Okun v. Morton

• Decision Date: 11 August 1988
• Docket Number: No. B024082,B024082
• Citation: 203 Cal.App.3d 805,250 Cal.Rptr. 220
• Parties: Milton OKUN, Plaintiff and Respondent, v. Peter MORTON, et al., Defendants and Appellants.
• Court: California Court of Appeals Court of Appeals

Page 220

250 Cal.Rptr. 220

203 Cal.App.3d 805

Milton OKUN, Plaintiff and Respondent, v. Peter MORTON, et al., Defendants and Appellants.

No. B024082.

Court of Appeal, Second District, Division 2, California.

Aug. 11, 1988.

Review Denied Nov. 9, 1988.

Rosenfeld, Meyer & Susman, Harry B. Swerdlow and James L. Seal, Beverly Hills, for defendants and appellants.

Bergman & Wedner, Inc., Gregory A. Wedner and Gregory M. Bergman, Los Angeles, for plaintiff and respondent.

COMPTON, Associate Justice.

This litigation arises out of a dispute over the interpretation of an agreement between Milton Okun (plaintiff) and Peter Morton (defendant) which, at its inception, contemplated the development of a restaurant and commercial enterprise known as the "Hard Rock Cafe." Although the venture proved highly successful, the parties found themselves at odds concerning provisions in the contract covering the exploitation of future business opportunities.

As a result, plaintiff initiated this action for specific performance, declaratory relief, and damages. Alleging that the disputed portion of the agreement was too vague to be enforceable, defendant cross-complained for recision, damages, and other forms of equitable relief. Following a non-jury trial, the court granted plaintiff specific performance and awarded him a total of $354,325 in damages for fraud, breach of contract, and tortious breach of contract. The judgment as rendered also specified the manner in which the parties were to share in all business opportunities utilizing the Hard Rock name and format. This appeal by defendant follows.

Plaintiff first met defendant when the two were residing in England in the early 1970's. Defendant and a partner, Isaac Tigrett, were operating a popular local restaurant and tourist attraction known as the Hard Rock Cafe. Plaintiff contacted defendant and inquired about investing in the business. Defendant declined plaintiff's offer but indicated that he contemplated expanding his business to the United States and would contact plaintiff if an opportunity for participation in the venture became available.

In 1978, plaintiff having returned to this country, was contacted by defendant who indicated that he was looking for investors willing to back a restaurant in the Los Angeles Area. Plaintiff and defendant were successful in opening and operating a restaurant known as "Morton's", patterned after another restaurant in London but more modest in size and concept than the Hard Rock Cafe.

In December 1981, defendant located a site suitable for the Hard Rock Cafe and began circulating a private placement memorandum to potential limited partners for the purpose of raising $850,000 in capital. ¹

Earlier that year, defendant had entered into an agreement with his London partner, Isaac Tigrett, in an attempt to settle a long standing dispute concerning their respective rights to use the restaurant's name and trademark in the United States. Memorialized in a July 1981 telex, the parties agreed that defendant was to have the exclusive right to use the Hard Rock name and logo in California, Arizona, and Illinois while Tigrett was to have rights in New York, Florida, and Texas. The remaining states were available for exploitation on a "first come, first serve" basis. Although the agreement appeared unambiguous on its face, both defendant and Tigrett continued to argue over the meaning of various terms, including the length of time each would be bound by its provisions.

The private placement memorandum circulated by defendant failed to mention even the existence of that dispute. That document merely noted that defendant was the sole shareholder of the Hard Rock Cafe Corporation (HRC), and that he had personally licensed HRC to use the Hard Rock name. ² The memorandum further represented that "the General Partner [HRC] and Mr. Morton have the unrestricted right to develop future restaurants, including such as may bear the Hard Rock Cafe name or otherwise embody the concepts involved in the restaurant, for their own accounts or for the account of others...." (Emphasis added.) These statements notwithstanding, the licensing agreement appended to the memorandum did disclaim defendant's right to use or license the Hard Rock name as follows: "Licensor [Morton] makes no representation or warranties that it has the right to use or license the name 'Hard Rock Cafe' and Licensor shall not be liable to Licensee [HRC] for any causes of action, claims, damages, costs or expenses of any nature whatsoever which Licensee may suffer or incur as a result of its use of said name pursuant to this Agreement."

Plaintiff received a copy of the memorandum but initially rejected the proposal. Sometime later, after it became apparent that HRC could not meet its capital contribution obligations as specified in the private placement memorandum, defendant attempted to rekindle plaintiff's interest in the business by offering him stock in the general partnership and the right to participate in other opportunities utilizing the Hard Rock name.

In the negotiations which followed, plaintiff demanded a 30% interest in HRC in exchange for his payment of $100,000 to the limited partnership. He also insisted on receiving 20% of the fees earned by defendant for operating the restaurant despite his expressed desire to have no role in the management of the business. When defendant, through his attorney Gary Hampar, balked at the proposal, plaintiff agreed to accept a 20% interest in the general partnership so long as his financial liability for the venture was confined to narrowly defined circumstances. The parties further agreed that plaintiff's obligation to pay 100% of HRC's contribution to the limited partnership was unique, and that in future ventures he would be responsible only for capitalization equal to his shareholder interest.

Although during the course of the negotiations neither defendant nor Hampar mentioned that there were any limitations on the use of the Hard Rock name, they did emphasize the possible future investments that could be anticipated and the markets which existed for the opening of other similar restaurants.

The parties executed the agreement which, on March 2, 1982, provided that HRC was to be capitalized for $5,000, $1,000 of which was to be provided by plaintiff in exchange for a 20% interest in the general partner. Plaintiff further agreed to advance $99,000 to HRC, which amount would be contributed to capital prior to the closing of the limited partnership offering. In addition to receiving 20% of the management fees paid defendant as compensation for his services at the L.A. Hard Rock location, plaintiff's liability for future financial contributions to the venture was limited to 25% of defendant's contributions, not to exceed $50,000. ³

Paragraph 9 of the agreement, entitled "Business Opportunities," read in pertinent part as follows:

"All business opportunities which arise in connection with the business of HRC, the partnership or that which utilizes the name and mark 'HARD ROCK CAFE' must be offered to HRC. If HRC does not avail itself of such opportunity, we shall then have the right to exploit such opportunity together in a manner mutually agreeable in the same ratio which we currently hold stock in HRC. If you elect not to participate in such opportunity after reasonable notice, I shall be free to exploit such opportunity in any manner I choose."

In addition to his 20% ownership in HRC, plaintiff purchased two limited partnership units in the L.A. Hard Rock and encouraged his business associates to do the same. The restaurant itself opened at its Beverly Center location in October 1982, and proved to be a commercial success.

As a result, defendant went forward with plans to exploit the San Francisco market in a manner similar to that used in Los Angeles. In April 1983, he circulated a private placement memorandum for the purpose of soliciting investors in a new limited partnership which, in conjunction with a general partner, would own and operate a second Hard Rock Cafe. Defendant, however, decided against using HRC as the general partner and, instead, formed the Hard Rock Cafe Corporation II (HRC II). When plaintiff became aware of this development he was informed by defendant's attorneys that HRC actually was the general partner and that HRC II had been organized solely to minimize the tax consequences of the venture. At the same time, he was assured that HRC and HRC II would be functionally identical insofar as his ownership interest was concerned.

In accordance with the terms of the L.A. Hard Rock limited partnership deal, the investors in that operation were given the right of first refusal to participate in the San Francisco venture at $35,000 per unit (i.e., a 1 1/3% % interest). The private placement memorandum itself referred to defendant as the "majority stockholder" in HRC II and indicated that he had committed to obtain a third-party loan up to a maximum of $100,000 and/or additional operating expenses not to exceed $50,000. The general partner's financial commitment to the venture, however, was expressly limited to its contribution of $10,000 for the capitalization of HRC II. Nevertheless, the limited partnership offering was expected to generate approximately $1.2 million.

Defendant subsequently offered plaintiff a 20% interest in HRC II for $2,000 and retained the remaining shares (i.e. 80%) for himself. Before the transaction was consummated, however, defendant's attorney, Philip Adler, advised plaintiff in August 1983 that defendant had instituted a lawsuit in federal district court against his partner in the London Hard Rock, Tigrett, over the parties' respective rights to use the Hard Rock name in the United States. In view of his asserted right to participate in future business opportunities utilizing the Hard Rock trademark, plaintiff was asked to contribute 20% of the legal fees generated by the...