Broussard v. Meineke Discount Muffler Shops, Inc., s. 97-1808

Decision Date19 August 1998
Docket Number97-1848,Nos. 97-1808,s. 97-1808
Citation155 F.3d 331
PartiesKelly 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 Internati
CourtU.S. Court of Appeals — Fourth Circuit

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 ...

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