Entre Computer Centers, Inc. v. FMG of Kansas City, Inc.

Citation819 F.2d 1279
Decision Date11 August 1987
Docket NumberNos. 86-3520,s. 86-3520
PartiesRICO Bus.Disp.Guide 6644 ENTRE COMPUTER CENTERS, INC., a Delaware Corporation, Appellant, v. FMG OF KANSAS CITY, INC., a Missouri Corporation and Porter B. Guttery, Defendants, and Gary J. Fox and David H. McMullen, Appellees. FMG OF KANSAS CITY, INC.; FMG of Omaha, Inc.; Gary J. Fox and David H. McMullen, Appellees, v. ENTRE COMPUTER CENTERS, INC., Appellant. ENTRE COMPUTER CENTERS, INC., a Delaware Corporation, Appellee, v. FMG OF KANSAS CITY, INC., a Missouri Corporation; Gary J. Fox and David H. McMullen, Appellants, and Porter B. Guttery, Defendant. FMG OF KANSAS CITY, INC.; FMG of Omaha, Inc.; Gary J. Fox and David H. McMullen, Appellants, v. ENTRE COMPUTER CENTERS, INC., Appellee. (L), 86-3528.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

James L. Quarles, III, Boston, Mass. (William G. McElWain, Hale and Dorr, Boston, Mass., Michael J. Walter, on brief), for appellant.

Edward A. McConwell, Overland Park, Kan., Clayton E. Dickey (Kenneth C. Bass, III, Great Falls, Va., Jeffrey J. Peck, Venable Baetjer & Howard, Baltimore, Md., on brief), for appellees.

Before SPROUSE, Circuit Judge, HAYNSWORTH, Senior Circuit Judge, and MAXWELL, United States District Judge for the Northern District of West Virginia, sitting by designation.

SPROUSE, Circuit Judge:

The action from which this appeal arises involved the business failures of two retail computer store franchises. The franchisees--Gary Fox and David McMullen--obtained franchises from Entre Computer Systems, Inc., for Entre stores in Kansas City, Missouri, and Omaha, Nebraska, 1 and operated them through their corporations, FMG of Kansas City and FMG of Omaha. 2 After both businesses failed, FMG brought this action against Entre alleging, inter alia, breach of contract, fraudulent misrepresentation, tortious interference and RICO 3 violations. The district court dismissed the RICO claim. 4 After trial, however, the jury awarded FMG $960,539 for breach of contract and $4,000,000 for fraudulent misrepresentation ($251,426 in compensatory damages and $3,748,574 in punitive damages). 5 Entre subsequently moved for a judgment notwithstanding the verdict or for a new trial on both the breach of contract and fraudulent misrepresentation claims. The district court denied its motions.

We agree with and affirm the district court's action in dismissing the RICO claim. We also agree with the district court's denial of Entre's motion for judgment notwithstanding the verdict or for a new trial on the breach of contract claim and affirm that portion of the judgment. We disagree, however, with its denial of Entre's motion for judgment notwithstanding the verdict on the fraudulent misrepresentation claim and reverse that portion of the judgment.

I.

Entre is a Delaware corporation with its corporate headquarters in Vienna, Virginia. It franchises retail computer stores and the franchisees, in turn, sell small computers to individuals and businesses. In late fall 1983, David McMullen and Gary Fox approached Entre about the possibility of opening Entre franchises in Kansas City and other Midwestern cities. David McMullen was a certified public accountant and successful businessman in Kansas City. His partner, Gary Fox, previously had managed several computer stores in the Midwest for Computerland, a competitor of Entre.

On December 19, 1983, Fox and McMullen mailed their franchise application to Entre. On January 6, 1984, they visited Entre's headquarters in Virginia and discussed their plans, including multiple stores, with John Zsidsin, Entre's senior franchising officer. Zsidsin mailed McMullen a franchise agreement for a single franchise on January 12. McMullen, through his attorney, altered it to reflect the fact that McMullen would have the exclusive right to future Entre franchises in Kansas City. He mailed Entre the modified agreement and a check to cover the franchise fee of $40,000. Zsidsin promptly returned the franchise agreement and the check, informing McMullen that Entre did not permit modification of its franchise agreements. Consequently, on January 20 McMullen mailed another signed franchise agreement to Entre, one that left the standard contract language intact. 6 McMullen testified, however, that Entre (through Zsidsin) orally promised him the exclusive right to operate Entre franchises in Kansas City. FMG based its fraudulent misrepresentation contention on this and other alleged oral promises. On February 28, Fox, McMullen and Guttery signed a franchise agreement for a store in Omaha, Nebraska. In the spring of 1984, Fox and McMullen created FMG of Kansas City and FMG of Omaha for the purpose of owning and operating the two Entre franchises.

The Kansas City store opened in June 1984, the Omaha store in September 1984. In July 1984, however, McMullen learned that Entre had granted a Kansas City franchise to a third party, Larry Shouse. In September, FMG brought suit to enjoin Shouse from opening his store, but this action was voluntarily dismissed in November 1984 after Shouse lost his financing. No other Entre store was ever opened in Kansas City.

The Kansas City and Omaha franchises both closed on January 10, 1985, because of financial difficulties. The parties disagree, however, on the cause of the financial problems. FMG contends that its lawsuit (to enjoin Shouse's operation) forced Fox and McMullen to divert their attentions away from establishing the two franchises. It also contends that Entre overcharged it $36,000 for inventory and equipment; that Entre forced it to purchase obsolete equipment; that Entre refused to accept returns of unordered merchandise; that Entre unexpectedly cancelled certain product lines; and that FMG lost $200,000 in profits because of Entre's inability to supply adequate quantities of IBM products.

In contrast, Entre contends that mismanagement led to financial difficulties and the eventual closing of the stores. Fox was the manager at the Kansas City store. He was demoted, however, because of unsatisfactory performance. In addition, the initial sales manager was discharged due to poor performance. Moreover, the Kansas City store suffered because the building was not ready at the beginning of the lease and the parking facilities were inadequate. At the Omaha store, the initial sales manager turned the store into a center for religious activity and had to be removed. His replacement fared no better, however, and was removed for lack of "business maturity." Finally, advertising problems, both on a local and national level, added to the stores' difficulties.

After the two franchises closed, FMG filed suit against Entre in federal district court in Missouri. Entre previously had filed an action against Fox, McMullen and Guttery in federal district court in Virginia. 7 FMG's action was transferred to Virginia and consolidated for trial with Entre's action.

II. Breach of Contract

In its complaint, FMG alleged eleven breaches of the franchise agreement. 8 The jury agreed that Entre breached the franchise agreement and awarded FMG $960,539. Entre contends that none of these allegations were supported by sufficient evidence at trial. Accordingly, Entre argues that the district court erred in denying its motion for judgment notwithstanding the verdict.

In reviewing a judgment based on a jury verdict, our task is to determine whether, when viewed in the light most favorable to the prevailing party, the record contains substantial evidence to support the jury's finding. Wilhelm v. Blue Bell, Inc., 773 F.2d 1429, 1433 (4th Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1199, 89 L.Ed.2d 313 (1986); Brady v. Allstate Insurance Co., 683 F.2d 86, 89 (4th Cir.), cert. denied, 459 U.S. 1038, 103 S.Ct. 452, 74 L.Ed.2d 605 (1982). An affirmative answer to that inquiry requires that we affirm the judgment.

FMG first argues that substantial evidence supports its allegation that Entre breached the agreement by preventing FMG from performing its contractual obligations. Under Virginia law, a party breaches a contract by preventing the performance of the opposing party. See R.G. Pope Construction Co., Inc. v. Guard Rail of Roanoke, Inc., 219 Va. 111, 244 S.E.2d 774 (1978); Boggs v. Duncan, 202 Va. 877, 121 S.E.2d 359 (1961). According to FMG, Entre prevented it from performing its contractual duties by imposing unreasonable demands. FMG offered evidence, for example, that Entre required it to purchase obsolete or excessive inventory, that Entre forced it to contribute to local and national advertising, and that Entre requested that FMG's stores be of above-average size. Whether these demands were unreasonable, however, is not the issue because FMG cites no contractual obligation that Entre's demands prevented them from performing. Consequently, this is an inadequate basis upon which to justify a verdict based on a breach of contract.

FMG further argues, however, that the jury's verdict is supported by evidence demonstrating that Entre failed to perform specific duties imposed upon it by the franchise agreement. 9 Although these duties are described in general terms, McMullen and Fox offered specific testimonial examples of obligations and breaches.

Section III.A. of the agreement provides that Entre will assist the franchisee in selecting a store site. Fox testified that Entre refused to approve his primary sites for the Kansas City store, thus forcing him to settle for a secondary location. Moreover although Entre eventually approved the ultimate location of the Kansas City store, it initially rejected the site and this forced FMG to delay the opening of the store. McMullen testified that Entre's stated reason for refusing the initial selections was the heavy competition in that area. McMullen also testified, however, that Entre's later market survey confirmed Fox's original opinion--that his initial...

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