Food Lion fraud award against ABC thrown out

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3

From the Fall 1999 issue of The News Media & The Law, page 3.


The nearly $317,000 judgment that remained against ABC in the fraud case brought by the Food Lion grocery chain was thrown out by a federal appellate court in mid-October, leaving only a $2 award for trespass and employee disloyalty intact.

Hidden cameras were used by ABC producers investigating allegations of improper food handling at Food Lion stores. The chain sued ABC and the reporters, who lied on job applications to get jobs in a store’s meat department, for fraud, trespass, and breach of employee loyalty in July 1995.

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ABC broadcast a report on “PrimeTime Live” in November 1992 alleging that Food Lion’s meat department required employees to engage in unsafe, unhealthy or illegal practices, such as selling old meat that was washed with bleach to kill odor, selling cheese that had been gnawed by rats, and working off the time clock. In order to gather information for the report, two ABC producers, Lynne Dale and Susan Barnett, obtained jobs at Food Lion stores in North Carolina and South Carolina by falsifying grocery store experience on their resumes and omitting their current employment with ABC.

Each worked only one or two weeks at the stores, and while there, they used hidden cameras to secretly record Food Lion employees treating, wrapping and labeling meat; cleaning machinery; and discussing meat department practices.

Food Lion sued ABC in July 1995 in federal District Court in Greensboro, N.C., for fraud, breach of the duty of loyalty, trespass, and unfair trade practices under North Carolina statutory provisions. It argued that ABC used illegal newsgathering methods in obtaining the information for the report, but did not allege libel.

Food Lion alleged that the ABC producers fraudulently gained employment by lying on their job applications and giving false references, and then used hidden cameras to “stage” events in order to create footage that fit ABC’s version of Food Lion’s sanitary practices. Food Lion claimed that it lost $2.5 billion after the broadcast when its sales and stock price plummeted.

In late December 1996, a jury found ABC liable for fraud, trespass, and disloyalty. In late January 1997, the same jury awarded Food Lion $1,400 in compensatory damages and $5.5 million in punitive damages for fraud, along with $2 in nominal damages for breach of loyalty and trespass. However, the federal District Court found the punitive award excessive and reduced it to $315,000.

Both ABC and Food Lion appealed the judgment to the U.S. Court of Appeals in Richmond (4th Cir.), which heard arguments in early June 1998.

ABC argued that the lower court should have rejected the jury’s fraud verdict because Food Lion failed to show it suffered any injury as a result of the misrepresentations made by Dale and Barnett on their job applications.

Furthermore, ABC argued that it should not have been held liable for disloyalty to Food Lion under North Carolina or South Carolina law because the producers did not compete with Food Lion, misappropriate any of its profits, or breach its confidences. Additionally, it asserted that the producers had not trespassed on Food Lion’s property because, by hiring them to work in the grocery stores, Food Lion had consented to their presence in those stores. Moreover, ABC argued that the lower court should have subjected Food Lion’s claims to First Amendment scrutiny.

Food Lion argued that as a result of the misrepresentations Dale and Barnett made on their job applications, it suffered losses due to hiring and training costs, and paid wages to the two producers. Furthermore, Food Lion argued that the lower court should have allowed recovery of compensatory damages for reputational harm, not just training costs and wages, that resulted from the broadcast.

In mid-October, the appellate court rejected the fraud claim, and the nearly $317,000 in damages that accompanied it, but upheld the $2 award for breach of loyalty and trespass. The appellate court also held that Food Lion was not entitled to recover damages for reputational harm without meeting the First Amendment based “actual malice” — knowledge of falsity or reckless disregard for the truth — standard for recovery of such damages.

The appellate court rejected the fraud damages because it found that Food Lion had failed to prove it suffered any injury as a result of relying on the misrepresentations made by Dale and Barnett on their job applications.

Since the two producers did not make any representations about how long they would work, they were “at-will” employees who could quit at any time, the court noted. With at-will employment, Food Lion has no right to presume that any worker will remain employed long enough for the grocery chain to recoup its training costs. As a result, the court ruled, Food Lion could not establish that the false resumes, rather than the general risks of at-will employment, caused it to lose the value of training the producers.

Furthermore, the appellate court held that Food Lion failed to show that it paid wages to Dale and Barnett because of their misrepresentations. The reason for issuance of the paychecks was not the misrepresentations, but rather the performance of the two producers in their capacity as Food Lion employees, the court held.

Because Food Lion could prove no injury as a result of the misrepresentations, it could not recover any compensatory damages for fraud, the court concluded. Without a tenable basis for compensatory damages for fraud, Food Lion could not recover punitive damages for that alleged fraud, the court held.

The court also found that because Dale and Barnett were employed by Food Lion, they owed Food Lion a duty of loyalty. The court held that since the two producers intended to “act against the interests of their second employer, Food Lion, for the benefit of their main employer, ABC,” they breached that duty of loyalty to Food Lion.

In addition, the appellate court concluded that the ABC producers trespassed. The court explained that Dale and Barnett had permission to be in the stores where they worked because Food Lion had hired them, but that they did not have permission to secretly videotape footage in non-public areas of the stores for use on ABC because Food Lion had not consented to their presence for that purpose.

The court held that the lower court correctly declined to apply a First Amendment analysis to Food Lion’s breach of loyalty and trespass claims. The court found that the laws regarding employee loyalty and trespass were laws of general application, from which the press could not be exempt, and that the application of those laws to the media would merely have “an ‘incidental effect’ on newsgathering.”

Thus, the court reversed the $1,400 in compensatory damages and $315,000 punitive award based on Food Lion’s fraud claim, but upheld damages of $2 for breach of loyalty and trespass.

In addition, the appellate court affirmed the lower court’s denial of damages Food Lion sought for injury to its reputation, such as loss of good will and lost sales, based on the content of ABC’s broadcast. The court refused to analyze whether the broadcast caused Food Lion to lose sales and stock value because “an overriding (and settled) First Amendment principle precludes the award.”

The court said that Food Lion had “attempted to avoid the First Amendment limitations on defamation claims” by seeking damages to its reputation based on the broadcast, but not alleging libel and not offering any proof of falsity or reckless disregard for the truth — which is what public figures must prove to recover for reputational harm in libel cases. The court held that such recovery of damages against the press is precluded by the U.S. Supreme Court’s decision in Hustler Magazine v. Falwell.

Under Hustler, a public figure must prove actual malice — knowledge of falsity or reckless disregard for the truth — when seeking damages in non-libel claims against parties protected by the First Amendment. The appellate court concluded that Food Lion could not meet the actual malice standard for libel, and therefore, could not receive damages for harm to its reputation as a result of the broadcast.

Judge Paul Niemeyer dissented from the part of the panel’s holding that found Food Lion suffered no injury as a result of the falsified resumes. Niemeyer asserted that because Food Lion would not have hired the producers had they not lied about their experience and failed to disclose that they already were employed by ABC, the misrepresentations caused Food Lion to incur training expenses for which it should be compensated. (Food Lion, Inc. v. Capital Cities/ABC, Inc.)