SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-6440-96T2
BELL ATLANTIC NETWORK SERVICES,
INC., a Delaware Corporation,
Plaintiff-Respondent/
Cross-Appellant,
v.
P.M. VIDEO CORP., d/b/a
AVIUS, a Delaware Corporation,
Defendant/Third-Party Plaintiff-
Appellant/Cross-Respondent,
v.
HONEYWELL CORPORATION, SQUARE D
CORPORATION, GEORGE A. CRETECOS,
JR., TELETIMER INTERNATIONAL,
INC., JOHN G. PUMA, and ERIC DAVIDSON,
Third-Party Defendants,
and
ANTHONY W. CAPUANO and BELL
ATLANTIC CORPORATION,
Third-Party Defendant-
Respondents/Cross-Appellants.
Argued March 30, 1999 - Decided June 11, 1999
Before Judges Keefe, Eichen, and Coburn.
On appeal from Superior Court of New Jersey, Law
Division, Essex County.
Herbert J. Stern argued the cause for appellant/cross-respondent (Stern & Greenberg, and Stephen L. Snyder,
Robert J. Weltchek, and Sheldon N. Jacobs (Snyder,
Weiner, Weltchek, Vogelstein & Brown) of the Maryland
bar, admitted pro hac vice, attorneys; Mr. Snyder, Mr.
Weltchek, Mr. Stern, and Mr. Jacobs, of counsel and on
the brief).
Theodore V. Wells, Jr., argued the cause for
respondents/cross-appellants (Lowenstein Sandler,
attorneys; Mr. Wells, Peter L. Skolnik, Melissa A. Rule,
and Frank D. Stefanelli, of counsel; Mr. Wells, Mr.
Skolnik, and R. Scott Thompson, on the brief).
The opinion of the court was delivered by
COBURN, J.A.D.
PlaintiffSee footnote 1 PMV Video Corp. ("PMV") alleged that it was
induced by fraud to enter into an oral contract with defendants
Bell Atlantic Network Services, Inc. ("BANS"), a subsidiary of Bell
Atlantic Corporation ("Bell"), and sought to recover compensatory
damages consisting of $375,000 in consulting fees, as provided in
the agreement, projected lost profits of approximately $400 million
dollars in this entirely new business venture, and punitive
damages.
The case was tried twice. Before the first trial, on
defendants' motion for summary judgment, the judge decided that the
lost profits claim was barred by the "new business rule," Weiss v.
Revenue Bldg. and Loan Ass'n,
116 N.J.L. 208 (E. & A. 1936). He
also found, apart from the rule, that the proofs offered by PMV
were too speculative.
The first jury found defendants liable in fraud and awarded
PMV $375,000 in compensatory damages and $25 million in punitive
damages. The judge denied defendants' motion for judgment n.o.v.
or a new trial on the fraud claim but granted them a new trial on
punitive damages, subject to PMV's right to accept a remittitur of
$3,125,000. PMV declined, and the second jury awarded it $1
million in punitive damages.
PMV appeals. With respect to the first trial, it contends the
judge erred in disallowing the claim of approximately $400 million
dollars in projected lost profits and in vacating the award of $25
million in punitive damages. Regarding the second trial, it
contends the judge erred by permitting defendants to argue that
they "had not committed any fraud" and by prohibiting the jury from
considering the projected lost profits in calculating punitive
damages. In short, what PMV now seeks is a judgment leaving
untouched the $375,000 award, reinstating the $25 million punitive
damage award, and a new trial on its $400 million lost profits
claim; or, in the alternative, should we agree with the remittitur
decision, a new trial on punitive damages.
The defendants cross-appeal. As to the first trial, they
argue that the doctrine of judicial estoppel barred the fraud
claim; that there was insufficient evidence to establish one of the
elements of fraud, namely whether PMV reasonably relied on
defendants' misrepresentations, thus warranting their request for
judgment n.o.v.; and that PMV's display during summation of "highly
prejudicial graphic material" mandated approval of defendants'
motion for a new trial. With respect to both trials, defendants
claim the evidence was insufficient, even if fraud was proved, to
permit any consideration by the jury of punitive damages because
their conduct was not egregious. They also argue that the
corporate defendants should not have been assessed punitive damages
because there was no evidence that any employee sufficiently high
in authority participated in or ratified the conduct of defendant
Anthony W. Capuano, the individual BANS employee with whom
plaintiff negotiated.
As a preliminary matter, we take note of our obligation "to
accept as true all evidence supporting the jury's verdict and to
draw all reasonable inferences in its favor whenever reasonable
minds could differ." Harper-Lawrence, Inc. v. United Merchants and
Mfrs., Inc.,
261 N.J. Super. 554, 559 (App. Div. 1993) (citing
Dolson v. Anastasia,
55 N.J. 2, 5 (1969)). With that principle in
mind, these are the facts.
A full appreciation of plaintiff's case requires some discussion of the evidence bearing on the 1982 break-up of AT&T, the initial restrictions placed on regional Bell operating companies, and the lifting of those restrictions, a process begun in 1990.
In 1982, AT&T and the federal government entered into an agreement settling the government's long-running antitrust action against the Bell System. The agreement was the subject of a consent decree, which was itself an amendment of an earlier consent decree; hence, the amended consent decree and incorporated agreement are widely referred to as the "Modified Final Judgment" or "MFJ."
Under the terms of the MFJ, AT&T was required to divest itself of its local telephone companies. This divestiture occurred in 1984, and it led to the formation of seven "regional Bell operating companies," which are widely referred to as "RBOCs" or "Baby Bells." Bell was one of the RBOCs formed in 1984. By 1996, Bell had "about a hundred or more wholly owned subsidiaries," employed "in the neighborhood of 80 thousand" workers, and had an estimated net worth of more than $32 billion.
The MFJ imposed certain operating restrictions upon the RBOCs. For purposes of this appeal, the most important restriction was that the RBOCs were prohibited from providing information services.
Information services involve the processing of information that moves over telephone lines, but it does not include the actual transport of that information. Thus, a conversation over a telephone line is not an information service because "the information that you put in at one end is the same information that you get out at the other" end. However, if the conversation were recorded for later retrieval, that process would be an information service because it involves data processing and is "not just the carrying of information."
The effect of the MFJ was to confine the RBOCs to the minimally expanding local telephone business and to prohibit them from directly entering the potentially lucrative data processing businesses that were rapidly developing in the mid-to-late 1980s. The MFJ precluded the RBOCS from providing to their customers home automation, meaning the centralized control of such functions as heating, air conditioning, lighting, and security by a computerized panel.
In 1984, Congress enacted the Cable Communication Policy Act of 1984, Pub. L. No. 98-549, 98 Stat. 2779 (codified as amended at 47 U.S.C.A. §§521-559), which restricted the RBOCs from providing video-on-demand services to their customers. Video-on-demand involves sending "VCR quality video over existing telephone lines," rather than over a separate cable, as with cable television. With the video-on-demand service, the customer would have a wide choice of movies or recorded events to choose from and would be billed for each selection. The pay-per-view billing method currently employed by many cable companies is a "rudimentary form of video on demand," according to Capuano. Bell estimated in 1991 that if this statutory restriction could be lifted, video-on-demand services had a ten-year cumulative revenue potential of $8.2 billion. While the RBOCs apparently had a favorable court ruling on the restriction in 1993, the restriction was finally laid to rest in 1996 by a provision of the Telecommunications Act of 1996, Pub. L. No. 104 104, 110 Stat. 56 (codified in scattered sections of 47 U.S.C.A.).
As a result of the MFJ and the statutory cable restriction, during the 1980s and into the 1990s, the RBOCs (including Bell) could only indirectly offer information services or video-on-demand services to their customers by entering into a business relationship as a subcontractor to an information-service or video-on-demand provider. In such a relationship, the RBOCs could only be compensated for performing the services they were legally allowed to perform and could not share in the revenues derived from the provision of information or video-on-demand services. Because the RBOCs wanted to enter those business lines, they were thus compelled to seek third-party business partners who could provide the restricted services.
In January 1989, Bell announced that it had formed the PAL alliance with Teletimer International, Inc., and Square D Corporation. Honeywell Corporation soon joined the alliance. PAL was an acronym for "Personally Automated Lifestyles," and the object of the PAL alliance was to provide a variety of information services, especially those involving home automation, to the alliance's customers.
As envisioned by the alliance, the information services would actually be provided through a system of one national and seven regional "licensed systems integrators," also referred to as "LSIs," whose task would be the "tying together [of] energy management, security, lighting and appliance control, [as well as] some form of in-house communications and some form of in-house distribution of audio and video signals" for the alliance's customers. The seven regional LSIs were to be responsible for local sales, installation, and service, while the national LSI was to be responsible for creating and running the network.
One of the persons working to accomplish the PAL alliance's vision was defendant Anthony W. Capuano, who was employed in 1989 as the Managing Director of Home Automation with BANS, a wholly owned subsidiary of Bell. Capuano's quest to identify possible contenders for the available LSI positions soon led him to PMV.
PMV was formed, in 1982, by John Puma and Steve Meehan and was initially involved with servicing pay-TV accounts in Washington, D.C. It was an outgrowth of another corporation, PM Video Network, Inc., that Puma and Meehan had formed in 1980 to service pay-TV accounts in New England. To avoid the impression that PMV was merely "renting video tapes," Puma and Meehan often operated PMV under the trade name of "AVIUS," which was an acronym for automation voice and information unified systems.
From 1983 to 1989, PMV worked under a contract with MCI to install, service, and train technicians concerning MCI's "network access auto dialers." PMV's service territory extended from Connecticut to New Jersey, and the work involved "systems integration," whereby PMV would connect the customers' phone system into "the public network" by way of an MCI device. The MCI contract provided PMV with $7,000,000 to $8,000,000 in revenue overall, and PMV employed "about a hundred subcontractors and about twenty to twenty-five in-house personnel" during this period. Thus, PMV was a firm with a proven record of performance in systems integration. By 1989, Puma was apparently the sole owner of PMV.
On January 21, 1989, Puma attended the National Association of Home Builders convention in Atlanta, Georgia, where he saw the PAL alliance's exhibit and where he met George Cretecos of Teletimer, as well as Capuano and Capuano's subordinate Timothy Eggleston of BANS. Puma met with Capuano, Eggleston, and representatives from Square D, in March 1989, to make a presentation concerning the capabilities of PMV. He also met Capuano at a telecommunications conference in May 1989, where the two discussed the goals of the PAL alliance and dealer networks. According to Puma, Capuano told him "very clearly at that point in time that he wanted AVIUS [PMV] in the [PAL] program."
In July 1989, Eggleston and representatives from Square D visited PMV's offices in Fairfield, New Jersey. They observed PMV's performance of tasks under the MCI contract and went to several of the home sites that PMV had wired with home automation devices.
On January 20 and 21, 1990, Puma attended another National Association of Home Builders convention in Atlanta and saw Capuano at a prearranged meeting. According to Puma, Capuano told him that PMV had been awarded one of the regional LSI positions and would have responsibility for sales, service, installation, and customer relations within that region. Puma testified that Capuano did not state that the award of the unspecified regional LSI to PMV was subject to conditions or contingencies, but he did indicate that the regional LSI would receive a "hundred million dollars" a year in revenue over a ten-year period. Capuano also told him that PMV had to "beef up" its marketing prowess to become eligible for the national LSI position. Capuano suggested that Puma hire a mutual business acquaintance, Eric Davidson of Smart House, Inc. Puma and Davidson had previously discussed joining together to pursue mutual business interests, including "contracts with Bell Atlantic."
On April 3, 1990, the United States Court of Appeals for the District of Columbia issued a decision in an appeal by various RBOCs, including Bell, that remanded part of the 1984 divestiture MFJ to the district court and essentially directed the district court "to approve getting rid of or dropping the information services line of business restriction" on the RBOCs. See United States v. Western Elec. Co., 900 F.2d 283 (D.C. Cir.), cert. denied, 498 U.S. 911, 111 S. Ct. 283, 112 L. Ed.2d 238 (1990). This court decision was widely reported and understood to mean that the RBOCs would soon be permitted to enter business fields involving information services from which they had earlier been excluded. Fifteen months later, on July 25, 1991, the federal district court entered the anticipated order removing the restrictions on information services. United States v. Western Elec. Co., 767 F. Supp. 308 (D.D.C. 1991), aff'd, 993 F.2d 1572 (D.C. Cir.), cert. denied, 510 U.S. 984, 114 S. Ct. 487, 126 L. Ed.2d 438 (1993).
On April 27, 1990, in reaction to the federal appeals court's decision of April 3, 1990, Bell's highest management met and reviewed plans for Bell's entry as a competitor without partners into the information services and home automation marketplace. Capuano participated in the preparation of materials for that meeting, and those materials plainly called for Bell itself to provide information services that had been earlier earmarked as tasks for the regional and national LSIs.
On April 29, 1990, Capuano met with Puma and Davidson, and, according to Puma, told them that PMV had the national LSI position and the regional LSI position for the region serviced by the RBOC NYNEX. The contract awards were unconditional. Puma testified that he believed Capuano had the authority to make these agreements because Capuano "was the biggest guy in the industry at that point in time" and the PAL alliance was "the most powerful group in the industry." Capuano made a diagram of the prospective business relationship. In the diagram, "John [Puma] & Eric [Davidson]" were set out in a national LSI box above the "7 Guys" who were to be the regional LSIs, and the PAL alliance was also prominently displayed in the business schematic.
Capuano's version of what occurred at the meeting was substantially different from that of Puma. Essentially, Capuano testified that he outlined a three-phase business plan to Puma and Davidson, and that each phase was subject to conditions and to approval by his superiors at BANS and Bell. Capuano said that he never entered into contract negotiations with PMV concerning the national or regional LSI positions.
Capuano's testimony, however, conflicted with that of a businessman unrelated to PMV, Sean Walsh of Hometron, Inc., a competitor of PMV. He said that Capuano informed him that PMV had been unconditionally awarded the national LSI position. Although Capuano testified that he told Walsh only that he was going to recommend PMV for the national LSI position, the jury was entitled to credit Puma and Walsh and reject the contrary recollections of Capuano.See footnote 2
On May 3, 1990, Puma mailed a letter with attached documents to Capuano describing his understanding of the three-phase agreement between BANS and PMV. Capuano explained at trial that he interpreted the letter and its attachments as a consultancy agreement for the first phase of the agreement, not as a recitation of the existence of the entire three-phase agreement.
In late May 1990, after Capuano promised the national LSI position to PMV, Davidson resigned from his position at Smart House and began working for PMV. Over the following four months, Puma and Davidson spoke and met with Capuano and Eggleston often to discuss plans for the regional LSI.
From June 1 to 3, 1990, Capuano attended a consumer electronics show in Chicago, which Puma and Davidson also attended. The three met and, according to Puma, "hammered out the deal that we still have today." Puma testified that the first phase of the agreement called for PMV's production of an outline of its national marketing plan for the PAL products. The outline would include PMV's "proprietary information," which Puma testified "took me ten years to develop," and for which BANS agreed to make an initial payment of $25,000; but Puma reserved PMV's right to the proprietary information, refusing to convey those rights to BANS under the first phase.
Puma testified that the second phase of the agreement called for PMV's production of the final version of the national plan, PMV's active participation in the plan as a consultant, and PMV's conveyance of its proprietary information to BANS. PMV was to be paid $350,000 for the proprietary information conveyed to BANS under the second phase.
According to Puma, the third phase of the agreement entailed the implementation of the national plan, including the formation of the national LSI company with PMV as majority owner, as well as Bell's funding of that national company.
On June 6, 1990, Puma and Davidson met with Capuano and executed nondisclosure documents. On June 16, PMV sent the initial "National Channel Development for Bell Atlantic" document in fulfillment of Phase One of the agreement. On June 19, PMV forwarded additional financial information to Capuano, further explaining the plan.
On June 18, 1990, while PMV was working on the second phase of the agreement, Capuano wrote to his superior in the corporate hierarchy at BANS, Thomas Gorman. Discussing the role of PMV and another company who were viewed as "consultants" by Capuano, he reported that "we will leverage the consultants' knowledge about Home Automation in technical and marketing related areas (task descriptions follow) to provide necessary experience for BAC [Bell] to carry out these tasks in the future." This letter reflects Capuano's awareness that Bell was not seeking partners at that time in its prospective marketing of information services.
On July 10, 1990, Capuano and Puma spoke on the telephone. According to Puma, Capuano said that Bell had approved a ten-year, $118,000,000 investment in the national LSI company. Puma also testified that Capuano did not at that time indicate that there were any "snags," "problems," or conditions to Bell's performance under the three-phase agreement. Subsequently, PMV received financial projections from Bell concerning the anticipated revenue and net income for the national LSI company and the regional LSIs.
On July 13, 1990, PMV delivered to Capuano what amounted to the final report due under Phase Two of the three-phase agreement: "The National Channel Development for Bell Atlantic." The report evidently contained much of PMV's proprietary information. Puma and PMV continued to work on the consultancy portion of Phase Two after delivering the final report, responding to all inquiries by Bell.
On July 27, 1990, according to Capuano, his boss's superior, John Seazholtz vetoed the idea of Bell investing in small outside companies like PMV and decided that the national LSI would be run by Bell.
On August 2, 1990, according to Sean Walsh of Hometron, Capuano told him "on the QT" that Bell would be the national LSI. Walsh also testified that Bell had reneged on a contract with him that Hometron would have an equity interest in the regional LSI position for which it had been chosen; instead, Bell would totally own all of the regional LSIs. Capuano, however, denied that he had made the comment to Walsh concerning the national LSI position.
Also, on August 2, Geoffrey Harton of BANS sent a standard Bell consultancy contract to Puma as a prelude to Bell's payment of PMV for its services. The contract contained $15,000 and $10,000 total-payment provisions and a "Developed Information" provision that Puma found confusing, baffling, and preposterous. Puma did not execute or return the contract to Harton but, instead, considered it a "mix up" after speaking to Harton about it. Puma then continued to do the Phase Two consultancy work pursuant to the three-phase agreement.
On September 6, 1990, Puma and Davidson travelled to Bell's offices in Silver Spring, Maryland, to confer with Capuano about some bills that Bell had not paid. At the meeting, Capuano informed the two that Bell would "not make an investment in an outside" national LSI company, "that there was going to be no investment in AVIUS [PMV]," and that "Bell Atlantic was going to do the job themselves." According to Capuano, he had already told Puma this on August 13. Puma testified that he was "shocked" and "nauseous" at this turn of events because he had worked without any compensation for "virtually the entire summer, [and for] a great deal of time before that." Capuano did not cut PMV off completely, however. Instead, while "Bell Atlantic would be the national [LSI] and would execute the plan," Bell would provide PMV with the "functional financial equivalent" of the national LSI position. Puma decided that if Capuano's alternate proposal proved to be the monetary equivalent of the national LSI position, then "it would be prudent for me to just go along" with Capuano until the alternative proposal was made concrete. The meeting ended with many unresolved issues.
On September 10, 1990, Capuano sent Puma a letter suggesting three "major potential opportunity areas" for PMV to work with the PAL alliance. These "areas" were largely undefined in Capuano's letter, and, though Puma really did not know the parameters of these opportunities, he stated that he would have been willing to accept Bell's alternative. But, according to Puma, Capuano "didn't deliver anything" on this supposed alternative to the original deal. Nevertheless, Puma took Capuano's "letter as a positive step," and he resolved to enter into any favorable contracts with Bell that he could. Puma testified that he was "very, very nervous" at this time because "I had a company [PMV] to run, I had families to feed and I had no work, I had just spent the entire past six months working for him [Capuano], and not working for P.M. Video."
On September 25, 1990, Puma and Davidson traveled to Bell's offices in Silver Spring, where they met with Capuano and Eggelston. Puma testified that his purpose in attending the meeting was "to take that September 10th letter [from Capuano] and articulate it in as great detail as possible, create an agreement that would be executed spontaneously and get money for the work that I had done." As a result of their discussions, Capuano directed Puma "to take the notes that we had taken at the meeting, reduce it into a formal letter and submit it to him." On October 18, 1990, Puma sent Capuano a letter detailing PMV's proposal for an alternative contract with Bell.
Capuano testified that he considered Puma's letter to be an "extortion letter," and he countered with a letter on October 29, 1990, "to clarify our relationship to date and outline future possibilities." In that letter, Capuano stated that PMV had only been hired as a consultant under an oral contract to "produce a quick preliminary study" for $25,000, and that the "study was based almost entirely on Bell Atlantic proprietary information and concepts developed internally by Bell Atlantic which were provided to you under a non-disclosure agreement." Capuano offered to pay PMV the $25,000 that he said was owing if Puma executed a concurrence that Capuano's letter recited the true scope of the business relationship between PMV and Bell or, alternatively, if Puma signed the consulting contract that Harton of BANS had sent him on August 21, 1990.
Puma refused Capuano's offer and sought legal counsel. Puma testified that Capuano's offer was "ridiculous" because "this was like having a gun to my head. I wasn't going to give them my work that took me ten years to develop for twenty-five thousand dollars. That's not what the deal was."
About a year later, on October 31, 1991, Capuano's superior at BANS, Gorman, sent a letter to his superior, John Seazholtz, discussing the various contracts entered into by the Home Automation Group headed by Capuano. Gorman wrote that
[i]n all cases but one, we reviewed the proposed relationships beforehand with legal, contracting and, if necessary, with Bell Atlantic's senior management.
The one exception to this rule was an
oral contract which Mr. Capuano made with a
company called Avius [PMV] to develop some
data for our business development plan. This
agreement is now the subject of litigation,
and while the claims being made by Avius are
regarded by our lawyers and outside counsel as
completely unfounded, Mr. Capuano accepts full
responsibility for stepping outside the rules
in this instance in order to meet a
presentation deadline.
Following the termination of its relations with PMV, Bell
explored the possibility of entering the home automation market on
a nationwide basis either in combination with the other RBOCs or
alone. Bell's plan, "Project Domotique," was estimated in November
1991 to be capable of producing approximately $523,000,000 in net
operating revenue by the year 2000, but those revenues were never
realized. Bell's entire home automation plan was "killed" and
Capuano's unit was disbanded in May 1992, when it came under the
purview of a new senior manager at BANS.
As for Bell's video-on-demand plan, there was no proof that it
was anything other than an experimental program by the time of
trial and no evidence that it ever achieved any profits.
This lawsuit was preceded by an action PMV filed against Bell, and other defendants, in the United States District Court for the Eastern District of New York. Based on the same circumstances, that action alleged breach of contract. It was quickly dismissed for lack of diversity jurisdiction because PMV and Bell were both Delaware corporations. Nonetheless, Bell sought an order in the Law Division prohibiting PMV "from attempting to prove at trial any version of a three-phase agreement with the Bell Defendants other than that which it alleged in the [federal] complaint . . . ."
In their appellate brief, defendants explain their position in the following manner:
[PMV] has played fast and loose with many facts central to this case. Perhaps most critically, [PMV] has taken inconsistent positions about when "phase one" ended and "phase two" began. In its verified federal complaint . . . [PMV] claimed phase one ended and . . . [it] delivered a phase one report on July 14, 1990. But thereafter, in [PMV's] New Jersey counterclaims . . ., [it] claims phase one ended on June 16, 1990, and that it was the phase two report delivered on July 14.
It is a change of great consequence
because only by claiming that it completed the
phase two report can [PMV] argue that it
deserves the $350,000 in compensatory damages
for the phase two report, and that by
completing phase two it thereby completed a
necessary condition precedent to establishing
liability for the enormous damages it claims
for phase three.
[Footnote omitted.]
Generally, the doctrine of judicial estoppel "bar[s] a party
to a legal proceeding from arguing a position inconsistent with one
previously asserted." N.M. v. J.G.,
255 N.J. Super. 423, 429 (App.
Div. 1992). It is most often applied when a party takes
inconsistent positions in different litigation; however, it is
equally applicable where a party asserts inconsistent legal
positions in different proceedings in the same litigation.
Cummings v. Bahr,
295 N.J. Super. 374, 385 (App. Div. 1996).
But the doctrine is only applicable when the party against
whom it is to be applied "successfully asserted" the inconsistent
position in the prior proceeding. Id. at 387. A position has been
"successfully asserted"
if it has helped form the basis of a judicial
determination. The judicial determination
does not have to be in favor of the party
making the assertion. If a court has based a
final decision, even in part, on a party's
assertion, that same party is thereafter
precluded from asserting a contradictory
position.
These principles demonstrate that the doctrine of judicial
estoppel is inapplicable. PMV did not "successfully assert" its
legal position concerning the disputed Phase One and Phase Two
dates in the federal action because those disputed dates were not
the basis of the judicial determination ending the litigation.
Instead, the dismissal of the federal action turned solely on the
lack of diversity jurisdiction.
At the end of the first trial, defendants moved for judgment notwithstanding the verdict on the ground that one element of fraud, reasonable reliance, had not been proven. We disagree.
An action for common-law fraud requires proof of five elements: "(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages." Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997). Included within the first element are promises made without the intent to perform since they are "material misrepresentations of the promisor's state of mind at the time of the promise." Dover Shopping Center, Inc. v. Cushman's Sons, Inc., 63 N.J. Super. 384, 391 (App. Div. 1960); accord Lipsit v. Leonard, 64 N.J. 276, 283 (1974).
Implicit in defendants' argument for judgment n.o.v. was the admission that all but one of the elements of common-law fraud were adequately supported by the evidence. In other words, at least for purposes of this argument, defendants must be understood as conceding that their promise was a material misrepresentation of a presently existing fact; that it was made with knowledge or belief in its falsity; that they intended that PMV rely on it; and that PMV was damaged as a result of it.
Given that understanding, defendants' argument, which is based on the contention that the initial promise was contingent on later Bell approvals, was properly rejected since, as the trial judge noted, there was credible evidence "[t]hat before Mr. Puma [the president of PMV] did any work the [Bell] defendants unconditionally promised him a national business network in order to obtain his [PMV's] work product." (Emphasis added.)
During summation in the first trial, plaintiff's attorney displayed two drawings to the jury. The first depicted Bell's chairman in royal attire, including a crown. He, Capuano, Puma, and others were seated at a table laden with food. The second drawing showed the chairman alone at the table with all the food gathered before him. While displaying these drawings, plaintiff's attorney said:
And we've created our own graph[ics] and . . . this is another one of our inventions to show you what we think about Bell . . . . This is Bell Atlantic's meal ticket. These are all the players on the right . . . . all that food is being distributed equally. And if you'll turn the page, look what happens. Everybody is gone. All that food is in front of Ray Smith [the chairman]. Tony Capuano is even gone. That's how we perceive what happened here with the use of a graph[ic].
Members of the jury, I want you to enjoy
them but, you know, we're all serious, very
serious about this case and the allegations.
This was an agenda at the highest level on a
project that involved billions of dollars,
billions of revenues to Bell. A project that
would allow them with relief, to do things on
their own without partners, exactly what
they're doing today. For Mr. Smith to suggest
to you under oath that he knows very little
about this, when the evidence shows to the
contrary, it's an absurdity. It's an attack
on your intelligence. And you should not
accept it.
During trial, defendants neither objected to the comments nor
to the display of the drawings. In fact, their first objection on
this point "surfaced" in their brief in support of their motion for
a new trial, and it was contained in one of eighty-six footnotes to
that brief.
Since the presentation of this argument in the trial court was
untimely, we must consider the issue under the plain error rule.
Nisivoccia v. Ademhill Assocs.,
286 N.J. Super. 419, 424 (App. Div.
1996) ("Inasmuch as plaintiffs' motion for a new trial expressed
their first objection to the defense attorney's summation remarks,
we will consider the present appeal under the plain error standard.
See R. 2:10-2."). With that in mind, we reject the argument.
While the drawings may have had some potential for prejudice, they
were only metaphors, and they were not clearly capable of producing
an unjust result.
PMV alleged that as a result of the defendants' fraudulent conduct it suffered hundreds of millions of dollars in lost profits. Defendants responded with a motion for summary judgment, asserting the claim was barred by the "new business rule." Weiss v. Revenue Bldg. and Loan Ass'n, 116 N.J.L. 208, 212 (E. & A. 1936). Alternatively, defendants argued that even if New Jersey no longer follows that rule, the damage claims were too speculative for consideration by a jury. The trial judge granted defendants' motion, finding that the "new business rule" was the law in this state, and that if it was not, the plaintiff's proofs were still too speculative. We agree with the judge on both rulings.
In Weiss, the Court of Errors and Appeals described the "new business rule" in this manner:
There is a well established distinction, in respect of the ascertainment of future probable profits, between a new business or venture and one in actual operation. In the first, the prospective profits are too remote, contingent and speculative to meet the legal standard of reasonable certainty; while in the second, the provable data furnished by actual experience provides the basis for an estimation of the quantum of such profits with a satisfactory degree of definiteness.
The "new business rule" was rejected as a statement of the law
of New Jersey by the Third Circuit in In re Merritt Logan, Inc.,
901 F.2d 349, 357 (3d Cir. 1990). After noting the modern trend
towards rejection of this once generally accepted rule, the court
predicted that the New Jersey Supreme Court, given the chance,
would "no longer follow a per se rule precluding all new businesses
from recovering any damages for lost profits." Ibid.
In Perini Corp. v. Greate Bay Hotel & Casino, Inc.,
129 N.J. 479 (1992), the Supreme Court reviewed an arbitration award for
lost profits incurred by a new business. The three-justice
plurality addressed the issue in the following manner:
Perini[, the general contractor,] argues
that the renovation project amounted to a new
business. In Weiss v. Revenue Building and
Loan Ass'n,
116 N.J.L. 208,
182 A.2d 891 (E. &
A. 1936), the Court stated that lost profits
for a new business are "too remote, contingent
and speculative to meet the legal standard of
reasonable certainty." Id. at 212,
182 A. 891. Sands[, the casino,] questions that
argument. It points out that the casino had a
proven track record; the location and nature
of the business never changed; and the
management team never changed.
However, even were we to consider profits
from the 1984 season as those of a new
business, the trend in recent cases has been
to award lost profits for a new business when
they can be proved with reasonable certainty.
Robert L. Dunn, Recovery of Damages for Lost
Profits, § 4.2 (3d ed. 1987); see also Seaman
[v. United States Steel Corp.], supra, 166
N.J. Super. at 474-75,
400 A.2d 90 (evidence
of lost rental value from new operation
incorrectly admitted at trial because, among
other things, defendant failed to show that a
profit would have been made). In In re
Merritt Logan, Inc.,
901 F.2d 349 (3d Cir.
1990), the court predicted that this Court
would follow that trend and allow lost profits
for a new business if damages were proved with
reasonable certainty. Id. at 358. That court
also relied on comment 2 to N.J.S.A. 12A:2
708(2) (UCC), which states that "[i]t is not
necessary to a recovery of 'profit' to show a
history of earnings, especially if a new
venture is involved." Ibid. Given that
recent trend, the arbitrators cannot be said
to have acted in manifest disregard of the
law. Thus, because the arbitrators were
presented with enough evidence to decide that
Sands had proved its lost profits damages with
reasonable certainty, the damage award does
not fall.
No other justice joined these remarks.
A year later, the Third Circuit, citing Merritt Logan and
Perini, said, "New Jersey no longer adheres to its 'new business
rule . . . .'" Lightening Lube, Inc. v. Witco Corp.,
4 F.3d 1153,
1176 (3d Cir. 1993). A decision of the Third Circuit is entitled
to "due respect," but it is not binding on the state courts. See
Dewey v. R.J. Reynolds Tobacco Co.,
121 N.J. 69, 79-80 (1990).
Furthermore, the court in Lightening Lube did not actually find
that New Jersey had abandoned the "new business rule." As in
Merritt Logan, the court was making a prediction of the course the
New Jersey Supreme Court would follow if presented with the issue.
The court said, "While we recognize that Perini involved damages
awarded in an arbitration, we believe that the Supreme Court of New
Jersey would apply its holding to trials in court as well.
Lightening Lube, supra, 4 F.
3d at 1176 (emphasis added).
The only exception to the rule that we are bound by decisions
of the Supreme Court and the Court of Errors and Appeals is where
"more recent decisions of the Supreme Court clearly undermine the
authority of a prior decision, although not expressly overruling
it." Burrell v. Quaranta,
259 N.J. Super. 243, 252 (App. Div.
1992) (emphasis added). While the arguments for abandonment of the
"new business rule" appear to be persuasive, those arguments are
not supported by a majority opinion of the Supreme Court; rather,
they appear only in the plurality opinion in Perini. That is not
a sufficient basis for us to say that Perini, which only involved
arbitration and was itself overruled on other grounds in Tretina
Printing, Inc. v. Fitzpatrick & Assocs.,
135 N.J. 349, 358-59
(1994), clearly undermined the authority of Weiss.
Defendants also argue that the "new business rule" is limited
to contract actions and is inapplicable to fraud. But that is not
so. See, e.g., Kurtz v. Oremland,
33 N.J. Super. 443, 451-53 (Ch.
Div.), aff'd o.b.,
16 N.J. 454 (1954).
In view of the possibility that our Supreme Court might
overrule the "new business rule," the trial judge also considered
whether PMV's lost profit claim was too speculative despite the
opinions offered by its economic experts. In rejecting the claim
on the ground that the evidence of lost profits could not be
established with reasonable certainty, the trial judge emphasized
the following points: (1) the substantial discrepancy between the
projections of PMV's two experts, one putting the loss, as of 1995,
at $410 million and the other putting the loss, as of the same
date, at $288 million, a difference of $112 million; (2) the
national LSI company never came into existence; (3) the national
LSI concept was contingent on the development of a complex network
of interlocking companies, none of which has been created; (4) the
profitability of the national LSI would have depended on the
formation of numerous collateral agreements with independent
service providers and their agreement to accept PMV's demands for
set percentages of each provider's revenue stream; (5) the business
plan was unique and untested; (6) the products, home automation and
video-on-demand, were new and both industries were "still in a very
preliminary planning stage and [were] years away from the mass
marketing penetration that PM[V] envision[ed]"; and (7) PMV's
experts had relied almost exclusively on projections made by Bell
while ignoring the numerous caveats, contingencies, and assumptions
contained in the Bell financial projections, which detailed the
risk and uncertainty of the proposed business concept. The trial
judge also concluded that "[g]iven the substantial start-up costs
associated with these projects, the future profitability of home
automation products and related services is far from certain."
Assuming the inapplicability of the "new business rule," PMV
was still required to prove its alleged lost profits with
"reasonable certainty." See, e.g., Advent Sys. Ltd. v. Unisys
Corp.,
925 F.2d 670, 680-81 (3d Cir. 1991) (explaining the standard
under Pennsylvania law). None of the cases cited by plaintiff even
approximate the degree of speculation involved in this case. Here,
we are dealing with new, highly innovative products whose reception
by the public was doubtful, to say the least. Adding to that
consideration the enormous complexity of the multiple business
relationships required for successful marketing, we are satisfied
that the trial judge correctly relied on these views expressed by
the Supreme Court of Texas in Texas Instruments, Inc. v. Teletron
Energy Management, Inc.,
877 S.W.2d 276 (Tex. 1994):
Profits which are largely speculative, as from
an activity dependent on uncertain or changing
market conditions, or on chancy business
opportunities, or on promotion of untested
products or entry into unknown or unviable
markets, or the success of a new and unproved
enterprise, cannot be recovered. Factors like
these and others which make a business venture
risky in prospect preclude recovery of lost
profits in retrospect.
The fact that a business is new is but
one consideration in applying the "reasonable
certainty" test. . . . [But t]he mere hope
for success of an untried enterprise, even
when that hope is realistic, is not enough for
recovery of lost profits. When there are
firmer reasons to expect a business to yield a
profit, the enterprise is not prohibited from
recovering merely because it is new.
Consequently, we see no basis for disturbing the trial judge's
determination that plaintiff's proofs were too speculative to
permit their consideration by a jury. See generally Roger I.
Abrams, Donald Welsch, & Bruce Jones, Stillborn Enterprises:
Calculating Expectation Damages Using Forensic Economics,
57 Ohio
St. L.J. 809 (1996) (criticizing the "new business rule" and
indicating the proofs, not present here, that are needed to support
this kind of claim). As those authors concluded, "The key judicial
finding [is] the market viability of the stillborn enterprise."
Id. at 834. In essence, the trial judge found that plaintiff had
failed to establish the "market viability" of the proposed
business.
Under this heading, we consider these arguments: (1) defendants' contention that their conduct was not egregious enough to warrant punitive damages; (2) their related contention that there was insufficient involvement in the fraud by upper management to permit an award of punitive damages against the Bell corporations; (3) plaintiff's contention that the judge erred in vacating the $25 million punitive damage award given by the first jury; and (4) plaintiff's alternative arguments for a new trial on punitive damages.
A. Defendants' Argument that the Evidence did not Warrant Punitive Damages
At the close of all the evidence in the first phase of the
first trial, defendants moved, pursuant to R. 4:40-1, for judgment
dismissing the punitive damages claim. They argued that there was
insufficient evidence of egregious conduct. The motion was denied.
The jury found defendants liable for $375,000 in compensatory
damages and for punitive damages in an amount to be set at the
second phase. On April 12, 1996, the jury returned its verdict for
$25 million in punitive damages. Subsequently, defendants moved
for judgment n.o.v. on the punitive damage claim, again asserting
that their conduct was not sufficiently egregious to warrant such
relief.
Defendants rely on the principle that "[e]very fraud is
reprehensible, but not every fraud . . . warrants punitive
damages." Jugan v. Friedman,
275 N.J. Super. 556, 572 (App. Div.),
certif. denied,
138 N.J. 271 (1994).
In Nappe v. Anschelewitz, Barr, Ansell & Bonello,
97 N.J. 37
(1984), the Supreme Court explained when punitive damages would be
justified:
To warrant a punitive award, the
defendant's conduct must have been wantonly
reckless or malicious. There must be an
intentional wrongdoing in the sense of an
"evil-minded act" or an act accompanied by a
wanton and wilful disregard of the rights of
another. DiGiovanni v. Pessel, supra, 55 N.J.
at 191. In Berg v. Reaction Motors Div.,
supra, 37 N.J. at 414, this Court said:
Professor McCormick suggests
that in order to satisfy the
requirement of willfulness or
wantonness there must be a "positive
element of conscious wrongdoing."
See McCormick, supra, at p. 280.
Our cases indicate that the
requirement may be satisfied upon a
showing that there has been a
deliberate act or omission with
knowledge of a high degree of
probability of harm and reckless
indifference to consequences. See
King v. Patrylow,
15 N.J. Super. 429, 433 (App Div. 1951); cf. Krauth
v. Israel Geller and Buckingham
Homes, Inc.,
31 N.J. 270, 277
(1960); Egan v. Erie R. Co.,
29 N.J. 243, 255 (1959); Tidewater Oil Co.
v. Camden Securities Co.,
49 N.J.
Super. 155, 164 (Ch. Div. 1958).
See also Staub v. Public Service
Railway Co.,
97 N.J.L. 297, 300 (E &
A. 1992).
The key to the right to punitive damages is
the wrongfulness of the intentional act. "The
right to award exemplary damages primarily
rests upon the single ground--wrongful motive
* * *." Dreimuller v. Rogow, supra, 93 N.J.L.
at 3; see also Trainer v. Wolff,
58 N.J.L. 381
(E. & A. 1895).
The defendants argue the "evidence showed, at worst, that Bell
Atlantic's conduct was motivated by a desire to make large profits
for itself, not any ill will towards or desire to harm [PMV]." In
other words, they contend the evidence failed to demonstrate that
Bell had a "wrongful motive." Nappe, supra, 97 N.J. at 49. But
that argument ignores the evidence that Capuano, as a result of the
April 27, 1990, executive meeting, knew that Bell intended to enter
the home automation and information services businesses itself, to
the exclusion of PMV, and yet thereafter persisted in representing
to PMV that it would be the national LSI and a regional LSI. It
also ignores the letter of June 18, 1990, from Capuano to his
supervisor, which the jury could well have understood as reflecting
defendants' consistent intent to unfairly benefit from PMV's
proprietary information, despite that PMV only turned over the
information on the understanding that it would have the LSI
positions.See footnote 3
Relying on Fischer v. Johns-Manville,
103 N.J. 643 (1986),
defendants argue that punitive damages can only be awarded where
there have been "repeated instances of misconduct, with knowledge
that there was a 'high probability' of 'substantial injury.'" They
then assert that here the jury found only one act of misconduct
with minimal injury.
Fischer, supra, a products liability case, does not stand for
the proposition suggested--it does not require "repeated" instances
of misconduct. 103 N.J. at 673. To the contrary, it accepts the
law of fraud and punitive damages as laid down in Nappe. Id. at
655, 673 (citing Nappe, supra, 97 N.J. at 49-50). Furthermore, in
this case the misconduct was carried on by Capuano over a period of
some five months, during which time he continued to obtain, on
behalf of his employer, the benefit of PMV's efforts, while knowing
that Bell had no intention of consummating the LSI deals. Thus,
viewing the evidence from the plaintiff's point of view, as we
must, there were repeated instances of misconduct.
Even if we were to accept the proposition offered by Bell,
that it did not act with an "evil mind," which we do not, there
was, nonetheless, more than sufficient evidence to show that the
repeated acts of Capuano were accompanied by a wanton and willful
disregard of PMV's right to profit from its propriety information
and from the efforts of its employees. Therefore, punitive damages
were warranted under Nappe.
B. Defendants' Argument Against Corporate Liability for Punitive
Damages
We turn next to defendants' contention that the corporate
defendants should not have been found liable for punitive damages
because executives were not involved in the fraud and because the
corporations did not ratify Capuano's fraudulent acts. This
argument, raised for the first time in defendants' motion for
judgment n.o.v., appears to be somewhat disingenuous since it is
made by a law firm representing all defendants even though its
success would leave one defendant, Mr. Capuano, personally exposed
to punitive damages in a retrial. In any case, the argument is
without merit for three reasons.
First, the argument was raised too late to allow its
consideration on appeal. Defendants concede, as they must, that
they did not raise this corporate defense until they filed their
post-judgment motions. Furthermore, they took a contrary position
in the charge conference. Their attorney said, "I think if they
find fraud against Mr. Capuano and they decide whatever he did he
did within the scope of his employment, that's what the law is,
then the corporations are liable." Without objection before or
after the charge, this case was submitted to the first jury on the
theory that the corporations would be liable for all damages if
Capuano had committed acts of fraud within the scope of his
employment.
Thus, this aspect of the case is controlled by our decision in
Viviano v. CBS, Inc.,
251 N.J. Super. 113 (App. Div. 1991), wherein
we made the following observations:
In the present case, the jury awarded
punitive damages only against CBS and not
against the individual defendants. Defendants
contend that plaintiff's proofs did not
warrant assessing punitive damages against the
corporation. They argue that exemplary
damages may be assessed against a corporation
only if the wrongful acts were committed by
employees so high in authority as to be fairly
considered executive in character or by agents
authorized to act in the particular manner
deemed wrongful or if the corporation ratified
the wrongful acts.
We agree that the trial court did not
charge the jury that awarding punitive damages
required their finding that the employees
responsible for the reprehensible conduct were
executives or that the conduct was ratified by
the corporation. However, the defendants did
not request such a charge or object to the
charge as given. We will therefore not
reverse on the basis of that omission.
Defendants argue that Viviano is distinguishable because it
"holds only that such silence waives the right to appeal omission
of a charge, not the lack of evidence." We disagree. If, as is
the case under Viviano, a corporate defendant cannot complain of
the court's failure to include a charge on corporate, as distinct
from individual, liability, it is because that issue was not in the
case as tried. In Viviano, supra, we arrived at that view by
application of the plain error rule. 251 N.J. Super. at 130. The
same result obtains by application of the doctrine of judicial
estoppel. See supra Section II. The doctrine bars defendants from
now asserting a legal position inconsistent with that taken
earlier. Cummings, supra, 295 N.J. Super. at 385-88 (explaining
that the doctrine attaches when "the party was allowed by the court
to maintain the position").
Second, we would note, as did the trial judge, that there was
evidence showing involvement of upper management in the fraud,
including the April 27, 1990, meeting and the June 18, 1990, letter
sent by Capuano to his supervisor, an assistant vice-president with
BANS.
Third, the corporations may be held liable for punitive
damages because they ratified Capuano's conduct by instituting the
declaratory judgment action and conducting a single defense with
him to justify their retention of plaintiff's proprietary
information for what was a negligible compensation in the context
of this case. See, e.g., Cappiello v. Ragen Precision Indus.,
Inc.,
192 N.J. Super. 523 (App. Div. 1984):
Also, since Ragen [the corporation] here has
participated in a single defense with its
executives in an effort to retain plaintiff's
commissions, we can well find a specific
ratification of [their] actions.
C. Plaintiff's Argument that the Trial Judge Improperly Granted
a New Trial on Punitive Damages
On defendants' motion after the first trial, the judge
determined that the $25 million punitive damage award was excessive
and granted a new trial subject to an offer of remittitur, which
plaintiff rejected. The standards governing our review of the
judge's decision to grant a new trial were restated in the
following manner in Caldwell v. Haynes,
136 N.J. 422, 432 (1994):
In reviewing a trial court's ruling on a
motion for a new trial, an appellate court
shall not reverse a trial court "unless it
clearly appears that there was a miscarriage
of justice under the law." R. 2:10-1.
Accordingly, "The standard for appellate
review of a trial court's decision on a motion
for a new trial is substantially the same as
that controlling the trial court except that
due deference should be made to its 'feel of
the case,' including credibility." Feldman v.
Lederle Lab.,
97 N.J. 429, 463,
479 A.2d 374
(1984) (quoting Dolson v. Anastasia,
55 N.J. 2, 6,
258 A.2d 706 (1969)). At the same time,
a trial court's determination is "not entitled
to any special deference where it rests upon a
determination as to worth, plausibility,
consistency or other tangible considerations
apparent from the face of the record with
respect to which he is no more peculiarly
situated to decide than the appellate court."
Dolson, supra, 55 N.J. at 7,
258 A.2d 706.
The trial judge's granting of the motion for a new trial did
not rest on the worth or plausibility of evidence, the credibility
of witnesses, or other intangible factors not revealed by the
record. Consequently, we "may review for excessiveness the jury's
award[] based on an independent review of the record." Id. at 433.
Stated broadly, punitive damage awards should be vacated as
excessive where the amount clearly supports the inference that the
jury acted out of mistake, passion, prejudice, or partiality; where
it is so disproportionate as to shock the conscience; or where it
would result in a manifest denial of justice. Leimgruber v.
Claridge Assocs.,
73 N.J. 450, 459 (1977). Our review of a
punitive damage award must occur "with an appreciation that at the
core of punitive damages lurks a volatile dilemma: the same
findings necessary for the award of punitive damages can incite a
jury to act irrationally." Herman v. Sunshine Chem. Specialties,
Inc.,
133 N.J. 329, 337 (1993). Although a jury should consider
all of the circumstances surrounding the event, including the
nature of the wrongdoing, the extent of injury, the intent and
wealth of the wrongdoer, as well as any mitigating evidence,
Leimgruber, supra, 73 N.J. at 456, ultimately the award of punitive
damages "must bear some reasonable relation to the injury inflicted
and the cause of the injury." Id. at 457.
In Maiorino v. Schering-Plough Corp.,
302 N.J. Super. 323, 357
(App. Div.), certif denied,
152 N.J. 189 (1997), the court vacated
as shocking to the judicial conscience an $8 million punitive
damage award where the compensatory damages were set by the jury