Opinion
No. CV97-0060279S
June 12, 2003
MEMORANDUM OF DECISION
The plaintiffs have filed an application with the court to confirm an arbitration award and the defendants have filed an application to vacate the arbitration award. This court has previously determined that de novo review of the arbitrators' award in this case is warranted with respect to the defendants' claim that the award imposes grossly excessive punitive damages. Hadelman v. DeLuca, Superior Court, judicial district of Ansonia/Milford at Milford, Docket No. CV97-0060279S (November 25, 2002, Alander, J.). It is now time to address the merits of that claim.
As I stated in my prior decision in this matter, the record reveals the following facts. The underlying dispute between the parties involves an aborted election to the board of directors of a trust that administers the advertising funds for Subway sandwich stores throughout the nation. Every Subway franchisee pays a percentage of its gross sales into the Subway Franchise Advertising Fund Trust ("SFAFT"). SFAFT is managed by a board of directors consisting of Subway franchisees who are elected by their fellow franchisees in a written, secret ballot. The sole purpose of the SFAFT is to fund group advertising and promotion of the Subway Sandwich Shop business for the benefit of all franchisees. At the time of the events in dispute, the advertising budget administered by the SFAFT exceeded $150 million. The decisions of the Board included hiring the national advertising agency, approving national advertising campaign themes and authorizing specific expenditures of funds.
In 1997, the plaintiffs Gerald Hadelman, Robert Dowell and Dennis Rottinghaus, each of whom is the owner of at least one Subway franchise, sought election to the Board of Directors of SFAFT. The defendant Frederick DeLuca is the president of the defendant Doctor's Associates, Inc. ("DAI"), the franchiser of Subway Sandwich stores. DeLuca had concerns about the candidacies of the plaintiffs and the nature of their campaigns. DeLuca prepared a video expressing his concerns. The video was presented on October 13, 1997 at a meeting of Subway Multi-Unit Owners in Orlando, Florida. DeLuca urged the existing SFAFT Board to change the rules governing the election of board members. He also threatened to terminate the voluntary annual contributions totaling between $3 million and $4 million made by DAI to SFAFT if the changes he advocated were not made. The SFAFT Board subsequently canceled the election which was in progress and adopted new election rules which prevented the plaintiffs' candidacies.
On October 22, 1997, the plaintiffs Gerald Hadelman, Robert Dowell and Dennis Rottinghaus filed the above-captioned action seeking injunctive relief and damages against Frederick Deluca, the SFAFT, twelve individual members of the SFAFT Board of Directors and the executive director of the SFAFT. On November 6, 1997, the parties voluntarily entered into an agreement providing for arbitration of the dispute concerning the cancellation of the 1997 SFAFT election. This action was stayed on November 12, 1997 by the court, Ripley, J., in accordance with the parties' arbitration agreement. Hadelman subsequently withdrew as a plaintiff in this action. On May 10, 1999, this action was dismissed by agreement as to the defendants SFAFT, the individual SFAFT board members and the SFAFT executive director. On January 29, 2002, DAI was made a defendant in the litigation.
After the various additions and subtractions of parties, the current lineup in this litigation has Dowell and Rottinghaus as plaintiffs and DeLuca and DAI as defendants.
An arbitration proceeding was held with the plaintiffs Dowell and Rottinghaus as claimants and DAI as respondent. The three person panel of arbitrators issued its final arbitration award on November 11, 2001. The arbitrators determined that DAI, acting through DeLuca, improperly interfered with the 1997 SFAFT election in order to prevent the election of the claimants. The arbitrators found the improper actions of DeLuca to include:
(A) communications intended to cause the SFAFT Board to cancel the election and change the election rules in order to prevent the election of the claimants; (B) the threat to terminate important financial support to SFAFT if DAI's requests for election changes were not met in a timely manner; (C) misrepresentations to the SFAFT Board and Multi-Unit Owners regarding the intent and bona fides of the claimants in seeking election to the SFAFT Board; (D) encouraging the Multi-Unit Owners to pressure the SFAFT Board to implement election changes by falsely suggesting that the SFAFT Board had been acting in dereliction of their obligations to the franchisees; and (B) the threat to the SFAFT Board that DAI would distribute DeLuca's video, which contained the threat to terminate funding, to all franchisees if the Board did not enact the recommended election changes.
The arbitrators concluded that DAI tortiously interfered with the claimants' right to seek election to the SFAFT Board and that, in doing so, it committed an unfair and deceptive trade practice in violation of the Connecticut Unfair Trade Practices Act ("CUTPA"), General Statutes §§ 42-110a et seq. The panel awarded each claimant punitive damages in the amount of $150,000. The claimants were also awarded attorneys fees and expenses totaling $150,000.
The defendants have moved to vacate the arbitration award on the grounds that the award of punitive damages in the amount of $150,000 for each plaintiff violates the clearly defined public policy contained in the due process clause of the fourteenth amendment to the United States Constitution prohibiting the imposition of grossly excessive punitive damages.
An arbitral decision rendered on an unrestricted submission may be vacated when the award violates clear public policy. Garrity v. McCaskey, 223 Conn. 1, 6 (1992). See also South Windsor v. Police Union Local 1480, 255 Conn. 800, 815 (2001). In order to establish that the arbitration award in this case violates public policy, the defendants must show that the award is "clearly violative of a strong public policy." Id. The defendants must show that a clearly defined public policy exists and that the arbitration award violates that policy. Cheverie v. Asheraft Gerel, 65 Conn. App. 425, 432 (2001). See also State v. AFSCME, Council 4, Local 2663, AFL-CIO, 59 Conn. App. 793, 797, cert. denied, 255 Conn. 905 (2000).
This court has previously determined that a clear and well-defined public policy exists prohibiting the award of grossly excessive punitive damages. See Hadelman v. DeLuca, Superior Court, judicial district of Ansonia/Milford at Milford, Docket No. CV97-0060279S (November 25, 2002) (Alander, J.). The United States Supreme Court has clearly and repeatedly held that the due process clause of the fourteenth amendment to the United States Constitution prohibits the award of "grossly excessive" punitive damages. See State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. (2003), Cooper Industries v. Leatherman Tool Group, 532 U.S. 424 (2001), BMW of North America, Inc. v. Gore, 517 U.S. 559, 568 (1996), TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443, 454 (1993), and Pacific Mutual Life Insurance Co. v. Haslip, 499 U.S. 1 (1991).
The unresolved question is whether the punitive damages award in this case violates the public policy against grossly excessive punitive damages. The defendants assert that the award is grossly excessive under the guidelines established by the United States Supreme Court in BMW of North America, Inc. v. Gore, 517 U.S. 559, 568 (1996). The plaintiffs maintain that the punitive damages award clears those same guideposts. For the foregoing reasons, I agree with the plaintiffs.
The plaintiffs also maintain that the punitive damages award in this case does not violate the constitutional ban on grossly excessive punitive damages for the simple reason that no state action is present in a private arbitration proceeding. They further contend that judicial confirmation of a private arbitration award is insufficient to constitute state action for purposes of the due process clause. In support of their position, they cite a number of federal court decisions including Davis v. Prudential Securities, Inc., 59 F.3d 1186 (11th Cir. 1995); Mantle v. Upper Deck Co., 956 F. Sup. 719 (N.D.Tex. 1997); and Cort v. American Arbitration Ass'n, 795 F. Sup. 970 (N.D.Cal. 1992); and a California case, Rifkind Sterling, Inc. v. Rifkind, 28 Cal.App.4th 1282, 33 Cal.Rptr.2d 828 (Cal.Ct.App. 1994). See also Duffield v. Robertson Stephens Co., 144 F.3d 1182 (9th Cir. 1998). The one Connecticut decision directly on point supports the plaintiffs' contention that the due process prohibition on grossly excessive punitive damages does not apply to private arbitration awards due to a lack of state action. Medvalusa Health Programs, Inc. v. Memberworks, Incorporated, Superior Court, judicial district of Hartford at Hartford, Docket No. CV 02-0821887S (May 22, 2003, Berger, J.).
The defendants counter that these decisions lack an appropriate analysis of the state action doctrine and are wrong. See Commonwealth Associates v. Letsos, 40 F. Sup.2d 170, 177 n. 37 (S.D.N.Y. 1999). They further assert that the issue before this court is not whether the arbitration award in this case directly violates the due process clause, but whether it contravenes the clear public policy against excessive punitive damages that is derived from the due process clause. See Sawtelle v. Waddell Reed, 2003 WL 288471 (N.Y.A.D. 1 Dept. Feb. 11, 2003).
In light of my determination that the punitive damages award in this case is not grossly excessive under the guideposts established in Gore, it is not necessary for me to delve into this engaging debate.
The United States Supreme Court has stated that there is no "mathematical bright line" between constitutionally acceptable and constitutionally unacceptable punitive damages. Pacific Mutual Life Insurance Co. v. Haslip, supra, 499 U.S. 18. "[A] general concept of reasonableness properly enters into the constitutional calculus." TXO Production Corp. v. Alliance Resources Corp., supra, 509 U.S. 458. "Only when an award can fairly be categorized as `grossly excessive' in relation to [a State's interests in punishing unlawful conduct and deterring its repetition] does it enter the zone of arbitrariness that violates the Due Process Clause of the Fourteenth Amendment." BMW of North America, Inc. v. Gore, supra, 517 U.S. 568. The court established three "guideposts" for determining whether an award of punitive damages is grossly excessive: (1) the degree of reprehensibility of the person's conduct; (2) the disparity between the harm, including potential harm, suffered and the punitive damages awarded; and (3) the difference between the punitive damages awarded and the civil penalties authorized or imposed in comparable cases. BMW of North America, Inc. v. Gore, supra, 517 U.S. 575. The purpose of the guideposts is to gauge whether a person has been given fair notice of the magnitude of the penalty that may be imposed. Id., 574.
The United States Supreme Court has decreed that "The most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct." State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 8 (2003) quoting BMW of North America, Inc. v. Gore, supra, 517 U.S. 575. "[P]unitive damages may not be grossly out of proportion to the severity of the offense." (Internal quotation marks omitted.) BMW of North America, Inc. v. Gore, supra, 517 U.S. 576. The court has recently reiterated the factors to be considered regarding reprehensibility. "We have instructed courts to determine the reprehensibility of a defendant by considering whether: the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery or deceit, or mere accident." State Farm Mut. Automobile Ins. Co. v. Campbell, supra, 538 U.S. 8.
The defendants contend that their conduct was not particularly reprehensible because it did not involve violence or threats of violence nor did it include trickery or deceit. True, but, as found by the arbitrators, opprobrious nonetheless. The arbitrators made factual findings that the defendants engaged in wilful malicious misconduct. The arbitrators determined that DeLuca engaged in intentional acts to intentionally harm the plaintiffs. The arbitrators specifically found that DeLuca intentionally made misrepresentations about the intent and bona fides of the plaintiffs, misrepresentations about the SFAFT Board acting in dereliction of their obligations and threats to withdraw substantial financial support to the SFAFT, all with the specific intent of frustrating the plaintiff's candidacies and preventing their election to the SFAFT Board. It can not be said of this case, what the United States Supreme Court said when it overturned the punitive damages award in Gore: "[T]he record in this case discloses no deliberate false statements, acts of affirmative misconduct, or concealment of evidence, or improper motive, such as was present in Haslip and TXO." The defendants' conduct as determined by the arbitrators may not reach the highest point on the reprehensibility scale, but it holds a firm foothold on that scale. See Argentine v. United Steelworkers of America, AFL-CIO, 287 F.3d 476, 487-88 (6th Cir. 2002) (the court upheld the award of punitive damages finding sufficiently reprehensible the defendant international labor union's conduct imposing a trusteeship on the local union and removing the plaintiff union officers from office in deliberate violation of its by-laws).
"A wilful and malicious injury is one inflicted intentionally without just cause or excuse. It does not necessarily involve the ill will or malevolence shown in express malice. Nor is it sufficient to constitute such an injury that the act resulting in the injury was intentional in the sense that it was the voluntary action of the person involved. Not only the action producing the injury but the resulting injury must be intentional. A wilful or malicious injury is one caused by design." Markey v. Santangelo, 195 Conn. 76, 77 (1985).
The second guidepost established in BMW of North America, Inc. v. Gore measures the disparity between the harm suffered and the punitive damages awarded. The defendants maintain that the failure of the arbitrators to award any compensatory damages results in an unreasonable ratio between the punitive damages awards of $150,000 per plaintiff and the zero compensatory damages awards. The defendants argue that it is self-evident that the ratio here is so disproportionate as to be unreasonable since the ratio between a punitive damages award of $150,000 and a compensatory damages award of $0 is infinite.
The defendants argue that the figure of $300,000 should be used when applying the Gore guideposts. I do not agree. The arbitrators did not render a single punitive damage award of $300,000 in this case. Rather, they awarded each of the two plaintiffs a punitive damages award of $150,000. Consequently, the Supreme Court's guideposts should be used to measure the punitive damages award of $150,000 to each plaintiff.
The decision cited by the defendants, Johansen v. Combustion Engineering Inc., 170 F.3d 1320 (11th Cir. 1999), is inapposite. In Johansen, the court aggregated thirteen awards of compensatory damages and thirteen awards of punitive damages involving multiple plaintiffs when conducting its analysis under Gore. While it may make sense to compare aggregated compensatory damages to aggregated punitive damages, it makes little sense to aggregate punitive damages when, as in the case at bar, there are no compensatory damages to aggregate.
In State Farm Mut. Automobile Ins. Co. v. Campbell, supra, the United States Supreme Court gave additional guidance on the parameters of the second Gore guidepost. While the court continued to decline to impose a bright-line ratio which a punitive damages award cannot exceed, it did declare that "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." Id., 14. The court also recognized that ratios greater than single-digits may comport with due process where a particularly egregious act has resulted in only a small amount of economic damages or, citing language in Gore, where the injury is hard to detect or the monetary value of noneconomic harm might have been difficult to determine. Id. "In sum, courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered." Id.
The principles set forth in Gore and, more recently, in Campbell establish that the inquiry as to whether an award of punitive damages is reasonable does not end with a comparison of the ratio between the amount of compensatory damages and the amount of punitive damages. Courts must look to the nature of the harm suffered by the plaintiff at the hands of the defendant and determine whether the award of punitive damages was reasonable. As the Supreme Court recognized, this is so because some types of harm are not readily susceptible to monetary quantification.
This case is a paradigm of an instance where the monetary value of the noneconomic harm suffered by the plaintiffs was difficult to determine. The arbitrators chose not to award any compensatory damages to the plaintiffs, but not because they found a lack of harm suffered by the plaintiffs. The arbitrators specifically found that the plaintiffs were harmed by the defendants' actions. According to the arbitrators, the plaintiffs' ongoing candidacies were torpedoed, they were denied any future opportunity to seek election to the SFAFT Board and "unjustified negative attention" was brought upon them. The loss of an opportunity to seek election and harm to one's reputation are not readily susceptible to monetary measure.
In Argentine v. United Steelworkers of America, AFL-CIO, supra, 287 F.3d 476, the Sixth Circuit found reasonable a large disparity between the amount of compensatory damages and punitive damages in a case with injuries similar to the one at bar. In Argentine, the jury found that the defendant international labor union improperly removed the plaintiffs as elected officers of the local union affiliate. The jury awarded two of the plaintiffs compensatory damages of $3,800 and punitive damages of $100,000 and the remaining plaintiff compensatory damages of $1,800 and punitive damages of $200,000. The Court of Appeals opined that, since the monetary value of the injuries suffered by the plaintiffs, i.e. harm to their reputation and their free speech rights, was difficult to assess, it could not say that the larger than normal ratio was unreasonable. Id., 488. See also Swinton v. Potomac Corp., 270 F.3d 794, 799 (9th Cir. 2001) (the court affirmed a jury award of $35,612 compensatory damages and $1 million punitive damages in a case of racial harassment because, in part, the noneconomic harm suffered by the plaintiff was difficult to calculate). Accord Deeters v. Equifax Credit Information Services, Inc., 202 F.3d 1262, 1272-73 (10th Cir. 2000); Cooper v. Casey, 97 F.3d 914, 919-20 (7th Cir. 1996).
The defendants' argument that the ratio is per se unreasonable in this case because of the award of no compensatory damages would invalidate punitive damages awards in all cases where no compensatory damages have been awarded and in cases where only nominal damages have been awarded. In such cases, the ratio will always be infinite or a huge multiple. It is not the law in this state or in the Second Circuit that punitive damages are inappropriate in cases involving little or no compensatory damages. In Hi-Ho Tower Inc. v. Com-Tronics, Inc., 255 Conn. 20, 34 (2000), the Connecticut Supreme Court upheld a jury award of $0 compensatory damages and $120,000 in punitive damages, ruling that an award of compensatory damages is not necessary in order to support an award of punitive damages where, as in this case, there has been a finding of an ascertainable loss. See also Lyons v. Nichols, 63 Conn. App. 761, 768 (2001), in which the court approved the award of punitive damages in conjunction with an award of nominal damages and Calandro v. Allstate Insurance, Superior Court, judicial district of New Haven at New Haven, Docket No. CV 0337064-S (Nov. 12, 1998, Downey, J.), in which the court awarded punitive damages for a CUTPA violation upon the award of $1 nominal damages. The Second Circuit Court of Appeals has similarly held that in § 1983 cases punitive damages may be awarded in the absence of compensatory damages. King v. Macri, 993 F.2d 294, 297-98 (2d Cir. 1993). It has also held that an award of compensatory or nominal damages is not a prerequisite for an award of punitive damages in Title VII cases. Cush-Crawford v. Adchem Corp., 271 F.3d 352, 357 (2d Cir. 2001).
In sum, I do not find the ratio of punitive damages to compensatory damages awarded in this case by the arbitrators to be unreasonable in light of the nature of the harm found by the arbitrators to have been suffered by the plaintiffs and the difficulty in monetarily measuring that harm.
Finally, the defendants assert that the difference between the punitive damages awarded in this case and the civil penalties authorized or imposed in comparable cases is so great as to make the award unreasonable. The defendants point to the provision in CUTPA that subjects wilful violations to a civil penalty of $5,000 as support for their position that the punitive damages award of $300,000 is grossly excessive. They also contend that given the amount of punitive damages awarded in prior court cases they were not given any notice that their actions could subject them to six figure punitive damages awards.
The Supreme Court in Gore acknowledged that "Punitive damages may properly be imposed to further a State's legitimate interests in punishing unlawful conduct and deterring its repetition." BMW of North America, Inc. v. Gore, supra, 517 U.S. 568. Elementary notions of fairness simply require that a person receive fair notice of the severity of the penalty that a State may impose for his reprehensible conduct. Id., 574.
The fact that the award of $150,000 in punitive damages in this case greatly exceeds the civil penalty of $5,000 contained in CUTPA, see General Statutes § 42-110o (b), is not dispositive. In Pacific Mutual Life Insurance Co. v. Haslip, supra, 499 U.S. 23-24, the Supreme Court found not violative of due process an award of punitive damages that greatly exceeded the amount of the statutory fine. In BMW of North America, Inc. v. Gore, the Supreme Court looked not only to the civil penalties authorized by the Alabama Deceptive Trade Practices Act but also to whether any judicial decision in Alabama existed which indicated that the defendant's conduct might give rise to punishment as severe as that imposed by the jury. BMW of North America, Inc. v. Gore, supra, 517 U.S. 584.
The defendants here were expressly put on notice that any actions deemed unfair or deceptive under the Connecticut Unfair Trade Practices Act would subject them to punitive damages. General Statutes § 42-110g (a). See TXO Production Corp. v. Alliance Resources Corp., supra, 509 U.S. 465-66 ("In any event, the notice component of the Due Process Clause is satisfied if prior law fairly indicated that a punitive damages award might be imposed in response to egregiously tortious conduct). Prior Connecticut case law put the defendants on notice that punitive damages equaling and exceeding $100,000 might well be awarded for violations of CUTPA. See Meyers v. Cornwell Quality Tools, Superior Court, judicial district of Tolland at Rockville, Docket No. CV90-46316S (October 6, 1994, Hammer, J.) ( 12 Conn.L.Rptr. 510), aff'd., Meyers v. Cornwell Quality Tools, Inc., 41 Conn. App. 19 (1996), in which the court denied a motion to open a judgment entered on a jury verdict awarding punitive damages of $137,752.33 for CUTPA violations; Resources Available v. New England Contr Pkrs., Superior Court, judicial district of Waterbury, Docket No. 0119393 (July 23, 1996, McDonald, J.), in which the court entered judgment of $150,000 in punitive damages for unfair trade practices; and Willow Springs v. Seventh BRT, Superior Court, judicial district of Litchfield, Docket No. CV062549 (September 11, 1996, Dranginis, J.) ( 17 Conn.L.Rptr. 559), aff'd., Willow Springs Condo. Ass'n, Inc. v. 7th Brt Dev. Corp., 245 Conn. 1 (1998), in which the court awarded punitive damages of $100,000 for violations of CUTPA. Given the express statutory provision authorizing punitive damages for unfair trade practices and prior case law imposing punitive damages of $100,000 and more, the defendants were provided fair notice that their conduct could result in the imposition of punitive damages of $150,000.
The defendants' conduct at issue here took place in the fall of 1997.
I do not find that the award by the arbitrators to each of the plaintiffs of punitive damages of $150,000 for the egregious conduct of the defendants clearly violates the public policy against grossly excessive punitive damages. In light of my previous findings that the defendants' two additional grounds for vacating the arbitrators' award lack a legitimate and colorable basis, see Hadelman v. DeLuca, Superior Court, judicial district of Ansonia/Milford at Milford, Docket No. CV97-0060279S (November 25, 2002, Alander, J.), the defendants' motion to vacate the arbitration award is hereby denied and the plaintiffs' motion to confirm the award is hereby granted.
The defendants contended that the arbitrators' award violated (1) the prohibition on punishing truthful, non-defamatory speech contained in the United States and Connecticut constitutions; and (2) the limitation under CUTPA which restricts the award of punitive damages to cases involving the reckless indifference to or intentional and wanton violation of rights.
BY THE COURT
Judge Jon M. Alander