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.
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 executed personal guaranties as part of each shop's FTA, guaranteeing RLB's performance and obligations under each FTA.
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"), such sum also being payable weekly.
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.)
RLB closed each of the shops well before the end of the respective FTA's 15-year period.
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 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.
We review the district court's grant of summary judgment de novo.
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.
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.
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, 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."
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.
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 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."
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
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.
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,
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.
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 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.
Long-standing principles of North Carolina contract law permit a non-breaching party to recover damages that are "the proximate consequence of a breach of contract" and "all damages must flow directly and naturally from the wrong."
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 already occurred. As a result, Meineke was losing future royalties and advertising fund contributions it would have received had the stores remained opened.
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.)
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."
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, 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.
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 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.
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 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."
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 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 not make its calculations speculative. Meineke used data specific to
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.
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.
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.)
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."
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.
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. 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.
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 refranchising." (J.A. 834.) Citing the Supreme Court of North Carolina's decision in
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."
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 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.
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 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.
(Article 3.3 — J.A. 36.)
There is no evidence in the record that RLB ever responded to Meineke's interim letters regarding the other three Shops.
While Meineke articulates the proper standard of review,
As the California Court of Appeals observed in
By contrast, in
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.