7th Circuit's Take on Ratios Between Compensatory and Punitive Damages

In Matthias v. Accor Economy Lodging, Inc., 347 F.3d 672 (7th Cir. 2003), the plaintiffs brought a suit against various entities that own and operate the "Motel 6" chain of hotels and motels (Motel). Mathias, 347 F.3d at 673. The plaintiffs were guests at Motel 6 and were bitten by bedbugs. Id. The plaintiffs argued that the Motel's willful and wanton conduct in allowing them to be victims of the bloodthirsty insects entitled them to punitive damages. Id. at 674. The jury awarded each plaintiff $5,000 in compensatory damages and $186,000 in punitive damages. Id.

On appeal, the Motel argued that at worst, it was guilty of simple negligence. The Seventh Circuit quickly rejected that argument noting that:

• in 1998, the Motel's extermination service discovered bedbugs in several rooms and recommended spraying all the rooms for $500, which the Motel refused;
• the next year, bedbugs were found in a room and the Motel had the exterminator spray only that particular room;
• meanwhile, the Motel tried to negotiate a full sweep of the premises by the exterminator for free, which was refused by the exterminator;
• by the year 2000, the Motel's manager noticed that clerks were issuing refunds to guests based on the presence of ticks and bugs in the rooms;
• a management level employee refused to close the Motel and spray the entire premises despite further incidents of guest being bitten by bedbugs;
• the Motel continued to rent rooms that had been designated as being unfit to rent due to their infestation with the bedbugs, including the room rented to the plaintiffs.

Id. at 674-75.

Based on this extensive history, the Seventh Circuit reasoned that the Motel's failure to warn guests or "take effective measures to eliminate the bedbugs amounted to fraud and probably to battery . . ." Id. The Court further stated that "[t]here was, in short, sufficient evidence of 'willful and wanton conduct' within the meaning that the Illinois courts assign to the term to permit an award of punitive damages in this case." Id.

The Court then analyzed the Motel's argument that $20,000 was the maximum punitive damage award given the United States Supreme Court's decision in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 155 L.Ed.2d 585, 123 S.Ct. 1513 (2003). The Motel specifically advanced the Supreme Court's language in State Farm that "few awards [of punitive damages] exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." Id. (quoting State Farm Mutual Automobile Insurance Co. v. Campbell, supra.) After quoting the Supreme Court's language that "four times the amount of compensatory damages might be close to the line of constitutional impropriety," the Seventh Circuit noted that "[t]he Supreme Court did not, however, lay down a 4-to-1 or single-digit-ration rule - it said merely that 'there is a presumption against an award that has a 145-to-1 ratio.'" Id. at 676.

Before determining the appropriate punitive damage award, the Seventh Circuit analyzed the reasons why punitive damages are awarded and why the Supreme Court has decided that due process imposes limits on such awards. The Court discussed three principles behind the limits imposed on punitive damages by due process. The first penal theory principle the Seventh Circuit discussed was that the punishment has to fit the crime "in the sense of being proportional to the wrongfulness of the defendant's action." Id. The Court also noted that "a defendant should have reasonable notice of the sanction for unlawful acts, so that he can make a rational determination of how to act." Id. As such, there need to be "reasonably clear standards for determining the amount of punitive damages for particular wrongs." Id. The third principle was that the "sanctions should be based on the wrong done rather than on the status of the defendant." Id. As for the reasons why punitive damages are awarded, the Seventh Circuit noted that one function is to relieve the pressures of the overloaded criminal justice system. Id.

Applying these principles to the facts at bar, the Court noted that the Motel's behavior was outrageous. Id. at 677. The Court also found the compensable harm to be slight but difficult to quantify because "a large element of it was emotional." Id. In its analysis, the Court specifically noted the Motel may have profited by concealing the bedbug infestation and its misconduct, and consequently, an award of punitive damages may serve "the additional purpose of limiting the defendant's ability to profit from its fraud by escaping detection and (private) prosecution." Emphasizing this element, the Court noted: "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." Id.

One important note is the Seventh Circuit took care to note the defendant's net worth of $1.6 billion while simultaneously stating that "[a] defendant's wealth is not a sufficient basis for awarding punitive damages." Id. The Court noted the Motel's stubborn conduct in the litigation and the "host of frivolous evidentiary arguments despite the very modest stakes even when the punitive damages awarded by the jury are included." Id.

In sum, the Seventh Circuit held that the punitive damage award was not excessive and noted that its "function is to police a range, not a point" of punitive damage awards. Id. at 678. Any defendant who is the subject of a suit seeking punitive damages in the Seventh Circuit should keep Mathias in mind along with the Supreme Court's recent decisions in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 155 L.Ed.2d 585, 123 S.Ct. 1513 (2003), and BMW of North America, Inc. v. Gore, 517 U.S. 559, 134 L.Ed.2d 809, 116 S.Ct. 1589 (1996).