If the manufacturer of a defective product sells its assets and goes out of business, can a party injured by the product sue the purchaser of the assets on a products liability theory? The general rule of successor liability is that purchaser is not liable for the debts and liabilities of the transferor, unless (1) the purchaser agreed to assume the liabilities, (2) the transaction amounts to a consolidation or merger, (3) the purchaser is a mere continuation of the seller, or (4) the transaction was entered into fraudulently to escape liability.
In Gonzalez v. Standard Tools and Equipment Co., the plaintiff sought to add a fifth exception to the no-liability rule, called the "product line" exception. Courts in other states have adopted that exception, holding that, where a successor company continues to produce the same type of product as the original company, the successor assumes tort liability for defects in units from the same product line. The Court of Appeals last month rejected plaintiff's argument, declining to add a new exception to the "long-established rule" of successor liability.
Under Oregon law, a noncompetition agreement is "voidable," as opposed to void, if the employer fails to give notice two weeks before an employee starts work that the agreement is a condition of employment. In Bernard v. S.B., Inc., the Oregon Court of Appeals last week examined whether a demand letter based on a voidable noncompetition agreement constitutes tortious interference with economic relations.
In Bernard, plaintiff's former employer sent the noncompetition agreement to plaintiff's new employer with a demand that plaintiff stop working. Plaintiff sued the former employer for tortious interference, contending that because the noncompetition agreement was voidable, the former employer acted tortiously when it attempted to invoke the agreement. The Court held that the agreement was in fact valid at the time the employer attempted to enforce it because plaintiff took no steps to void it. Invoking the express terms of a valid contract cannot constitute tortious interference, and as a result the Court concluded that the employer was not liable in tort for sending the demand letter.
Last week the Oregon Court of Appeals examined the remedies that a trial court may impose to remedy shareholder oppression. In Hickey v. Hickey, ownership of a family ranching business was divided among several siblings. One sibling acquired a majority interest by purchasing shares from others. As controlling shareholder, he engaged in self-dealing and commingling of assets, to the detriment of the remaining minority shareholder. The minority shareholder then filed suit under ORS 60.952 to impose remedies for oppression. The trial court ordered amendment of the bylaws and articles of incorporation to strip the voting rights of the majority shareholder and remove him from management.
The appellate court reviewed the nonexclusive list of remedies provided under ORS 60.952 to rectify oppressive conduct, including: (1) cancellation or alteration of any provision in the corporations articles of incorporation or bylaws, (2) removal from office of any director or officer, (3) appointment of a custodian to manage the business, (4) appointment of a provisional director, (5) retention of jurisdiction by the trial court for protection of the minority shareholder, or (6) dissolution of the corporation. While the trial court has many remedies to choose from, "[t]he remedy must correspond to the wrong--or legally recognized right--for which the remedy is provided under ORS 60.952."
The Court of Appeals reversed the trial court, holding that the effect of the remedy selected was to convert the minority shareholder into the majority shareholder. That constituted a windfall to the plaintiff and was not within the "reasonable expectations" of either party. The appellate court then remanded the case to the trial court with instructions to devise a more appropriate remedy, such as ordering a share purchase for fair value to remove one of the two shareholders from the business.
Last week the Oregon Court of Appeals addressed the liability of directors of a nonprofit corporation, reversing summary judgment for directors of a homeowners association on breach of fiduciary duty claims.
In WSB Investments, LLC v. Pronghorn Development Company, LLC, plaintiff was an owner of a timeshare and a member of the HOA that asserted various claims against the directors, including breach of fiduciary duty. In reviewing the trial court's grant of summary judgment, the court discussed the standards for directors' obligations to a nonprofit. While ORS 65.369(1) imposes liability for gross negligence or intentional conduct, the legislature has not defined gross negligence in this context. The court held that, for directors' liability, gross negligence means negligence characterized by near total disregard or indifference to the rights of others or the probable consequence of a course of conduct. The court further held that, while ORS 65.357 states the standard of care of uncompensated directors of a nonprofit, whether those standards have been violated must be determined with reference to the obligations set out in the governing documents.
Accordingly, the court found triable issues of fact as to,among other things, the use of reserve funds for operating expenses and failing to elect new board members in a timely fashion, all in violation of the HOA's governing documents.
Members and managers of a limited liability company are shielded from vicarious liability for the LLC's torts, but can be held personally liable if they either knew of the tortious acts or participated in them. That was the conclusion of the Oregon Supreme Court last week in Cortez v. Nacco Material Handling Group, Inc.
ORS 63.165(1) protects members and managers of an LLC from liability resulting "solely by reason of being or acting as a member or manager." The scope of that statutory immunity was at issue in Cortez. The court held that the immunity is comparable to that available to an officer or director of a corporation. According the to court, "members or managers who participate in or control the business of an LLC will not, as a result of those actions, be vicariously liable" for the LLC's torts. But a member or manager can be liable for its own negligent acts in managing the LLC, or for knowing of or participating in the LLC's torts.
There is little debate that the Lanham Act, 15 USC 1125(a), entitles direct competitors to sue each other for false advertising, while consumers (including business consumers) lack standing to sue under the Act. For parties that are neither competitors nor consumers, however, the landscape has been far from clear. In Lexmark International v. Static Control Components, Inc., the United States Supreme Court last week clarified that the class of plaintiffs entitled to assert a false advertising claim under the Lanham Act includes any party that suffers injury to a commerical interest in reputation or sales flowing directly from the deception.
Lexmark manufactures and sells laser printers, including the toner cartridges for those printers. Static Control does not sell printers or toner catridges but it manufactures a microchip that remanufacturers may use to refurbish Lexmark toner catridges. Although Lexmark and Static Control are not direct competitors, Static Control sells its microchips to Lexmark's competitors. Lexmark allegedly informed consumers that it was illegal to use Static Control's microchips to refurbish Lexmark toner catridges, and then sued Static Control for copyright infringement. Static Control countersued Lexmark under the Lanham Act for false advertising. The District Court dismissed Static Control's counterclaim on the ground that only a direct competitor has standing to sue.
The Supreme Court ruled that direct competition is not required to assert a Lanham Act false advertising claim, and that Static Control stated a claim for relief against Lexmark where Lexmark disparaged Static Control and its products, thereby causing injury to Static Control's reputation.
The Oregon Court of Appeals recently held that a business owner can pursue a defamation claim against an individual who posted a negative on-line review. In Neumann v. Liles, plaintiff, who operates a wedding venue, was the target of a review on google.com calling her, among other things, "two faced, crooked, and . . . rude." She sued the author of the review, who had been a guest at a wedding hosted at plaintiff's venue.
The on-line critic in response filed a "special motion to strike" under Oregon's SLAPP statute. SLAPP stands for "strategic lawsuit against public participation," and the anti-SLAPP statute creates a procedure for dismissing at an early stage an unfounded lawsuit designed to quash speech or activism on issues of public interest. While the statute protects certain speech-related activities, it does not shield defendants who engage in defamatory speech.
According to the Court of Appeals, the trial court should not have granted the anti-SLAPP motion to strike the complaint because plaintiff had offered sufficient evidence that the review was in fact defamatory. While defendant claimed that the review represented his opinion and was merely "figurative, rhetorical, or hyperbolic," the Court of Appeals concluded that most of the post was "nonrhetorical and factual" and contained specific, potentially defamatory, statements about plaintiff's honesty and business ethics. Accordingly, the trial court should have allowed the case to proceed to trial.
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.
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.
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.