TCBY System, Inc. v. RSP Co.

Citations: 33 F.3d 925; 1994 WL 460804Docket: Nos. 93-2683, 93-2788, 93-3026, 93-3028

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

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The case involves a dispute between TCBY Systems, Inc. (the franchisor) and RSP Company, Inc. (the franchisee) following RSP's premature termination of their franchise agreement. TCBY filed a lawsuit against RSP, its investor Clarence Paulson, and his son Randy Paulson, who operated the store. RSP and the Paulsons counterclaimed, alleging TCBY breached the franchise agreement by not providing adequate assistance in selecting a store location. A jury sided with RSP, finding TCBY in breach, prompting TCBY to appeal the district court's denial of its motion for judgment as a matter of law, evidentiary rulings, and the award of attorneys' fees to RSP and the Paulsons. RSP and the Paulsons cross-appealed the dismissal of their claims under the Minnesota Franchise Act, the denial of their motion for a new trial on damages, and the awarded attorneys' fees.

The court reversed and remanded the case for reconsideration of the cost award but affirmed all other issues. The background reveals that Clarence Paulson initially contacted TCBY for a franchise and was informed by TCBY's representatives about their expertise in site selection. Despite TCBY rejecting a potential site in Crystal, they encouraged Paulson to look outside the Twin Cities, despite a struggling store in that region. Ultimately, the Paulsons identified a site in Alexandria, which TCBY approved after a visit by division manager Randy Ball. However, Ball failed to obtain necessary demographic reports as per TCBY’s guidelines, relying instead on personal observations. The Alexandria site did not meet TCBY’s minimum standards, revealing significant discrepancies between the guidelines and the actual demographics of the proposed location.

Ball’s site evaluation for TCBY in Alexandria led to the approval of a franchise, with projected first-year gross sales estimated at $250,000. However, the actual sales were less than half of this estimate, prompting RSP to terminate the franchise agreement in December 1990 after TCBY declined to add “cold weather” items to the menu. TCBY subsequently sued RSP and the Paulsons for unpaid royalties and advertising funds, while 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 and allowed the contract and fraud claims to proceed to jury trial. 

The jury found TCBY breached the franchise agreement by failing to provide reasonable assistance and by not acting in good faith, awarding $70,000 in damages to RSP and the Paulsons; however, it ruled in favor of TCBY on the fraud claim. TCBY's motion for Judgment as a Matter of Law (JAML) was denied, as the court found sufficient evidence supporting the jury's verdict. TCBY’s site evaluator, Randy Ball, lacked experience and did not follow TCBY’s guidelines, relying instead on personal observation without proper demographic analysis, which indicated a breach of good faith. TCBY’s subsequent approval of the site despite unfavorable demographic data supported this finding. The district court also awarded RSP and the Paulsons $95,363 in attorneys' fees and $3,990.99 in costs. TCBY contested the jury instructions regarding the duty of good faith and fair dealing but did not prevail.

TCBY contends that under Arkansas law, there is no implied duty of good faith and fair dealing in the franchise agreement, but fails to provide supporting authority. The court undertakes a de novo review of state law, predicting that the Arkansas Supreme Court would recognize such an implied covenant, based on precedents indicating its presence in contracts, employment agreements, and oil and gas leases. The district court's instruction to the jury regarding this implied covenant was deemed appropriate.

TCBY's request for a new trial was denied by the district court, which found no prejudicial evidentiary rulings and concluded that the jury's verdict was not against the weight of the evidence. This decision was upheld upon review.

Additionally, TCBY argued that the district court erred by allowing parol evidence to modify the franchise agreement. However, the court found the term "reasonable assistance" ambiguous, allowing the evidence to clarify its meaning rather than alter the contract. 

Finally, TCBY challenged the admission of expert testimony regarding its site review process. The court found the testimony admissible under Federal Rules of Evidence, as it would assist the jury in understanding the industry standards relevant to the case. The expert was allowed to provide an opinion on whether TCBY's approval process met these standards.

The expert's testimony was deemed sufficient by both the expert and the district court, aiding the jury's understanding of reasonable standards in the franchise industry. TCBY's claim that the expert's opinion affected its substantial rights was dismissed, as supporting testimonies from the Paulsons and Randy Ball upheld the verdict. TCBY argued that the jury improperly combined RSP’s corporate damages with Clarence Paulson’s individual damages through an interrogatory regarding breach of contract. While TCBY maintained that Paulson, not being a party to the franchise agreement, should not recover damages, the district court found he was entitled to recoup his $70,000 investment due to individual injury. Despite disagreement with this conclusion, it was determined that the jury did not commingle damages, as there was no evidence of separate injuries to Paulson. The jury understood Paulson's role as RSP's sole shareholder, which clarified any confusion about damages. The breach of contract instruction specifically required the jury to find a breach affecting RSP, rendering any interrogatory error harmless.

TCBY also contested the district court's decision to award attorneys' fees and costs to RSP and the Paulsons, arguing that their counterclaim for fees was based on dismissed MFA claims. However, post-verdict, RSP and the Paulsons sought fees under the franchise agreement and applicable Arkansas law, which allows discretionary fee awards in breach of contract cases. The court affirmed that it did not abuse its discretion in awarding fees under Ark.Code Ann. 16-22-308, and TCBY's concerns about the excessiveness of the fee award were unfounded, as RSP and the Paulsons were deemed prevailing parties entitled to such fees. Finally, in the cross-appeal, RSP and the Paulsons contested the dismissal of the MFA claims, arguing against the district court's interpretation of the franchise agreement’s choice-of-law clause.

The franchise agreement specifies that it will be governed by the substantive laws of Arkansas, excluding the Arkansas Franchise Practices Act. Previous cases indicate that similar choice-of-law clauses can limit the application of certain statutes. Although a subsequent amendment clarifies the applicability of anti-waiver statutes, it does not apply retroactively to agreements signed before its effective date, which is pertinent since the agreement was signed before 1989. The court found no strong public policy violation in upholding the Arkansas law choice. 

RSP and the Paulsons challenged the district court’s denial of their motions for additur or a new trial regarding damages, which the court reviews for abuse of discretion. Under Arkansas law, a new trial for inadequacy is warranted only if a fair-minded jury could not have reasonably determined the awarded amount. RSP’s expert calculated total losses at $177,005, while the jury awarded $70,000, potentially aligning with RSP’s initial capitalization. 

On attorney fees, the district court awarded fees based on Arkansas rates rather than the higher Minneapolis rates sought by RSP and the Paulsons, who argued they needed out-of-town counsel due to their unfamiliarity with local attorneys. The court’s decision to use Arkansas rates was not deemed an abuse of discretion. 

Regarding costs, RSP and the Paulsons sought over $25,000 but were awarded only $3,990.99 for specific allowable expenses. The district court disallowed several costs not listed under federal statutes, but the franchise agreement allows for reimbursement of “reasonable costs” independent of those statutes. Therefore, the court remanded the issue of disallowed costs for further consideration, while affirming all other rulings.