APU Business Editor's Pick Legal Studies Original

Demystifying the Law – Compensatory and Punitive Damages

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The University offers degrees in Legal Studies at both the bachelor’s and master’s levels. These degrees prepare students for non-lawyer professional roles in legal environments as well as for possible future law school enrollment. The curriculum of these programs covers both criminal and civil law concepts, which often are as complex as they are intriguing.

In previous articles, I’ve attempted to demystify complex legal topics such as the different types of causation and the differences between decriminalization and legalization. In this article, we’re going to look at compensatory and punitive damages, and why the distinction between these two legal remedies is so important.

We’re going to look at one of the most notorious personal injury cases to make news headlines in the last 30 years, the McDonald’s hot coffee case.

The Initial Narrative Was a Clumsy Woman Spilled a Hot Cup of McDonald’s Coffee on Her Lap

You might have heard of this case before. Or perhaps it’s more likely that you heard some bastardization of the truth. The initial popular narrative was that a clumsy woman spilled a hot cup of McDonald’s coffee on her lap. She then sued the restaurant company and won a bazillion dollars from what some saw as frivolous litigation.

You’d be forgiven if this is what you remember from the incident, which occurred all the way back in 1992. But the reality is most people didn’t truly understand the actual facts because of the way the case was distorted or otherwise inadequately reported by the media.

Stella Liebeck was 79 years old at the time of the incident. She was a passenger in a car that her grandson was driving. They decided to go to a McDonald’s where Liebeck ordered coffee through the drive-thru window. Liebeck’s grandson then parked the car and she attempted to open her coffee so that she could add cream and sugar. In doing so, she dropped the coffee and spilled it on her lap.

The Coffee Was Served at Approximately 180 to 190 Degrees Fahrenheit

The coffee was served at approximately 180 to 190 degrees Fahrenheit. And as such it caused third-degree burns to Liebeck’s legs and genital area. It burned some of her skin down to the muscle. She required skin grafts and eight days of hospitalization.

Liebeck retained an attorney and they sent a demand letter to McDonald’s seeking $20,000 in compensatory damages. As the name suggests, the amount was designed to compensate Liebeck for the harm done to her. In this case, it accounted for what Liebeck thought was fair coverage for her medical bills and lost income from the injuries she sustained.

McDonald’s replied back to her with an offer of $800. Obviously, this didn’t even begin to cover Liebeck’s monetary losses, so she refused and the litigation continued on to court.

There, a jury examined the standard of care for service of coffee. Most home coffee makers prepare coffee at between 130 and 150 degrees Fahrenheit. Most restaurants serve coffee no hotter than 160 degrees Fahrenheit, which takes 20 seconds of exposure to cause third-degree burns like those Liebeck sustained.

McDonald’s Was Serving Its Coffee at 180 to 190 Degrees, Approaching the Boiling Point

But McDonald’s was serving its coffee — routinely and by design — at 180 to 190 degrees Fahrenheit, which is literally simmering hot and approaching the boiling point. Coffee this hot causes third-degree burns in just three seconds. So this increase of more than 20 to 30 degrees hotter than industry-standard meant that serious burns from spilled coffee sustained by customers were likely to be much more frequent and much more severe.

And in fact, they were. Discovery in Liebeck’s case revealed that more than 700 people had reported being burned by McDonald’s coffee before Liebeck, including some children. And at least some of those victims had sustained severe burns as she had.

The Jury Found for a Total Sum of $200,000 in Compensatory Damages

So what was the outcome for Liebeck in court? The jury found for a total sum of $200,000 in compensatory damages. In other words, that was the total amount of loss that the jury perceived in the case. However, Liebeck received only $160,000 as she was found to have been partially negligent herself, so her compensatory award was reduced by 20 percent due to the doctrine of comparative negligence.

But beyond the compensatory damages, the court also awarded Liebeck $2.7 million in punitive damages. What are punitive damages? The root of the word “punitive” is to punish, so these kinds of damages are reserved for those rare cases when the court finds negligent conduct of a party to be so reckless or egregious that special penalties should be applied to account for this degree of offensive behavior.

And that is what happened to Liebeck. The jury examined McDonald’s conduct. They looked at the blatant disregard for industry standards and safe service practices. They looked at the fact that 180 to 190-degree coffee service was literally written into the company’s operations manual. They looked at the history of coffee burns at McDonald’s and the company’s apparent reluctance to change anything about how it did business. And so, the jury believed that McDonald’s deserved punishment for its failure to provide safe food and beverage service to its customers.

The $2.7 Million Was Equivalent to Roughly Two Days of McDonald’s Coffee Sales Worldwide

But the $2.7 million figure wasn’t just drawn out of thin air. It was a calculated amount equivalent to roughly two days of McDonald’s coffee sales worldwide. For large corporations worth billions of dollars, scope and scale need to be considered in order to assess what kinds of punitive awards might effectively achieve the goal — which is of course to deter future malfeasance.

For a Fortune 500 company like McDonald’s, a $200,000 adverse judgment might just be considered a routine cost of doing business in managing claims. And if the entire award is classified as compensatory, it would likely be covered by a general liability insurance policy that dramatically limits the financial hit to the company, with the exception of a deductible and maybe a modest increase in premiums.

But in many states, punitive damage awards are not insurable. So if a court wants to maximize the chances that an egregiously negligent company will take the matter seriously and correct its deficiencies, punitive damages can serve as a powerful instrument for motivation.

And this was the idea behind the jury’s award in Liebeck’s case. They wanted to make sure McDonald’s would feel the sting from the assigned penalty and ensure that this kind of disregard for safety never happens again.

The Court Reduced the Punitive Damage Award to $480,000, Admonishing McDonald’s Conduct as ‘Willful, Wanton, and Reckless

However, the court later reduced the punitive damage award to $480,000 while simultaneously admonishing McDonald’s conduct as “willful, wanton, and reckless.” And in the end, the parties reached a confidential settlement that was reported to be less than $500,000. But it’s safe to say the final amount was probably still a lot more than the $20,000 McDonald’s could have settled the case for at the onset.

The clarity of hindsight can be painfully enlightening.

So the point of compensatory damages in litigation is to compensate victims for injuries or losses, and punitive damages are intended to punish litigants when negligent conduct is particularly egregious.

But laws around punitive damages, including their permissibility, their insurability, what evidentiary standard is applied and any caps on amounts, will vary from state to state. So it’s important to check state laws and precedents for the applicability of punitive damage awards.

For example, according to the legal website mondaq, “Many state legislatures across the country have enacted statutory measures to limit the amount of compensatory and/or punitive damages recoverable by plaintiffs in a civil lawsuit. These limitations and the rationale behind them vary, sometimes widely and sometimes fractionally, from state to state.” So understanding variations by state is critical to assessing what remedial goals may be realistic in litigation.

Dr. Gary Deel is a Faculty Director with the School of Business at American Public University. He holds a J.D. in Law and a Ph.D. in Hospitality/Business Management. Gary teaches human resources and employment law classes for American Public University, the University of Central Florida, Colorado State University and others.

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