Petition for Writ of Certiorari — Judy's Foods, Inc. v. A & B Food Services Corp.

Le teen

B6-515 0

No.

IN THE

Supreme Cut of the United States

OCTOBER TERM, 1986

JUDY’S Foops, INC., et al.,

Petitioners,

V.

A&B Foop SERVICES CorRP., et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

PETER J. NICKLES *

K. GREGORY TUCKER

ELLIOTT SCHULDER

MARK H. LYNCH

COVINGTON & BURLING

1201 Pennsylvania Avenue, N.W.

P.O. Box 7566

Washington, D.C. 20044

(202) 662-6000

Attorneys for Petitioners

* Counsel of Record

WILSON - EPES PRINTING Co., INC. - 789-O096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether the Excessive Fines Clause of the Eighth

Amendment bars the imposition, in a civil case, of

punitive damages that are as much as 35 times

greater than the actual damages found.

2. Whether the Due Process Clause bars the imposi-

tion of punitive damages absent evidence that satis-

fies the “clear and convincing” standard of proof.

(i)

li

PARTIES TO THE PROCEEDING AND STATEMENT

PURSUANT TO SUP. CT. RULE 28.1

The following were appellants in the court of appeals

and are petitioners in this Court: Judy’s Foods, Inc.,

General Care Corporation, Marvin P. Friedman and Joel

Gordon. Judy’s Foods, Inc. is a wholly-owned subsidiary

of General Care Corporation which, in turn, is a wholly-

owned subsidiary of Eospital Corporation of America.

The following were appellees in the court of appeals

and are respondents in this Court: MC Management Cor-

poration No. 4, MC Management Corporation No. 7 and

A&B Food Services Corposation.

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TABLE OF CONTENTS

Page

ec icavecsscanbsanetvoneeissensissacauunnsaninedsseis L

Li) ty ot), aa eee icant edlees ae 1

CONSTITUTIONAL PROVISIONS INVOLVED ........ 2

ye ye | | pt) gig | EOF 5. | anne nnnEeE 3

REASONS FOR GRANTING THE PETITION ........... 5

I. The Eighth Amendment Prohibits the Imposi-

tion of Excessive and Disproportionate Punitive

I EE ON i nse soscnesnenassossawvecsens 6

A. Punitive Damages Are Subject to the Eighth

Amendment Because They Are Penal In

ae ion acc ccuratsahapabaibanengeeainncwniwe 6

B. History Demonstrates that the Excessive

Fines Clause Applies to Punitive Damages.... 7

C. The Eighth Amendment Requires That Puni-

tive Damages Be Proportionate to the De-

Nn cc sinimmiennoaveusnneceten 9

Il. The Due Process Clause of the Fourteenth

Amendment Mandates that a Defendant’s Culpa-

bility For Punitive Damages Must Be Estab-

lished By “Clear and Convincing Evidence” _..... 10

rs cickdiseiaceennaginchinakapesnnnonsboninchesrmneinnvsnvenenecsonnees 15

APPENDIX A ...................... EAE A ee la

Neen ee i iiaehdietedntacsninseiasgnndecstenbosatectacnssee: 7a

(iii)

iv

TABLE OF AUTHORITIES

CASES: Page

Acosta v. Honda Motor Co., 717 F.2d 828 (3d Cir.

SE NPN a ASD DR ea AA SARE ETON = ONO 14

Addington v. Texas, 441 U.S. 418 (1979) -........... 11,12

Aetna Life Insurance Co. v. Lavoie, 106 S. Ct.

BT. Riese tees ermerrct tne ear er repent 4, 5

Amoco Oil Co. v. Cardinal Oil Co., 535 F. Supp.

7 A een ane enna ne an 4

Colorado v. New Mexico, 467 U.S. 310 (1984) -....... 13

Domed Stadium Hotel, Inc. v. Holiday Inns, Inc.,

762 F248 800 (oth Clr. 10084) ...........0:..002......:-..... 4

Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974).. 7

Huckeby v. Spangler, 563 S.W.2d 555 (Tenn.

Pe a a a a mane Nala 7

Huckle v. Money, 2 Wils, K.B. 205, 95 Eng. Rep.

| Ree eee ee ear eee 8

In re Winship, 397 U.S. 358 (1970) .............--......... 11

Ingraham v. Wright, 430 U.S. 651 (1977) —.......... 6, 9

International Brotherhood of Electrical Workers

ae ae BR nr 7

Kennedy v. Mendoza-Martinez, 372 U.S. 144

IUD sas visnpcicadZustinacoesch teen cameenia oaplaas aaceadbaeidiedlareane 6

Mathews v. Eldridge, 424 U.S. 319 (1976) .......... 11

Marey v. Freightliner Corp., 722 F.2d 1238, modi-

fied, 727 F.2d 350 (5th Cir. 1984) —.................... 9

Murphy v. White Hen Pantry Co., 691 F.2d 350

A 5 eR rane Cer Bose ER LK Oe POR 4

Power Motive Corp. v. Mannesmann Demag Corp.,

617 F. Supp. 1048 (D. Colo. 1985) 0.000000... 4

Roginsky v. Richardson-Merrell, Inc., 378 F.2d

Bae Ce GA. Bee ae ice 14

Santosky v. Kramer, 455 U.S. 745 (1982) 0.00.0... 11

Sedima, S.P.R.L. v. Imrex Co., 105 S. Ct. 3274

IIIS sics-5scusaccveys veces ememrmsacinagnaaaneles tse saoiamanamete tat 10

Solem v. Helm, 463 U.S. 277 (1988) .................... passim

Stambaugh v. International Harvester Co., 106

Ill. App.3d 1, 485 N.E.2d 729 (1982), rev’d,

102 Ill.2d 250, 464 N.E.2d 1011 (1984) 0.0000... 10

Steadman v. SEC, 450 U.S. 91 (1981) 0000000000... 13

a er Se

Vv

TABLE OF AUTHORITIES—Continued

Page

The Traveler’s Indemnity Co. v. Armstrong, 442

Nie BOO CTE. BOGE) ois cess cists nee 14

Tipton County Bd. of Educ. v. Dennis, 561 S.W.2d

DE Fe. . See reese eee 7

Tri-Aspen Constr. Co. v. Johnson, 714 P.2d 484

CE cabins a eiatesceceet one heen 14

Trop v. Duiles, 356 U.S. 86 (1958) ........................ 6

Tuttle v. Raymond, 494 A.2d 1353 (Me. 1985).... 14

Wangen v. Ford Motor Co., 97 Wis.2d 260, 294

FR ee GE CUO nsec ee ioe 14

Wisconsin v. Constantineau, 400 U.S. 433 (1971).. 12

CONSTITUTIONAL PROVISIONS AND

STATUTES:

Beate es OURS WRB esses ives occentertccce ces passim

oe a a et Seen kone ae OAT passim

Oe ee Be Sikisiicaciniaseiend een 10

Re es ee eR iereese eee 10

ED, nnseicaseces oration a sdetnndenneessnuad eeeadieaaee 10

Be I” ‘cattiivanias eeiisaideiaihinseas ocaoeleteeumedibdes tecesetatatacts 10

Colo. Rev. Stat. § 13-25-127(2) (1978) .............. wee 14

Minn. Stat. Ann. § 549.20 (West Supp. 1986) ........ 14

Mont. Code Ann. § 27-1-221(2) (1985) _.... Renee eer 14

Or, Mev. BUN. SGO.920 CUGGE) once cccenecccevcccedess. 14

MISCELLANEOUS:

W. Blackstone, Commentaries on the Laws of Eng-

land (facsimile ed. 1979) _......00000000 8

Granucci, “ ‘Nor Cruel and Unusual Punishments

Inflicted’: The Original Meaning,” 57 Cal. L.

Bee. a EE isa ia anda eccnctiesekaas 7

W. Holdsworth, A History of English Law (3d ed.

|< 5 ERO Ce ER Oat? SRM BEES BG Anika ee OU SM Ce RIE 8

A. Howard, The Road From Runnymede (1968).. 7

Jeffries, “A Comment on the Constitutionality of

Punitive Damages,” 72 Va. L. Rev. 139

(1986)

vi

TABLE OF AUTHORITIES—Continued

Page

Magna Carta (1216) 22...20ncncs.nscccccscesccsvccsscnnsnsossesens 7

Oe TOD... ccacssinccsuesgnossosiemmenmmnatcneamaanncmien 8

R. Perry, Sources of Our Liberties (1959) -.......... 7

F. Pollock & F. Maitland, The History of English

Kegeew COR OG. TOD) necscscesepsvvcstemsicsvitnnsermtorssmcansnennens 8

Wheeler, “The Constitutional Case for Reforming

Punitive Damages Procedures,” 69 Va. L. Rev.

DOD CEDIB) annccnnncnierinnncse snc pecsniiovecncsonveasornceenvenouesone 6, 11

I Wm. & Mary, sess. 2, ch. 2 (1689) (English Bill

OF Tebatiats GE LGGD) nncniccnnscincscnesnsssancosnsacsvecttntonnncnnas 7,8,9

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

No.

JUDY’S Foops, INC., et al.,

Petitioners,

Vs

A&B FoopD SERVICES CorpP., et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Judy’s Foods, Inc., General Care Corporation, Marvin

P. Friedman and Joel Gordon petition for a writ of cer-

tiorari to review the judgment of the United States

Court of Appeals for the Sixth Circuit in this case.

OPINION BELOW

The opinion of the court of appeals (App. A, infra,

la-6a) is not reported.

JURISDICTION

The judgment of the court of appeals was entered on

June 3, 1986. A petition for rehearing was denied on

August 4, 1986 (App. B, infra, 7a-8a). The jurisdiction

of this Court is invoked under 28 U.S.C. § 1254(1).

2

CONSTITUTIONAL PROVISIONS INVOLVED

1. The Eighth Amendment provides, in pertinent

part:

“'Njor [shall] excessive fines [be] imposed * * *.”

2. The Fourteenth Amendment provides, in pertinent

part:

“No state shall * * * deprive any person of * * *

liberty, or property, without due process of law.”

STATEMENT OF THE CASE

1. In 1976, petitioner General Care Corporation estab-

lished a wholly-owned subsidiary corporation in Nash-

ville, Tennessee, known as Judy’s Foods, Inc., to enter

the “fast-food” franchise business. Petitioners Marvin

P. Friedman and Joel Gordon were the principal officers

of both General Care and Judy’s. App. A. infra, 2a.

Respondents are three corporations established by two

Philadelphia businessmen—Agostine Malerba and Bur-’

ton Cooperberg—to operate restaurants under franchises

from Judy’s. Id.

Respondents’ restaurants did not prosper and even-

tually were closed. Thereafter, respondents filed a diver-

sity action in the United States District Court for the

Middle District of Tennessee, claiming that petitioners

had breached the contractual agreements between the

parties and had engaged in actual fraud, fraudulent con-

cealment, promissory fraud, constructive fraud, and neg-

ligent misrepresentation in the course of their dealings

with Malerba.' Petitioners contended that respondents’

lack of success was due to respondents’ own mismanage-

ment and to adverse economic conditions.

Following a trial, the jury exonerated petitioners on

respondents’ claims of actual fraud, promissory fraud,

1 Respondents’ complaint also included a claim for conspiracy

which was dismissed on petitioners’ motion for a directed verdict.

3

negligent misrepresentation and breach of contract, but

found petitioners liable for fraudulent concealment and

constructive fraud, and awarded $44,000 in compensa-

tory damages. Additionally, the jury awarded respond-

ents $850,000 in punitive damages.* The district court

denied petitioners’ motion for judgment n.o.v. App. A,

infra, 3a.

2. On appeal, petitioners argued, inter alia, that (1)

the district court erred in failing to instruct the jury

that fraud must be proven by clear and convincing evi-

dence; and (2) the punitive damages award should be

reduced or vacated because Tennessee law requires a rea-

sonable relationship between compensatory and punitive

damages and the ratio in this case—of as much as 35 to

l1—was far beyond the range generally approved by

Tennessee courts.*

2 These aggregate awards were broken down as follows: for

respondent A&B Food Services, $20,000 in compensatory damages

and $100,000 in punitive damages; for respondent MC Manage-

ment Corp. No. 4, $14,000 in compensatory damages and $375,000

in punitive damages; for respondent MC Management Corp. No. 7,

$10,000 in compensatory damages and $350,000 in punitive damages.

Punitive damages were assessed against petitioners in the follow-

ing amounts: $50,000 against Judy’s and its parent, General Care;

$500,000 against Marvin Friedman; and $300,000 against Joel

Gordon.

3 Petitioners also contended that they should not have been found

liable for failing to disclose certain information about their busi-

ness because the decision not to disclose that information was a

legitimate exercise of business judgment. Viewed in the light most

favorable to respondents, the evidence showed that petitioners failed

to disclose: (1) that another fast-food franchisor, Wendy’s, threat-

ened to sue Judy’s for allegedly copying the Wendy’s format; (2)

that the ensuing 'itigation with Wendy’s contributed to Judy’s

decision to change its format; (3) the financial performance of

restaurants owned and operated by Judy’s itself; (4) the overall

financial performance of Judy’s; (5) the return of franchise fees

to other franchisees; and (6) adverse business circumstances re-

ported to the board of directors.

The trial judge instructed the jury that in ordinary business

relationships there is no duty of disclosure and that such a duty

aT

4

The court of appeals affirmed. App. A, infra, la-6a.

The court did not specifically address petitioners’ claim

concerning the appropriate standard of proof. With re-

spect to petitioners’ claim that the punitive damages

awards were excessive and disproportionate, the court of

appeals remarked that “Tennessee has never adopted the

reasonable relationship test.” Jd. at 5a. The court

noted that the Tennessee Supreme Court has held that

the reasonableness of punitive damages should be meas-

ured against the egregiousness of the defendant’s acts

and the financial worth of the defendant. Jd. Under this

standard, the court of appeals was “constrained to con-

clude that the punitive damage awards were not ‘con-

trary to all reason.’” Id.

3. On April 22, 1986, several weeks before the court

of appeals issued its opinion in this case, this Court de-

cided Aetna Life Insurance Co. v. Lavoie, 106 S.Ct. 1580

(1986). In Aetna, the appellants challenged an award of

punitive damages on the ground, among others, that the

award was impermissible under the Excessive Fines

Clause of the Eighth Amendment and that the lack of

sufficient standards governing the imposition of punitive

damages awards contravenes the Due Process Clause of

the Fourteenth Amendment. 7d. at 1589. Although this

Court vacated the lower court’s judgment on a different

arises only where there is a fiduciary relationship between the

parties. II Tr. 274-75. Although most courts that have considered

the issue have held that the franchisor-franchisee relationship is

not, as a matter of law, a fiduciary one, e.g., Domed Stadium Hotel,

Inc. v. Holiday Inns, Inc., 732 F.2d 480, 485 (5th Cir. 1984);

Murphy v. White Hen Pantry Co., 691 F.2d 350, 354-55 (7th Cir.

1982) ; Power Motive Corp. v. Mannesmann Demag Corp., 617 F.

supp. 1048, 1052 (D. Colo. 1985); Amoco Oil Co. v. Cardinal Oil

Co., 585 F. Supp. 661, 666-67 (E.D. Wis. 1982), the trial court

permitted the jury to decide whether there was a fiduciary relation-

ship between the parties. But for this finding, there would have

been no wrong for which punitive damages could have been

awarded.

5

ground, it took note of the appellants’ constitutional

arguments and observed that they “raise important issues

which, in an appropriate setting, must be resolved.” Jd.

In light of this Court’s statement in Aetna, petitioners

lodged a supplemental brief with the court of appeals on

June 3, 1986, asserting that there was a constitutional

dimension to petitioners’ arguments about the reasonable-

ness of the punitive damages award and the appropriate

standard of proof for punitive damages. On that same

day, however, the court of appeals issued its opinion

affirming the district court’s judgment. Petitioners again

presented the constitutional issues in a timely petition

for rehearing. The court of appeals denied the petition

for rehearing, noting that the issues raised therein “were

fully considered upon the original submission and deci-

sion of the case.” App. B, infra, Ta-8a.

REASONS FOR GRANTING THE PETITION

This case presents two important constitutional ques-

tions that warrant review by this Court. The first ques-

tion is whether the Eighth Amendment prohibits the

award of excessive and disproportionate punitive dam-

ages in civil cases. The second question is whether due

process requires that punitive damages may be awarded

only if the plaintiff has proved by “clear and convincing

evidence” that the defendant acted with the requisite

culpability.

Just last Term, in Aetna Life Insurance Co. v. Lavoie,

106 S.Ct. 1580 (1986), this Court was confronted with

arguments raising very similar constitutional questions

concerning the imposition of punitive damages. The

Court in Aetna noted that the constitutional arguments

“raise important issues which, in an appropriate setting,

must be resolved.” Jd. at 1589. This case provides the

Court with “an appropriate setting’ in which to resolve

these important issues.

6

I. The Eighth Amendment Prohibits the Imposition of

Excessive and Disproportionate Punitive Damages in

Civil Cases.

There can be no question that the Eighth Amendment

requires a penalty to be proportionate to the offense.

Solem v. Helm, 463 U.S. 277, 284-88 (1983). The appro-

priate question, therefore, is whether the Eighth Amend-

ment applies to punitive damages. The Amendment, by

its terms, expressly prohibits “excessive fines.” Both the

history of this provision and recent decisions of this

Court support the conclusion that this prohibition ex-

tends to excessive awards of punitive damages in civil

cases.*

A. Punitive Damages Are Subject to the Eighth

Amendment Because They Are Penal In Nature.

This Court has recognized that “[s]ome punishments,

though not labeled ‘criminal’ by the State, may be suffi-

ciently analogous to criminal punishments in the circum-

stances in which they are administered to justify applica-

tion of the Eighth Amendment.” Ingraham v. Wright,

430 U.S. 651, 669 n.87 (1977). Thus, when a law “im-

poses a disability for the purposes of punishment—that

is, to reprimand the wrongdoer, to deter others, etc.—it

has been considered penal.” Trop v. Dulles, 356 U.S. 86,

96 (1958) (plurality opinion) (footnote omitted). Ac-

cord, Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168-

69 (1963) (listing factors relevant to a determination of

whether a particular sanction is ‘“‘penal’” in character).

The Court has defined punitive damages in plainly

“penal” terms: they are “ ‘private fines levied by civil

juries to punish reprehensible conduct and to deter its

4In addition, a growing body of academic commentary has

questioned the constitutionality of unrestrained punitive damages.

See, e.g., Jeffries, “A Comment on the Constitutionality of Punitive

Damages,” 72 Va. L. Rev. 139 (1986) ; Wheeler, “The Constitutional

Case for Reforming Punitive Damages Procedures,” 69 Va. L. Rev.

269 (1983).

|

7

future occurrence.’” International Brotherhood of Elec-

trical Workers v. Foust, 442 U.S. 42, 48 (1979), quoting

Gertz v. Robert Welch, Inc., 418 U.S. 328, 350 (1974).

Similarly, Tennessee has consistently identified punitive

damages as a sanction not meant to enrich the plaintiff

but to punish the defendant, to deter the defendant and

others from repeating his misconduct, and to make a pub-

lic example of the defendant. E.g., Huckeby v. Spangler,

563 S.W.2d 555, 558-59 (Tenn. 1978); Tipton County

Bd. of Educ. v. Dennis, 561 S.W.2d 148, 152 (Tenn.

1978).

Since punitive damages serve a penal function, they

should be constrained by the limits imposed by the Eighth

Amendment. As we demonstrate below, the history of

the Eighth Amendment also compels this conclusion.

B. History Demonstrates that the Excessive Fines

Clause Applies to Punitive Damages.

The Eighth Amendment was taken nearly verbatim

from the Virginia Declaration of Rights, which in turn

was taken verbatim from the English Bill of Rights of

1689. Solem, 463 U.S. at 285 n. 10; R. Perry, Sources of

Our Liberties 235, 247, 303 (1959) ; A. Howard, The Road

From Runnymede 205-07 (1968). Thus the Framers in-

tended the Eighth Amendment to provide at least as

much protection as its English counterpart provided.

Solem, 463 U.S. at 286.

The English Bill of Rights of 1689 stated that “ ‘ex-

cessive Baile ought not to be required nor excessive Fines

imposed * * *.”” 1 Wm. & Mary, sess. 2, ch. 2, quoted

in Solem, 468 U.S. at 285. By this time English law had

long required that monetary penalties must be in propor-

tion to the offense. See Jeffries, supra, 72 Va. L. Rev. at

154-57; Granucci, “ ‘Nor Cruel and Unusual Punishments

Inflicted’: The Original Meaning,” 57 Cal. L. Rev. 839,

847 (1969). This freedom from excessive penalties was

first enshrined in Magna Carta, three chapters of which

8

were “devoted to the rule that ‘amercements’ may not be

excessive.” Solem, 463 U.S. at 284 (footnote omitted).

An amercement we* a monetary penalty that could

be assessed for a var.ety of wrongs in civil as well as

criminal actions. See 3 W. Blackstone, Commentaries on

the Laws of England 376, 398 (facsimile ed. 1979); 4

Id. at 372. “Every tort, nay, every cause of civil action,”

was punishable by amercement. 2 F. Pollock & F. Mait-

land, The History of English Law 519 (2d ed. 1898).

See Jeffries, supra, 72 Va. L. Rev. at 154-55.

Amercements were the forerunners of the “fines” that

were the subject of the English Bill of Rights in 1689.°

Accordingly, when the English Bill of Rights proscribed

excessive fines, it proscribed excessive monetary penal-

ties, whether in criminal or civil proceedings. Moreover,

the Excessive Fines Clause of the English Bill of Rights

encompassed penalties that served the same purposes as

are served by punitive damages, which were not ju-

dicially recognized until the Eighteenth Century.® Be-

cause the English bar against excessive fines applied to

5 Fines developed because of the procedural rule in Magna Carta

that only ‘“ ‘honest men of the neighbourhood’ ” were authorized to

impose an amercement. Magna Carta, ch. 20 (1215), quoted in

Jeffries, supra, 72 Va. L. Rev. at 155. The effect of this rule was

to deprive judges (and the king) of their power to impose amerce-

ments. The judges, however, retained the power of imprisonment,

and used it to exact monetary penalties. Rather than be incar-

cerated, a defendant could “make fine with the king.” 2 F. Pollock

& F. Maitland, supra, at 517. The difference between an amerce-

ment and a fine thus was wholly procedural, and a fine could be

imposed for civil as well as criminal offenses.

Before 1689, other substitutes for amercements developed which

resembled punitive damages insofar as the amounts were more

than compensatory and were paid to the plaintiffs, rather than to

the king. 2 F. Pollock & F. Maitland, supra, at 522; see also

4 W. Holdsworth, A History of English Law 536-37 (3d ed. 1927).

® Exemplary damages were first identified by name in 1763.

Huckle v. Money, 2 Wils, K. B. 205, 95 Eng. Rep. 768 (1763).

9

civil fines, it therefore follows that the Excessive Fines

Clause of the Eighth Amendment also applies to punitive

damages.

C. The Eighth Amendment Requires That Punitive

Damages Be Proportionate to the Defendant’s

Wrong.

As noted earlier, the bedrock principle embodied in

the Eighth Amendment is that bails, fines and other

punishments must be proportionate to the offense. ‘When

the Framers of the Eighth Amendment adopted the lan-

guage of the English Bill of Rights, they also adopted

the English principle of proportionality.” Solem, 463

U.S. at 285-86 (footnote omitted). Indeed, “[t]he con-

stitutional principle of proportionality has been recog-

nized explicitly in this Court for almost a century.” Id.

at 286 (footnote omitted). Since “the Eighth Amend-

ment imposes ‘parallel limitations’ on bails, fines, and

other punishments,” id. at 289, quoting Ingraham, 430

U.S. at 664, fines are subject to the limitation of propor-

tionality. And since punitive damages are “fines” within

the meaning of the Excessive Fines Clause, punitive dam-

ages cannot be disproportionate to the offense.

The punitive damages awarded in this case are dis-

proportionate and therefore excessive under the Eighth

Amendment. To begin with, the aggregate punitive dam-

ages award of $850,000 is more than nineteen times the

aggregate compensatory award of $44,000. The punitive

damages awarded to respondents are, respectively, 35, 27,

and five times the compensatory award each received.

Thus, the punitive damages awards are grossly dispropor-

tionate to respondents’ injuries.’

7Courts in a number of jurisdictions have expressly required

proportionality between the amount of punitive damages and the

amount awarded for actual damages. E.g., Maxey v. Freightliner

Corp., 722 F.2d 1238, 1242, modified on other grounds, 727 F.2d

350, 353 (5th Cir. 1984) (applying Texas law); Stambaugh v. In-

10

The punitive damages awards are disproportionate by

other standards of measurement as well. For example, un-

der the general statute governing false statements against

the federal government, a convicted defendant is subject

to a fine not exceeding $10,000. See 18 U.S.C. § 1001.

By the same token, the Racketeer Influenced and Cor-

rupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et

seq. authorizes a private plaintiff to institute a civil

action, § 1964, at which treble damages (plus attorney’s

fees) may be recovered if the defendant can be shown,

inter alia, to have engaged in “racketeering” activity.

§1961(1). As four Justices of this Court recently

observed, a civil RICO action places a defendant in the

position of “facing a tremendous financial exposure [pro-

ducing] a strong interest in settling the dispute.” Sedima,

S.P.R.L. v. Imrex Co., 105 S.Ct. 3275, 3294 (1985)

(Marshall, J., dissenting). Yet this “tremendous financial

exposure” of treble damages pales by comparison to the

fine which has been imposed on petitioners here.

In short, this case is an appropriate vehicle for resolv-

ing one of the important constitutional questions left

open in Aetna—whether the Eighth Amendment pro-

hibits excessive punitive damages awards in civil cases.

II. The Due Process Clause of the Fourteenth Amendment

Mandates that a Defendant’s Culpability For Punitive

Damages Must Be Established By “Clear and Con-

vincing Evidence.”

The district court instructed the jury that respondents

had to prove their fraud claims only by a preponderance

of the evidence (II Tr. 258-59). By its silence on the

matter, the court indicated that the same burden of proof

applied to the question whether petitioner’s conduct was

sufficiently egregious to warrant imposition of punitive

damages (II Tr. 300-01). However, the Due Process

ternational Harvester Co., 106 Ill. App. 3d 1, 485 N.E.2d 729, 747

(1982), rev’d on other grounds, 102 II].2d 250, 464 N.E.2d 1011

(1984).

11

Clause required the court to instruct the jury that it

could award punitive damages only if it found by “clear

and convincing evidence” that petitioners had acted reck-

lessly, willfully, or wantonly.

The Due Process Clause requires the use of an ap-

propriate standard of proof in a particular proceeding to

ensure that the factfinder engages in a properly intensive

search for the truth. Addington v. Texas, 441 U.S. 418,

423-25 (1979). As the Court has observed, id. at 423:

The function of a standard of proof, as that con-

cept is embodied in the Due Process Clause and in

the realm of factfinding, is to “instruct the factfinder

concerning the degree of confidence our society

thinks he should have in the correctness of factual

conclusions for a particular type of adjudication.”

In re Winship, 397 U.S. 358, 370 (1970) (Harlan,

J., concurring). The standard serves to allocate the

risk of error between the litigants and to indicate

the relative importance attached to the ultimate

decision.

In determining the appropriate standard of proof in

any case, “[t]hree distinct factors” must be considered:

“the private interests affected by the proceeding; the risk

of error created by the State’s chosen procedure; and the

countervailing governmental interest supporting use of

the challenged procedure.” Santosky v. Kramer, 455 U.S.

745, 754 (1982), citing Mathews v. Eldridge, 424 U.S.

319, 335 (1976). Application of these factors demon-

strates the need for a heightened standard of proof on

the question whether a defendant’s conduct warrants an

award of punitive damages. See Wheeler, supra, 69 Va.

L. Rev. at 291-93, 296-98, 311-14.

First, the interests at stake for a defendant on the

issue of liability for punitive damages are generally much

greater than on the issue of liability for compensatory

damages. As noted earlier, exemplary awards are penal

in nature; one of the purposes of punitive damages in

12

most jurisdictions, including Tennessee, is to punish the

defendant for willful or wanton misconduct. Thus, the

imposition of punitive damages stigmatizes a defendant

and brands him as an egregious wrongdoer. In a com-

mercial case such as this one, an award of punitive dam-

ages marks the defendant as one not to be trusted in

future transactions. See Wisconsin v. Constantineau, 400

U.S. 438, 436-37 (1971) (government-imposed stigma

entitles party to due process). In addition, punitive dam-

ages expropriate the defendant’s property in excess of the

amount necessary to compensate the injured plaintiff.

Second, the risks entailed by the possibility of error

are not shared equally by both parties, as in an ordinary

civil action for compensatory damages. Where punitive

damages are at stake, the defendant faces the possi-

bilities of social stigma and of an onerous money judg-

ment. On the other hand, once the plaintiff has recovered

compensatory damages, he already has been made whole;

so far as the plaintiff is concerned, therefore, punitive

damages provide a windfall. Accordingly, the adverse

consequences of an erroneous finding in the punitive dam-

ages context are much greater for a defendant than for

a plaintiff.

Third, the state has an interest in a heightened stand-

ard of proof because punitive damages awards serve

essentially the same functions as criminal penalties—

punishment and deterrence. For this reason, the state

has an interest in seeing that such penalties are meted

out in a rational and consistent manner.*®

8 Where, as here, a defendant is alleged to have engaged in

fraudulent conduct, many jurisdictions require the plaintiff to

satisfy the clear and convincing evidence standard in order to

establish any liability for fraud, let alone liability for punitive

damages arising from such fraud. Thus, as the Court observed in

Addington, a heightened standard of proof is typically used “in

civil cases involving allegations of fraud or some other quasi-

13

The preponderance of the evidence standard does not

adequately balance these interests. Because, under that

standard, a plaintiff need only tip the scales in its favor

“ever so slightly” (II Tr. 264-65), a defendant in an ac-

tion seeking punitive damages is vulnerable to a massive

monetary judgment and to stigmatization based on an

uncertain determination of liability. The clear and con-

vincing standard, by contrast, requires the jury to make

a more considered finding that a defendant has acted

recklessly, willfully, or wantonly. Under the latter stand-

ard, a plaintiff would be entitled to recover punitive dam-

ages “only if [it] could place in the ultimate factfinder

an abiding conviction that the truth of its factual conten-

tions are ‘highly probable.’” Colorado v. New Mevxico,

467 U.S. 310, 316 (1984). This heightened standard

reduces substantially the risk of an erroneous judgment

with severe consequences.

The clear and convincing standard also would promote

the state’s interest in a fair and effective system for im-

posing civil penalties. Because this higher standard re-

quires juries to scrutinize the evidence more carefully,

it would avoid situations in which punitive damages

awards are based on only minimal differences in proof.

By requiring a more definitive finding that the defendant

has engaged in egregious conduct, the clear and convinc-

wrongdoing by the defendant. The interests at stake in those

cases are deemed to be more substantial than mere loss of money

and some jurisdictions accordingly reduce the risk to the defendant

of having his reputation tarnished erroneously by increasing the

plaintiff’s burden of proof.” 441 U.S. at 424. See also, Steadman v.

SEC, 450 U.S. 91, 105 (1981) (Powell, J., dissenting). In this case,

the courts below determined that petitioners could be held liable

for constructive fraud and fraudulent concealment on the basis of

evidence satisfying the lesser preponderance of the evidence stand-

ard. It was all the more critical, therefore, that the heightened

standard of proof be applied before petitioners could be found

liable for punitive damages.

14

ing standard would help to ensure that punitive damages

satisfy the state’s interests in punishment and deterrence.’

The Court has already stated that the application of

the Due Process Clause to the procedures by which puni-

tive damages are awarded is an issue worthy of review.

This case offers the Court an appropriate opportunity to

consider this important issue.

® Without specifically considering whether the clear and con-

vincing standard is constitutionally required, several courts have

concluded that punitive damages may be imposed only where there

is clear and convincing evidence of willful and wanton misconduct.

Acosta v. Honda Motor Co., 717 F.2d 828, 839 (8d Cir. 1983)

(applying Virgin Islands law); Tuttle v. Raymond, 494 A.2d 1353,

1362-63 (Me. 1985); The Traveler’s Indemnity Co. v. Armstrong,

442 N.E.2d 349, 358-63 (Ind. 1982); Wangen v. Ford Motor Co.,

97 Wis.2d 260, 294 N.W.2d 437, 457-58 (1980). Cf. Roginsky v.

Richardson-Merrell, Inc., 378 F.2d 832, 851 (2d Cir. 1967). In

addition, several states have enacted legislation imposing this

higher standard of proof in actions seeking punitive damages.

See Minn. Stat. Ann. § 549.20 (West Supp. 1986) ; Mont. Code Ann.

§ 27-1-221(2) (1985); Or. Rev. Stat. § 30.925 (1981). In one

jurisdiction, moreover, a plaintiff seeking punitive damages must

meet the reasonable doubt standard. Colo. Rev. Stat. § 13-25-127 (2)

(1973). See Tri-Aspen Constr. Co. v. Johnson, 714 P.2d 484, 486

(Colo. 1986). These recent judicial and legislative actions reflect

a growing realization that a heightened standard of proof is re-

quired in the punitive damages context as a matter of fundamental

fairness.

15

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

PETER J. NICKLES *

K. GREGORY TUCKER

ELLIOTT SCHULDER

MARK H. LYNCH

COVINGTON & BURLING

1201 Pennsylvania Avenue, N.W.

P.O. Box 7566

Washington, D.C. 20044

(202) 662-6000

Attorneys for Petitioners

* Counsel of Record

Dated: September 26, 1986

APPENDICES

la

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 85-5527

A & B Foop SERVICES CORPORATION, M.C. MANAGEMENT

CORPORATION +7, M.C. MANAGEMENT CORPORATION

+8, AB MANAGEMENT CORPORATION #8,

Plaintiffs-A ppellees,

Vv.

JUDY’S Foops, INC.; GENERAL CARE CORPORATION ;

MARVIN FRIEDMAN; AND JOEL GORDON,

Defendants-A ppellants.

On Appeal from the United States District Court

for the Middle District of Tennessee

Decided and filed June 3, 1986

Before: KRUPANSKY and Guy, Circuit Judges; and

HOLSCHUH, District Judge

PER CURIAM. Defendants/appellants Judy’s Foods

Ine., General Care Corporation, Marvin Friedman and

Joel Gordon (collectively referred to as “defendants’’)

* Hon. John D. Holschuh, United States District Judge, Southern

District of Ohio, sitting by designation.

2a

appealed the jury verdict and denial of their motion for

judgment notwithstanding the verdict in this diversity

action.

In 1976, General Care Corporation, a Tennessee corpo-

ration, formed Judy’s Foods, Inc. (“Judy’s’”) for the pur-

pose of owning, operating and franchising limited menu

fast food restaurants under the name “Judy’s Homestyle

Hamburgers and Fixins.” The individual defendants,

Marvin Friedman and Joel Gordon, were officers, direc-

tors, and members of the Executive Committee of both

Judy’s and General Care Corporation.

Judy’s solicited Agostine Malerba (“Malerba”), to be-

come its franchisee in the greater Philadelphia area. In

May, 1978, Malerba, relying upon the representations of

Judy’s, executed an agreement with Judy’s, which granted

to Malerba an option to franchise a total of fifteen Judy’s

restaurants in the geographical area of Philadelphia.

Malerba assigned one-half of his interest in the franchisee

agreements to his business partner, Buddy Cooperberg

(“Cooperberg”) and they in turn formed the three plain-

tiff corporations, A & B Food Services Corporation, M.C.

Management Corporation #4 and M.C. Management

Corporation #7 to construct and operate two Judy’s

franchises in Philadelphia. Malerba and Cooperberg were

the sole stockholders of the corporate plaintiffs, and their

franchise rights were assigned to the corporations. Plain-

tiff’s completed the construction of two Judy’s restaurants

which commenced business operations during February

and June of 1979. Both restaurants proved to be un-

profitable and were closed in December of 1979 and

October of 1980 respectively.

Thereafter, plaintiffs initiated this action in the federal

district court charging the defendants with fraud, negli-

gent misrepresentation, intentional failure to disclose

vital business information, conspiracy, and breach of con-

tract which caused substantial injury to the plaintiffs. At

the conclusion of a three and one-half week trial, the jury

ities

8a

returned a verdict in favor of plaintiffs, having concluded

that defendants had failed to disclose critical business

information to the plaintiffs and had committed fraudu-

lent concealment and constructive fraud. Defendants

timely moved for a judgment notwithstanding the verdict

or, in the alternative, a new trial. The court denied the

motions and this appeal ensued.

Defendants’ first assignment of error charged that the

district court’s submission of the issue of. constructive

fraud to the jury was improper. Defendants argued that

an action for constructive fraud could be maintained only

upon proof of a confidential relationship between plaintiff

and defendant and that, as a matter of law, the facts of

the case did not give rise to such a relationship. This

assignment of error is disposed of by Edwards v. Trav-

elers Insurance Company of Hartford, Connecticut, 563

F.2d 105, 114 (6th Cir. 1977) wherein this circuit re-

viewed the Tennessee law of constructive fraud and

observed :

A definition of constructive fraud was given in

Maxwell v. Land Developers, Inc., 485 S.W. 2d 869,

875 (Tenn. App.), cert. denied, (1972).

“Constructive frauds are acts, statements or

omissions, which operate as virtual frauds on

individuals, or which, if generally permitted,

would be prejudicial to the public welfare, and

are not clearly resolvable into mere accident or

mistake, and yet may have been unconnected

with any selfish evil design, or may amount, in

the opinion of the person chargeable therewith,

to nothing more than what is justifiable or allow-

able.” Gibson’s Suits in Chancery 5th Ed. Vol.

II, § 982, p. 217. Constructive fraud may be

established where there is a breach of legal or

equitable duty, whether or not fraudulent intent

be present. Bank of Blount County v. Dunn,

(1929) 10 Tenn. App. 95.

4a

Failure to disclose thus becomes fraudulent when it

is the duty of a party having the knowledge to reveal

the facts to the other party. Domestic Serving Ma-

chine v. Jackson, 83 Tenn. 418, 424-25 (1885) ;

Dozier v. Hawthorne Development Co., supra, 37

Tenn. App. 279, 262 S.W. 2d 705; Georgia Marble

Co. v. Standard Tile Co., supra, 19 Tenn. App. 258,

86 S.W. 2d at 432.

The Edwards court went on to conclude that the “duty”

to disclose known facts arises when there exists a “con-

fidential relationship”, which the court defined as:

one in which “confidence is placed by one in the

other and the recipient of that confidence is the

dominant personality, with the ability, because of the

confidence, to influence and exercise dominion over

the weaker or dominated party.” Jacometti v. Fras-

sinelli, 494 S.W. 2d 496, 499 (Tenn. App.), cert.

denied (Tenn. 1973).

In light of this circuit’s pronouncements in Edwards v.

Travelers Insurance Co. of Hartford, Connecticut, this

court concludes that the trial court properly submitted

the issue of the defendant’s duty to disclose material busi-

ness information to the plaintiff franchisees to the jury

for disposition. Moreover, a review of the record disclosed

that sufficient probative evidence supported the jury’s

decision that a relationship of confidence existed between

the parties that required Judy’s to disclose material facts

that impacted upon the current and future viability of its

entire franchising and business operations and the inter-

related business operations of its individual franchisees

which Judy’s intentionally failed to do.

Defendants also asserted that the district court’s re-

fusal to grant a remittitur to reduce the jury’s award

of punitive damages was error because the award was

excessive and disproportionate to the injuries suffered by

the plaintiff. It should initially be noted that this circuit

5a

has long adhered to the view that where, as here, a dam-

age award has been determined by the jury and left un-

disturbed by the trial court, the award bears a presump-

tion of correctness. As this court noted in Manning v.

Altec, Inc., 488 F.2d 127 (6th Cir. 1973) :

Where the jury finds a particular quantum of dam-

ages and the trial court refuses to disturb its find-

ings on the motion for a new trial, the two factors

press in the same direction, and an appellate court

should be certain indeed that the award is contrary

to all reason before it orders a remittitur or a new

trial.

488 F.2d at 133 (quoting Taylor v. Washington Terminal

Company, 409 F.2d 145, 148 (D.C. Cir.) cert. denied,

396 U.S. 885 (1969)). See also Cathey v. Johns-Manville

Sales Corp., 776 F.2d 1565, 1572 (6th Cir. 1985).

Moreover, while defendants argued that plaintiffs

failed to prove a reasonable relationship between the pu-

nitive damages and actual injury, Tennessee has never

adopted the reasonable relationship test. Instead, Ten-

nessee courts have ruled that punitive damages “are al-

lowed as punishment of the wrongdoer and are not based

so much upon the nature and extent of the injury as they

are upon the oppression of the party who does the in-

jury.” Lazenby v. Universal Underwriters Insurance Co.,

214 Tenn. 639, 642, 383 S.W.2d 1, 4 (1964); Johnson v.

Husky Industries, Inc., 5386 F.2d 645, 650 (6th Cir.

1976) ; Cathey v. Johns-Manviile, supra.

Viewing the evidence under the aforementioned stand-

ards, this court is constrained to conclude that the puni-

tive damage awards were not “contrary to all reason.”

Manning v. Altec, Inc., supra. The Tennessee Supreme

Court has recently directed that in assessing the reason-

ableness of awarded punitive damage consideration should

be given to the egregiousness of a defendant’s acts and

the financial worth of the defendant. “The more repre-

6a

hensible the act, the greater the award of punitive dam-

ages,” Coppinger Color Lab, Inc. v. Nixon, 698 S.W. 2d

72, 75 (Tenn. 1985). Defendants’ acts in the instant case

were certainly egregious and the punitive damages award,

when viewed against defendants’ aggregate net worth of

over thirty-seven million dollars, was not excessive.

This court having reviewed the defendants remaining

assignments of error concludes that they are not well

taken. For the foregoing reasons, the decision of the dis-

trict court is AFFIRMED.

Ta

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 85-5527

A&B FoopD SERVICES CORPORATION, et al.,

Plaintiffs-A ppellees,

vs

.JUDY’S Foops, INC., et al.,

Defendants-A ppellants

—

[Filed Aug. 4, 1986]

Before: KRUPANSKY and Guy, Circuit Judges, and

HOLSCHUH” U.S. District Judge

ORDER

The Court having received a petition for rehearing en

bane, and the petition having been circulated not only to

the original panel members but also to all other active

judges of this Court, and no judge of this Court having

requested a vote on the suggestion for rehearing en banc,

the petition for rehearing has been referred to the origi-

nal hearing panel.

The panel has further reviewed the petition for rehear-

ing and concludes that the issues raised in the petition

* Hon. John D. Holschuh sitting by designation from the Southern

District of Ohio.

8a

were fully considered upon the original submission and

decision of the case. Accordingly, the petition is denied.

ENTERED BY ORDER OF THE COURT

/3/ John P. Hehman

JOHN P. HEHMAN

Clerk