August 01, 2009
Hoffman v. Red Owl Revisited
Posted by Gordon Smith

If you teach Contracts, you know Hoffman v. Red Owl. My former Wisconsin colleague Bill Whitford recently located Joseph Hoffmann, the plaintiff, who now lives in St. Joseph, Michigan. Bill describes the unlikely chain of events that led him to Hoffmann (who spells his name with two “n’s” ... the Wisconsin Supreme Court is responsible for the altered spelling) in footnote 9 of his new article about the case, Hoffman v. Red Owl Stores: The Rest of the Story, written with Stewart Macaulay. Here is the abstract:

Hoffman v. Red Owl Stores is one of the most famous 20th century cases in American contract law, usually credited both with expanding the reach of the promissory estoppel doctrine and with opening up the issue of liability for precontractual reliance. It is a staple in contracts casebooks. By fortunate circumstance we have located the plaintiff, who retains a vivid memory about many of the circumstances in his famous case. We have interviewed him and we have examined the full trial record as well as the briefs on appeal. In this article we tell the story of what we have learned about this famous case, including what happened after the appellate decision. We conclude that a fuller understanding of the facts provides information about a promise that was made, yet was not described in the Court’s opinion. This promise supports the outcome of the litigation . Justice was done! The plaintiff substantially relied to his detriment after receiving specific assurances from an authorized agent of the defendant that he would receive a franchise if he relied by selling his bakery building and business. Reimbursing precontractual reliance in this circumstance can be done without creating a rule that would justify reimbursement of precontractual reliance in all circumstances.

This is a fascinating case, and the article is well worth reading. This account differs in important respects from the account offered by Bob Scott in Hoffman v. Red Owl Stores and the Myth of Precontractual Reliance, 68 Ohio St. L. J. 71, 101 (2007), who characterizes the case as an "outlier." The key distinction between these two accounts relates to the interpretation of statements made by Ed Lukowitz, the Red Owl Divisional General Manager, to Hoffmann preceding the sale of Hoffmann's bakery business. Here is Scott's version:

To be sure, Lukowitz did make two subsequent assurances -- that with the additional $2,000 in promotion “the deal would go through,” and that the sale of the bakery building in November “was the last step.” But these statements were all made after the September meeting between Hoffman and Carlson and Hall from the home office. By that time, Hoffman knew well that their approval and not Lukowitz's was the key to securing the franchise. Given these facts, the question is not whether Hoffman was exploited by corporate barons (Lukowitz, after all, had less education than he did). The real issue was whether Hoffman's understanding of the transaction was a reasonable one and, more importantly, was it the only reasonable one.

Compare Whitford and Macaulay:

We believe that Hoffmann knew that Lukowitz was not the ultimate decision maker well before that. But we also think that Hoffmann very reasonably understood that Lukowitz was authorized by Red Owl to be a conveyor of decisions made at headquarters. In fact, Red Owl never disputed Lukowitz’ agency in this regard. If a jury believed Hoffmann's testimony that Lukowitz said that the people at the home office had told him that the "only hitch" to Joe being granted a franchise was the sale of the bakery, we think the jury could reasonably find the statement to be a promise. This understanding is entirely consistent with the encouraging attitude of the Red Owl officials at the Chilton meeting. It is possible that Lukowitz overstated what he had been told by the home office officials. There is some reason to believe that some officials at the home office had not yet considered the adequacy of Hoffmann's proposed investment in the new franchise. But Lukowitz failed to convey this information, if he knew it. Moreover, Lukowitz knew he was persuading Joe Hoffmann to do something that Hoffmann did not want to do. Had Lukowitz only made carefully limited statements about what might influence the home office decision, Red Owl would have been justified in deciding to deny Hoffmann a franchise for good, bad or no reason. But Hoffmann testified, credibly, that Lukowitz did make highly encouraging statements about Red Owl's commitments that prompted significant reliance.

Note the potential agency law issue -- whether Lokowitz was authorized to make the key representations to Hoffmann -- and the fact that Red Owl did not press this issue. Perhaps Red Owl knew that they would lose under the doctrine of apparent authority, or perhaps Lukowitz was, in fact, told to make those representations, only to have "corporate" change its mind about Hoffmann. Either way, Red Owl loses on the agency issue.

Elsewhere in the paper, Whitford and Macaulay portray Lukowitz as a "Red Owl employee who wanted to keep his job" because Lukowitz denied making important assurances to Hoffmann. While Lukowitz comes off in the case as a pawn, to me he looks like an irresponsible intermediary who was the primary cause of the dispute. While it's possible that someone at Red Owl's headquarters told Lukowitz that the "only hitch" in the deal was the sale of Hoffmann's bakery, I think it's more likely that Lukowitz was overstating Red Owl's actual commitment.

Although Red Owl is treated as a single person for purposes of this lawsuit, it's worth remembering that Red Owl has multiple decision makers in the hierarchy. My guess is that none of them had a strong incentive to approve this deal. Certainly, we wouldn't expect anyone above Lukowitz to get a commission (and Whitford and Macaulay note that even Lukowitz may not have had that sort of incentive). While these middle managers have some incentive to grow the company, they often have a bigger incentive to avoid mistakes than to pursue gains.

Think of it this way: if the store failed, the obvious question for HQ would be, "who authorized this?" If, on the other hand, the store succeeded, HQ would be less likely to focus on who authorized the store and more likely to focus on who found Hoffmann (i.e., Lukowitz). Thus, the middle managers and Lukowitz have asymmetric incentives, and I suspect that these incentives account for Lukowitz's excess zeal and HQ's excess caution.

UPDATE: When I went back to the case after reading Bill and Stewart's paper, I was surprised to see no mention of agency law. They told me in the paper that Red Owl didn't press the issue, but I guess I didn't quite believe them. Larry Ribstein feels the same way.

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