Carvel Corp. v. Noonan
| Decision Date | 21 November 2003 |
| Docket Number | Docket No. 02-9248.,Docket No. 02-9252.,Docket No. 02-9246.,Docket No. 02-9362. |
| Citation | 350 F.3d 6 |
| Parties | CARVEL CORPORATION, Plaintiff-Counterclaim-Defendant-Appellant, v. Elizabeth A. NOONAN, John D. Noonan, Peter Marsella and Joseph A. Giampapa, Defendants-Counterclaim-Plaintiffs-Appellees, Abdul Aziz Hoodbhoy, John K. Hazelton, Mary Lisa Hazelton, Edward Gromelski, Marcia Finkle, Nelson Finkle, Suleman Hoodbhoy, Dost M. Khemani, John G. Hughes, Beverly A. Papp; Robert A. Morath; Iqbal Naviwala; Estelle McNerney; Pen Li Wang; Stanley Sicinski; Josephine Ingenito; Angela Sparacino; Gaspare Sparacino; Jerome Lang; Margaret C. Lang; Nasim Arhsed Chugtai; Robert Spielman; Joseph A. Rotondo; Paula Rotondo; Valerie Cristiano; Stephen W. Vangelder; Mildred Miller; Dora Lee Shock; Bruce Mordaunt; Rosemarie Mordaunt; John F. Schneider; Josephine Ann Schneider; Carlton K. Harding; Judith M. Harding; Anthony Iaquinta; Frank Iaquinta, MD; Kenneth Mounts; Shirley Mounts; Burton G. Fischer; Lynn Kohler; Don Roggie Siclait; Wilfrid Siclait; Ismail Tawfik; Noor J. Tawfik; Randy Hyde; Robert Noorigian; Stephen Kwacz; Ash Family Trust; Christel Sicinski; Maria Capodieci; Geraldine McCormack; Vincent Valva, Sr.; Jerry Capodieci; Carol Guadagno; Chin Tien Hsieh; Margaret Y.M. Hsieh; Sue Tsing Hsieh; Diane Humphrey; Robert Kohler; Christine Liberti; Hugo Liberti; Mary H. Lisa; Robert T. Maida; Jeanne V. Marsella; Edward McCormack; George M. Piquette, Jr.; Ketki P. Shah; Pankaj Shah; Douglas Casavant; Barbara Casavant; John Lynch; Catherine Lynch; H. Martin Popiel; Joyce Popiel; Armond Liguoni; Henry Goldman; Richard Harris, Dr.; Michael Bailey; Denise Bailey; Joan Noorigan; James Baker; Defendants-Counterclaim-Plaintiffs. Louis R. Pepe and Ernest J. Mattie, Special Masters. |
| Court | U.S. Court of Appeals — Second Circuit |
Mitchell A. Karlan, Gibson, Dunn & Crutcher LLP (Marshall King, David Arroyo, Michelle Craven, of counsel), New York, NY, for Plaintiff-Counterclaim-Defendant-Appellant.
J. Manly Parks, Esq., Duane Morris LLP (Aegis J. Frumento, on the brief, Wayne A. Macks, Jr., James H. Steigerwald, Shannon Hampton Sutherland, of counsel), Philadelphia, PA, for Defendants-Counterclaim-Plaintiffs-Appellees.
Before: NEWMAN, SOTOMAYOR, and WESLEY, Circuit Judges.
This is an appeal from a judgment of the United States District Court for the District of Connecticut (Covello, Chief Judge), entered on jury verdicts in three separate trials in favor of appellees on their claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and intentional interference with prospective economic relations. Appellees — the Noonans (hereinafter "Noonan"), Marsella, and Giampapa — were once franchisees of appellant Carvel Corporation ("Carvel"); the events underlying this litigation occurred while Carvel and appellees were, respectively, franchisor and franchisees. In this appeal, Carvel presents six contentions in seeking a reversal, however only two require our current attention. First, Carvel argues that the district court erred in denying its renewed motion for judgment as a matter of law on appellees' claims that Carvel tortiously interfered with their prospective economic relations with their retail customers. Second, Carvel argues that the district court erred in permitting the juries in appellees' trials to assess punitive damages against Carvel.1
Because there is no controlling New York case law, we certify to the New York Court of Appeals questions as to the standard by which we should evaluate Carvel's conduct for purposes of imposing liability for tortious interference, and as to whether punitive damages may be awarded in this type of case. Answers to these questions will determine whether we will reach the remaining contract issues. We will retain jurisdiction so that, following the New York court's responses, we may resolve any issues that remain and dispose of the appeal.
Appellant Carvel, owner of various brand names, trademarks, and recipes for the production of ice cream products, entered into numerous franchise agreements under which franchisees obtained the right to do business under the name "Carvel" and to manufacture and sell Carvel products in retail stores. All of Carvel's franchise agreements ("the agreements") provide that their construction and performance shall be governed by the law of the State of New York; no party contests that choice of law.2 Under the agreements, franchisees were permitted to sell Carvel products at specified off-site locations such as restaurants, schools, and hospitals. However, franchisees were not permitted to sell Carvel products to anyone other than ultimate consumers; they were not, for example, permitted to wholesale their products to supermarkets. In the early 1990's, Carvel began selling its products through supermarkets. Appellees claim that Carvel's distribution of its products through supermarkets violated the terms and spirit of their franchise agreements.
Historically, Carvel distributed its products solely through franchise retail stores. The "Acknowledgments" paragraph in Carvel franchise agreements noted that the public was accustomed to receiving Carvel products through these stores, that the stores were "unique," and that Carvel had a "unique system" of distributing its products. (The agreements are described in more detail in Section II.A., infra.) One Carvel newsletter elaborated on this unique system by stating, "[o]f course a customer can go to a supermarket or to a franchise commercial scoop store and pay dearly for commercial storage ice cream brands that are 10 days to 10 months old, but only at Carvel can a customer buy superior premium quality fresh ice cream that is hand made daily." In its publication, The Carvel Way, the company further stated that "[t]he Carvel Corporation is in the business of selling franchises to licensees who open a very special store."
Prior to 1992, Carvel never distributed its products through supermarkets. In addition to prohibiting franchisees from doing so, Tom Carvel, himself, repeatedly told graduates of Carvel College that supermarkets were Carvel's primary competition and were the "enemy." However, in 1989, Tom Carvel sold his controlling interest in Carvel to Investcorp. Still, Carvel's new President and CEO, Steve Fellingham, continued to assure franchisees that Carvel was "not in the ice cream manufacturing or the supermarket business and [had] no plans to enter [that] market." Fellingham indicated that a similar strategy had "ruined" Haagen Dazs's retail stores.
Despite those assurances, the company unveiled its "supermarket program" in the early 1990s. In the 1980s, Carvel's franchise stores — and the company in general — had begun to suffer due to competition presented by an increase in frozen desserts being offered in supermarkets, the introduction of frozen desserts at McDonald's, and the growing popularity of frozen yogurt. Carvel commissioned a study on its market decline. This study recommended that Carvel begin selling its products through supermarkets; Carvel accepted the recommendation.
The supermarket program provided that either Carvel sales representatives or franchisees were to secure accounts with supermarket chains. To participate in the program, franchisees had to pay a license fee of $30,000 to $40,000 and had to upgrade their stores to the current design. If a franchisee chose to participate, it would be assigned a "route" of approximately 30-40 supermarkets. The franchisee would produce ice cream cakes and supply them to the supermarkets, Carvel would bill the supermarkets, and the franchisee would receive the wholesale price minus a ten percent fee to Carvel. If a franchisee chose not to participate, it would still receive a "cooperation payment" equal to five percent of the wholesale sales of Carvel products at supermarkets within a radius of five miles (or a population of 25,000, whichever was less) of its store. Appellant asserts that the program was developed with input from franchisees.
Appellant contends that by selling through supermarkets, Carvel would gain name-recognition and sales at franchise stores would correspondingly increase. Appellant also claims that it initially designed the supermarket program with the intention that franchisees would be the primary suppliers of supermarkets. However, by the time of trial, only about 25 percent of supermarkets selling Carvel products were being supplied by franchisees. Indeed, appellees argue that more franchisees sued Carvel over the program than participated in it. Appellees also note that while Carvel was offering franchisees the opportunity to participate in the program, it was contemporaneously building factories from which it could service supermarkets directly. Appellees argue that the supermarket program was simply an "exit strategy" by which Investcorp could sell Carvel at a profit, and that it became obvious that franchises were not part of the company's long-term strategy. From 1993 to 2000, approximately 134 franchise stores went out of business — down to 361 in 2000 — while the supermarket program grew at an annual rate of 40.7 percent. At the Marsella trial, Donald Boroian, an expert franchising consultant, testified that Carvel's supermarket program violated franchising industry standards and practices. Boroian's testimony, which was read into the records at the Giampapa and Noonan trials, also described the supermarket program's sales of Carvel products as "beyond cannibalization," and "the most egregious kind of violation of that franchise relationship you could have." Appellees also claim that Carvel products sold in supermarkets were of inferior quality, causing customer...
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