Crues v. KFC Corp.

• Decision Date: 13 April 1984
• Docket Number: 82-2085,Nos. 82-2050,s. 82-2050
• Parties: James T. CRUES, Appellant/Cross-Appellee, v. KFC CORPORATION, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1145

729 F.2d 1145

James T. CRUES, Appellant/Cross-Appellee, v. KFC CORPORATION, Appellee/Cross-Appellant.

Nos. 82-2050, 82-2085.

United States Court of Appeals,

Eighth Circuit.

Submitted April 14, 1983.

Decided March 13, 1984.

Rehearing and Rehearing En Banc Denied April 13, 1984.

Law Offices of Theodore F. Schwartz, Theodore F. Schwartz, Barry S. Ginsburg, Clayton, Mo., R.J. Slater, Padberg, McSweeney, Slater, Merz & Reid, St. Louis, Mo., for James T. Crues.

Shepherd, Sandberg & Phoenix, P.C., John C. Shepherd, John S. Sandberg, Richard L. Prebil, St. Louis, Mo., for appellee/cross-appellant KFC Corp.

Before LAY, Chief Judge, and McMILLIAN and JOHN R. GIBSON, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

James T. Crues obtained a judgment for $450,000 on his claim that KFC Corporation had fraudulently induced him to purchase an H. Salt Seafood Galley restaurant franchise. KFC appeals this judgment, arguing that Crues failed to establish all of the elements of fraud and to prove damages, and that it is entitled to judgment as a matter of law. KFC also claims error in the jury instructions, in reception of evidence and in rulings concerning plaintiff's final argument. In turn, Crues appeals the district court's granting of KFC's motions for a directed verdict on the issue of punitive damages and for judgment notwithstanding the verdict on its claim for royalties. We conclude that Crues established a submissible case of fraud but that the district court erred in instructing the jury and in directing a verdict on the issue of punitive damages. We reverse and remand for retrial. 546 F.Supp. 217.

Crues became interested in obtaining an H. Salt Seafood Galley restaurant franchise from KFC in early 1976. On May 13, 1976, he received from KFC a package of materials directed to prospective H. Salt franchisees. Crues submitted an application to KFC in late June, 1976, and signed a franchise option agreement dated July 19, 1976. KFC accepted the option on August 27, 1976. It notified Crues on November 5, 1976, that his site had been approved, and requested that he return further forms when he had purchased the property. On December 3, 1976, he was allowed additional time to negotiate for the location.

According to several KFC representatives, the business in the various Seafood Galleys took a turn for the worse in late November, 1976. On February 7, 1977, KFC sent Crues a certified mail letter informing him that sales in the St. Louis stores were disappointing and that sales in Pittsburgh were a little better but not what KFC expected or required. The letter continued, "As a result, the company is not going to build anymore Galleys this fiscal year. Any additional builds will depend on our ability to improve sales or somehow get a better balance between investment and return." Finally, the letter advised: "In view of the current Galley performance data, you may want to reconsider starting construction on your unit on Grand in St. Louis."

Crues signed a construction contract on May 18, 1977, and construction began in the summer. The restaurant opened for business on November 9, 1977. On January 7, 1978, KFC sent him fully executed copies of the franchise agreement, which was effective as of November 9, 1977, for a period of twenty years with a four percent royalty rate.

By the time the case was tried in 1982, Crues's Seafood Galley and two located in California were the sole remains of the H. Salt Seafood Galley project.

Crues brought this action, claiming that KFC had induced him to purchase the H. Salt franchise through fraudulent misrepresentation. The materials that KFC provided to potential franchisees included the following information:

The H. Salt Seafood Galley concept is the result of two years of research. In addition, more than a year of actual operating experience was gained in company-owned H. Salt Seafood Galley restaurants located in Pittsburgh, Atlanta, Dallas and Houston....

The company intends to expand its own H. Salt Seafood Galley operations with the firm conviction that the quick service seafood restaurant will hold an important place in the future of America's food service industry. This conviction is based, in part, on these facts:

....

Actual market experience has shown that the H. Salt Seafood Galley is an efficient, high volume profit producer.

The primary issue submitted to the jury was whether KFC fraudulently misrepresented to Crues "that the H. Salt Seafood Galley restaurant concept, after testing and research, was an efficient, high-volume profit producer."

The jury found for Crues, awarding him $450,000 in damages. This exceeded the prayer of $281,501 in the complaint, but the court permitted amendment of the complaint after trial. The district court directed a verdict for KFC on the issue of punitive damages, overruled KFC's motion for a new trial, and entered judgment notwithstanding the verdict in favor of KFC on its claim for royalties in the amount of $18,154.37.

I.

KFC argues that the district court should have granted its motion for a directed verdict on the fraud claim because Crues failed to establish all of the elements of a fraudulent misrepresentation action under Missouri law. In Slater v. KFC Corp., 621 F.2d 932 (8th Cir.1980), which also involved the Seafood Galley, we enumerated those elements:

(1) a representation;

(2) its falsity;

(3) its materiality;

(4) the speaker's knowledge of its falsity or ignorance of its truth;

(5) his intent that it should be acted upon by the person and in the manner reasonably contemplated;

(6) the hearer's ignorance of its falsity;

(7) his reliance on its truth;

(8) his right to rely thereon; and

(9) the hearer's consequent and proximate damage.

Id. at 936. See also Schimmer v. H.W. Freeman Const. Co., 607 S.W.2d 767, 769 (Mo.App.1980); Cantrell v. Superior Loan Corp., 603 S.W.2d 627, 634 (Mo.App.1980).

The standards for granting a directed verdict are the same under both federal and Missouri law. Hladyshewski v. Robinson, 557 F.2d 1251, 1252 (8th Cir.1977). We have outlined these standards as follows:

[A] directed verdict should be granted only when all the evidence points one way and is susceptible of no reasonable inferences sustaining the position of the nonmoving party.

Dace v. ACF Industries, Inc., 722 F.2d 374, 375 (8th Cir.1983) (quoting Decker-Ruhl Ford Sales, Inc. v. Ford Motor Credit Co., 523 F.2d 833, 836 (8th Cir.1975)); Hladyshewski, 557 F.2d at 1252. In Dace we further explained that we must

(1) resolve direct factual conflicts in favor of the nonmovant, (2) assume as true all facts supporting the nonmovant which the evidence tended to prove, (3) give the nonmovant the benefit of all reasonable inferences, and (4) deny the motion if the evidence so viewed would allow reasonable jurors to differ as to the conclusions that could be drawn.

Missouri decisions announce similar principles. Bayne v. Jenkins, 593 S.W.2d 519, 521 (Mo.1980) (en banc); Strebler v. Rixman, 616 S.W.2d 876, 877 (Mo.App.1981). Under these standards, ¹ we shall examine each element of the fraudulent misrepresentation action to determine whether the district court correctly denied KFC's directed verdict motion.

(1) KFC argues that the statement submitted to the jury that the Galley "is an efficient, high volume profit producer" is a statement of opinion, puffing or value, which is not an actionable representation of fact because it relates to terms of degree capable of different interpretations. Carrier Corp. v. Royale Investment Co., 366 S.W.2d 346, 350 (Mo.1963); Lowther v. Hays, 225 S.W.2d 708, 714 (Mo.1950). The materials that KFC sent to Crues listed the statement, however, as one of the "facts" upon which it based its "firm conviction that the quick service seafood restaurant will hold an important place in the future of America's food service industry." Moreover, KFC representatives testified that the statement was a fact. James Crivits, who as Manager of the Retail Venture Company had headed the marketing operations for non-chicken businesses at KFC, testified that the statement was based upon experience and that it was true at the time it was made. Crivits' testimony was confirmed by Theodore Kurilec, former franchise sales representative for the H. Salt Galley. Kurilec testified that the statement was based on actual store performance and the design of the restaurants.

(2) KFC argues that the truth or falsity of a representation must be determined as of the time it was made and acted upon by the hearer, Hunter v. Roberts, 267 S.W.2d 368 (Mo.App.1954); Powers v. Shore, 248 S.W.2d 1 (Mo.1952), and that the statement at issue here was true at the time KFC made it and Crues acted upon it. The "efficient high volume profit producer" statement was made to Crues on May 13, 1976, when he received the franchise package from KFC. When Crues acted upon the statement is not this clear. Crues submitted an application in late June, 1976. The franchise option agreement that KFC sent Crues was dated July 19, 1976. Crues completed the option agreement, and KFC accepted it on August 27. Crues then obtained approval of his site November 5, and signed a construction contract May 18, 1977. On January 7, 1978, KFC sent Crues fully executed copies of the franchise agreement, effective as of November 9, 1977, the day the restaurant opened.

Kenneth Everett Nunn, a security dealer active particularly in the fast-food franchise area, testified after analyzing Seafood Galley sales figures for eight of the stores that there was a substantial decline in sales in the year ending June 30, 1976, and that there was then something seriously wrong with the Seafood Galley concept. In Nunn's opinion, all eight of the restaurants were "in serious trouble" at that time. Rebecca Enders, who had been a franchise sales representative for the Seafood Galley program, and Richard Sivewright, Vice President and General Manager of H. Salt, testified...