Can A Corporation Sue for Reputation Damages? The Texas Supreme Court Answers

Apple.  Microsoft.  Google.  Starbucks.  Wal-Mart.  People generally hold certain views and beliefs about each of these companies.  But what happens when a competitor makes false statements that intentionally damage the reputation of such a company?  Can a corporation sue for damages to its reputation?  On May 9, 2014, the Texas Supreme Court answered this question, and held that corporations, like people, can sue for injury to their reputation.[1]

Background

According to the lawsuit allegations, Waste Management of Texas, Inc. (“WMT”) and Texas Disposal Systems Landfill, Inc. (“TDS”) were competing for waste disposal contracts with the cities of Austin and San Antonio.  In early 1997, while TDS was in the final stages of negotiations with the City of San Antonio and after TDS and WMT responded to the City of Austin's request for proposals, WMT anonymously published a community “Action Alert.”  The Alert, which was distributed to Austin environmental and community leaders, claimed that TDS’s landfills were less environmentally sensitive than they actually were and as compared to other area landfills.  A public relations consultant hired by WMT drafted the document based on information he gathered from several WMT officials.

TDS sued WMT for defamation, tortious interference with an existing or prospective contract, and business disparagement.  Although TDS ultimately finalized its contracts with both Austin and San Antonio, TDS alleged that the Alert caused it to suffer economic damages by delaying the execution of those contracts.  The trial court granted WMT summary judgment on all of TDS’s claims except for defamation.

At trial, TDS requested that the trial court instruct the jury on defamation per se and the related issue of presumed damages but the trial court declined to do so.  The jury found that WMT’s statements were false and that TDS had shown by clear and convincing evidence that WMT knew of their falsity or had serious doubts about their truth.  However, the jury determined that TDS had suffered no actual damages as a result of the publication so the trial court entered a take-nothing judgment against TDS.  TDS appealed.

The appellate court held that the trial court erred by refusing to submit a jury instruction on defamation per se and reversed and remanded for a new trial.  In the second trial, the jury returned a verdict in favor of TDS and awarded it $450,592.03 for reasonable and necessary expenses, $0 for lost profits, $5 million for injury to reputation, and $20 million for exemplary damages based on the jury’s finding that WMT published the defamatory statements with malice.

The trial court treated the $5 million injury to reputation award as non-economic damages and consequently, capped the exemplary damage award at $1,651,184.06.^[2]  WMT appealed, and the appellate court affirmed. Both parties then filed cross-petitions in the Texas Supreme Court.

Analysis

The Texas Supreme Court considered (1) whether a corporation could suffer reputation damages, (2) if so, whether those damages are economic or non-economic for purposes of the statutory cap on exemplary damages, and (3) whether the evidence supported the damages awarded by the jury.

Reputation Damages

WMT contended that defamation per se is an inherently personal tort that is designed to address harm only natural persons may suffer such as mental anguish, sleeplessness, or embarrassment.  The Court rejected such argument and found that “corporations, like people, have reputations and may recover for harm inflicted on them. . . . If false and disparaging statements injure a corporation’s reputation, it can sue for defamation per se just like flesh-and-blood individuals.”

As a public figure, TDS was required to prove WMT published the defamatory statements with actual malice, i.e., knowledge of the falsity or reckless disregard for the truth of the statements.  The consultant who drafted the Alert testified that he knew TDS's landfill complied with the EPA rules and that it would be false to say otherwise; he wanted readers to think TDS had a loophole around such environmental rules; he wanted readers to think TDS's landfill was less environmentally safe; and WMT officials involved with him had the same understanding.  The Court held that this evidence was legally sufficient to support the finding that WMT published the Alert with knowledge of the falsity of the statements.

Economic vs. Non-Economic Damages

TDS's sole issue on appeal was whether the trial court erred by categorizing the jury award as non-economic damages rather than economic damages for purposes of the statutory cap on exemplary damages.  The Court found no error, noting that the current version of the statute and settled precedent classify injury to reputation as non-economic damages.

Evidence of Damages

The Court then examined whether the evidence was sufficient to support the award of remediation costs, reputation damages, and exemplary damages.  The Court found no evidence of reputation damages, so it vacated the jury's $5 million award, and held that TDS was only entitled to nominal damages.  The Court recognized that assessing injury to reputation is an inexact measurement, but noted that the jury is not unconstrained in its discretion.  Even though damages are presumed, the corporation must still provide specific evidence of the amount of the economic loss caused by the damaged reputation.  The Court held that "the evidence must be legally sufficient as to both the existence and the amount of such damages. . . ."

The Court affirmed the amount of damages for the remediation costs TDS incurred as a result of the Alert.  Because the evidence was sufficient to support the jury's finding of actual malice and because TDS established actual damages for remediation costs, the Court held that TDS was entitled to exemplary damages.  However, because the evidence was insufficient to support the award of reputation damages, the calculations of exemplary damages and interest were affected.  Therefore, the Court reversed the appellate court's judgment affirming the exemplary damages and remanded the case to the court of appeals for it to reconsider the amount of exemplary damages and interest.

Conclusion

"It takes 20 years to build a reputation and five minutes to ruin it."[3]  The Texas Supreme Court's decision confirmed that for-profit corporations can suffer reputational damages.  However, to recover more than nominal damages, the corporation must quantify the amount of damage to its reputation.  Look for more litigation to ensue following this ruling, particularly as on-line reviews and social media continue to take on an important role in the success or failure of a business entity.

[1] Waste Mgmt. of Tex., Inc. v. Tex. Disposal Sys. Landfill, Inc., No. 12-0522, 2014 WL 1875637 (Tex. May 9, 2014).

[2] The Texas Civil Practice and Remedies Code caps exemplary damages at the greater of (1) two times the amount of economic damages plus an amount equal to any non-economic damages found by the jury, not to exceed $750,000; or (2) $200,000.  Tex. Civ. Prac. & Rem. Code § 41.008(b).

[3] This quote has been attributed to Warren Buffet.  See http://business.time.com/2010/03/01/warren-buffetts-boring-brilliant-wisdom/.

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