Friday, January 20, 2005
Appeals Court Overturns Judgment in Suit Between ‘Smart Mop’ Pair
By KENNETH OFGANG, Staff Writer/Appellate Courts
A jury’s finding that one of the two men who became wealthy marketing the Smart Mop and other household inventions through heavy television advertising defrauded the other has been upheld by this district’s Court of Appeal, but the ensuing judgment for nearly $750,000 has been overturned on other grounds.
Div. Eight agreed with Thomas Persson that Jon Nokes fraudulently concealed the fact that at the time Nokes was buying out Persson’s share of their financially distressed company, he was in the process of developing the Tap Light, which has sold over 18 million units and apparently restored Smart Inventions, Inc. to profitability.
But in an opinion Wednesday by Justice Paul Boland, the panel rejected Los Angeles Superior Court Judge James R. Dunn’s finding that Persson owed Nokes a fiduciary duty in connection with the sale. While Smart Inventions was originally a partnership, Boland explained, it was a corporation at the time of the events giving rise to the lawsuit, and the fiduciary duties that exist between partners are not present as between shareholders.
The court also held that Dunn was in error when he ruled that an offer of settlement under Code of Civil Procedure Sec. 998 was ineffective.
Nokes, of English origin, and the Swedish-born Persson formed Smart Products International as a partnership in 1991, then incorporated, with Nokes as president and each as a 50 percent shareholder, in 1994.
The parties, however, had disagreements, which—according to their trial testimony—stemmed in Nokes’ case from a belief that he was under-compensated for the time and effort he was putting in as the day-to-day head of the company. Persson, who was primarily responsible for product development, said he felt “disrespected and undermined.”
After Persson rejected Nokes’ request that his salary be increased to $1 million annually, the parties began discussing a possible end of their business relationship in May 1998, but no agreement was reached for more than a year.
In the middle of 1999, with sales dropping, KMart and Wal-Mart notifying the company they would no longer sell their mop, and other products nearing the end of their productive life cycles, Nokes offered what he represented to be “the truest picture possible of where the company is right now.”
He proposed such measures as laying off two-thirds of the workers at the company’s factory, cutting salesperson and management salaries by 40 percent or more, reducing work weeks, and terminating his and Persson’s salaries. Shortly thereafter, Persson accepted Nokes’ offer of a buyout of his shares at $1.6 million, including $200,000 for shares which Persson bought between his acceptance of the offer and the closing, the transaction being structured for tax purposes.
On Aug. 6, 1999, the transaction closed. That very day, the company began advertising the Tap Light, a disc-shaped, battery-operated, touch-activated portable light fixture Persson said he was never told about. The trial evidence showed that at the time of the buyout, Nokes had been working with the Home Shopping Network for months on a plan to roll out the Tap Light and other products.
“In addition to generating huge revenues, the Tap Light generated this litigation,” Boland explained, as Persson sued Nokes and the corporation for fraud, negligent misrepresentation, securities fraud, breach of fiduciary duty, declaratory relief and an accounting.
The defendants denied liability and asserted as an affirmative defense that all claims were barred by an express mutual release the parties signed as part of the buyout.
Smart Inventions also filed a cross-complaint against Persson for breach of fiduciary duty and self-dealing, contingent on the court concluding that the mutual release was not binding.
Nokes and the corporation later offered a joint settlement proposal in the amount of $500,000, which was rejected. The case eventually went to trial on theories of fraud, negligent misrepresentation, and breach of fiduciary duty.
After a month of trial in the summer of 2002, the jury found that Nokes made no affirmative misrepresentations but concealed material facts, causing $218,000 damages. In advisory findings, adopted by the judge, the jury found that Nokes owed Persson a fiduciary duty, and that he breached that duty, causing damages in the amount of $306,000.
The jury also found that Persson breached his fiduciary duty to the corporation, but that no damages resulted. Dunn found that Persson had such a duty but did not breach it, and ordered judgment in favor of Persson and against Nokes only, in the amount of $306,000.
Ruling on post-trial motions, Dunn found Smart Inventions jointly and severally liable for fraudulent concealment on a respondeat superior theory, notwithstanding the verdict. He awarded Persson’s attorneys $365,000 in fees and $48,000 in costs, and denied the defendants’ motion for nearly $800,000 in fees and costs incurred subsequent to the rejection of the settlement offer.
Dunn reasoned that the offer did not comply with Sec. 998 because it was a joint offer and the defendants were not subject to joint and several liability on all causes of action, the court having previously ruled that a breach of fiduciary duty could only be alleged against Nokes.
Boland, writing for the Court of Appeal, rejected the plaintiff’s argument that a breach of fiduciary duty was properly found to result from the parties having continued to treat each other as partners.
There was, the justice acknowledged, evidence that Nokes and Persson were the only principles of the corporation, continued to run it after incorporation in the same manner as before, and often referred to each other as partners. But that did not create “a ‘de facto’ partnership that somehow existed concurrently with the corporate enterprise,” Boland wrote, because none of the limited exceptions to the rule that partnership obligations cease once a corporation is formed—such as where the corporation is formed to carry out a preincorporation agreement that was later breached—apply.
The verdict for fraudulent concealment was valid, however, Boland went on to say, based on the evidence that the Tap Light and Nokes’ plan to market it was of such significance that disclosure would have had a material effect on the sale of Persson’s shares.
The jurist rejected the argument that the product was not material because there was no way of knowing that it would be successful, saying there was sufficient evidence that it might be, particularly given HSN’s willingness to be involved.
Boland also rejected the claim that there was no duty of disclosure in the absence of a fiduciary relationship. The argument “overlooks the critical principle that intentional concealment exists when a party to a transaction, who is under no duty to speak, nevertheless does speak and suppresses facts which materially qualify the facts stated.”
The justice cited Nokes’ statement that his report to Persson of the company’s condition was “the truest picture,” accompanied by analyses of potential revenues that omitted the Tap Light, even though it was already in development.
Boland went on to explain that the Sec. 998 offer should not have been invalidated solely based on the lack of joint-and-several liability as to one of the causes of action.
The offer was not “uncertain,” Boland explained, because all the plaintiff had to do was assess his prospects of prevailing against each defendant, add up the potential recoveries against each, and consider the likelihood that the total equaled or exceeded the joint offer.
Nor, the justice added, did the joint nature of the offer place Persson at risk of having to pay fees and costs to one defendant even after prevailing against the other.
“Even if, after trial, one defendant were found to have no liability, that defendant could not claim post-offer costs against Persson unless the other defendant’s liability was also less than the offer, since the offer was a joint offer,” the justice explained.
The court’s ruling, Boland emphasized, does not resolve other issues that might exist under Sec. 998, such as whether the offer was reasonable under the conditions existing when it was made. Such issues must be considered by the trial court on remand, the justice said.
Attorneys on appeal were Stephen R. Mick, Robert N. Treiman and Joanna H. Kim of Akin Gump Strauss Hauer & Feld for the defendants and James R. Rosen and Adela Carrasco Defendants of the Law Offices of James R. Rosen for Persson.
The case is Persson v. Smart Inventions, Inc., 05 S.O.S. 257.
Copyright 2005, Metropolitan News Company