Koch and wine: punitive damages for wine fraud reduced but allowed

Koch v. Greenberg, 14 F. Supp. 3d 247 (S.D.N.Y. 2014)

There’s probably a good magazine article or two in this story.  William Koch, the “litigious younger brother” of Charles and David, bought over 2600 bottles of rare French wine consigned by Eric Greenberg to an auction house.  He subsequently determined that 24 were counterfeit, and sued Greenberg for fraud (both affirmative misrepresentation and fraudulent concealment) and violations of New York’s General Business Law.  A three-week jury trial resulted in a verdict for Koch on all his claims, awarding compensatory damages of $355,811 (the purchase price for the 24 bottles) and an additional $24,000 in statutory damages on one of Koch’s GBL claims ($1000 per bottle, pursuant to §349’s authorization of treble damages up to $1000 per violation). In addition, the jury awarded Koch $12 million in punitive damages.

The court reduced the compensatory damages award to $212,699 to take account of Koch’s prior settlement with the auction house Zachys.  It also remitted the punitive damages award to $711,622, denied Koch’s requests for attorneys’ fees and injunctive relief, and granted him pre- and post-judgment interest.

The court denied Greenberg’s motions for judgment as a matter of law and for a new trial.  Of interest to me, Greenberg argued that the statements at issue were non-actionable statements of opinion, and that Zachys, not Greenberg, made the relevant statements.  Opinion: the jury was properly instructed that statements of opinion are non-actionable unless the opinion is not sincerely held.  And the jury was properly instructed that puffery is non-actionable.  The jury is presumed to follow instructions, and along with vague superlatives, “the record contains several additional potential statements of fact, or potentially insincerely held opinions, that the jury could have reasonably construed as actionable misstatements.

As for statements in the Zachys auction catalogue, fraudulent misrepresentations don’t need to be made directly to the plaintiff as long as the plaintiff is among the class of persons intended to rely on the statement.  The jury could conclude that misrepresentations made to Zachys were intended to be communicated to purchasers like Koch and that the misrepresentations in the catalogue could ultimately be traced to Greenberg as the “driving force.”  The jury apparently rejected contrary evidence, apportioning blame for Koch’s GBL claims at 100% for Greenberg and 0% for Zachys with respect to the § 349 claim and at 75% for Greenberg and 25% for Zachys with respect to the § 350 claim. 

Likewise, the jury could properly have found fraudulent concealment, on the theory that Greenberg possessed superior knowledge with respect to material facts about the bottles and that therefore his silence or omission could constitute fraud. Greenberg’s counsel repeatedly emphasized that Koch had the opportunity to inspect the bottles at issue, and could have seen apparent indicators of their counterfeit status.  But the jury was free to reject that argument.  The record did indicate “surface-level problems with the bottles of wine—aberrational labels or irregular cork striations, for example,” but it also included numerous references to information Greenberg knew but chose not to share.  The jury could agree that no amount of inspection would’ve revealed what Greenberg knew.  It was properly instructed that buyers, especially sophisticated ones, have a duty to protect themselves in business transactions.  But it was also properly instructed that “a buyer is not required to conduct investigations to unearth facts and defects that are present, but not obvious,” meaning that “a buyer is not expected to discover that a house is infested with termites.”

Nor was Koch’s reliance unreasonable as a matter of law.  There was an “as-is” clause in the auction catalog, disclaiming the authenticity, provenance, and merchantability of the wine. The jury was instructed that specific disclaimers ordinarily “preclude a finding of justifiable reliance,” as required for a fraud claim.  But not always: where the material facts upon which a plaintiff relies are “peculiarly within the [defendant’s] knowledge,” and not discoverable by the plaintiff through “the exercise of ordinary intelligence,” such an “As–Is” clause will not act as a bar to a fraud claim.  The jury was also properly instructed that in determining whether Greenberg had “peculiar knowledge” it should consider the buyer’s sophistication and the accessibility of the underlying information.

Greenberg argued that, even if it was difficult to inspect over 2000 bottles of wine, that was a difficulty of Koch’s own making, and Koch’s wealth and sophistication weighed against a finding of peculiar knowledge.  But it was reasonable for the jury to conclude that, in light of all the circumstances, and despite Koch’s sophistication and his right to inspect the bottles, it was unreasonably difficult or impossible for him to have discovered what Greenberg knew.  Under the circumstances, Koch wasn’t unreasonable as a matter of law to fail to recognize various indicia of inauthenticity or hire an expert to spend 25 minutes per bottle on inspection at the time of purchase.  The jury could therefore find fraud notwithstanding the presence of an explicit disclaimer.

As for the GBL claims, GBL § 349 claim requires that (1) “the defendant has engaged in an act or practice that is deceptive or misleading in a material way”; (2) the “plaintiff has been injured by reason thereof”; and (3) the deceptive act or practice is “consumer oriented.”  Consumer-oriented conduct has to be more than a private contract dispute, but it need not involve repetition or a pattern as long as it was aimed at the public at large.  Given the large number of bottles Greenberg consigned, other consumers at the auction could have been affected by the alleged misconduct.  The finding of liability under §349 also survived.

The court then found that the exclusion of Greenberg’s refund offers as evidence during the liability phase was proper, though it was properly admitted when the jury was considering whether to award punitive damages.  Refunds as a remedy for counterfeits might provide limited insight into wine industry practices, but not necessarily into Greenberg’s state of mind at the time of the key events, but their probative value was outweighed by the prejudicial effects of portraying Koch as unreasonable and litigious in not accepting the money.

The court also upheld the award of punitive damages; the jury heard sufficient evidence from which it could conclude that Greenberg acted with wanton disregard for potential buyers’ rights, and that this auction was not the first time Greenberg had sold counterfeit wine. However, the award was reduced because of due process concerns.

The reprehensibility of the conduct at issue was the most important factor: the harm was economic as opposed to physical or potentially physical (these bottles were collector’s items, not for drinking), and the targets—Koch and other potential buyers—were not financially vulnerable, and the subject wasn’t a core asset like a home or business.  “Greenberg deceived a wealthy collector whose hobby involves expenditures that most people will never contemplate.”  Some punitive award was nonetheless appropriate, given that “[t]o deceive for one’s personal, pecuniary gain and exploit one’s superior knowledge—the gravamen of the fraud here—reflects reprehensibility that warrants some sanction.”  The jury evidently rejected Greenberg’s argument that his refund offer proved his good faith.

The high ratio of the jury’s award to its compensatory award (33x the initial amount, and 56x the reduced amount) signalled a constitutional problem.  Given the economic nature of the fraud, its lack of relation to liberty or dignity, and its lack of disruption of Koch’s life, this wasn’t a case that justified going up to the limits of the Due Process Clause.  A six-figure compensatory award was already significant in the absolute sense, but less so in the relative sense, “particularly in the context of high-end wine auctions where a single bottle may sell for $20,000, and in light of the wealth of the inevitable participants in such auctions, including Greenberg.”  Thus, a punitive award less than the compensatory award wouldn’t likely have much deterrent effect.  Thus, the court remitted the award to $711,622, twice the initial compensatory damages award.  The court didn’t use the setoff from the Zachys settlement in its calculation, given that the jury awarded punitive damages on the fraud claim—a claim brought only against Greenberg when Zachys settled—and given that the jury allocated 100% liability to Greenberg (and 0% to Zachys) on the GBL § 349 claim.

Attorneys’ fees: Koch sought nearly $7.9 million in attorneys’ fees.  The GBL allows an award of reasonable fees to a prevailing plaintiff, at the trial court’s discretion.  The court declined to do so, for several reasons.  The fees “bore no relationship to the amount of actual damages at issue,” given the aggressive “battle royale” fought by the parties for six years, for a compensatory damage award of only $355,811.  In addition, the compensatory damages for Koch’s commercial injury did capture the extent of his success at trial, as opposed to other situations in which intangible rights are vindicated. 

Also, the purposes of the GBL didn’t support an award of fees; the potential for punitive damages on the fraud claim was the only reason the case wasn’t mooted by Greenberg’s refund offers, but only the GBL claims provided a basis for fee-shifting.  This wasn’t a case within the heartland of GBL fee-shifting, because it didn’t involve vulnerable or disadvantaged consumers, and it didn’t involve conduct with a broad impact on consumers in general, even though Greenberg’s conduct was consumer-oriented. 

Plus, Koch did refuse a full refund and insist on trial, “in the hopes of sending a message and exposing what he perceived as Greenberg’s wrongdoing.”  He did so, and the court accepted that Koch felt strongly about the matter, but this was really “a litigation of choice and of principle, rather than of necessity or monetary recompense.”  Though neither Koch’s wealth nor his sophistication barred an award of fees, it was still relevant that Koch could’ve gotten his compensation years earlier but chose to spare no expense in litigation.

Koch also requested broad injunctive relief against Greenberg, barring him from (among other things) engaging in deceptive acts or practices in selling wine.  The GBL allows private parties to obtain injunctive relief, but it wasn’t clear whether eBay applied.  The case law suggested that, while government entities didn’t need to meet the traditional equitable requirements in seeking injunctions, private plaintiffs did. Just because the New York statute specifically authorized injunctive relief didn’t mean eBay’s equitable principles were displaced; so too does the Lanham Act. The alternative would be absurd: automatic injunctive relief for any prevailing plaintiff, no matter how small the violation.  Given the absence of specific statutory conditions for injunctive relief, the court applied the ordinary rules.

Koch didn’t suffer irreparable injury; money fully compensated him.  Though Koch argued that Greenberg consigned more than the 24 counterfeits proven at trial, that was beyond the scope of the trial and not the proper subject of a permanent injunction.  Compensatory and punitive damages were adequate to make Koch whole. 

As to the balance of hardships, Koch requested extensive and damaging mandatory disclosures not required of other consigners in the wine industry.  “Koch has made efforts to change the auction practices in the industry that permit this type of deceit to occur. However, it does not follow from the jury’s finding that Greenberg engaged in GBL violations that he must now be the symbol for changed norms within the wine industry.” An injunction wouldn’t serve the overall public interest.  Rather, “this costly litigation, intense public scrutiny, and a punitive damages award are sufficient to dissuade Greenberg from engaging in deceptive acts or practices in the future.”