TCBY Systems, Inc. v. RSP Co., Inc.

• Decision Date: 26 August 1994
• Docket Number: 93-3026,93-2788,93-3028,Nos. 93-2683,s. 93-2683
• Citation: 33 F.3d 925
• Parties: TCBY SYSTEMS, INC., an Arkansas Corporation, Appellant, v. RSP COMPANY, INC.; Clarence Paulson; Randy Paulson, Appellees. (Two Cases) TCBY SYSTEMS, INC., an Arkansas Corporation, Appellee, v. RSP COMPANY, INC.; Clarence Paulson; Randy Paulson, Appellants. (Two Cases)
• Court: U.S. Court of Appeals — Eighth Circuit

Page 925

33 F.3d 925

TCBY SYSTEMS, INC., an Arkansas Corporation, Appellant, v. RSP COMPANY, INC.; Clarence Paulson; Randy Paulson,

Appellees. (Two Cases)

TCBY SYSTEMS, INC., an Arkansas Corporation, Appellee, v. RSP COMPANY, INC.; Clarence Paulson; Randy Paulson,

Appellants. (Two Cases)

Nos. 93-2683, 93-2788, 93-3026, 93-3028.

United States Court of Appeals Eighth Circuit.

Submitted March 17, 1994.

Decided Aug. 26, 1994.

Kevin A. Crass, Little Rock, AR, argued (William H. Sutton and R. Christopher Lawson, on the brief), for appellant.

J. Michael Dady, Minneapolis, MN, argued (Joseph A. Thompson and Ann K. Grossman, appeared on brief), for appellee.

Before FAGG, Circuit Judge, BRIGHT, Senior Circuit Judge, and WOLLMAN, Circuit Judge.

FAGG, Circuit Judge.

This diversity case is about a failed frozen yogurt store and the meltdown of the franchise relationship between the franchisor, TCBY Systems, Inc., and the franchisee, RSP Company, Inc. After RSP prematurely terminated the franchise agreement, TCBY sued RSP, RSP's investor and sole shareholder Clarence Paulson, and his son and store operator Randy Paulson. RSP and the Paulsons counterclaimed asserting, among other things, that TCBY breached the franchise agreement by failing to provide reasonable assistance in selecting and evaluating a location for their store as the agreement provided. Following a trial, a jury found TCBY breached the franchise agreement. TCBY appeals the district court's denial of its motion for judgment as a matter of law (JAML) or alternatively a new trial, evidentiary rulings, and the award of attorneys' fees and costs to RSP and the Paulsons. RSP and the Paulsons cross-appeal the dismissal of their Minnesota Franchise Act claims, dismissal of their motion for additur or a new trial on damages, and the amount of attorneys' fees and costs awarded. We reverse and remand for reconsideration of the cost award, but affirm on all other issues.

In December 1988, Clarence Paulson contacted TCBY about owning and operating a TCBY franchise. Paulson spoke with TCBY's director of franchise administration, Kim Hinton, who sent Paulson a brochure about TCBY franchises. The brochure stated:

Our organization is fully versed in the real estate aspects with respect to the opening of a "TCBY" yogurt store.... [O]ne of TCBY's real estate directors will schedule a site trip to your particular area to discuss the various options open to you and to approve the optimal location.... [We have] proven experience in knowing what kind of location can provide you the best opportunity for continued success.

TCBY representatives told the Paulsons they could expect gross sales in the range of $200,000 to $240,000 in a Minnesota store. The Paulsons were initially interested in locating a store in Crystal, a Minneapolis suburb, but TCBY refused to approve the Crystal site. In discussing the Crystal site's rejection with Clarence Paulson, Hinton suggested that the Paulsons look for potential sites outside the Twin Cities, even though the only Minnesota TCBY store outside the Twin Cities was faltering. When Clarence Paulson expressed uncertainty about recognizing a viable location, Hinton told Paulson that TCBY had experts who would tell him whether a location was appropriate. The Paulsons eventually found a new strip mall in Alexandria, a small town in central Minnesota, and wrote to TCBY about the site. TCBY approved the Paulsons' request for a franchise in Alexandria and scheduled a site approval visit by its division manager. On RSP's behalf, Randy Paulson signed a franchise agreement, which stated TCBY would provide reasonable assistance in selecting and evaluating proposed store locations, but TCBY's selection or approval of a proposed location was not a warranty or representation of the location's suitability.

TCBY division manager Randy Ball met the Paulsons in Alexandria and spent about four hours there. Ball looked at the proposed site, drove around Alexandria, and spoke with the mall developer. Ball did not obtain a demographic report as outlined by TCBY's internal site selection guidelines provided to division managers. According to Ball, he was able to gather the demographic information by his "sight observation of the community." Contrary to the erroneous information Ball gathered from his sight observation, the Alexandria site did not satisfy the minimum standards listed in TCBY's guidelines. These guidelines stated a TCBY store needed a minimum population base of 7500 people within a one-mile radius of the store, estimated median household income of at least $25,000, median age in the high 20s or low 30s, and a focused rather than scattered market. In contrast, the population within one mile of the proposed Alexandria site was 3756, the median household income was about $18,000, and the market was scattered. In addition, the site was in a new mall, which the guidelines stated should be avoided because of a new mall's uncertain prosperity. Based on Ball's visit to Alexandria and a site evaluation report he completed later, TCBY approved the site. The site evaluation report estimated the first year's gross sales at $250,000.

In May 1989, the Paulsons opened a TCBY store in Alexandria. Despite excellent store assessments by TCBY, the store's gross sales during the first year were less than half of TCBY's estimate. After TCBY refused RSP's request to add "cold weather" items to the store's menu, RSP terminated the franchise agreement in December 1990. The store never met the break even point.

TCBY sued RSP and the Paulsons in Arkansas seeking to recover the value of royalties and advertising funds it would have received over the remaining term of the original franchise agreement and renewal period. RSP and the Paulsons counterclaimed alleging breach of contract, fraud, and violations of the Minnesota Franchise Act (MFA), Minn.Stat.Ann. Secs. 80C.01-.30 (West 1986 & Supp.1994). The district court dismissed the MFA claims and submitted the contract and fraud claims to the jury. The district court submitted the breach of contract claim on two theories. The court instructed the jury it could find TCBY breached the agreement if the jury found that TCBY failed to provide reasonable assistance and expertise in selecting a viable location for a TCBY store or that TCBY breached its obligation of good faith and fair dealing in its performance of the agreement.

After a five-day trial, the jury found TCBY had breached the franchise agreement, but found in TCBY's favor on the fraud claim. The jury awarded $70,000 in damages. TCBY moved for JAML or alternatively for a new trial on the contract claim, asserting the evidence was insufficient to support the verdict. The district court denied TCBY's motion and later awarded RSP and the Paulsons $95,363 in attorneys' fees and $3990.99 in costs. RSP and the Paulsons moved for additur or a new trial on damages. The district court denied the motion.

TCBY first asserts the district court should have granted its motion for JAML on the breach of contract claim. In reviewing the district court's denial of JAML, we apply the same standard as the district court. We consider the evidence in the light most favorable to RSP and the Paulsons, and give them the benefit of all reasonable inferences from the proven facts. TEC Floor Corp. v. Wal-Mart Stores, Inc., 4 F.3d 599, 601 (8th Cir.1993). JAML was properly denied unless all the evidence pointed one way and was susceptible of no reasonable inferences sustaining RSP and the Paulsons' position. Pate v. National Fund Raising Consultants, Inc., 20 F.3d 341, 343 (8th Cir.1994).

We agree with the district court that sufficient evidence supports a jury finding that TCBY breached the contract by failing to provide reasonable assistance in site selection. See Brennan v. Carvel Corp., 929 F.2d 801, 809-10 (1st Cir.1991). We also agree with the district court that sufficient evidence supports a jury finding that TCBY breached the contract by breaching an obligation of good faith and fair dealing. Evidence supporting both findings includes the testimony of the Paulsons and Randy Ball. TCBY sent Ball, who had no earlier experience in evaluating sites for TCBY franchises, to evaluate the Alexandria site. Ball did not follow TCBY's own guidelines for site evaluation and selection. Rather than obtaining a demographic report, he just "eyeballed" the community. After the initial approval, TCBY issued its final approval of the Alexandria location even though it had obtained a demographic report showing Alexandria fell woefully short of TCBY's minimum guidelines. This supports a finding that TCBY was not honest in fact and acted with a bad motive. See Richard Short Oil Co. v. Texaco, Inc., 799 F.2d 415, 422 (8th Cir.1986). Because the evidence sufficiently supported the breach of contract verdict on both theories, the district court properly denied TCBY's motion for JAML.

In a related argument, TCBY contends the district court erroneously instructed the jury that the franchise agreement imposed a duty of good faith and fair dealing in its performance. According to TCBY, the parties did not have this duty under Arkansas law. TCBY cites no authority disavowing the duty, however, and our research does not reveal any Arkansas cases that decide the issue. Thus, we must review the question of state law de novo and predict whether the Arkansas Supreme Court would find the franchise agreement contains an implied covenant of good faith and fair dealing. Ethyl Corp. v. BP Performance Polymers, Inc., 33 F.3d 23, 24 (8th Cir.1994).

In deciding there is an implied covenant of good faith and fair dealing in every contract, the district court relied on the common law and the Arkansas Commercial Code. Another federal district judge in Arkansas shares the view that contracting parties have a general obligation of good faith, and that breach of this obligation is a breach of contract. See Ripplemeyer...