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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1986
- **Citation:** 479 U.S. 962

## Text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0013%3A1. Public record. Not legal advice.