By Philip A. O’Connell, Jr. and Tony K. Lu
In most jurisdictions, the amount of interest that may accrue on a judgment for damages generally comes as somewhat of an afterthought and has only a marginal impact on the size of a recovery.[i] Not so in Massachusetts. Here, the 12% statutory interest rate, recently confirmed as constitutional by the Supreme Judicial Court, looms large – often from the outset of litigation.
The Massachusetts Interest Statutes
In Massachusetts, calculation of interest on a verdict, finding, or order for judgment (collectively, a “judgment”) for pecuniary damages is controlled principally by twin statutes: G.L. c. 231, § 6B (“Interest added to damages in tort actions”) and § 6C (“Interest added to damages in contract actions”). See Bank v. Thermo Elemental Inc., 451 Mass. 638, 662 n.30 (2008) (“The same principles govern the calculation of prejudgment interest under both statutes.”).[ii] These statutes apply not only in the state courts in Massachusetts, but also in diversity cases controlled by Massachusetts law. See Fratus v. Republic Western Ins. Co., 147 F.3d 25, 30 (1st Cir. 1998).[iii] These statutes do the following:
- set the prejudgment rate of interest at 12% per annum (except where otherwise set by contract);
- specify the date from which such interest shall be calculated; and
- provide that the clerk of court must automatically calculate and add the interest award to the judgment.
The Calculation of Interest
The date from which interest is calculated amplifies the impact of the high rate of interest. Under both statutes, that calculation is not performed from the date of judgment. Rather, in tort actions, it is calculated from “the date of the commencement of the action.” G.L. c. 231, § 6B. In contract actions, it is calculated from the “date of breach or demand” if “established” or, if none is established, from “the date of the commencement of the action.” G.L. c. 231, § 6C.
Given that many lawsuits continue for years before a judgment, the interest component of a recovery may end up comprising a significant portion of the overall award. Indeed, in cases where intervening appeals prolong the litigation, the interest owed could even approximate the damage award itself. For example, assume the defendant breached a $100,000 contract with no interest provision on January 1, 2016, and the plaintiff filed suit three years later on January 1, 2019. If judgment does not enter until January 1, 2024, then the total judgment after eight years would be $196,000 including interest – nearly double the original value of the contract. ($12,000 per year x 8 years).[iv]
The Constitutionality of the Twelve Percent Interest Rate
In addressing a challenge to the constitutionality of the rates in G. L. c. 231, § 6B (pre-judgment interest) and G. L. c. 235, § 8 (postjudgment interest), the Supreme Judicial Court recently concluded “that the Legislature’s pre- and postjudgment interest rates pass rational basis review and, thus, are constitutional.” Greene v. Philip Morris USA, Inc., 491 Mass. 866, 868 (2023). Philip Morris contended that the 12% rates in the statutes, which had been used to calculate interest due on a judgment against it, “under current market conditions, are excessive in violation of its due process rights under the Federal and State Constitutions and cannot survive rational basis judicial review.” Id. at 880. Citing the fact that the purpose of the statutes was to help make plaintiffs whole, Philip Morris argued that the rates were punitive and did not rationally advance the purpose of the statutes. Id. at 881.
The Supreme Judicial Court rejected this position, holding that the 12% rate did not lack a rational basis, did not amount to punitive (as opposed to compensatory) damages, and was not excessive or in violation of Philip Morris’s due process rights under the Federal and State Constitutions. The Court explained, “[d]espite the arguable windfall this rate provides in a low interest economy, the interest amount is comparable to stock market returns over the same period; the money at issue, whether in the hands of plaintiffs or defendants, may very well have been so invested, despite the risk. Furthermore, that this high rate may encourage settlement does not violate a defendant’s due process rights.” Id. at 884-85.
Limitations on the Application of the Interest Statutes
Though the interest statutes provide for the automatic application of an interest award, certain principles limiting the applicability of these statutes have emerged in the case law.
- First, because these statutes are designed to “compensate a damaged party for the loss of use or unlawful detention of money,” Perkins School for the Blind v. Rate Setting Comm’n., 383 Mass. 825, 835 (1981), and “not to penalize the wrongdoer,” McEvoy Travel Bureau, Inc. v. Norton Co., 408 Mass. 704, 717 (1980), to avoid a windfall, interest should not be due on sums when the plaintiff was “not deprived of the use of those sums.” Sterilite Corp. v. Continental Casualty Co., 397 Mass. 837, 841-42 (1986). See also Thermo Elemental, Inc., 451 Mass. at 662-63. For example, prejudgment interest may not be awarded on portions of a judgment that compensate for lost future earnings and benefits. See, e.g., Conway v. Electro Switch Corp., 402 Mass. 385, 390-91 (1988).
- Second, prejudgment interest under these statutes may not be awarded on multiple damage portions of a judgment. McEvoy, supra at 718. See also, Briggs v. Carol Cars Inc., 407 Mass. 391, 396 n. 2 (1990).
- Third, prejudgment interest may not be awarded on penal or punitive damage portions of a judgment. Makino, U.S.A., Inc. v. Metlife Capital Credit Corp., 25 Mass. App. Ct. 302, 320-21 (1988) (“Indeed, to add interest on punitive damages in a c. 93A case would have the flavor of an unseemly piling on.”).
The Consequences of These Statutes
Several considerations flow from these interest statutes.
- For all contracting parties: Persons entering into a contract that may be enforced in Massachusetts may wish to ensure that both the rate of interest and the accrual trigger is controlled by their contract and not by the Massachusetts interest statutes.
- For plaintiffs: The incentive is significant to file suit early so that prejudgment interest begins to accrue. In contract disputes, the incentive for a potential plaintiff to serve a demand for performance on a breaching party at the earliest possible time is significant. Indeed, in contract actions, both the defendant and plaintiff may have a significant motive for establishing the date of breach to control the date from which interest will be calculated, with the plaintiff preferring an earlier date and the defendant a later date. In a tort case, a plaintiff may need to take into consideration competing needs, such as the need to determine the extent of their injuries.
- For defendants: The benefit that a defendant often obtains from delay may be offset to a considerable extent, with delay increasing the defendant’s risk of paying substantial prejudgment interest on top of any actual damages. To offset leverage created for the plaintiff by the accrual of prejudgment interest, the incentive for a defendant to identify and prosecute counterclaims may be materially increased.
- For all litigants: The impact of these statutes on the exposure of a defendant should be taken into account by all parties in the context of settlement efforts.
The Massachusetts interest statutes may materially increase the risks of litigation for defendants in Massachusetts courts. To a greater degree than the interest statutes of many other states, parties in Massachusetts should take the interest statutes into account at the outset of a dispute in order to inform litigation strategy and risk assessment.
[i] Note the much lower rates of interest in other states. For example, absent any contractual terms, Virginia, Maryland, Pennsylvania, and Texas provide only 6% prejudgment interest for contract actions. See Va. Code Ann. §§ 8.01-382, 6.2-302; Md. Code Ann. Com. Law. §12-102; 41 Pa. Stat. § 202; Tex. Fin. Code §§ 302.001, 302.002.
[iii] The federal district court, however, has substantial discretion to determine the interest rate in patent infringement cases. See, e.g., Banhazl v. Am. Ceramic Soc’y, No. 16-CV-10791-ADB, 2023 WL 159842, at *2 (D. Mass. Jan. 11, 2023).
[iv] In the example, interest is not compounded. A party may argue for compound interest, but compound interest is generally disfavored and only permitted in limited circumstances, including an express contractual provision. In general, whether to compound interest is within the discretion of the judge. See Scott v. Boston Housing Auth., 64 Mass. App. Ct. 693, 697 (2005) (upholding judgment that did not compound interest award where jury awarded multiple damages). See also Sec’y of Admin. & Fin. v. Labor Rels. Comm’n., 434 Mass. 340, 347-348 (2001) (Labor Relations Commission acted within its discretion to order “‘quarterly compounding’ of the awarded interest”); Cent. Water Dist. Assocs. v. Cedar Meadow Lake Watershed Dist., 80 Mass. App. Ct. 468, 473-474 (2011) (reversing judge’s order denying compound interest). In the example, if the interest were compounded, the total award would be $247,596.32.
Philip A. O’Connell, Jr. is the Managing Partner of the Boston office of Dentons US LLP. He is admitted to practice in Massachusetts, California, Illinois, and Nevada. He represents clients primarily in insurance and commercial litigation.
Tony K. Lu is a Senior Managing Associate in the Boston office of Dentons. He is admitted in Massachusetts and Connecticut. He represents clients primarily in trade secret litigation, other commercial litigation, and insurance litigation.