Case Name:   Silver v. Cartridge World North America, LLC

Case No.:        1-13-CV-243281

 

After full consideration of the evidence, the separate statements submitted and the authorities submitted by each party, the court makes the following rulings:

 

This is an action for breach of a master franchise agreement (“MFA”).  The first amended complaint (“FAC”) alleges that in August 2009, plaintiffs Robert Silver (“Silver”) and Silver Ink Corporation (“SIC”) (collectively, “Plaintiffs”) acquired the MFA from defendant Cartridge World North America, LLC (“Defendant”) at substantial expense and investment, acquiring 24 unit franchises within his territorial rights in 42 counties in California and portions of Los Angeles County.  (See FAC, ¶¶ 15-16.)  In late 2009, Defendant began taking actions that created difficulties for Plaintiffs to provide assistance to the unit franchisees, in turn leading to declining sales of new franchise locations, a decline in the number of franchise units and a decline in year to year sales for the entire Cartridge World system.  In 2009 to 2011, Defendant began competing with its unit franchises through alternate distribution methods including e-commerce sales, on-line retailers such as Amazon, and nontraditional retail outlets such as Goodwill stores.  (See FAC, ¶ 20.)  Defendant also eliminated its marketing and operational support staff, and acknowledged that it had improperly commingled the franchisee national marketing funds to support Defendant’s operations.  (See FAC, ¶¶ 21-23.)

 

During 2009 through 2012, Silver did not register a Franchise Disclosure Document (“FDD”) to offer and sell new franchises with the California Department of Corporations.  (See FAC, ¶ 24.)  During this time, Defendant also did not have timely registered FDDs, and Defendant did not ask Silver to register an FDD, and many other Master Franchisees did not obtain FDD registration during this period.  (Id.)  In September 2012, Defendant informed its Master Franchisees that it would not allow any Master Franchisees to sell their MFA unless the purchaser had a net worth of $2 million and was an existing Master Franchisee, thereby eliminating any possibility of Silver to sell his Master Franchise and exit Defendant due to the scarcity of any such potential buyers.  (See FAC, ¶ 25.)  To protect their interests, on October 2012, Silver and several other Master Franchisees formed a franchisee association of Master Franchises of Defendant, and Silver spoke with Defendant’s CEO, Bill Swanson (“Swanson”), about the Master Franchises’ concerns of lack of support and the limitations imposed on sales of MFA rights.  (See FAC, ¶ 26-27.)  On October 4, 2012, Silver received a “Notice of default of Master Franchise Agreement” from Swanson, stating that the failure to have registered an FDD constituted a default of the MFA and to contact Tony Shiblom, VP for Defendant.  (See FAC, ¶ 28.)  The letter did not state a specific date to cure the asserted default, nor cited a specific provision of the MFA which was assertedly breached.  (Id.)

 

Silver contacted Shiblom, and informed him that: Silver had engaged the services of Dawn Newton who had prepared FDDs for other area development franchisees of Defendant, and that Newton could file an FDD quickly but needed an audited financial statement for the Master Franchise business; Silver had engaged an auditor, but that an audited financial statement would likely take 6-8 weeks.  (See FAC, ¶ 29.)  On November 8, 2012, Newton wrote to Silver and Swanson informing them that she expected the FDD would not be filed before mid-February 2013.  (See FAC, ¶ 30.)  On January 28, 2013, Swanson asked Silver to produce proof that the FDD was received by the State, and on February 1, 2013, Silver responded, noting that the audit was scheduled to be complete by February 15, 2013, and that Silver would be away on a trip starting February 15.  (See FAC, ¶¶ 31-32.)  On February 15, 2013, Swanson sent a letter to Silver requesting that the financials be provided by February 18, 2013.  (See FAC, ¶ 33.)  On February 24, 2013, Silver forwarded the audit to Defendant, and on February 25, 2013, counsel for Defendant stated that the financial statements were inadequate and that Plaintiff was immediately terminated under the MFA for failure to provide an FDD, and demanded that Silver stop working as Area Manager for a separate Master Franchisee in California, Cartridge Twins, LLC.  (See FAC, ¶¶ 34-35.)

 

Plaintiff was and remains ready to file the FDD, but had to instead begin communications to rescind the notice of termination.  (See FAC, ¶ 36.)  As of now, other Master Franchises have not registered or received an FDD from the California Department of Corporations or other franchise registration states.  (See FAC, ¶ 37.)  On July 9, 2013, Plaintiffs filed the FAC against Defendant asserting causes of action for:  breach of written master franchise contract; California Franchise Relations Act violation; California Franchise Investment Act violation; tortious interference with contractual and economic relations; and, unfair business practices.  On September 30, 2013, the Court overruled a demurrer to the FAC, but granted a motion to strike allegations supporting punitive damages with leave to amend.  Plaintiffs never amended the FAC.

 

Defendant moves for summary judgment, or in the alternative, for summary adjudication of each cause of action on the ground that Plaintiffs materially breached the MFA when they failed to register they failed to register the FDD and thus each of the claims against it are without merit.

 

Defendant’s request for judicial notice is GRANTED.

 

The motion for summary adjudication of the first cause of action

 

Defendant meets its initial burden

 

Defendant presents the notice of default of MFA in which Defendant stated that the basis for the termination of the MFA was Plaintiffs’ failure to register the FDD.  (See Def.’s separate statement of undisputed material facts, nos. (“UMFs”) 12, 19; see Swanson decl., exhs. E (“notice of default”), F (“reminder of notice of default”), G (“letter regarding FDD registration deadline”), H (“follow up to financial audit”).)  Defendant also presents a notice of immediate termination as master franchisee under the MFA, in which the letter states that:

 

This immediate termination of the Master Franchise Agreement is based on your continuous and repeated default under the provisions of the Master Franchise Agreement requiring you to maintain a currently-effective Franchise Disclosure Document (“FDD”), properly registered with the California Department of Corporations, for disclosure to prospective franchisees, your continuous and repeated failure to provide a copy of your effective and registered FDD to Cartridge World, your continuous and repeated failure to meet the Development Standards in the Master Franchise Agreement, and your continuous and repeated default under other provisions of the Master Franchise Agreement.

 

(Swanson decl., exh. I (emphasis added).)

 

The Master Franchise Agreement initially stated that Plaintiffs, as a part of the Development Standards, were required to obtain 19 stores by December 31, 2010, 21 stores by December 31, 2011, and 23 stores by December 31, 2012.  (See Swanson decl., exh. B. (“MFA”), p.57.)  The MFA was amended to require 24 stores by December 31, 2011, and 27 stores by December 31, 2012.  (See Swanson decl., exh. A.)

 

Defendant presents testimony by Silver who states that he sold zero franchises and did not meet the development standards in the MFA.  (See UMF 3; see also Swanson decl., exh. D (“Silver depo”), pp.30:24-25, 31:1-13.)

 

The MFA clearly states that a failure to meet the Development Standards is a material default under the MFA.  (See UMF 9; see also MFA, p.10, § 4.1.2 (stating that the parties “have specifically bargained for the foregoing obligations and your development commitments form one of the core business bases for your and our relationship… [and y]our failure to comply with your obligations under this Section will be regarded as a material default”; also stating that the parties “acknowledge that a primary reason for defaults in master franchising relationships is a failure to meet development schedule obligations, that performance of such obligations is central to the business relationship and that if we had known that such obligations would not be performed on schedule, we would never have entered into this Agreement with you”).)  As Defendant notes, the MFA also states that Defendant may terminate the MFA by mere delivery of the written notice of termination “without further action by us and without opportunity to cure” if a franchisee “fail[s] to timely meet the Development Standards within the applicable time period….”  (MFA, pp.32-33, § 14.2.1; see also UMF 10.)

 

Thus, regardless of whether Defendant offered a reasonable time to cure for Plaintiffs’ failure to register the FDD, the MFA was rightfully terminated on February 25, 2013, due to Plaintiff’s failure to meet his obligations under the MFA regarding the development standards.  (See Acoustics, Inc. v. Trepte Construction Co. (1971) 14 Cal.App.3d 887, 913 (stating that the plaintiff’s performance is an element for a breach of contract cause of action).)  Thus, Defendant meets its initial burden to demonstrate that the first cause of action lacks merit on this basis.

 

Section 8.1.6 of the MFA states that:

 

You are solely responsible for the preparation, content and filing, as applicable, of all disclosure documents, franchise advertising and any other documents and materials related to the offer and sale of unit franchises in the Territory….  All Franchise Disclosure Documents and all other documents, marketing materials and other material to be used in connection with any of your franchising activities, together with any state and/or other filings to be made by you, are subject to our prior review and written consent, which we may withhold, condition and/or deny, in our reasonable discretion….  You are expressly prohibited from the offer and/or sale of unit franchises unless and until you have received written approval from us, have obtained state notices of effective filings (initial registrations, amendments, annual renewals and any other applicable filings) and have otherwise complied with your obligations under the law and this Agreement in connection with any franchise marketing, offers and/or sales.

 

(MFA, p.18, § 8.1.6; see also UMF 2.)

 

Section 8.1.7 of the MFA states that the failure to comply with the provision constitutes a material breach of the MFA.  (See MFA, p.18, § 8.1.7; see also UMF 8.)

 

In support of its motion, Defendant provides the October 4, 2012 letter notifying Plaintiffs of their failure to register the FDD, stating that such failure constitutes a breach of the MFA and a basis for termination.  (See Swanson decl., exh. E; see also UMF 12.)  Defendant also provides subsequent reminders of the breach, in addition to the February 25, 2013 notice of termination.  (See Swanson decl., exhs. F- I; see also UMFs 12-13.)  Defendant also presents evidence demonstrating that Plaintiffs did not register an FDD.  (UMFs 4-7.)

 

Here, a fundamental basis for the MFA was for Plaintiffs to meet their development standards through the sale of subfranchises—which they could not lawfully do without filing an FDD.  Defendant presents evidence demonstrating that Plaintiffs did not file any FDD; thus, Defendant sufficiently demonstrates a second basis for termination of the MFA.

 

Defendant meets its initial burden to demonstrate that the first cause of action lacks merit, and the burden shifts to Plaintiffs to demonstrate the existence of a triable issue of material fact.  (See Code Civ. Proc. § 437c, subd. (p)(2).)

 

 

In opposition, Plaintiffs fail to demonstrate the existence of a triable issue of material fact

 

In opposition, Plaintiffs argue that “[a] triable issue of fact exists as to whether Plaintiffs Silver failed to meet the development schedules because of Cartridge World’s own actions and failure to perform.”  (Pls.’ opposition to motion for summary judgment (“Opposition”), p.8:24-27.)

 

Plaintiffs make a number of arguments regarding the lack of notice of default and opportunity to cure (see Opposition, p.9:4-6 (stating “[d]evelopment was not possible, and no master franchisees received notices of default for not meeting a development schedule”, citing to reply facts 62-63), 9:16-18 (stating that Defendant “provided no notice of default and opportunity to cure”); however, as stated above, the MFA clearly states that  Defendant may terminate the MFA by mere delivery of the written notice of termination “without further action by us and without opportunity to cure” if a franchisee “fail[s] to timely meet the Development Standards within the applicable time period.”  (MFA, pp.32-33, § 14.2.1; see also UMF 10.)

 

Plaintiffs also assert that “development was not possible due to Cartridge World’s competition with its own franchisees, misuse of the franchisee’s advertising funds, cessation of services, closing of its headquarters, changing or failing to replace staff… [and, a]s a result[,] Cartridge World had a validation problem, and only a few franchises were being sold anywhere (none in California) while instead more franchises were closing.”  (Opposition, pp.8:27-28, 9:1-4, citing Pls.’ additional evidence in opposition and reply to summary judgment and adjudication in separate statement of undisputed material facts, nos. (“ADFs”) 43-53; see also Opposition, p.9:7-15 (asserting that “[t]here is a triable issue of fact whether Cartridge World’s actions breached its performance or effectively rendered Cartridge World franchises unsellable thus amounting to commercial frustration, excusing Plaintiff’s further performance”).)  Here, although the evidence supporting ADFs 43-53 demonstrates that selling franchises was a tough sell and that franchises did not appear to have much support from Defendant, it does not demonstrate that those problems constituted a breach of the agreement or that development was not possible.  In fact, ADF 50—“Franchise Dynamics was to be the developer of the Cartridge World Express Concept, a business to business operation without a retail store presence, but was only able to sell one such Cartridge World franchise in 2012 and one more in 2013”—demonstrates that development was possible, however difficult.

 

Plaintiffs’ final argument is that “Cartridge World was not enforcing its development schedules with master franchisees, [and] agreed with Plaintiffs Silver instead working on transferring existing unit franchises….”  (Opposition, p.9:16-18, citing ADFs 35-37, 62-69.)  ADFs 35-37 address the notice of default and letters related to default, noting that the sole reference to the failure to meet development schedules was contained in the termination letter.  As previously stated, the MFA provided for termination without a notice of default in the event that a franchisee failed to meet the development schedules.  ADFs 63-69 again demonstrate that selling Defendant’s franchises was a very difficult task and Plaintiffs’ efforts as a master franchisee are likewise immaterial to whether Defendant was enforcing its development schedules with master franchisees.  ADF 62 cites to a portion of the deposition of William D. Swanson, who, after being asked about the lowering of development schedule requirements for some master franchisees, states that those amendments occurred “as a result of the global economic crisis that there was an overall difficulty in the franchising arena for awarding of franchises and that this was an attempt by the parties to the transaction to recognize that perhaps the original goals in light of the global economic situation would have been much more difficult to achieve… [a]nd so, the parties got together and agreed that these would be more reasonable goals to achieve.”  (See Pls.’ evidence in opposition to motion for summary judgment, exh. 21 (“Swanson depo”), p.123:2-20.)

 

However, although the prior page (page 122) is not included, page 121 indicates that Swanson testified that he did not have any personal knowledge as to any change to the development schedule of plaintiffs, but was aware that the development schedules “were altered for a lot of the master franchisees.”  (Swanson depo, p.121: 18-25.)  As stated above, Defendant already presented evidence regarding an amendment of the development schedule—and further demonstrated that Plaintiffs did not perform pursuant to that amendment.  Plaintiffs do not present any evidence to establish that any amendments referenced on page 123 actually applied to Plaintiffs or the timing of any such amendment that would demonstrate the existence of a triable issue of material fact that Plaintiffs’ MFA was further amended such that Plaintiffs did not breach the MFA.

 

As Plaintiffs fail to demonstrate the existence of a triable issue of material fact with regards to the first cause of action as to the Development Schedules, the motion for summary adjudication of the first cause of action is GRANTED on this independent basis.

 

As to the FDDs, in opposition, Plaintiffs argue that “[m]aterial issues of fact exist regarding the lack of an obligation to register and provide a copy of registration to Cartridge World as asserted in the seminal default letter… [because t]he MFA does not impose requirements to register and provide a copy to Cartridge World but only requires that the franchisee pay the costs… [n]either the default letters nor the termination letter cite a provision of the MFA requiring registration… [and] Plaintiff Robert Silver had not registered to sell franchises from 2009 to 2012 and was not told he needed to do so.”  (Opposition, pp.7:28, 8:1-12.)  Plaintiffs also assert that the MFA is ambiguous as to the date of the filing of an FDD.

 

In support of their opposition, Plaintiffs provide: a portion of Swanson’s deposition testimony in which he states that he does not believe that section 8.1.6 does not require an FDD by a particular date (ADF 27, citing to Swanson depo, p.117:7-22); the default and termination letters which they assert do not point to a particular paragraph of the MFA requiring the filing of an FDD (ADFs 30-34, citing to Pls.’ evidence, exhs. 26-30); and, Silver’s declaration in which he states that he was not told to obtain an FDD from 2009 to 2012, and was never sent a default letter for his failure to so obtain from 2009 to 2011 (ADF 113, citing to Pls.’ evidence, exh. 40 (“Silver decl.”), ¶¶ 24, 28.)

 

This evidence does not assist Plaintiffs.  Here, it is clear that section 8.1.6 requires Plaintiffs to register an FDD.  The fact that Defendant did not earlier inform Plaintiffs of their failure to do so does not change the fact that they were in default as of the October 4, 2012 default letter.  Although the MFA does not require the filing of an FDD by a particular date, since the fundamental basis for the agreement is to sell subfranchises, and since Plaintiffs would be unable to do legally do so absent the filing of an FDD, it is apparent that a master franchisee should immediately file an FDD.  Thus, the MFA is not ambiguous as to this issue.  Finally, although the default letters and termination letter do not specifically identify section 8.1.6 of the MFA as the basis for the breach, Plaintiffs do not point to a contractual provision requiring Defendant to do so.  In fact, section 14.3 of the MFA does not require a default letter to specify the paragraph of the MFA allegedly violated.

 

Accordingly, Plaintiffs also fail to demonstrate the existence of a triable issue of material fact as to the first cause of action to the extent that it is based on the failure to file FDDs, and the motion for summary adjudication of the first cause of action is GRANTED on this additional basis.  (See Code Civ. Proc. § 437c, subd. (p)(2).)

 

The motion for summary adjudication of the second cause of action

 

The second cause of action alleges that Defendant breached Business and Professions Code section 20020 of the California Franchise Relations Act, which states that:

 

Except as otherwise provided by this chapter, no franchisor may terminate a franchise prior to the expiration of its term, except for good cause.  Good cause shall include, but not be limited to, the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice thereof and a reasonable opportunity, which in no event need be more than 30 days, to cure the failure.

 

(Bus. & Prof. Code § 20020.)

 

Defendant asserts that it did not violate section 20020 because it had good cause to terminate the MFA because Plaintiffs failed to meet development standards and failed to register an FDD despite an opportunity to cure.

 

Here, the provision allowing for immediate termination due to the failure to meet development standards, in fact, violates section 20020.

 

However, as addressed above, the MFA was also terminated due to Plaintiffs’ failure to file an FDD.  In opposition, Plaintiffs assert that a “triable issue of fact exists as to whether any of the notices of default were sufficient, as none of the notices provided a thirty day time period to cure the asserted failure to register a FDD… [and t]he Master Franchise Agreement required a thirty day notice to cure, or a longer period if the cure could not reasonably be effected within thirty days.”  (Opposition, p.13:22-27, citing to ADFs 103-110.)  However, the evidence presented by Plaintiffs demonstrates that a default letter notifying Plaintiffs of their default was issued on October 4, 2012, and after more than thirty days to cure the default and multiple reminders to do so, Defendant issued a termination letter on February 25, 2013.  Although Defendant violated section 20020 by the issuance of the termination letter referencing the Development Standards for the first time, Plaintiffs lack damages for the violation because the MFA was also rightfully terminated for their failure to file the FDD, and subsequent failure to cure the default despite receiving adequate notice of that default.  Accordingly, Defendant demonstrates that the second cause of action lacks merit and, in opposition, Plaintiffs fail to demonstrate the existence of a triable issue of material fact.  The motion for summary adjudication of the second cause of action is GRANTED.  (See Code Civ. Proc. § 437c, subd. (p)(2).)

 

The motion for summary adjudication of the third cause of action

 

The third cause of action is for violation of Corporations Code section 31220 of the California Franchise Investment Act, which states that “[i]t shall be a violation of this division for any franchisor, directly or indirectly, through any officer, agent or employee, to restrict or inhibit the right of franchisees to join a trade association or to prohibit the right of free association among franchisees for any lawful purposes.”  (Corp. Code § 31220.)  The third cause of action alleges that Defendant wrongfully retaliated against Plaintiffs by terminating the MFA, and “seeking to sever his employment with another Master Franchisee Cartridge Twins, LLC, because Plaintiffs Silver had formed the association and to deter the association of Master Franchisee Cartridge World.”  (FAC, ¶ 53.)

 

Defendant’s sole assertion addressing the latter basis of the claim is that the MFA “provided Cartridge World with the right to treat Silver’s material breach of the MFA as a breach of the relationship between Cartridge World and other related entity… [s]ection 14.4 of the MFA thereby gave Cartridge World the right to assert that Silver’s continued employment with Cartridge Twins would also constitute a violation of the MFA.”  (Def.’s memorandum of points and authorities in support of motion for summary judgment (“Def.’s memo”), p.13:11-15.)

 

Section 14.4 states:

 

Any default by you (or any owner or Affiliate of yours) under this Agreement may be regarded by us as a default under any other agreement between us (or any Franchisor-Related Parties) and you (or any owner or Affiliate of yours).  Any such default under any other agreement or any other obligation between us (or any Franchisor-Related Parties) and you (or any owner or Affiliate of yours) may be regarded as a default under this Agreement.  Any default by you (or any owner or Affiliate of yours) under any lease, sublease, loan agreement, or security interest relating to the Master Franchise may be regarded as a default under this Agreement, regardless of whether or not any such agreements are between you (or any owner or Affiliate of yours) and us (or any Franchisor-Related Parties).

 

(MFA, p.35, § 14.4.)

 

Here, it is entirely unclear how Defendant is entitled to terminate a party’s employment with one entity pursuant to section 14.4 when that person defaults pursuant to an agreement with a separate entity.  Accordingly, Defendant fails to meet its initial burden with respect to the third cause of action and the motion for summary adjudication of the third cause of action is DENIED.  (See Code Civ. Proc. § 437c, subd. (p)(2).)

 

The motion for summary adjudication of the fourth cause of action

 

Defendant moves for summary adjudication of the fourth cause of action for tortious interference with contractual and economic relations, again asserting that section 14.4 of the MFA entitled Defendant to attempt to terminate Silver from his position with Cartridge Twins.  Defendant acknowledges that it so requested, but asserts—without citation to any authority—that “[i]t was also entirely proper, and therefore legally privileged….”  (Def.’s memo, p.14:11-12.)  It is entirely unclear as to how Defendant’s actions could possibly be “legally privileged,” and without citation to any authority to support such an assertion, Defendant fails to meet its initial burden as to the fourth cause of action.  The motion for summary adjudication of the fourth cause of action is DENIED.  (See Code Civ. Proc. § 437c, subd. (p)(2).)

 

The motion for summary adjudication of the fifth cause of action

 

In light of the above rulings with regards to the third and fourth causes of action, Defendant fails to meet its initial burden with regards to the fifth cause of action.  The motion for summary adjudication of the fifth cause of action for unfair business practices is DENIED.  (See Code Civ. Proc. § 437c, subd. (p)(2).)

 

Defendant’s motion for summary judgment is DENIED given that Defendant did not prevail on the third through fifth causes of action.

 

As Defendant failed to meet its initial burden with regards to the third through fifth causes of action, the Court did not rely on its objections to Plaintiffs’ evidence in its ruling given that the burden did not shift to Plaintiffs to demonstrate a triable issue of material fact with regards to these causes of action.

 

As to the first and second causes of action, the Court did not rely on Defendant’s objections to Plaintiffs’ evidence as the basis for its ruling.  Accordingly, the objections are OVERRULED.

 

The Court will prepare the order.  The parties are reminded of the settlement conference on August 27, 2014 at 9:00 a.m. and the trial on September 2, 2014.