Kelly BROUSSARD; Jim Stephens; Mark Zuckerman; Arnold
Fischthal; John Hagar; Vincent Matera; Denis
Wickham; Mary Ann Wickham; Kenex
Corporation; Ralph Yarusso,
Plaintiffs-Appellees,
v.
MEINEKE DISCOUNT MUFFLER SHOPS, INCORPORATED; New Horizons
Advertising, Incorporated; GKN Parts Industries;
GKN, plc; Ronald Smythe; Gene Zhiss;
Ted Pearce, Defendants-Appellants,
and
Michigan Franchisees, which consists of: Peter D. Beyer,
Ronald S. Slack, Susan I. Slack, Sherman J. Radford, Jayne
Radford, William J. Varney, Sr., William J. Varney, Jr.,
Sher-Jay and Sons, Incorporated, and M.A.T.M., Incorporated,
Defendant.
ATL International, Incorporated; Blimpie International,
Incorporated; Burger King Corporation; Doctor's
Associates, Incorporated; Foodmaker, Incorporated; Golden
Corral Corporation; Hardee's Food Systems, Inc.;
International Dairy Queen, Incorporated; McDonald's
Corporation; Mobil Oil Corporation; The Southland
Corporation; Secretary of Commerce of the State of North
Carolina; American Council of Life Insurance; Securities
Industry Association; British American Business Council of
North Carolina, Incorporated; American Association of
Franchisees and Dealers; American Franchisee Association;
Sal Lobello; Goodwin Management Group, Inc.; Steven D.
Loye Family Limited Partnership; PS & F Enterprises Inc.;
Stephen Parascondola; Robert Ott, Amici Curiae.
Kelly BROUSSARD; Jim Stephens; Mark Zuckerman; Arnold
Fischthal; John Hagar; Vincent Matera; Denis
Wickham; Mary Ann Wickham; Kenex
Corporation; Ralph Yarusso,
Plaintiffs-Appellants,
v.
MEINEKE DISCOUNT MUFFLER SHOPS, INCORPORATED; New Horizons
Advertising, Incorporated; GKN Parts Industries;
GKN, plc; Ronald Smythe; Gene Zhiss;
Ted Pearce, Defendants-Appellees,
and
Michigan Franchisees, which consists of: Peter D. Beyer,
Ronald S. Slack, Susan I. Slack, Sherman J. Radford, Jayne
Radford, William J. Varney, Sr., William J. Varney, Jr.,
Sher-Jay and Sons, Incorporated, and M.A.T.M., Incorporated,
Defendant.
ATL International, Incorporated; Blimpie International,
Incorporated; Burger King Corporation; Doctor's
Associates, Incorporated; Foodmaker, Incorporated; Golden
Corral Corporation; Hardee's Food Systems, Inc.;
International Dairy Queen, Incorporated; McDonald's
Corporation; Mobil Oil Corporation; The Southland
Corporation; Secretary of Commerce of the State of North
Carolina; American Council of Life Insurance; Securities
Industry Association; British American Business Council of
North Carolina, Incorporated; American Association of
Franchisees and Dealers; American Franchisee Association;
Sal Lobello; Robert Ott; Stephen Parascondola; PS & F
Enterprises Inc.; Steven D. Loye Family Limited
Partnership; Goodwin Management Group, Inc., Amici Curiae.
Nos. 97-1808, 97-1848.
United States Court of Appeals,
Fourth Circuit.
Argued May 5, 1998.
Decided Aug. 19, 1998.
ARGUED: Kenneth Winston Starr, Kirkland & Ellis, Washington, DC, for Appellants. Charles Justin Cooper, Cooper & Carvin, P.L.L.C., Washington, DC, for Appellees. ON BRIEF: Steven G. Bradbury, Christopher Landau, Adam G. Ciongoli, Brett M. Kavanaugh, Kirkland & Ellis, Washington, DC; E. Osborne Ayscue, Jr., Catherine E. Thompson, Thomas D. Myrick, Corby C. Anderson, Smith, Helms, Mulliss & Moore, L.L.P., Charlotte, North Carolina, for Appellants. Michael A. Carvin, Michael W. Kirk, R. Ted Cruz, Cooper & Carvin, P.L.L.C.; James J. McCabe, John J. Soroko, Wayne A. Mack, Mark B. Schoeller, Duane, Morris & Heckscher, Philadelphia, Pennsylvania; Thomas J. Ashcraft, Charlotte, North Carolina, for Appellees. Theodore B. Olson, Theodore J. Boutrous, Jr., Sean E. Andrussier, Gibson, Dunn & Crutcher, L.L.P., Washington, DC, for Amici Curiae ATL International, et al. Andrew A. Vanore, Jr., North Carolina Department of Justice, Raleigh, North Carolina, for Amicus Curiae Secretary of Commerce. Phillip E. Stano, American Council of Life Insurance, Washington, DC; Stuart J. Kaswell, Fredda L. Plesser, Securities Industry Association, New York City, for Amici Curiae American Council of Life Insurance, et al. Edgar Love, III, Kiran H. Mehta, Stanford D. Baird, Kennedy, Covington, Lobdell & Hickman, L.L.P., Charlotte, North Carolina, for Amicus Curiae British American Business Council. Mario L. Herman, Washington, DC; J. Michael Dady, Dady & Garner, P.A., Minneapolis, MN, for Amici Curiae Association of Franchises, et al. John K. Bush, Janet P. Jakubowicz, Greenebaum, Doll & McDonald, P.L.C.C., Louisville, Kentucky, for Amici Curiae Lobello, et al.
Before WILKINSON, Chief Judge, and ERVIN and MICHAEL, Circuit Judges.
Reversed and remanded by published opinion. Chief Judge WILKINSON wrote the opinion, in which Judge ERVIN and Judge MICHAEL joined.
OPINION
WILKINSON, Chief Judge:
This case is a study in the tensions that can beset the franchisor-franchisee relationship. Ten owners of Meineke Discount Muffler franchises sued franchisor Meineke Discount Muffler Shops, Inc. ("Meineke"), Meineke's in-house advertising agency New Horizons Advertising, Inc. ("New Horizons"), three officers of Meineke, and Meineke's corporate parents GKN plc ("GKN") and GKN Parts Industries Corporation ("PIC"). Plaintiffs claimed that Meineke's handling of franchise advertising breached the Franchise and Trademark Agreements ("FTAs") that Meineke had entered into with every franchisee. Plaintiffs also advanced a raft of tort and statutory unfair trade practices claims arising out of the same conduct. The plaintiff-franchisees purported to advance these claims on behalf of a nationwide class of current and former Meineke dealers. Plaintiffs won a $390 million judgment against Meineke and its affiliated parties.
On appeal, defendants maintain that the suit was erroneously certified as a class action and challenge several other legal rulings by the district court. Because the class the district court certified does not conform to the requirements of Federal Rule of Civil Procedure 23(a), we reverse the class certification. And because the class action posture, along with at least three fundamental legal errors, deprived defendants of a fair trial on the precise issue of contractual breach that is properly the focus of this case, we reverse the judgment below, vacate the award of damages, and remand the case for further proceedings consistent with this opinion.
I.
The plaintiff class consisted of "all persons or entities throughout the United States that were Meineke franchisees operating at any time during or after May of 1986." As a Meineke franchisee, each putative class member is or has been a party to one or more FTAs with Meineke. FTAs expire after a fixed period, usually 15 years, at which point the franchise can be renewed or terminated. During the time relevant to this lawsuit, Meineke periodically revised the FTA, so several different versions of the contract are at issue in this action. Under all versions of the FTA, each franchisee was to pay Meineke an initial franchise fee (which is sometimes waived) and thereafter some percentage of its weekly gross revenue (generally 7-8%) as a royalty. Franchisees also paid Meineke ten percent of weekly revenues to fund national and local advertising. Initially, franchisees made these advertising contributions directly to a third-party advertising agency, M & N Advertising ("M & N"), which placed ads on a commission basis. After late 1982, franchisees paid their ten percent contributions to a central account maintained by Meineke, the Weekly Advertising Contribution ("WAC") account.
Franchise advertising is addressed in two sections of the FTAs. Among other things, Section 3.1 of all versions of the FTA obliges Meineke "[t]o purchase and place from time to time advertising promoting the products and services sold by FRANCHISEE." The FTAs provide that "all decisions regarding whether to utilize national, regional or local advertising, or some combination thereof, and regarding selection of the particular media and advertising content, shall be within the sole discretion of MEINEKE and such agencies or others as it may appoint." In FTAs executed from 1989 through 1991, Section 3.1 was introduced by a clause that indicated Meineke would provide the services identified in that section "[i]n consideration for the payment of Franchisee's initial license fee." However, until 1990, every FTA also provided that "MEINEKE agrees that it will expend for media costs, commissions and fees, production costs, creative and other costs of such advertising, with respect to MEINEKE franchisees, an amount equal to the total of all sums collected from all franchisees under and pursuant to Section 7.17 hereof." Section 7.17 of the FTA describes payments to the WAC account.
Three categories of disbursements from the WAC account, totaling approximately $32.2 million, are at the heart of this lawsuit. First, Meineke used just over $1.1 million of WAC funds to defend and settle a suit brought by M & N for past and future commissions when, in 1986, Meineke stopped doing business with M & N and established New Horizons to handle advertising placement in-house. As had M & N, New Horizons placed some advertisements on its own and engaged the services of outside agencies to place the rest. These outside agencies were paid a total of almost $14 million in commissions from the WAC account, the second category of disputed expenditures. Third, New Horizons itself was paid approximately $17.1 million in commissions from the WAC account for the advertisements it placed.
At a dealers' meeting in April 1993, a Meineke official read from a December 1992 Uniform Franchise Offering Circular ("UFOC") that disclosed New Horizons' 5-15% commission rates. Plaintiffs knew before the meeting that New Horizons took commissions from WAC funds but claim they were unaware that its rates were so high. As one of the named plaintiffs explained, he had not seen the UFOC in question "because I hadn't bought a shop in three or four years and ... you don't get an offering circular unless you're buying a shop." Shortly after the meeting, plaintiffs filed this lawsuit, charging that Meineke had no right to pay New Horizons (or any other entity) any commissions from the WAC account for the purchase or placement of advertising. Rather, according to plaintiffs, WAC funds were to be used only to pay for the advertisements themselves, and Meineke was to perform the purchase and placement duty in return for franchisees' royalty fees. In addition to this alleged breach of the FTAs, plaintiffs charged Meineke and the other defendants variously with breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, unjust enrichment, negligence, negligent misrepresentation, intentional interference with contractual relations, and unfair and deceptive trade practices in violation of the North Carolina Unfair Trade Practices Act ("UTPA"), N.C. Gen.Stat. § 75-1.1.1
In January 1995, Meineke offered all its franchisees a new franchise package, the Enhanced Dealer Program ("EDP"). In exchange for releasing Meineke from all claims arising out of past dealings, specifically including the claims at issue in this lawsuit, franchisees who accepted the EDP received a reduced royalty rate, a guaranteed reduction in New Horizons' commission rates, greater control over local advertising, and other benefits like a free computer system and the chance to obtain an additional franchise at a discount. Plaintiffs urged their fellow franchisees not to accept the EDP, warning that by doing so franchisees would be "signing away [their] rights to be in the class" and asserting that the EDP did "not go nearly far enough as a settlement offer" because it "ask[ed] franchisees to trade legal rights for too little change." Nevertheless, more than half of Meineke's existing franchisees accepted the EDP before the offer expired on March 15, 1995. No named plaintiff accepted the EDP.
On May 11, 1995, the district court certified a non-opt-out class of "all persons or entities throughout the United States that were Meineke franchisees operating at any time during or after May of 1986." The district court also disposed of numerous pretrial motions. Most relevant here, the court denied GKN's motion for summary judgment, holding that the issue of "piercing the corporate veil" to impose vicarious liability on GKN for the acts of its subsidiaries was one for the jury. The court denied two motions by Meineke to depose absent class members. And the court denied Meineke's motion to sever issues related to the EDP and other releases executed by franchisees.
Trial lasted seven weeks. The cornerstone of plaintiffs' contract case was language that appeared only in some versions of the FTA. And plaintiffs' tort and statutory unfair trade practices claims prominently featured 171 taped excerpts of statements made by Meineke representatives at so-called "final review sessions" that preceded the execution of any franchise agreement--all but one of the sessions involving absent class members. Plaintiffs' expert outlined a damages formula, by which he purported to calculate the lost profits damages of all class members on a "global" basis. He testified that every Meineke franchisee lost $8.16 in sales for each dollar of allegedly misallocated WAC funds and projected a 34% profit margin for all franchisees. To show that Meineke, New Horizons, and PIC were "mere instrumentalities" of their parent, plaintiffs introduced evidence that GKN was aware New Horizons was financed with WAC funds and that GKN secretly encouraged Meineke to maximize New Horizons' profitability. Meineke and the other defendants advanced a contrary interpretation of the FTAs, denied all wrongdoing, and denied that GKN had exercised control over its subsidiaries sufficient to justify veil-piercing. Defendants also interposed the defense of statute of limitations.
The jury returned a verdict against Meineke for breach of contract and against Meineke and New Horizons for breach of fiduciary duty, negligence, and unjust enrichment. The jury found that GKN and PIC had utilized Meineke and New Horizons as mere instrumentalities, and that PIC was merely an instrumentality of GKN, which justified piercing the corporate veil and imposing vicarious liability on GKN. Along with Meineke and New Horizons, GKN, PIC, and three officers of Meineke were found to have themselves committed fraud, made negligent misrepresentations, and violated the UTPA. The jury also found that New Horizons, GKN, PIC, and the three individual defendants were directly liable for aiding and abetting Meineke's and New Horizons' breach of fiduciary duty and for interfering with plaintiffs' contractual relations with Meineke. And the jury determined that none of plaintiffs' claims was barred by statutes of limitations ranging from three to ten years, finding that plaintiffs had no actual knowledge of the challenged conduct outside the various limitations period and/or ascribing any delay in filing suit to plaintiffs' reasonable reliance on Meineke's fraudulent concealment of its wrongdoing.
The jury awarded plaintiffs $196,956,596 in compensatory damages, which, over Meineke's objection, was not allocated among the various theories of liability or among defendants. The jury awarded a total of $150 million in punitive damages: $70 million against Meineke; $7 million against New Horizons; $1.8 million against PIC; $70 million against GKN; and $1.2 million total against the three Meineke officers. Required by the district court to make a choice, plaintiffs elected to forgo the punitive award in favor of trebling the compensatory award under the UTPA, see N.C. Gen.Stat. § 75-16. After trebling, the court entered a $590,869,788 judgment for plaintiffs.
On March 6, 1997, the district court ruled on two categories of releases signed by some class members: (1) releases executed in connection with the EDP ("EDP releases"), and (2) releases executed in the normal course of business, as when a franchise was terminated or renewed ("non-EDP releases"). The jury had rejected plaintiffs' argument that these releases were procured by fraud, duress, or undue influence on the part of Meineke. Accordingly, the district court held that the EDP releases executed by about half the plaintiff class waived all claims advanced in this lawsuit against the defendants. The court found that non-EDP releases covered only those claims arising before the releases were executed and that non-EDP releases which named Meineke and its "affiliates" released GKN, while releases of Meineke and its "stockholders" did not include GKN.
On May 22, 1997, the trial court disposed of the parties' postjudgment motions. The court calculated the effect of the releases, entering final judgment in plaintiffs' favor for around $390 million (a reduction of approximately 35%). In addition, the court granted plaintiffs' request for a permanent injunction against Meineke's "taking commissions or fees or otherwise deriving any profit from the WAC Fund on account of activities undertaken to purchase and place advertising for those class members who are currently operating Meineke franchises but have not (1) entered Meineke's EDP program, or (2) executed franchise agreements after March 1995." Both parties appeal.2
II.
We first consider Meineke's challenge to the ruling that had the largest impact on the conduct of this lawsuit, class certification. As a prerequisite to certifying the class, the district court had to find that the class of "all persons or entities throughout the United States that were Meineke franchisees operating at any time during or after" the creation of New Horizons satisfied the four criteria of Federal Rule of Civil Procedure 23(a): numerosity, commonality, typicality, and adequacy of representation. As the Supreme Court has said, the final three requirements of Rule 23(a) "tend to merge," with commonality and typicality "serv[ing] as guideposts for determining whether ... maintenance of a class action is economical and whether the named plaintiff's claim and the class claims are so interrelated that the interests of the class members will be fairly and adequately protected in their absence." General Tel. Co. v. Falcon,
A.
The first obstacle to class treatment of this suit is a conflict of interest between different groups of franchisees with respect to the appropriate relief. The Supreme Court and this court have long interpreted the adequate representation requirement of Rule 23(a)(4) to preclude class certification in these circumstances. Amchem Prods., Inc. v. Windsor,
The class of Meineke franchisees the district court certified can be grouped into three categories: (1) former franchisees; (2) current franchisees who accepted the EDP ("EDP franchisees"); and (3) current franchisees who did not accept the EDP ("non-EDP franchisees"). Broken down this way, it is clear that the remedial "interests of those within the single class are not aligned." Amchem, 521 U.S. at ----,
Nor were plaintiffs, who are current non-EDP franchisees, able to mediate this conflict. Like former franchisees, non-EDP franchisees do stand to benefit from damages, and it is hard to imagine a larger award than the one at issue here. Nevertheless, in making the class certification decision the district court might reasonably have been concerned that plaintiffs' residual, forward-looking interest, as current franchisees, in Meineke's continued viability would have tempered their zeal for damages and prejudiced the backward-looking interests of former franchisees. See, e.g., Southern Snack Foods, Inc. v. J & J Snack Foods Corp.,
That potential conflict of interest apparently did not materialize, but the conflict between plaintiffs and EDP franchisees quite clearly did. Initially, pursuing any litigation at all was in tension with the evident desire of many EDP franchisees to put the advertising dispute with Meineke behind them. The EDP releases did not preclude EDP franchisees from getting the benefit of any advertising funds Meineke restored to the WAC account. Nevertheless, at least three times during the course of this litigation, plaintiffs explicitly disavowed any claim for restitution to or replenishment of the WAC account, focusing instead on a damage award. This election of remedies may have benefitted non-EDP franchisees and former franchisees, but at the expense of the EDP franchisees who made up half of the class. Pursuing a damage remedy that was at best irrelevant and at worst antithetical to the long-term interests of a significant segment of the putative class added insult to the injury of abandoning the only remedy in which that segment (the EDP franchisees) was interested. Plaintiffs' strategy thus illustrates the error of allowing them to sue on behalf of "all" Meineke franchisees.4
In a case involving a plaintiff class with a similar conflict in remedial interests, the Seventh Circuit also found that class certification was inappropriate. Gilpin v. American Fed'n of State, Cty., and Mun. Employees AFL-CIO,
[a] potentially serious conflict of interest within the class precluded the named plaintiffs from representing the entire class [of nonunion workers] adequately. Two distinct types of employee will decline to join the union representing their bargaining unit. The first is the employee who is hostile to unions on political or ideological grounds. The second is the employee who is happy to be represented by a union but won't pay any more for that representation than he is forced to. The two types have potentially divergent aims. The first wants to weaken and if possible destroy the union; the second, a free rider, wants merely to shift as much of the cost of representation as possible to other workers, i.e., union members. The "restitution" remedy sought by ... the nine named plaintiffs, is consistent with--and only with--the aims of the first type of employee.
The instant class action failed to recover from the error of including the EDPs. The error was not cured by the district court's post-trial order effectuating the releases signed by many class members. Even though this ruling did reduce the damages Meineke owed, it could not repair the harm that was already done to some class members' interests. First, those EDP franchisees who had sought to settle the dispute with Meineke were nevertheless forced into non-opt-out class litigation. And because of plaintiffs' desire for money damages, any interest EDP franchisees had in replenishment of the WAC account was not advanced at trial at all. And, as we have noted, plaintiffs--ostensibly on behalf of all Meineke franchisees--repeatedly and explicitly waived any restitutionary claim. If we allowed class certification to stand, thereby binding EDP franchisees to plaintiffs' choice of remedy, the only relief EDP franchisees could pursue would be foreclosed. Second, the post-trial reduction in damages made barely a dent in the big damage award and did not undo the harm to those EDP franchisees who never wanted to be in court. Of course, EDP franchisees have no right to prevent non-released parties from pursuing damages against Meineke, but EDP franchisees do have the right to insist that money damages against Meineke not be pursued in their names.B.
The pointed "adversity among subgroups" of the class the district court certified, Amchem, 521 U.S. at ----,
First, plaintiffs simply cannot advance a single collective breach of contract action on the basis of multiple different contracts. As the district court itself recognized, Meineke FTAs "may vary from year to year and from franchisee to franchisee." Thus, because Meineke franchisees (and plaintiffs themselves) signed FTAs containing materially different contract language, the actual contractual undertaking of each was subject to several critical variables. Approximately half of the contracts signed by class members suggest Meineke was authorized to use WAC funds for "media costs, commissions and fees, production costs, creative and other costs of ... advertising." Contracts containing this language are more favorable to Meineke. The reference to "commissions and fees" can be argued to validate the payments from the WAC account, as "commissions" paid to New Horizons and other advertising placement services are what plaintiffs dispute. And the reference to "other costs" can be read as a catch-all category into which the cost of purchasing and placing advertising may well fall. However, about a quarter of the contracts, including some with the provision referenced above, contain language indicating that Meineke should purchase and place advertising "[i]n consideration for the payment of Franchisee's initial license fee" only. This clause makes plaintiffs' case stronger, as it suggests consideration for purchasing and placing advertising must come from some source other than the WAC account. In yet another variation among FTAs, Meineke in some instances waived the license fee that certain versions of the FTA recite as consideration for the promise to purchase and place, raising a wholly distinct set of interpretive issues. Evidently, the breach of contract action that is the cornerstone of plaintiffs' case raises numerous uncommon questions, and the contract claims of plaintiffs are not typical of claims of franchisees who entered into FTAs containing different language.
In a case much like this one, Sprague v. General Motors Corporation, the Sixth Circuit also found that class certification was inappropriate.
Second, subjecting plaintiffs' tort and statutory claims to class treatment was likewise problematic. Plaintiffs built their breach of fiduciary duty, fraud, and negligent misrepresentation claims on the shifting evidentiary sands of individualized representations to franchisees; these claims have as their starting point what Meineke said to franchisees and how Meineke portrayed its responsibilities vis-a-vis the WAC account. Despite their proffer of standardized documents or other communications disseminated to the entire class to establish these representations, plaintiffs in fact relied heavily on audiotapes of non-standard final review sessions between franchisees and Meineke representatives. In some of these sessions, for example, Meineke's role was portrayed as a mere custodian of WAC funds, in others as a trustee, and in others some combination of both. We are struck by the sheer number of separate statements that were put before the jury to prove a "common" message, and find the Sprague court's rationale for refusing class certification in a similar situation persuasive: "The district court took testimony from more than three hundred class members in an effort to obtain a purportedly representative sample of the representations and communications made by [the defendant]. That it was necessary to do so strongly suggests to us that class-wide relief was improper."
The oral nature of the final review sessions makes them a particularly shaky basis for a class claim. Fifth Circuit caselaw even suggests a per se prohibition against class actions based on oral representations. See Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Third, the reliance element of plaintiffs' fraud and negligent misrepresentation claims were not readily susceptible to class-wide proof. Under North Carolina law, these claims turn on whether each franchisee reasonably relied on Meineke's representations. See, e.g., Helms v. Holland,
In Zimmerman v. Bell we affirmed a denial of class certification in the analogous securities fraud context because "[t]o recover in an action for securities fraud, individual class members must demonstrate that the omitted information was not otherwise available to them."
Fourth, tolling the statute of limitations on each of plaintiffs' claims depends on individualized showings that are non-typical and unique to each franchisee. As we discussed above, the alleged misrepresentations and obfuscations on which plaintiffs base their argument for tolling differed from franchisee to franchisee. The trial court's analysis of equitable tolling should thus have taken the form of individualized inquiry into what each franchisee knew about Meineke's operation of the WAC account and when he knew it. The representations made to each franchisee varied considerably, with some franchisees being informed about New Horizons' role in Yellow Pages advertising and others being given assurances that "we don't make any money on advertising." In Lukenas we recognized that a "considerable difference in right, so far as tolling the statute [of limitations] is concerned," arises when some class members might be able to point to fraudulent misrepresentations while others cannot.
Moreover, even assuming that Meineke downplayed or underestimated the amount of payments from the WAC account to New Horizons and other advertising buying agencies, the fact of these payments was unquestionably known by some franchisees from the very beginning. In 1986 Meineke prepared and distributed to franchisees an audit of the WAC account, which detailed the creation of New Horizons, its role in Yellow Pages advertising, and that "[a]dvertising commissions paid to M & N Advertising and New Horizons Advertising, Inc. during 1986 were based on standard industry practice." This message was repeated in several progressively more detailed annual audits of the WAC account, and several franchisees testified that they in fact reviewed these audits. Whether and when each franchisee received, read, and understood the audit is crucial to whether their contract claim against Meineke is time-barred by North Carolina's three year statute of limitations on contract claims. As the Ninth Circuit has recognized, when the defendant's "affirmative defenses (such as ... the statute of limitations) may depend on facts peculiar to each plaintiff's case," class certification is erroneous. In re Northern Dist. of Cal. Dalkon Shield IUD Prods. Liab. Litig.,
Finally, each putative class member's claim for lost profits damages was inherently individualized and thus not easily amenable to class treatment. We have previously recognized that the need for individual proof of damages bars class certification in some antitrust cases. See Windham v. American Brands, Inc.,
This rationale for individualized proof of damages extends beyond the setting of a federal claim in antitrust. Indeed, the
North Carolina courts have long held that damages for lost profits will not be awarded based upon hypothetical or speculative forecasts of losses.... Instead, we have chosen to evaluate the quality of evidence of lost profits on an individual case-by-case basis in light of certain criteria to determine whether damages have been proven with "reasonable certainty."
Iron Steamer, Ltd. v. Trinity Restaurant, Inc.,
Plainly plaintiffs' claim for lost profits damages was not a natural candidate for class-wide resolution; the calculation of lost profits is too "dependent upon consideration of the unique circumstances pertinent to each class member." Boley v. Brown,
The class the district class certified was thus no more than "a hodgepodge of factually as well as legally different plaintiffs," Georgine v. Amchem Prods., Inc.,
We recognize that a class action may be the most economical and efficient means of litigation in many circumstances, and we do not intend to discourage its use when the claims of named plaintiffs can truly be called representative of class members whose resources would not permit individual lawsuits. To be sure, a "trial court has broad discretion in deciding whether to certify a class, but that discretion must be exercised within the framework of Rule 23." American Medical Sys.,
the district court abused its discretion in certifying the class.... Some class members may have signed the same form, some may have received the same documents, or some may have attended the same meetings ..., but taken as a whole the class claims were based on widely divergent facts. Class-wide relief was awarded here without any necessary connection to the merits of each individual claim. Rule 23 does not permit that result.
Sprague,
III.
Often, when a class is decertified, the court evaluates the viability of the named plaintiffs' claims standing alone. See, e.g., Sprague,
Specifically, plaintiffs enjoyed the practical advantage of being able to litigate not on behalf of themselves but on behalf of a "perfect plaintiff" pieced together for litigation. Plaintiffs were allowed to draw on the most dramatic alleged misrepresentations made to Meineke franchisees, including those made in final review sessions with absent class members, with no proof that those "misrepresentations" reached them. And plaintiffs were allowed to stitch together the strongest contract case based on language from various FTAs, with no necessary connection to their own contract rights. In fact, plaintiffs' opening argument and their examination of Meineke's General Counsel highlighted the introductory clause to Section 3.1 that appeared in only one quarter of FTAs--this language was displayed on an illuminated screen next to the jury.
In addition, the class action posture of the case complicated Meineke's efforts to establish the defense of statute of limitations. Normally a claim would have been time-barred if Meineke had shown that the claimant knew about the challenged conduct outside the limitations period. See, e.g., Brooks v. Ervin Constr. Co.,
And Meineke may not have received a fair trial on the breach-of-contract issue because the trial highlighted inappropriate theories of tort and statutory liability, see Section IV, infra. Although it is routine to advance multiple theories of liability in a single suit, see Fed. R. Civ. Pro. 8(e)(2), in this case plaintiffs' non-contract theories of liability may well have impacted the jury's consideration of the contract claims. And because the jury did not apportion its compensatory damage award among theories of liability, calling into question the validity of plaintiffs' recovery on any one theory imperils the entire damage award. Barber v. Whirlpool Corp.,
In sum, plaintiffs portrayed the class at trial as a large, unified group that suffered a uniform, collective injury. And Meineke was often forced to defend against a fictional composite without the benefit of deposing or cross-examining the disparate individuals behind the composite creation. Fundamentally, the district court lost sight of the fact that a class action is "an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only." Califano v. Yamasaki,
IV.
We respect the fact that class actions may play some role in franchisee-franchisor relations. E.g., Remus v. Amoco Oil Co.,
A.
The first error involves nothing less than misconceiving the basic character of the lawsuit. The district court ignored North Carolina law limiting the circumstances under which an ordinary contract dispute can be transformed into a tort action. It is true that this suit is one that has aroused strong feelings. Plaintiffs claim they were cheated "every single week for over ten years by their own fiduciary, in connection with the administration of a common advertising trust fund for the benefit of all Meineke dealers." Defendants charge they have been swindled by the legal system itself, in a suit that "represents in microcosm much of what has gone awry in the American civil justice system." Beneath these intense feelings lies a simple fact: the parties differ fundamentally on their rights and obligations under the Franchise and Trademark Agreements that govern every aspect of their relationship. Typically thirty-five pages long, the FTAs cover such subjects as confidentiality and Meineke's intellectual property, royalty fees and record keeping, training provided by Meineke, standards of operation, transferability of the franchise, and termination. Among the subjects that the agreements address, albeit in different ways and often through different provisions, is that of advertising and how such advertising is to be funded. As we earlier discussed, the topic of advertising is addressed in Sections 3.1 and 7.17 of the FTAs.
At bottom then, this lawsuit centers on a dispute between Meineke and its franchisees over the interpretation of different FTAs and over Meineke's performance under those FTAs. This is a straightforward contract dispute, yet it somehow managed to become a massive tort action in the end. As one of the named plaintiffs, Kelly Broussard, testified, in the months before this lawsuit was filed, some franchisees were growing increasingly dissatisfied with the cost, amount and quality of Meineke's advertising. Under all versions of the FTA, however, decisions about advertising strategy were within Meineke's sole discretion. So plaintiffs could not address their primary complaint of a poor advertising strategy directly. Instead plaintiffs filed this lawsuit, charging that the FTAs prescribed how Meineke could operate the WAC account and characterizing Meineke's exercise of its discretion not only as tortious conduct, but as conduct that constituted unfair trade practices as well.
The district court erred, however, by allowing plaintiffs to advance tort and UTPA counts paralleling their breach of contract claims. The crux of this matter is and always has been a contract dispute. The defendants believe that Meineke was perfectly entitled under the various FTAs to pay advertising commissions from the WAC account. The plaintiffs say Meineke absolutely was not. Whatever view the parties take of the various FTA provisions at issue did not justify transforming what was essentially a breach of contract action with finite damages into a massive tort suit resulting in a $390 million award. In this, plaintiffs' case is remarkably like Strum v. Exxon Company, where we found a similar "attempt by the plaintiff to manufacture a tort dispute out of what is, at bottom, a simple breach of contract claim" to be "inconsistent both with North Carolina law and sound commercial practice."
The list of tort claims brought against the Meineke defendants was extensive: breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, unjust enrichment, negligence, negligent misrepresentation, intentional interference with contractual relations, and unfair trade practices in contravention of the North Carolina Unfair Trade Practices Act, N.C. Gen.Stat. § 75-1.1. And by any measure, whether in terms of punitive damages for torts or statutory trebling for unfair trade practices, the non-contract component of plaintiffs' recovery made up a significant portion of the nearly $390 million total award.7 Punitive damages are generally not recoverable for breach of contract, and for good reason. As we explained in Strum:
The distinction between tort and contract possesses more than mere theoretical significance. Parties contract partly to minimize their future risks. Importing tort law principles of punishment into contract undermines their ability to do so. Punitive damages, because they depend heavily on an individual jury's perception of the degree of fault involved, are necessarily uncertain. Their availability would turn every potential contractual relationship into a riskier proposition.
Id. at 330.
In recognition of the fundamental difference between tort and contract claims, and in order to keep open-ended tort damages from distorting contractual relations, North Carolina has recognized an "independent tort" arising out of breach of contract only in "carefully circumscribed" circumstances. Id. at 330-31 (citing Newton v. Standard Fire Ins. Co.,
Likewise, the district court should not have allowed the UTPA claim to piggyback on plaintiffs' breach of contract action. It has been said that because "[p]roof of unfair or deceptive trade practices entitles a plaintiff to treble damages," a UTPA count "constitutes a boilerplate claim in most every complaint based on a commercial or consumer transaction in North Carolina." Allied Distributors, Inc. v. Latrobe Brewing Co.,
On remand the observation made by this court in Strum should guide the district court's consideration of plaintiffs' tort claims: "We think it unlikely that an independent tort could arise in the course of contractual performance, since those sorts of claims are most appropriately addressed by asking simply whether a party adequately fulfilled its contractual obligations."
B.
The district court erred by allowing plaintiffs to advance their claims for breach of fiduciary duty when there is no indication that North Carolina law would recognize the existence of a fiduciary relationship between franchisee and franchisor. "Rather," in North Carolina "parties to a contract do not thereby become each others' fiduciaries; they generally owe no special duty to one another beyond the terms of the contract and the duties set forth in the U.C.C." Branch Banking,
Moreover, the North Carolina Court of Appeals has also said:
Our review of reported North Carolina cases has failed to reveal any case where mutually interdependent businesses, situated as the parties were here [in equal bargaining positions and at arms' length], were found to be in a fiduciary relationship with one another. We decline to extend the concept of a fiduciary relation to the facts of this case.
Tin Originals, Inc. v. Colonial Tin Works, Inc.,
Though plaintiffs and some amici would portray franchisees as helpless Davids to the franchisor's Goliath, size, as that story teaches, is not a reliable indicator of strength or influence. Nor is it what North Carolina courts mean by superiority. Only when one party figuratively holds all the cards--all the financial power or technical information, for example--have North Carolina courts found that the "special circumstance" of a fiduciary relationship has arisen. E.g., Lazenby v. Godwin,
We have not found, and the parties have not identified, any North Carolina case retreating from Tin Originals. And as a federal court exercising concurrent jurisdiction over this important question of state law we are most unwilling to extend North Carolina tort law farther than any North Carolina court has been willing to go. Our hesitation is strengthened by the refusal of courts in many other jurisdictions to superimpose fiduciary duties on a franchisor-franchisee relationship. See, e.g., Original Great Am. Chocolate Chip Cookie Co., Inc. v. River Valley Cookies, Ltd.,
A fiduciary bears the extraordinary obligation, as the district court explained to the jury, "never [to] place his personal interest over that of the persons for whom he is obliged to act." The near-universal rejection of imposing fiduciary duties in the franchise setting reflects a recognition that these obligations are out of place in a relationship involving two business entities pursuing their own business interests, which of course do not always coincide. Not only is importing fiduciary concepts into the ordinary franchise relationship unworkable, it is unnecessary. At the outset of the franchise relationship, franchisees are protected by federal regulations imposing mandatory disclosure obligations on franchisors. See 16 C.F.R. Part 436. And during the life of the franchise, franchisees are protected by the full panoply of contract remedies for any breach of the franchise agreement. The market imposes a further, overriding restraint on the franchisor. There exists a grapevine among franchisees and franchisors do earn reputations. A franchise system marred by bad franchisor-franchisee relations is unlikely to expand--or survive.
These points are underscored by the malleable standard the jury used to find a fiduciary duty in this case. The court instructed the jury that such a duty exists "any time one person reposes a special confidence in another" and that the fiduciary relationship "extends to any possible case" in which this special confidence resulted in "domination and influence" on one side of the relationship. This broad basis for imposing fiduciary status leaves open the real possibility of retroactively imposing fiduciary duties on one half of a contractual relationship if the jury accepts the post hoc claims of the other half to have reposed "special confidence" in its contract partner. These claims are all too easy to make at the point of litigation, when the contractual relationship has already broken down and when there is likely to be substantial animosity between contracting parties. And surprising the allegedly "dominant" party with fiduciary responsibilities at this point would strip that party of the benefit of its bargain--the very contract through which it thought to describe and limit its obligations. Given the elasticity of the standard the district court used, it would be difficult to circumscribe any holding that imported fiduciary concepts into the franchise relationship. Without a clearer signal from the North Carolina courts--or from the North Carolina legislature--that they are willing to break with the great majority of other jurisdictions and lower the threshold for imposing fiduciary obligations, we are unwilling to do so ourselves on their behalf.
C.
Finally, the district court erred by allowing the jury to consider claims against PIC and GKN.
The court first erred in permitting plaintiffs to pierce the corporate veil. Disregarding the corporate form to impose vicarious liability on PIC and GKN was plainly impermissible under North Carolina law. A corporate parent cannot be held liable for the acts of its subsidiary unless the corporate structure is a sham and the subsidiary is nothing but a "mere instrumentality" of the parent. B-W Acceptance Corp. v. Spencer,
In this case there is no evidence of such "complete domination." Meineke exhibits none of the characteristics North Carolina courts have identified as indicative of sham incorporation. Initially, plaintiffs make no allegation that Meineke is inadequately capitalized. See Glenn,
There is no evidence that GKN, located in the United Kingdom, was involved in the day-to-day operations of Meineke, headquartered in North Carolina. GKN did not concern itself with Meineke's FTAs or UFOCs until after this lawsuit was filed. And there is no evidence of GKN's involvement in establishing New Horizons or managing the WAC account. In fact GKN's direct involvement with Meineke has been limited to dealing with occasional special problems that arise. And though GKN does participate on Meineke's Board of Directors, it has never had majority control of Meineke's Board and in fact has a policy of ensuring that it never has majority control of any subsidiary's board. Finally, there is no evidence that GKN's diverse subsidiaries are excessively fragmented into separate corporations. See id. (citing Fountain v. West Lumber Co.,
We recognize that veil piercing may present a jury question in North Carolina. But the question cannot reach a jury (and, if it has, the jury's verdict cannot stand) without evidence supporting the claim that one corporation is merely an instrumentality of another. Here the evidence suggests an ordinary parent-subsidiary relationship between GKN, PIC, and Meineke. Plaintiffs emphasize that Meineke and GKN share funds; that GKN's "bottom line" ultimately reflects Meineke's profits; and that GKN urged Meineke to enhance profitability and identified New Horizons as a profit center for the company. Far from signaling sham incorporation or complete domination of Meineke by GKN, this evidence supports an entirely benign interpretation. As the owner (through PIC) of all Meineke's stock, GKN has a natural interest in maximizing the return on that investment. Its communications with Meineke and its limited oversight--as well as the profit motive they reflect--portray not a sham structure but a legitimate and routine parent-subsidiary relationship.
To hold that GKN's involvement justified disregarding the corporate form would place North Carolina well outside the mainstream of corporate law. The United States Supreme Court just recently has had occasion to consider and confirm the "general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation (so-called because of control through ownership of another corporation's stock) is not liable for the acts of its subsidiaries." United States v. Bestfoods, --- U.S. ----, ----,
Plaintiffs advanced several theories of direct liability in an effort to circumnavigate these principles of corporate law, among them aiding and abetting breach of fiduciary duty and intentional interference with contractual relations.
Plaintiffs' claim that PIC and GKN aided and abetted Meineke's breach of fiduciary duty fails for two reasons. First, a cause of action for aiding and abetting breach of fiduciary duty depends on the existence of a fiduciary duty, which, as the preceding section shows, does not exist between Meineke and its franchisees. Even placing aside that basic obstacle to aider and abettor liability in this case, liability is still inappropriate here. Imposing liability for aiding and abetting a breach of fiduciary duty requires a finding that GKN or PIC was "a substantial factor" in Meineke's alleged breach of duty. Blow v. Shaughnessy,
Plaintiffs' claim that GKN intentionally interfered with contractual relations also should not have been submitted to the jury. The elements of this claim are:
First, that a valid contract existed between the plaintiff and a third person.... Second, that the outsider had knowledge of the plaintiff's contract with the third person. Third, that the outsider intentionally induced the third person not to perform his contract with the plaintiff. Fourth, that in so doing the outsider acted without justification. Fifth, that the outsider's act caused the plaintiff actual damages.
Peoples Security Life Ins. Co. v. Hooks,
We do not think that the fourth element is satisfied here. There is, of course, evidence that GKN and PIC were interested in increasing the profitability of New Horizons: GKN approved bonuses for increasing New Horizons's profitability and PIC considered New Horizons to be a "profit center." The fourth prong, however, requires that the defendant have acted "without justification." "For interference with a contract to be tortious, 'plaintiff's evidence must show that the defendant acted without any legal justification for his action....' " Carolina Water Serv., Inc. v. Town of Atlantic Beach,
Under North Carolina law, there was justification here. As the owner through PIC of all Meineke's stock, GKN is protected by a form of qualified privilege for "non-outsiders." See Wilson v. McClenny,
Here, we believe for several reasons that the privilege should obtain. GKN and PIC, as parents and shareholders in Meineke, took an interest in Meineke's bottom line and implored Meineke to increase its profitability by pursuing an advertising strategy which it was at least arguably entitled to pursue under the contract. Although we cannot and do not decide whether Meineke's various contractual contentions will ultimately prevail on remand, see supra note 6, we do think it incorrect to hold GKN and PIC liable on a tortious interference theory when the contract language itself admits of respectable arguments from both sides in this case as to whether Meineke's conduct comported with the FTA conditions. Such good-faith actions taken by shareholders--urging the corporation to maximize profits--are privileged under North Carolina law and cannot form the basis of a tortious interference claim.
Any apparent tension between North Carolina's recognition of a qualified privilege and its reluctance to pierce the corporate veil is easily resolved. Shareholders who take an active interest in the affairs of the corporation are "non-outsiders" and thus protected from tortious interference claims by the qualified privilege. And if those shareholders do not completely dominate the affairs of the corporation, the corporate veil will not be pierced and they will be shielded from vicarious liability. Setting up such a safe harbor preserves the advantages of limited liability while encouraging shareholders to actively monitor corporate affairs.
It is true that the qualified privilege may be waived and liability may be imposed where an insider's "acts involve individual and separate torts ... or where his acts are performed in his own interest and adverse to that of his firm." Wilson,
V.
We do not dismiss the action against Meineke, however. The plaintiffs in this lawsuit may have some legitimate grievance with Meineke's conduct. They retain a variety of contract remedies for any breach that may have occurred. Those remedies include, where appropriate, restitution to the WAC account and consequential contract damages in the form of franchisees' lost profits. See generally John D. Calamari & Joseph M. Perillo, The Law of Contracts § 14-5, at 595-96, § 15-4, at 651-53 (3d ed.1987). And it is not inconceivable that a class action might be used in a carefully controlled manner to achieve the economies and efficiencies for which that device was intended. But in various ways this lawsuit managed to wander way beyond its legitimate origins, and at the end it spun completely out of control, with a diffuse class and proliferating theories of liability. In fact, this lawsuit came close to visiting corporate ruin on Meineke over what is a vigorous but straightforward contract dispute, totally losing sight of the basic principle that in size and in nature a legal remedy must bear some degree of proportion to the extent of the legal wrong actually committed. If we permitted this judgment to stand, commercial disputes and contract law would be transformed--a string of tort claims advanced in a sprawling class action would put many companies--and their corporate parents--out of business.
We do respect the important role of juries in striking the balance between injury and recompense. Nevertheless, like the class action device, the jury's function must be exercised under the guidance and within the framework of basic principles of law. Without respect for law neither the class action device nor the jury system can serve the important functions for which they were intended. Because the most primary principles of procedure and the most settled precepts of commercial law were not observed here, the judgment of the district court is reversed in its entirety, and the case is remanded for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
Notes
Plaintiffs' complaint also alleged violations of the analogous Texas Deceptive Trade Practices--Consumer Protection Act, Tex. Bus. & Com.Code Ann. §§ 17.41 et seq., and RICO, 18 U.S.C. §§ 1962(c) and (d). With respect to the Texas act, the district court ruled after trial that both North Carolina and Texas choice of law rules directed that only the North Carolina UTPA applies to this dispute, a ruling neither party challenges. The district court dismissed the RICO claims before trial, and plaintiffs do not press them on appeal
Hereafter, we shall generally refer to defendants collectively as "Meineke," except when necessary to distinguish among GKN and its various subsidiaries
Meineke also challenges the district court's finding that the class should be certified as a non-opt-out class under Rule 23(b). "It is, however, unimportant to determine whether the action meets the criteria of [section (b) ], if ... plaintiffs' action failed to qualify for class action treatment under ... section (a) of Rule 23, qualifications which a party must satisfy as a basis for class certification before compliance with section (b) of Rule 23 is considered...." Lukenas v. Bryce's Mountain Resort, Inc.,
Because we hold that plaintiffs cannot represent the interests of EDP franchisees, see, e.g., Melong v. Micronesian Claims Comm'n,
Plaintiffs' reliance on Teague v. Bakker,
We recognize that the parties have raised numerous issues on appeal and cross appeal. However, in view of the fact that we have reversed the judgment in its entirety, we think it unnecessary and in some instances gratuitous to resolve all the many claims of error addressed herein. It should be evident from our discussion of the evidence in this case that, given the multiplicity of contracts and the variations in language among them, it simply is not possible at this point to determine whether or not judgment would be appropriate on certain of these contracts as a matter of law
The jury awarded plaintiffs $150 million in punitive damages on their claims of aiding and abetting breach of fiduciary duty, fraud, intentional interference with contractual relations, and willful and wanton negligence. But because the jury also found that Meineke's tortious conduct constituted unfair and deceptive trade practices under the UTPA, plaintiffs chose to substitute the larger figure of treble compensatory damages as the punitive component of their award
We recognize that in exceptional circumstances, when the franchisor really does hold all the cards, a fiduciary duty may exist. See, e.g., Walker v. U-Haul Co.,