Opinion
G044164
08-31-2011
JSA DEPOT, INC., et al., Plaintiffs and Respondents, v. FOREVERLAWN INC., Defendant and Appellant.
Morris & Stone and Aaron P. Morris for Defendant and Appellant. Law Offices of Timothy A. Scott, Timothy A. Scott and Matthew C. Binninger for Plaintiff and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Super. Ct. No. 07CC06601)
OPINION
Appeal from a judgment of the Superior Court of Orange County, Kazuharu Makino, Judge. Reversed and remanded.
Morris & Stone and Aaron P. Morris for Defendant and Appellant.
Law Offices of Timothy A. Scott, Timothy A. Scott and Matthew C. Binninger for Plaintiff and Respondents.
Foreverlawn, Inc. (Foreverlawn), appeals from a $987,000 judgment for plaintiffs, JSA Depot, Inc. (JSA), and Foreverlawn of Southern California (FSC), on their contract, interference, and implied covenant claims. Foreverlawn contends plaintiffs offered insufficient evidence of damages. We agree and reverse. No substantial evidence shows plaintiffs suffered loss in the awarded amounts.
Our decision moots Foreverlawn's other claims on appeal. Foreverlawn contended the court erred by (1) allowing plaintiffs to amend the complaint to add the implied covenant claim; (2) allowing a layperson to give expert testimony on plaintiffs' future lost profits; (3) allowing the implied covenant damages to exceed the contract damages; (4) not limiting plaintiffs to recovering only 60 days of future lost profits, consistent with the contract's termination clause; and (5) not granting a new trial for jury misconduct; i.e., a purported express agreement to disregard their damages instructions.
FACTS
The Deal
Foreverlawn distributes artificial turf through a system of exclusive dealers and subdealers. Matt Mighell worked for the Southern California exclusive dealership, and later became one of its subdealers. Mighell and his wife bought the exclusive dealership in September 2005. Their corporation, JSA, negotiated a new contract with Foreverlawn to operate the Southern California exclusive dealership.
Pursuant to their December 2005 contract, Foreverlawn granted an exclusive license to JSA to sell its turf in several counties in California and Nevada. Foreverlawn agreed not to sell its turf directly in those territories "outside of the Dealer channel." It "reserve[d] the right to negotiate national and corporate sales" in those territories, but promised "to respect the Dealer in these transactions. The fulfillment of these national contracts will continue to move through the Dealer so long as the Dealer is capable of fulfilling the demand . . . ."
JSA agreed to "meet[] the predefined [sales] requirements set forth" in the contract. The contract's "Performance Requirements" set out "Monthly Square Footage Requirements" totaling 86,000 square feet of turf each month across the territories. JSA also agreed to market Foreverlawn turf through advertisements and trades shows, and to "[r]espond to leads (whether forwarded by Foreverlawn or direct requests . . . .) in a timely manner. Respond to at least 90% of all inquiries within two weeks of inquiry . . . ."
The contract contemplated remedies if JSA's sales fell short. It provided, "If [JSA] fails to meet these requirements, [Foreverlawn] reserves the right to revoke the [contract], and/or adjust the territory appropriately." And it provided, "This contract may be canceled by [Foreverlawn] in the event [JSA] fails materially to perform any of its obligations under this Agreement, and such material failure is not corrected within sixty (60) days after [JSA's] receipt of written notice . . . ."
The contract was silent on several points. It did not state how Foreverlawn should forward sales leads to JSA, how JSA should place turf orders with Foreverlawn, or how Foreverlawn should fill those orders.
The Turf Business
Despite the contract's omissions, the parties were able to conduct business under a general framework. JSA received sales leads from Foreverlawn or through its own marketing efforts. JSA followed up on the leads, attempted to turn them into sales, and, when successful, submitted purchase orders for turf to Foreverlawn. JSA paid for the turf when it submitted the order. Foreverlawn delivered turf to JSA only in response to orders. The turf would arrive in large rolls, like carpet. JSA would "inspect[] one or two rolls of each order that came in, unless it was already being installed."
As for sale leads, Foreverlawn forwarded 914 leads to JSA from 2006 through 2007. JSA understood the contract to obligate Foreverlawn to forward all sales leads it received from potential customers in JSA's territories, and to do so in a "timely" manner. Though the contract was silent on the issue, JSA deemed any lead that Foreverlawn forwarded to JSA more than 48 hours after Foreverlawn had received it to be late. By that standard, Foreverlawn forwarded 131 leads late. Eventually Foreverlawn forwarded fewer and fewer leads to JSA, despite JSA's spending $7,000 to $8,000 per month on advertising.
JSA began taking customer orders for turf and placing purchase orders with Foreverlawn in December 2005. The contract did not specify how quickly Foreverlawn had to respond to the orders. In Mighell's experience, turf "[t]ypically" took six to 12 days to arrive, so JSA deemed anything longer than 12 days to be late. In mid-January 2006, Foreverlawn informed JSA that the turf manufacturer was delaying production. It began taking weeks or "months" ("a minimum of 30 days") to fill orders. Nine customers canceled contracts totaling over $120,000 due to the delivery delays.
Some delivered turf did not meet the order specifications or was otherwise defective. The JSA bookkeeper/office manager gave "an approximation" that "90 percent of all orders received" from Foreverlawn in JSA's first six months "were either defective, short, or late or of second quality." Though the contract was silent on this issue too, JSA believed Foreverlawn was required to replace any defective turf. When JSA complained about the defects, Foreverlawn replied its warranty from the manufacturer would not allow turf to be returned after it was cut or installed.
At no point did JSA order 86,000 square feet of turf per month from Foreverlawn. As early as June 2006, Foreverlawn wrote to JSA to express its concern that JSA was already 300,000 square feet behind in its sales. By the end of 2006, JSA had ordered only about 120,000 square feet of turf for the entire year, with gross receipts of just over $490,000 and a net income of just under $63,000.
By January 2007, Foreverlawn informed JSA it wanted to "take over [its] territory." Foreverlawn sent a letter to JSA the next month restricting JSA's territory to the City of Riverside. A JSA subdealer soon confirmed to JSA that Foreverlawn asked it to order directly from Foreverlawn. By around the spring of 2007, JSA noticed its orders from its subdealers had "changed by 40 percent at least."
In April 2007, Foreverlawn notified JSA it was being terminated for missing its sales requirements. Foreverlawn offered to reinstate JSA if it sold 127,000 square feet of turf before the end of the 60-day termination period. JSA did not sell that much turf.
The Litigation
Plaintiffs sued Foreverlawn in June 2007. In the operative complaint, they asserted causes of action against Foreverlawn for breach of contract, interference with contract, fraud, and franchise registration violations. During trial, the court entered a directed verdict for Foreverlawn on the fraud and franchise registration violation causes of action.
The court also entered a directed verdict for three individual defendants, Foreverlawn's two principals and one employee.
After the close of evidence, the court allowed plaintiffs to amend the complaint to conform to proof. JSA added a cause of action for breach of the implied covenant of good faith and fair dealing, and FSC added a cause of action for negligent interference with prospective economic relations.
The jury returned a verdict for JSA and FSC. It found that Foreverlawn breached its contract with JSA, awarding $109,000 to it. It found Foreverlawn interfered with JSA's contractual relations, awarding $31,000 to it. It also found Foreverlawn interfered with the contractual relations of FSC, but awarded no damages. It found Foreverlawn negligently interfered with the prospective economic relations of FSC, awarding $30,000 to it. And it found Foreverlawn breached the implied covenant, awarding $926,000 in damages to JSA: $109,000 for "past economic loss" and $817,000 for "[o]ther economic loss, including loss after the termination of the contract . . . ."
The court denied Foreverlawn's new trial and judgment notwithstanding the verdict motions. It noted, "Although [Foreverlawn] claims the damages were excessive, the only argument made is that no damages should have been awarded, not a lesser amount. Both Mighells testified to damages suffered by their business due to the conduct of the defendants." The court did strike the $109,000 in past-loss implied covenant damages as duplicative of JSA's contract damages. It entered judgment for JSA for $957,000 and for FSC for $30,000.
DISCUSSION
On appeal, Foreverlawn does not dispute it breached the express and implied terms of its contract with JSA, interfered with JSA's contracts with its subdealers, and interfered with FSC's potential economic relations. Moreover, we will "accept as true all evidence tending to establish the correctness of the judgment, taking into account all inferences which might reasonably have been thought by the trial court to lead to the same conclusion. [Citation.] Every substantial conflict in the testimony is to be resolved in favor of the judgment." (GHK Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 872 (GHK).)
But Foreverlawn does insist the awarded damages are at least excessive, if not wholly unsupported. In its view, plaintiffs failed to offer substantial evidence connecting Foreverlawn's acts to $109,000 in JSA's past economic losses, $31,000 in JSA's interference damages, $30,000 in FSC's interference damages, or $817,000 in JSA's future economic losses. We agree.
"Where the fact of damages is certain, the amount of damages need not be calculated with absolute certainty. [Citations.] The law requires only that some reasonable basis of computation of damages be used, and the damages may be computed even if the result reached is an approximation. [Citation.] This is especially true where . . . it is the wrongful acts of the defendant that have created the difficulty in proving the amount of loss of profits [citation] or where it is the wrongful acts of the defendant that have caused the other party to not realize a profit to which that party is entitled." (GHK, supra, 224 Cal.App.3d at pp. 873-874.)
But any reasonable basis of computation must be based on substantial evidence. Thus, the evidence of damages must be "reasonable, credible and of solid value." (Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651 (Roddenberry).)"Inferences may constitute substantial evidence, but they must be the product of logic and reason. Speculation or conjecture alone is not substantial evidence." (Ibid.) And "'damages which are speculative, remote, imaginary, contingent, or merely possible cannot serve as a legal basis for recovery.'" (Piscitelli v. Friedenberg (2001) 87 Cal.App.4th 953, 989 (Piscitelli.)
Plaintiffs Offered Insufficient Evidence of JSA's Contract Damages
No substantial evidence shows JSA suffered $109,000 in past economic losses for breach of contract. JSA points to four sources of its damages, but none survive scrutiny.
First, JSA invokes the $120,000 in contracts that its customers canceled due to Foreverlawn deliveries that were late or defective. But those contracts are on FSC stationary. And $120,000 is the total sales price of those contracts. Thus, they leave us unable to determine JSA's lost net profits on those canceled sales. "'Damage awards in injury to business cases are based on net profits. . . .'" "'A plaintiff must show loss of net pecuniary gain, not just loss of gross revenue.'" (Parlour Enterprises, Inc. v. Kirin Group, Inc. (2007) 152 Cal.App.4th 281, 287 (Parlour), citations omitted.) JSA cites no evidence reflecting how much, if any, of the $120,000 in lost FSC sales would have been net profit to JSA.
Second, JSA relies on $67,000 in purchase orders with Foreverlawn. It asserts they "represented . . . turf that turned out to be defective, short, late, or some combination of each." But the purchase orders do not say so on their faces, and JSA points to no other evidence to that effect. "Counsel is obligated to refer us to the portions of the record supporting his or her contentions on appeal." (Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133, 1149.) "[W]e will not scour the [2,000 page] record on our own in search of supporting evidence" (ibid.) connecting those purchase orders to shipments of unreimbursed, defective turf.
Third, JSA contends it "wasted" $7,000 to $8,000 in monthly advertising costs due to "Foreverlawn's failure to timely forward sales leads." But JSA fails to draw any specific connection between the advertising costs and the untimely leads. What leads did JSA's advertising generate, as opposed to leads developed independently by Foreverlawn? JSA prepared a chart showing only 14 percent — 131 of 914 — of the sales leads were forwarded late. How many of those leads, timely or not, did JSA pursue? How many sales did JSA close from them? How many sales would JSA have closed if Foreverlawn had forwarded the leads more promptly? Wouldn't JSA have advertised anyway, regardless of Foreverlawn's delays? Only "[s]peculation and conjecture" fill the gaps between Foreverlawn's conduct and JSA's advertising costs. (Roddenberry, supra, 44 Cal.App.4th at p. 651.)
Fourth, JSA relies upon a lost $1 million contract for installing turf at a library inside its territory. But the only cited testimony is that JSA and another contractor both bid for that job using Foreverlawn turf. No cited evidence shows Foreverlawn was involved in the other contractor's bid. And no cited evidence shows the other contractor won the job, that JSA would have won it had it submitted the only bid using Foreverlawn turf, or even that the library ever completed the project. It requires more "[s]peculation and conjecture" to conclude JSA would have earned a dime off of the library job. (Roddenberry, supra, 44 Cal.App.4th at p. 651.)
This analysis holds true whether the library job is considered as evidence of either past or future losses, or of contract or interference damages.
Plaintiffs Offered Insufficient Evidence of Any Interference Damages
No substantial evidence supports the award of $31,000 to JSA for interference with its contractual relations with its subdealers, or the award of $30,000 to FSC for interference with its prospective economic advantage.
As for JSA's interference damages, plaintiffs contend they are supported by testimony that JSA's sales numbers "changed by 40 percent at least" after Foreverlawn began dealing directly with JSA's subdealers. But plaintiffs fail to assign any dollar amount to that figure or suggest a means for calculating the reduction. They do not point to specific dates and sales figures showing the $31,000 award is even a reasonable "approximation" of the value of the 40 percent decrease. (GHK, supra, 224 Cal.App.3d at p. 873.)
As for FSC's interference damages, plaintiffs offer no defense of the $30,000 award in their respondent's brief. In closing argument, though, plaintiffs relied upon canceled FSC contracts, presumably the $120,000 in canceled contracts. But even then, plaintiffs failed to show the "net pecuniary gain" to FSC from those contracts. (Parlour, supra, 152 Cal.App.4th at p. 287.)
Plaintiffs Offered Insufficient Evidence of JSA's Future Lost Profits
Finally, no substantial evidence shows JSA would have suffered $817,000 in future economic losses due to Foreverlawn's breach of the implied covenant.
"Where an established business's operation is prevented or interrupted, '"damages for the loss of prospective profits that otherwise might have been made from its operation are generally recoverable for the reason that their occurrence and extent may be ascertained with reasonable certainty from the past volume of business and other provable data relevant to the probable future sales."'" (Parlour, supra, 152 Cal.App.4th at pp. 287-288.)
"On the other hand, lost anticipated profits for an unestablished business whose operation is prevented or interrupted are generally not recoverable because their occurrence is uncertain, contingent and speculative. Nevertheless, they may be recovered '"where the evidence makes reasonably certain their occurrence and extent."'" (Parlour, supra, 152 Cal.App.4th at p. 288.) "'"[I]f the business is a new one or if it is a speculative one . . . , damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like."' [Citation.] '[T]he experience of similar businesses is one way to prove prospective profits. [Citations.] Also relevant is whether the market is an established one. [Citations.]' [Citations.] "'A plaintiff's [or a third party's] prior experience in the same [or similar] business has been held to be probative [citations]; as has a plaintiff's [or a third party's] experience in the same [or similar] enterprise subsequent to the interference. [Citations.]"' [Citation.] '"Similarly, prelitigation projections, particularly when prepared by the defendant, have also been approved. [Citation.] The underlying requirement for each of these types of evidence is a substantial similarity between the facts forming the basis of the profit projections and the business opportunity that was destroyed." [Citation.]' [Citation.] '"' [E]xpert testimony alone is a sufficient basis for an award of lost profits in the new business context when the expert opinion is supported by tangible evidence with a "substantial and sufficient factual basis" rather than by mere "speculation and hypothetical situations."'"'" (Parlour, supra, 152 Cal.App.4th at p. 288.)
Plaintiffs assert JSA was an established business because it stepped into the shoes of the existing Southern California exclusive dealership. But they point to no evidence showing the "'"past volume of business [or] other provable data relevant to [their] probable future sales."'" (Parlour, supra, 152 Cal.App.4th at p. 288.) They do not rely upon the prior owner's sales figures to support their lost profit calculation.
Neither do plaintiffs rely upon the traditional evidence of future lost profits for new businesses. They offered no expert testimony or market surveys. They do not cite to sales figures for Foreverlawn turf in California and Nevada after their termination, or to sales figures for the artificial turf market generally in those areas.
Instead, plaintiffs rely heavily on Foreverlawn's own "projections," as reflected in three documents. First, the contract required JSA to sell 86,000 square feet of turf every month, or just over 1 million square feet of turf every year. Second, JSA's bookkeeper/office manager prepared a 10-year sales projection. She worked on the assumptions JSA would meet its sales goals by selling 1 million square feet of turf in year one, and increase its sales 10 percent every following year. She concluded JSA should have realized $16.8 million in net profits. Third, Foreverlawn prepared a "Five-year vision" for 2004 to 2008. In it, Foreverlawn foresaw sales growth company-wide from 200,000 square feet in 2004 to 3.5 million square feet in 2008.
The problem with these numbers is they are nothing more than that — numbers on paper. "Although prelitigation projections are relevant and admissible, especially when they are prepared by the defendant [citations], the projections must nevertheless be based on facts that are substantially similar to the lost business opportunity." (Parlour, supra, 152 Cal.App.4th at p. 290.) There must be evidence "as to the facts underlying the projections or the calculations used to prepare them" (id. at pp. 289-290), and the "qualifications that would allow [the preparer] to predict income, expenses, or profits" (id. at p. 289) for that particular business. Projections are insufficient if they are merely "assumptions for the [upcoming] years." (Ibid.)
Plaintiffs fail to show the reasonableness of the projections. First, as for the contract's sales requirements, plaintiffs cite no evidence showing "the facts underlying
[them] or the calculations used to prepare them." (Parlour, supra, 152 Cal.App.4th at pp. 289-290.) Nor do they show JSA would have met those requirements but for Foreverlawn's conduct — JSA never ordered 86,000 square feet of turf in any one month.
Second, plaintiffs cite to no "qualifications that would allow [the bookkeeper] to predict income, expenses, or profits" for JSA. (Parlour, supra, 152 Cal.App.4th at p. 289.) She conceded she merely assumed JSA would meet its sales requirements, though it had never done so. She based the 10 percent growth rate only on the fact that "the JSA's sub dealers had doubled their sales in 2007," without justifying why they would continue to experience growth. She did not account for JSA's market share, government reports on the turf industry, local competition, or inflation. She conceded it would be "important to look at what the other sub dealers or dealers of Foreverlawn, Inc., were doing, but [she] was only provided with a limited amount of information," and so she did not consider this information.
Finally, plaintiffs cite no evidence showing the reasonableness of Foreverlawn's vision statement. The statement disclaims any evidentiary underpinning on its face. Its creator "came up with the numbers above just by stating what [he] thought we could do. Then on the spreadsheet, [he] put more detailed thought into what would happen . . . ." Foreverlawn's thoughts about what it could do, without more, fall far short of the expert analysis or qualified projections needed to support an award of future lost profits. On this record, JSA's loss of $817,000 in future profits is "speculative," "contingent," and "merely possible." (Piscitelli, supra, 87 Cal.App.4th at p. 989.)
DISPOSITION
The judgment is reversed. No argument having been made on appeal regarding liability, the matter is remanded for a new trial on the amount of damages only. Foreverlawn shall recover its costs on appeal.
IKOLA, J. WE CONCUR: ARONSON, ACTING P. J. FYBEL, J.