SCOTX—DEFAMATION AND BUSINESS DISPARAGEMENT ARE NOT THE SAME!

Innovative Block of South Texas, Ltd. v. Valley Builders Supply, Inc.
Supreme Court of Texas, No. 18-1211 (June 25, 2020)
Justice Devine (opinion available here)
The Supreme Court reversed a $2.7 million defamation verdict entered in favor of Valley Builders Supply, concluding it was “not a case of defamation but rather of business disparagement—a cause of action not submitted to the jury.” The case involved two building-supply companies that manufactured and sold concrete blocks and pavers in the Rio Grande Valley. Valley went out of business several years after Innovative entered the market. It sued Innovative for disparagement and defamation, claiming that Innovative disparaged the quality of Valley’s concrete blocks and falsely accused Valley of using “bad” aggregates in its manufacturing process. Ultimately, Valley only went to the jury on the defamation claim, and the trial court entered a judgment against Innovative for $1.8 million in actual damages and $937,000 in exemplary damages based on the jury’s verdict. The judgment was affirmed on appeal.

Valley did not fare so well at the Supreme Court. The threshold issue for the Court was whether Valley’s allegations and proof supported an action for defamation, business disparagement, or both. The torts of defamation and business disparagement are alike in that “both involve harm from the publication of false information.” But there are important differences between the two, largely explained by the interests the respective torts seek to protect. Defamation serves to protect one’s interest in character and reputation (“dignity harm”), whereas disparagement protects economic interests by providing a remedy for pecuniary losses from slurs affecting the marketability of goods and services (“commercial harm”). In other words, “defamatory communications about a corporation’s reputation are those directed at the character of the owner rather than the underlying business.” To support its defamation claim, then, Valley had to show actual injury to reputation.

Valley attempted to provide that evidence through the testimony of its expert, Kenneth Lehrer. Lehrer used a “Quasi-Monte Carlo method” to quantify the possible harm done to Valley’s reputation. A Monte Carlo simulation can be used to predict a range of values when a precise value is difficult to calculate. It “essentially requires a computer to run millions of possible, randomized scenarios to produce a range of likely values for the number in question.” It is typically used to answer questions for which a massive amount of data is available—for example, the number, intensity, and location of all forest fires in the United States for a given year. A “Quasi-Monte Carlo method” can be used to address questions smaller in scope, like whether a forest fire will happen within a particular county.

Essentially, Lehrer took Valley’s total estimated lost profits over the years in question and multiplied that figure by eight random percentages, allegedly representing the portion of lost profits caused by Innovative’s statements. But the percentages used in the model “had no basis in any underlying data from the case.” He then arbitrarily assigned a “percentage of probability” to each of the eight percentages. Again, the percentages were not derived from any data or evidence in the case. He then averaged these calculations to come up with his range of damages. The Court rejected this alleged expert opinion, finding that it was “largely unmoored from the facts,” and that it should have been excluded by the trial court.

Valley also argued that Innovative’s comments resulted in the loss of a specific customer’s business, which could support an award of special damages. The customer testified at trial that she had been told Valley received a load of bad aggregate and thereafter moved her business from Valley to Innovative. Another expert then calculated Valley’s alleged lost profits from that customer. But such damages could only be damages for business disparagement, not defamation, because the “receipt of bad aggregate does not imply reprehensible conduct or lack of integrity on Valley’s part.”

Without proof of harm to Valley’s reputation, as opposed to its business, Valley’s defamation claim failed.

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