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Large punitive damage ratio OK when harm is slight

A motel that rented out bedbug infested rooms was properly ordered to pay $186,000 in punitive damages to customers, even though compensatory damages were only $5,000 per customer, the Seventh Circuit held on Oct. 21.

In downtown Chicago, a Motel 6 had a bedbug problem, but nevertheless, rented a room to Burl and Desiree Mathias in November, 2000. Rents exceeded $100 per day for the rooms.

Back in 1998, EcoLab, the extermination service that the motel used, had discovered bedbugs in several rooms in the motel and recommended that it be hired to spray every room, for which it would charge the motel only $500; the motel refused.

The next year, after bedbugs were again discovered in a room, EcoLab was asked to spray just that room. The motel tried to negotiate “a building sweep [by EcoLab] free of charge,” but the negotiation failed. By the spring of 2000, the motel’s manager “started noticing that there were refunds being given by my desk clerks and reports coming back from the guests that there were ticks in the rooms and bugs in the rooms that were biting.”

The manager looked in some of the rooms and discovered bedbugs. Fur-ther incidents of guests being bitten by insects and demanding and receiving refunds led the manager to recommend to her superior in the company that the motel be closed while every room was sprayed, but this was refused.

In one instance, a motel patron who complained was moved to four different rooms before he could sleep without being attacked.

Desk clerks were instructed to refer to the “bedbugs” as “ticks,” even though ticks are in fact more dangerous than bedbugs, because it was perceived that customers would be less alarmed. Rooms were placed on “Do not rent, bugs in room” status, but were rented anyway.

The Mathiases rented such a room, and brought suit in Illinois federal court, seeking compensatory and punitive damages under Illinois state law. The jury awarded each $5,000 in compensatory damages and $186,000 in punitive damages. Motel 6 appealed the punitive damage award, but the Seventh Circuit affirmed in a decision by Judge Posner.

State Farm v. Campbell

The court held that the award was not excessive, and was not a violation of due process under State Farm Mutual Automobile Ins. Co. v. Campbell, 123 S.Ct.1513 (2003).

The court acknowledged that, in Campbell, the U.S. Supreme Court stated that few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process, and suggested that “four times the amount of compensatory damages might be close to the line of constitutional impropriety.”

In the case at bar, the jury’s award was 37.2 times the amount of compensatory damages. Nevertheless, the court rejected Motel 6’s argument that punitive damages should be capped at $20,000 per plaintiff (4 x $5,000).

The court found that the court in Campbell did not lay down a 4-to-1 or single-digit ratio rule; the court held only that a 145-to-1 ratio is presumptively excessive.
Purposes

Concluding that a cap on the punitive damage ratio would be unreasonable, the court cited three precepts underlying punitive damages: the punishment should fit the crime; defendants should have reasonable notice of the sanction for unlawful acts; and sanctions should be based on the wrong done rather than the status of the defendant.

The court also noted that one function of punitive damages is to relieve pressures on an overloaded criminal justice system by providing a civil alternative.

What the court held

Case: Mathias v. Accor Economy Lodging, Inc. & Motel 6 Operating L.P., Nos. 03-1010 & 03-1078.

Issue: Is $186,000 an excessive punitive damage award, where only $5,000 were awarded in compensatory damages against a motel that rented rooms infested with bedbugs?

Holding: No. Where conduct is outrageous, but actual harm slight, a large ratio of punitive damages to compensatory damages may be necessary to adequately deter the conduct.

The court explained, “An example is deliberately spitting in a person’s face, a criminal assault but because minor readily deterrable by the levying of what amounts to a civil fine through a suit for damages for the tort of battery. Compensatory damages would not do the trick in such a case, and this for three reasons: because they are difficult to determine in the case of acts that inflict largely dignatory harms; because in the spitting case they would be too slight to give the victim an incentive to sue, and he might decide instead to respond with violence — and an age-old purpose of the law of torts is to provide a substitute for violent retaliation against wrongful injury — and because to limit the plaintiff to compensatory damages would enable the defendant to commit the offensive act with impunity provided that he was willing to pay, and again there would be a danger that his act would incite a breach of the peace by his victim.”

Contrasting that example with “billion-dollar oil spills and other huge economic injuries,” the court found those considerations fade in such cases. The court noted that, in Campbell, the very substantial compensatory damages — $1 million — greatly reduced the need for a large punitive damage award to provide an effective remedy.

Application

The motel’s conduct, the court concluded, was closer to the spitting example on the continuum.

The court reasoned, “The defendant’s behavior was outrageous but the compensable harm done was slight and at the same time difficult to quantify because a large
element of it was emotional. And the defendant may well have profited from its misconduct because by concealing the infestation it was able to keep renting rooms.

Refunds were frequent but may have cost less than the cost of closing the hotel for a thorough fumigation. The hotel’s attempt to pass off the bedbugs as ticks, which some guests might ignorantly have thought less unhealthful, may have postponed the instituting of litigation to rectify the hotel’s misconduct. The award of punitive damages in this case thus serves the additional purpose of limiting the defendant’s ability to profit from its fraud by escaping detection and (private) prosecution.”

The court also concluded that, if the punitive damages were capped, the plaintiffs may have had difficulty financing the lawsuit.

After noting that the motel’s net worth is $1.6 billion, and acknowledging that wealth alone is not grounds for awarding punitive damages, the court nevertheless considered that wealth relevant, because it had enabled the motel to mount an “extremely aggressive defense.”

Links

7th Circuit Court of Appeals

Related Article

Case Analysis

The court stated, “In other words, the defendant is investing in developing a reputation intended to deter plaintiffs. It is difficult otherwise to explain the great stubborness with which it has defended this case, making a host of frivolous evidentiary arguments despite the very modest stakes even when the punitive damages awarded by the jury are included.”

As an aside, the court noted that net worth is a suspect guide in assessing punitive damages against a corporation, labelling net worth an “accounting artifact” that does not measure a corporation’s resources.

The court observed, “A firm financed largely by equity investors has a large ‘net worth’ (= the value of the equity claims), while the identical firm financed largely by debt may have only a small net worth because accountants treat debt as a liability.

After noting that the total damages awarded per plaintiff, $191,000, equaled $1,000 per room in the hotel, the court stated, “But as there are no punitive-damages guidelines, corresponding to the federal and state sentencing guidelines, it is inevitable that the specific amount of punitive damages awarded whether by a judge or by a jury will be arbitrary,” and upheld the award.

The court also noted that, under Illinois law and Chicago ordinances, the motel could be sanctioned up to $2,500, and could lose its license, respectively. The court concluded, “We are sure that the defendant would prefer to pay the punitive damages assessed in this case than to lose its license.”

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David Ziemer can be reached by email.

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