Spahn v. Guild Industries Corp.

• Decision Date: 18 June 1979
• Citation: 156 Cal.Rptr. 375,94 Cal.App.3d 143
• Court: California Court of Appeals Court of Appeals
• Parties: Victor SPAHN et al., Plaintiffs and Respondents, v. GUILD INDUSTRIES CORP., et al., Defendants and Appellants. Civ. 40531.

Page 375

156 Cal.Rptr. 375

94 Cal.App.3d 143

Victor SPAHN et al., Plaintiffs and Respondents, v. GUILD INDUSTRIES CORP., et al., Defendants and Appellants.

Civ. 40531.

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

June 18, 1979.

David L. Skinner, Jr., San Francisco, for defendants and appellants

Robert S. Epstein, Williams, Van Hoesen & Brigham, San Francisco, for plaintiffs and respondents.

TAYLOR, Presiding Justice.

Defendants, Guild Industries Corp. (Guild), a Florida corporation, and its officers and directors, M. Byrd, R. Byrd, J. Bass, R. Berman and L. Silverstein (hereafter collectively franchisors) appeal from a judgment entered on a jury verdict in favor of Spahn, et al. (hereafter collectively franchisees) ¹ awarding compensatory and punitive damages on grounds of fraud and violation of the Franchise Investment Law (Corp.Code, § 31000, et seq.), and from the orders denying their motions for judgment notwithstanding the verdict and for new trial. ² The franchisees were granted area franchises to distribute furniture under Guild's "Baby Butler" trade name, ³ by the franchisors' California agents and intermediaries Viewing the record most strongly in favor of the judgment, as we must, the following pertinent facts appear: Guild manufactures and distributes throughout the United States a complete line of baby furniture, including a high chair substitute called the Baby Butler. Margar Enterprises, Inc. (Margar), a California corporation, was used by Guild to sell franchises and conduct its other business in California. Margar's president, Gerry Marcus (Marcus), was also an employee of Guild with the titles of director of sales and director of marketing. Guild authorized Marcus to establish retail stores and enlist franchisees for the operation of these stores. The franchisees were all solicited by Guild.

Gerry Marcus, the president of Margar Enterprises, Inc. (Marcus/Margar, both nonappealing defendants), for valuable consideration. All of the franchises were unsuccessful and were closed after the franchisees sustained substantial losses. The franchisors now contend that the evidence does not support the verdict, that Marcus/Margar were independent contractors, and that the trial court committed prejudicial error by failing to instruct on all of the elements of fraud. For the reasons set forth below, we have concluded that there is no merit to any of these contentions, and that the judgment in favor of the franchisees must be affirmed.

Guild's marketing system was not geared to casual walk-in customers but was based on prospective customers or "leads," namely, prospective or new parents who had a need for baby furniture. Guild developed and provided the franchisees with several methods for obtaining names of "leads." For this purpose, Guild supplied forms and information cards to the franchisees. The franchisees were instructed to place these cards and forms at various locations where prospective customers would see them, e. g., shopping centers, obstetricians' offices, etc. The prospective customers were induced to provide their names and addresses and other pertinent information by promises of substantial gifts, such as TV sets, chests and sewing machines. The cards were returned to Guild which then forwarded them to the franchisees who then contacted the prospective customers and made appointments for a visit to the stores.

The card distribution methods developed by Guild included: 1) a "ballot box" which was placed in retail stores. Monthly drawings were to be held at each ballot box location, and the gifts were to be given to prospective customers whose names were drawn; 2) a free magazine devoted to subjects of interest to expectant mothers, with titles such as "Welcome Babee" and "Baby Talk," with attached information cards. The franchisees were to place these magazines in doctors' offices. These information cards promised that the free gifts would be sent by Guild to those who filled in their names and addresses and returned the cards to Guild in Florida. Guild eventually distributed the cards to the various franchisees, as described above; 3) "TV Boxes," small cardboard boxes designed to be placed in stores. The cards in the TV Boxes also promised a free gift from Guild as an inducement to prospects to complete the cards.

Each of the above mentioned distribution schemes was inherently fraudulent, as the cards falsely promised that a free gift would be sent to the prospective customers directly by Guild in exchange for simply filling out and returning the cards. Guild never intended to send the promised gifts and did not do so. In some instances, the franchisees gave gifts to prospective customers who called or visited the stores. However, the franchisees were instructed by Marcus to do so Only when pressed by the customer.

After the completed information cards had been returned to the franchisee, the franchisee was instructed to contact the prospective customer and arrange an appointment for the customer to visit the store. One method provided by Guild for such a contact was a device known as the "Lisa Letter." The "Lisa Letter" promised the prospective customer a free gift if he called the Baby Butler store and asked for "Lisa." The franchisee was instructed to For example, Guild provided a flip chart that was generally the first sales book shown to a prospective customer. The flip chart displayed pictures of injured or strangled babies who had fallen from, or become entangled in, high chairs, and included newspaper clippings detailing the pain and suffering of injured infants and their parents.

answer the telephone as "Lisa" and then arrange an appointment for the customer to see Guild furniture. The fact that franchisees had to pretend they were "Lisa" was particularly offensive to some of them who felt that this was a dishonest method of attracting customers. After a prospective customer succumbed to the Lisa [94 Cal.App.3d 149] Letter or other attraction and visited the store, she was confronted with other high pressure sales devices provided to the franchisees by Guild. Most of the devices consisted of graphic materials designed to cajole or scare prospective parents into purchasing Guild furniture.

After the flip chart, the prospect was shown a film ⁴ narrated by Bert Parks and supplied by Guild. The film described the Baby Butler; Parks stated that Baby Butler was approved by the Better Business Bureau. Marcus admitted, however, that Baby Butler was not approved by the Better Business Bureau or any other consumer organization. Thus, the film was also a fraudulent sales method.

The fact that Guild was fully aware of and proud of its sales techniques is demonstrated by the letter dated February 11, 1972, written by Berman to Leone, and set forth in its entirety below, except for the opening and closing salutations; Marcus was the "Gerry" referred to by the letter. ⁵

After sales were made, the franchisee accepted a small downpayment and arranged for financing of the purchase either directly by Guild or a finance company.

In 1969, Guild hired Marcus, who had been one of its door-to-door salesmen since 1951, to be Guild's director of sales for certain counties in northern California. Marcus was given a franchise and a letter of authority which indicated that he was empowered by Guild to establish franchises for Guild in California. In addition to the letter, Guild orally conferred actual authority upon Marcus to act as its agent in establishing franchises. Pursuant to this authority, Marcus placed newspaper advertisements for the sale of franchises. Through these advertisements placed by Marcus, six of the eight instant franchisees contacted and met Marcus; as to the remaining two, the newspaper advertisement had been placed by the proprietor of an existing Baby Butler retail outlet who arranged an eventual meeting with Marcus.

When Marcus met with a prospective franchisee, he generally indicated that he had worked for Guild for 15 to 20 years, and was then Guild's director of marketing for Although the agreements eventually signed between Margar and the franchisee were subject to all of the requirements of the Franchise Investment Law (Corp.Code, § 31000, et seq., hereafter sometimes referred to as the Act), neither Guild, Marcus nor Margar ever registered any of the instant offerings with the Corporations Commission, as required by section 31110 of the Corporations Code. ⁷ Marcus also failed to disclose any of the information required pursuant to section 31111. ⁸

the West Coast, as well as Guild's regional director for California, Hawaii, Oregon, and several other states. Marcus also gave each prospective franchisee a certain amount of limited information about Guild and indicated that Guild was a highly successful company ⁶ that manufactured a complete line of high quality baby furniture, including Baby Butler.

Marcus told the franchisee that sales of Baby Butler furniture required a very low pressure sales technique and indicated that prospective customers would be "firm leads" who would already have received a free gift sent directly by Guild from its Florida headquarters. For example, Mrs. Kelso testified that Marcus led her to believe that all advertising costs would be paid by Guild, at least to the extent of securing the "leads." The franchisees were not told that they would have to pay for the leads.

Marcus also told the franchisee that the Baby Butler stores were highly successful and that they could expect to make a profit of 50 percent of their gross sales. For instance, Marcus told Maines that the profit potential was "unlimited," and Spahn that he would net $35,000 to $40,000 in the first year of operation. At trial, however, Marcus testified that he knew of only one Baby Butler store that was ever financially successful and that one was located in San Diego. He also admitted that the San Diego Baby Butler store was closed after it...