Northwest Business Litigation

Retracting an at-will job offer puts employer at risk for a tort claim

The Oregon Supreme Court this month held that a person offered at-will employment may be able to state a claim for promissory estoppel and fraud when the prospective employer retracts the offer. 

In Cocchiara v. Lithia Motors, Inc., according to the facts put forward by plaintiff in response to a summary judgment motion, plaintiff was a long-time employee of defendant who, after suffering a heart attack, asked defendant for a transfer to a less stressful position.  Defendant offered plaintiff a transfer to a new position, and plaintiff as a result turned down a job offer from another prospective employer. Soon thereafter, and before plaintiff made the transfer, the employer retracted the offer.  Plaintiff sued for promissory estoppel and fraud.

The trial court and Court of Appeals held that plaintiff could not state a claim as a matter of law.  Because the employment offered to him was at-will and could have been terminated at any time, those courts concluded he could not prove either reasonable reliance on the promise or damages.  The Supreme Court disagreed, finding nothing in the law to support the conclusion that "a promisee's reliance is per se unreasonable if the underlying promise is for a contract at will."  Reasonableness is an issue for the jury, considering all relevant circumstances.  Likewise, the fact that the offered job was terminable at will does not mean as a matter of law that plaintiff cannot prove associated damages.

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.

Oregon Court of Appeals: Plaintiff shareholder may have a direct action against a fellow shareholder, even if their shares are diluted equally

In Kollman v. Cell Tech International, Inc., decided last month by the Oregon Court of Appeals, one of the issues before the court was whether the plaintiff shareholder's claim against another shareholder for breach of fiduciary duty was derivative or direct. In a derivative action, a shareholder brings a lawsuit on behalf of the corporation and all of the shareholders benefit from any recovery. In a direct action, a shareholder sues on his own behalf and recovers individually. In Kollman, the Court of Appeals, applying Delaware law, held that, under some circumstances, a plaintiff shareholder may have a direct action against a fellow shareholder, even if the defendant's alleged breach of fiduciary duty caused a pro rata dilution of their respective shares of the corporation.

The plaintiff in Kollman alleged that the defendant shareholder, who was his former spouse and a corporate director, deceived him into giving up his positions as an officer and director of the corporation; that, once he was ousted, he was excluded from all meaningful participation in the management of the corporation; that his employment with the corporation was terminated; and that his former spouse increased her salary from $140,000 to $290,000. The plaintiff also alleged that his former spouse entered into a transaction with a third party that resulted in substantial dilution to his and his former spouse's ownership of the corporation. This transaction with the third party reduced their combined ownership in the corporation from approximately 80% to less than 10%.

Citing Delaware law, the Court of Appeals noted a two-prong test to determine whether a claim is derivative or direct: (1) who suffered the alleged harm--the corporation or the plaintiff shareholder; and (2) who would receive the benefit of the recovery or other remedy. In the typical direct action lawsuit, the plaintiff suffers some harm that the other shareholders do not suffer. However, in Gatz v. Ponsoldt, the Delaware Supreme Court held that plaintiff shareholders can have a direct claim for breach of fiduciary duty if the fiduciary expropriates economic value and voting power from the shareholders, even if the fiduciary does not retain the direct benefit of the expropriation.

In this case, the Court of Appeals agreed with the trial court that plaintiff's fiduciary duty claim is direct and not derivative.  First, the Court held that the plaintiff suffered a unique harm because he was excluded from any meaningful participation in corporate affairs. Second, any recovery on behalf of the corporation in a derivative action would benefit the third party who already was the main beneficiary of the defendants' breach of fiduciary duty.

Controlling shareholders must be wary of how they structure transactions that have the effect of extracting value from their corporations, even if they suffer a pro rata decrease in voting power and ownership.

Oregon Court of Appeals affirms judgment against title company in real estate sale gone wrong

A title company is liable for negligence in a real estate transaction in which plaintiff thought he had purchased a lot that -- it was later discovered -- had already been sold to another party.  Last week the Oregon Court of Appeals in Peterson v. McCavic affirmed a jury verdict for negligence against Amerititle, Inc., which had served as escrow agent and title insurer in the transaction. 

Plaintiff undertook to purchase an empty lot in The Dalles, Oregon, but the property description in the earnest money agreement was changed after he signed it -- leading to his purchase of a lot about 50 feet from the one he thought he was buying.  Plantiff learned of the mistake from the actual owners of the land he thought he had purchased, but only after spending several months building a house on the wrong lot. 

Amertitle argued that, pursuant to the economic loss doctrine, it could be liable for negligence only if it had a special relationship with plaintiff.  An escrow holder generally is a neutral party with no obligation to either party to the transaction.  However, an escrow holder can assume a duty when it volunteers advice or otherwise acts outside the scope of its normal duties.  Viewed in the light most favorable to plaintiff, the evidence showed that the escrow agent changed the property description in the earnest money agreement, and prepared closing documents based on that change, without direction from or knowledge of the parties to the transaction. By doing so, it acted outside the duties of a neutral party and incurred an obligation to exercise due care.  On that basis, the court affirmed the jury verdict.

See our earlier discussion of the economic loss doctrine here.

Oregon Supreme Court: No remedy for stolen medical records absent actual, present injury

The lack of an actual, present injury prevents recovery by plaintiffs whose electronic patient records were stolen from the car of an employee of Providence Health System.  So held the Oregon Supreme Court last month in Paul v. Providence Health System.  The Court affirmed a 2010 decision by the Oregon Court of Appeals, which dismissed claims by individuals who were among thousands of patients whose records were stolen.

Plaintiffs asserted negligence and Unlawful Trade Practices Act claims against Providence.  Plaintiffs did not allege that the records had been viewed or used by any third party, but only that defendant caused financial injury in the form of past and future credit monitoring, along with the possible future costs related to identity theft, and noneconomic damages in the form of emotional distress. 

The Supreme Court relied on cases including Lowe v. Philip Morris USA, Inc., 344 Or 403 (2008), for the rule that the threat of future harm -- in the form of potential identity theft -- is not sufficient as an allegation of damages to support a negligence claim.  That rule precludes as well recovery for the current cost of credit monitoring.  Likewise, a risk of future identity theft will not support a claim for emotional distress, and the cost of credit monitoring is not the type of "ascertainable loss of money or property" subject to the UTPA.

See our coverage of the Court of Appeals opinion in Paul v. Providence Health System here.

Roommate-matching service can't be sued for housing discrimination

The anti-discrimination provisions of the Fair Housing Act don't apply to a Roommate.com, the Ninth Circuit Court of Appeals ruled last month in Fair Housing Council v. Roommate.com, LLC.

Roommate.com operates a web site that helps roommates find each other.  When users sign up they create a profile stating their sex, sexual orientation, and whether children will be living with them.  Users may also complete an "Additional Comments" section.  Users are asked to list their preferences for roommate characteristics, including sex, sexual orientation, and familial status.  Based on the profiles and preferences the web site provides potential matches.  The site also allows users to search based on roommate characteristics.

Plaintiff sued Roommate.com alleging that the questions about users' characteristics, and matching and steering based on those characteristics, violate the federal Fair Housing Act, which prohibits discrimination in the sale or rental of dwellings. 

Judge Kozinski, writing for the Ninth Circuit, found no violation, based on the fact that roommates necessarily share a single "dwelling":  "It makes practical sense to interpret 'dwelling' as an independent living unit and stop the FHA at the front door."  According to the court, the selection of a roommate is more akin to a private relationship -- in which the government won't meddle -- than to a landlord-tenant relationship that's protected against discrimination.

Ninth Circuit rejects nationwide class action for false advertising

The Ninth Circuit continues to grapple with the standards for certifying class actions following the U.S. Supreme Court decision in Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011). Last week, a divided panel of the Ninth Circuit refused to certify a nationwide class action on behalf of individuals who bought or leased Acura RL automobiles equipped with a Collision Mitigation Braking System.

In Mazza v. American Honda Motor Company, Inc., plaintiffs claimed that Honda misrepresented and concealed material information about the braking system in the marketing and sale of Acura RL vehicles. Plaintiffs made claims under California’s unfair competition and false advertising laws. While the District Court found common issues of law and fact sufficient to certify a nationwide class, the Ninth Circuit reversed. Judge Ronald M. Gould, writing for the majority, focused on the admonition in Wal-Mart that commonality means that an issue central to each class member’s claim is subject to resolution “in one stroke.”

Material differences in the consumer protection laws of the states in which class members reside, and those states’ interests in having their own laws apply, caused the court to conclude that common issues of law do not predominate. Further, the small scale of the advertising campaign for the braking system did not support a presumption that all purchasers and lessors relied on the alleged false advertising. The proposed class, as defined, would almost certainly include members who were not exposed to the allegedly misleading advertising material, and as a result common issues of fact would not predominate.

Judge Dorothy W. Nelson issued a strong dissent. She stated first that, because the allegations of false advertising are based on omissions rather than affirmative statements, it is appropriate to impute reliance to the class. Second, the differences among the consumer protection statutes of the states in which class members reside are not material and should not block a class action. Finally, because American Honda and its advertising agency are headquartered in California, that state’s interest in deterring false advertising makes it appropriate to apply California law. Judge Nelson decried the seemingly insurmountable hurdles to a nationwide class action by consumers subjected to false advertising: “If the harm to individual consumers is small enough to create a disincentive to individual litigation, and if a nationwide class action is not a potential consequence, corporations can choose increased revenues over the consumer with impunity.”

Oregon Court of Appeals: Tortious interference claim accrues when injury occurs, not when wrongful act occurs

A dispute over the inheritance of a family farm set the stage for a ruling by the Oregon Court of Appeals this week on the law of interference with economic relations.  In Butcher v. McClain, plaintiffs were a woman and her children, and defendants were the siblings of the woman's deceased husband.  Plaintiffs contended that defendants had wrongly caused the family matriarch to execute a will that disinherited plaintiffs from the family farm.  Plaintiffs sued for tortious interference with a prospective inheritance. 

Defendants moved to dismiss the claim on the ground that the two-year statute of limitations had run.  The trial court agreed, holding that the claim accrued when the matriarch executed the will disinheriting plaintiffs, more than two years before suit was filed.

The Court of Appeals reversed.  Judge Rosenblum, writing for the Court, first noted that Oregon does recognize the tort of interference with an economic advantage in the form of a prospective inheritance.  Such a claim is subject to the two-year statute of limitations for torts.  According to the Court, the claim accrues not when the wrongful act occurs, but when the interference in fact causes injury.  Thus, plaintiffs' claim accrued not when the will was executed, but when the matriarch died and plaintiffs lost their expected inheritance.  Because those events occured within two years of the date plaintiffs filed suit, the claim was timely.

Homeowner may pursue negligence claim for construction defect, Oregon Supreme Court holds

Last week the Oregon Supreme Court held that a homeowner seeking to recover against a builder for damages caused by construction defects may sue for common law negligence, absent a contractual provision that forecloses such a claim.  In Abraham v. T. Henry Construction, Inc., plaintiff homeowners hired defendant contractors to build a house.  When plaintiffs discovered defects in the construction years later, they sued for negligence. 

The Court of Appeals held that the parties' contractual relationship did not prevent a negligence claim, and that plaintiffs were entitled to pursue a negligence per se claim based on a violation of the Oregon Building Code.

The Supreme Court affirmed, but on a somewhat different basis.  First, according to the Court, a construction defect claim concerns damage to property -- and not mere economic losses -- and thus is not barred by the economic loss doctrine.  Second, the existence of a contract between plaintiff and defendant does not preclude a common law negligence claim for personal injury or property damage, unless the contract defines the parties' obligations and remedies in such a way as to limit or foreclose such a claim.  As a result, plaintiff is entitled to pursue a tort claim as long as the property damage at issue was a reasonably foreseeable result of defendant's conduct.  Plaintiff is not limited to a negligence per se claim. 

See our discussion of the Court of Appeals opinion in Abraham here.