Seventh Circuit Affirms Punitive Damages 37 Times Greater Than Compensatory Award
March, 2004
Introduction
In Mathias v. Accor Economy Lodging, Inc., 347 F.3d 672 (7th Cir.), the Seventh Circuit Court of Appeals upheld an award of punitive damages 37-times larger than compensatory damages due to a hotel chain’s willful and wanton conduct in failing to avoid the known risk of bedbug infestation in its rooms. The hotel chain’s district manager’s knowledge of the risk of bedbugs and his failure to eliminate the risk or warn the hotel’s guests were imputed to the hotel for purposes of determining whether the employer hotel was liable for punitive damages.
Facts
Plaintiffs checked into a motel in downtown Chicago in November, 2000. They were given a room classified by the motel as “DO NOT RENT UNTIL TREATED” despite the fact that the room had not been treated. On this night, 190 of the motel’s 191 rooms had been rented even though several rooms had been placed on the same “do not rent” status. Plaintiffs were bitten by bedbugs and alleged that the hotel was guilty of willful and wanton conduct and thus, was liable for punitive and compensatory damages under Illinois law.
The motel had a history of bedbugs. In 1998, the motel’s extermination service discovered bedbugs in several rooms and recommended that it spray every room at a total cost of $500. The motel refused this service. In 1999, although bedbugs were discovered in a room, the extermination service was hired just to spray that room. In the spring of 2000, the motel’s manager noticed that on many occasions, refunds were given to hotel guests due to bedbugs and several reports were made regarding ticks and bugs in the motel rooms. The manager notified her superior, the district manager, of the problem and suggested that the motel be closed while every room was sprayed. The district manager refused her request. The motel’s desk clerks were instructed to call the insects “ticks” because guests might be less alarmed by ticks than bedbugs. Rooms that had been placed on “do not rent” status continued to be rented and guests continued to complain of insects in the rooms.
At trial, the jury awarded each plaintiff $5,000 in compensatory damages and $186,000 in punitive damages. The motel appealed, primarily arguing that $20,000 was the maximum amount of punitive damages that the jury could have constitutionally awarded each plaintiff based on the U.S. Supreme Court’s decision in State Farm Mutual Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003), wherein the Court stated that “four times the amount of compensatory damages might be close to the line of constitutional impropriety.” Defendant argued that the 37.2 to 1 ratio of punitive to compensatory damages here was impermissible under Campbell.
Analysis
The Seventh Circuit determined that the motel’s failure to either warn guests or to take effective steps to eliminate the infestation problem amounted to fraud and battery. The evidence supported a finding of willful and wanton conduct and thus, punitive damages were appropriate. The court determined that the district manager was a management-level employee of the motel and thus, his knowledge of the risk of bed bugs and his failure to take the necessary steps to either eliminate the bed bugs or to warn the motel’s guests were imputed to his employer for purposes of determining the motel’s liability for punitive damages. The motel’s liability for compensatory damages was automatic based on respondeat superior because the district manager was acting within the scope of his employment.
In upholding the amount of punitive damages awarded, the court explained that the term “punitive damages” implies punishment and “a standard principle of penal theory is that the ‘punishment should fit the crime’ in the sense of being proportional to the wrongfulness of the defendant’s action, though the principle is modified when the probability of detection is very low (a familiar example is the heavy fines for littering) or the crime is potentially lucrative (as in the case of trafficking in illegal drugs) . . . hence, punitive damages should be proportional to the wrongfulness of the defendant’s actions.” Further, punitive damages should be based on the actual wrong done rather on the defendant’s status. In other words, a person should be punished for what he does wrong and not for who he is, even if that person is a large corporation.
The court concluded that the motel’s behavior was “outrageous” but the compensable harm to plaintiffs was minimal and difficult to quantify. The motel profited from its misconduct by concealing the infestation problem and continuing to rent the rooms. Even though the motel had to give frequent refunds to guests, the cost of these refunds was probably less than the cost of shutting down the hotel during a fumigation. The motel’s tactic of passing off the insects as ticks rather than bedbugs, which some guests may have thought to be less unhealthy, may have delayed or prevented litigation by other guests. Therefore, the court determined that the amount of punitive damages awarded served the additional purpose of limiting the motel’s ability to profit from its fraudulent conduct. “If a tortfeasor is ‘caught’ only half the time he commits torts, then when he is caught he should be punished twice as heavily in order to make up for the times he gets away.”
Learning Point:
Courts may be reluctant to follow Campbell’s “guidelines” regarding the acceptable ratio of punitive to compensatory damages, especially in cases where compensatory damages are low, the risk of getting caught is slight, and defendant’s wrongful conduct is particularly outrageous. ¨
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