Area damage and healing caps
Area damage and healing caps limit Area of Effect abilities to a specified multiplier of damage or healing, based on the number of targets affected. Damaging abilities have a cap of twenty targets, and healing abilities have a cap of six targets. For damaging abilities, from one to twenty targets, the total damage will increase linearly with each target affected. After that, the total damage output is capped and the amount of damage each individual target will take decreases proportionally.
Details
Assume a fictional AoE spell hits for 1,000 damage against a single target after all effects like spell power are taken into account. Thus, with an increasing amount of targets hit per cast, assuming all else is held constant, the total damage output is:
| # | DPT | Total |
|---|---|---|
| 1 | 1,000 | 1,000 |
| 2 | 1,000 | 2,000 |
| ⋮ | ||
| 19 | 1,000 | 19,000 |
| 20 | 1,000 | 20,000 |
| 21 | ~952 | 20,000 |
| 22 | ~909 | 20,000 |
| ⋮ | ||
The damage cap is raised based on other effects that modify ability damage, such as spell power. For abilities that can land a critical strike, any crits will not be affected by the cap, and the total damage output can thus exceed the nominal cap. Using the same fictional area of effect ability that hits for 1,000 damage normally, a critical strike would land for 2,000 damage, and if by some cosmic coincidence all twenty targets are critically struck at the same time, the total damage output would be 40,000 damage.
History
From Patch 3.3 to Patch 5.2, the cap was at ten targets, rather than twenty. Before patch 3.3, the damage cap was completely static based on the rank of the ability, back when abilities had fixed ranks, and increasing damage would mean that players would hit the cap against fewer and fewer targets. Thus, assuming an ability hit for 200 damage against one target, but after equipping armor it hit for 300 damage, the damage cap would still be 2,000 damage, and players would start hitting the cap at 6.67 targets.
Before Patch 2.2, there was no damage cap and damage output would increase linearly without limit.
Patch changes
Patch 5.2.0 (2013-03-05): The area damage cap is now 20 targets (was 10). This means area of effect damage spells now reach their maximum damage when striking 20 targets. If more than 20 targets are struck, then the total damage done is spread evenly over the actual number of targets present. 
Patch 3.3.0 (2009-12-08): Area-of-Effect Damage Caps: We've redesigned the way area damage is capped when hitting many targets. Instead of a hard cap on total damage done, the game now caps the total damage done at a value equal to the damage the spell would do if it hit 10 targets. In other words, if a spell does 1000 damage to each target, it would hit up to 10 targets for 1000 each, but with more than 10 targets, each target would take 10,000 damage divided by the number of targets. 20 targets would be hit for 500 damage each in that example. 
Patch 2.2.0 (2007-09-25): Added.