Pauline's Chicken Villa, Inc. v. KFC Corp., 84-SC-1135-DG

• Decision Date: 31 October 1985
• Docket Number: No. 84-SC-1135-DG,84-SC-1135-DG
• Citation: 701 S.W.2d 399
• Parties: PAULINE'S CHICKEN VILLA, INC., Movant, v. KFC CORPORATION, Respondent.
• Court: United States State Supreme Court — District of Kentucky

Page 399

701 S.W.2d 399

55 A.L.R.4th 499

PAULINE'S CHICKEN VILLA, INC., Movant, v. KFC CORPORATION, Respondent.

No. 84-SC-1135-DG

Supreme Court of Kentucky.

Oct. 31, 1985.

As Corrected Nov. 1, 1985.

Rehearings Denied Jan. 16, 1986.

Walter J. Swyers, Jr., Alex F. Talbott, Karen A. Conrad, Louisville, for movant.

William C. Boone, James E. Milliman, Barbara R. Hartung, Louisville, for respondent.

GANT, Justice.

Pauline M. Houchen has owned and operated six Kentucky Fried Chicken franchises since 1962, and at the time of this litigation had two operating under corporate names in Clarksville and Jeffersonville, Indiana. In the summer of 1978 Mrs. Houchen and her manager learned that a competitor was interested in obtaining a prime site in Clarksville, at the intersection of Interstate 65 and Indiana Highway 131, and contacted the respondent. Respondent encouraged movant to purchase the site, which was accomplished. On May 16, 1979, respondent issued a franchise relocation agreement for the new site and contemporaneously gave a letter to movant by which respondent agreed that movant could continue to operate its existing franchise in Clarksville, which would become an additional franchise if movant was satisfied, after a one-year test period, that the additional franchise was economically viable.

The construction of the new facility was never accomplished and respondent rescinded the contract and franchise agreement. Movant brought this action for breach of contract utilizing as its sole basis for damages the loss of profits occasioned by the breach. The trial court directed a verdict for the respondent on the question of breach of contract, rendering moot any question of what damages would be allowed, but did, parenthetically, make the following finding:

5. Plaintiff's choice of remedy, recovery of lost profits, under the facts and circumstances of this case, is not an allowable measure of damages recoverable under Kentucky law and Plaintiff failed to offer proof of any other measure of damages.

On appeal, the Court of Appeals reversed the directed verdict and remanded for a new trial, holding that there was sufficient evidence of waiver and lack of demand that the question of breach of contract should be submitted to a jury. However, on remand, the Court of Appeals limited damages to "measures of recovery" other than lost profits. It is this limitation which is the first argument presented on discretionary review. It is noted there is no Cross-Petition for Discretionary Review herein from the decision of the Court of Appeals remanding for a new trial and thus no necessity to pass upon the sufficiency of the evidence at the first trial relating to loss of profits.

In examining this point, the court must confront the "new business rule." This rule has tautologically become one which states that lost profits cannot be recovered on behalf of an unestablished business because without a history of past profits the existence of any profits that might be realized in the future but for the breach of contract cannot be proved with the requisite legal certainty necessary to allow recovery.

Both movant and respondent and the Court of Appeals have referred to, relied upon or sought to distinguish the case of Brundige v. Sherwin-Williams Co., Ky.App., 551 S.W.2d 268 (1977). That case contains an excellent history of the development of the "new business rule" in Kentucky and in other jurisdictions, especially relating to cases since Holliday v. Sphar, 274 Ky. 556, 119 S.W.2d 656 (1938). Although the facts in Brundige are readily distinguishable from the case before us, the ultimate holding of Brundige was that where lost profits in an unestablished business are alleged as damages for breach of contract, they may be awarded if such lost profits may be proved with reasonable certainty. It is our opinion that this is the law in Kentucky and to the extent that Holliday, supra, may be interpreted as adopting the "new business rule," as previously defined herein, it is expressly overruled.

The rule in this state is that which is set out in Restatement (Second) Contracts, Sec. 352: "Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty."

Thus, the test is not whether the business is a new or unestablished one, without a history of past profits, but whether damages in the nature of lost profits may be established with reasonable certainty. Comment b in the Restatement, supra, sums it up as follows:

However, if the business is a new one ... proof will be more difficult. Nevertheless, damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.

No court, including this one, can elucidate a single definition of "reasonable certainty" which may be used as a yardstick in all cases. However, this is a case containing factors and elements which eliminate virtually all the uncertain variables. This is a national franchisor, with uniformity of national advertising, uniform quality control, earnings and expense figures on nearby and comparable locations, and an available history concerning success and failure ratios. The franchisee, likewise, is experienced in the field and with the specific product, with a proven record of operation and management, a history of profit and loss, with two current operations in the...