Research v. Fresno Cty. Office of Educ.
Filed
6/20/13 Quantum Research v. Fresno Cty.
Office of Educ. CA5
NOT
TO BE PUBLISHED IN THE OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
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as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
QUANTUM
RESEARCH AND EVALUATION,
Plaintiff, Cross-defendant and Respondent,
v.
FRESNO
COUNTY OFFICE OF EDUCATION et al.,
Defendants, Cross-complainants and Appellants.
F062880
(Super. Ct. No. 09CECG02107)
APPEAL
from a judgment of the Superior Court of
County. Jeffrey Y. Hamilton, Jr.,
Judge.
McCormick,
Barstow, Sheppard, Wayte & Carruth, Marshall C. Whitney, Todd W.
Baxter and Mandy L. Jeffcoach for Defendants, Cross-complainants and
Appellants.
James
E. Toothman & Associates, James E. Toothman, Joel F. Donahoe and Elizabeth
A. Coleman for Plaintiff, Cross-defendant and Respondent.
-ooOoo-
This
is a breach of contract action in which plaintiff sued defendants for payment
under a contract pursuant to which plaintiff marketed defendants’ computerized
learning program to schools and school districts. Defendants cross-complained against
plaintiff, asserting it failed to properly account for money it received and it
sold sublicenses for the program at prices less than those called for in the
contract or a valid modification of the contract. The trial court found in favor of plaintiff
and awarded substantial damages.
Defendants appeal, contending the trial court’s interpretation of the
contract was incorrect and resulted in an unconstitutional gift of public funds
to plaintiff, substantial evidence
did not support the damage award, and any oral modifications of the pricing
schedule for sale of the sublicenses were unenforceable because the contract
required all modifications to be made in writing. We reverse the award in plaintiff’s favor on
the complaint and affirm the judgment in its favor on the cross-complaint.
PROCEDURAL BACKGROUND
Approximately
thirty years ago, defendants began using the Portable Assisted Study Sequence
(PASS) program to assist students who were the children of migrant workers to
continue their high school education and earn credits toward graduation,
despite moving from one place to another.
It began as a paper and pencil system; subsequently, Dr. Guido
Prambs, the director of the PASS program, was charged with the task of converting
the program to a computer-based system, using federal funding. The computerized system became known as Cyber
High. With the federal funding ending in
2001, defendants began looking for other sources of funding to expand the use
of the program, which they believed to be effective. Prambs met with Donald Collins, deputy
superintendent of Fresno County Office of Education (FCOE), and Dr. Donald
Gregory, director of media and library services for FCOE, who had experience in
marketing. They decided to market Cyber
High for use by nonmigrant students.
Initially,
defendants contracted with Dr. Leo Cardona, who had developed the PASS
program, to market Cyber High. Cardona
resided in Florida at that time, and contracted with Ken and Charlene Bunger to
carry out the actual work of selling the program in California. From February to August 2002, Cardona and the
Bungers attempted to market the program; they began with the pilot schools that
were already using it, but met with resistance because the schools did not want
to pay for a program they had been getting free. After several months, defendants terminated
their contract with Cardona. Defendants
then considered having Gregory, who was retiring from FCOE, undertake the
marketing of Cyber High through his company, Quantum Research and Evaluation
(plaintiff).
On
October 24, 2002, plaintiff and defendants entered into a contract in which
defendants, as licensors, authorized plaintiff, as licensee, to “[a]dvertise,
promote, market, and distribute sublicenses for the use of†the Cyber High
program. The contract required plaintiff
to “[p]ay Licensor a fee of fifty percent (50%) of all monies collected by
Licensee based on the per student per year of system use charges set forth in
the Cyber High Pricing Schedule.â€
Plaintiff contracted with Cal Media, the Bungers’ business, to assist in
marketing Cyber High.
The
contract between plaintiff and defendants provided for a three-year term, with
automatic renewal for succeeding three-year terms unless one of the parties
gave notice that it would not be renewed.
The contract renewed automatically in 2005. In 2008, however, defendants gave timely
notice that the contract would be terminated effective October 24, 2008. Subsequent to that date, defendants
contracted with Kenjo Marketing to perform marketing services for Cyber High.
This
dispute turns on the meaning of a provision within paragraph 12 of the parties’
contract which states: “In the event of termination by Licensor, Licensee will
continue to receive 50% of all payments collected as a result of its efforts
under this Agreement for a period of two years commencing from the date of
termination.â€
Plaintiff
interpreted the provision to entitle it to collect, during the two-year
posttermination period, 50 percent of all purchases made by customers it
had sold to at any time during the six-year contract term (former
customers). Its interpretation included
as customers all schools and school districts to which it had made sales, as
well as all schools within a school district to which it had sold sublicenses,
and the school districts of all schools to which it had sold sublicenses.
Defendants, on the other hand, interpreted this provision to permit plaintiff
to collect, during the two-year period, money due on purchases of sublicenses
that schools or school districts had
committed to prior to October 24, 2008, even if they had not yet completed
the paperwork or paid in full prior to that date.
By
agreement of the parties (interim agreement), plaintiff collected money
due on, and retained its 50 percent share of, purchases that were not completed until after October 24, 2008, provided
the purchaser’s intent to make the purchase was formed prior to that date and
the purchaser confirmed that intent in writing.
Plaintiff
sued defendants to recover the 50 percent compensation it contends is due
under paragraph 12 of the contract for purchases of Cyber High sublicenses that
were initiated by its former customers during the two-year period after
termination of the contract. Defendants
denied that any further compensation was due under the contract; they contended
plaintiff’s interpretation of the contract would result in an unconstitutional
gift of public funds by compensating plaintiff for sales it did not procure.
Defendants
also cross-complained against plaintiff, alleging plaintiff breached the
contract by failing to render accurate accountings and failing to timely pay
sales tax; they also alleged plaintiff interfered with defendants’ relationship
with its customers and potential customers by continuing to market the Cyber
High program and by instructing purchasers to pay plaintiff for their Cyber
High purchases. At trial, defendants
contended plaintiff changed the prices at which it sold Cyber High sublicenses,
in violation of the contractual provision setting out the prices to be charged
and prohibiting plaintiff from changing the prices without a writing signed by
the director of Cyber High or the Fresno County Superintendent of Schools.
After a
court trial, judgment was entered in favor of plaintiff on the complaint and
the cross-complaint. The trial court found that, as part of the compensation
for its marketing efforts, plaintiff was to be paid, for two years after
termination, for all sales that resulted from the work plaintiff performed
during the contract period to procure and maintain its customers. The trial court also concluded, however, that
plaintiff was required to prove a nexus between its marketing efforts and the sales
made to its former customers during the two-year period; it found plaintiff met
that burden, and awarded plaintiff damages of $738,771.22, which was
50 percent of the money collected for sales to former customers of
plaintiff’s during that period, less an amount the court found to be due to
defendants.
The trial
court rejected the claims in defendants’ cross-complaint, concluding there was
no breach of plaintiff’s obligation to charge only the prices set out in the
contract or in a written modification.
There was no interference with defendants’ contracts or business
relationships by plaintiff’s attempts to continue servicing and collecting from
its customers during the posttermination period, and there was no evidence
plaintiff failed to remit 50 percent of the money it collected to defendants. Defendants appeal, challenging the decisions
on both plaintiff’s complaint and defendants’ cross-complaint.
Interpretation of Termination Provision
Law Regarding Contract Interpretation
“Contract
interpretation presents a question of law which this court determines
independently.†(Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 472 (
effect to the mutual, expressed intention of the parties. Where the parties have reduced their
agreement to writing, their mutual intention is to be determined, whenever
possible, from the language of the writing alone. [Citations.]â€
(Id. at p. 473.) If contractual language
is clear and explicit, the plain meaning governs. (Civ. Code, § 1638; Dowling v. Farmers Ins.
Exchange (2012) 208
Cal.App.4th 685, 695.)
“Any
contract must be construed as a whole, with the various individual provisions
interpreted together so as to give effect to all, if reasonably possible or
practicable. [Citations.]†(City of Atascadero v. Merrill Lynch, Pierce,
Fenner & Smith, Inc.
(1998) 68 Cal.App.4th 445, 473.)
“We may not ‘create for the parties a contract which they did not make,
and … cannot insert in the contract language which one of the parties now
wishes were there.’ [Citation.]†(Ben-Zvi,
supra, 40 Cal.App.4th at p. 473.)
“‘Contract formation is governed by objective manifestations, not the
subjective intent of any individual involved.
[Citations.] The test is “what
the outward manifestations of consent would lead a reasonable person to
believe.†[Citation.]’ [Citation.]â€
(Allen v. Smith (2002)
94 Cal.App.4th 1270, 1277.) “‘A
contract must be interpreted to give effect to the mutual, expressed intention
of the parties. Where the parties have
reduced their agreement to writing, their mutual intention is to be determined,
whenever possible, from the language of the writing alone.’ [Citations.]â€
(Ibid.) “A contract may be explained by reference to
the circumstances under which it was made, and the matter to which it
relates.†(Civ. Code, § 1647.)
Paragraph 12 of Contract
The contract recited that it
was an agreement between plaintiff and the Fresno County Superintendent of
Schools; it was signed by Gregory, on behalf of plaintiff, and by
Dr. Peter G. Mehas, Fresno County Superintendent of Schools. According to Gregory, he negotiated the
language of the contract with Deborah Garabedian, an in-house attorney for
FCOE, with input from Collins and Prambs.
In a fax message to Prambs dated September 15, 2002, Gregory
indicated that language making “‘customer
lists and tendered marketing opportunities involving the promotion of the Cyber
High program’†the property of the licensor was unacceptable. It would be acceptable with the addition of
“protective language … such as ‘the contract will automatically be renewed as
long as a minimum of $50,000 in sales is achieved in each contract year and
that should termination occur, any monies received thereafter from clients
established by [plaintiff] would continue to be paid to [plaintiff] at the same
rate as established in the contract for a period of three years as
“residuals.â€â€™â€ Gregory was concerned
plaintiff would invest a great deal and establish a client base, then someone
would take the client base and get the benefit if it.
Gregory
testified that language in response to his fax message was supposed to be added
to the contract, but when he went to Collins’s office to sign the contract,
that provision was not in it and he refused to sign. The contract went back to the legal
department and language was added to paragraph 12; he then signed the
contract. Gregory also testified that,
at some point before he was presented with the draft of the contract that he
refused to sign, he told Garabedian he wanted a provision for two years of
residuals if the contract was terminated at the end of the term; he explained
he wanted plaintiff to continue to receive its percentage of the fees for two
years from the client base it had established.
The
disputed language of paragraph 12 of the contract provides: “In the event of termination by Licensor,
Licensee will continue to receive 50% of all payments collected as a result of
its efforts under this Agreement for a period of two years commencing from the
date of termination.†Paragraph 12 did
not adopt the language suggested by Gregory in his September 15, 2002, fax
message. It did not provide for a
guaranteed renewal with minimum purchases or provide for a three-year residual
period; it did not even mention “residuals.â€
The contract provision did not entitle plaintiff to continue to be paid
its share of any money received from customers established by plaintiff or from
plaintiff’s client base. By the plain
meaning of the language used, the provision entitled plaintiff only to a percentage
of the payments from sales that resulted from plaintiff’s “efforts under this
Agreement.â€
The
contract required plaintiff to “[a]dvertise, promote, market, and distribute
sublicenses for the use of [the Cyber High] program†and to “[p]rovide any and
all support or technical assistance to System End Users.†Plaintiff was granted a nonexclusive “right
to distribute and market use of said system to sub-licensees.†Plaintiff was “responsible for the collection
of fees generated under this Agreement,†and was required to pay defendants
50 percent of the fees collected immediately upon receipt. Defendants retained all proprietary rights to
the system and plaintiff agreed “that customer lists and tendered marketing
opportunities involving the promotion of the Cyber High program are the
property of Licensor and will be provided to Licensor by Licensee upon
termination of this Agreement.â€
Thus,
under the contract, plaintiff was to make sales of sublicenses for the use of
the Cyber High program to schools or school districts, to collect the
appropriate fees, and to pay defendants 50 percent of the fees
collected. Plaintiff did not contract to
develop customers, establish a client list, or bring in accounts. Construing the contract as a whole,
plaintiff’s “efforts under this Agreement†were its efforts to sell sublicenses
to schools and school districts. The
fact that plaintiff saw development of long-term customers as an effective
means of generating further sales did not change the nature of the services plaintiff
contracted to perform in order to obtain its fees.
“Procuring Cause†of Individual Sales
The party claiming a commission is required to prove
that its efforts were the “procuring†or “effective†cause of the sale. (Brea
v. McGlashan (1934) 3 Cal.App.2d 454, 465 (Brea); Chamberlain v. Abeles
(1948) 88 Cal.App.2d 291, 295 (Chamberlain);
Willson v. Turner Resilient Floors, Inc.
(1949) 89 Cal.App.2d 589, 595 (Willson);
Wood v. Hutchinson Coal Co. (4th
Cir. 1949) 176 F.2d 682, 684 (Wood).) The parties agree with this legal
proposition, but disagree on its application to this case.
Plaintiff contends that paragraph 12 is a residuals
clause such that plaintiff is entitled to commissions on all sales made to its
former customers within two years after the termination date. Plaintiff argues that it procured such sales because it procured
the customer during the contract period.
Defendants contend that paragraph 12 requires
plaintiff to prove that it procured each individual sale. It is not enough that the sale was made by a
former customer of plaintiff. It must be
established that plaintiff was the procuring
or effective cause of each
posttermination sale for which it seeks a commission.
Case law distinguishes between an agent’s efforts to
establish a client base and efforts to make an individual sale.
In
v. Multaplex, Inc. (1982)
129 Cal.App.3d 410, at the defendant’s request, the plaintiff solicited and
obtained certain business accounts for the defendant, and the defendant agreed
to pay him a five percent commission on those accounts. The plaintiff had no continuing duty to
service the accounts; his performance was complete when he obtained the
accounts. (Id. at pp. 412, 414.)
After two years, the defendant gave notice that it would terminate the
commission payments, although the customers continued to do business with the
defendant. Because there was no time
limit on the commission payments in the contract, the court construed the
contract to require the payments to continue until the termination of the
defendant’s sales to the specified accounts.
(Id. at p. 415.)
In cases involving payment of commissions or fees
for sales, the party claiming the
commission is generally required to prove that the party’s efforts were the
procuring cause of the sales. In
defendant to procure radio advertising contracts for the defendant’s radio
station. After the plaintiff spent four
months soliciting such sales, she had a commitment from two companies to
purchase advertising; before she obtained signed contracts, however, the
defendant sent other agents who obtained the contracts. The plaintiff sought to recover the
commissions she should have received on the contracts she procured. The court concluded “‘procure’†did not
require formal consummation. (
prevail upon, induce or persuade a person to do something. In this sense did the trial court interpret
it, when it found in its findings, that the two contracts upon which it allowed
a commission were secured ‘as a result of plaintiff’s efforts.’ This was a correct interpretation of the
contract.†(Ibid.) Accordingly, the
plaintiff was entitled to her commissions even though the defendant prevented
her from completing the sales through signed contracts. (Id.
at p. 466.)
In Chamberlain
the contract between the parties required the plaintiff to use his time,
efforts and business contacts to procure orders from a specified
company. In order to recover his
commission, the plaintiff was required to prove he was the “‘effective’†or
“‘procuring’†cause of the sales. (
his efforts have been sufficiently important in achieving a result for the
accomplishment of which the principal has promised to pay him so that it is
just that the principal should pay the promised compensation to him.’ [Citations.]â€
(Id. at pp. 295-296,
quoting Rest., Agency, § 448, com. a.)
“‘In its broadest sense, the word [procure] means to prevail upon,
induce or persuade a person to do something.…
The originating cause, which ultimately led to the conclusion of the
transaction, is held to be the procuring cause.’†(Chamberlain,
supra, at p. 296.) The
plaintiff met his burden by producing evidence that he visited the potential
buyer and explained the product he was selling; when told the buyer could not
use the product, he worked with the buyer and an engineer to design a product
that the buyer could use, and that the company he worked for could manufacture
and sell to it. The court concluded this
was ample evidence that the plaintiff “‘set in motion a series of events which,
without break in their continuity’ brought about the sales in question.†(Id.
at p. 299.)
In Willson the appellate court applied the substantial evidence
standard of review and affirmed a judgment in favor of the
plaintiff-agent. There was substantial
evidence that
plaintiff was the procuring cause of the sales on which the jury allowed him a
percentage even though he did not actually submit the bid that resulted in
consummation of the transaction. He had
solicited and obtained permission to submit the bid and was active in the
negotiations prefatory to the bid. Although
the evidence was in conflict, there was sufficient evidence from which the jury
could conclude that plaintiff was the inducing cause of the sale. (Willson,
supra, 89 Cal.App.2d at p. 595.)
In
with the defendant, the owner of coal mines, to receive a commission on coal
sold by him to customers and shipped from the defendant’s mines. The defendant had its own sales force, but
wished to bring in additional business.
(Wood, supra, 176 F.2d at p. 683.)
Through the plaintiff’s efforts, Milwaukee Solvay Company signed a
five-year contract to buy coal from the defendant. When the contract expired, the plaintiff did
not immediately seek to renew it. The
defendant, however, directly negotiated a new contract with Milwaukee. The plaintiff sued, claiming he was due a
commission on all coal sold under the new contract. (Id.
at p. 684.)
The court upheld the judgment in favor of the
defendant.
“It is conceded that Wood had
nothing to do with the negotiation or execution of the second five year
contract between Hutchinson and Milwaukee; he did not make the sale and did not
accomplish the specific result upon which the payment of the commission was
conditioned. An attempt is made to meet
the requirements of Section 448 [of the Restatement of Agency] by
advancing the theory that Milwaukee was Wood’s customer and hence Wood was
entitled to commissions on all Milwaukee’s purchases. This position, however, cannot be maintained. For obtaining the customer and making the
first sale Wood was entitled to and was paid the agreed commissions, but that
situation did not continue indefinitely.
It is well established that the successful negotiation of a contract by
an agent does not give him a right to commissions on a renewal, which he does
not secure, in the absence of an express contract to that effect. [Citations.]
The contract did not provide that commissions would be paid on all
purchases made by Milwaukee or any other particular customer as it sometimes
provided in a broker’s contract, but only on such sales as the agent would
make. He did not actually make the sale
in question.â€
title="">[2] (Wood,
supra, 176 F.2d at p. 684.)
Thus, an agreement providing that one party will
bring in accounts or customers, and the other will compensate him with
commissions on all sales on that account or by that customer, must be
distinguished from an agreement in which one party is to be paid a commission
for making sales of the other party’s product.
Under the former, once the customer is established, the commission is
paid on all sales to that customer; under the latter, the party earns a
commission only on the sales he procures through his efforts.
D.
Statement of
Decision
The trial court awarded plaintiff 50 percent
commissions on all sales proceeds collected from former customers of plaintiff
during the two-year period after termination.
The statement of decision’s rationale for this award is not clear.
On the
one hand the trial court acknowledged that, “[u]nder the ‘procuring cause’
analysis, it is the [plaintiff’s] burden to produce evidence showing that he
was the procuring cause of the sale.â€
Consistent with that rule, it concluded plaintiff bore the burden of
proving “each sale after the close of the contract, for the ensuing two-years,
was entered into ‘as a result of its efforts.’â€
The trial court muddied the waters, however, by seeming to agree with
plaintiff that each completed sale was not a separate transaction that had to
result from plaintiff’s efforts in order to entitle plaintiff to
compensation. Rather, to compensate it
for investing “substantial time, effort and expense in marketing an unknown
program … the parties agreed to pay [plaintiff] for two years after the
contract’s final end date, if it was the result of work they had performed to
procure the sales in the first instance.â€
The trial court stated the contract “contemplated, and was compensating
for, the marketing efforts and risk of the [plaintiff], as a result of the work
it did to procure and maintain the client.â€
Thus, it
appears that the trial court adopted plaintiff’s position that
paragraph 12 was a “residuals†clause, entitling plaintiff to earn
commissions on all posttermination proceeds from sales to former customers of
plaintiff.
Plain Meaning of Paragraph 12 and Rejection of Each Party’s
Interpretation
In our view, the parties have
each advocated interpretations of paragraph 12 that stretch the contract’s
words beyond their plain meaning.
Plaintiff
insists that paragraph 12 is a “residuals†clause, whereby it is owed
commissions on any monies received by FCOE between October 24, 2008 and
October 24, 2010, for sales of Cyber High to any former customer of plaintiff.
Thus, plaintiff’s entitlement to the commissions does not depend upon,
nor does plaintiff need to prove, a particular sale “resulted from its
efforts,†only that the sale was to a former
customer of plaintiff.
The
wording of paragraph 12 is not reasonably susceptible to plaintiff’s
interpretation. The fallacy of this
interpretation is best illustrated by a hypothetical. Assume that the procuring
cause of a particular posttermination sale to a former client of plaintiff
resulted from the efforts of FCOE or Kenjo Marketing. According to plaintiff, it would be still be
owed a commission, but that would directly contradict the “efforts†language of
paragraph 12 because, in this hypothetical, the sale resulted from the efforts
of someone else. (Casa Herrera, Inc. v. Beydoun
(2004) 32 Cal.4th 336, 344 (Herrera)
[parol evidence rule
bars consideration of extrinsic evidence of prior or contemporaneous
negotiations or agreements at variance with the written agreement].)
Plaintiff
fails to recognize the difference between plaintiff’s contractual entitlement
to commissions during the six-year contract period and the two-year
posttermination period. During the
six-year period, plaintiff received commissions on all collected sales proceeds
regardless of whose efforts procured the sale.
For example, if a potential client placed an order for Cyber High
without any input from plaintiff whatsoever, so long as plaintiff collected the
money on the sale, it received a 50 percent commission. To illustrate, assume plaintiff sells Cyber
High to School A in year one and then without any further marketing efforts
sells Cyber High to School A in year six.
Since plaintiff collected the money, it gets paid for the sale in year
six even though the product sold itself or some other person or entity played a
significant role in making the sale.
This is so because the contract entitled plaintiff to commissions on all
monies it collected during the six-year period, regardless of whether its
efforts were the procuring cause of the sale.
It did not have to prove that its efforts were the procuring cause in
order to earn a commission during the six-year period. Its only efforts may have been to take the
order and collect the money. This
commission arrangement is to be distinguished from Cyber High sales during the
two-year posttermination period. For
monies FCOE collected after October 24,
2008, plaintiff’s right to commissions depended not on whether plaintiff
collected the sales money or whether the sale was made to a former customer of
plaintiff, but on whether plaintiff could prove that those monies resulted from
its efforts, i.e., that plaintiff was the “procuring cause.†(Brea,
supra, 3 Cal.App.2d at p. 465;
Cal.App.2d at p. 595; Wood,
FCOE
insists that paragraph 12 only entitles plaintiff to collect commissions on
sales that the client committed to
before FCOE terminated plaintiff as its selling agent.
Paragraph
12 is not reasonably susceptible to FCOE’s interpretation. The fallacy of this interpretation is
likewise best illustrated by a hypothetical.
Assume plaintiff proved that a posttermination sale was obtained as a
result of its efforts during the six-year contract period even though that
customer had not committed to the
sale as of October 24, 2008.
According to FCOE, plaintiff would not be entitled to a commission, but
that would directly contradict the “efforts†language of paragraph 12 because,
in this hypothetical, the sale was shown to have resulted from plaintiff’s
efforts. (Casa Herrera,
FCOE’s
argument that paragraph 12 only refers to sales that customers
of paragraph 12, it renders the two-year period referenced in paragraph 12
illusory. It is unlikely that a client
who committed to buy Cyber High in 2008 would take up to two years to pay. There is no evidence in this record to
indicate that the two-year period was selected because of a concern that a customer
who committed to purchasing Cyber High in October 2008 might take two years to
pay for the product. The only reasonable
interpretation of paragraph 12 is that plaintiff would be entitled to a
commission on any sale made during the two-year posttermination period so long
as the sale resulted from efforts it made during the six-year contract period.
During
the posttermination period, plaintiff was no longer authorized to market or
sell Cyber High. Under paragraph 12,
plaintiff doesn’t earn commissions on money it collects; rather, it earns
commissions on money FCOE received between October 24, 2008 and
October 24, 2010, which resulted from plaintiff’s efforts. And those efforts, if any, necessarily
occurred on or before October 24, 2008.
So, the parties contemplated that plaintiff’s pretermination efforts
could result in sales proceeds received up to two years after the
termination. There is nothing in the
language of paragraph 12 or in this evidentiary record that precludes plaintiff
from trying to prove that its efforts (during their six-year relationship with
FCOE) resulted in posttermination sales and collections.
Paragraph
12 means what it says. In order for
plaintiff to be entitled to receive a commission on sale proceeds received
between October 24, 2008 and October 24, 2010, it had to prove that the
particular sale resulted from its efforts.
This did not require, as FCOE urges, that plaintiff prove that the
client had committed to the
particular sale before termination. We
also reject plaintiff’s argument that mere proof of a sale to a former customer
entitled plaintiff to a commission. Just
because a former client made a later purchase does not necessarily prove that
the later purchase was a result of plaintiff’s efforts. The word “efforts†is the linchpin of
paragraph 12. The words “committed,â€
“residuals†and “former customers†appear nowhere in this paragraph. In order to earn a commission, plaintiff had
to prove that a particular sale resulted from its efforts, that is, was the
procuring cause. Consequently, we will
uphold the judgment only to the extent substantial evidence supports the trial
court’s conclusion plaintiff was the procuring cause of each of the sales for
which compensation was allowed.
Substantial Evidence Does Not Support the Trial Court’s
Damage Award
We review the record to determine if substantial
evidence supports the trial court’s
findings
of fact. “‘[T]he question of whether or
not the sale is primarily the result of the broker’s efforts is one of fact,
and the trial court’s conclusions thereon will not be disturbed on appeal if
there be substantial evidence to sustain them.
[Citation.]’ [Citation.]†(Jones
v. Foster (1931) 116 Cal.App. 102, 108.) We must of
course indulge every reasonable inference from the evidence in favor of
plaintiff. (SFPP v. Burlington Northern
& Santa Fe Ry. Co.
(2004) 121 Cal.App.4th 452, 461-462.)
The
trial court concluded that:
“[Plaintiff] provided adequate
proof through testimony and documentation (see
trial exhibits: 8, 9, 13, 20, 119, 153, 156 and 158 for a sampling of school
districts showing ‘intent’ to purchase through [plaintiff]) that each and every
school for which they allege purchased ‘as a result of its efforts’ after the
conclusion of the contract, did just that.
The Court is convinced, and does so find that, but for [plaintiff’s]
efforts in the sales at issue, the client and subsequent sale(s) would not
likely have been procured. As a result,
[plaintiff] is entitled to its 50% share of the sales made and money collected
post October 24, 2008 through October 24, 2010 or $774,450.00, minus any
accounting discrepancies.â€
The trial court determined that
plaintiff met its burden because marketing was solely the responsibility of
plaintiff, plaintiff made substantial, successful efforts to market the
program, and defendants did not contribute to those marketing efforts. It also found support for its damage award in
the letters of intent some schools or districts provided to plaintiff, which
demonstrated that certain sales, completed after termination of plaintiff’s
contract, entitled plaintiff to compensation because the purchaser committed to
the purchase prior to termination of the contract.
We find that substantial evidence does not
support the trial court’s conclusion that plaintiff met its burden of demonstrating
that it was entitled to compensation for any of the posttermination sales.
First, the so-called letters of
intent did not pertain to any sales for which plaintiff sought damages. Pursuant to the interim agreement, defendants
paid plaintiff commissions on those posttermination sales where it was
demonstrated in writing that a customer had committed to the purchase before
October 24, 2008. The eight exhibits
cited by the trial court in support of the damage award contained seven letters
of intent concerning purchases made after October 24, 2008,
under the interim agreement. The intent letters in the record came from
only nine of the 74 schools or school districts for whose posttermination sales
plaintiff sought compensation. None of
the exhibits cited by the trial court constitutes evidence that any of the
posttermination sales for which plaintiff sought damages were procured by its
efforts.
Second, plaintiff never introduced any documentary
evidence to prove that it was the procuring cause of any of the posttermination
sales for which it sought damages. Gregory, owner of Quantum, was not even asked about each of
the sales represented on exhibit Nos. 33 and 37. He offered no testimony about plaintiff’s efforts
in procuring each of those sales. In
fact, he testified that plaintiff did not procure any of those individual
sales. He was asked on
cross-examination, “What’s before the court today from your case is the claim
you have for monies FCOE received after October 24 that were not specific
contracts that you procured, correct?â€
His answer was “Correct.†He
contended that paragraph 12 only required plaintiff to prove that it
sales. This proof would have been sufficient
under a residuals clause, but paragraph 12, as we have explained, is not such a
clause.
We have
reviewed all of the trial exhibits and have found none that satisfy plaintiff’s
burden under paragraph 12 as to any particular sale. Plaintiff introduced written statements from
former customers to qualify for commissions under the interim agreement, but
failed to introduce evidence from former customers to prove that any other
posttermination sales resulted from its efforts. It never deviated from its contention that
paragraph 12 was a residuals clause that entitled it to commissions on all
sales to former customers during the two-year posttermination period.
The
statement of decision asserts that plaintiff provided adequate proof that
posttermination sales resulted from its efforts through “testimony.†A review of the trial testimony reveals the
following: Plaintiff spent six years
developing a customer base for Cyber High.
It engaged in various activities to market, demonstrate and sell the
product. It had repeat customers. Many customers expressed their high
satisfaction with the product and with plaintiff. Some schools that bought Cyber High
recommended it to other schools within its school district and some districts
with whom plaintiff worked recommended the program to schools within the
district. FCOE did not market the
program during their six-year relationship with plaintiff. FCOE also did not market the program during
the two years after termination of the relationship. On November 1, 2008, FCOE contracted
with Kenjo Marketing to market and sell the program. During the two-year posttermination period,
product sales were either processed by FCOE (in-house sales) or by Kenjo. Both handled sales to former customers of
plaintiff.
No specific
testimony is mentioned in support of the court’s conclusion that all
posttermination sales resulted from plaintiff’s efforts other than generalized
references to testimony about the marketing and service activities of plaintiff
during the contract period. As
previously mentioned, plaintiff did not introduce any testimony to prove that
it was the procuring cause of any of the posttermination sales for which it
sought damages. Testimony favorable to
plaintiff was elicited from representatives of the Oakland and Santa Rosa
school districts, but plaintiff did not claim damages based on sales to either
district and neither representative testified that its district purchased Cyber
High during the two-year posttermination period because of plaintiff’s efforts. In fact, plaintiff offered no evidence from
any of the posttermination sales customers as to why they bought Cyber High or
whether they credited plaintiff’s efforts for their purchase.
It was plaintiff’s
burden to prove that each sale after
October 24, 2008, was made as a result of its efforts. Where is the proof as to each sale? Plaintiff’s
answer is to paint with a broad brush:
since it created a bank of satisfied customers during its six-year
relationship with FCOE, it is reasonable to assume that posttermination orders
be credited to those efforts. But that
doesn’t satisfy its burden of proving that each
sale resulted from its efforts.
Plaintiff’s position is tantamount to a burden-shifting argument: by proving it established a satisfied customer
base, the burden shifts to defendant to prove that the posttermination sales
did not result from plaintiff’s efforts.
But it is plaintiff’s burden to prove that each sale resulted
from its efforts, not defendants’ burden to prove that each sale did not result
from plaintiff’s efforts. By allowing plaintiff to meet its burden of proof in this
way, the trial court treated paragraph 12 as a residuals clause, which we have
already determined it is not.
Adopting
the terminology used in the case law, it was plaintiff’s burden to prove that
it was the procuring cause for each sale after October 24, 2008. On this record, it is pure speculation to
conclude that these sales resulted from plaintiff’s efforts. There is no evidence from the individual
customers as to why they made a particular purchase. Defendants argue that there are other
possible explanations for why these sales occurred other than plaintiff’s
efforts. One is that the product sold
itself, that is, former customers placed new orders because of the product’s
proven performance, rather than because of plaintiff’s past marketing or other
activities. Another explanation is that
some of these sales resulted from Kenjo’s efforts. Without receiving evidence from the
individual customer as to why it made a particular purchase, it is speculative
to say who or what the procuring cause was.
(
v. Perez (1992) 2 Cal.4th
1117, 1133 [speculative evidence does not constitute substantial evidence].)
In an attempt to show the amount it
was entitled to recover for posttermination sales of sublicenses, plaintiff
presented two documents (exhibit Nos. 33 and 37), which were compilations
of information from the parties’ records prepared by one of plaintiff’s
attorneys. The attorney took plaintiff’s
master list of all the schools and districts to which it had sold sublicenses
during the contract term (exhibit Nos. 27 and 28), and compared it with
defendants’ list of posttermination sales (exhibit No. 29). Exhibit Nos. 33 and 37 represent the
overlap; every posttermination sale made to a school or district to which
plaintiff made a sale during the contract term, every sale made to a district
in which plaintiff made a sale to any school, and every sale made to a school
within a district to which plaintiff ever made a sale during the contract term,
is included in exhibit Nos. 33 and 37.
After termination of plaintiff’s contract, customers
were informed that plaintiff was no longer the official seller of the Cyber
High program and further purchases were made directly from defendants. Kenjo Marketing entered into its marketing
contract with defendants on November 1, 2008. The sales listed in exhibit Nos. 33 and
37 included sales defendants attributed to Kenjo Marketing, for which Kenjo
Marketing was compensated under its marketing contract with defendants. Plaintiff claimed it was entitled to
50 percent of the proceeds of all of the sales reflected in exhibit
Nos. 33 and 37.
The trial court awarded plaintiff the total amount
shown by the exhibits, less approximately $35,000 that it determined defendants
were entitled to because of discrepancies in plaintiff’s records. It found a nexus between the posttermination
sales and plaintiff’s efforts; it stated that, “but for [plaintiff’s] efforts
in the sales at issue, the client and subsequent sale(s) would not likely have
been procured.†A procuring or effective
cause, however, is one that persuades or induces a person to do something. (Brea,
supra, 3 Cal.App.2d at p. 465.)
When there are two potential causes of the sale, the court must
determine which one was the predominating cause.
“Where
several agencies have been active in bringing about a sale, it may happen that
each has contributed something without which the result would not have
occurred. One may have found a buyer who
would otherwise have been overlooked, and yet that buyer may actually make his
bargain through a different instrumentality.
In such case, the crucial question is, which was the predominating
efficient cause? … [¶] To constitute
himself … the predominating effective cause, it is not enough that the broker
contributes indirectly or incidentally to the sale by imparting information
which tends to arouse interest. He must
set in motion a chain of events, which, without break in their continuity, cause
the buyer and seller to come to terms as the proximate result of his peculiar
activities.†(Sessions, supra,
57 Cal.App. at p. 17.)
Thus,
it is incorrect to apply a “but for†test, for there can be several causes that
satisfy that definition, including the product itself, FCOE and, as to some
sales, Kenjo Marketing. Instead, case
law advises that it must be determined who or what was the predominating,
effective or procuring cause. And it
necessarily contemplates that there is only one such cause.
As to the
in-house sales, we have found no direct evidence from any former customer of
plaintiff that any of the posttermination sales (excluding those covered by the
interim agreement) resulted from plaintiff’s efforts. There was no testimony by any former customer
of plaintiff that it was induced to purchase and pay for Cyber High between
October 24, 2008 and October 24, 2010, due to plaintiff’s marketing or other
related activities.
The trial
judge, citing the aforementioned exhibits, may have reasoned that because
certain schools submitted letters confirming they intended to purchase Cyber
High due to plaintiff’s efforts prior to October 24, 2008, then all of the
posttermination sales to former customers were due to plaintiff’s efforts. That reasoning is grounded in
speculation. It does not follow that
because Schools A, B and C made purchases after October 24, 2008, and confirmed
in writing that plaintiff’s efforts played a significant role in those
purchases that later purchases made by Schools D, E and F were also due to
plaintiff’s efforts. Letters submitted
by certain schools confirming plaintiff’s role in procuring their purchases of
Cyber High are not probative as to who or what was the procuring cause for
other purchases made by other schools or districts.
The only
other evidence that may bear on the question of what or who was the procuring
cause of these posttermination sales is the fact that FCOE itself did not
market this product during the two-year period.
But that only proves that the in-house sales did not result from FCOE’s
marketing activities. It doesn’t prove
that those sales resulted from plaintiff’s efforts. Again, without any evidence from the individual
customers as to why they made each individual purchase, it is speculative to
say that it must have been plaintiff’s efforts, rather than the product itself,
a recommendation from someone else, or other reasons that motivated these
individual customers to make each of these posttermination purchases.
The
statement of decision is also flawed because it makes no distinction for sales
made by Kenjo Marketing. There was
evidence that, after termination of plaintiff’s contract, Kenjo actively
marketed the program to schools throughout the state. Plaintiff presented no evidence that schools
that purchased from Kenjo Marketing did so as a result of plaintiff’s efforts,
rather than the more immediate efforts of Kenjo Marketing. The
statement of decision did not discuss the respective sales efforts of the two
marketers in procuring the particular sales that were attributed to Kenjo
Marketing in exhibit Nos. 33 and 37.
The trial court seemed to assume that, because plaintiff was the first
marketer, all of the posttermination sales should be attributed to plaintiff
without regard to any marketing efforts by Kenjo Marketing. The trial court made this assumption despite
evidence that some of the purchases in exhibit Nos. 33 and 37 were made by
entities whose only purchases from plaintiff had occurred years earlier. For example, exhibit Nos. 33 and 37
reflected a purchase made by Valley Center – Pauma through Kenjo Marketing in
December 2009; plaintiff’s records reflected purchases by Valley Center – Pauma
in 2002 and 2003. Plaintiff presented no
evidence demonstrating that its efforts six years earlier “set in motion a
chain of events, which, without break in their continuity,†(Sessions,
supra, 57 Cal.App. at p. 17) caused Valley Center –
Pauma to make its December 2009 purchase, despite the subsequent efforts of
Kenjo Marketing.
Plaintiff
offered no evidence that it was the procuring cause of sales made by Kenjo
Marketing unless one adopts
plaintiff’s “residuals†interpretation of paragraph 12, that is, plaintiff is
entitled to a commission on all posttermination sales to its former customers. Substantial evidence does not support the
conclusion that plaintiff was the predominating effective cause of the
posttermination sales attributed to Kenjo Marketing.
The trial court effectively converted plaintiff’s
marketing contract into a contract that compensated plaintiff for obtaining
customers or accounts rather than sales.
Or, it assumed that because
plaintiff made efforts to market the program during its contract term and those
efforts resulted in orders from particular customers during that term,
subsequent orders by the same customers must also have been the result of those
efforts, but assumptions do not constitute proof that individual sales were in
fact the result of plaintiff’s efforts.
Neither this court nor the trial court can rewrite the parties’
contract. (Walnut Creek Pipe Distributors, Inc. v. Gates Rubber Co. (1964) 228
Cal.App.2d 810, 815.) Under the
contract, plaintiff can recover only for sales procured through its
efforts. Substantial evidence does not
support the trial court’s determination that sublicenses purchased from Kenjo
Marketing after termination of plaintiff’s marketing contract were procured
through plaintiff’s efforts. Therefore,
plaintiff’s damage award cannot stand.
II. Admissibility of Exhibit Nos. 33 and 37
Defendants contend exhibit
Nos. 33 and 37 were improperly admitted as compilations of information
from business records. They assert the
exhibits were inadmissible because they were prepared by plaintiff’s attorney
rather than by plaintiff through its personnel, and only plaintiff’s attorney
testified to their preparation. We find
no error in their admission, but regard this claim as moot in light of our
reversal of plaintiff’s damage award.
III. Cross-complaint for Unauthorized Changes
in Pricing
Defendants
contend the trial court erred in denying them damages on their claim that
plaintiff sold Cyber High courses at prices other than those set forth in the
contract, without obtaining a written agreement, signed by defendants, to
modify the price list. They contend the
contract required a signed writing and, where a public entity’s contract
includes such a requirement, the contract cannot be modified orally. They base their argument on
(2007) 155 Cal.App.4th 104 (Katsura)
and P&D Consultants, Inc. v. City of
Carlsbad (2010) 190 Cal.App.4th 1332 (P&D).
Civil Code section 1698 provides that a written
contract may be modified in writing or orally if the oral agreement is executed
by the parties. In some circumstances, a
contract with a public entity may not be modified orally.
In Reams v.
Cooley (1915) 171 Cal. 150 (Reams), the plaintiff entered into a contract with a school to
perform certain construction work.
Before it was completed, the board of trustees arranged to have the
plaintiff perform additional work. The
school superintendent refused to approve payment for the additional work
because it was not performed under a contract awarded as a result of
competitive bidding. (
awarded through the competitive bidding process. Therefore, the contract was void “because of
irregularities committed which go to the jurisdiction of the high school
board.†(Id. at p. 152.) The
court also rejected a quantum meruit claim.
“Undoubtedly,
a school board, like a municipal corporation, may, under some circumstances, be
held liable upon an implied contract for benefits received by it, but this rule
of implied liability is applied only in those cases where the board or
municipality is given the general power to contract .… [T]he decided weight of authority is to the
effect that when by statute the power of the board or municipality to make a
contract is limited to a certain prescribed method of doing so and any other
method of doing it is expressly or impliedly prohibited, no implied liability
can arise for benefits received under a contract made in violation of the
particularly prescribed statutory mode.
Under such circumstances the express contract attempted to be made is
not invalid merely by reason of some irregularity or some invalidity in the
exercise of a general power to contract, but the contract is void because the
statute prescribes the only method in which a valid contract can be made,
and the adoption of the prescribed mode is a jurisdictional prerequisite to the
exercise of the power to contract at all and can be exercised in no other
manner so as to incur any liability on the part of the municipality.
prescribes the only mode by which the power to contract shall be exercised the mode
is the measure of the power. A
contract made otherwise than as so prescribed is not binding or obligatory as a
contract and the doctrine of implied liability has no application in such
cases. [Citations.]†(Reams,
supra, 171 Cal. at
pp. 153-154.)
The court reached a similar result in
Hawthorne (1997) 56 Cal.App.4th 1231. The plaintiff sued the city for breach of a
lease. The city contended there was no
enforceable lease because the mayor did not sign one. By statute, in a general law city like the
defendant, a lease of city-owned property was required to be approved by the
city council and, unless the city council provided otherwise by ordinance, it
was required to be signed by the mayor.
(Id. at p. 1236.) The city council had not provided otherwise,
so the lease was required to be signed by the mayor. (Ibid.) Citing Reams,
supra, 171 Cal. 150, the court
distinguished between a city contracting pursuant to a general power to
contract and one contracting pursuant to a statute that imposes limits on the
city’s power to make certain contracts to a certain prescribed method. (South
Bay Senior Housing Corp. v. City of Hawthorne, supra, at p. 1235.)
Because the city’s power to contract was governed by statutes that
prescribed the method to be used in contracting, the contract would be void if
it did not comply with that method, “‘“the only method in which a valid
contract [could] be made.â€â€™â€ (
The adoption of the prescribed mode was a jurisdictional prerequisite to
the exercise of the power to contract at all.
Consequently, the contract was not enforceable unless it was signed by
the mayor. (Id. at pp. 1235-1236.)
In Katsura,
a chartered city entered into a written contract with a firm of consulting
engineers. The contract required
modifications to be made in writing. The
city’s charter required contracts to be in writing and approved by specified
city officials; it allowed the city council to authorize the city manager to
make certain types of contracts with or without a writing. (Katsura,
supra, 155 Cal.App.4th at p. 108.)
The city manager had delegated his authority to sign contracts to the
public works director, who signed the contract with the plaintiff. The plaintiff sought payment for extra work,
which was requested by an associate engineer employed by the city and an
outside consultant hired by the city as project manager. (Ibid.) The plaintiff sued when the city refused to
pay because he failed to obtain a contract modification. (Id.
at p. 107.)
“‘[A] charter city may not act in conflict with its
charter. [Citations.] Any act that is violative of or not in
compliance with the charter is void.’
[Citation.] … ‘Certain general
principles have become well established with respect to municipal
contracts .… It is … settled that
charter, is the measure of the power to contract; and a contract made in
disregard of the prescribed mode is unenforceable.’ [Citation.]â€
(Katsura, supra, 155
Cal.App.4th at pp. 108-109.)
The city charter did not authorize execution of oral
contracts by city employees who did not have the requisite authority. (Katsura,
supra, 155 Cal.App.4th at p. 109.)
“The alleged oral statements by the associate city engineer and project
manager are insufficient to bind the City. ‘“No government, whether state or local,
is bound to any extent by an officer’s acts in excess of his …
authority.â€â€™ [Citations.]†(Ibid.) A person dealing with a public officer is
presumed to know the extent of the officer’s powers to bind the public agency;
“‘“any act of an officer to be valid must find express authority in the law or
be necessarily incidental to a power expressly granted.â€â€™ [Citation.]â€
(Ibid.) The court concluded that, regardless of the
plaintiff’s knowledge or lack of knowledge of the extent of the individuals’
authority, the request for extra work by the associate city engineer and
project manager was neither a modification of the contract nor a basis for
recovery on an implied-in-law or quasi-contract theory. (Id.
at pp. 109-110.)
In these cases, the court recognized that, where a
city charter or statute establishes the only method by which the public entity
may enter into a valid contract, a contract purportedly made by the public
entity in some other manner is void.
Where, however, there is no statute or charter prescribing the method by
which the public entity may create a contract, general contract rules apply.
In P&D,
broad terms: “Unlike private contracts,
public contracts requiring written change orders cannot be modified orally or
through the parties’ conduct.†(
p. 1335.) The plaintiff sued the
city for breach of a civil engineering contract, seeking payment for extra
work; the city contended the plaintiff was not entitled to recover in the
absence of a written change order. The
contract prohibited modification without a written agreement signed by both
parties. The parties agreed in writing
to five change orders. The plaintiff
asked for a further change order to cover other work, and there was disputed
evidence regarding whether the project manager orally agreed to “‘take care of
it.’†(Id. at p. 1338.)
After summarizing Katsura, the court noted that the plaintiff in Katsura was trying to enforce an oral modification of a
contract. It extended the reach of that
decision to modifications through the parties’ conduct, concluding that
modification through conduct.†(
court did not, however, adequately discuss or apply that reasoning. It did not discuss whether there was any
statutory or charter provision prescribing the only method by which the city
could enter into or modify contracts.
Nor did it discuss whether the project manager, who allegedly made the
oral modification agreement, had the requisite authority to bind the city
through such an agreement. Consequently,
we are not persuaded that the rule is as broad as described in
The contract in this case was not awarded after
public bidding. We have been cited to no
statute that prescribes the acceptable method or methods for entering into a
valid contract of the sort in issue in this case. We have not been cited to any statute that
requires the modification of such a contract to be made in writing. Although the contract itself required that
any variance in the pricing schedule be approved in writing by Prambs or the
superintendent of schools, under general contract law, such a contract could
nonetheless be modified by an executed oral agreement in the absence of a
statute providing otherwise. (See Civ.
Code, § 1698, subd. (d).)
Gregory testified that he always obtained Prambs’s
approval before charging anything other than the prices in the schedule,
although the approval was not always reflected in a signed writ
| Description | This is a breach of contract action in which plaintiff sued defendants for payment under a contract pursuant to which plaintiff marketed defendants’ computerized learning program to schools and school districts. Defendants cross-complained against plaintiff, asserting it failed to properly account for money it received and it sold sublicenses for the program at prices less than those called for in the contract or a valid modification of the contract. The trial court found in favor of plaintiff and awarded substantial damages. Defendants appeal, contending the trial court’s interpretation of the contract was incorrect and resulted in an unconstitutional gift of public funds to plaintiff, substantial evidence did not support the damage award, and any oral modifications of the pricing schedule for sale of the sublicenses were unenforceable because the contract required all modifications to be made in writing. We reverse the award in plaintiff’s favor on the complaint and affirm the judgment in its favor on the cross-complaint. |
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