Opinion ID: 1728775
Heading Depth: 1
Heading Rank: 2

Heading: Admissibility of Evidence of Gross Sales

Text: In the case before us, Wal-Mart vigorously objected to the plaintiff's introduction of evidence of gross sales. The trial court overruled the objection and evidence was adduced that Wal-Mart had gross sales of about $5 million in January 1989. In closing argument, the plaintiff's attorney used this evidence to suggest to the jury that they should utilize gross sales to measure the punitive damage award to the plaintiff. In reviewing the punitive damage award, the court of appeals held it would not follow the reasoning of Southland Corp. v. Burnett, 790 S.W.2d 828, 830 (Tex.App.El Paso 1990, no writ) (holding that admission of evidence of defendant's gross receipts was reversible error) due to the court's conclusion that admission of the evidence was not harmful error. 827 S.W.2d 420, 425. In its first point of error to this Court, Wal-Mart alleges that the admission of evidence of gross sales was harmful error as a matter of law. The majority does not address this point because it concludes that it is unnecessary since there is no evidence of gross negligence. This Court in Lunsford failed to define net worth and failed to suggest a procedure for placing such evidence before the jury. [4] I predicted then that in the absence of guidance from this Court, confusion will prevail as practitioners and judges attempt to ascertain the components of `net worth.' Lunsford, 746 S.W.2d at 475. Conflicting appellate court decisions on the meaning of the term net worth are evidence of the confusion surrounding this fundamental issue. See Southland Corp. v. Burnett, 790 S.W.2d 828 (Tex.App.El Paso 1990, no writ) (admission of gross sales on issue of punitive damages constitutes harmful error); Miller v. O'Neill, 775 S.W.2d 56 (Tex. App.Houston [1st Dist.] 1989, orig. proceeding) (order denying discovery of income tax returns and net worth statements was abuse of discretion); Delgado v. Kitzman, 793 S.W.2d 332, 333 (Tex.App.Houston [1st Dist] 1989, orig. proceeding) (order denying discovery of income tax returns and net worth statements was abuse of discretion); [5] K-Mart Corp. v. Pearson, 818 S.W.2d 410 (Tex.App.Houston [1st Dist.] 1991, no writ) (gross sales, net income, and net worth all admitted into evidence). This confusion should be resolved by this Court. In the absence of a resolution, however, I will once again offer my suggestions on this matter. The courts have utilized the term net worth in punitive damage cases to describe the wealth or means of defendants. Lunsford, at 471-73. However, the term has not been further defined in this state. Is net worth purely the capital of an entitythe entity's assets minus its liabilities, or is net worth a more fluid concept, based on net income and the earning capacity of the entity? Other jurisdictions have struggled with the issue of what constitutes net worth. See, Annotation, Punitive damages: Relationship to Defendant's Wealth as Factor in Determining Propriety of Award, 87 A.L.R. 4th 141 (1991); Martin J. McMahon, Annotation, Discovery of Defendant's Sales, Earnings, or Profits on Issue of Punitive Damages in Tort Action, 54 A.L.R. 4th 998 (1987). Many jurisdictions allow discovery and admission of evidence of net income as well as the capital of the entity. 87 A.L.R. 4th 141. Although a well-entrenched fear exists in our legal system that jury determinations would be biased by evidence of the relative wealth of the parties, the jury must have enough information to assess the true means of the defendant. Evidence of net earnings history may reduce the likelihood of a jury being misled by the net worth figure alone since a defendant's earnings may not directly translate into net worth. Marsee v. United States Tobacco Co., 639 F.Supp. 466, 472 (W.D.Okla. 1986), aff'd, 866 F.2d 319 (10th Cir.1989); Gerald R. Powell and Cynthia A. Leiferman, Results Most Embarrassing: Discovery and Admissibility of Net Worth of the Defendant, 40 Baylor L.Rev. 527, 529-32 (1988). A rule which limits admissibility only to assets minus liabilities may exclude relevant evidence and impede the goal of determining the true wealth of a defendant. On the other hand, because financial evidence is so potentially prejudicial, courts must be especially sensitive when reviewing this evidence under Rule 403 of the Texas Rules of Civil Evidence. Not all financial information relating to a defendant will be relevant to its net worth. A corporate defendant's assets are irrelevant in determining its wealth until its liabilities are subtracted. Similarly, a company's gross sales are only remotely related to its wealth until the company's expenses are subtracted. In order to avoid prejudice, parties should not be allowed to tell only part of the story. Only evidence which allows the jury to assess the wealth of the defendant without requiring the jury to make calculations should withstand review under Rule 403. Under this standard, gross sales would be clearly inadmissible. The court of appeals held that the admission of gross sales evidence over objection was not reversible error because there was other evidence in the record of Wal-Mart's financial strength. The evidence the court of appeals alludes to is the size and volume of Sam's and Wal-Mart, the amount of the lease payment, and a provision in the lease for self insurance. In today's economic climate, size and sales volume can be very misleading. It is not uncommon for big companies to file for bankruptcy. Without evidence of Wal-Mart's liabilities, the evidence the court of appeals finds persuasive is irrelevant to determining net worth. Because the evidence only tells part of the story, it tainted the punitive damages award. We should hold that the only evidence which is admissible at trial on the issue of net worth is the net income of the defendant and the defendant's capitalits assets minus its liabilities.