Due process does not require that punitive damages be capped at a 4-to-1 ratio with compensatory damages

In Mathias v. Accor Economy Lodging, Inc., No. 03-1010 (7th Cir. Oct. 21, 2003), the Seventh Circuit held that a jury verdict, in which punitive damages exceeded compensatory damages by more than four times a single-digit ratio, was not unconstitutionally excessive in violation of due process. Mathias is the first case in the Seventh Circuit to apply the recent United States Supreme Court case, State Farm Mutual Automobile Ins. Co. v. Campbell, 123 S. Ct. 1513, 1524 (2003), in which the Supreme Court stated that "few awards [of punitive damages] exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process."

In Mathias, plaintiffs brought a diversity suit against defendants who owned and operated a 191-room hotel in downtown Chicago that was entirely infested with "bedbugs." For four years, hotel management failed to fumigate for insects, despite numerous patron complaints. A jury verdict awarded the plaintiffs $5,000 in compensatory damages, and $186,000 in punitive damages (a ratio of 37.2-to-1). Applying Illinois substantive law, the Seventh Circuit held that the evidence adduced at trial justified the jury's verdict as to both the compensatory and punitive damages award. The defendants, citing Campbell, argued that due process required that the punitive damages award be capped at $20,000 because Campbell stated that a punitive damages award that is "four times the amount of compensatory damages might be close to the line of constitutional impropriety." Judge Posner, writing for the court, noted that Campbell did not establish a prophylactic rule that always barred punitive damages where the ratio between punitive and compensatory exceeded 4-to-1. Instead, the Supreme Court only held that "there is a presumption against an award that has a 145-to-1 ratio" and that any punitive damages award that exceeded this ratio was presumptively prohibited.

In all other cases, however, Mathias creates a two-part analysis for determining the propriety of a punitive damages award. First, the permissible maximum ratio of punitive to compensatory damages in a jury verdict depends on whether the punitive damages awarded in the particular case is necessary to achieve their intended purpose-providing meaningful civil relief to the plaintiff while deterring the defendant from repeating its misconduct. Thus, where a plaintiff is awarded substantial compensatory damages, there is less need to impose significant punitive damages, since compelling the defendant to pay a large compensatory sum provides sufficient deterrent effect against repeated misconduct. But where, as in Mathias, the plaintiff suffers an injury that provides only nominal compensatory damages, tort law permits a jury to impose a larger punitive damages award to ensure that the defendant is sufficiently deterred from repeating its misconduct.

Second, once the jury verdict is rendered, the ultimate ratio of punitive-to-compensatory damages in the jury award is scrutinized to determine if it offends standard notions of due process. Factors to be considered in assessing the constitutionality of the punitive damages award include: (1) whether the award is proportional to the wrongfulness of the defendant's misconduct; (2) whether the defendant had reasonable notice that it could be subjected to punitive damages for its alleged misconduct; and (3) ensuring that the damages award is based on the defendant's conduct, and not its status (i.e., a corporation should be punished for its conduct, not for being a corporation).

In Mathias, the evidence showed that the defendant ignored repeated warnings from its pest control contractor that a full-scale fumigation of the hotel was necessary, and repeatedly rented specific rooms that the defendant had previously placed on "do not rent, bugs in room" status. Because the defendant knew or should have known that the infestation constituted a health code violation punishable with the revocation of its operator's license, and the jury award was clearly based on the defendant's demonstrated misconduct, the Seventh Circuit concluded that the $186,000 punitive damages award did not offend due process and was appropriate given the egregious degree of the defendant's misconduct.