if a friend of Warhol's did a limited edition watch deal. Schlaifer said no, and he never even told his attorneys about that conversation. (Tr. 311-12, 390). Finally, SNC's lawyers specifically discussed the possibility of a competing watch deal in October 1987. Yet, they did not conduct any due diligence. The only inquiry made was Schlaifer's verbal inquiry of Hughes.
Schlaifer never testified that SNC would not have gone forward with the transaction had he known about the North American Watch deal (see Tr. 229-30, 311-12, 316-17), and any such testimony would have made no sense in any event, since Schlaifer in fact had already consented to a watch deal. On this record, the jury could not have reasonably found that Hughes's answer of "none" to Schlaifer's question was material or that SNC's reliance on that answer was reasonable.
c) The Agreement
Likewise, the jury's finding of fraud cannot be sustained on the basis of the representations contained in the Agreement. First, the Agreement cannot reasonably be construed as representing that the Estate owned all the rights to Warhol's works. The representations in section 9 were keyed to the term "Existing Artworks." Existing Artworks were defined in section 4 as all of Warhol's artworks known to the Estate; they were listed in Exhibit D to the Agreement. The Agreement recognized, however, that Exhibit D "may not be a complete listing." Moreover, Exhibit D itself stated in the legend on the first page that "no representation is made that each of these works bears a copyright symbol." Exhibit D also contained descriptions of works that showed, through copyright notices and otherwise, that rights were held by third parties, including Castelli Graphics 2, Seabird Editions, D.C. Comics, Inc., Factory Additions, and Ronald Feldman Fine Arts. Section 4(a) explicitly stated that "additions of Existing Artworks to the List shall clearly identify those Existing Artworks to which the Estate does not own the Copyrights or otherwise have the right to license to [SNC] free of all rights of any third parties . . . ." Finally, section 9 contemplated the possibility that the warranties were inaccurate as to specific Existing Artworks, and it provided for the possibility of an inadvertent breach of the warranties. In view of these various provisions, the representations in the Agreement cannot fairly be the basis of a fraud claim. See, e.g., Scala v. Sequor Group, Inc., 1995 U.S. Dist. LEXIS 4969, No. 94 Civ. 0449 (LAP), 1995 WL 225625, at *7 (S.D.N.Y. Apr. 14, 1995) (fraudulent inducement claim barred because reasonable reliance lacking where contract provided for "the possibility" that an event that plaintiff claimed was not intended might occur); Phoenix Canada Oil Co., 749 F. Supp. at 531 & n.7 (holding in fraud case that plaintiff's "blind reliance" on alleged misrepresentations was not reasonable or justifiable where letter put plaintiff on notice of "possibility" that facts were otherwise); 600 W. 115th St. Corp. v. 600 W. 115th St. Condominium, 180 A.D.2d 598, 580 N.Y.S.2d 307, 308 (1st Dep't 1992) (holding in fraud case, "any claim of justifiable reliance by plaintiff is dispelled by the plain language of plaintiff's lease").
Second, even assuming the Agreement could reasonably be interpreted as representing that the Estate owned all the rights to all of Warhol's works (with the exception of Celebrity Works), on the basis of the facts set forth above, SNC had reason to believe that that representation could not be true. Moreover, the second, third and fourth sentences of section 4(a), the last two sentences of section 9(a), and Exhibit D gave SNC even further reason to believe that the Estate did not own all the rights to all the works. Yet, again, SNC took no steps to investigate the matter.
d) The Opinion Letter
Although SNC now places heavy emphasis on the opinion letter, clearly the letter was unimportant to SNC at the time the Agreement was executed. SNC did not receive the opinion letter until after it executed the Agreement. (Tr. 481). Moreover, the opinion letter was defective on its face. Not only was it dated prior to the date of execution of the Agreement, it referenced a non-existent agreement. Yet, SNC and its attorneys never asked for a corrected opinion letter. The opinion letter also represented that Treanor, Harvey & Horgan had represented Hughes and the Estate in the negotiations with SNC over the Agreement. SNC and its lawyers knew that statement was false, for they knew that they had never dealt with Harvey or his purported law firm. When they received the opinion letter, however, they did not take the trouble to ask the Estate to provide a proper opinion letter signed by attorneys with whom they had actually dealt.
3. SNC's Post-Agreement Conduct
Further evidence that SNC could not have reasonably relied on the purported misrepresentations is provided by SNC's post-Agreement conduct. In the beginning of the program, for example, just a few weeks after the Agreement was signed, SNC established a procedure whereby Gia Partane regularly sent requests to the Estate to inquire about the "copyright statuses" of various images. (Tr. 745). The fact that SNC established such a procedure so early in the program suggests that it was not under the impression that the Estate owned all the copyrights to all the works.
Moreover, SNC had the ability under the Agreement to walk away from the deal in the event of a "material breach going to the essence" of the Agreement. (PX 1, § 14(a)). Hence, if the right to all Warhol's works was of such critical importance to it, SNC could have sought to terminate the Agreement when it learned of the copyright problems and competing agreements in the first few months after the Agreement was signed. Yet, it made no effort to do so.
Hence, the incontrovertible evidence -- the testimony of SNC's own witnesses, SNC's own documents, and the terms of the Agreement itself -- unequivocally shows that no reasonable juror could have found that SNC reasonably or justifiably relied on the purported misrepresentations. Accordingly, the motion for judgment as a matter of law must be granted.
C. Punitive Damages
Since I have granted defendants' motion with respect to the jury's finding of fraud, the jury's award of punitive damages must be set aside as well. Even assuming the jury's verdict on liability should be sustained, however, independent grounds exist for granting the motion with respect to SNC's claims for punitive damages.
1. Applicable Standards
Under New York law, punitive damages are appropriate in a fraud action when the proof establishes "gross, wanton, or willful fraud or other morally culpable conduct." Borkowski v. Borkowski, 39 N.Y.2d 982, 387 N.Y.S.2d 233, 233, 355 N.E.2d 287 (NY. 1976); see also Ostano Commerzanstalt v. Telewide Sys., Inc., 880 F.2d 642, 649 (2d Cir. 1989) (punitive damages are appropriate "when fraud is gross, wanton, or willful"); Saint Calle v. Prudential Ins. Co., 815 F. Supp. 679, 688 (S.D.N.Y. 1993) ("punitive damages are appropriate in cases involving 'gross, wanton, or willful fraud or other morally culpable conduct'"); Coldwell Banker Residential Real Estate Serv., Inc. v. Eustice, 190 A.D.2d 839, 594 N.Y.S.2d 52, 53 (2d Dep't 1993) (punitive damages are appropriate when fraudulent conduct is "gross, wanton, or deliberate and demonstrates a high degree of moral culpability"). Also, as SNC conceded at trial, it had to prove its entitlement to punitive damages by clear and convincing evidence. (Tr. 1083-85).
In some respect, all fraud contains an element of "gross, wanton, or willful" conduct. Yet, of course, punitive damages should not be awarded in every case in which fraud is found. Walker v. Sheldon, 10 N.Y.2d 401, 223 N.Y.S.2d 488, 491, 179 N.E.2d 497 (N.Y. 1961) (punitive damages not available for "ordinary fraud"); accord Wallach Marine Corp. v. Donzi Marine Corp., 675 F. Supp. 838, 842 (S.D.N.Y. 1987) (punitive damages not available for "mere fraud"); Shults v. Henderson, 625 F. Supp. 1419, 1426 (W.D.N.Y.) (punitive damages not available for "ordinary fraud"), aff'd, 805 F.2d 391 (2d Cir. 1986). Instead, punitive damages are intended to punish the offending party and to discourage that person as well as others from engaging in similar wrongful conduct in the future. Jeffries v. Harleston, 21 F.3d 1238, 1249 (2d Cir. 1994) (citing Restatement (Second) on Torts § 908 cmt. a (1979)), vacated on other grounds, 115 S. Ct. 502 (1994). Thus, punitive damages may be available when, for example, the false statements giving rise to the fraud were made maliciously or were "actuated by evil motives." Accusystems, Inc. v. Honeywell Information Sys., Inc., 580 F. Supp. 474, 483 (S.D.N.Y. 1984); see also Walker, 223 N.Y.S.2d at 490 ("Punitive or exemplary damages have been allowed in cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future.").
The determination as to whether a party's conduct crosses the line from mere fraud to morally culpable conduct deserving of punishment turns "on a considered observation of the defendant's conduct in light of the ordinary morals of the marketplace and on an assessment of whether the punishment is needed and will be effective as a deterrent." Whitney v. Citibank, N.A., 782 F.2d 1106, 1118-19 (2d Cir. 1986). Thus, a determination that a particular fraud is more worthy of punitive damages than another simply boils down to a matter of degree. The decision does not turn, however, on the number of instances of fraudulent conduct. See id. at 1118. ("The test is not the number of wrongful acts . . . ."). Rather, the decision whether to award punitive damages must be based on an overall appraisal of defendant's conduct, motive, and mental state. Punitive damages should be awarded only when the defendant's conduct "is sufficiently willful and egregious to indicate a need for something more than compensatory relief." Id.
Some examples may be helpful. In Accusystems, the defendant fraudulently induced the plaintiffs to enter into a contract for the purchase of computer hardware and software. Defendant made material misrepresentations, either knowing them to be false or recklessly without regard for their truth or falsity. 580 F. Supp. at 482. Following a bench trial, the court found that plaintiffs had proven fraud; it held, however, that plaintiffs were not entitled to punitive damages. It denied the request for punitive damages because defendant's misrepresentations were not made "maliciously or wantonly" or as the result of "evil motives." 580 F. Supp. at 482. Rather, the court held that because the defendant likely thought that plaintiffs, with their experience, could make the computer system work, the "moral culpability" required for an award of punitive damages was not present. 580 F. Supp. at 482.
In Key Bank of New York v. Diamond, 203 A.D.2d 896, 611 N.Y.S.2d 382 (4th Dep't 1994), the defendant defrauded plaintiff by pledging 32,000 shares of stock, which defendant knew was worthless, as collateral for a loan. The jury awarded both compensatory and punitive damages. The Fourth Department set aside the award of punitive damages, holding that the pledge of worthless stock, "although fraudulent, [did] not . . . evince 'that high degree of moral culpability' necessary to sustain an award of punitive damages." 611 N.Y.S.2d at 383. See also Sangimino v. Sangimino, 176 A.D.2d 872, 575 N.Y.S.2d 515, 517 (2d Dep't 1991) (husband's false representation that he would purchase new home in both his and his wife's name was sufficient basis for fraud cause of action, but would not support a claim for punitive damages "since the husband's alleged fraud did not evince a high degree of moral turpitude"); Yuzwak v. Dygert, 144 A.D.2d 938, 534 N.Y.S.2d 35, 36 (4th Dep't 1988) (false representations that a horse was "quiet and easy to handle" and would make a "good horse for a youth," while sufficient to support a claim for fraud in inducing the purchase of the horse, did not constitute conduct sufficient to warrant punitive damages).
2. Proof of the Requisite Culpability
Here, SNC did not show, by clear and convincing evidence, that any of the defendants acted with the degree of moral culpability necessary to support an award of punitive damages. Indeed, defendants' conduct was at worst reckless, for at least six reasons.
First, SNC was not a naive, innocent victim being preyed upon by defendants. To the contrary, SNC was a sophisticated, successful company represented by a large Atlanta law firm. The Agreement was negotiated over a three to four month period and it went through some 12 drafts.
Second, it was Schlaifer who conceived the idea of a Warhol program, and he initiated the discussions with Warhol. In an effort to "sell" Warhol on the program, SNC put together an elaborate presentation that included a videotape. At one point, Warhol suspended the discussions and Schlaifer was disappointed as a result. After Warhol's death, Schlaifer continued the discussions with the Estate and he "enthusiastically" suggested that a "worthwhile" program could still be done. (Tr. 289-90). Indeed, SNC was "anxious" to enter into the Agreement. (Tr. 502, 951-52). In short, defendants did not pursue SNC; if anything, it was the other way around.
Third, defendants had nothing to gain by the purported fraudulent scheme. SNC provided no "upfront" money under the Agreement, and the minimum royalties provisions did not take effect until after the first two years. Hughes and Hayes would have profited from their purported fraud only if the program succeeded and the assets of the Estate increased as a result. Defendants had nothing to gain from deceiving SNC into entering into a transaction that was doomed to failure because the Estate did not own the necessary rights.
Fourth, Hughes made at least two disclosures that were wholly inconsistent with any intent to defraud. It is undisputed that Hughes told Schlaifer in March or April of 1987 about the possibility of another watch deal and asked for SNC's consent. If Hughes had truly wanted to deceive SNC, he would not have disclosed the possibility of another, competing deal. In addition, Hughes disclosed to Fotofolio in June 1987 that he had been negotiating with SNC about a licensing program and he suggested that Fotofolio contact SNC directly. Again, if Hughes had truly wanted to defraud SNC, he would not have suggested that Fotofolio communicate with SNC directly.
Fifth, although SNC presented evidence that it committed substantial resources to the project, it is undisputed that its expenses in preparing for performance of the Agreement amounted to only $ 63,941. In addition, the Agreement was somewhat one-sided in the sense that it obligated SNC to use only "reasonable efforts" to perform the Agreement and it gave SNC the discretion "to devote such time, effort and resources to the development of the Works into Licensed Products as it reasonably deems appropriate. " (PX 1, § 5(a) (emphasis added)). Hence, SNC had the right, within reason, to devote as much or as little time, effort, and resources as it saw fit, and it also had the ability to terminate the Agreement. Although it learned early on that there were significant public domain problems, SNC did not choose to terminate the Agreement. In other words, if defendants had actually wantonly and maliciously induced SNC to enter into the Agreement, once SNC learned that it had been deceived it could have taken steps to terminate the relationship. It did not.
Finally, even assuming that the jury could have properly found the requisite moral culpability on the part of Hughes and the Estate, it certainly could not have reached that conclusion with respect to Hayes. Again, Hayes was not a party to the Agreement. He acted at all times as the Estate's attorney. He was under no duty to "blow the whistle" on his clients; his refusal to do so cannot, under any stretch of the imagination, be the basis for an award of punitive damages.
Taking into account all the circumstances of the case, including defendants' conduct, motive (or lack thereof), and mental state, and construing the evidence in the light most favorable to plaintiff, I hold that no reasonable jury could have found that SNC had proven by clear and convincing evidence that defendants had acted with the evil motive or moral culpability necessary for an award of punitive damages. Nor would an award of punitive damages in the unusual circumstances of this case accomplish the goal of discouraging others from engaging in similar conduct in the future.
Defendants' motion for judgment as a matter of law is granted. Judgment will be entered dismissing the third amended complaint with prejudice.
Dated: New York, New York
May 14, 1996
United States District Judge