the claimant was
awarded liquidated damages.").
Applying this analysis to a concomitant award of prejudgment interest
and compensatory damages pursuant to the PHRA brings this court to the
same result. As this court instructed the jury, "[c]ompensatory damages
include damages for emotional pain, embarrassment,
suffering, humiliation, inconvenience, mental anguish and other what we
call non-monetary or non-pecuniary losses." (N.T. 1/24/2000, 111). Since
compensatory damages pursuant to the PHRA refer specifically to
noneconomic losses, and prejudgment interest is an economic award to
compensate the plaintiff for the loss of the time value of money, a
concomitant award is not double compensation for the same loss.
Furthermore. the award of both is consistent with the "statutory goal of
making [the plaintiff] whole." Starceski, at 1101. Therefore, the court
will award prejudgment interest.
The plaintiff and defendant do not agree on the interest rate, at which
the prejudgment interest should be calculated. The plaintiff proposes
that this court utilize the Internal Revenue Service's rate of interest
for the time period in issue. The defendant argues that the court be
guided by the post-judgment interest statute, 28 U.S.C. § 1961.
"The decision to award prejudgment interest and the amount of interest
awarded are within the trial court's discretion.' Kraemer v. Franklin and
Marshall College, 941 F. Supp. 479, 487 (E.D.Pa. 1996) (citing Berndt v.
Kaiser Aluminum & Chem. Sales, Inc., 629 F. Supp. 768, 770 (E.D.Pa.
1985), aff'd, 789 F.2d 253 (3d Cir. 1986)). Although both bases for
calculation have support in our circuit, see Kraemer, Taylor v. Central
Pennsylvania Drup and Alcohol Servs. Corp., 890 F. Supp. 360, 368-70
(M.D.Pa. 1995); EEOC v. Reads, Inc., 759 F. Supp. 1150, 1162, n. 20
(E.D.Pa. 1991) (awarding prejudgment interest on back pay in Title VII
case using IRS rates and compounded quarterly), but see, Shovlin, at *2
(citing Sun Ship, Inc. v. Matson Navigation, Co., 785 F.2d 59, 63 (3d
Cir. 1986)); Young v. Lukens Steel Co., 881 F. Supp. 962, 977-978
(E.D.Pa. 1994) (awarding prejudgment interest on backpay utilizing the
postjudgment interest statute), the court is convinced by the defendant's
argument, utilizing the post-judgment interest statute, in light of the
district court's reasoning in Davis v. Rutgers Casualty Insurance Co.,
964 F. Supp. 560, 576 (D.N.J. 1997).
First, this rate is easy to determine from the federal
post-judgment interest rate charts following
28 U.S.C. § 1961. Second, the 52-week Treasury
bill rate has been found by Congress and by the
marketplace to be a suitable approximation of the
available return for a typical risk-free investment;
such a benchmark is a reasonable approximation of a
riskfree investment available throughout the period in
which the employer retained the employee's wages and
The post-judgment interest statute, 28 U.S.C. § 1961 (a), provides
for the calculation as follows:
Such interest shall be calculated from the date of the
entry of the judgement, at a rate equal to the coupon
issue yield equivalent (as determined by the Secretary
of the Treasury) of the average accepted auction price
for the last auction of the fifty-two week United
States Treasury bills settled immediately prior to the
date of judgment.
28 U.S.C. § 1961 (a). Having chosen the method of calculation, the
court then faces the application of this method. The judges of our court
have employed this statute differently in calculating prejudgment
interest. The Honorable Raymond Broderick calculated simple interest on
the backpay award by taking the average T-bill rate for the prejudgment
period and applied that rate to the award of back pay. See Shovlin, *2.
The Honorable Herbert Hutton used the T-bill rate on the date of the
judgment and compounded the interest yearly based on the amount of
earnings that the plaintiff would have collected in that year, plus all
the preceding years. Young v. Lukens Steel Co., 881 F. Supp. 962, 978
Although Judge Broderick's method would be mathematically simpler, we
find that Judge Hutton's method best serves the purpose of making the
Contrary to § 1961, however, the interest rate
shall be applicable only to the amount the plaintiff
would have earned each year before the verdict plus
interest and salary the plaintiff would have earned in
all of the preceding years (i.e. compounded), instead
of interest on the whole award annually. This
distinction from § 1901 is necessary because a
plaintiffs backpay award grows incrementally each
year, whereas a plaintiff becomes entitled to the
amount subject to post-judgment interest on the day of
We, however, will refine Judge Hutton's method by utilizing the T-bill
rate available at the end of each year, rather than applying the rate
available at the date of judgment. Employing this method results in a
total backpay award of $120,768.11 — including $14,032.11 in
prejudgment interest, calculated as follows.
Dividing the total backpay award by 46, the number of months that
elapsed between Mr. O'Neill's termination and the judgment, results in
a monthly earnings amount of $2,320.35. Using the T-bill rates for the
period ending just prior to each annum results in the following
March 25, 1996 — March 25, 1997 27,844.20 [*]5.67% = $1,578.77
March 25, 1997 — March 25 — 1998 (27,844.20 27,844.20) [*]5.407% $3,011.07
March 25, 1998 — March 25, 1999 (55,688.40 27,844.20) [*]4.918% $4,108.13
March 25, 1999 — January 24, 2000 (83,532.60 23,203.50) [*]5.997% = $6,400.96*fn*
II. Negative Tax Consequences
A. In General
The Plaintiff also requests the court to amend the judgment to include
an award for negative tax consequences, relying on the "make-whole"
objective of the ADEA. The defendant contends that the ADEA does not
provide for such damages, disputes the taxability of compensatory
damages, and argues that the defendant should not bear the increased tax
liability to which the Plaintiffs awards for front pay, backpay, and the
punitive damage awards are subject.
We conclude that the Plaintiff is entitled to an award for negative tax
consequences, but limit the award to the increased tax liability on the
award of front and backpay, only. Although the Third Circuit has not
directly address this question, and, in fact, avoided the question in
Gelof v. Papineau, 829 F.2d 452, 455 n. 2 (3d Cir. 1987), and the judges
of this district have denied such relief, see Young; Shovlin, at *2-3;
Becker v. ARCO Chemical Co., 15 F. Supp.2d 621, 638 (E.D.Pa. 1998)
(reversed on other grounds), we are again guided by the reasoning of
Starceski and conclude that our case is distinguishable from those in
which the claimant was denied such relief.
Prior to Starceski, the Third Circuit recognized the "make-whole
purpose governing remedies for employment discrimination cases arising
under the [ADEA]." Squires v. Bonser, 54 F.3d 168, 172 n. 7 (3d Cir.
1995) (citing Maxfield v. Sinclair Intern., 766 F.2d 788, 796 (3d Cir.
1985) cert. denied, 474 U.S. 1057, 106 S.Ct. 796, 88 L.Ed.2d 773
(1986)). In Starceski, the Third Circuit relied on this "make-whole"
purpose in concluding that the plaintiff was entitled to a concomitant
award of liquidated damages and prejudgment interest.
Prejudgment interest, the Third Circuit held, "reimburse[s] the
claimant for the loss of the use of its investment or its funds from the
time of the loss until judgment
is entered." Starceski, at 1102 (quoting Berndt v. Kaiser Aluminum &
Chemical Sales, Inc., 789 F.2d 253, 259 (3d Cir. 1986)). Since the Third
Circuit recognized the economic necessity of compensating for the lost
"time value of money" in order to comply with the "make-whole" doctrine,
we anticipate that the Third Circuit would likewise compensate the
claimant for the depletion of that money due to the increased taxes to
which the award is subject on account of its being received in a single
tax year, rather than being spread out over time.
The argument is particularly compelling in the case of front pay, since
the plaintiff has already had his front pay recovery reduced to present
value, on the assumption that he can now invest the money and receive a
yearly return equal to his lost wages. However, if the plaintiff must pay
a higher tax on the present value of his earnings, this leaves less for
investment. Hence, the plaintiff will not, in fact, realize an investment
gain large enough to equal the future wages that he is not getting as a
result of the defendant's discriminatory conduct. As the television
advertisement of a few years ago said: "It's not how much you make, it is
how much you keep." The goal of the ADEA is to allow plaintiff to keep
the same amount of money as if he had not been unlawfully terminated.
Compliance with this goal requires reimbursement for the reduced amount
of front pay money that the plaintiff has to invest as a result of higher
taxes, as well as reimbursement for the higher taxes he must pay on his
back wages caused by getting this money in a lump sum.
We also note that such a decision does not contradict other cases in
this district, as our case is distinguishable from those previously
decided. Although the Honorable Herbert Hutton denied a request for an
award of negative tax consequences in Young, his decision pre-dated the
taxability of the award. Id., at 978. The Honorable Raymond Broderick
denied a similar request in Shovlin, a case decided after the Internal
Revenue Code had been amended to include such awards as ordinary income.
However, Judge Broderick based his denial on the fact that the plaintiff
had failed to present any testimony by a tax expert calculating the
negative tax consequences. "[T]his court is not inclined to engage in the
speculative task of determining the Plaintiffs future tax liability."
Shovlin, at *3. Relying on Shovlin, the Honorable Eduardo Robreno also
denied any award for negative tax consequences.*fn2 Becker, at 638. In
our case, plaintiffs counsel has remedied the defect cited by Judge
Broderick by presenting the opinion and calculations of Andrew Verzilli,
the economic expert whose testimony the plaintiff presented at trial.
(N.T. 1/20/2000, 178-182; Exhibit B attached to Plaintiffs Motion to Mold
B. Applicability to the Components of the Award
Having concluded that negative tax consequences are an appropriate
remedy pursuant to the "make whole" provisions of the ADEA, we will
proceed to discuss the applicability of the remedy to each component of
damages award by the jury.*fn3 The plaintiff argues that the defendant
should bear the increased tax burden to which the entire award ($519,068)
is subject. The defendant, although arguing that an award for negative
tax consequences in not appropriate, argues alternatively that the
compensatory and liquidated damages awarded by the jury not be considered
in calculating such an award.
The court agrees with the defendant in this regard. The plaintiff
focuses on the taxability of the other components of the award, the
compensatory and liquidated
damages. Although the court agrees that those components of the award
will also be subject to taxation, the plaintiffs counsel loses sight of
the "make whole" rationale behind the ADEA, upon which she relied in
arguing for an award for negative tax consequences, in the first place.
Mr. O'Neill would have earned the backpay and front pay had the defendant
not unlawfully terminated him. Therefore, he is entitled to receive the
value of front pay and backpay that he would have received over his work
life. That value is diminished when the lump sum is taxed at a higher
level. Therefore, in order for Mr. O'Neill to be made whole, he is
entitled to an award of the negative tax consequences on the backpay and
front pay portions of the jury's award.
The compensatory and liquidated damages, however, are only a product of
this lawsuit. Mr. O'Neill would not have received these sums but for the
defendant's discriminatory action. Hence, allowing the plaintiff to
recover the increased tax he will have to pay on these sums does more
than make him whole. It gives the plaintiff a windfall.
C. The Calculation
Unfortunately, in the report attached to the Plaintiffs Motion to Mold
the Verdict, the calculations done by Mr. Verzilli assume that the court
would consider the entire award when calculating the negative tax
consequences. As previously discussed, the court will consider only the
front and backpay portions of the award in doing such a calculation.
Therefore, the court will not consider the tax imposed on the
compensatory and liquidated damages and will not consider the effect that
the additional $281,736 in compensatory and liquidated damages will have
on the plaintiffs tax bracket.
According to Mr. Verzilli (and the defendant has presented no evidence
contrary to Mr. Verzilli's calculations), the O'Neills' gross earnings
this year would have been approximately $55,853, had Mr. O'Neill
continued working at Sears. (Exhibit B attached to Plaintiffs Motion to
Mold the Verdict). Using the O'Neills' deductions of approximately
$12,000 yields a tax rate of 11.96%.
At that tax rate, Mr. O'Neill would owe $28,384.91 in taxes on the
$237,332 he has received in front and backpay. However, because he is
receiving this money all at once, together with his present salary of
$24,960 and Mrs. O'Neill's salary of $11,428, his gross income this
year, exclusive of compensatory and liquidated damages, will be
$273,730. Using the same deductions, the tax rate jumps to 28.3%.
Applying this rate to plaintiffs front and backpay recovery of $237,332
shows a tax bite of $67,164.96. This amount is $38,780.05 more in taxes
than plaintiff would owe on this money had he received it over time as
annual wages. The court will, therefore, mold the verdict to include an
award of $38,780.05 for these negative tax consequences.
III. Post-Judgment Interest
The defendant concedes that the plaintiff is entitled to an award of
post-judgment. interest on the entire award, calculated pursuant to
28 U.S.C. § 1961. Therefore, post-judgment interest will be awarded
at 5.997%, the T-bill rate available on January 4, 2000, the last auction
prior to the date of the judgment.
<http://156. 119.80.10/finance/postiud/table html>.
An appropriate order follows.
AND NOW, this 31 day of July, 2000, upon consideration of the
Plaintiffs Motion to Mold the Verdict, the Defendant's Response,
thereto, and the Plaintiffs Reply, IT IS HEREBY ORDERED that the Motion
is GRANTED IN PART AND DENIED IN PART.
1. The Plaintiffs Motion to Mold the Verdict to add prejudgment
interest is GRANTED. However, the court's method
of calculation differs from that proposed by the Plaintiff. Prejudgment
interest through January 24, 2000 is awarded in the amount of
$14,032.11, resulting in a backpay award of $120,768.11.
2. The Plaintiffs Motion to Mold the Verdict to add an amount for
negative tax consequences is granted to the extent the tax consequences
are calculated with the addition of the awards for backpay and front pay
only. No consideration is given to the awards for compensatory or
liquidated damages. Therefore, the verdict is increased by $38,780.05.
3. Judgment is amended and entered in the amount of $571,880.16 in
favor of the Plaintiff. Richard P. O'Neill, and against the Defendant,
Sears, Roebuck & Company.
4. Plaintiffs Motion to Mold the Verdict to add post-judgment interest
is GRANTED and such interest shall be calculated at the rate of 5.997%.
5. Plaintiff shall file it's motion for attorney fees and costs within
fourteen (14) days of this the date of this Order.