The Fate of Gawker – What Happens Next

Despite all the media attention, there is dearth of professional legal opinions as to the fate of Gawker in light of losing the Florida jury trial, as well as Hogan being awarded an additional $25 million in punitive damages, for a total $140 million against Gawker.

Although I’m not a lawyer, I will try my best to assess the situation.

First, the facts: Gawker earns about $40 million a year, of which $6 million is profit, making it a successful business. As of 2014, Gawker’s valuation is estimated between $200-300 million.

From Aaron Clarey of Captain Capitalism: Gawker’s Financial Statements

Mathematically, yes. Gawker will go away. With revenues of $45 million and a a lawsuit, even when paired down, will wipe them out financially, you can safely say Gawker will die as a financially solvent entity. But there are some problems, and this introduces the world of finance.

However, it may be too soon to celebrate. Although Hogan won the jury trial (which Gawker anticipated it would lose), the case will likely be appealed which may rule rule that Gawker is protected under the First Amendment, being that Hogan is a public figure who has also made his personal life public in the past. Hogan starring in his own racy reality TV show doesn’t help his cause.

From Nick Denton himself, The Hogan Verdict:

A state appeals court and a federal judge have already held repeatedly that the 2012 commentary and short video excerpt, which joined an existing conversation and explored the public’s fascination with celebrity sex tapes, were newsworthy. We have had our day in trial court, and we lost. We will have our day back in appeals court, and we will be vindicated.

From the Bloomberg article:

In the meantime, lower courts apply principles derived from the justices’ opinions in related areas. One is that debate on public issues should be uninhibited. A second, closely linked, is that public figures sacrifice a good deal of their privacy when they when they enter the public sphere. Both can be traced back to New York Times v. Sullivan, the 1964 landmark case in which the court said public officials could only collect damages for libel if the statements against them were made with knowing or reckless disregard for their falsehood.

Taken together, these principles clearly indicate that newsworthy speech about a public figure merits full First Amendment protection. And, unfortunate though it may be, Hulk Hogan is a public figure and his sex life is newsworthy.

A distinction must be made between Trial Courts and Appellate/appeals Courts. Gawker lost the jury trial, but the state appeals court does not involve a jury.

Consider the infamous Liebeck v. McDonald’s Restaurants, in which the jury originally awarded Liebeck $3 million (mostly punitive damages), but was eventually reduced to just $600,000 after arbitration.

A twelve-person jury reached its verdict on August 18, 1994.[16] Applying the principles of comparative negligence, the jury found that McDonald’s was 80% responsible for the incident and Liebeck was 20% at fault. Though there was a warning on the coffee cup, the jury decided that the warning was neither large enough nor sufficient. They awarded Liebeck US$200,000 in compensatory damages, which was then reduced by 20% to $160,000. In addition, they awarded her $2.7 million in punitive damages. The jurors apparently arrived at this figure from Morgan’s suggestion to penalize McDonald’s for one or two days’ worth of coffee revenues, which were about $1.35 million per day.[2] The judge reduced punitive damages to $480,000, three times the compensatory amount, for a total of $640,000. The decision was appealed by both McDonald’s and Liebeck in December 1994, but the parties settled out of court for an undisclosed amount less than $600,000.[18]

In light of the very real possibility of losing in the appeals court, it’s likely there will be a settlement that will result a much small payout – maybe only, say, $15 million, which will be low enough for Gawker to continue its operations mostly unharmed. Or as in the case of Liebeck , the judge will reduce the damages.

Should Gawker be forced to pay a much larger sum – $50-140 million – it may still be able to continue, mainly by making it nearly impossible for the plaintiff to collect. As any attorney will attest to, wining a lawsuit is just half the battle – collecting is just as hard, if not harder. Gawker may immediately file bankruptcy, delaying the collection process (automatic stay) and allowing the site to continue as if nothing happened. A trustee will be appointed to oversee the process of liquidation, which will take years to complete – if it ever does.

Using its profitability and valuation as collateral, Gawker may also take out a loan to pay the judgment in small installments – sorta like the conservatorship Fannie and Freddie are in, which allows the business to function but forfeits its profit. The terms of this loan would probably be unfavorable given Gawker’s small size and presumably low credit worthiness.

Although Gawker does have insurance, the cap is likely already exceeded. From the Atlantic: In First Round With Gawker, Hulk Hogan Prevails

. The New York Times reported last year that the site had to pay its legal fees in the Hogan case out of hand after exceeding its insurance cap. Denton also told the Times that there was a one-in-ten chance he would have to sell a controlling interest to keep the company solvent.

The full verdict will exceed the insurance cpa, in which Gawker may sue its insurance company Nautilus, creating more complications.

From the NYT: Jury Tacks On $25 Million to Gawker’s Bill in Hulk Hogan Case

The England-born, Oxford-educated Mr. Denton is well off, with most of his $121 million net worth held as stock in Gawker’s parent company, the Gawker Media Group, which runs multiple websites. The company is worth $276 million, the judge said, with revenue last year of $49 million.

Mr. Denton’s personal wealth includes $3.6 million in equity in a New York City condominium.

Under an unfavorable revolving credit facility, Denton’s equity in Gawker media may be destroyed or reduced substantially, although Gawker will still function. The fact Gawker is profitable should help it secure financing. This is similar to the fate of the currency broker FXCM, which sustained a very large one-time loss of $225 million on short positions against the Swiss Francs after the currency peg was rescinded and the broker was bailed out by Leucadia National Corp at a cost of 90% of FXCM’s equity.

If Gawker is sold, the bankruptcy trustee or the creditor will get the proceeds, with whatever is leftover going to shareholders.

So I doubt Gawker will go away even if they lose the full verdict, although Mr Denton may be much poorer due to loss of equity.