Northwest Business Litigation

LLC member's breach of fiduciary duty results in 600,000-1 ratio of punitive to compensatory damages

Last week the Oregon Court of Appeals again addressed the appropriate ratio of punitive to compensatory damages when compensatory damages are modest.  One week after affirming an award of punitive damages that was 200 times compensatory damages in Lithia Medford LM, Inc. v. Yovan, the court, in Evergreen West Business Center, LLC v. Emmert, reinstated a jury award of punitive damages 600,000 times compensatory damages.

In Evergreen, the jury's verdict and damages awards were supported by evidence that the defendant LLC member had a substantial net worth and that he made a calculated decision to breach his fiduciary duties to the LLC in order to profit at its expense. The defendant breached his fiduciary duties by dealing behind the backs of the other LLC members to acquire real property that was owned by the LLC, but under threat of foreclosure.

Finding for the LLC, the jury had awarded $1 in compensatory damages and $600,000 in punitive damages. The trial court reduced the punitive damages award to $4 in order to maintain the 4-to-1 ratio that has been approved by the Oregon Supreme Court as consistent with the Due Process Clause in non-personal-injury cases.

Among his arguments on appeal, defendant contended that, as a member of the LLC, he did not owe it any fiduciary duty.  In particular, he claimed the LLC statute provides that members of a manager-managed LLC who are not also managers owe no duties to the entity or the other members solely by reason of being a member. The Court of Appeals concluded that the statute was inapplicable because the defendant's fiduciary duty was not based solely upon his status as a member, but rather upon the fact that the defendant entered into a relationship of confidence with the company when he promised to prevent the foreclosure of the property on behalf of the LLC.

Next, the court discussed the punitive damages award of $600,000. Relying on the Oregon Supreme Court's decision in Hamlin v. Hampton Lumber Mills, Inc. and its own decision in Lithia, the court held that the reprehensibility of the defendant's conduct, which is the most important indicator of reasonableness of a punitive damages award, supported an award that exceeded a single-digit multiplier of nominal damages. Given the defendant's net worth and the gravity of his tortious conduct, the $600,000 in punitive damages was sufficiently admonitory and did not violate his right to due process.

See our discussion of Lithia here.

Oregon Court of Appeals affirms 200-1 ratio of puntive damages to compensatory damages

The Oregon Court of Appeals last week affirmed a jury award of $100,000 in punitive damages in a case where compensatory damages were $500.  The Court applied the standards set forth by the Oregon Supreme Court last year in Hamlin v. Hampton Lumber Mills, Inc., finding that the defendant engaged in sufficiently reprehensible behavior to justify punitive damages 200 times compensatory damages.

In Lithia Medford LM, Inc. v. Yovan, defendant purchased an automobile from plaintiff, and soon thereafter found a discrepancy between the mileage on the odometer and the actual mileage.  Following an extended dispute over how to resolve the issue, plaintiff sued to rescind the sale due to mutual mistake.  Defendant counterclaimed for violation of the Oregon Unlawful Debt Collections Practices Act.  The trial court reduced the jury's award of $100,000 in punitive damages to $2,000, to bring it in line with the modest amount of compensatory damages. 

Hearing the case en banc, the Court of Appeals split on whether the trial court properly reduced the punitives award to a single-digit multiple of the compensatory damages. Judge Nakamoto, writing for the majority, stated that the consumer had proven that the car dealer "repeatedly used deceptive and abusive tactics against a financially vulnerable consumer to enhance its financial interests."  The court also pointed to the dealer's "arrogant presentation to the jury of its position that it had done nothing wrong" to justify retaining the jury's punitive damages award.  These facts supported the 200-1 ratio of punitive to compensatory damages.

Judge Wollheim, writing for the minority, advocated for reducing the punitives to $25,000, which is comparable to the statutory penalties available under the Unlawful Debt Collections Practices Act.

See our discussion of Hamlin, and its analysis of punitive damages in cases in which compensatory damages are small, here.

Ater Wynne vindicates trademark owner against prior user of mark

A federal judge in Illinois recently ruled that a Chicago company's long-term use of the term "vault" to describe its product did not defeat an Oregon company's use of the term as a registered trademark. 

Edsal Manufactoring Company, Inc., an industrial steel cabinet manufacturer, sued Vault Brands, Inc., an Oregon designer of custom cabinetry and the owner of the registered mark VAULT, for trademark infringement on the grounds that Edsal had been using the word "vault" for its locking metal cabinets more than 10 years before Vault had used its VAULT mark for custom cabinets.  Soon after answering the complaint and denying the allegations, Vault filed a motion for summary judgment on Edsal's claim for trademark infringement.  Vault contended that, although Edsal used the word "vault" to describe its locking metal cabinets, Edsal never used the term as a trademark to identify the source of the goods.  Sitting in the Northern District of Illinois, United States District Judge Dow agreed with Vault and granted summary judgment on Edsal's claim of trademark infringement because Edsal used the word "vault" as merely a desciptor or generic for its locking metal cabinets. 

Ater Wynne litigator Dan Larsen represented Vault Brands.  See the opinion in Edsal Manufacturing Company, Inc. v. Vault Brands, Inc., here.