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01/23/2005

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Bonddad

One quick comment on the McDonalds' case. McDonalds had about 700 complaints on file regarding the terperature of their coffee. This gave them notice of a potential problem.

I also wanted to thank Mr. Posner and Becker for this blog. I have always liked Mr. Posner's judicial opinions. In addition, the commentary is beautifully reasoned and articulated.

Martin Bento

Becker's case has remarkably little articulated basis in matters other than personal opinion. Punitive judgments are excessive? By what criteria? Because they are too high a multiple of compensatory damages? What criteria determines this? The purpose of punitive damages is deterrence; the proper test of their appropriate level is the effectiveness of the deterrent. In this there is a good parallel in criminal law, which has a similar purpose. If we find that a criminal law, say against mugging, is ineffective, so that muggers find their activity worth the risk, we either increase the penalty (damages) or up the enforcement of them. In the case of courts, increasing punitive damages awarded to plaintiffs does some of each. The measure, then, of whether the levels are appropriate is whether the proscribed behavior is in fact deterred.

This is where the McDonalds case is relevant. As has been pointed out, McDonalds deliberately chose to make their coffee unsafe because they calculated that the probable punitive loss was worth the gain. This indicates that the prior established level of punitive damages was insufficient to its purpose and needed to be increased, both for McDonalds and for other cases where the cost/benefit calculation would be similar. Far from being excessive, McDonalds should become the new standard for how punitive damages in similar cases are accessed.

I agree with Becker that it is ridiculous to limit compensatory damages to lost income. Someone who loses an arm loses much more than a job. But why on Earth should the other compensatory damages be a function of lost income? Do poor people not mind much losing an occasional arm? Becker asserts that it should be a function of what someone would be willing (really willing and able) to pay, which would presumably vary with wealth. But money has a utility curve too, and the actual marginal utility of a dollar declines as you gain more of them and move down that curve. Adjusting for this, the non-compensatory impact of an arm-loss, while difficult to estimate in a particular, should probably as a "rule of thumb" be considered equivalent for rich and poor and therefore be calculated independent of income, with adjustments, perhaps, for particular circumstances (if someone is a pianist, for example).

Becker's scheme amounts to a feedback loop magnifying current disparities in wealth. If you have more income, you are entitled to more compensatory damages, and if you are entitled to more compensatory damages, you are also entitled to more punitive damages.

Becker also asserts that jury awards may just reflect a perception of "deep pockets". But since juries do not get any of the money, are randomly selected from the population, and are filtered for bias of various kinds, this is quite a strong assertion to make without support. Is there proof of such a bias? And, if there is, what are we to make of it?

Finally, this business of being able to test the coffee. Is this a reasonable expectation? Let's go back to our mugger. If I walk down a dark street to take a shortcut home, it is true that I could have chosen a better-lit street. It is perhaps true that I even knew dark streets were dangerous (which is a higher standard than the McDonalds case, as the woman had no evident reason to suspect the coffee was dangerous). Does that mean the mugger is blameless, and I have no right to pester the police. McDonalds willfully endangered its customers, based on a prevailing level of punitive damages that were too low. If there is some possible way the customer could have prevented the damage, is this supposed to leave them off the hook? Under this standard, our jails would be quickly emptied.

Jason Goitia

One point on the comment regarding incentive to sue when punitive damages are awarded to some state entity. Another effect is that the parties are more likely to settle for an amount less than a court would award for punitive plus compensatory damages and an amount greater than compensatory damages plus the percentage recovery the plaintiff would receive from the punitive damages split. This would cut out the state entity from any recovery and award less to the harmed individual. Whether this proposal merits consideration as a way to reduce overall payments from the wrongdoer (which some argue are too high) is for another day. But the proposal would not achieve its proponents' desired effects.

Tino

The comparison between mugger and selling hot coffee is deeply flawed. The consumer willingly entered into a transaction with McDonald, whereas the rubbery victim presumably did not.
Since the woman willingly purchased a product, she has some responsibility of what do do with it, and of learning about what the product is. In fact there is ample evidence that the coffee was "dangerous", for example the steam
coming out of it, the temperature of the cup and previous experience with coffee. With your logic (to use the word overly broadly) I can buy a knife, stab myself with it and than pursue to sue the knife company since there was no reason for me to expect that it would hurt me.

"The measure, then, of whether the levels are appropriate is whether the proscribed behavior is in fact deterred."

What you overlook is that these kinds of laws deter not only (or even mainly) bad behavior, but also good behavior. McDonald serves hot coffee since people wish to buy hot coffee. Even if they make the coffee too hot from a consumer perspective in order to preserve it better, there is an efficiency gain to be made.
The cost of coffee goes down more than the value to the consumer, otherwise they would not do it. If any consumer does not value the hot coffee they are perfectly free not to purchase it.

You are simply taxing an efficient tradeoff by only looking at the costs and ignoring the benefits. The same way medical malpractice laws tax the tradeoff between saving many more patients and risking to hurt a few. As long as the tradeoff is (explicitly or implicitly) known to the consumers there is no basis to sue them. This could be a case if McDonald s were for example lying to the consumers and putting heroin in the coffee.

"But money has a utility curve too, and the actual marginal utility of a dollar declines as you gain more of them and move down that curve."

On what basis exactly do you make this assertion may I ask? We can readily observe that rich people work as much or more than poor people do. This indicates that for many people the marginal
utility of money is very high for large intervals. Wealth is an aggregate good, and is further a complement to leisure and other non-monetary consumption. If money in fact was always rapidly diminishing in utility,
don't you think we would have a hard time explaining why there are so many
high income earners working hard for money? Meanwhile most poor people in America could work two jobs and do not. To some degree at least who is rich and poor is decided by how much one values money, not the other way around.

At any case, this refutes your own point. If the rich need so much more money to compensate them for utility loss, this only implies that they in fact should be compensates much more moneytarly for non-monetary losses! That is the only way to repay the utility lost.

"the non-compensatory impact of an arm-loss, while difficult to estimate in a particular, should probably as a "rule of thumb" be considered equivalent for rich and poor"

You are also compleatly wrong in that Beckers argument about willingness to pay hinges on being willing *AND* able. If we were to reverse it, you could simply ask how much they should be offered to say allow their hand to be burned. This does not require that they have the money to pay, and we would get the same results, the poor would probably do it for less, but the
hetrogeniety would mainly be due to inherent preferences rather than income.

Michael

The real issue in the McDonalds case was not that the coffee was too hot. It was that McDonalds knew that people were getting injured by the 'super-hot' coffee and that they did nothing to avoid the injuries. They could easily have avoided the accident by spending one-cent more on higher quality lids or lowering the temperature of their coffee to that of a normal restaurant. The additional costs could have been passed on to the consumer. McDonalds acted unreasonably by allowing the injuries to occur when the cost to prevent them was so low and the injuries were so severe.

Martin Bento

Tino,

First of all, in measuring the marginal utility of money, not of time, we have to measure per unit money, not per unit time. Therefore, if time is to be a factor, income per unit time at the margin must be held constant. For example, suppose we have two people one of whom makes $6 an hour and the other $200. Each works a 40 hour week and is then offered 10 hours of overtime at $50 an hour. Who is more likely by a huge margin to take the offer? Pointing out that the person who makes $200 an hour works more hours is ridiculous, since the person who makes $6 would be thrilled to work more hours at that level of compensation.


The comparison with the mugger had to do with the effectiveness of deterrence, not the nature of the transaction. What sort of behavior should be proscribed is obviously another question. I don't know how this managed to elude you.

Your point about paying people to get their hand burned is also invalid because your reasoning about the utility of money is wrong.

Since no one can serve coffee at absolute zero nor at the temperature of the sun's core, the question is obviously not whether McDonalds should serve coffee that contains heat, i.e. "is hot", but rather how much heat the coffee should contain. Since coffee that is hot enough to cause third degree burns is obviously undrinkable, we can safely assume that consumer demand for such a product is zero. I would like to see some evidence for the body of McDonalds customers who were demanding coffee hot enough to maim them.

As for this business that the woman could have inspected the coffee better, suppose Osama bin Laden decided to get out of aviation and kill Americans by poisoning their coffee at random. He pays McDonads to do the spiking. The poison is not completely odorless, so a casual inspection could tell that something is wrong, however, if someone is in a hurry or has a malfunctioning olfactory apparatus, well, more virgins for bin Laden. Is McDonalds off the hook because the customer could have detected that the coffee was unsafe? Unlike the hot coffee, this would be in response to customer demand, since bin Laden would be paying McD for a service and therefore would be a customer. This is relevance of the dark alley example; negligence of the victim does not excuse proscribed behavior.

Finally, you may as well use the term "logic" loosely; your use of the item is so loose it is liquid, if not vaporous.

Drew

Regarding the McDonald's case -- first, it's telling that this most famous case is so horribly distorted (the falsely-inflated judgment amount, the hundreds of previous complaints, the deviance from industry norms on coffee temperature, etc.) but for me the more troubling aspect is just how common it is to have "legislation by anecdote."

Tino

Martin,

First you say that the comparison with them mugger "had to do with the effectiveness of deterrence, not the nature of the transaction.", but only a couple of paragraphs later you use basically the same equally flawed example,
where the nature of the transaction again is "victim - assailant" and not "buyer-seller".

It almost seems too silly to point out, but I guess I have to. If Osama were to poison the coffee no one would buy it, hence it would not be "in response to customer demand".

The only difference is that the consumer cannot expect their coffee to be poisoned, so cDonald's should be required to point this out clearly. However every reasonable consumer of coffee should be expected to know that the product is served hot. Just the same way the responsibility to find out that knifes are sharp is on the buyer, not Wall-Mart. But if Wall-Mart instead
hides sharp spikes in candy-bars you will have ample reason to sue.

When it comes to utility we have the clarify what the point is. First of all to say that the 200 dollar worker will not work for 50 dollars an hour is meaningless, his/her alternative cost is higher than 50 so of course they won't! But more importantly utility is a concept used to order choice, so for it to be meaningful you have to compare at least two different
alternatives. That's why I compared utility of money and of time, you have to have more than one variable.

You yourself seem to acknowledge that the value of time and of money seems to increase somewhat proportionally with income (otherwise we would either see high income earners work much more or much less than low income workers). If we extend this to the value of health it is quite reasonable to expect compensatory damages to be a multiple of foregone earnings.

Becker is compleatly right when he point out that "the correct measure of compensatory damages should equal what individuals are willing to pay to avoid death or the injuries in question."

You seem to think this hinges on how much one is able to pay, but it does not. You could reverse it and ask "how much money would I in principle turn down in order to avoid avoid death or the injuries in question". This number is likely
lower for poor income earners than high income earners, not because the poor want to but cannot buy health, but because they are likely to value their health lower relative to income.

I would for instance GLADLY have incurred third-degree burn over 6% of my skin and spend 8 days in the hospital for 2.9 million dollars (or for the 200 000 compensatory part). On the other hand I suspect many rich people would not.
There is nothing "invalid" about this reasoning, whether you understand it or not.

"""Since coffee that is hot enough to cause third degree burns is obviously undrinkable, we can safely assume that consumer demand for such a product is zero."""

That is simply absolute nonsense, and a sign of general ignorance. McDonallds had recommended the franchise to brew coffee at 180-190 degrees. This is in fact slightly *lower* than the recommended temperature of 195-205 by the
National Coffee Association of America, for optimal taste. http://www.ncausa.org/

"""I would like to see some evidence for the body of McDonald customers who were demanding coffee hot enough to maim them."""

The evidence is that McDonald served some 17 billion cups of coffee between 1982-92, the same period with this practice the the 700 complaints over hot coffee. Evidence enough?

By the way Drew that's roughly one complaint/24 million cups, speakings of being "horribly distorted".

Let me finish with a joke:

Kerry and Edwards stop by a McDonald to do some campaigning. A young, excited worker spills some coffee on Kerry's hand. Edwards immediately cries "Let's Sue them for 3 million!", but Kerry calmly shakes his head "Son, you still have much to learn. This is not the time to sue, it's time for my fourth Purple Heart."

Martin Bento

Tino wrote:

"First you say that the comparison with them mugger "had to do with the effectiveness of deterrence, not the nature of the transaction.", but only a couple of paragraphs later you use basically the same equally flawed example,
where the nature of the transaction again is "victim - assailant" and not "buyer-seller". "

What seems to be confusing you here is that I used the mugger parallel to make two independent points, neither of which hinge on the distinction between "victim-assailant" and "buyer-seller". The first is that the proper level and enforcement of a deterrent is determined by its effectiveness. The second is the proscribed behavior is not excused by the possibility of negligence on the part of those who suffer from it. The nature of the transaction impacts neither of these points. One proof is that I could substitute another example that is buyer-seller and the conclusion would be the same. For example, on the point about negligence, if I purchase a necklace from a jeweler who represents it as solid gold when it is only gold-plated, this is arguably something I could readily detect, since a gold necklace would be heavier. This does not excuse the jeweler of fraud.


"It almost seems too silly to point out, but I guess I have to. If Osama were to poison the coffee no one would buy it, hence it would not be "in response to customer demand".

"

I have to agree that that is indeed a very silly thing to say. First of all, it is extremely obtuse, since I was obviously discussing the detection of the poison, so it's existence could not have been prior knowledge. The other objection I answered in advance, not that anything important hinges on customer demand. If Osama is paying McD for a service that he receives, he is, by definition, a customer. Therefore whatever he demands McD do is, by definition, a customer demand. I figured this might elude you, which is why I pointed it out in advance, but somehow it eluded you anyway.


"The only difference is that the consumer cannot expect their coffee to be poisoned, so cDonald's should be required to point this out clearly. However every reasonable consumer of coffee should be expected to know that the product is served hot. "

"Served hot" is meaningless, as I said. The question is how hot should coffee be served. Hot enough to sear human flesh is obviously too hot, and customers have a reasonable expectation that coffee is safe to consume. Restaurant coffee normally contains some quantity of toxins, but not enough to cause serious immediate harm. If it contains enough toxins to do that, it is "poisoned". Likewise, such coffee normally contains some level of heat (as do all substances not at absolute zero), but not enough to cause serious immediate harm. Customers have a perfectly reasonable expectation that we they purchase is fit for human consumption.


"When it comes to utility we have the clarify what the point is. First of all to say that the 200 dollar worker will not work for 50 dollars an hour is meaningless, his/her alternative cost is higher than 50 so of course they won't! But more importantly utility is a concept used to order choice, so for it to be meaningful you have to compare at least two different
alternatives. That's why I compared utility of money and of time, you have to have more than one variable. "

Uh, no. First of all, what you said was:

" We can readily observe that rich people work as much or more than poor people do. This indicates that for many people the marginal
utility of money is very high for large intervals. Wealth is an aggregate good, and is further a complement to leisure and other non-monetary consumption. If money in fact was always rapidly diminishing in utility,
don't you think we would have a hard time explaining why there are so many
high income earners working hard for money? Meanwhile most poor people in America could work two jobs and do not. To some degree at least who is rich and poor is decided by how much one values money, not the other way around.
"

This is not comparing money and time, it is attempting to use time as a surrogate for money, by asserting that if higher income people work more, it must be because they have a greater love of money. You could only make this absurd argument by specifically ignoring the variations in the tradeoff of money for time, which is what I pointed out.

In any case, my assertion was about the *marginal* utility of money, which is a comparison, not of the value of money to something else, but of the value of money at one state of accumulation to another state. Marginal utlity is a perfectly noncontroversal concept in economics; look it up if you don't believe me.
The marginal utility of money must decline as one accumulates more, as one will spend the first money accumulated on the highest priority items, and therefore loss of this money will have a higher opportunity cost than money accumulated when one can move on to lower priority items.

"You yourself seem to acknowledge that the value of time and of money seems to increase somewhat proportionally with income (otherwise we would either see high income earners work much more or much less than low income workers)."

This statement is not even coherent. What is an increase in the "value of time and of money proportionally with income" supposed to mean? The sum of the two? The product? Expressed in what units?

"You seem to think this hinges on how much one is able to pay, but it does not."

If you reverse the question, it does not, directly, but Becker did not reverse the question. In any case, the premise of this argument is that the harm done should be a function of the individual's wealth - the same harm done to a wealthier person is a greater harm in the eyes of the law, since the law's estimation of monetary value has to be nominal, not a function of its utility to the court, the there is not, or should not be, any such utility. Ability to pay does come into it, since that it just a way of assessing wealth, which is precisely what we are discussing. It is a premise of a democratic society that people are equal under the law, and therefore the court system should not treat people differently based on their wealth.

"I would for instance GLADLY have incurred third-degree burn over 6% of my skin and spend 8 days in the hospital for 2.9 million dollars (or for the 200 000 compensatory part). "

Including your genitals? That's one of the places she was maimed. I, for one, would not permit my genitals to be maimed at any price, and I am not a wealthy man. I suppose that means I am entitled to infinite compensation, so I'm glad I got it out here in writing. BTW, the woman's award was later reduced to 800,000, and they ended up settling for some undisclosed amount, so I would make sure you're really getting the money before you sign up to get your dick seared off.

"That is simply absolute nonsense, and a sign of general ignorance. McDonallds had recommended the franchise to brew coffee at 180-190 degrees. This is in fact slightly *lower* than the recommended temperature of 195-205 by the
National Coffee Association of America, for optimal taste. http://www.ncausa.org/"

The first sentence is true, provided it refers to what follows it, not what preceded it. First of all, the ncausa link you cite gives that temperature for brewing, not serving, coffee. Furthermore, you are attempting to deny things that McD themselves conceded under oath in court. For example, McD's own quality assurance manager conceded that their coffee was hot enough to cause third degree burns and that they had not warned customers of this. While it's true that buning is partly a function of how long the coffee is held to the skin, 190 degrees will produce such a burn in less than three seconds, and, of course, clothing will commonly hold it to the skin for that length of time.

The "700 complaints" were not simply complaints - who knows how many there were of those - but prior cases of burning, many of them 3rd degree.

"Evidence enough? "

No, it is not evidence at all. What is required is evidence that customers demanded coffee sufficiently hot to sear human flesh. Since the bulk of McD's customers were not burned, their coffee clearly varies in temperature. However, at the top of the range, the product is unfit for human consumption. The key issue is that they had a multitude of previous injuries and even had an official request from the Shriner Burn Center that they reduce the temperature of their coffee, which they ignored.

BTW, you haven't even addressed the argument about punitive damages, which was of course the bulk of the award.

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