Tag: punitive damages

No Punitive Damages For Breach of Contract; Conversion of ‘Intangible’ Property = An Open Question – IL ND

Sometimes in breach of contract suits, I see clients (and attorneys, too!) let visceral considerations cloud their judgment.  They let emotions factor into a litigation equation that should purely be about “dollars and cents.”  What’s to an objective observer a simple monetary dispute, becomes a complex psychological event when a breach of contract plaintiff views the defendant’s breach as a personal affront – one calling out for revenge.  Usually though, a breaching defendant isn’t trying to make the plaintiff’s life miserable.  Instead, the defendant typically can’t meet his financial obligations under the agreement or he lets his performance lapse for purely strategic reasons. 

One way the law puts a check on emotions dominating a business dispute is by preventing plaintiffs from bootstrapping a breach of contract claim into a fraud claim.  Another way is through the firmly entrenched legal principle that punitive damages cannot be recovered for a breach of contract.

The latter rule is at play in David Mizer Enterprises, Inc. v. Nexstar Broadcasting, Inc., 2015 WL 469423 (N.D.Ill. 2015), where a business consultant sued a television broadcasting firm under various legal and equitable theories for wrongfully disclosing plaintiff’s proprietary software and business model to third parties in violation of a written licensing agreement.

The plaintiff alleged that after a three-year license period expired, defendant continued using plaintiff’s secret software and business model without permission.

The plaintiff sought over $330K in damages in its breach of contract suit and sought an award of punitive damages premised on the defendant’s bad faith.  The plaintiff also joined a conversion count based on the defendant’s unauthorized use of plaintiff’s software after the license lapsed.  Defendant moved to dismiss and to strike plaintiff’s punitive damages allegation.

Result: motion to dismiss denied; motion to strike punitive damages claim granted

Reasons:

Under Illinois law, punitive damages are generally not available for a breach of contract.  An exception to this rule applies where the contract breach amounts to an independent tort is done with “malice, wantonness or oppression.”  The court looks to a defendant’s motive for its breach in determining whether punitive damages are warranted.

The court struck the plaintiff’s punitive damages claim.  The plaintiff failed to allege malice or bad faith conduct by the defendant.  Instead, plaintiff’s allegations were consonant with a basic breach of contract action.  As a result, punitive damages weren’t warranted.

Next, the court sustained the plaintiff’s conversion claim. Under Illinois law, a conversion plaintiff must establish that he (1) has a right to certain property; (2) has an absolute and unconditional right to the immediate possession of the property; (3) made a demand for possession; and (4) the defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.

Typically, conversion must involve tangible, personal property like computer hardware or a car, for example.  Whether conversion applies to intangible property is an open question with cases going each way.

The defendant argued that plaintiff was suing to recover damages based on defendant’s interference with its intangible electronic data.  Rejecting this argument, the court found that since the licensing contract specifically mentioned plaintiff’s software and related writings, the lifted property was tangible enough to underpin a conversion claim.

The court held that the plaintiff’s allegation that the defendant deprived Plaintiff of the exclusive benefit of its software and information, stated a valid conversion claim sufficient to survive a motion to dismiss.

Take-aways:

Punitive damages aren’t recoverable in breach of contract suits.  The only exception is where the plaintiff can show the defendant’s breach was done with malice: for the sole purpose of harming the plaintiff;

Whether intangible property (like computer data) can underlie a conversion action is an open question.  The more “hard” or concrete property the plaintiff can point to, the better his chances of making out a civil conversion suit. 

 

Greeting Card Giant Wins $30M-Plus Jury Verdict in Trade Secrets Case (8th Cir.)

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In Hallmark Cards, Inc. v. Monitor Clipper Partners, LLC, 2014 WL 3408853 (8th Cir. 2014), the Eighth Circuit affirmed a $31.3M dollar jury verdict in favor of the greeting card giant against a private equity firm that used Hallmark’s confidential market research.

Hallmark hired a consultant to research consumer behavior as it relates to greeting cards.  Hallmark had the consultant sign non-disclosure agreements that strictly prohibited it from sharing the research findings.  The contracts also contained broad consequential damages disclaimers.

Hallmark sued under trade secrets law when it learned the consultant surreptitiously disclosed Hallmark’s data to the defendant who used the data to try to buy a Hallmark competitor.

 The jury awarded Hallmark a more than $30M judgment against the defendant equity firm including $10M in punitive damages.

Held: Verdict affirmed.

Reasons:

Missouri’s trade secrets statute (Mo.Rev.Stat. s. 417.450, 454) broadly defines a trade secret as (1) information, including (2) non-technical data, that’s (3) sufficiently secret to derive monetary value from not being known to competitors and (4) that’s subject to efforts to maintain the information’s secrecy. 

Misappropriation covers both acquisition of and subsequent use of a trade secret and occurs where a defendant (1) acquires a trade secret that defendant knows or has reason to know was obtained by improper means or (2) discloses or uses the trade secret without the secret’s owner’s express or implied consent. (*5).  

The court held that the PowerPoint slides qualified as trade secrets under the statute in view of the lack of market research available in the greeting cards market.  The scarcity of data on the subject led the appeals court to affirm the jury’s finding that the research data compiled for Hallmark met the elements of a protectable trade secret under Missouri law. 

The court also found there was evidence of the defendant’s misappropriation of the trade secrets. (**3-5). 

Upholding the damage award, the court rejected defendant’s argument that Hallmark obtained improper double recovery.  In Missouri, a party can’t recover twice for the same injury.  

Here, the Court found there were two separate injuries: (1) the consultant’s transmission of the secret data to the defendant; and (2) defendant’s (own) use of the market data. (*4).  Since the injuries were separate, Hallmark could recover separate damage amounts for each injury.

Finally, the Court affirmed the $10M punitive damage award.  Punitive damages under Missouri law are allowed where conduct is outrageous, reprehensible and shows an evil motive or reckless indifference to others’ rights. 

Defendant exhibited reckless indifference by its stealthy campaign of document destruction to cover its tracks once Hallmark learned of the defendant’s plan to buy Hallmark’s rival. 

The court found the defendant’s conduct reckless and sufficiently reprehensible to support the punitive damage award.  The Court also noted that the punitive damage award was “only” one-half of the compensatory award and that this damage ratio met due process standards. (*8).

Afterwords:

Even something as nebulous and innocuous as consumer buying trends research in the greeting card market can qualify for trade secret protection (at least in Missouri). 

Hallmark Cards also shows that a trade secrets plaintiff can recover separately for both (1) disclosure of a trade secret and (2) subsequent use by a third party without violating contract law double-recovery restrictions. 

 

IL First Dist. Examines Punitive Damage Standards In RE Fraud Suit

In K2 Development, LLC v. Braunstein, 2013 IL App (1st) 103672-U, the First District addressed Illinois law’s compensatory and punitive damages guideposts in a convoluted real estate fraud suit filed by an LLC against one of its two members.

The plaintiff LLC – through one of its members (a real estate novice) – sued the LLC’s other member – an experienced real estate developer – for fraud in connection with the defendant’s sale of an undeveloped piece of land to the plaintiff. 

The court awarded compensatory damages of nearly $400K and punitive damages of over $750K after a bench trial and the defendant appealed.

Held: Affirmed.

Rules/reasoning: The Court upheld the trial court’s damage awards based on the  evidence that the defendant orchestrated a fraudulent scheme and took advantage of his neophyte business partner (the other LLC member). 

In Illinois, compensatory damages are awarded as compensation, indemnity or restitution for a wrong or injury suffered by a plaintiff.  The purpose of compensatory damages is to make the injured party whole and restore him to his pre-loss condition. 

Compensatory damages are not designed to provide plaintiff with a windfall or profit.  Damage computations present a fact issue and a damage award will be overturned where the trial court ignores the evidence or the damage calculation is palpably erroneous.  ¶ 28 

The Court held that the trial court’s damage award based on defendant’s ill-gotten profits on the fraudulent deal coupled with the amount of asecret lien and easement defendant recorded/allowed to be recorded against the property had support in the record.  ¶¶ 28- 29

Punitive damages aim to (1) act as retribution against a defendant; and (2) deter the defendant and others from similar conduct.  The defendant’s conduct must be willful, outrageous and evince an “evil motive” or “reckless indifference” to others’ rights.  Punitive damages can be awarded in Illinois fraud actions; particularly where the false statements are made repeatedly and are particularly egregious. ¶¶ 32-34. 

Applying these rules, the Court held that punitive damages were appropriate based on the defendant’s continuing pattern of fraudulent conduct that saw   him make repeated misstatements and omissions. 

The K2 Court also rejected defendant’s claim that the $750K punitive damage award was unconstitutional.  The constitutional calculus for punitive damages includes (1) the degree of defendant’s “reprehensibility”, (2) disparity between actual or potential harm suffered by plaintiff and the punitive damage award, and (3) the difference between the punitive damages awarded and civil penalties authorized or imposed in comparable cases.  ¶ 37.

The Court addressed factors 1 and 2 above (factor (3) didn’t apply since there was no civil penalty for fraud or breach of fiduciary duty)).  In finding the defendant’s conduct reprehensible, the Court noted the defendant repeatedly made false statements to the plaintiff concerning the nature of property and the investment.  This showed a pattern of deceitful conduct. 

On the actual vs. punitive damage issue, the court noted that the punitives awarded ($750K) were about double the amount of the compensatory damages ($382K).  This 2:1 punitive:compensatory damages ratio clearly fell within reasonable damages bounds under Illinois law where anything more than a 4:1 punitive to actual damages ratio is “close to the line” (e.g. $400,000 punitive on a $100,000 actual damage award) of permissible punitives.  ¶¶ 41-42

Comments: A key factor in the Court’s damage analysis was that defendant owed and breached fiduciary duties to the plaintiff LLC’s other member.  

The disparity in business acumen between the parties clearly led the Court to affirm the trial court’s over $1M aggregate damage award for the plaintiff. 

K2 is particularly instructive on the “ratio issue”: how much a punitive damage can exceed an actual damage award without the court viewing it as excessive.  While there’s no bright-line rule, K2 suggests that anything higher than 4 to 1 can invoke elevated court scrutiny and a possible damage reduction.  

K2 also illustrates that a pattern of conduct – more than an isolated incident – will likely lead to a finding of reprehensible fraud and support a punitive damage award.