Kim v. Servosnax, Inc.

• Decision Date: 10 November 1992
• Docket Number: No. AO55586,AO55586
• Citation: 13 Cal.Rptr.2d 422,10 Cal.App.4th 1346
• Court: California Court of Appeals Court of Appeals
• Parties: , 1992-2 Trade Cases P 70,057 Agnes Y. KIM, Plaintiff and Appellant, v. SERVOSNAX, INC., Defendant and Appellant.

Page 422

13 Cal.Rptr.2d 422

10 Cal.App.4th 1346, 1992-2 Trade Cases P 70,057

Agnes Y. KIM, Plaintiff and Appellant, v. SERVOSNAX, INC., Defendant and Appellant.

No. AO55586.

Court of Appeal, First District, Division 4, California.

Nov. 10, 1992.

M. Van Smith, Mountain View, for plaintiff and appellant.

Vincent M. Spohn and James L. McIntosh, Napa, for defendant and appellant.

ANDERSON, Presiding Justice.

This appeal and cross-appeal raise issues concerning the Franchise Investment Law (CORP.CODE, § 31000¹ et seq.), the Cartwright Act (Bus. & Prof.Code, § 16720 et seq.) and related matters. In July 1986 plaintiff and appellant Agnes Y. Kim sued defendant and appellant Servosnax, Inc. (Servo), alleging, among others, causes of action for breach of contract, violation of the Franchise Investment Law and violation of the Cartwright Act. The trial court nonsuited Kim on her Cartwright Act claim; the two remaining causes of action went to the jury. The jury delivered a verdict in favor of Kim on her cause of action for violation of the Franchise Investment Law, awarding damages in the amount of $45,000. Thereafter Servo moved unsuccessfully for a new trial. We conclude there were no errors below and affirm the judgment.

I. FACTS

A. Servo's Business in General

Servo is a California corporation which contracts with owners and managers of office complexes to operate food dispensing facilities, typically cafeterias, on site. Servo builds out the cafeteria space, purchases and installs the equipment, opens the cafeteria for business, and then operates it for a period of four to eight weeks.

Servo then licenses the right to operate the cafeteria to an individual operator, pursuant to a license agreement. The operator pays a fee for the license, typically a cash down payment for half the purchase price, with the remainder carried back by Servo on a promissory note. Additionally, Servo charges the operator a monthly fee equal to 10 percent of the net sales.

After the new operator is in place, Servo stays on the premises for a short training period. Thereafter, Servo acts as a liaison between the location owner or manager and the licensee, and makes routine inspection visits to ensure quality standards are maintained. Servo controls the menu and pricing for its cafeteria operations. It requires its operators to provide a hot entree, hot soup and sandwiches on a daily basis.

There was no name, logo or symbol identifying the cafeteria with Servo. In fact, licensees were not permitted to use Servo's name or any derivative thereof in the operation of the cafeteria. Servo does not register its license agreements as franchises under the Franchise Investment Law.

B. Servo's Agreement with Kim

In July 1982, Mr. and Mrs. Kyung Ja Kim entered into a license agreement with Servo to operate an employee cafeteria located at Nicolet Magnetics Corporation in Fremont. The agreement was for a five-year term; the purchase price was $35,000. Nearly three years into the term, in April 1985, the original licenses sold and transferred their license to Agnes Kim for $33,000. She paid $24,000 in cash and gave Servo a promissory note for $9,000.

At the end of June or beginning of July, cafeteria sales dropped because Nicolet began laying people off; that fall, Nicolet announced it would close the cafeteria.

In January 1986, Mr. Goodroe, vice-president of Servo, visited the Nicolet cafeteria and informed Kim that the cafeteria would be closed. He considered the extensive layoffs to be a "loss of location" under the agreement, and set January 14, 1986 as the date her location was lost. The "loss of location" provisions provide that if the location owner terminates the right of possession of the licensed premises within the five-year period, Servo, at its option, can either provide the licensee "another location of comparable income within ninety (90) days" or partially refund the purchase price according to an established schedule that reduces the payout for each year of operation under the agreement.

Servo chose to offer Kim the location replacement remedy. Kim consulted with an attorney who prepared a letter agreement which expressed that: (1) Servo would provide Kim a new location within 90 days of January 14, 1986; (2) if Kim rejected the initial location offered, Servo would continue to seek another location, but at that point it would not be bound by the 90-day period; and (3) Servo would consider replacement options of greater than comparable income, providing Kim would pay an additional fee. Goodroe executed this letter agreement on behalf of Servo.

Within 90 days, Goodroe notified Kim that 2 other employee cafeterias were available that the company considered comparable. One was in San Ramon, the other in Livermore. Goodroe testified that Kim expressed that these locations were "too far away." ² Ross was a large facility with a complex configuration and a tight shift schedule for serving up to approximately 500 employees. Goodroe testified he told Kim the Ross facility was not suitable for her; he did not offer her the Ross license because she did not have the experience to operate that cafeteria. ³

The Sun location was under construction and not yet occupied. Its potential employee base of 500 was greater than that at Nicolet. Kim testified Goodroe offered her Sun at no extra cost; Goodroe stated that after they visited the site, he told her he would have to review the move-in schedules before figuring a price. On April 22 Goodroe offered Kim the Sun location for $12,000 on a 50 percent down payment plus a five-year note at 12 percent, or $10,000 in cash. Goodroe explained in court that this offer would be based on the existing term of the Nicolet license, which was four years old. In reality Kim would be paying $12,000 for the opportunity to run Sun for one year, and she still had to pay $8,000 on the promissory note to Servo.

The parties negotiated over the Sun location and explored the cost of a new, five-year license there, but never reached agreement. They disagreed principally on the formula for crediting Kim for her Nicolet license. Servo offered Kim an additional location which she rejected.

II. APPEAL

Servo urges that we reverse the judgment awarding Kim $45,000 in damages based on Servo's violation of the Franchise Investment Law. A "franchise" is a contract by which: "(1) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and [p] (2) The operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, ⁴ logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and [p] (3) The franchisee is required to pay, directly or indirectly, a franchise fee." ( § 31005, subd. (a).)

In California, the sale of franchises is regulated. Subject to certain exceptions not germane to this appeal, the franchisor must register the sale of a franchise with the Commissioner of Corporations (hereafter Commissioner) ( § 31110 et seq.) and must provide the prospective franchisee with a proposed offering circular enumerating material information set forth in the application for registration ( §§ 31114, 31119).

At the operative times, a franchisor had to disclose, among other things, the franchise fee charged and the "formula by which the amount of the fee is determined if the fee is not the same in all cases" as well as the conditions under which the franchise could be terminated, or its renewal could be refused. ⁵ Any person who sells a franchise without registering it or delivering the offering circular to the prospective franchisee is liable to the franchisee, who in turn may sue the franchisor for damages caused thereby. ( § 31300.)

Kim's theory was that (1) Servo's license agreements were franchises; (2) Servo did not register its franchises or provide prospective franchisees with an offering circular revealing material information about the franchise; and (3) had she known how Servo valued the Nicolet license and the conditions for terminating or not renewing if there was a loss of location, she would not have purchased the license from Kyung Kim.

In order to prove a statutory violation, Kim of course initially had to establish that the license agreement was a franchise within the meaning of section 31005. Servo agrees that the first and third elements of a franchise were met but contends as a matter of law that the second element requiring "substantial association" with the franchisor's name or symbol could not be established, and that the court's instructions to the jury on this point were erroneous.

As Servo accurately points out, the code does not define the concept of "substantial association." Nor have we discovered any reported decisions on target. As did the court in this case, we thus also look to guidelines and opinions issued by the Commissioner for further insight. However, we are mindful that although interpretation of a statute by the officials charged with its administration is entitled to great weight, the courts have the final say on the meaning of a statute. (People v. Kline (1980) 110 Cal.App.3d 587, 593, 168 Cal.Rptr. 185, construing § 31005.)

In the Guidelines for Determining Whether an Agreement Constitutes a "Franchise" issued by the Commissioner (Release No. 3-F, revised Feb. 21, 1974 [hereafter Guidelines] ), the Commissioner explains that the objective of the law is to deal with a multiplicity of business establishments presented to the public as a unit or marketing concept operated pursuant to a uniform marketing plan under coverage of a common symbol. (Guidelines, at p. 6.) In line with that objective, "for the operation of the franchisee's business to be substantially associated with the symbol, it must be...