Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—CalCtApp: Terminating Sanctions Against McDonald’s Franchisees Vacated, New Trial Ordered, (Mar 29, 2013)

By Peter Reap, J.D., LLM

A California state trial court’s award of terminating sanctions to McDonald’s Corporation in the franchisor’s dispute with its franchisees Syed Ali Husain and Khursheed Husain—including the striking of the Husain’s complaint and answer to McDonald’s cross-complaint—was not warranted under either the California Civil Discovery Act or the court’s inherent powers, according to a California appellate court (Husain v. The Superior Court of Marin County, March 28, 2013, Margulies, S.). Thus, the trial court was ordered to set aside those sanctions, reinstate the Husains’ third amended complaint and answer to McDonald’s amended cross-complaint, and schedule a new trial date.

Background

In 2005, the Husains, already holders of five McDonald’s franchises, entered into an agreement with third parties to purchase an additional seven McDonald’s restaurants in Marin County. The underlying dispute in this case centers on whether McDonald’s made an enforceable promise to the Husains to provide new 20-year franchises to them for three of the restaurants whose franchise terms were due to expire in 2009 and 2010. The Husains sued McDonald’s to enforce the alleged promise, and McDonald’s cross-complained to compel the Husains to restore the three disputed restaurants to McDonald’s.

The trial court granted the Husains a preliminary injunction, allowing them to continue operating the restaurants during the litigation, which this court affirmed in Husain v. McDonald’s Corp. (2012) 205 Cal.App.4th 860.

Initial motion for terminating sanctions. In their original verified complaint, the Husains alleged that McDonald’s franchising manager, Jodi Breen, had offered in writing to renew the franchise terms for each of the three restaurants in January 2006 and that Mr. Husain had timely signed and mailed the Breen letters back to her, indicating his willingness to accept the new terms on January 21, 2006.

In later sworn declarations, Mr. Husain averred under penalty of perjury that he mailed the signed Breen letters back to Breen by delivering them for mailing to the United States Post Office at Capuchino Station on January 21, 2006. He attached to his declarations a copy of a form United States Postal Service certificate of mailing filled out with Breen’s mailing address and stamped with a Capuchino Station postmark dated January 21, 2006.

McDonald’s obtained evidence that the Capuchino Station post office was in fact closed to customers on January 21, 2006, making it impossible for Husain to mail the Breen letters from that office on that date. Further, McDonald’s obtained evidence that the particular form of postmark stamp on the certificate of mailing Husain presented to the court did not exist in 2006 and was not in use until 2008. The Husains subsequently dropped the contract cause of action based on the Breen letters.

Based on its evidence of perjury and evidence fabrication, McDonald’s moved for terminating sanctions against the Husains in June 2012.The trial court denied the motion for sanctions, finding McDonald’s would at most be entitled to the dismissal of the cause of action the Husains had already dismissed, even if it found they had forged the certificate of mailing.

Renewed motion for terminating sanctions. Four weeks into a jury trial, McDonald’s presented a renewed motion for terminating sanctions, contending that Husain had: (1) presented falsified invoices purporting to be from Blackrock Paving and used the invoices to substantiate an overstated amount of investment expenses in response to an interrogatory asking him to itemize amounts he alleged he invested in his franchises, and testified untruthfully about the documents during the trial; (2) falsified the certificate of mailing pertaining to the Breen letters; and (3) violated a court order on a motion in limine not to refer to Mrs. Husain’s breast cancer.

The trial court found the Husains had committed perjury and provided false evidence in discovery and during trial, including: (1) false testimony concerning the mailing of the Breen letters, (2) the production of false invoices in discovery, and (3) false testimony about their investment in the franchises. The court also found Mr. Husain willfully and repeatedly violated its orders on McDonald’s motions in limine by stating his wife had “recurring breast cancer.”

The trial court ordered terminating sanctions under section 2023.030, subdivisions (a) and (d)(3)4 of the Civil Discovery Act and under its inherent powers, finding “[n]o lesser sanction would be appropriate or would ensure compliance and a fair trial.” The court ordered the Husains’ complaint to be dismissed with prejudice, and their answer to McDonald’s cross- complaint stricken.

Analysis

Discovery abuse. The Civil Discovery Act sections pertaining to document production, depositions, and interrogatories do not authorize terminating sanctions unless a party fails to obey an order compelling document production, the court observed.

This case did not involve anything that can fairly be characterized as disobedience of a discovery order, the court decided. McDonald’s had propounded an interrogatory asking the Husains to identify “each item comprising the $1,682,090.27 you alleged to have invested in the Marin Franchises.”

The Husains’ amended response did in fact identify the expenses comprising the $1,682,090.27 the Husains alleged to have invested in the Marin franchises and did enumerate those alleged expenses in a manner fully complying with the court’s order, the appellate court determined. The Husains’ allegation was apparently knowingly inflated by about 7 percent, and three of the documents gratuitously offered in support of it were clearly doctored. However, these deceptions could not reasonably be characterized as a failure to provide the discovery McDonald’s sought or disobedience of the discovery order. Moreover, the actual amount of the Husains’ investment expenses, and whether it was 7 percent higher or lower than claimed, was of little or no consequence to the litigation, according to the appellate court.

While the court did not minimize the significance of making false and perjurious allegations in litigation, or rule out the possibility that terminating sanctions could properly be imposed for knowingly providing false or fabricated discovery responses in a particularly egregious case, it found that this was not such a case.

Court’s inherent powers. McDonald’s made no showing the Husains’ misconduct deprived it of a fair adversary trial in any sense, the court ruled. As noted, the certificate of mailing concerned a cause of action that was no longer at issue at the trial, having been withdrawn by the Husains before the court denied McDonald’s initial motion for terminating sanctions.

In fact, it was McDonald’s itself that brought the certificate of mailing and Mr. Husain’s prior testimony about it back into the case, making effective use of this material to cross-examine Mr. Husain and expose his falsehoods to the jury, the court noted. McDonald’s was able to exploit this by vigorously cross-examining Mr. Husain about it at the trial and properly placing his credibility in doubt.

Mr. Husain’s violations of the court’s in limine order not to refer to his wife’s illness, while indefensible, could not have so impaired McDonald’s ability to defend itself as to throw the fairness of the trial into question. The trial court immediately admonished the jury to disregard Mr. Husain’s comments.

Lesser sanctions would have fully protected McDonald’s right to a fair trial. A range of lesser sanctions—instructing the jury on inferences to be drawn from a witness’s false testimony and offering of false documents, initiating contempt proceedings, referring the matter for perjury prosecution, or imposing monetary, issue, or evidence sanctions—could have been pursued by the trial court in lieu of terminating the case.

There was no indication in the record that any sanctions short of termination were proposed to or considered by the trial court. On these facts, terminating sanctions were not appropriate, the court held.

The case is No. A136692.

Attorneys: Karen Marie Bray (Horvitz & Levy) for Syed Husain. Christopher William Keegan (Kirkland & Ellis) for McDonald's Corporation.

Companies: McDonald's Corporation

Cases: FranchisingDistribution CaliforniaNews