Slater v. KFC Corp.

• Decision Date: 26 June 1980
• Docket Number: Nos. 79-1360,79-1398,s. 79-1360
• Citation: 621 F.2d 932
• Parties: Thomas J. SLATER, Appellee, v. KFC CORPORATION, Appellant. Thomas J. SLATER, Appellant, v. KFC CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 932

621 F.2d 932

Thomas J. SLATER, Appellee, v. KFC CORPORATION, Appellant.

Thomas J. SLATER, Appellant, v. KFC CORPORATION, Appellee.

Nos. 79-1360, 79-1398.

United States Court of Appeals,

Eighth Circuit.

Submitted Dec. 3, 1979.

Decided June 3, 1980.

Rehearing and Rehearing En Banc Denied June 26, 1980.

Robert R. Schwarz, Clayton, Mo. (argued), and Daniel P. Card II, Clayton, Mo., on brief, for KFC Corp.

Theodore F. Schwartz, Clayton, Mo. (argued), and Barry S. Ginsburg, Clayton, Mo., on brief, for Slater.

Before HEANEY, BRIGHT and ROSS, Circuit Judges.

BRIGHT, Circuit Judge.

Thomas J. Slater brought this action alleging that the KFC Corporation (KFC) fraudulently induced him to purchase two franchises for the operation of seafood restaurants. KFC denied this allegation and counterclaimed for the cost of certain equipment which it had supplied to Slater and for royalty and advertising fees allegedly owing under the franchise agreements. The jury awarded Slater $265,000 in actual and $100,000 in punitive damages on his fraud claims. The jury awarded KFC $141,000 on its equipment counterclaim ¹ but denied recovery on the counterclaim for royalty and advertising fees. The district court entered judgment for Slater and for KFC in these amounts. Both parties have appealed.

On appeal, KFC alleges numerous trial court errors and contends that it was entitled to a judgment n.o.v. of dismissal on Slater's claim and an award of damages for royalty and advertising fees. Slater appeals from the form of judgment entered on the jury's awards, asserting that, to "reflect the true spirit of the jury verdict," the counterclaim award should be set off against the fraud recovery so that the judgment reflects solely the balance in favor of Slater. For the reasons set forth below, we reverse the trial court's judgment on Slater's claim for fraud and on KFC's counterclaim for royalty and advertising fees, and remand for a new trial.

I. Background.

Appellant KFC franchises and operates fast-food restaurants throughout the country, including Kentucky Fried Chicken outlets, H. Salt Fish & Chips Shoppes, H. Salt Seafood Galley restaurants and Zantigo Mexican-American restaurants. Appellee Slater has operated two Kentucky Fried Chicken franchises in St. Louis County, Missouri, for over eleven years.

KFC began experimenting with the market concept of the H. Salt Seafood Galley (galley) in 1973, when it opened a test store in Pittsburgh, Pennsylvania. By the summer of 1975, KFC was operating eight test galleys and had decided to expand the number of company-owned galley outlets and to sell franchises for this type of restaurant.

Slater first learned of the "galley concept" while at a KFC convention in March of 1975. In August 1975, Slater received a letter addressed to all prospective franchisees from KFC concerning the galley concept. The letter stated in part:

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

In the fall of 1975, Slater and a former KFC employee, David Bennett, formed an investment company to operate one or more H. Salt Seafood Galley franchises. In October 1975, Bennett and Slater obtained franchise option agreements for two stores: one in Bridgeton and the other in St. Ann, Missouri. Construction at the Bridgeton site began that fall and the restaurant opened on March 21, 1976. The St. Ann franchise opened for business four months later, on July 21, 1976. Slater purchased Bennett's interest in their investment company in November of 1976.

By the summer of 1976, Slater already had expressed doubt to KFC about the potential for these franchises. As Slater feared, the restaurants proved to be unsuccessful. Slater ultimately closed the two galley-restaurants in May 1978.

In March of 1978, Slater brought this suit alleging that KFC fraudulently induced him and his predecessor in interest, Bennett, to enter into the franchise agreements. The fraud, according to Slater, was that KFC intentionally concealed its knowledge that from July 1975 through May 1976 the eight test seafood restaurants experienced a marked decline in profits and, thus, could no longer be characterized as high volume profit producers. Hence, Slater asserted that he (and his partner, Bennett) relied upon false information from KFC in entering into the franchise agreements.

Following a nine-day trial, the jury returned verdicts for Slater on his fraud claim and on KFC's counterclaim for royalty and advertising fees. The jury found in favor of KFC on its counterclaim for money owing on certain equipment supplied to Slater.

In considering these appeals we divide our discussion into three areas: (1) the claim that KFC defrauded Slater; (2) KFC's counterclaim for royalty and advertising fees; and (3) the form of the judgment entered by the district court.

II. The Fraud Claim.

KFC challenges the trial court's judgment on the fraud claim by arguing that it was entitled to a judgment n.o.v., and that the jury instructions on damages were erroneous. We discuss these arguments in turn and conclude by addressing whether KFC is entitled to a new trial on the merits of Slater's claim.

A. Whether KFC Was Entitled to Judgment N.O.V.

(1) The contractual disclaimers.

The franchise agreements set out the following disclaimer in large type:

NO STATEMENT, REPRESENTATION OR OTHER ACT, EVENT OR COMMUNICATION, EXCEPT AS SET FORTH HEREIN, IS BINDING ON THE FRANCHISOR IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT.

KFC maintains that when Slater sued on these agreements, he became bound by the disclaimer clause. Under this theory, the disclaimer provision effectively insulated KFC from making any actionable misrepresentation. Hence, KFC asserts that the trial court erred in refusing to set aside the fraud judgment.

KFC correctly observes that Missouri law ² affords an alleged fraud victim an option: he may retain whatever he has received and sue on the contract, or he may return what he has received and sue for rescission and restitution. E. g., Harper v. Barket, 557 S.W.2d 455, 457 (Mo.App.1977). KFC incorrectly asserts, however, that by electing to sue on these agreements Slater affirmed all the contractual terms, including the disclaimer.

A party simply may not, by disclaimer or otherwise, contractually exclude liability for fraud in inducing that contract. Beshears v. S-H-S Motor Sales Corp., 433 S.W.2d 66, 71 (Mo.App.1968) sets forth the Missouri rule as follows:

"The rule that all prior and contemporaneous oral agreements and representations are merged in the written contract entered into by the parties does not apply to fraudulent representations made for the purpose of inducing a party to enter into such contract." (Id. at 71, quoting from Horwitz v. Schaper, 119 S.W.2d 474, 480 (Mo.App.1938).)

Unlike Beshears, the fraud in this case arose from KFC's concealment of the decline in volume and profits of the test stores, not from the original representation. Regardless of its source, however, the fraud allegedly induced Slater to enter the franchise agreements. Under the Missouri rule, KFC's contractual disclaimers will not bar a suit based upon fraud which induced the defrauded party to enter into the contract.

(2) Sufficiency of evidence of fraud.

KFC also argues that it was entitled to a judgment n.o.v. because the evidence was insufficient to prove each of the essential elements necessary to establish a case of fraud. KFC focuses solely on the classic elements of affirmative misrepresentation. These elements are (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. Beshears v. S-H-S Motor Sales Corp., supra, 433 S.W.2d at 70; Yerington v. Riss, 374 S.W.2d 52 (Mo.1964). See McMahon v. Meredith Corp., 595 F.2d 433, 438 (8th Cir. 1979).

The potential for fraud, however, extends beyond affirmative misrepresentation. Missouri recognizes that fraud may also arise by concealment where one contracting party breaches a duty to disclose certain information to the other. We commented on that aspect of Missouri law in McMahon v. Meredith Corp., supra, 595 F.2d at 438-39:

A failure to disclose a material fact can be considered to be an implicit representation of the nonexistence of such fact on which a party may rely, but only if the alleged fraud-feasor has a duty to speak. See Daffin v. Daffin, 567 S.W.2d 672, 677 (Mo.App.1978); National Alfalfa Dehydrating and Milling Co. v. 4010 Washington, Inc., 434 S.W.2d 757, 765 (Mo.App.1968); see also Hill v. Securities Investment Co., 423 S.W.2d 836, 841-42 (Mo.1968). Whether there exists a duty to speak in turn is a function of the defrauded party's ignorance of the truth, means of acquiring it, and relation to the other party, thus implicating the same considerations which underlie elements six, seven, and eight of the general elements of fraud. Missouri courts have consistently held that a duty to speak may arise under any of three conditions: (1) where there is a fiduciary relationship between the parties or a relationship of confidence; (2) where there is an inequality of condition between the parties; and (3) where one party has superior knowledge not within the fair and reasonable reach of the other party. See, e. g., Citizens Bank of Windsor v. Landers, 570 S.W.2d 756, 762 (Mo.App.1978); Alexander v. Johnson Furnace Co., 543 S.W.2d 539, 542 (Mo.App.1976); W. Prosser, Law of Torts § 106, at 695-98 (4th ed. 1971).

Both the representation implicit in fraudulent concealment and the express statement contained in an affirmative misrepresentation relate to a present fact or an existing intention....