Parlous Enterprises, Inc. v. Kirin Group

• Decision Date: 19 June 2007
• Docket Number: No. G036525.,G036525.
• Citation: 61 Cal.Rptr.3d 243,152 Cal.App.4th 281
• Court: California Court of Appeals Court of Appeals
• Parties: PARLOUR ENTERPRISES, INC., et al., Plaintiffs and Respondents, v. The KIRIN GROUP, INC., et al., Defendants and Appellants.

61 Cal.Rptr.3d 243

152 Cal.App.4th 281

PARLOUR ENTERPRISES, INC., et al., Plaintiffs and Respondents, v. The KIRIN GROUP, INC., et al., Defendants and Appellants.

No. G036525.

Court of Appeal, Fourth District, Division 3.

June 19, 2007.

Law Offices of William B. Hanley, William B. Hanley, Newport Beach; and Gerald N. Shelley, Costa Mesa, for Defendants and Appellants.

Smith, Chapman & Campbell, Steven C. Smith, Santa Ana, William D. Chapman, San Francisco, and Robert J. Hadlock, Santa Ana, for Plaintiffs and Respondents.

OPINION

RYLAARSDAM, J.

A jury awarded plaintiffs Parlour Enterprises, Inc. (Parlour), Fun Foods 1, LP (Fun Foods 1), and Fun Foods Block, LP (Fun Foods Block) approximately $6.6 million in damages. The award consisted of lost profits, lost franchise fees, and consequential expenses sustained by plaintiffs when defendants unilaterally terminated a franchise agreement to develop subfranchises. Defendants Herman Chan and his corporation, The Kirin Group, Inc. (Kirin), appeal, contending the damages awarded were improper because the evidence was unreliable. We agree, with the exception of $62,907 awardable to Parlour as lost franchise fees and $67,348 in extra expenses incurred by Parlour to develop the subfranchises. We also reverse the judgment in favor of Fun Foods 1 and Fun Foods Block on the cause of action for intentional interference with prospective economic advantage. The matter is remanded to the trial court with directions to reduce the award of damages to Parlour to $130,255. In all other respects, the judgment is affirmed.

FACTS AND PROCEDURAL BACKGROUND

From 1963 to 1972, Bob Farrell opened 55 Farrell's Ice Cream Parlours (Farrell's) around the United States. In 1972, he sold all of them to Marriott Corporation, which opened an additional 85 restaurants. Around 1980, Marriott sold the ice cream parlors only to take them back three years later. Marriott shut down all Farrell's operations in the mid-1980s, except for a single Farrell's operating in San Diego.

Chan, who had worked at a Farrell's Ice Cream Parlour as a teenager, formed Kirin and in 1996 bought the Farrell's trademarks and trade names. In November 1999 he opened a Farrell's in Temecula but closed it in early 2002 because it was not profitable.

Before closing that Farrell's, Kirin entered into a series of written agreements with Parlour in 2000 to develop Farrell's subfranchises in California. The agreements consisted of an Area Development Agreement (ADA) and a rider to the ADA. The ADA gave Parlour the exclusive right to subfranchise Farrell's in California, subject to Kirin's written consent and except for Kirin's "reserving] to itself the right ... to: ... itself, or through an Affiliate, own and operate `Farrell's Ice Cream Parlour Restaurants' which are located a minimum of two and a half (256) miles in any direction from an existing Restaurant or a Restaurant then under construction in accordance with a Franchise Agreement or an approved Subfranchise Agreement[]...." Under the subfranchise agreements, Parlour was to receive an up-front fee and royalties in the form of a percentage of the net sales.

The ADA required Parlour to open a minimum number of restaurants within a certain time period. Parlour ultimately opened only one store within the required time, a Farrell's in Santa Clarita, which opened in 2001. The limited partnership that owns the center provided the funds. Before then Parlour had been unable to find any investors.

Parlour was also unsuccessful in obtaining investors for additional restaurants. Accordingly, Parlour set up the limited partnerships of Fun Foods Block and Fun Foods 1 to fund the building of Farrell's at The Block in Orange and in Aliso Viejo, respectively. For both partnerships, the limited partners contributed 100 percent of the funds.

In December 2002, Kirin and Parlour executed a Settlement and Mutual Release-Agreement, which extended Parlour's time to open the second restaurant to December 2003 and gave it an additional year to open the other restaurants. The parties thereafter signed an Amendment to the Settlement Agreement. Kirin terminated the ADA in October 2003 for Parlour's refusal to pay over $19,000 in attorney fees relating to the Amendment.

Parlour, Fun Foods 1, and Fun Foods Block sued defendants. Parlour alleged causes of action for breach of contract, intentional fraud, negligent misrepresentation, and defamation. Fun Foods 1 and Fun Foods Block brought a claim for interference with prospective business advantage.

At trial plaintiffs' expert, Robert Wunderlich, testified to the amount of damages caused by defendants' conduct, referencing eight locations in his analysis. Three of them, The Block, Aliso Viejo, and Fresno, had specific plans for opening a restaurant. For these he calculated franchise fees and lost profits owed to Parlour. For the one location already open, Santa Clarita, and the remaining four locations, Wunderlich assessed only franchise fees owed to Parlour. The fees included a $35,000 up-front charge, plus royalties in the form of a percentage of the gross sales.

Projections provided by Parlour formed the starting point of Wunderlich's analysis for both the franchise fees and lost profits. Wunderlich did not know who created the projections or his or her education, training, or experience. But he knew the projections were prepared on behalf of Parlour's principals, who were "experienced in these sorts of businesses." If Parlour had not provided the projections, Wunderlich would have had to develop them himself.

He also used these projections to determine expenses and "bench marked that by looking at actual expenses [and analyzing the financials of] the Santa Clarita location and in general for the industry." He did not use Parlour's projections for the first two years but rather allowed for a ramp up time. As Wunderlich explained, "So the first two years have lower sales than actually [were] contained in this projection. And then beyond ... year 3, that's when I reached the stabilized period" and used Parlour's projections.

In addition, Wunderlich "obtained market data[ ] ... about a couple of dozen ice cream parlors." He looked at the publicly available information for one chain of restaurants called Friendly's, a publicly traded company. According to Wunderlich, Friendly's "is a chain of about 300 or so restaurants, which is similar to Farrell's in that it has both the ice cream end and the food end." The earnings projected by Parlour were lower than the Friendly's chain, which indicated to him that Parlour's projections were reasonable. He also considered "some projections from ice cream stores," but relied more on the data for Friendly's because it "had both the ice cream component and the food component, where the others were purely ice cream [parlors], smaller operations than ones which would be serving a full menu."

He further considered the two Farrell's that were open, Santa Clarita and San Diego. To determine San Diego's revenues, expenses, and profits, Wunderlich spoke only to Parlour's principals. For Santa Clarita, the profit and loss statement covered the entire center, precluding Wunderlich from determining the restaurant's profit and loss from its operations alone. But he was able to "do a rough appraisal" of the net profits by allocating or apportioning expenses. He looked at line items, tagged some of the expenses as food-oriented or game-oriented, and allocated the rest according to revenue. He determined "that the [Santa Clarita] restaurant was generating a positive profit when [he] did a reasonable allocation of the operating expenses to the restaurant."

The sales from Santa Clarita were lower than plaintiffs' projections, which he concluded was because it did hot receive stand-alone business but rather "most of its business tended to be from people already there at the arcade, as opposed to itself being a big attraction. [H] And so in [plaintiffs'] view, the [Santa Clarita] location was not as attractive of a location as the other[s] for which they had plans." For that reason, he did not use the actual Santa Clarita numbers as a starting point for his other estimates.

Wunderlich started with revenues and deducted expenses, such as labor, rent, insurance, and other items of overhead to arrive at net profit. He divided the amount of damages suffered by plaintiffs into three categories: loss of franchise fees (a one-time charge plus a percentage of revenue), lost profits, and extra expenses incurred in implementing the ADA. He calculated that Parlour's lost franchise fees would be about $2.6 million, lost profits for The Block, Aliso Viejo, and Fresno would be about $3.9 million ($1.5 million for The Block, $785,000 for Aliso Viejo, and $1.7 million for Fresno), and the extra expenses incurred collectively by plaintiffs would be $202,929, for a total of about $6.7 million.

As to the lost franchise fees, Wunderlich took a percentage of the gross revenue, and adding a "one-time flat fee," discounted it to present value. According to Wunderlich, "franchise fees are based only on a percentage of revenue[ s]o you don't have to consider expenses. You don't even have to consider profitability A]s long as the stores are open and earning revenue," Parlour would receive franchise fees.

For the $202,929 in extra expenses, Wunderlich separated the expenses between Parlour, Fun Foods Block, and Fun Foods 1. Using Parlour's bank account records, he added up the expenses that would be wasted if it could not develop the locations, which totaled $67,348. He did the same thing with Fun Foods Block and Fun Foods 1 and determined their extra expenses were $126,486 and $9,095, respectively.

A jury found in plaintiffs' favor on all causes of action except defamation. It awarded Parlour $4.25 million, Fun Foods 1 $785,000 and Fun Foods Block $1.6 million. The trial court denied defendants' motions for judgment notwithstanding...