Schlaifer Nance & Co., Inc. v. Estate of Warhol

• Decision Date: 15 May 1996
• Docket Number: No. 90 Civ. 1095 (DC).,90 Civ. 1095 (DC).
• Parties: SCHLAIFER NANCE & COMPANY, INC., Plaintiff, v. The ESTATE OF Andy WARHOL, Frederick Hughes, and Edward W. Hayes, Esq., Defendants.
• Court: U.S. District Court — Southern District of New York

927 F. Supp. 650

SCHLAIFER NANCE & COMPANY, INC., Plaintiff, v. The ESTATE OF Andy WARHOL, Frederick Hughes, and Edward W. Hayes, Esq., Defendants.

No. 90 Civ. 1095 (DC).

United States District Court, S.D. New York.

May 15, 1996.

Powell, Goldstein, Frazer & Murphy by James C. Rawls, Scott Greene, Kathlynn L. Butler, Atlanta, Georgia, and Paul K. Rooney, New York City, for Plaintiff Schlaifer Nance & Company, Inc.

Coblence & Warner by Paul J. Hanly, Jr., New York City, for Defendants The Estate of Andy Warhol and Edward W. Hayes, Esq.

Winthrop, Stimson, Putnam & Roberts by Susan J. Kohlmann, New York City, for Defendants The Estate of Andy Warhol and Frederick Hughes.

OPINION

CHIN, District Judge.

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).¹

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 L. 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 A1. 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).²

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).

On May 18, 1987, Schlaifer met with Hayes and Hughes in Manhattan for lunch, after which they continued their discussions at The Factory. (Tr. 290-92). Schlaifer raised the issue of "knock-offs" (Tr. 291), to which Hayes responded at one point: "No one is going to get away with using Andy Warhol for free." (Tr. 296). At another point, in the course of discussing SNC's proposed 65/35% "split" of royalties, Hughes said, "We own all of these rights to Andy Warhol's art. We control all of these rights, so we think it is more fair if it is just an even split." (Tr. 296). Neither Hayes nor Hughes revealed that any of Warhol's works had fallen into the public domain. (Tr. 296-99). Nor did Hayes say anything when Hughes said, "We control all the rights." (Tr. 299).

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...