Judge sets aside $500K verdict in commercial fraud case

A U.S. District Court judge has found that the litigation privilege barred a commercial fraud suit brought by the manufacturer of food-packaging equipment over a buyer’s false statement that the equipment it purchased was contaminated with listeria.

Defendant William J. Hall, president of defendant Hart Food Products, claimed the equipment it bought from plaintiff Ohlson Packaging was “contaminated, defective and dangerous” and demanded a refund. Hall threatened to sue over the matter.

The same day, Hall wrote privately to his attorney that listeria testing indicated the equipment was “clean,” but he wanted the plaintiff to realize it was “dealing with someone who’s kind of crazy and seriously pissed off.”

Apparently unbeknownst to the defendants, Ohlson’s owner, who was in the process of selling the company at the time, disclosed the contamination allegations to a potential purchaser, which allegedly resulted in a reduced sale price.

Following a trial in federal District Court, Ohlson secured a $500,000 commercial fraud verdict against the defendants.

But Chief Judge F. Dennis Saylor IV granted the defendants’ motion for judgment notwithstanding the verdict, finding that the litigation privilege protected Hall’s statements.

“Without exception, those statements appeared alongside threats of bringing a lawsuit and involved his lawyer,” Saylor wrote. “Furthermore, they did, ultimately, result in a lawsuit. Again, it does not matter for the purposes of the litigation privilege whether those statements were false or malicious; it is sufficient that Hall made them while contemplating litigation.”

The 11-page decision is C.P. Packaging, Inc. v. Hall, et al., Lawyers Weekly No. 02-473-23.

‘Lesser of two evils’

Defense counsel T. Christopher Donnelly of Boston declined to comment. Boston attorney Matthew H. Greene, who represented the plaintiff, did not respond to interview requests.

But Robert W. Stetson, a business litigator in Boston, said that as “unjust or distasteful as the result may appear,” the decision was the correct one.

The adversarial system depends on a robust litigation privilege to encourage parties and witnesses to come to court, Stetson said. Otherwise, people would not use the courts out of fear of being sued, which would diminish the rule of law.

“Although the privilege is absolute, it does not apply to absolutely all communications about a dispute. Make all statements, especially those made in an adversarial environment, with care and caution.”

And while the privilege may sometimes enable people to resort to “sharp tactics and gamesmanship without consequence,” Stetson continued, “it’s the lesser of two evils.”

Swampscott attorney Andrew F. Caplan said the case reinforces that, when dealing with the absolute litigation privilege, “absolute means absolute.”

“Anything said by a party or lawyer during a lawsuit or in reasonable anticipation of a lawsuit is absolutely privileged,” he said, pointing out that there is still a difference between non-actionable statements and those that can be used as evidence of underlying wrongful actionable conduct.

Along those lines, Alan E. Brown of Boston said the decision should not be read to suggest that it is a good idea to make statements like the ones Hall made while presenting claims or while negotiating.

“The court cites to many other decisions where plaintiffs were successful in showing that statements like this actually were evidence of other misconduct,” he said.

Boston attorney Eric P. Magnuson agreed.

“Although the privilege is absolute, it does not apply to absolutely all communications about a dispute,” he said. “Make all statements, especially those made in an adversarial environment, with care and caution.”

Meanwhile, Boston corporate attorney Mark J. Tarallo said that even if Hall’s allegations impacted the valuation of Ohlson as a company, its owner did the right thing from a transactional standpoint by disclosing Hall’s contamination assertions to potential buyers.

“Presumably, those statements, where the equipment purchaser’s complaints go to the core of the business, would need to be disclosed either in response to due diligence requests or representations and warranties,” he said. “It could be worse if they hid something like this, leading to litigation down the road with the company’s buyer, where the costs could have been substantially more.”

Contamination allegation

In 2015, Ohlson Packaging, a Massachusetts company owned and managed by John Ohlson Jr., entered into a contract with Hart Food Products and its distributor, under which Hart bought several pieces of food-packaging equipment.

Soon after receiving the equipment at its California facility, Hart Food identified issues with the equipment’s functioning.

In response, Ohlson sent technicians to service the machinery several times.

In October 2016, Hart Food hired a food safety consultant to inspect the equipment for compliance with U.S. Department of Agriculture regulations.

The consultant allegedly flagged several sanitation risks due to the equipment’s design, in particular warning of possible contamination issues due to the difficulty of cleaning certain surfaces.

In February 2017, Hart Food’s president, Hall, removed the Ohlson equipment, reinstalled its previous production line, and emailed the distributor demanding a refund.

Hall said he would give the distributor and Ohlson “one last chance to make this right” or they would face a lawsuit.

After Ohlson refused a refund, Hall sent the distributor another email stating, “Bring your video evidence and see you in court” and warning that “if we find Listeria when we have the independent lab come in and do the swabbing” and are forced into a costly recall, “that’ll be on your guy’s head too.”

In a third email, Hall said that while he was never anxious to file a lawsuit, “I’ve done it before and won’t hesitate to do it again.”

He added: “Do you seriously think you can win this? I’ve got expert witness from within the industry. Nonpartisan health and safety inspectors. Former and current USDA officials. I’ve got the contaminated, defective and dangerous conveyors. I’ve got hours of videos.”

Hall copied his attorney on each email and, on the same day as the third email, wrote privately to his attorney: “We started Listeria testing independently several months ago and we’re clean.”

He also told his attorney: “I’m sure you’re seeing the point of my emails to them is to scare them. I want them to realize they’re dealing with somebody who’s kind of crazy and seriously pissed off. Someone who’s committed to this and won’t back down.”

Ohlson’s president, engaged in preliminary discussions with potential buyers for the company, disclosed the allegations of listeria contamination.

The president ultimately sold the company in December 2017 for a price he claimed was substantially depressed due to the allegations.

In August 2018, Hart Food initiated arbitration proceedings against Ohlson pursuant to an arbitration agreement in the contract. During the proceeding, Hart Food disclosed the emails between Hall and his attorney, which Ohlson introduced as evidence.

Ohlson filed suit against Hall and Hart Food in 2020, alleging fraud and other business torts.

After a jury trial this year, a jury awarded the plaintiff $500,000 in damages on the fraud claim. The defendants moved for a judgment notwithstanding the verdict.

Protected statements

In opposing the JNOV, the plaintiff argued that the litigation privilege should not apply because the statements were not truly made in contemplation of litigation but to obtain a refund for the installed equipment.

Saylor was not convinced.

“[P]laintiff adduced no evidence at trial to rebut the assertion that Hall meant what he said in his e-mails — that he would sue if necessary,” Saylor said. “Indeed, Hall’s uncontroverted testimony at trial was that he planned to bring a lawsuit when he wrote them. … In light of the uncontroverted evidence, therefore, there is no reasonable basis for concluding that the statements were not made in good-faith contemplation of a lawsuit.”

Saylor similarly rejected the plaintiff’s argument that even if Hall anticipated litigation, his statements were not protected because they were evidence of a malicious intent to harm Ohlson’s business, therefore constituting conduct and not speech.

“Here, the basis of plaintiff’s fraud claim — indeed, its sole basis for asserting that claim — is that Hall falsely stated that the Ohlson equipment was contaminated or likely to be contaminated with listeria,” the judge wrote. “Hall’s statements thus did not amount to mere evidence of underlying misconduct, but are themselves the basis of its fraud claim.”

Additionally, Saylor continued, there was no evidence that Hall knew that Ohlson’s owner was seeking to sell his company, nor was there evidence of any other unlawful motivation that would support construing his statements as conduct.

Thus, he concluded, the JNOV should be granted.