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Consumer Reports

'Bedbug case' marks significant step in awarding punitive damages | (KRT) A day after Burl and Desiree Mathias arrived in Chicago for a packaging trade show, they found themselves itching to get away - from their downtown hotel overrun with bedbugs.

After a night in the Motel 6 on East Ontario Street, the brother and sister awoke to find itchy bumps all over their bodies, and the next evening they found the culprit: legions of insects scurrying about in their beds.

Hotel management wasn't surprised by their horrified complaints, because it had been renting out rooms infested with bedbugs for months to unsuspecting customers. The company that operates Motel 6 and other economy motels was, however, taken aback when a Cook County jury hit it with $372,000 in punitive damages after the Mathiases sued.

The $1.6 billion company appealed, but it wasn't banking on a run-in with an incredulous federal appeals court judge. Richard Posner's recent opinion upholding the jury's award not only takes the corporation to task for an infestation that reached "farcical proportions," it provides an important analysis of punitive damages that is certain to reverberate in other disputes across the country.

Posner's decision comes on the heels of a Supreme Court ruling that knocked down a $145 million punitive-damages judgment in an insurance case. It also comes amid renewed efforts to pass laws scaling back those types of awards. The public has long been torn about the propriety of massive awards, with critics saying they are growing out of hand and defenders insisting they provide a vital check on corporate wrongdoing.

Most immediately, courts across the country are grappling with how to decide when big-money punitive damage awards - those intended to punish wrongdoing, not just reimburse plaintiffs - are simply too large.

The Supreme Court has said punitive damages can be so excessive that they violate the Constitution, and it has given lower courts guidelines for reining in colossal awards. In its most recent ruling on the issue this spring, it said punitive damages that were dramatically higher than the compensatory damages - the payments that compensate victims for their financial loss - would be considered suspect.

Catherine Sharkey, a professor at Columbia University Law School who has just written a law review article on punitive damages, called Posner's opinion "very significant." Not only did it interpret the recent Supreme Court decision, she said, it also laid out a comprehensive analysis of why punitive damages are awarded in the first place, such as deterring bad behavior and giving plaintiffs an incentive to sue and correct the problem.

"There hasn't been enough attention placed on what are the purposes of punitive damages," she said.

Posner said the bedbug case shows that there are circumstances in which punitive damages can be dramatically higher than compensatory damages. Burl and Desiree Mathias received only $5,000 each to compensate them for the pain and treatment of the bug bites, but they were entitled to the jury's award of roughly 37 times that, Posner concluded.

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"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," Posner wrote for the court.

In detailing the company's misconduct, Posner noted that Motel 6 had known for years that it had a bedbug problem on East Ontario Street but rejected offers to have the entire hotel exterminated for only $500. (The hotel is now a Red Roof Inn, but it still is owned by the same company.)

In 2000, Motel 6 desk clerks began issuing refunds to customers who complained about ticks and biting bugs in rooms. The hotel's manager then recommended closing the establishment while every room was sprayed, but a supervisor refused.

Instead, the hotel continued to rent rooms and move guests who complained. Posner wrote of one guest who was moved to three different rooms to get away from bedbugs, saying it was "odd that at that point he didn't flee the motel."

With the problem reaching such "farcical proportions," the hotel desk clerks were told to call the bedbugs "ticks" on the theory that customers would be less alarmed, Posner noted. It also put rooms on "Do not rent, bugs in room" status but then rented them anyway, the judge said.

When the Mathias siblings arrived with a reservation in November 2002, Motel 6 had almost every room rented. It put them in Room 504, even though it was on "Do not rent" status. The Mathiases were bitten from head to toe that night.

"The next day, sores started forming on both of their bodies - huge red welts. They had it all over their bodies, their faces, necks, chests," said Peter Stamatis, the Mathiases' lawyer. "The woman had it on her legs and feet - everywhere."

Timothy Murphy, an attorney for Accor Economy Lodging, which owns and operates Motel 6, said corporate officials were reviewing the decision and refused to comment on whether they would ask the Supreme Court to take up the case.

Many corporate defense lawyers have insisted that the Supreme Court's April decision in State Farm v. Campbell, an insurance case, should invalidate all outsized punitive damages. But Posner, like several other federal appeals judges, concluded that the Supreme Court was not issuing a magic formula to keep punitive damages low.

Motel 6 had argued that the Supreme Court in the State Farm case said punitive damages generally should not be more than nine times the amount of compensatory damages. It said the justices concluded that four times the amount of compensatory damages "might be close to the line of constitutional impropriety."

As such, it argued that it should be liable for only $40,000 in punitive damages for renting the bedbug-infested rooms to the Mathiases - the $5,000 in compensatory damages times four for each sibling. But Posner said the Supreme Court was not laying down a single-digit rule, adding that "it would be unreasonable to do so."

The judge concluded in his opinion that higher punitive damages were appropriate in situations where low compensatory damages would not adequately punish the wrongdoer or give the victims an incentive to sue, particularly because their lawyers would get upwards of 30 percent in fees.

Moreover, the motel deserved to be punished more heavily "in order to make up for the times" it got away with renting bug-infested rooms, Posner said, noting that it continued to rent infested rooms and tried to pass off the bedbugs as ticks.

Although the ratio of punitive damages to compensatory damages in the bedbug case was far greater than the Supreme Court contemplated in State Farm, Sharkey and others said Posner's approach complied with the high court's ruling.

Sharkey noted that other courts have reached the same conclusion under similar circumstances. A federal appeals court in New York, for example, recently said a $75,000 punitive damages award was appropriate in a police misconduct case where compensatory damages were $1.

"Judge Posner indicates that you have to make it not worth their financial while ... to engage in willful and wanton conduct," said Stamatis, the lawyer. "Otherwise, no one would be deterred."

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© 2003, Chicago Tribune Distributed by Knight Ridder/Tribune Information Services