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In a biting decision in a case about bedbugs in a hotel, the 7th U.S. Circuit Court of Appeals upheld a punitive damage award that is 37 times the compensatory damages. The decision in the case against a Chicago Red Roof Inn fits a pattern in a handful of federal appellate cases. Courts have approved punitive awards that are high in relationship to the compensatory damages awarded, despite a 6-month-old Supreme Court decision aimed at holding them in check. The 7th Circuit allowed an award of $186,000 for each of two plaintiffs. That’s more than 37 times the $5,000 in compensatory damages awarded each one. Mathias v. Accor Economy Lodging, nos. 03-1010, 03-1078 (Oct. 21, 2003). The amount is well above the single-digit multiplier that the Supreme Court suggested would not violate the due process requirements of the 14th Amendment. The high court warned that “few awards exceeding a single-digit ratio would satisfy due process.” State Farm Mutual Ins. Co. v. Campbell, 123 S. Ct. 1513 (2003). There’s disagreement among experts as to whether the Supreme Court would see Mathias as in keeping with the spirit of State Farm or as an outright challenge to its authority. As to an appeal, the defendant company, Dallas-based Accor North America, issued a statement saying, “We disagree with both the court’s decision and characterization of the facts and are currently reviewing our legal options.” Three guidelines Some of the uncertainty stems from the fact that the Supreme Court held that a single-digit ratio isn’t mandatory. Determinations must be made case by case, applying two other guidelines as well. Chief among all the guidelines is the reprehensibility of the defendant’s conduct. The other is the level of official financial sanctions that a defendant could have been subject to for the conduct being punished. A dozen cases have been decided on appeals to federal circuit courts under the State Farm guidelines, an online search shows. Four of them were appeals by defendants of multidigit multipliers. The courts found the awards justified, although on two occasions the amounts were reduced. In a police-misconduct case, the 2d Circuit found that a 650,000-to-1 ratio was excessive. It reduced the multiplier to 75,000-to-1, producing a $75,000 punitive damages award. The court’s theory was that the $1 in nominal damages would not deter the police from repeating the malicious and reprehensible conduct that the jury had found, and that the officer could have been subject to a misdemeanor battery charge and been sentenced to a year in jail. Disorbo v. Hoy, 343 F.3d 172 (2003). The 5th Circuit used a similar rationale in a police-misconduct award of $100 in nominal damages and $15,000 in punitive damages, a 150-to-1 ratio. “Because actions seeking vindication of constitutional rights are more likely to result in nominal damages, strict proportionality would defeat the ability to award punitive damages at all,” the court said. Williams v. Kaufman Co., 343 F.3d 689 (2003). In another case, the 5th Circuit used the alternative-sanctions guideline in reducing a punitive damages award in a housing discrimination case, but still allowed 100 times the compensatory damages. The punitive award of $100,000 was reduced to a statutory maximum civil penalty of $55,000. Lincoln v. Case, 340 F.3d 283 (2003). Eight cases involved single-digit multipliers of punitives appealed by defendants as too high. The appellants mostly complained that the trial courts had failed to factor in the guidelines of reprehensibility and alternative sanctions. All but one were affirmed. Red Roof Inn’s reprehensibility was the main basis for the Chicago opinion, decided by a three-judge panel and written by the court’s best-known judge, Richard Posner. The court found “gross negligence . . . an unjustifiable failure to avoid a known risk.” Bedbugs, which are about one-fifth of an inch long, generally feed at night, hiding during the day in places like mattress seams and box springs. The past few years reportedly have seen a resurgence of the insects, whose bites are painful and unsightly. In 1998, according to the opinion, an extermination service at the hotel discovered bedbugs in several rooms and offered to spray all 191 rooms for “only $500,” an offer that was rejected. The following year the service found another room with bedbugs, and the hotel asked that the exterminators do a free sweep of the hotel. “Not surprisingly,” Posner wrote, “the negotiation failed.” By spring 2000 the manager noticed that desk clerks had been giving refunds to guests who had complained of being bitten. The manager suggested to her district manager that the building should close while the rooms were sprayed. That idea was rejected. ‘Farcical proportions’ “The infestation began to reach farcical proportions,” Posner wrote. One guest, he wrote, was moved three times after finding bugs in successive rooms. Posner wrote that the hotel realized that spraying individual rooms was merely “chasing them from room to room.” At one point, he wrote, desk clerks were instructed to call the bedbugs ticks so that guests would be less alarmed. Rooms that supposedly had been placed on “Do not rent, bugs in room” status were still being rented. The plaintiffs in the case, a brother and sister visiting from Toronto for a packaging trade show, got one of those rooms in November 2000. Posner said that the hotel’s failure to warn the guests in the $100-a-night rooms amounted to fraud and probably battery-willful and wanton conduct that supported an award of punitive damages. Accor, which also operates Motel 6, Studio 6, Sofitel and Novotel hotels, was represented by Timothy Murphy of Chicago’s MacCabe and McGuire. He argued that punitives should be capped at $20,000 under the State Farm formula. He wouldn’t comment on the case. Peter Stamatis, a Chicago solo practitioner who was the plaintiffs’ co-counsel in the six-day trial and made his debut before the 7th Circuit, argued that State Farm had not set a bright line for determining punitive damages. “There’s an agenda out there among certain groups of people who decreed that State Farm stood for the proposition that the ratio between punitive and compensatory damages must be in single digits,” Stamatis said. “I think that was wishful thinking on their part. That’s not what State Farm stands for.” Posner agreed with that reasoning. He looked to the rationale behind the State Farm decision, which found that a 145-to-1 ratio, in a bad-faith case growing out of an auto accident fatality, had denied the insurer due process. Need for predictability The punishment should fit the crime, Posner wrote, but there must be standards and predictability. The court attempted to divine the jury’s thinking, finding it not coincidental that when compensatory and punitive damages were added together, the total was $191,000, exactly $1,000 apiece for each of the hotel’s rooms. Posner suggested other justifications for a court allowing a larger multiplier. He wrote that 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.” Posner also wrote that but for a multi-digit multiplier it would be difficult to finance litigation that only had a prospect of negligible compensatory damages. He said this is particularly justifiable when defendants, as they had in this case, increase the cost of litigation by filing “a host of frivolous evidentiary motions despite the modest stakes.” As for the third guideline set out in State Farm-the regulatory penalties to which a tortfeasor might be subject-Posner noted that because guests were exposed to bedbug bites, under Illinois and Chicago law corporate officers might be subject to misdemeanor battery charges. The hotel might face the revocation of its license to operate, making the punitive damages comparatively small, he wrote. Jim Miller, a Washington partner at Atlanta’s King & Spalding, said the opinion is provocative and that Posner intended it to be. He is concerned, he said, that the ruling did not take the State Farm formula seriously. “Lower courts have not taken the high court’s attempt to constitutionalize the limits of punitive damages seriously,” Miller said. He approved of the panel’s analysis of potential civil liability but said that the three guidelines have to be taken together. “Justice Kennedy was clear that the court wanted to fix an upper limit,” Miller said, referring to Justice Anthony M. Kennedy, who wrote the State Farm opinion. He questioned the 7th Circuit’s attempt to look behind the high court’s rationale for its decision in State Farm and to refashion it. Catherine Sharkey, a law professor at Columbia University who has studied punitive damages, said Posner’s analysis was commendable. “It is important to begin with the state’s underlying reasons for assessing punitive damages” because it can vary state to state, she said. She said a dual analysis is required: Why are punitive damages awarded? Why did the Supreme Court decide that due process requires that these awards need to be limited? “Too many times courts and litigators jump to the second question without considering the first,” she said. “What intrigues me is he talks about the multiplier theory . . . that without it a defendant might be able to escape detection. One of the purposes of punitive damages might be for providing compensatory damages for people who aren’t before the court.” She said that in eight states, including Illinois, trial judges have the discretion to allocate the punitive damages to others or entities beyond plaintiffs and their attorneys. In Illinois, the judge could have allocated some of those damages to the Department of Human Services. If the defendants petition the Supreme Court for certiorari, Miller thinks, the justices might bite. “They’ve always been intrigued by facts that are unusual and bizarre,” he said. Post’s e-mail address is [email protected].

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