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SCHLAIFER NANCE & CO. v. THE ESTATE OF ANDY WARHOL

May 14, 1996

SCHLAIFER NANCE & COMPANY, INC., Plaintiff, against THE ESTATE OF ANDY WARHOL, FREDERICK HUGHES, and EDWARD W. HAYES, Esq., Defendants.


The opinion of the court was delivered by: CHIN

 CHIN, D.J.

 On June 27, 1995, following a seven-day trial, the jury in this case returned a verdict in favor of plaintiff Schlaifer Nance & Company, Inc. ("SNC") against defendants The Estate of Andy Warhol (the "Estate"), Frederick Hughes ("Hughes"), and Edward W. Hayes, Esq. ("Hayes"). The jury found that all three defendants had fraudulently induced SNC to enter into a licensing agreement with the Estate. The jury awarded punitive damages against the three defendants in the amount of $ 1 million each. Pursuant to testimony presented by SNC, not contested by defendants, the amount of compensatory damages to be awarded on the basis of the jury's finding of fraud -- if that finding were to be sustained -- would be $ 63,941. (Tr. 274-77, 342, 1026-30). *fn1"

 Before the Court is defendants' motion pursuant to Fed. R. Civ. P. 50(b) for judgment as a matter of law. The motion is granted, for the jury could not have reasonably found that SNC proved its claim of fraud by clear and convincing evidence or that defendants acted with the moral culpability necessary to warrant an award of punitive damages.

 In essence, SNC alleged that defendants fraudulently represented that the Estate controlled all the rights to all of Warhol's works, when defendants knew that many of Warhol's works had fallen into the public domain and that Warhol had also entered into agreements giving rights to others. As the incontrovertible evidence showed, however, SNC knew or should have known that the representations that the Estate controlled all the rights to all of Warhol's works could not have been true. Yet, SNC entered into the licensing agreement without conducting any due diligence and without making any reasonable effort to determine the truth or falsity of the purported representations. SNC could not have reasonably relied on representations that it knew or should have known were false but did not even bother to investigate. Hence, the jury could not have found by clear and convincing evidence that SNC's reliance on defendants' purported misrepresentations was reasonable and justifiable.

 Second, even assuming that the jury could have properly found that SNC had proven fraud by clear and convincing evidence, it could not have reasonably found that defendants acted with the evil motive or high degree of moral culpability required for an award of punitive damages. Defendants had nothing to gain by defrauding SNC. The agreement provided for no "upfront" money to be paid to defendants for the right to exploit Warhol's works; rather, the Estate was to be paid solely from royalties, and no minimum was guaranteed by SNC until the third year of the agreement. In addition, SNC had the right to terminate the agreement in the event of a material breach and it could have done so before the minimum royalties provisions became effective. Hence, defendants would have profited from their purported scheme only if SNC successfully exploited the rights. Finally, it is undisputed that defendants made certain disclosures that were wholly inconsistent with any malice or evil intent.

 The jury's finding of fraud and its award of a total of $ 3 million in punitive damages could only have been the product of sheer surmise and speculation. Accordingly, the motion for judgment as a matter of law is granted and judgment will be entered in favor of defendants dismissing the third amended complaint.

 BACKGROUND

 A. The Parties

 1. Plaintiff

 Plaintiff SNC is a licensing and product development company operating out of Atlanta, Georgia. It has been in the business of developing and marketing ideas and products for approximately 20 years. Its most successful venture was the Cabbage Patch Kids program, which resulted in the licensing of the "concept" of Cabbage Patch dolls for a wide variety of children's merchandise, including clothing, toys, bicycles, and play houses. (Tr. 231-35). SNC was established by Roger b. Schlaifer and Susanne Nance Schlaifer, who, in addition to being husband and wife, are the President and Executive Vice President of SNC, respectively. (Tr. 230-31, 468).

 2. Defendants

 Andy Warhol died on February 22, 1987. He was described in an obituary as "a founder of Pop Art whose paintings and prints of Presidents, movie stars, soup cans and other icons of America made him one of the most famous artists in the world." Douglas C. McGill, Andy Warhol, Pop Artist, Dies, N.Y. Times, Feb. 23, 1987, at Al. He was a prolific artist who created "tens and tens of thousands of artworks" over his 40-year career. (Tr. 109; see also Tr. 948 (referring to "sheer magnitude" of Warhol's works)).

 Hughes, who had been Warhol's business manager for many years, was named executor of Warhol's will. He hired Hayes to be general counsel of the Estate. (Tr. 40, 686). Both Hughes and Hayes expected to be compensated for their services. They were obliged to maximize the assets of the Estate, and it was in their financial interest to do so, for their compensation was based, at least in part, on the value of the Estate. (Tr. 40-42)

 Hayes, in turn, hired Francis J. Harvey, Jr., Esq., for the latter's expertise in estate law. Hayes agreed that Harvey would receive as compensation for his services one-fourth of the fees that Hayes received. (Tr. 42-43). In the end, the Surrogate's Court awarded Hayes $ 7.2 million in fees, which was to be shared with Harvey. (Tr. 123). *fn2"

 B. The Facts

 1. SNC's Interest in a Warhol Program

 In August 1985, in connection with its work on the Cabbage Patch Kids program, SNC commissioned Andy Warhol to do portraits of four Cabbage Patch dolls. (Tr. 236-37). When Roger Schlaifer was at Warhol's studio in New York (which was referred to as "The Studio" or "The Factory") to discuss the paintings, he developed the idea of "building a fashion program around Andy Warhol," capitalizing on "Andy Warhol's name, his association with glamorous people, [his] incredible compositions." (Tr. 237-38 ). In October of 1985, Schlaifer spoke first to Warhol and then to Hughes about a licensing program. (Tr. 238-39).

 Negotiations ensued and meetings were held to discuss a licensing program involving SNC and Andy Warhol. During these discussions, Schlaifer emphasized that SNC was only interested in an "exclusive agreement" because it did not want to be competing with other licensing companies. (Tr. 238-41). The discussions led to the drafting of a proposed licensing agreement by SNC's lawyers, Powell, Goldstein, Frazer & Murphy, a large Atlanta law firm, in the summer of 1986. (Tr. 278-81). In September of 1986, however, the negotiations were suspended indefinitely, at Warhol's request (as communicated to Schlaifer by Hughes). (Tr. 284). Schlaifer described this turn of events as "very disappointing." (Tr. 285).

 Notwithstanding the suspension of negotiations, Schlaifer continued to have occasional discussions with Hughes about a licensing program and the possibility of a reduced program. (Tr. 286-88). There were no major developments, however, until after Warhol's death on February 22, 1987.

 2. The Negotiations with the Estate

 In March 1987, just a few weeks after Warhol's death, Schlaifer met with Hughes to discuss a licensing program with the Estate. (Tr. 289-90). Schlaifer "enthusiastically" suggested that a "worthwhile" program could still be done. (Tr. 289-90). Further discussions between Schlaifer and Hughes followed, and eventually Schlaifer also met and had discussions with Hayes in his capacity as general counsel of the Estate. (Tr. 290-305).

 In March or April of 1987, Hughes and Schlaifer had dinner in New York. Hughes asked Schlaifer if he would have "any problem" if a friend of Andy Warhol's "did" a limited edition art watch using Warhol's photographs. Schlaifer responded that he did not see a problem with such a limited edition as long as it did not interfere with SNC's ability to do a watch program. (Tr. 311-12).

 The negotiations continued into the summer of 1987. Schlaifer discussed with Hayes on more than one occasion SNC's need "to have the exclusive rights." (Tr. 304). In none of these discussions did Hayes disclose that any of Warhol's works had or might have fallen into the public domain. (Tr. 228, 305). Nor did Hughes tell Schlaifer, at any time prior to the signing of the license agreement, that any copyrights had fallen into the public domain. (Tr. 228). As Schlaifer explained at trial, once a work had fallen into the public domain, the copyright was lost and "every person in the world" was free to use the work. (Tr. 305).

 In August of 1987, in a telephone conversation, Hayes told Schlaifer, "It's a go." (Tr. 305). Schlaifer understood that statement to mean that the terms that he and Hayes had negotiated were acceptable to the Estate and that the Estate was "ready to go." (Tr. 305). At that point, SNC again turned to the Powell Goldstein firm for assistance in drafting a licensing agreement. (Tr. 306). The Estate retained Hayes's brother, Steven Hayes, Esq., of the Parcher & Hayes firm, to negotiate and to assist in the drafting of the licensing agreement. (Tr. 56, 127, 306-07, 583-84). Steven Hayes was experienced in intellectual property and entertainment law. (Tr. 127, 129, 306, 600-02).

 The drafting and negotiating process continued into the fall of 1987. During the week of November 9, 1987, Schlaifer met with Hughes, Hayes, and Steven Hayes in New York. During the meeting, Schlaifer asked if there was a "watch deal." Hughes responded: "There is none. There are no other deals." (Tr. 315-17). A few days later, SNC and the Estate entered into a licensing agreement.

 3. The Licensing Agreement

 The licensing agreement between SNC and the Estate (the "Agreement") is dated November 13, 1987. (PX 1). It was negotiated over a three or four month period from August 1987 until it was signed. It went through some 12 drafts. It provided for the Estate to grant to SNC certain rights to use artworks created by Warhol as well as his name, likeness, trademarks, and other assets to develop and market products for "the fashion, home decorating, gift, toy, entertainment and other industries." (PX 1).

 Section 4(a) of the Agreement, entitled "Inventory of Artworks," required the Estate to "promptly" provide SNC a list (defined as the "List") of all of Warhol's artworks known to the Estate (defined as the "Existing Artworks"). Attached to the Agreement, and referred to in Section 4 (a), was an Exhibit D, which was a list of works that the Agreement recognized "may not be a complete listing." *fn3"

 Exhibit D bore a legend on the first page that provided:

 
* This list is incomplete. The Estate agrees to update this list as often as reasonably may be requested by [SNC] in regard to any specific works other than those listed herein which [SNC] wishes to exploit pursuant to the terms of the Agreement. No representation is made that each of these works bears a copyright symbol, but the Estate will place such a symbol upon any works sold[,] publicly displayed or transferred in the future.

 (PX 1, Exh. D) (emphasis added). Exhibit D contained what was supposed to be a list of all of Warhol's works of which the Estate was aware. (Tr. 308). It consisted primarily of pages excerpted from a 1985 book edited by Ron Feldman's wife that listed Warhol's works by title and provided certain other information. (PX 8; Tr. 399, 576-77). The listings for some works gave copyright information, including who held the copyright. (Tr. 401-03).

 Section 4(a) also contained the following language:

 
The Estate agrees to use its best efforts and to cooperate with [SNC] to ensure that the List shall become an accurate and complete list as soon as is practicable. 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, specifying the nature of the limitation on the Estate's ability to grant the license.

 (PX 1, § 4(a)) (emphasis added).

 Section 4(c) described "Celebrity Works." These were artworks that utilized, for example, the likenesses of well known individuals (such as Marilyn Monroe) or cartoon characters (such as Superman and Mickey Mouse). The Agreement contained special provisions with respect to the use of "celebrity works," for the parties acknowledged that special consent might have to be obtained (for example, from the owner of the rights to the cartoon characters) before celebrity works could be used for licensing purposes.

 Section 9 of the Agreement contained certain representations and warranties. The Estate represented, for example, that:

 
(ii) . . . the Estate is the sole owner of the Copyrights (other than the right to exhibit previously sold or loaned Existing Artworks) in the Existing Artworks . . ., (iii) all Existing Artworks owned by the Estate contain and will contain, prior to publication, appropriate notices regarding the ownership of copyrights therein; (iv) except with respect to Celebrity Works, in which third parties have proprietary rights, and except as noted on Exhibit C, the Estate has and will continue to have the sole and exclusive right to transfer to [SNC] all rights to the Existing Artworks and the Works and the Copyrights, Trademarks and New Trademarks granted hereunder; (v) neither the Existing Artworks, the Trademarks nor the Works infringe the rights of any third parties; (vi) neither the Artist nor the Estate has granted and the Estate will not grant any right, license or privilege for Licensed Products with respect to the Trademarks, New Trademarks, Copyrights, or the Works or any portion thereof to any person or entity other than [SNC]; (vii) the Estate has not done and will not do . . . anything which would violate or impair any right vested, created or arising in favor of [SNC] under this Agreement . . . .

 (PX 1, § 9(a)).

 Section 9(a) also provided that, upon SNC's request, "the Estate shall reaffirm the accuracy of the warranties contained herein as they relate to specific Existing Artworks." The last sentence of Section 9(a) provided:

 
An inadvertent breach by the Estate of the warranties contained in subsections (ii) and (iii) of this Section 9(a) shall not be deemed a material breach of this Agreement so long as the Estate, immediately upon receipt of a written notice from [SNC] identifying a breach of warranty, undertakes in good faith and at no expense to [SNC] such actions as shall be necessary to establish its rights as warranted . . . .

 The Agreement also granted SNC a license to use the Estate's trademarks. (PX 1, § 2(b)). Excluded from this license were any licenses that had previously been granted to third parties. These third-party licenses were to be listed on Exhibit C to the Agreement, but Exhibit C was a sheet of paper that simply read "N O N E." (PX 1, § 2(b) & Exh. C thereto).

 The Agreement did not require SNC to make any "upfront payment" to the Estate, Hughes, or Hayes. (Tr. 417; see also Tr. 129). The Agreement did provide, however, for a 50/50% "split" of net royalties, with guaranteed royalties starting in the third year. (Tr. 129; PX 1 at §§ 6(a), 6(b)). It obligated SNC "to use reasonable efforts and 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). The Agreement also gave either party the right to terminate it "in the event of a material breach going to the essence" of the Agreement, upon the failure of the defaulting party to cure after notice of the breach. (PX 1, § 14(a)).

 In 1987, SNC incurred $ 63,941 in expenses in order to perform its obligations under the Agreement. (Tr. 342).

 4. The Opinion Letter

 In connection with the execution of the Agreement, the Estate provided an opinion letter that was signed by Francis J. Harvey, Jr., Esq., on behalf of Treanor, Harvey & Horgan on letterhead of Treanor, Harvey & Horgan. The letter was dated October 27, 1987 and was addressed to SNC. It stated in part as follows:

 
We have served as counsel to Frederick Hughes, as Executor . . . of the Estate of Andy Warhol . . ., and the Estate in connection with the negotiation and execution of that certain Agreement between the Estate and [SNC] dated October 27, 1987 . . . .

 (PX 36). The letter represented that Treanor, Harvey & Horgan had examined the Agreement and other documents and records and that "the Estate possesses all right, title, and interest in the Existing Artworks necessary ...


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