Lost Profits Caused by Defamation Must Be Proven with Competent Evidence

On May 31, 2013, the Fourth Circuit reversed a $4 million verdict against U.S. Bancorp for defamation, finding that the amount was excessive and/or unsupported because the jury apparently based its verdict on expert testimony of lost profits admitted in violation of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). Still, in MyGallons, LLC v. U.S. Bancorp, the court found that Bancorp’s public statements refuting the plaintiff’s press release were sufficient to support defamation liability, so it ordered a new trial on damages only.

When Steve Verona conceived of a prepaid consumer gas card program, he contacted Voyager Fleet Systems, Inc., a subsidiary of U.S. Bancorp, about processing the program’s payments. Voyager operates a payment processing network for commercial and fleet gas purchases but was not set up to issue consumer gas cards. Verona explained his program to Bancorp executives, one of whom directed Verona to work with an authorized reseller of the Voyager payment processing system, “GoGas,” as Bancorp would not work with him until the program was larger. GoGas submitted and Bancorp approved Verona’s fleet card application and issued Verona several dozen cards using the Voyager payment network. Verona distributed the cards to family and friends who used the cards to purchase gas. Verona branded the program “MyGallons.”

Internally, Bancorp stated that MyGallons was an approved Voyager fleet card account and that it was working to expand the program. Bancorp began drafting a new contract for its relationship with MyGallons. Bancorp, GoGas and Verona worked to design fleet cards with MyGallons and Voyager logos on them.

Without alerting Bancorp, MyGallons issued a press release in June 2008 announcing the launch of its nationwide prepaid gas program using the Voyager payment network. Bancorp apparently was unaware of the consumer money.jpgrather than commercial nature of MyGallons’ business plan until reading the press release. The press release spread far and wide, and within days of its launch, MyGallons had over 6000 members who had paid the annual fee. Another approximately 30,000 people attempted to sign up after MyGallons stopped accepting memberships.

Bancorp’s counsel emailed Verona, emphasizing that the parties did not have an agreement and that MyGallons had not described the program as one for consumer use. The emails stated that MyGallons did not have approval to use Voyager’s marks and was not authorized to use the commercial fleet cards. The email indicated Bancorp was terminating the fleet card agreement. Bancorp also issued a series of “desk statements” which it shared with media outlets. The desk statements indicated that Bancorp “does not have a contract to do business with MyGallons.com”; (2) Bancorp “did not authorize the use of its name in association with this venture”; (3) Bancorp is “not affiliated with this company”; and (4) “there are no ongoing negotiations to enter into any agreement with MyGallons.”

The desk statements caused the public to distrust MyGallons’ press release. The Better Business Bureau gave it an “F” rating and the company received much negative press. Internet postings and articles labeled MyGallons a scam. MyGallons refunded all monies that it had collected and stopped signing up members. MyGallons contacted numerous companies but was not able to find a replacement payment processing network.

Verona and MyGallons filed suit against Bancorp, Voyager and GoGas for defamation among other claims. A jury found for MyGallons on its defamation claim and awarded $4 million in damages. Bancorp appealed challenging the jury’s finding of defamation and its award of $4 million in damages.

On appeal, Bancorp contended that its desk statements were substantially true and therefore it was entitled to judgment as a matter of law. MyGallons countered that when the statements are considered as a whole they communicate the false impression that the parties had not had any contact and that the jury had sufficient evidence to conclude that one or more comments in the desk statements were false.

The Fourth Circuit noted that even though Bancorp’s statement that it did not have a contract with MyGallons was true, the remaining comments in the desk statements communicated a total disassociation of the companies when the evidence showed that Verona had told Bancorp executives about his concept for MyGallons, had met with Bancorp and that Bancorp executives had directed MyGallons to establish a pilot program through Go Gas. Although confusion existed as to whether the proposed business relationship was commercial or consumer oriented, the parties were clearly negotiating and had a relationship. Bancorp employees had been working with Go Gas and Verona to design fleet cards using the companies’ logos and Bancorp was in the process of drafting a contract to implement a direct relationship between it and MyGallons. By stating the parties had no relationship, Bancorp implied that the press release was a complete fabrication leading the public to view MyGallons as a fraud. The court noted that while MyGallons may have jumped the gun with its press release, Bancorp’s response was an overreaction that the jury could conclude gave a false description of the relationship resulting in defamation.

The court then examined the damage award. Minnesota law (which applied in this case) provides for the recovery of both general damages (harm to reputation) and special damages (for the loss of something having economic value) in defamation cases. The jury did not specify whether the $4 million in damages was for general or special damages or both. The court found that if the award was for general damages, it was excessive because a $4 million award for reputational harm to a startup that had only publicly launched its business a few days before the defamation would be exorbitant. Similarly, if the award was for special damages, it would have required proof of financial loss caused by the statements. Here, the court found the expert testimony on the issue of lost profits amounted to “sheer speculation.” As such, it failed the Daubert test and should not have been admitted. The court vacated the award of damages and remanded for a new trial on damages.

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