Thursday, March 24, 2011

$12 Million Punitive Damage Award to Hotel Franchisee Upheld

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

There was no due process violation in an Arkansas state court jury’s award of $12 million in punitive damages to a hotel franchisee in its dispute with a franchisor, an Arkansas appellate court has determined. Thus, the trial court erred in reducing the punitive damages awarded to $1 million, and its ruling was reversed.

The jury found that the franchisor committed fraud by failing to disclose a report prepared by one of its executives that he would oppose the franchisor’s re-licensing of a franchisee’s hotel and instead would advocate the licensure of a competing hotel in the franchisee’s area.

Amount of Punitive Damage Award

Three guideposts are considered in determining whether a punitive damages award was excessive under federal law:

(1) The degree of reprehensibility of the defendant’s conduct;

(2) The disparity between the harm or potential harm suffered by the plaintiff and the punitive damages award, also expressed as the ratio between compensatory and punitive
damages; and

(3) The difference between the punitive award and comparable civil penalties authorized or imposed in comparable cases.

The franchisor’s failure to disclose valuable information to the franchisee, who had worked with and trusted the franchisor for over half a century, showed a degree of reprehensibility that supported a significant punitive damages award, the court held.

Ratio of Punitive to Compensatory Damages

The ratio of punitive damages to compensatory damages was 1.19-to-1 ($12 million to $10.056), a ratio that was well within constitutional territory. Such a ratio was a far cry from the 145-to-1 or 500-to-1 ratios found constitutionally wanting in other cases. The ratio of 1.19-to-1 also fell easily within the range of generally accepted ratios that Arkansas courts approved in other punitive damages cases.

As for comparable civil penalties, the Arkansas “little FTC Act” imposed a $10,000 penalty for unconscionable trade practices and the Arkansas Civil Justice Reform Act, which was not in effect at the time this cause of action arose, limited punitive damages to $1 million in many circumstances, the court observed.

Those statutes militated in favor of reducing the jury’s award but they were not dispositive, in the court’s view. When balanced against the reprehensibility of the franchisor’s conduct and a punitive to compensatory ratio of 1.19 to 1, the analysis compelled a net result in favor of the jury’s full punitive damages award, the court ruled.

Evidence of Fraud

Substantial evidence supported the jury’s finding of fraud, the appellate court held. On appeal, the franchisor argued that because it had no fiduciary or other confidential or special relationship with the franchisee, it had no duty to disclose the existence of its executive’s report.

However, the franchisee had a long-term relationship with the franchisor, characterized by honesty, trust, and the free-flow of pertinent information, the court noted.

In light of the parties’ history and the assurances he had received, the franchisee was justified in assuming that there were no obstacles to his re-licensure, according to the court.

The decision is Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. It will be reported at CCH Business Franchise Guide ¶14,563.

No comments: