Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Cal. App.: Award of compensatory, but not punitive, damages upheld over hydrogen-on-demand company’s failure to provide marketable products or test data to dealer, (Jul 2, 2013)

By Tobias J. Gillett, J.D., LL.M.

Former dealers of products offered by a hydrogen-on-demand company and its principal were entitled to compensatory damages for breach of contract, breach of warranty, and negligent misrepresentation over the company’s failure to provide marketable hydrogen-on-demand units or promised test data regarding the units, a California appellate court has ruled (Allen v. Packer, June 28, 2013, Chaney, V.). However, the court found a punitive damage award based on a fraud claim to be unsupported by necessary evidence of the principal’s financial condition.

In 2008, Phillip and Todd Allen contacted David Packer about the possibility of opening a dealership to sell hydrogen-on-demand products produced by HydroFuture, LLC. Hydrogen-on-demand technology produces hydrogen from water and then injects it into diesel engine fuel intakes to increase engine power and reduce fuel consumption and exhaust emissions.

Packer claimed his products were “perfected” and ready for market. He gave a demonstration of a HydroZilla unit in operation on an idling truck, and claimed he would be able to provide data regarding their effectiveness in the near future that could be used for product sales. The Allens and Packer entered into a dealer’s agreement purporting to be between HydroFuture, LLC and an entity called HydroFuture of Texas, LLC, with the Allens signing as its officers. However, no entity called HydroFuture of Texas, LLC was ever formed.

According to the Allens, the HydroZilla units were not ready when promised, and Packer never provided the test data. Packer later informed the Allens that the units were overheating and “building up green sludge inside,” but that other units might be available from Taiwan. Packer refused the Allens’ request for a refund, although he responded to a letter from the Allen’s attorney by stating that HydroFuture was coming out with a new version that had a stainless steel core and used sodium hydroxide rather than drinking water that it would exchange for the Allens’ units at no cost.

The Allens filed suit, asserting claims for breach of contract, fraud, negligent misrepresentation, breach of the implied warranty of merchantability, and breach of warranties under U.C.C. Sections 2314 and 2315. The trial court entered judgment jointly and severally against Packer and HydroFuture for compensatory damages of $49,060 on the breach of contract and breach of warranty claims, for compensatory damages of $45,000 on the negligent misrepresentation claim, and for punitive damages of $25,000 on the fraud claim. Packer and HydroFuture appealed.

Standing. The appellate court rejected Packer’s argument that the Allens did not have standing bring their claims because the agreement was between HydroFuture, LLC and HydroFuture of Texas, LLC, not between Packer and the Allens. The evidence showed that the agreement allowed the Allens to use a Gas Busters LLC name to market hydrogen-on-demand products, that the invoice for units they purchased identified the Allens and Gas Busters as the purchasers, that the purchase was paid with a Gas Busters check, and that Packer printed business cards for the Allens identifying them as HydroFuture’s Texas dealership, rather than “HydroFuture of Texas.” “This evidence support[ed] the court’s implied determination that the agreement was entered into by and on behalf of the Allens and their then-existing company Gas Busters,” in the court’s view.

Joint and several liability. The court also concluded that the trial court properly imposed joint and several liability against both HydroFuture, LLC and Packer personally. The court did not have to evaluate whether the record would support a finding of alter ego liability because HydroFuture, LLC did not yet exist when he induced the Allens to enter into the dealership agreement. When the parties signed the agreement and it became effective Packer was merely using the Hydrofuture LLP name in his business, and it was not yet a separate legal entity. Therefore, Packer was acting on his own behalf, the court found.

Product performance. The court determined that the products had not performed as represented by Packer. In discovery, Packer admitted that as of almost two years after the agreement was signed, no working units had been installed on commercial vehicles. Packer also admitted to the Allens that the units “functioned inconsistently and were overheating,” and that he could not install and test units on a truck because truck owners would not permit him to put units on their trucks without evidence of their safety. Therefore, “Packer had admitted to Allen that the units did not work as he had represented they would, and that he could not provide the promised test data.” The evidence, although hearsay, “was admissible as evidence of the truth of Packer’s admissions,” and was enough, even without other evidence, to support the trial court’s finding of breach.

Exclusion of evidence. The court rejected Packer’s contention that the trial court improperly excluded evidence that would have shown the units worked as represented. The “Olson report” allegedly found that the units did not increase, and in some cases may lower, exhaust emissions, but reflected testing performed long after the dealer agreement was signed, and addressed a newer version of the units. The “Robertson data” purported to compare odometer readings and fuel usage for a truck outfitted with and without a “HydroZilla Version 3” unit, but most of the data appeared to come from a period after the dealer agreement was reached. The court observed that, “contrary to Packer’s unsupported claim,” the trial court did not exclude the Olson report.

Moreover, the court properly excluded the Robertson data, in the court’s view. No evidence demonstrated that the data was “relevant to the sole issue for which it was offered”—showing that the Allens had received test data—because nothing in the document indicated that it had been given to the Allens. Therefore, the data was not admissible.

Furthermore, Packer had not provided “a foundation sufficient to show the admissibility of the Robertson data for any purpose involving proof of the document’s contents,” because he “offered nothing to show how, or by whom, the data had been collected, compiled, and maintained; whether the data had been compiled and maintained in the ordinary course of someone’s business; who had prepared the document in the form it was offered; for what purpose the document had been prepared; or even what portion of the data (if any) had been provided to the Allens before their revocation of the dealership agreement.” Even if the data were relevant and admissible, Packer would not have been prejudiced by its exclusion because “very little of the data was dated before the Allens’ dealership transaction,” and the data did not contradict the conclusion that Packer had not provided test data.

Contract deadlines. The court declined to consider Packer’s appeal based on his argument that contractual deadlines for filing claims related to the units’ quality or performance barred the Allens’ claims. Packer had not pleaded them in his answer or raised them before the trial court, and therefore could not assert them on appeal. Moreover, the compensatory damages awarded by the trial court were all supported by the breach of contract and negligent misrepresentation claims, “without regard to the validity of any of the warranty claims, negating any prejudice to Packer.”

Compensatory damages. The trial court did not improperly award double recovery of compensatory damages to the Allens by awarding them $49,060 on the breach of contract and breach of warranty claims, and $45,000 on the negligent misrepresentation claim. The $49,060 award reimbursed the Allens for their payment for the units, while the $45,000 award represented reasonably anticipated profits from their dealership.

Punitive damages. The court reversed the trial court’s award of $25,000 on the fraud claim. The Allens had failed to introduce evidence of Packer’s financial condition, a prerequisite to an award of punitive damages. Although the Allens provided evidence of Packer’s gross revenues, that evidence did not show what costs or liabilities he had sustained. Without evidence of Packer’s approximate net worth, the record was insufficient to support the award of punitive damages, according to the court.

The case is No. B238909.

Attorneys: Scott D. Bertzyk (Greenberg Traurig) for David W. Packer. Robert E. Drescher (Drescher Law Firm) for Phillip Allen.

Companies: HydroFuture, LLC

Cases: FranchisingDistribution CaliforniaNews