Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Cal. App.: Punitive damages award reversed because of failure to establish restaurant operator’s financial condition, (Oct 30, 2013)

By Peter Reap, J.D., LL.M.

A California state trial court jury’s award of $500,000 to a restaurant franchisor based on a restaurant operator’s continued operation of a franchise despite termination of the franchise agreement has been reversed by a California appellate court because the franchisor failed to adequately present evidence of the operator’s current financial condition (Oggi’s Pizza & Brewing Co. v. Durrant, October 28, 2013, Irion, J.). However, the operator waived his contention that insufficient evidence supported the jury’s award of compensatory damages, and his appeal from the judgment was dismissed as untimely. Thus, the action was remanded with directions that the trial court amend the judgment to delete the punitive damages award against the restaurant operator.

Background. Oggi’s Pizza & Brewing Company is a restaurant franchisor that entered into an agreement with DSB Enterprises, Inc. (DSB) in 2001 allowing DSB to operate an Oggi’s franchise in Vista, California. At the time, DSB was owned by Daniel Borshell and Dale Borshell. After defaults by DSB, Oggi’s terminated the franchise agreement on August 6, 2009, putting DSB on notice that it was to immediately cease operating as an Oggi’s restaurant.

At some point in August 2009, DSB was apparently sold to Oceans Restaurant Corporation, Inc. The appellant restaurant operator, Robert Durrant, was allegedly a shareholder, director and officer of Oceans. Durrant continued to operate the restaurant as an Oggi’s and use Oggi’s trademarks despite the termination of the franchise agreement and the absence of any permission from Oggi’s for Durrant to operate an Oggi’s restaurant. According to the complaint, this conduct continued for several months, ceasing only after the trial court granted injunctive relief and then issued contempt orders against the restaurant operator for violating the injunction.

Following motion practice, Oggi’s lawsuit proceeded to trial against DSB, Daniel and Dale Borshell, Oceans, and Durrant. The jury found in the franchisor’s favor on its claims for breach of contract, concealment, conversion, misappropriation of trade secrets, and conspiracy to commit infringement, misappropriation and/or conversion. In a special verdict form that did not ask the jury to differentiate between the damages caused by the different defendants, the jury awarded $1.74 million in compensatory damages to Oggi’s. As a predicate for a punitive damages award, the jury further found that DSB, the restaurant operator, and Oceans acted with malice, oppression, or fraud. In a second phase of the trial, the jury awarded punitive damages against DSB, the restaurant operator, and Oceans, on a joint and several basis, in the amount of $500,000.

After the trial court ruled on the remaining equitable remedies sought by Oggi’s, the trial court entered judgment on January 23, 2012, with the judgment amended on February 1, 2012, to provide for an award of costs. Notice of the amended judgment was served on February 2, 2012. On February 14, 2012, the restaurant operator and Oceans filed a JNOV motion and a motion for a new trial.

On March 9, 2012, the trial court denied the JNOV motion and the motion for a new trial. The superior court clerk served the order denying the JNOV motion and the motion for a new trial on March 12, 2012. On April 12, 2012, the restaurant operator filed notices of appeal from the judgment and from the motion denying the JNOV motion.

Appeal from the judgment. Because a motion for a new trial and a motion for JNOV were filed in the matter, the timeliness of the appeal was governed by California Rules of Court, Rule 8.108(b)(1) and (d)(1). Rule 8.108(b)(1) provides: “If any party serves and files a valid notice of intention to move for a new trial, the following extensions of time apply: (1) if the motion for a new trial is denied, the time to appeal from the judgment is extended for all parties until the earliest of: (A) 30 days after the superior court clerk, or a party serves an order denying the motion or a notice of entry of that order; (B) 30 days after denial of the motion by operation of law; or (C) 180 days after entry of judgment.” Rule 8.108(d)(1) provides for the same deadlines after a denial of a JNOV motion, i.e., the earliest of 30 days after service of the order denying the motion, 30 days after denial of the motion by operation of law, or 180 days after entry of judgment.

Here, the superior court clerk served the order denying the motion for a new trial and motion for JNOV on March 12, 2012. Thus, the earliest of the three deadlines set forth in Rule 8.108(b)(1) and (d)(1) was April 11, 2012, which was 30 days from the date the clerk served the order. However, the restaurant operator did not file his notice of appeal until one day after the deadline—on April 12, 2012. Accordingly, the appeal from the judgment was not timely, according to the appellate court.

Because the restaurant operator did not file his notice of appeal from the judgment within the applicable time period, the court lacked jurisdiction over that appeal and, accordingly, it was dismissed.

Appeal from the Order Denying the JNOV Motion

The restaurant operator argued that the trial court erred in ruling on the JNOV motion in two respects. Specifically, the restaurant operator contended that (1) insufficient evidence supported the jury’s award of compensatory damages; and (2) Oggi’s submitted insufficient evidence of the restaurant operator ‘s current financial condition to permit an award of punitive damages.

Compensatory damages. The restaurant operator waived his challenge to the sufficiency of the evidence to support the compensatory damages award because he failed to provide an adequate appellate record, the court held. The first phase of the trial took place during a 10-day period between December 5 and 15, 2011. However, the record that the restaurant operator provided of the liability phase of the trial consisted of only a few trial exhibits and the testimony of a single witness, Carl Sheeler, whom Oggi’s called as an expert witness on “business valuation economic damages.”

Because the appellate court had no record of the first phase of the trial except for the testimony of a single witness, the appellate record provided by the restaurant operator was woefully inadequate for the court to evaluate his contentions that Oggi’s presented “no evidence” that (1) it “incurred any type of damage” from the restaurant operator ‘s wrongdoing; (2) the restaurant operator benefited from his wrongdoing; and (3) the items converted by the restaurant operator had value and Oggi’s devoted resources to recovering them, according to the court.

Further, without reviewing the entire record, the court obviously could not verify the restaurant operator ‘s assertion that Sheeler’s testimony was the only evidence during the entire trial relevant to the issue of damages. It was the duty of an appellant to provide an adequate record to the court establishing error, the court noted. Because the restaurant operator failed to provide an adequate appellate record for evaluation of his contention that insufficient evidence supported the compensatory damages award, he waived that issue on appeal.

Punitive damages. The second phase of the trial—which took place on December 19, 2011—was limited to the issue of punitive damages, resulting in a jury award of $500,000 in punitive damages against the restaurant operator, Oceans, and DSB on a joint and several basis. The restaurant operator contended that the trial court should have granted his JNOV with respect to the punitive damages award because Oggi’s failed to establish the restaurant operator ‘s financial condition at the time of trial. The appellate court agreed.

Under California law, a punitive damages award must be based on three factors: (1) the reprehensibility of the defendant’s conduct; (2) the amount of compensatory damages awarded to or actual harm suffered by the plaintiff; and (3) the defendant’s financial condition. The restaurant operator challenged the sufficiency of the evidence only as to the third factor—his financial condition.

Trial took place in December 2011, but the financial statement that Oggi’s relied on was two and half years old, from June 2009. As the restaurant operator testified, he had undergone a significant change in his financial condition since that time and the financial statement no longer accurately represented his wealth. Oggi’s presented the restaurant operator ‘s most recent income tax returns, but a consideration of income alone did not permit meaningful review and something more was required, according to the court.

Although Oggi’s presented evidence of the restaurant operator ‘s former assets, without any evidence that he still held the assets, or of the amounts of his liabilities, the punitive damages award was unsupported by substantial evidence and excessive, the court ruled. When, as here, the plaintiff has had a full and fair opportunity to present the case for punitive damages but failed to present sufficient evidence of the defendant’s current financial condition, the proper appellate remedy was to reverse the punitive damages award.

Accordingly, that portion of the trial court’s order denying the motion for JNOV as to the punitive damages award against the restaurant operator was reversed, and the case remanded for the trial court to amend the judgment accordingly.

The case is No. D061848.

Attorneys: Shelly K. Pawchuk for Robert Durrant. Morgan Hezlep (Preovolos Lewin & Hezlep) for Oggi’s Pizza & Brewing Co.

Companies: Oggi’s Pizza & Brewing Co.; DSB Enterprises, Inc.; Oceans Restaurant Corporation, Inc.

Cases: FranchisingDistribution CaliforniaNews