Business Law Journal

In Mazik v. GEICO Gen. Ins. Co., the California Court of Appeal recently affirmed an award of $1 million in punitive damages, throwing into sharp relief the fact that companies are liable for the wrongful conduct of their “managing agents”.  This holding explained that a “managing agent” under California Civil Code §3294(b) includes an employee who’s “systematic application of policies” realistically determines corporate policy, even if such policies are not formally adopted by the corporation.

Background

On August 11, 2008, Michael Mazik (“Mazik”) was involved in a serious head-on collision with another driver who had crossed over double yellow lines into Mazik’s lane on a highway in Riverside County, with both vehicles traveling at approximately 45 to 50 miles per hour.  The other driver was killed.  Mazik suffered multiple lacerations and abrasions, as well as deformities of the heel hone and destruction of the joint.  As Mazik medical expert testified, the heel bone “literally exploded”.

Thereafter, Mazik received the other driver’s full insurance policy limit of $50,000, and Mazik’s attorney subsequently submitted a claim on December 31, 2009 to Mazik’s $100,000 underinsured motorist policy with GEICO General Insurance Company (“GEICO”) for the remaining $50,000 (offset by the money Mazik had already received).  After receiving Mazik’s demand, a GEICO claims adjuster prepared a written “Claim Evaluation Summary” (“Evaluation”), which ostensibly summarized Mazik’s medical records and assessed values for his medical expenses, lost income, and “pain and suffering”, but omitted important information.  The Evaluation determined a negotiation range for the full value of Mazik’s claim to be $47,047.86 to $52,597.86 (including the $50,000 that Mazik had already received).  After preparing the Evaluation, the adjuster obtained approval from GEICO’s regional liability administrator, Lon Grothen (“Grothen”), to reject Mazik’s claim for $50,000 and on January 22, 2010, GEICO instead offered Mazik a settlement of $1,000.  Then in September 2010, after a new claims adjuster began working on the file (but without receiving any additional information), GEICO increased its settlement offer to $13,800.  On January 22, 2011, GEICO further increased its offer to $18,000, with a note from Grothen stating that he had “Increased The General Damage Range To Increase The Possibility of Settlement.”

On February 16, 2012, GEICO served a statutory offer to compromise Mazik’s claim for $18,887, which Mazik rejected to reiterate his demand for the policy limit of $50,000.  GEICO did not make any additional settlement offers, because as Grothen explained “there was no negotiation from the other side. They never came off their policy limit. We call that throwing good money after bad. If we can’t get them to negotiate, he would have been — it’s bidding against yourself.”  On August 31, 2012, even after GEICO had received copies of Mazik’s medical records documenting his continuing issues three years after the accident, Grothen gave his “Ok To Move This Toward Arbitration. I Do Not See This As A Policy Limits Case.”  The arbitration took place in April 2013, and the arbitrator issued an award for the full policy limit to Mazik.  GEICO subsequently provided Mazik with a check for $50,000 in June 2013 — 30 months after the jury in this case concluded that GEICO should have paid the policy limits.

Mazik filed his action for bad faith against GEICO on May 7, 2014, and the case was tried before a jury in July 2016.  The jury awarded compensatory damages of $313,508, and punitive damages of $4 million.  The trial court reduced the punitive damages to $1 million.

Standard for “Managing Agents”

An employer may be liable for punitive damages based upon the acts of an officer, director, or managing agent.  The California Supreme Court explained in White v. Ultramar, Inc. (1999) 21 Cal.4th 562 (“White”), that managing agents are employees who “exercise substantial independent authority and judgment in their corporate decisionmaking so that their decisions ultimately determine corporate policy.”  The California Supreme Court further explained that a “plaintiff seeking punitive damages would have to show that the employee exercised substantial discretionary authority over significant aspects of a corporation’s business.”  White, at p. 577.  Such a requirement is not satisfied merely by the ability to hire and fire workers.

The Court of Appeal found that there was ample evidence that Grothen was a managing agent of GEICO; for instance, Grothen had wide regional authority over the settlement of claims, and his responsibilities affected a large number of claims.  The Court also noted Grothen had testified that an important part of his job was to establish settlement standards within his region.  This broad decision-making responsibility for establishing GEICO’s settlement standards reasonably supported a finding that Grothen ultimately determined corporate policy, even if not through policies formally adopted by GEICO.  As the Court reasoned “an employee’s authority over the systematic application of policies in a claims manual or other formal corporate document might determine corporate policy as effectively as the formulation of the policies themselves.”

Grothen’s Conduct Applied to the Punitive Damages Standard

After holding that Grothen qualified as a “managing agent” the Court analyzed his conduct against the backdrop of the punitive damages standard.  The Court of Appeal found that Grothen had satisfied several of the factors: Mazik was financially vulnerable; GEICO’s oppressive conduct was not only repeated, but there was reason to believe that Grothen had widely promoted his adversarial approach of selectively relying only on favorable facts in violation of his fiduciary duties; and there was evidence that GEICO had intentionally manipulated the facts to create a favorable record justifying its offers to Mazik below his policy limits.  Thus, there was sufficient evidence that Grothen had engaged in oppressive conduct by ignoring information concerning the serious and permanent nature of Mazik’s injuries, and that GEICO, through Grothen, had deliberately “cherry-picked” favorable medical information and disregarded unfavorable findings.  Furthermore, the jury had a sufficient basis to conclude that Grothen had approved unreasonably low offers to Mazik, which ignored his medical records showing the serious and permanent nature of his injuries.

Conclusion

The decision in Mazik highlights the potential liability that a business may face when it vests non-executive level employees with extensive decision-making power.  Even though the business entity may believe that such employees are not determining corporate policy, the reality of their decisions may prove otherwise.  Contact your counsel at Atkinson, Andelson, Loya, Ruud & Romo for a thorough analysis of such liabilities.

On May 20, 2019, the United States Supreme Court resolved a circuit split and answered a significant previously unresolved legal issue in trademark licensing.  The Supreme Court held in Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657, 587 U.S. __ (2019), that a debtor-licensor’s rejection of an executory trademark licensing agreement in bankruptcy has the same effect as a breach of contract outside bankruptcy and therefore does not rescind the licensee’s rights or revoke the trademark license.

Section 365 of the Bankruptcy Code allows a debtor to “reject any executory contract”—meaning a contract that neither party has finished performing.  The issue before the Court was whether a debtor-licensor’s rejection of a trademark license agreement, which “constitutes a breach of such contract” under Section 365(g) of the Bankruptcy Code, resulted in a rescission of the license even though a breach of contract in a non-bankruptcy context would not automatically terminate the license.

In its 8-1 decision authored by Justice Kagan (and joined by every justice except Justice Gorsuch), the Supreme Court reversed the First Circuit’s January 2018 decision that had ruled that a licensee loses its right to use licensed trademarks if the debtor-licensor rejects the trademark licensing agreement in bankruptcy.  Instead, the Supreme Court sided with the Seventh Circuit’s reasoning from Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), where the Seventh Circuit construed Section 365 and held to the contrary.

Prior to the Supreme Court’s decision, the circuits had been divided as to the effect of a debtor-licensor’s rejection of a license.  Some circuits, including the Seventh Circuit, had held that a rejection of a license agreement was simply a breach of contract, in which case the licensee’s rights under the contract remained intact and the licensee could continue to use the trademark.  Other circuits, such as the First Circuit, held that a rejection of a license agreement was a termination of the license, thereby prohibiting the licensee from continuing to use the trademark.  The debate has now been settled.

The Supreme Court’s decision significantly enhances the bargaining strength of trademark licensees because there is now certainty that a licensor’s rejection in bankruptcy does not revoke the licensee’s rights under a pre-existing license agreement.  Potential debtors are also affected because trademark licenses granted prior to bankruptcy remain valid and the debtor-licensor’s obligations under the license agreement continue. 

Justice Sotomayor issued a concurring opinion in part to highlight the special treatment of a trademark licensee’s post-rejection rights and remedies under Section 365. 

Parties who now find themselves negotiating agreements, including trademark licenses in particular, must carefully consider what terms and obligations will survive bankruptcy before entering such agreements.  Because the Supreme Court’s ruling implicates many business and drafting issues, it is important to consult with experienced intellectual property counsel before negotiating and entering into a trademark license agreement.

AALRR has a dedicated group of attorneys on its Intellectual Property Team who can assist you with negotiating and drafting license agreements.  Contact the authors for assistance with navigating the complicated intersection of intellectual property and insolvency.

In FilmOn.com v. DoubleVerify, Inc. (2019), Case No. S244157, the California Supreme Court recently clarified the circumstances under which the state’s anti-SLAPP law applies to commercial speech and services.  The anti-SLAPP law, Code of Civil Procedure § 425.16, was designed by the Legislature to provide for early dismissal of strategic lawsuits against public participation (known colloquially as “SLAPP” suits), which are filed primarily to discourage the free exercise of speech and petition rights.  A defendant prevailing under the anti-SLAPP law is entitled to recover its attorneys’ fees from the plaintiff.  The Supreme Court was called upon to interpret the anti-SLAPP law’s “catchall” provision, which provides for dismissal of claims arising from “conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest.”  Applying this provision, the Supreme Court held that DoubleVerify, Inc.’s (“DoubleVerify”) confidential reports about FilmOn.com’s (“FilmOn”) web content — which were generated for profit, delivered only to paying clients, and subject to a confidentiality requirement prohibiting broader dissemination of the reports — were not entitled to protection under the anti-SLAPP law.

On March 4, 2019, the United States Supreme Court issued a significant copyright decision that resolved a longstanding circuit split and changes how—and when—copyright owners can file an infringement action in federal court to enforce their copyrights.