Tcby Systems, Inc., an Arkansas Corporation v. Rsp Company, Inc. Clarence Paulson Randy Paulson, (Two Cases) Tcby Systems, Inc., an Arkansas Corporation v. Rsp Company, Inc. Clarence Paulson Randy Paulson, (Two Cases)

Citation: 33 F.3d 925Docket: 93-2683

Court: Court of Appeals for the Eighth Circuit; August 26, 1994; Federal Appellate Court

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In the case of TCBY Systems, Inc. v. RSP Company, Inc., TCBY Systems, the franchisor, is involved in a legal dispute with RSP Company, the franchisee, and its shareholders, Clarence and Randy Paulson, concerning a failed frozen yogurt store. RSP prematurely terminated the franchise agreement, prompting TCBY to sue for breach of contract. RSP and the Paulsons counterclaimed, alleging TCBY failed to provide reasonable assistance in choosing a store location as promised in the franchise agreement. After a jury trial, the jury found in favor of RSP, ruling that TCBY did breach the agreement. TCBY subsequently appealed the district court's decisions, which included denying its motion for judgment as a matter of law, evidentiary rulings, and the awarding of attorneys' fees to RSP. RSP and the Paulsons cross-appealed the dismissal of their claims under the Minnesota Franchise Act and the damages awarded. The appellate court reversed and remanded the cost award for reconsideration but affirmed all other issues. The initial franchise discussions included TCBY representatives claiming expertise in real estate for franchise locations and providing sales expectations, but TCBY ultimately rejected the preferred site in Crystal, Minnesota, leading to the selection of a different location in Alexandria. The franchise agreement included a clause stating that while TCBY would provide reasonable assistance in site selection, it did not warrant the suitability of the location.

Randy Ball, TCBY division manager, evaluated a potential store site in Alexandria, spending four hours assessing the location and discussing it with the mall developer. He did not obtain a required demographic report but relied on his observations, which inaccurately indicated that the site met TCBY’s internal guidelines for site selection. TCBY's criteria required a minimum population of 7,500 within a one-mile radius, a median household income of at least $25,000, a median age in the high 20s to low 30s, and a concentrated market. However, the actual demographics revealed a population of 3,756, a median income of $18,000, and a scattered market. Additionally, the site was located in a new mall, which TCBY guidelines advised against due to uncertain success. Despite these deficiencies, TCBY approved the site based on Ball's evaluation, projecting first-year gross sales of $250,000. The Paulsons opened the TCBY store in May 1989, but sales fell below half of the estimate, leading to the termination of the franchise agreement by RSP in December 1990, as the store never reached break-even.

TCBY subsequently sued RSP and the Paulsons for unpaid royalties and advertising funds. RSP and the Paulsons counterclaimed for breach of contract, fraud, and violations of the Minnesota Franchise Act (MFA). The district court dismissed the MFA claims but allowed the contract and fraud claims to proceed to a jury. The jury found that TCBY breached the franchise agreement, awarding $70,000 in damages, while rejecting the fraud claim. TCBY's motion for judgment as a matter of law (JAML) was denied, and RSP and the Paulsons were awarded $95,363 in attorney fees and $3,990.99 in costs. RSP and the Paulsons' motion for increased damages was also denied. On appeal, TCBY argued that the court should have granted JAML, but the standard for review required considering evidence favorably for RSP and the Paulsons, denying JAML unless the evidence overwhelmingly supported TCBY's position.

Sufficient evidence supports the jury's finding that TCBY breached its contract by failing to provide reasonable assistance in site selection and by acting in bad faith. Testimonies from the Paulsons and Randy Ball indicated that Ball, lacking prior experience in site evaluations, did not adhere to TCBY's guidelines and inadequately assessed the Alexandria site, ultimately approving it despite a demographic report indicating it did not meet TCBY's minimum standards. This behavior suggested dishonesty and bad motive. Consequently, the district court's denial of TCBY's motion for judgment as a matter of law (JAML) was appropriate.

TCBY's argument against the jury instruction regarding an implied duty of good faith and fair dealing was rejected, as no Arkansas law was cited to negate this duty. The court conducted a de novo review, predicting that the Arkansas Supreme Court would recognize such an implied covenant in franchise agreements, supported by common law and the Arkansas Commercial Code.

Additionally, TCBY's request for a new trial was denied by the district court, which found no prejudicial evidentiary errors and determined that the jury's verdict was consistent with the weight of the evidence. The appellate court agreed with the district court's assessment, concluding there was no abuse of discretion in denying the new trial motion.

TCBY argued that the district court erred by allowing parol evidence to alter the franchise agreement, claiming that RSP introduced promotional materials and verbal representations that established additional obligations. Under Arkansas law, the parol evidence rule typically excludes evidence that modifies an unambiguous written contract. However, the court found the term "reasonable assistance" ambiguous, allowing the evidence to clarify its meaning rather than change the contract. Consequently, the court's admission of the promotional material and verbal representations was deemed appropriate.

TCBY also contended that the district court incorrectly allowed a franchise expert to testify regarding the adequacy of TCBY's site evaluation process. The court reviews the admission of expert testimony for abuse of discretion. Under Federal Rule of Evidence 702, expert opinions are admissible if they assist the jury in understanding the evidence or deciding an issue. The expert opined that TCBY's site approval process was inadequate, and the court agreed that this testimony was beneficial for the jury. TCBY failed to demonstrate that the expert's testimony negatively impacted its substantial rights, as other testimonies supported the verdict.

Additionally, TCBY claimed the court wrongly permitted the jury to combine RSP's corporate damages with Clarence Paulson's individual damages. TCBY argued that Paulson, not being a party to the franchise agreement, should not recover for breach of contract. The district court found Paulson entitled to his $70,000 investment loss due to individual injury. While the summary of damages could appear commingled, the damages expert merely reframed corporate losses as Paulson's investment loss. The jury, understanding Paulson was RSP's sole shareholder, could not have commingled damages since there was no distinct evidence of separate injuries to him. The court concluded that any potential error regarding the jury’s interrogatory was harmless, as the jury was required to establish that TCBY breached the contract with RSP and that RSP suffered damages.

TCBY argues that the district court erred in awarding RSP and the Paulsons attorneys' fees and costs, asserting that their request for fees was based on claims under the Arkansas Franchise Practices Act (MFA), which were dismissed prior to trial. However, RSP and the Paulsons later sought fees based on the franchise agreement and relevant Arkansas law, specifically Ark.Code Ann. Sec. 16-22-308, which allows for discretionary attorney fee awards in breach of contract cases. The court found no abuse of discretion in awarding fees, affirming that RSP and the Paulsons were prevailing parties entitled to such fees, despite TCBY's claims that the award was excessive given their limited success.

In a cross-appeal, RSP and the Paulsons contend that the district court improperly dismissed the MFA claims, challenging the court's interpretation of the franchise agreement's choice-of-law clause, which stipulates that Arkansas law governs the agreement, excluding the application of the MFA. The court referenced precedent indicating that similar clauses have prevented the application of antiwaiver statutes in other jurisdictions. RSP and TCBY entered the franchise agreement before relevant amendments to the law, and the court did not find that enforcing the choice-of-law provision contradicted Arkansas public policy.

Additionally, RSP and the Paulsons claim the district court erred in denying their motion for additur or a new trial on damages. The court's review of this denial, which requires examining whether a fair-minded jury could have reasonably reached the awarded amount, found that the jury's damage award of $70,000 was reasonable given the evidence presented. This amount aligned with RSP's original capitalization, despite the parties disputing the extent of damages incurred.

RSP and the Paulsons argue that the district court incorrectly denied them their attorneys' usual hourly rates and full costs, opting instead for Arkansas rates over the higher Minneapolis rates charged by their counsel. The court typically bases reasonable hourly rates on local fees for similar services; however, it is recognized that out-of-town counsel can sometimes be awarded higher rates. The Paulsons, being Minnesota residents, were compelled to litigate in Arkansas due to a forum selection clause, which contributed to their choice of Minneapolis counsel. While the district court could have justifiably used Minneapolis rates, its decision to use Arkansas rates was not deemed an abuse of discretion.

Regarding costs, RSP and the Paulsons requested over $25,000 but were awarded only $3,990.99, covering specific expenses for one expert witness. The district court disallowed various costs, including expert fees and travel expenses, determining they were not recoverable under 28 U.S.C. Sec. 1920. RSP and the Paulsons argued that the franchise agreement allows for the recovery of "reasonable costs" beyond those specified in Sec. 1920. The summary agrees that the franchise agreement supports this view and remands the issue of disallowed costs for the district court to reassess their reasonableness. The overall ruling is reversed and remanded regarding costs, but affirmed on other matters.