$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.

Publisher's Use of Murder Victim’s Nude Photos Violated Right of Publicity

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

In a Georgia common law right of publicity suit, the publisher of Hustler Magazine was liable for the unauthorized publication of nude photographs of murdered professional wrestler Nancy Benoit, and Benoit's estate could seek to recover punitive damages, the federal district court in Atlanta has ruled.

The appropriation of another’s name and likeness without consent and for the financial gain of the appropriator is a tort in Georgia. LFP Publishing Group did not dispute that it appropriated Ms. Benoit’s name and likeness without her consent.

Financial Gain

Contrary to LFP's contention, the photographs were published for financial gain, the court held. Hustler is sold for the images it contains, the court said. The cover of the March 2008 magazine read, “Wrestler Chris Benoit’s Murdered Wife Nude.” No reasonable juror could conclude that LFP did not publish the photographs and the article for financial gain, the court determined.

Damages

The estate produced sufficient evidence of damages as measured by the value of the use of the appropriated publicity. The evidence showed that LFP made significant profits off the March 2008 issue, the court found. Yet LFP did not pay the estate anything for the photographs.

Newsworthiness Exception

The Eleventh Circuit had already held inapplicable the newsworthiness exception to the right of publicity (Toffoloni v. LFP Publishing Group, LLC, CCH Advertising Law Guide ¶63,480). Contrary to LFP's contention, there was no reason to revisit this ruling, according to the court.

Punitive Damages

In Georgia, punitive damages may be awarded in tort cases where there is clear and convincing evidence that a defendant’s actions showed “willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.” LFP argued that it acted innocently because it believed that the photographs were subject to the newsworthiness exception. However, what LFP believed at the time of publication was a question for the jury, the court concluded.

The November 23 opinion in Toffoloni v. LFP Publishing Group, LLC will be reported in CCH Advertising Law Guide.

Vehicle Retailer Held Liable Under Consumer Fraud Act for False Internet Ad

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

An out-of-state consumer was entitled to damages in a New Jersey Consumer Fraud Act (CFA) claim against an in-state seller of used vehicles that advertised over the Internet, according to the New Jersey Supreme Court. A lower court’s judgment and award of more than $25,000 in damages—plus attorneys’ fees and costs—was reinstated.

The consumer, living in Missouri, placed a bid for a used vehicle in an online auction run by the retailer, which was doing business in New Jersey. The online advertisement for the vehicle stated that the frame and convertible top were in good condition. The retailer spoke with the consumer on the telephone and stated that the car was in good enough condition to drive from New Jersey to Missouri.

After the consumer won the auction, the retailer informed the consumer that the car was probably not safe enough to drive across the country. The automatic headlights and windshield wipers did not work and the car lacked a spare tire. Nevertheless, the consumer paid for the car and had the retailer ship it to Missouri.

Once it arrived, the consumer had it inspected by a repair shop, which found that the frame was nearly rusted in half—thereby disqualifying it from registration in Missouri—and the top was in poor condition. The consumer filed a CFA claim in New Jersey against the retailer for losses sustained as a result of the allegedly false advertising.

"Dealer"

At trial, the retailer asserted that he did not misrepresent the condition of the car and that, in any event, he was not a “dealer” subject to the reach of the CFA. The trial court found that, contrary to the advertisement, the car did not have a solid frame, the engine did not “run strong,” the headlights and windshield wipers did not function, the car had been owned by more than one person, and the radio was not original equipment.

It further found that the retailer qualified as a “dealer” under the CFA and that the retailer had violated the CFA by clear and convincing evidence. The trial court awarded $25,953 in trebled damages, $29,950 in attorneys’ fees, and $6,544 in costs.

The state appellate court dismissed the CFA claim on the ground that the trial court should have entered judgment for the retailer at the close of the consumer’s case instead of deferring consideration and hearing the retailer’s evidence. It did, however, award the compensatory damages of $8,651 under a common law fraud claim.

"Textbook" Claim

On review, the New Jersey Supreme Court found that the seller pled and proved a “textbook” CFA claim. The CFA prohibits any person from committing any unconscionable commercial practice, deception, fraud, or misrepresentation of a material fact in connection with the sale or advertisement of any merchandise.

The definition of “person” was “sufficiently expansive to ensnare [the retailer].” He could not claim that he was exempt from coverage as a member of a regulated industry or learned profession.

An assertion that the retailer was not a “dealer” subject to the CFA was unavailing. It was “simply irrelevant” whether the retailer qualified as a “dealer” within the state lemon law, which expressly stated that it did not limit rights or remedies under any other law. Accordingly, the Supreme Court reinstated the trial court judgment in all respects.

The April 8 decision is Real v. Radir Wheels, Inc., CCH State Unfair Trade Practices ¶31,802.

Punitive Damages Award Left Standing in Tobacco Advertising Fraud Case

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

The U.S. Supreme Court has left undisturbed a $79.5 million punitive damages award in an Oregon wrongful death suit against Philip Morris for deceit.

After granting review of the case in June 2008 and hearing oral argument in December, the Court on March 31 issued a one-sentence decision that review had been “improvidently granted.”

The suit was brought by a smoker’s widow, who claimed that Philip Morris committed fraud by using its advertising power in a 40-year publicity campaign to undercut published concerns about the dangers of smoking. A jury found Philip Morris liable for its deceit in knowingly and falsely leading the decedent to believe that smoking was safe, awarding $821,000 in compensatory damages and $79.5 million in punitive damages.

Prior Decision Vacating Punitive Damages Award

In a 2007 decision in the case (CCH Advertising Law Guide ¶62,420), the Court vacated the punitive damages award on the ground that the Due Process Clause of the U.S. Constitution prohibited an award of punitive damages based in part on harm to nonparties. The trial court refused the company's proposed instruction that the jury could not seek to punish Philip Morris for injury to other persons not before the court.

The Court remanded the case to the Oregon Supreme Court to determine whether a new trial was required or whether the amount of the punitive damages award should be changed.

Reinstatement by Oregon Supreme Court

The Oregon Supreme Court, in January 2008, reinstated the punitive damages award in full (CCH Advertising Law Guide ¶62,859). The court held that Philip Morris had failed to preserve for review any claim that the jury instructions actually given were erroneous.

Before the constitutional standard could be addressed, state law standards for instructing the jury on punitive damages had to be considered, the court determined. Philip Morris' proposed instruction was incorrect because it would have told the jury that (1) Oregon statutory factors for justifying a punitive damages award were discretionary (instead of mandatory) and (2) one factor to be considered was the motivation to make illicit profits (rather than the profitability of the misconduct). Thus, even if Philip Morris' instruction articulated the correct due process standard, it misstated Oregon law, and the trial court did not err by refusing to give it, the court concluded.

The Oregon Supreme Court’s 2008 decision is left standing by the U.S. Supreme Court’s March 31 decision.

The amount of Philip Morris’s liability reportedly has grown to over $150 million, by application of the interest on the damages award.

Further details on the decision in Philip Morris USA, Inc. v. Williams, No. 05-1256, March 31, 2009, will be reported in CCH Advertising Law Guide.