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J & R Ice Cream Corp. v. California Smoothie Licensing Corp.

argued: June 23, 1994; As Corrected August 9, 1994.


On Appeal from the United States District Court for the District of New Jersey. (D.C. Civ. No. 89-4638).

Before: Greenberg and Stapleton, Circuit Judges, and Farnan, District Judge*fn*

Author: Greenberg


GREENBERG, Circuit Judge.


A. Factual History

This appeal arises from an unsuccessful attempt of a franchisee to operate a restaurant in Florida. The appellants-cross-appellees are California Smoothie International, Inc. (CSI) and its wholly-owned subsidiary, California Smoothie Licensing Corporation (CSLC). As a matter of convenience, we sometimes will refer to CSI and CSLC singularly as "California Smoothie". CSI owns and operates California Smoothie restaurants, and CSLC franchises California Smoothie restaurants. The appellee-cross-appellant is J & R Ice Cream Corporation, the franchisee, which Jeffrey Baugher and Richard Rossetti founded in 1984. We note that in the business, restaurants sometimes are called "stores" and thus we will use that term.

We recite the facts taken from the perspective of J & R Ice Cream as the verdict winner. Baugher and Rossetti are longtime friends who decided in the 1980's to open an ice cream shop together. Soon after incorporating J & R Ice Cream for that purpose, they decided that to secure a desirable location and financing, they would try to acquire a franchise. They initiated preliminary Discussions with a number of franchisors, including Frusen Gladje and Steve's Ice Cream. However, during the summer of 1985, Robert Keilt, a childhood acquaintance of the Baugher and Rossetti families who was the president of CSI and CSLC, learned from Baugher's brother that Baugher and Rossetti were considering acquiring a franchise. Subsequently, Joseph Kennedy, vice president of franchising and development for CSLC, contacted Baugher and suggested that they consider acquiring a California Smoothie franchise in the Boca Town Center in Boca Raton, Florida. Baugher agreed to attend a meeting at California Smoothie's headquarters in Clifton, New Jersey, to discuss that possibility. Prior to the meeting, California Smoothie sent Baugher brochures regarding California Smoothie franchises which contained representations concerning California Smoothie's expertise in site selection.

The first meeting regarding the acquisition of a California Smoothie franchise by Baugher and Rossetti was on August 8, 1985. On that date, Baugher met first with Kennedy, then with Keilt, and then with Kennedy again. According to Baugher, in their initial Discussions Kennedy told him that the average California Smoothie franchise accrued $300,000 in sales per year, that a store at the Boca Town Center would produce at least that level of sales and probably more, and that all existing stores were earning between 18 and 20 percent profit. Baugher then met with Keilt who reiterated Kennedy's representations. Finally, when Baugher met with Kennedy again after speaking with Keilt, Kennedy gave Baugher documents containing sales and profit figures for California Smoothie company-owned stores earning substantial profits. Some of the documents contained a "disclaimer" stating that prospective franchisees should not rely on the figures. Nonetheless, Kennedy told Baugher to ignore the disclaimer because it was merely a legal requirement. Kennedy also told Baugher that the distribution of the documents containing sales and profit figures to prospective franchisees violated FTC regulations and California Smoothie policy. Moreover, he gave Baugher CSLC's Uniform Offering Circular, which included the following statement:

the Franchisor does not disclose to prospective Franchisees the actual, average or projected sales, profits or earnings of existing California Smoothie restaurants. In the event that a prospective Franchisee should obtain such information, it should not be relied upon, since any information pertaining to sales, profits, or earnings is intended for internal use only as a basis for the Franchisor's management decisions.

Uniform Offering Circular § 19, app. at 105.

The second meeting regarding the acquisition of a California Smoothie franchise by Baugher and Rossetti involved Rossetti and California Smoothie representatives, James Skouras and Gary Goddard. Goddard assured Rossetti that he and Baugher could match the profit and sales figures on certain documents Goddard showed him. There was a third meeting on August 26, 1985, when Baugher met with Keilt and Skouras who suggested that Baugher consider the Pompano Fashion Square Shopping Center site in Pompano Beach, Florida, for a franchise and indicated that a store at that site would have sales in excess of $300,000 per year.

In September 1985, Baugher and Rossetti submitted franchise applications to California Smoothie, expressing interest in acquiring a franchise at the Boca Raton site. On November 22, 1985, California Smoothie notified Baugher and Rossetti that their applications had been approved. However, shortly thereafter California Smoothie informed them that Keilt had decided not to locate a "full-line-menu" restaurant at the Boca Town Center due to the lease economics of the site.*fn1 Meanwhile, in November 1985, CSI leased space in the food court scheduled to open at the Pompano Fashion Square Shopping Center some time in 1986. In late December 1985, Keilt and Skouras contacted Baugher and Rossetti and told them that a store at the Pompano mall would produce at least $300,000 in sales per year. Moreover, Keilt told Baugher that California Smoothie had conducted a full investigation of the Pompano mall site, including studies of demographic information.

Baugher and Rossetti retained an accountant, Thomas Maniscalo, to evaluate the Pompano mall site and to help them get financing should they choose to acquire a California Smoothie franchise. Maniscalo had several conversations with Keilt and another representative of California Smoothie, who indicated to him the level of gross sales and expenses associated with a franchise. In these Discussions, the California Smoothie representatives understated the expenses and failed to mention that certain California Smoothie restaurants were operating at a loss or had closed due to financial failure. Based on the misleading information he received, Maniscalo advised Baugher and Rossetti to acquire the Pompano mall California Smoothie franchise.

On January 28, 1986, Baugher and Rossetti entered into a site selection agreement with CSLC, and made a $5,000 downpayment on CSLC's $25,000 franchise fee. Subsequently, on February 21, 1986, Baugher and Rossetti paid the remaining $20,000 of the franchise fee and executed a franchise agreement and a sublease entitling and obligating them to operate a California Smoothie Restaurant at the site leased by CSI in the food court at the Pompano mall. Prior to executing these agreements, Baugher and Rossetti expressed concern that the lease negotiated by CSI with the Pompano mall's landlord did not contain a cap on the common area maintenance fees. Indeed, California Smoothie's guidelines indicated that common area maintenance fees for a food court should not exceed two per cent of gross sales. Keilt responded to their concern by stating that he and the landlord had reached an oral agreement providing that common area maintenance fees would not exceed three percent of gross sales.

Baugher and Rossetti opened their California Smoothie restaurant at the Pompano mall on June 8, 1986, and on August 6, 1986, they assigned their rights in the franchise agreement to J & R Ice Cream. By the end of 1986, the franchise was operating at a loss. Baugher and Rossetti complained to CSLC about their gross sales and about the level of the food court maintenance fees which the mall collected from food court tenants.*fn2 These fees totaled more than the promised three percent of the restaurant's gross sales. After unsuccessfully seeking a reduction in the fees from the agent representing the mall's landlord, CSLC filed a lawsuit against the landlord and its agent in a Florida state court, alleging that the agent had made material misrepresentations to CSI during the lease negotiations. At that time, CSI began making reduced rent payments to the landlord and, in turn, began collecting reduced rent payments from J & R Ice Cream.

However, in October 1988, when settlement negotiations between CSI and the landlord proved unsuccessful, CSLC demanded that J & R Ice Cream pay the full amount owed under the sublease, including all past-due amounts. But J & R Ice Cream refused to pay the full amount due and continued to make reduced rent payments. J & R Ice Cream incurred losses in 1987, 1988, and 1989. On November 6, 1989, J & R Ice Cream brought suit against CSI and CSLC. Subsequently, in December 1989, CSLC terminated J & R Ice Cream's franchise, and in February 1990, J & R Ice Cream gave CSLC notice of its intent to abandon the premises and cease operations, and it did so by March 1990.

B. Procedural History

As we have indicated, J & R Ice Cream filed the complaint in this diversity of citizenship action on November 6, 1989. The complaint alleged violations of the Florida Franchise law, the Florida Business Opportunity Law, the Florida Deceptive and Unfair Trade Practices Act, the New York Consumer Protection from Deceptive Practices Act, and the New Jersey Consumer Fraud Act. See app. at 6-10, 12-15. The complaint also contained an equitable fraud count and a count alleging that California Smoothie was negligent in its selection of the Pompano mall site and its negotiation of the lease there. Id. at 11-12, 15-17. At a settlement conference in early August 1991, the district court indicated that it would entertain choice-of-law motions, but not motions for summary judgment. Later that month, the parties filed choice-of-law motions and ultimately the court ruled that New Jersey law governed the action. Thus, the claims under Florida and New York law were dismissed. In September 1992, the parties consented to a jury trial before a magistrate Judge. The trial began in the district court on May 3, 1993. Before the court submitted the case to the jury, J & R Ice Cream decided to forego its equitable fraud claim, and thus the court submitted only the New Jersey Consumer Fraud Act claim and the negligence claim to the jury.

On May 19, 1993, the jury found that CSI and CSLC violated the New Jersey Consumer Fraud Act by: (1) representing to J & R Ice Cream, without a reasonable basis in fact, that J & R would accrue gross sales of no less than $250,000 in its first year of operation at the Pompano location, and was likely to accrue more than $300,000 in gross sales; (2) representing, without a reasonable basis in fact, that they had acquired expertise in selecting profitable locations for franchises and had utilized that expertise in selecting the Pompano mall site; and (3) representing, without a reasonable basis in fact, that the food court common area maintenance fees at the Pompano mall would not exceed three percent of gross sales. Moreover, as noted above, the jury also found that CSI and CSLC had been negligent in the manner in which they selected the Pompano mall location and in the manner in which they negotiated the terms of the lease for that location.

Based on its findings, the jury awarded J & R Ice Cream $200,000 for California Smoothie's violations of the New Jersey Consumer Fraud Act, and $55,000 for California Smoothie's negligent conduct. The $200,000 verdict was a lump sum which did not distinguish among the liability theories under the Consumer Fraud Act. The court trebled the damages for the New Jersey Consumer Fraud Act violations pursuant to N.J. Stat. Ann. § 56:8-19 (West 1989), and, in a post-trial hearing, the court awarded J & R Ice Cream $287,455.83 in attorney's fees and costs. However, the court struck the jury's award of $55,000 on the negligence count and refused to award J & R Ice Cream prejudgment interest on the verdict. Thus, the total award to J & R Ice Cream, as reflected in the court's order of judgment, was $887,455.83. CSI and CSLC appeal from the judgment entered on July 20, 1993, on the jury's verdict, and J & R Ice Cream cross-appeals from the court's denial of prejudgment interest and its decision to strike the jury's award of negligence damages.

II. Discussion

A. An Overall ...

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