FF Orthotics v. Paul

Filed 7/17/06 FF Orthotics v. Paul CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment of the Superior Court of San Diego County, Frederick L. Link, Judge. Reversed.

Between 1996 and 2002, Joe Paul and Rosalinda Johnson (together Paul) entered into contracts with numerous parties that granted territorial rights to operate retail stores selling orthotic products that bore a trademark name owned by defendants, as well as other products marketed by defendants. The contracts were entered into by a variety of entities wholly or partly owned by Paul. These entities were named as defendants in the current action. For ease of reference, we will refer collectively to Paul and the other entities as defendants. Although variously denominated as "dealer agreements" or "distributor agreements," defendants concede on appeal these contracts were substantively franchise agreements not registered as franchises under the California Franchise Investment Law (Corp. Code §§ 31110 et seq., hereafter CFIL).

In 2002, two of defendants' franchisees (plaintiffs FF Orthotics Corporation, Inc., and Smart Space, Inc.) initiated the present action alleging claims for violation of the CFIL, violation of the Cartwright Act, unfair business practices, fraud, and ancillary claims. By the time of trial, three other franchisees had joined the action as plaintiffs against defendants. The jury by special verdict found in favor of the plaintiffs on the bulk of the claims, and defendants appeal.

I

FACTUAL AND PROCEDURAL BACKGROUND^[1]

A. The Business Relationships

In 1994, defendants began selling "Good Feet" orthotic supports by a mail order business, and in 1995 they opened a retail store in Solana Beach, California. To expand their business into other geographic regions, defendants consulted an attorney on how to structure their relationship with third parties. The attorney advised them that Joe Paul's 1988 felony conviction would be required to be disclosed if they pursued a franchise offering, but that disclosure would be unnecessary if they used a "dealership agreement" rather than a franchise arrangement.

Defendants began entering dealership agreements in 1996. Their first dealership agreement, signed in 1997, was with the Krupps (doing business as "The Foot Depot") for a store in the Santa Barbara region. In 1998, the Krupps relocated to the San Francisco Bay area and signed agreements for three stores in that region. Defendants' next dealership agreement, also signed in 1997, was with the Hankees (doing business as "Feet First") for a portion of the Orange County region.^[2] The next dealership agreement, signed in 2000, was with the Woodruffs for a store covering a region in Alabama; the Woodruffs later sold that business to plaintiff Quillin, Inc. A final set of dealership agreements was signed in 2001 with plaintiff Smart Space, Inc., which granted territorial rights to a region in Alabama and another in North Carolina.

The dealership agreements granted territorial exclusivity to each of the plaintiffs, but also placed various restrictions on them: they could not sell competing orthotic products; they were required to carry defendants' "full line" of products to fully benefit from national advertising campaigns; and their ability to advertise was constrained.^[3]

B. The Litigation

Plaintiffs FF Orthotics, Inc. (apparently as successor in interest to the Hankees) and Smart Space, Inc., filed their action in June 2002 alleging claims under the CFIL, the Cartwright Act (Bus. & Prof. Code, §§ 16720 et seq.), the unfair competition law (Bus. & Prof. Code, §§ 17200 et seq.), and for common law fraud.^[4] Plaintiffs Foot Depot, Inc. (apparently as successor in interest to the Krupps), Quillin, Inc., and the Woodruffs joined the action as plaintiffs in April 2003.

The jury returned a special verdict against defendants.^[5] The jury found all plaintiffs were entitled to recover (in varying amounts) for violation of the CFIL. The jury also found defendants had unlawfully restrained trade as to plaintiffs FF Orthotics, Inc., Smart Space, Inc. and Foot Depot, Inc., and awarded varying amounts of damages to those plaintiffs on the Cartwright Act claim.^[6] Defendants timely appealed.^[7]

II

ANALYSIS

A. The CFIL Claims

Defendants concede on appeal the dealer or distributor agreements were properly found to have been franchise agreements that should have been, but were not, registered under the CFIL. However, defendants assert reversal of the award on the CFIL claims is nevertheless necessary because (1) the claims asserted by the California-based franchisees were time barred and (2) the out-of-state franchisees are outside the scope of the protections afforded by the CFIL.

The Statute of Limitations Issue

Plaintiffs' CFIL claim, brought under section 31300, was based on the allegation that defendants violated section 31110 of the CFIL by selling unregistered franchises. However, the CFIL contains a statute of limitations in section 31303, which states: "No action shall be maintained to enforce any liability created under Section 31300 unless brought before the expiration of four years after the act or transaction constituting the violation, the expiration of one year after the discovery by the plaintiff of the fact constituting the violation, or 90 days after delivery to the franchisee of a written notice disclosing any violation of Section 31110 . . . whichever shall first expire." The four-year period is an absolute outside limit, and "[o]nce the four-year . . . period expires, a plaintiff's belated discovery of the fact constituting the violation cannot serve to extend the statute of limitations. In other words, the four-year bar in section 31303 . . . [is] absolute." (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (2002) 95 Cal.App.4th 709, 727.)

Each of the two California-based plaintiffs (Krupps/Foot Depot, Inc. and Hankee/FF Orthotics, Inc.) purchased their initial unregistered franchise from defendants prior to June 28, 1998, more than four years before the instant action was filed. Because they filed this action beyond the outside limits of the applicable statutes of limitations for those franchises, any recovery based on the CFIL was time barred, and the judgment awarding damages to Krupps/Foot Depot, Inc. and Hankee/FF Orthotics, Inc. under the CFIL must therefore be reversed.

The Out-of-State Franchisee Issue

The CFIL claims of plaintiffs Woodruffs, Quillin, Inc., and Smart Space, Inc., were premised on defendants' sale of unregistered franchises to them less than four years prior to the initiation of this action. Accordingly, the CFIL claims of those plaintiffs were not time barred by the four-year outside limit under section 31303. However, defendants assert the CFIL claims by these out-of-state franchisees must be reversed because of the section 31105 exemption. That section provides the sale of a franchise to a "resident of another state . . . shall be exempted from [the registration and other provisions of the CFIL] if all locations from which sales, leases or other transactions between the franchised business and its customers are made, or goods or services are distributed, are physically located outside this state."

The apparent meaning of section 31105 is that, when the physical location of both the franchisee's business operations and the franchisee's customers are outside of California, the CFIL's regulatory scheme does not apply. Here, the out-of-state franchisees were outside of California and were contractually limited to operating stores and selling to customers in portions of Alabama and North Carolina. Accordingly, the CFIL's regulatory scheme (including section 31110's requirement that the contract be registered as a condition to selling the franchise to the franchisee) has no application to the relationship established between defendants and the out-of-state franchisees. The judgment awarding damages to the out-of-state franchisees, under the CFIL, must therefore be reversed.

B. The Fraud Claims

Although the precise nature of plaintiffs' fraud claims is murky, it appears their fraud claims were largely duplicative of or derivative from their CFIL claims.^[8] However, section 31306 specifies that:

"Except as explicitly provided in this chapter [describing the remedies available for CFIL violations], no civil liability in favor of any private party shall arise against any person by implication from or as a result of the violation of any provision of this law or any rule or order hereunder. Nothing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if [the CFIL] were not in effect." (Italics added.)

Because plaintiffs' fraud claims appear to rest exclusively on the failure to register the franchises and/or the failure to disclose facts the CFIL statutorily requires be disclosed in franchise offerings, and they cite no common law basis supporting the fraud recovery independent of the CFIL, section 31306 precludes maintenance of a common law fraud claim based on those omissions. (Cf. People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc., supra, 95 Cal.App.4th at pp. 724-725 [rejecting doctrine of tolling applicable to common law fraud cause of action because section 31306 limits remedies for statutory violations to CFIL remedies].)

C. The Cartwright Act Claims

The gravamen of plaintiffs' Cartwright Act claims, as derived from the allegations of their second amended complaint, was that (1) defendants conspired to fix the wholesale prices at which the orthotic goods were sold to plaintiffs; (2) defendants conspired to fix the retail price at which plaintiffs could resell the orthotic goods to the public; and, (3) defendants engaged in an unlawful tying arrangement by requiring plaintiffs to purchase broadcast advertising and nontrademarked supplies from defendants (the tied product) as a condition to using defendants' trademark (the tying product). We conclude the judgment on the Cartwright Act claims must be reversed.

The Price Fixing Claims

The price fixing claims lacked evidentiary support because plaintiffs apparently produced no evidence of an unlawful combination falling outside the scope of the Copperweld Corp. v. Independence Tube Corp. (1984) 467 U.S. 752 (Copperweld) doctrine. An antitrust lawsuit alleging unlawful price fixing must prove a plurality of separate actors conspired together. (City of Mt. Pleasant, Iowa v. Associated Elec. Co‑op., Inc. (8th Cir. 1988) 838 F.2d 268, 274-279.) Only separate economic actors pursuing separate economic interests can conspire within the proscription of the antitrust laws against price-fixing "combinations." (Copperweld, supra, at pp. 769-771.) Whether separate actors are present requires analysis not of the corporate formalities but of the economic realities under which the actors operate. (Mt. Pleasant, at p. 275.) The Copperweld court outlined the broad principles applicable to assessing whether the alleged conspirators are sufficiently separate to be capable of combining within the prohibition of the antitrust laws. Copperweld cautions that the mere existence of separately incorporated entities does not automatically suffice to show these entities are capable of combining, and instead the entities must have separate and independent interests combined by the unlawful conspiracy. Under Copperweld, a conglomeration of two or more legally distinct entities cannot conspire among themselves if they "[pursue] the common interests of the whole rather than interests separate from those of the [group] itself . . . . Because [such] coordination . . . does not represent a sudden joining of two independent sources of economic power previously pursuing separate interests, it is not activity that warrants [Sherman Act section 1] scrutiny." (Copperweld, at pp. 770-771.)

The only "combination" for price fixing of wholesale prices alleged or shown by respondents was that Paul's wholly-owned entities unilaterally fixed the wholesale price at which they sold goods to plaintiffs. Under Copperweld, this cannot support a claim of a price-fixing conspiracy. (Cf. Berkey Photo, Inc. v. Eastman Kodak Co. (2d Cir. 1979) 603 F.2d 263, 272, 294 [unilateral action ordinarily fatal to claim of price-fixing conspiracy].)

Plaintiffs' theory asserting a conspiracy to fix retail prices is not persuasive. There was no evidence defendants conspired or agreed with separate economic actors to set the retail price at which plaintiffs could sell to the public.^[9] To the contrary, the evidence showed defendants' dealers could and did select the price at which they sold their goods to the public. The only evidence cited by plaintiffs as supporting a retail price-fixing scheme was that they were contractually disabled from using any broadcast advertising not prepared by TMP, and because the TMP-prepared ads contained specific prices for various items, plaintiffs were forced to (1) charge those prices, or (2) pay additional amounts to TMP to customize the ads to include the price plaintiffs wished to charge, or (3) forgo using broadcast advertising. However, vertical maximum price fixing is not a per se violation of the antitrust laws (State Oil Co. v. Khan (1997) 522 U.S. 3, 17-20), and the Cartwright Act is not violated merely because a manufacturer unilaterally promulgates a minimum resale price policy and enforces that policy by refusing to deal with dealers who do not comply with those prices. (Chavez v. Whirlpool Corp. (2001) 93 Cal.App.4th 363, 369-373.)

The Tying Claim

Plaintiffs' final Cartwright Act theory rested on the claim of an unlawful tying arrangement. Specifically, they alleged the franchise agreements contractually required them to purchase certain tied products^[10] as a condition to obtaining trademarked goods and using defendants' trademark (the tying products). However, these types of limitations or requirements, when imposed on a franchisee as part of a contractually-negotiated franchise relationship, do not offend the Cartwright Act. As the court in Exxon Corp. v. Superior Court (1997) 51 Cal.App.4th 1672, 1686 explained:

"Plaintiffs' real complaint is that they are being oppressed within a contractual relationship with the manufacturer. There are legal remedies for oppressive conduct regarding a contractual relationship, but they are not antitrust remedies. Cases hold that a franchisor's ability to 'coerce' its franchisee does not show market power and does not invoke antitrust concerns. (See, e.g., Tominaga v. Shepherd (C.D.Cal. 1988) 682 F.Supp. 1489, 1495; Mozart Co. v. Mercedes-Benz of North America, Inc. (9th Cir. 1987) 833 F.2d 1342, 1346-1347 [analysis for vertical restraint and tying claims must be made at the precontract stage, not after a franchise agreement has been signed].) [¶] The franchisees' 'lock in' to Exxon results from a business relationship of their choosing, the franchise, whose terms were freely entered into by both parties. If the franchise agreement is unconscionable or adhesive it may be subject to rescission or reformation. However, these facts do not implicate antitrust concerns. Exxon's conduct vis a vis the franchisees is part of a negotiated business relationship and is not a restraint of trade; it does not directly impact the retail market. And there was no 'lock in' until plaintiffs voluntarily assumed their roles as franchisees; they had the entire spectrum of gasoline sellers from which to choose in deciding how to structure their service station businesses."

Thus, the requirement that a franchisee carry the franchisor's full line of products as a condition to obtaining a franchise does not violate antitrust laws. (See, e.g., Smith Machinery Co., Inc. v. Hesston Corp. (10th Cir. 1989) 878 F.2d 1290, 1297.) Moreover, before plaintiffs could prevail on a tying claim, under the theory that defendants constrained plaintiffs' ability to buy nontrademarked goods or broadcast advertising from third parties, it would be essential for plaintiffs to show defendants held such a dominant market power over the tying goods (orthotic shoe supports) that defendants could effectively compel plaintiffs to purchase the tied products if plaintiffs wanted to sell orthotic shoe supports.^[11] (People v. National Association of Realtors (1981) 120 Cal.App.3d 459, 469-473.) Although defendants certainly controlled orthotic products carrying the Good Feet brand name, there was no evidence they held a dominant market power over all orthotic shoe supports in the relevant markets. (See Domed Stadium Hotel, Inc. v. Holiday Inns, Inc. (5th Cir. 1984) 732 F.2d 480, 488 ["[Appellant] argues that the relevant market from which to analyze its claims is comprised only of Holiday Inn hotel rooms and that Holiday Inns has control over one hundred percent of this market. Its argument, however, is without merit as a matter of law, because absent exceptional market conditions, one brand in a market of competing brands cannot constitute a relevant product market"]; accord, Queen City Pizza, Inc. v. Domino's Pizza, Inc. (3d Cir. 1997) 124 F.3d 430, 436-440.) The absence of proof that defendants held a dominant market power over all orthotic shoe supports is fatal to plaintiffs' tying claim.

DISPOSITION

The judgment is reversed. Each party shall bear its own costs on appeal.

McDONALD, J.

WE CONCUR:

HUFFMAN, Acting P. J.

NARES, J.

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^[1] The parties after trial settled the action, and plaintiffs have declined to file a respondents' brief on appeal. Accordingly, we deem as true the facts stated in defendants' opening briefs.

^[2] Defendants later signed dealership agreements with the Hankees for stores covering additional territories in Los Angeles County.

^[3] Plaintiffs were required to have any print advertising approved by defendants before running the ads. Additionally, if a plaintiff wished to run radio or television advertising, plaintiffs were required to use infomercials or commercials prepared by Television Marketing Programs, Inc. (TMP), one of the wholly-owned Paul entities. Plaintiffs could select among commercials using different suggested retail prices for items, or could (for an additional fee) have the commercial customized to include store locations and/or change the price information. Defendants also conducted national advertising campaigns containing retail prices for various items, but with the proviso that "Prices valid at participating stores. Prices may vary. See dealer for details."

^[4] The complaint also included claims for declaratory and injunctive relief, and under the RICO statute. (18 U.S.C. §§ 1961 et seq.)

^[5] The complaint also alleged, and the jury found, that defendant Mark Walsh was liable (1) for the CFIL violations as a control person or employee of Paul or Paul's entities who materially aided in the offending conduct and (2) for fraud in concealing or not disclosing material information. Because of our disposition, we need not separately evaluate Walsh's appellate claims.

^[6] The jury also found in favor of plaintiffs Quillin, Inc., and Smart Space, Inc., on the fraud claims, but found that defendants' misrepresentations to the other plaintiffs had caused no injury. The trial court concluded the fraud damages suffered by Quillin, Inc., and Smart Space, Inc., were duplicative of the injury flowing from the violation of the CFIL, and therefore declined to add the fraud damages to the recovery awarded for the franchise law violation. Similarly, the court concluded that although defendants may have violated the unfair competition law, the damages award for violating the CFIL and the Cartwright Act fully covered any injury resulting from violations of the unfair competition law.

^[7] After trial, the parties apparently settled the monetary award. However, the settlement does not render the appeal moot because the existence of the judgment may have disadvantageous collateral consequences on defendants' ability to conduct business in the future or on their professional reputations. (See, e.g., People v. Becker (1952) 108 Cal.App.2d 764, 768-769.)

^[8] For example, plaintiffs' second amended complaint describes the fraudulent inducement or concealment claims by referring to the statutory disclosure obligations placed on franchisors under the CFIL. Moreover, in opposition to defendants' new trial motion, plaintiffs asserted the fraud claim was viable independent from the CFIL claim because Joseph Paul concealed both his true name and the fact he had outstanding civil judgments against him, but plaintiffs cited nothing to suggest defendants were under a duty to disclose these facts apart from the disclosure obligations imposed by the CFIL. Finally, as the trial court recognized when it entered judgment on the special verdict, the fraud damages awarded to Quillin, Inc., and Smart Space, Inc., were duplicative of the damages flowing from the violation of the CFIL.

^[9] In the proceedings below, plaintiffs relied on MacManus v. A. E. Realty Partners (1987) 195 Cal.App.3d 1106 to argue that when the plaintiff is coerced into cooperating with the antitrust defendant, the combination of the coerced plaintiff with the antitrust defendant can form the antitrust combination under Copperweld. (MacManus, at pp. 1110-1112.) However, MacManus involved a claim of an unlawful tying arrangement, and has no application to plaintiffs' claim of a conspiracy to fix retail prices.

^[10] Plaintiffs alleged they were required to buy defendants' trademarked goods and nontrademarked supplies from defendants. Additionally, plaintiffs were precluded from buying any broadcast advertising other than broadcast advertising prepared by defendants' company.

^[11] Plaintiffs apparently attempted to plead and prove a tying claim by asserting that defendants' trademark and branded product, over which defendants clearly held the dominant market power, was the relevant tying product. However, Jefferson Parish Hosp. Dist. No. 2 v. Hyde (1984) 466 U.S. 2, overruled on other grounds by Illinois Tool Works, Inc. v. Independent Ink., Inc. (2006) ___ U.S. ___, 126 S.Ct. 1281, 1284, effectively eviscerates this theory. The Jefferson Parish court explained that "every refusal to sell two products separately cannot be said to restrain competition. If each of the products may be purchased separately in a competitive market, one seller's decision to sell the two in a single package imposes no unreasonable restraint on either market, particularly if competing suppliers are free to sell either the entire package or its several parts. . . . [¶] Our cases have concluded that the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms. When such 'forcing' is present, competition on the merits in the market for the tied item is restrained and the Sherman Act is violated." (Id. at pp. 11-12.) However, the relevant market power over the tying product is not the branded product but is instead the product shorn of the trademark. (Mozart Co. v. Mercedes of North America, supra, 833 F.2d 1342, 1346 ["unlike a patent or copyright, which is designed to protect the uniqueness of the product itself, a trademark protects only the name or symbol of the product. Market power, if any, is derived from the product, not from the name or symbol as such"].) Thus, a tying claim examines whether the defendant has dominant market power over the product, not whether the defendant has dominant market power over its brand of the product.