GTE Products Corp. v. Broadway Elec. Supply Co., Inc.

• Decision Date: 06 March 1997
• Docket Number: No. 95-P-1983,95-P-1983
• Citation: 676 N.E.2d 1151,42 Mass.App.Ct. 293
• Parties: , 1997-1 Trade Cases P 71,759, RICO Bus.Disp.Guide 9228 GTE PRODUCTS CORPORATION, v. BROADWAY ELECTRICAL SUPPLY CO., INC., & others. 1
• Court: Appeals Court of Massachusetts

Page 1151

676 N.E.2d 1151

42 Mass.App.Ct. 293, 1997-1 Trade Cases P 71,759,

RICO Bus.Disp.Guide 9228

GTE PRODUCTS CORPORATION, v. BROADWAY ELECTRICAL SUPPLY CO., INC., & others. ¹

No. 95-P-1983.

Appeals Court of Massachusetts Middlesex.

Argued Dec. 17, 1996.

Decided March 6, 1997.

Jeffrey A. Gorlick, Danvers, for defendants.

Joseph D. Steinfield (Peter E. Ball with him), Boston, for plaintiff.

Before PORADA, KAPLAN and IRELAND, JJ.

IRELAND, Justice.

The defendants, distributors of electrical supplies from their place of business in Lawrence, fraudulently obtained discounted prices on lightbulbs manufactured by the plaintiff. The defendants accomplished this for eight years through a sham business entity known as Glomar, Inc. (Glomar), which they created in 1983. ² From 1983, when the plaintiff first agreed to supply lightbulbs to the defendants for resale, until 1991, when the defendants' scheme finally unraveled and the plaintiff terminated the agreement, the defendants regularly submitted claims to the plaintiff for special price breaks called "end user" discounts. The claims identified Glomar as a customer of the defendants' business and as the buyer or "end user" of the lightbulbs. The defendants carried out an elaborate ruse upon the plaintiff, backing up their claims for the end user discounts with phony records that included order forms, checks, and receipts--all purporting to show that Glomar had actually purchased the lightbulbs from the defendants.

Instead, the defendants sold the lightbulbs to another distributor, who was not affiliated with the plaintiff, after first removing their business's name from the shipping cartons to prevent the plaintiff from tracing the lightbulbs back to the defendants. That distributor, in turn, resold the lightbulbs to the general public at prices substantially lower than those offered by the plaintiff's affiliated distributors. The defendants' scheme was carried out almost from the beginning with the knowledge of the plaintiff's sales representative who never informed the plaintiff of the fraudulent activity.

After terminating the distribution agreement in 1991, the plaintiff sued the defendants for damages that included the difference of $312,394 between the regular undiscounted price of the lightbulbs and the end user discount price that the defendants had fraudulently obtained through the Glomar scheme between 1983 and 1991. All but a claim for damages under G.L. c. 93A (which the judge reserved to himself) were tried to a jury, which found the defendants Broadway Electrical Supply Co., Inc., and Marvin Rosenthal liable for common law fraud and the defendants Marvin Rosenthal, Mark Rosenthal, and Eduardo Mariani liable for violations of the Racketeer Influenced Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961 et seq. (1994). In a separate memorandum of decision, the judge found all of the defendants, except Gloria Rosenthal, liable on the c. 93A claim.

The ensuing judgment from which the defendants appeal awards the plaintiff substantial compensatory, punitive, and other damages. These include $312,394, plus interest, in compensatory damages on the fraud count; $2,186,758, plus interest, attorneys fees, and costs in compensatory and punitive damages on the c. 93A claim assessed by the judge; and $937,182 in punitive damages on the RICO claim. ³ We turn to the defendants' claims of error, reciting additional facts where needed.

1. Assessment of damages. According to the defendants, the plaintiff suffered no out-of-pocket losses as a result of their fraudulent acts: the plaintiff still made money on the discounted sales. Hence, the only possible claim for damages was the plaintiff's expected benefit between 1983 and 1991 from its bargain with the defendants. The defendants hoped to show that that bargain, in fact, was worth little more than what the plaintiff had already actually received. The defendants' cleverly crafted legerdemain on the point can be boiled down and put more baldly: if unable to cheat to obtain discounts, they claim they may not have performed the agreement in the first place. Accordingly, they sought to elicit evidence at trial that, had the end user discounts not been given, they likely would have purchased far fewer, or even none, of the plaintiff's lightbulbs. The judge, however, allowed, over the defendants' objections, the plaintiff's motion in limine to exclude all evidence or argument whether the defendants would have purchased lightbulbs without the price discounts. The judge's jury instructions on damages, to which the defendants also objected, relied essentially upon the same reasons used to exclude evidence that the plaintiff's bargain was worth substantially less than claimed. The judge instructed the jury that the proper measure of damages in the case (if any there were) would be the plaintiff's expected benefit of the bargain, seen as the difference between the undiscounted or full price of the lightbulbs and the fraudulently obtained end user price. There was no error either in excluding the defendants' proffered evidence or in instructing the jury on the measure of damages.

The general rule on damages in cases like this of intentional (versus negligent) misrepresentation is that the plaintiff is entitled to the benefit of his bargain or "the difference between the value of what he has received and the actual value of what he would have received if the representations had been true." Rice v. Price, 340 Mass. 502, 507, 164 N.E.2d 891 (1960). Where, as here, benefit of the bargain damages "are proved with reasonable certainty, that rule will be employed." Id. at 510, 164 N.E.2d 891, quoting from Prosser, Torts § 91, at 570 (2d ed.1955). See also Restatement (Second) of Torts § 549(2) (1977) (applying benefit of bargain recovery to parties in business transactions where damages are proved with reasonable certainty); Nolan & Sartorio, Tort Law § 146 (2d ed.1989). These principles are easily applied to the matter at hand. The defendants knowingly misrepresented to the plaintiff that Glomar was a genuine end user. Had they told the plaintiff the truth about Glomar, they would not have received end user discounts and would, instead, have paid undiscounted prices. The defendants wish to substitute the surmise and guesswork of calculating how many, if any, undiscounted lightbulbs they might have purchased from the plaintiff in the place of the near mathematical precision with which the plaintiff established its benefit of bargain damages.

In cases like this of fraudulently obtained price breaks, other courts have not hesitated to award manufacturer- the difference between a fraud-induced price and the regular price. See Ortho Pharmaceutical Corp. v. Sona Distributors, Inc., 663 F.Supp. 64, 66-67 (S.D.Fla.1987); Shulton, Inc. v. Optel Corp., 698 F.Supp. 61, 63-64 (D.N.J.1988). The defendants attempt to hide from those cases and, instead, seize upon a tiny portion of lengthy dictum in Ash v. Wallenmeyer, 879 F.2d 272, 275 (7th Cir.1989), to the effect that, on remand, the defendants would be allowed to try to prove they would have purchased fewer shipment services from the plaintiff at the full tariff rate than they did at the lower rate fraudulently charged by the plaintiff's unfaithful agent. We find the point unpersuasive. In Ash, unlike here, it was the plaintiff's own employee--not a party like the defendant in an arm's length transaction with the plaintiff--who instigated and carried out the fraud. Here, by contrast, the defendants' acts were the driving force behind the fraud; the plaintiff's agent merely stood by and helped to facilitate the scheme. The situation here is on all fours with Ortho Pharmaceutical, supra, and Shulton Inc., supra. The approach to damages for fraud in those cases is consistent with the general rule in Rice v. Price, 340 Mass. at 507, 164 N.E.2d 891, that favors, where possible, an award of benefit of bargain damages to victims of fraudulent misrepresentation.

The defendants also claim error in allowance of the plaintiff's postverdict motion to increase the damages of $108,167 that the jury awarded on the fraud and RICO counts to $312,394--the amount the plaintiff established through documentary evidence prior to and during trial as its benefit of bargain damages. For their part, the defendants produced no documentation prior to trial (or evidence at trial) that those damages were other than what the plaintiff claimed. Hence, the single question of damages on the two counts was ripe for summary judgment and need not have been submitted to the jury at all. The judge tacitly recognized that fact in comments he made at sidebar but, nonetheless, instructed the jury that damages on the fraud and RICO counts were the difference between the regular price and the total amount of end user discounts the plaintiff's records established for the entire eight-year period. ⁴

The plaintiff's postverdict motion was in the nature of a belated motion for summary judgment on the question of benefit of bargain damages. ⁵ The defendants never established a genuine issue of fact on the correct amount, and, hence, the plaintiff was entitled to summary judgment on that one question (dependent, of course, upon the jury's finding of liability on the other elements of the fraud and RICO claims). There was no error in allowing the motion, even though the preferable course would have been for the plaintiff to submit its motion prior to trial. We affirm the $312,394 award on each of those claims.

2. Unfaithful or adverse agent. Bill Wasserman, the plaintiff's local sales representative, met in 1983 with the defendants Marvin Rosenthal, Mark Rosenthal, and Eduardo Mariani, who were then the principals of Broadway Electrical Supply, to help negotiate the distribution agreement. Shortly after the agreement took effect, Wasserman learned that Glomar--the entity the defendants had identified during the...