Meineke Car Care Centers, Inc. v. RLB Holdings, LLC , 423 F. App'x 274 ( 2011 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-2030
MEINEKE CAR CARE CENTERS, INCORPORATED,
Plaintiff - Appellant,
v.
RLB HOLDINGS, LLC; JOE H. BAJJANI; MICHELLE G. BAJJANI,
a/k/a Michelle Bajjani,
Defendants - Appellees.
Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Robert J. Conrad,
Jr., Chief District Judge. (3:08-cv-00240-RJC-DSC)
Argued: January 27, 2011 Decided: April 14, 2011
Before GREGORY and AGEE, Circuit Judges, and Irene C. BERGER,
United States District Judge for the Southern District of West
Virginia, sitting by designation.
Reversed and remanded by unpublished opinion. Judge Agee wrote
the opinion, in which Judge Gregory and Judge Berger concurred.
ARGUED: Michael J. Lockerby, FOLEY & LARDNER, LLP, Washington,
D.C., for Appellant. Rodney Lenelle Eason, THE EASON LAW FIRM,
Atlanta, Georgia, for Appellees. ON BRIEF: Amy K. Reynolds, Ted
P. Pearce, MEINEKE CAR CARE CENTERS, INC., Charlotte, North
Carolina, for Appellant. Leslie K. Eason, THE EASON LAW FIRM,
Atlanta, Georgia, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
AGEE, Circuit Judge:
Franchisor Meineke Car Care Centers, Inc. (“Meineke”)
appeals the district court’s judgment awarding franchisee RLB
Holdings, LLC (“RLB”), Joe H. Bajjani, and Michelle G. Bajjani
partial summary judgment on Meineke’s claim for lost future
royalties and advertising fund contributions following the
premature closure of four franchises. The district court held
that the franchise agreements did not entitle Meineke to recover
future damages, and that Meineke failed to set forth a viable
common law claim for lost profits. For the reasons set forth
below, we reverse the district court’s judgment and remand for
further proceedings consistent with this opinion.
I.
Meineke is a nationwide automotive services franchisor.
Joe Bajjani and his wife, Michelle, (“the Bajjanis”) are the
sole owners of RLB, an entity formed for the purpose of
operating Meineke franchises, including the four stores at issue
in this case. Between December 2001 and June 2005, Meineke and
RLB entered into four separate Franchise and Trademark
Agreements (“FTAs”) related to four franchises (collectively
“the Shops”) that RLB would operate using Meineke’s registered
trademark, logo, and other proprietary marks. The Bajjanis
3
executed personal guaranties as part of each shop’s FTA,
guaranteeing RLB’s performance and obligations under each FTA. 1 2
Although the terms of the FTAs are not identical, they are
substantially the same, primarily using Meineke’s boilerplate
franchise agreement language. The FTAs each had a fifteen-year
term and granted RLB the exclusive right to operate a Meineke
shop within a protected territorial area. RLB agreed under the
FTAs to pay Meineke weekly royalty fees (“royalties”) based on a
percentage of each shop’s gross revenues, with the rate varying
from three to seven percent depending on the product or service.
(Article 3.2 – J.A. 35.) Subject to certain conditions, RLB was
also required to “contribute 8% of [its] Gross Revenues to the
Meineke Advertising Fund” (“advertising fund contributions”),
1
The Bajjanis subsequently sold one of the Shops, Number
1886, to another corporation, following the FTA’s protocol for
doing so. Joe Bajjani executed a limited guaranty agreement,
guaranteeing the corporation’s performance and obligations under
the FTA. The district court held Bajjani liable for past
damages related to Shop No. 1886 because they were incurred
during the time the personal guaranty was in effect. Bajjani
does not dispute that holding, and it is not before us on
appeal. Despite this transfer of ownership, and unless
otherwise noted, we will not differentiate between the Shops for
purposes of assessing the parties’ arguments regarding the issue
that is before us on appeal. On remand, the district court can
ascertain what, if any, effect Bajjani’s personal guaranty has
on Meineke’s claim for future damages arising from the closure
of Shop 1886.
2
Throughout the rest of the opinion, we will refer to the
defendants collectively as “RLB,” distinguishing between them
only where necessary to the discussion.
4
such sum also being payable weekly. 3 (Article 3.4 – J.A. 36.)
In exchange for its obligations to Meineke, RLB was entitled,
inter alia, to operate under the “Meineke” name and use the
associated logo and other marks, and also to receive training
and access to Meineke’s methods, procedures, and techniques.
Meineke had the right to terminate each FTA under certain
circumstances, but RLB did not have a reciprocal right to
terminate. One such circumstance permitting Meineke to
terminate the FTAs was if RLB “fail[ed] to have [its] Shop open
for business for any 6 consecutive days after [it] open[ed]
[its] Shop (other than in connection with a relocation . . . or
due to force majeure).” (Article 13 – J.A. 66.)
3
The FTAs defined “gross revenues” as
all the revenues derived from or in connection with
the operation of [the] Shop, whether from sales for
cash or credit, and irrespective of their collection,
including charges for Authorized Products and Services
and applicable proceeds from any business interruption
insurance for your Shop, but excluding: (a) sales
taxes, use taxes, gross receipts taxes, and other
similar taxes added to the sale price, collected from
the customer and remitted to the appropriate tax
authorities; (b) credit card fees on credit card
sales; and (c) check guaranty fees. “Gross Revenues”
also include revenues derived from any products or
services sold and/or performed from or in connection
with your Shop that are not Authorized Products and
Services . . . .
(Article 3.3 – J.A. 36.)
5
RLB closed each of the shops well before the end of the
respective FTA’s 15-year period. 4 Upon learning of the closures,
Meineke sent RLB letters notifying it that the decision to close
the Shops prematurely “would be deemed an abandonment and a
breach of contract.” (J.A. 352.) With respect to at least one
of the shops, Meineke specifically informed RLB that “[t]o avoid
being in breach of contract,” RLB had “three options: 1)
continue operating [the shop]; 2) sell the shop to a buyer pre-
approved by Meineke who will continue to operate the shop as [a
Meineke franchise]; or 3) relocate the shop to another location
approved by Meineke.” (J.A. 352.) Meineke asked RLB to
communicate its intent with respect to each of the closed shops. 5
RLB did not reopen any of the shops. Meineke subsequently sent
RLB letters by which Meineke exercised its right to terminate
each FTA, with the date of termination effective as of the date
each shop closed.
4
Shop Number 1660 closed “[o]n or about January 16, 2006”;
Shop Number 1661 closed “[o]n or about December 10, 2006”; Shop
Number 1886 closed “[o]n or about September 24, 2006; and Shop
Number 1889 closed “on August 1, 2007.” (J.A. 353, 393, 402,
406.) The Shops had between eleven and fourteen years remaining
on their terms.
5
For some period of time, RLB appeared to desire relocating
Shop 1661 and informed Meineke of its intent to do so, but
eleven months after closing the Shop at its original location,
it still had not opened the Shop at a new location. At that
point, Meineke informed RLB it was terminating the FTA for that
Shop.
There is no evidence in the record that RLB ever responded
to Meineke’s interim letters regarding the other three Shops.
6
Meineke filed a complaint in North Carolina state court
alleging RLB breached the FTAs causing Meineke to, inter alia,
“lose the contractually agreed to royalties and advertising
[fund] contributions that it would have received during the
remaining term[s]” of each FTA. (J.A. 21.) RLB removed the
case to the Western District of North Carolina on the basis of
diversity jurisdiction. It also filed counterclaims of breach
of contract and breach of the duty of good faith and fair
dealing.
The parties then filed cross motions for summary judgment.
RLB sought partial summary judgment on Meineke’s future damages
claims, while Meineke sought summary judgment on all of its
claims and the counterclaims.
The district court granted RLB partial summary judgment as
to Meineke’s claim for future damages for any prospective
royalties and advertising fund contributions for periods after
termination of the FTAs. Meineke was granted summary judgment
on claims for past amounts due for periods prior to termination
of the FTAs and the counterclaims by RLB.
Meineke noted a timely appeal of the portion of the
district court’s judgment related to its claim for future
damages. Because RLB did not cross-appeal the judgment against
it, that portion of the district court’s order is not before us.
Our sole inquiry concerns the district court’s award of summary
7
judgment based on its determination that Meineke failed as a
matter of law to show it was entitled to future damages in the
form of lost future royalties and advertising fund
contributions. We have jurisdiction under 28 U.S.C. § 1291.
II.
We review the district court’s grant of summary judgment de
novo. Hawkspere Shipping Co. v. Intamex, S.A., 330 F.3d 225,
232 (4th Cir. 2003). Summary judgment is appropriate if “there
is no genuine dispute as to any material fact” and a party “is
entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). In making this determination, we are to “view all facts
and reasonable inferences therefrom in the light most favorable
to the nonmoving party,” that being Meineke in this case.
Battle v. Seibels Bruce Ins. Co., 288 F.3d 596, 603 (4th Cir.
2002).
III.
The district court’s decision relied on two primary
grounds. First, the court determined that Meineke was not
entitled to recover prospective damages under the FTAs. Second,
the court determined that Meineke was not entitled to recover
lost profits under North Carolina law. We review each part of
the holding in turn.
8
At the outset we note that before reaching the prospective
damages claim, the district court determined that the decision
by RLB to prematurely close the Shops “constituted a material
breach” of the FTAs “because the very heart of the agreement
revolved around the continued operation of the automotive repair
[S]hops.” (J.A. 829.) RLB does not contest this ruling. It is
therefore the law of the case and we are bound by it on appeal.
See Mironescu v. Costner, 480 F.3d 664, 677 n.15 (4th Cir.
2007); see also Fed. R. App. Pro. 28(b). Accordingly, for
purposes of our analysis, RLB materially breached the FTAs by
permanently closing the Shops prior to the end of their
respective fifteen-year terms.
A.
The first part of the district court’s analysis examined
whether Meineke was entitled to future damages “under the FTAs.”
The district court held that “[b]y the express terms of the
FTAs, Meineke’s contract with [RLB] does not permit the recovery
of prospective damages.” (J.A. 830.) The district court based
this conclusion on several factors: the absence of any express
“provision for Meineke to recover amounts from [RLB] subsequent
to the termination of the FTAs,” J.A. 829, the absence of any
provision stating that the duty of paying royalties and
advertising fund contributions survives termination of the FTAs,
9
the fact Article 15.1 only requires RLB to pay past due
royalties and advertising fund contributions upon termination,
and the fact that payment of royalties and advertising fund
contributions do not expressly or by their nature survive
termination of the FTA and therefore do not fall within the
survivorship provision in Article 15.5. Read as a whole, but
without explicitly stating so, the district court’s order seems
to imply that Meineke could not recover prospective damages
unless a specific FTA contractual provision permitted such
damages. (See J.A. 830.)
Meineke contends the district court erred because North
Carolina law does not require that the written contract (the
FTAs) provide for future damages in order to recover these
damages in the event of a breach. It also maintains the
district court misconstrued provisions of the FTA (Article 15.1
and 15.5) to preclude recovery of prospective damages when those
provisions addressed other issues and do “not purport to address
all remedies available to Meineke for a franchisee’s breach.”
(Appellant’s Opening Br. 20.)
“Under North Carolina law, a court’s primary purpose in
construing a contract is to ascertain the intent of the parties
at the time of the contract’s execution.” S.C. Nat’l Bank v.
Atl. States Bankcard Ass’n, 896 F.2d 1421, 1426 (4th Cir. 1990)
(citation omitted). “Where the terms of the contract are not
10
ambiguous, the express language of the contract controls in
determining its meaning . . . .” Id. (quotation and citation
omitted).
The district court is correct that the FTAs do not
specifically provide for recovery of future damages in the event
of a breach of contract. However, nothing in the FTAs precludes
such damages either. 6 No principle of North Carolina contract
law suggests that in all circumstances a contract must
specifically provide for recovery of future damages in order to
preserve a party’s right to recover them. To the contrary,
cases discussing recovery of lost profits do not refer to the
6
Meineke points to Article 17.10 as further proof that the
district court erred, observing that contract provision
preserves “any other right or remedy which [a] party is entitled
to enforce by law.” (Appellant’s Opening Br. 21, quoting
Article 17.10 at J.A. 75.) RLB argues that Meineke’s failure to
raise the applicability of Article 17.10 in the district court
precludes it from being able to rely on it on appeal.
(Appellees’ Br. 36.) Meineke does not dispute its failure to
raise the application of Article 17.10 below, and defends its
reliance on the provision by stating that appellate review of a
district court’s interpretation of a contract is de novo.
While Meineke articulates the proper standard of review,
Williams v. Prof’l Transp. Inc., 294 F.3d 607, 613 (4th Cir.
2002), the standard of review is wholly separate from whether a
party has adequately preserved an issue for review on appeal.
Consistent with our general rule on this point, we have held
that “the failure of a party at trial to raise a certain
interpretation of a[] contract results in a waiver of that
argument on appeal absent exceptional circumstances.” In re:
Wallace & Gale Co., 385 F.3d 820, 835 (4th Cir. 2004); Canada
Life Assurance Co. v. Estate of Lebowitz, 185 F.3d 231, 239 (4th
Cir. 1999). Finding no exceptional circumstances in this case,
we will not consider Meineke’s argument and consider it waived
as to Article 17.10.
11
parties’ contracts as the basis for the non-breaching party’s
right to such a recovery. See, e.g., Weyerhaeuser Co. v. Godwin
Bldg. Supply Co., 234 S.E.2d 605, 607 (N.C. 1977); Perfecting
Serv. Co. v. Prod. Dev. & Sales Co., 131 S.E.2d 9, 21-22 (N.C.
1963); Builders’ Supply & Equip. Corp. v. Gadd, 111 S.E. 771,
772 (N.C. 1922); Storey v. Stokes, 100 S.E. 689, 690-92 (N.C.
1919); Pender Lumber Co. v. Wilmington Iron Works, 41 S.E. 797,
798 (N.C. 1902). While the parties were certainly free to
contract for liquidated damages or to bar a right to recover
lost profits under North Carolina law, they did not do so in
this case. To the extent the district court’s decision required
the FTAs to specifically provide for prospective damages as a
mandatory condition precedent to preserve a non-breaching
party’s right to recover such damages, this was error.
Contrary to the district court’s conclusion, Articles 15.1
and 15.5 of the FTAs do not operate as bars to recovering future
damages. Article 15.1 states that upon termination or
expiration of the FTAs, RLB “agree[s] to pay [Meineke] all
royalties, [advertising fund] payments, amounts owed for
purchases . . . , interest due on any of the foregoing and all
other amounts owed to [Meineke] which are then unpaid.” (J.A.
68.) Article 15.1 only addresses what is owed up to termination
of the FTAs. It is silent about RLB’s liability for periods
after termination. By expressly providing for certain
12
obligations upon termination or expiration of the FTAs, Meineke
and RLB did not implicitly exclude other legal rights that may
accrue in addition to those stated. The district court’s
construction in this instance runs contrary to the instruction
that courts “will not resort to construction [of a contract]
where the intent of the parties is expressed in clear and
unambiguous language.” Wallace v. Bellamy, 155 S.E. 856, 859
(N.C. 1930). There is no need to construe the Article 15.1
language to mean something other than the circumstances to which
it clearly applies—pre-breach damages. The provision is silent
as to prospective damages arising after termination pursuant to
breach of the FTA. The district court erred in reading Article
15.1 as precluding future damages.
The district court’s construction of Article 15.5 is
similarly mistaken. Article 15.5 states: “All obligations
under this Agreement which expressly or by their nature survive
the expiration or termination of this Agreement will continue in
full force and effect until they are satisfied in full or by
their nature expire.” (J.A. 70.) Although the right to
royalties and advertising fund contributions do not expressly
survive the expiration or termination of the Agreement as a
provision of the contract, they need not do so in order to form
the basis of a prospective damages claim in the event Meineke is
otherwise entitled to those damages under other applicable law.
13
As discussed below, Meineke’s right to recover such sums as the
measure of damages resulting from a breach of the FTAs arises
under North Carolina law and is independent and separate from
any obligation to pay such sums as a new obligation arising
under the FTAs. 7
In sum, the FTAs neither specifically provided for nor
expressly prohibited Meineke from recovering prospective damages
in the event of RLB’s material breach. In the absence of an
express contractual provision barring future damages, the FTAs
did not prohibit the recovery of those damages if otherwise
permitted under North Carolina law. The district court erred in
holding otherwise.
B.
Meineke’s ability to recover future damages thus depends on
whether it adduced sufficient evidence to set forth a North
Carolina common law claim for lost profits. Under North
Carolina law,
the general rule is that a party who is injured by
breach of contract is entitled to compensation for the
7
While the parties could have agreed to bar a future
damages claim in the written FTA, they did not do so. But
whether a future damages claim was otherwise within their
contemplation under state law at the formation of their contract
is an unresolved and disputed factual issue, as more fully
discussed below.
14
injury sustained and is entitled to be placed, as near
as this can be done in money, in the same position he
would have occupied if the contract had been
performed. Stated generally, the measure of damages
for the breach of a contract is the amount which would
have been received if the contract had been performed
as made, which means the value of the contract,
including the profits and advantages which are its
direct results and fruits.
Perkins v. Langdon, 74 S.E.2d 634, 643 (N.C. 1953) (citations
omitted). Accordingly, “[d]amages for breach of contract may
include loss of prospective profits where the loss is the
natural and proximate result of the breach.” Mosley & Mosley
Builders, Inc. v. Landin Ltd., 361 S.E.2d 608, 613 (N.C. Ct.
App. 1987) (citing Perkins, 74 S.E.2d at 634.). North Carolina
courts have set out a three-part test for determining when a
party may recover lost profits
“when it is made to appear (1) that it is reasonably
certain that such profits would have been realized
except for the breach of contract, (2) that such
profits can be ascertained and measured with
reasonable certainty, and (3) that such profits may
reasonably be supposed to have been within the
contemplation of the parties, when the contract was
made, as the probable result of the breach.”
Keith v. Day, 343 S.E.2d 562, 568 (N.C. Ct. App. 1986) (quoting
Perkins, 74 S.E.2d at 644). In addition, the non-breaching
party has a duty to mitigate its damages by “exercis[ing]
reasonable care and diligence to avoid or lessen the
consequences of [the] wrong.” See Miller v. Miller, 160 S.E.2d
65, 74 (N.C. 1968).
15
Based on these principles, in order to survive summary
judgment, Meineke had the burden of showing sufficient evidence
to establish or create a question of fact regarding these
issues: (1) RLB’s material breach proximately caused the
potential for future damages in the form of lost future
royalties and advertising fund contributions; (2) there is
reasonable certainty that Meineke’s lost profits would have been
realized but for RLB’s closure of the Shops; (3) the amount of
Meineke’s lost profits can be ascertained and measured with
reasonable certainty; (4) at the time of entering into the FTAs,
lost profits may reasonably be supposed to have been within
Meineke and RLB’s contemplation as the probable result of RLB’s
premature closure of the Shops. The district court held Meineke
failed to establish any material facts in dispute as to each
part of this analysis and that RLB was entitled to judgment as a
matter of law. For the reasons set forth below, we disagree.
1.
The district court held that Meineke failed to show that
RLB’s breach proximately caused its prospective damages. In the
district court’s view, “Meineke’s termination of the FTAs in the
instant case terminated [RLB’s] ability to generate royalties
and [advertising] fees, irrespective of whether [RLB] had
breached before” the termination. “Once [Meineke terminated the
16
FTAs, the FTAs] provided no right to future damages. Since
[these sums] were based on [the Shops’] revenues, the
termination of the [FTAs] cut off [RLB’s] ability to generate
revenues.” (J.A. 830-31.)
The district court cited no legal authority directly
supporting its conclusion. On appeal, the parties cite to
numerous cases from courts across the country, none of which are
binding on this court. We, too, found no controlling authority
on point. Most of the relevant discourse appears in various
federal district and state court opinions.
These courts have taken a variety of approaches to analyze
whether a franchisor is entitled to recover lost profits. They
have reached opposite conclusions based on the nature of the
franchisee’s breach and concerns such as whether recovering lost
profits would result in the franchisor unfairly benefiting with
a double recovery. See Moran Indus., Inc. v. Mr. Transmission
of Chattanooga, Inc., 725 F. Supp. 2d 712, 720-23 (E.D. Tenn.
2010) (collecting and discussing cases examining whether a
franchisor can ever be entitled to recover lost profits after
terminating a franchise agreement in response to franchisee’s
breach of contract). We need not examine the full panoply of
approaches because we believe the proper analysis is a
17
straightforward application of the relevant North Carolina law
concerning damages recoverable following a breach of contract. 8
Long-standing principles of North Carolina contract law
permit a non-breaching party to recover damages that are “the
8
Our approach is consistent with cases on both sides of the
analysis, as the focal point has not been whether the franchisor
or the franchisee is seeking lost profits, but whether the party
breaching the contract proximately caused the lost profits being
sought. Even where a court has held that the franchisor is not
entitled to recover lost profits, the rationale for that
decision has usually been that the franchisor’s lawful
termination of the parties’ agreement was the proximate cause of
lost profits rather the franchisee’s breach, the most common
example being a franchisee’s breach for failing to pay past due
royalties.
As the California Court of Appeals observed in Postal
Instant Press, Inc. v. Sealy, 51 Cal. Rptr. 2d 365 (Cal. Ct.
App. 1996), “it was the franchisor’s own decision to terminate
the franchise agreement that deprived it of its entitlement to .
. . future royalty payments” because “[n]othing in the
franchisee’s [breach, i.e.,] failure to pay past royalties[,] in
any sense prevented the franchisor from earning and receiving
its future royalty payments.” Id. at 370. But in so holding,
the court emphasized that it was “not holding franchisors can
never collect lost future royalties for franchisees’ breaches of
the franchise agreement. That entitlement depends on the nature
of the breach and whether the breach itself prevents the
franchisor from earning those future royalties.” Id. at 371.
By contrast, in Lady of America Franchise Corp. v. Arcese,
2006 U.S. Dist. LEXIS 68415 (S.D. Fla. 2006), the United States
District Court for the Southern District of Florida permitted a
franchisor to recover lost future royalties where the franchisee
voluntarily ceased operating the franchise, an action that,
under the terms of their agreement, automatically terminated the
agreement. Id. at *18. The court found “as a matter of law
that [the franchisee’s] actions were the proximate cause of the
termination of the agreement and [the franchisor’s] loss of
future royalties.” Id.
We do not rely on any of these cases as specific authority,
and only raise them as examples of how other courts have
approached this issue.
18
proximate consequence of a breach of contract” and “all damages
must flow directly and naturally from the wrong.” Johnson v.
Atl. Coast Line R.R. Co., 113 S.E. 606, 608 (N.C. 1922)
(citations omitted). Here, it is the law of the case that RLB
materially breached the contract by closing the Shops before the
FTAs’ terms ended. The nature of this breach is so
comprehensive as to constitute a de facto abandonment of the
FTAs by the sole decision of the franchisee, RLB. 9 RLB’s
decision to close the Shops stopped the potential for generating
any revenues through their future operation. That decision in
turn meant that Meineke, by virtue of this independent action of
RLB, would no longer receive royalties and advertising fund
contributions that it was entitled to receive under the FTAs.
RLB’s breach was therefore the proximate cause of Meineke’s lost
profits.
Meineke’s subsequent decision to terminate the FTAs had
certain legal consequences impacting the relationship between
the parties, but it did not cause RLB to stop operating the
Shops and thereby stop generating revenues: an event which had
9
The record indicates that Meineke sent RLB letters upon
learning of the Shops’ closure and provided RLB with an
opportunity to respond as to its intent and cure the breaches in
order to avoid termination of the FTAs. With the exception of
the one shop RLB indicated it desired to relocate, there is no
indication in the record that RLB responded to Meineke’s interim
letters. It was only after many months to over a year following
each Shops’ closure that Meineke finally terminated the FTAs.
19
already occurred. As a result, Meineke was losing future
royalties and advertising fund contributions it would have
received had the stores remained opened. 10 The district court
thus erred in concluding that the termination of the FTAs by
Meineke, rather than the established breach by RLB, proximately
caused Meineke’s lost profits.
2.
Closely linked to the causation analysis is the requirement
that Meineke had to show that it was reasonably certain to
realize lost profits absent RLB’s breach. The district court
concluded that Meineke had not made the requisite showing
because the “Shops struggled to keep business going.” (J.A.
832.) The court concluded Meineke did not provide sufficient
evidence that the Shops “would have been profitable” had they
remained open. (J.A. 832.) Although the district court did not
define “profits,” its analysis focused on each shop’s net income
and whether the shop “generate[d] income.” (J.A. 832.)
10
In light of RLB’s breach, termination seems to have been
a prudent decision in order to prevent further losses and
otherwise protect Meineke’s interests. As just one example, the
decision to terminate the FTAs may appropriately be viewed as
part of Meineke’s responsibility to mitigate its damages
following RLB’s breach. Under the terms of the FTAs, Meineke
was prohibited from refranchising within a certain geographic
proximity to the Shops as long as the FTAs were in force, and
therefore could not have approved another party’s application to
franchise the area unless the FTAs were terminated.
20
As the non-breaching party, Meineke was “entitled to
compensation for the injury sustained and [was] entitled to be
placed, as near as this can be done in money, in the same
position [it] would have occupied if the contract had been
performed.” Perkins, 74 S.E.2d at 643. As detailed above, the
FTAs entitled Meineke to a percentage of the Shops’ gross
revenues each week, both as royalties and as advertising fund
contributions. For purposes of avoiding RLB’s motion for
summary judgment, Meineke did not have to show that the Shops
would generate a particular profit or have a particular net
income, only that the Shops would have continued to have
revenues. As long as the Shops continued to make some sales for
any period of time after the breach, Meineke would be entitled
to its lost royalties and advertising fund contributions as a
percentage of those gross sales.
RLB contends “there is no evidence that [the Shops] could
have continued to be operational . . . given their financial
failings.” (Appellees’ Br. 43.) However, Meineke was not
required to prove as part of its prima facie case for purposes
of avoiding summary judgment that it was commercially feasible
to operate the Shops at the time of the closures. Meineke was
only required to show it was due future damages based on future
operation of the Shops. RLB could put on evidence as to when
the Shops could not operate in a commercially feasible manner,
21
forcing Meineke to adduce evidence to the contrary to avoid
summary judgment. However, this record only reflects the Shops
were not operating at a “profit” but without a definition of
“profit.” The record at this stage does not show the Shops
could not operate in a commercially feasible manner for a
particular period of time after RLB closed each shop, and the
district court made no finding to that effect. The Shops, or
some of them, may or may not have been able to operate at the
time of their closures because operation was no longer
commercially feasible. Whether a Shop made a profit is not
relevant without a definition of “profit” and how that term
relates to the commercial reasonableness of continued operation.
At this point in the proceedings, that determination has not
been made. 11
There is a factual question then, both as to how long the
Shops could have been kept operational and as to the amount of
revenues the Shops would have generated during that period. It
would be for the finder of fact to determine what lost profits
11
For example, a franchisee may operate a location and fail
to make a “profit” because it pays above-market compensation,
uses revenues for other ventures, or a myriad of other purposes
unrelated to that location. It would not be unusual for a
franchise location to operate as “unprofitable’ for a period of
time until it establishes a market or stable management. None
of these circumstances, standing alone, would excuse a
franchisee from payment of royalties. What occurred in the case
at bar is yet to be determined.
22
Meineke can prove it was reasonably certain to have realized
from the time of the breach forward until such time as the
finder of fact determines it was no longer reasonably certain
that any revenues would exist. We make no prediction what
additional evidence, if adduced, may show or whether that be at
another summary judgment proceeding or trial on the merits. The
salient point, for our purposes, is simply that material facts
remain in dispute, which does not permit the award of summary
judgment based on the current record.
Meineke satisfied its burden of showing with reasonable
certainty that except for RLB’s breach of the FTAs by closing
the Shops, some revenue – and therefore some lost royalties and
advertising fund contributions – would have been realized. This
showing was sufficient to survive summary judgment based on the
current record, and the district court erred in holding
otherwise.
3.
The district court also held Meineke’s “generic calculation
for lost profits” did not “assess [each shop’s] specific
location, viability, or profitability” and therefore failed to
measure or ascertain the asserted lost profits with reasonable
certainty. (J.A. 833.) The court specifically noted that
Meineke’s use of three years’ lost profits based on the time it
23
usually takes to re-franchise a location was speculative because
“Meineke cannot say with certainty that every franchise takes
three years.” (J.A. 833.)
Under North Carolina law, “[a]s part of its burden, the
party seeking damages must show that the amount of damages is
based upon a standard that will allow the finder of fact to
calculate the amount of damages with reasonable certainty.”
Olivetti Corp. v. Ames Bus. Sys., Inc., 356 S.E.2d 578, 586
(N.C. 1987) (citation omitted). Consequently,
damages for lost profits will not be awarded based
upon hypothetical or speculative forecasts of losses.
. . . Instead, [the court] evaluate[s] the quality of
evidence of lost profits on an individual case-by-case
basis in light of certain criteria to determine
whether damages have been proven with “reasonable
certainty.”
Iron Steamer, Ltd. v. Trinity Restaurant, Inc., 431 S.E.2d 767,
770 (N.C. Ct. App. 1993). Absolute certainty is not required.
Mosley, 361 S.E.2d at 613; see also McNamara v. Wilmington Mall
Realty Corp., 466 S.E.2d 324, 329-31 (N.C. Ct. App. 1996).
Meineke asserts its lost profits were calculated with
reasonable certainty. This is so, Meineke contends, because it
used each shop’s “actual historical sales data” to calculate
what royalties and advertising fund contributions RLB would have
paid Meineke in the future. (Appellant’s Br. 44.) RLB responds
that Meineke’s calculations are speculative because Meineke uses
“the identical generic formula [to calculate lost profits] in
24
every case” and “Meineke cannot say with certainty that every
franchise takes three years.” (Appellees’ Br. 46.)
We begin with a brief summary of how Meineke calculated its
future damages arising from the Shops’ closures. For the three
franchises still operated by the Bajjanis, Meineke calculated
lost future royalties by using the average weekly sales of the
shop in prior years, multiplying that average sum by the number
of weeks in the three-year period for which it sought relief,
and then multiplying that amount by an average historical
royalty rate to determine the prospective franchise fees Meineke
lost as a result of the breach. From that sum, Meineke deducted
its incremental savings resulting from the premature closing of
the franchise and then discounted that amount to present value.
A similar calculation was used to determine lost future
advertising fund contributions. For the fourth franchise (the
one RLB sold to a third party), Meineke performed a similar
calculation for both amounts, but took into account both royalty
concessions and the period of time remaining on Joe Bajjani’s
personal guaranty.
Having reviewed the evidence Meineke set forth as to the
amount of its lost profits, we conclude that the district court
erred in holding Meineke’s calculations were too remote and
speculative to survive summary judgment. Just because Meineke
uses the same formula in “every” breach of contract case does
25
not make its calculations speculative. Meineke used data
specific to each shop to calculate the damages it sought from
the closure of that shop. Meineke’s calculations were based on
a historical analysis of the Shops’ actual revenues projected
into the future, a methodology North Carolina courts have upheld
as a reasonable basis for calculating damages like the future
royalties and advertising fund contributions sought here: “If
an established business is wrongfully interrupted, the damages
can be proved by showing the profitability of the business for a
reasonable time before the wrongful act. It is only when the
prospective profits are conjectural, remote, or speculative,
they are not recoverable.” Mosley, 446 S.E.2d at 613 (internal
quotation mark and citations omitted). 12
12
Indeed, using past profits as a basis for calculating
future lost profits is a widely accepted methodology. Lockheed
Info. Mgmt. Sys. Co. v. Maximus, Inc., 524 S.E.2d 420, 429 (Va.
2000) (“[E]vidence of the prior and subsequent earning record of
a business can be used to estimate damages, in the case of an
established business with an established earning capacity.”);
Guard v. P&R Enters., Inc., 631 P.2d 1068, 1072 (Alaska 1981)
(“In cases involving an established business, courts have
considered past profits a reasonably certain measure by which to
calculate a damage award.”); Schoenberg v. Forrest, 228 S.W.2d
556, 560-61 (Tex. Ct. App. 1950) (“Where . . . it is shown that
the business . . . was making a profit[] when the contract was
breached, such pre-existing profit, together with other facts
and circumstances, may be considered in arriving at a just
estimate of the amount of profit which would have been made if
plaintiff had not breached its contract.” (quotation and
citation omitted)).
26
By using the Shops’ actual past performance to calculate
projected future royalties and advertising fund contributions,
Meineke did not fall into the sort of analysis North Carolina
courts have rejected as being too remote, hypothetical, or based
on conjecture. E.g., McNamara, 466 S.E.2d at 330 (concluding
calculations were not reasonably certain where they were based
on nationwide data from stores who “bore [no clear] similarity
to plaintiff’s business” rather than “sales figures and other
financial data” from smaller stores of plaintiff’s kind or
similar stores in the region); Olivetti, 356 S.E.2d at 586-87
(concluding lost profits calculation not made with reasonable
certainty where it was based on being offered an opportunity
that was turned down and then the subsequent profitability of
that opportunity where there was no evidence in the record to
support either contingency). To the contrary, Meineke’s
calculations were “based upon standards that allowed the jury to
determine the amount of plaintiff’s lost profits with reasonable
certainty.” 13 McNamara, 466 S.E.2d at 330.
13
The Shops closed at different periods into their terms,
and thus had different lengths of past performance on which to
base Meineke’s calculations. However, in Olivetti, the Supreme
Court of North Carolina rejected the “new business” rule, which
would have “preclude[d] an award of damages for lost profits
where the allegedly damaged party has no recent record of
profitability,” 356 S.E.2d at 585, either due to being a
“recently . . . instituted” business or an established business
“without a recent history of profitability.” Id. at 585 & n.3.
(Continued)
27
RLB’s arguments challenging the amount of future damages
Meineke seeks, including the three-year period for which it
seeks such damages, create a question of disputed fact as to
whether Meineke’s calculations reflect the time period for which
there is a reasonable certainty as to what lost profits would
have been received by Meineke. But Meineke’s methodology was
not unreasonably speculative, hypothetical, or the result of
conjecture as a matter of law. Thus, summary judgment on this
issue was erroneous as material facts remain in dispute as to
the amount of future damages and the time period for which they
are collectible.
4.
The district court next held that “[f]uture damages were
not reasonably within the contemplation of the parties at the
time of” entering into the FTAs because “[i]f they had been,
Meineke would have contractually provided for them.” (J.A.
834.) The court stated “[i]t would be unjust to construe the
FTAs as permitting future damages when the words [do not]
provide for them.” (J.A. 834.)
Instead, the court held that lost profits could be awarded to
any business – regardless of age or history of recent
profitability – as long as damages were proven “with reasonable
certainty.” Id. at 585.
28
Meineke contends this was error because “[t]he fact that
the [FTAs do] not expressly list each available remedy for such
a breach does not preclude Meineke from seeking the customary
breach of contract remedies, including lost future royalties and
advertising [fund] contributions, allowed by the black letter
law of contracts.” (Appellant’s Br. 35.) Moreover, Meineke
posits “it was reasonably foreseeable that if [RLB] stopped
operating [its] franchises before the expiration of the 15-year
term, Meineke would seek to recover the remaining royalties and
advertising [fund] contributions due to Meineke under the
[FTAs].” (Appellant’s Br. 34.)
As previously noted, to recover future damages, such
damages must “be reasonably supposed to have been within the
contemplation of the parties, when the contract was made, as the
probable result of a breach.” Perkins, 74 S.E.2d at 644; see
also Lamm v. Shingleton, 55 S.E.2d 810, 812-13 (N.C. 1949) (“A
party to a contract who is injured by another’s breach of
contract is entitled to recover from the latter damages for all
injuries and only such injuries as are the direct, natural, and
proximate result of the breach . . . and can reasonably be said
to have been foreseen, contemplated, or expected by the parties
at the time when they made the contract as a probable or natural
result of a breach.” (quotation and citations omitted)). “In
ascertaining what damages come within the rule, it is proper to
29
examine, not only the terms of the contract, the subject-matter,
etc., but also to inquire whether such circumstances or
conditions as produced special damages were communicated to the
defendant.” Storey, 100 S.E. at 691.
It was an error of law for the district court to base its
analysis solely on whether prospective damages were explicitly
provided for in the terms of the FTAs. Demanding such express
evidence of contemplation requires more than proof that lost
profits were “reasonably supposed to have been” within the
parties’ contemplation, and instead requires absolute certainty
that the parties considered such terms by including them in
their written agreement. We could find no cases – and neither
the district court nor RLB cite to any – where North Carolina
courts have held parties to such a high standard of proof.
Indeed, the principles espoused above clearly negate such a
proposition, focusing instead on what damages are within the
contemplation and expectation of the parties, and those that are
naturally and likely resulting from a breach. North Carolina
courts have typically articulated the principles regarding what
damages are generally recoverable following a breach of contract
in contrast to special circumstances that may lead to a
different recovery, which must have been specifically discussed
in order to be considered part of the parties’ contemplation at
the time of entering into the agreement. Perkins, 74 S.E.2d at
30
643-44. The requirement that lost profits be “reasonably
supposed to have been within the contemplation of the parties”
incorporates this notion of naturally arising from a breach, but
does not require express written agreement. Cf. id. at 644.
Thus, while the absence of such an express lost profits
provision in the contract is one fact the court may consider in
determining whether the parties reasonably contemplated future
damages, cf. Storey, 100 S.E. at 691, it is not the only
evidence relevant to the determination. The district court
erred in relying on that evidence alone to conclude that the
parties did not contemplate lost profits as damages.
The record reflects several relevant factors that could
support a contrary conclusion, including the FTAs’ fifteen-year
terms and the grant of an exclusive territorial right.
Moreover, the entire purpose of the FTA was to establish a
binding agreement whereby RLB paid Meineke royalties and
advertising fund contributions in exchange for being permitted
to operate under its name and marks, using its procedures and
products. At the very least, this evidence juxtaposed against
the absence of an explicit FTA provision specifying the recovery
of future damages creates a disputed issue of fact about whether
Meineke’s lost royalties and advertising fund contributions in
the event of a breach were reasonably within RLB and Meineke’s
contemplation at the time they entered into the FTAs.
31
Accordingly, the district court erred in holding that RLB was
entitled to judgment as a matter of law as to this aspect of
Meineke’s claim.
5.
Lastly, with respect to mitigation of damages, the district
court concluded the record held “no evidence that Meineke
attempted to mitigate its damages under the FTAs by re-
franchising.” (J.A. 834.) Citing the Supreme Court of North
Carolina’s decision in Miller v. Miller, 160 S.E.2d 65, 73-74
(N.C. 1968), the district court held that Meineke’s failure to
mitigate “operates as a bar to recovery.” (J.A. 834.) The
court’s quotation from Miller is incomplete and thus does not
correctly state the North Carolina law regarding mitigation:
The rule in North Carolina is that an injured
plaintiff, whether his case be tort or contract, must
exercise reasonable care and diligence to avoid or
lessen the consequences of the defendant’s wrong. If
he fails to do so, for any part of the loss incident
to such failure, no recovery can be had. This rule is
known as the doctrine of avoidable consequences or the
duty to minimize damages. Failure to minimize damages
does not bar the remedy; it goes only to the amount of
damages recoverable.
Id. at 73-74 (internal citation omitted) (emphasis added). The
district court thus erred as a matter of North Carolina law
because Meineke’s failure to mitigate, if such be ultimately
32
found, does not bar recovery of prospective damages, but only
circumscribes the amount of damages that may be recovered.
In asserting a failure to mitigate defense, the burden was
on RLB to allege and prove that Meineke failed to “do what
reasonable business prudence required to minimize [its] damage.”
Mt. Gilead Cotton Oil Col. v. W. Union Tel. Co., 89 S.E. 21, 22
(N.C. 1916); see also United Labs., Inc. v. Kuykendall, 403
S.E.2d 104, 108 (N.C. Ct. App. 1991) (holding an injured
plaintiff “must exercise reasonable care and diligence to avoid
or lessen the consequences of the defendant’s wrong” (quotation
and citation omitted)). To avoid denial of its motion for
summary judgment based on a failure to mitigate, RLB would have
had to put on some evidence that Meineke’s duty to mitigate
arose contemporaneously with any damages arising from the
breach. RLB did not offer any such proof, and instead more
broadly claimed that Meineke was simply not entitled to the
amount of damages it sought because of a failure to mitigate.
In effect, RLB’s position is that Meineke was required to prove,
even as to the first day after RLB’s breach, that Meineke acted
in mitigation. This argument reverses the burden of proof under
North Carolina law.
Meineke responded to this assertion with evidence
contending that it adequately mitigated its damages by only
seeking damages for a three-year period rather than for the each
33
FTA’s remaining term, and that it would have cost more to
specifically seek to refranchise the exact area of each of the
shops rather than continuing to market the availability of
nationwide franchises. 14 This evidence creates an issue of
disputed fact as to whether, under the circumstances of this
case, the three-year period satisfies the duty to mitigate and,
if not, what period of prospective damages between one day and
three years Meineke was entitled to recover before its failure
to mitigate barred further recovery. Accordingly, the district
court erred in its ruling on mitigation.
IV.
For the aforementioned reasons, we conclude that the FTAs
do not bar Meineke from recovering future damages, that RLB’s
breach proximately caused Meineke to incur prospective damages,
and that Meineke put forth sufficient evidence to create issues
of disputed fact on its claim for lost profits. Accordingly,
the district court erred in granting summary judgment to RLB on
14
For example, in deposition testimony, Meineke’s Chief
Financial Officer, Michael Carlet, explained that Meineke
“typically do[es] not try to refranchise a specific territory”
“[b]ecause the incremental cost to find a franchisee for that
specific territory would not be cost beneficial.” (J.A. 503.)
He explained “[t]he cost to target a market on a specific basis,
to find the advertising source in that market, and to find a
franchisee is much more expensive than the other methods of
advertising that [Meineke] use[s] to attract franchisees.”
(J.A. 503; see also 503-06.)
34
the issue of prospective damages. We therefore reverse the
district court’s grant of summary judgment to RLB as to
Meineke’s future damages claim and remand for further
proceedings consistent with this opinion.
REVERSED AND REMANDED
35