Opinion
G057655
05-05-2020
STEPHEN PHELPS, Plaintiff and Appellant, v. SP FRANCHISING, LLC, Defendant and Respondent.
Howard & Howard Attorneys, Matthew J. Kreutzer and Ryan A. Ellis for Plaintiff and Appellant. Kelly & Walker and Shannon M. Bell; Lewis Brisbois Bisgaard & Smith and Leo A. Bautista for Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 30-2019-01052522) OPINION Appeal from an order of the Superior Court of Orange County, Walter P. Schwarm, Judge. Affirmed. Howard & Howard Attorneys, Matthew J. Kreutzer and Ryan A. Ellis for Plaintiff and Appellant. Kelly & Walker and Shannon M. Bell; Lewis Brisbois Bisgaard & Smith and Leo A. Bautista for Defendant and Respondent.
Stephen Phelps challenges the trial court's order denying his request for a preliminary injunction against SP Franchising, LLC (SPF). He contends the court erred by: incorrectly construing an ambiguous term in the parties' master development franchise agreement (MDA); interpreting the underlying franchise agreement to circumvent the California Franchise Relations Act (CFRA) (Bus. & Prof., § 20000 et seq.); determining the MDA was a personal services contract; and deciding monetary damages were an adequate remedy. The court did not abuse its discretion, and we affirm the order denying the preliminary injunction.
All further statutory citations are to the Business and Professions Code, unless otherwise indicated.
FACTS
I. Business Relationship of the Parties
Speedpro USA, LLC (USA) is a franchisor of custom printing stores. USA offers two types of franchises, unit franchises and development franchises. In 2008, Phelps and USA entered into a fully integrated, 20-year MDA. Pursuant to the MDA's terms, Phelps agreed to assist USA as a regional developer by marketing, opening, monitoring, and supporting USA franchises in his exclusive development area in Orange and San Diego counties. In return, USA agreed to pay Phelps a percentage of the royalty fees collected from each franchisee in Phelps's development area. USA subsequently assigned the MDA and all of its rights and obligations under the MDA to SPF.
II. SPF's Business Model
A basic overview of the structure of the SPF business model is helpful to our analysis. Regional developers like Phelps act in a broker-like relationship with SPF, finding potential franchisees. If a franchisee candidate wants to open a SPF store and meets SPF's requirements, a unit franchise relationship is created through a franchise agreement, whereby the franchisee candidate becomes a unit franchisee. Regional developers, such as Phelps, are third-party beneficiaries to unit franchise agreements, because they form the basis for payment of royalties to the developers.
III. Relevant Contractual Provisions and Terms
The MDA defines Phelps as "Developer" and SPF as "Franchisor." An "'Individual Franchisee'" is defined as "a Person, unaffiliated with Developer, who operates a [SPF] franchise in the Development Area pursuant to a valid franchisee agreement with Franchisor." The MDA also provides as follows: "[Phelps] accepts and assumes, the right and obligation to develop the number of [c]enters . . ." and "[e]ach [c]enter to be developed hereunder shall be established and operated pursuant to a separate Franchise Agreement."
Under section 12, entitled "Termination," the MDA states in relevant part: "This Agreement and the rights conferred upon Franchisee hereunder may be terminated at Franchisor's option at any time following the occurrence of any of the following events: [¶] . . . [¶] 12.2.9. Termination of any Franchise Agreement executed under this Agreement." The MDA does not define "Franchise Agreement."
While the MDA is the operative agreement between Phelps and SPF, the Franchise Disclosure Document (FDD) is a document filed by USA (SPF's predecessor) with the Department of Corporations to register as a franchisor. Under the FDD, SPF may only terminate the MDA for cause if "any Franchise Agreement that you are a party to with us has been terminated." The FDD also permits Phelps to open his own unit franchise, which would have resulted in a franchise agreement with SPF as an individual franchisee, or recruit others to operate unit franchises.
IV. Phelps's Responsibilities Under the MDA
Under the MDA, Phelps was required to, among other things: coach and train unit franchisees, assist them in developing their SPF studios, communicate with the unit franchisees regularly, act as a liaison between SPF and the unit franchisees, advise SPF of any problems the unit franchisees are experiencing, and attend required meetings and trainings. The majority of Phelps' obligations under the MDA, with the exception of attending required meetings and trainings, required him to utilize his skill, judgment, and discretion.
One of the franchisees in Phelps' region was RD & AJ Investments & Acquisitions, LLC (RD). RD stated it struggled for months without any help from Phelps and decided to terminate its franchise agreement. RD claimed it informed Phelps of its intent to terminate three months before it closed its doors. SPF was unable to continue its relationship with RD or find a replacement franchisee because the store was already closed by the time SPF was informed of its problems. SPF suffered loss of goodwill and harm to its business reputation due to the loss of a franchisee and the lack of support the remaining franchisees received from Phelps. Phelps also failed to present any new franchise candidates for SPF's consideration since 2008, and did not attend required meetings and trainings.
V. Notice of Default and Termination
On January 30, 2019, SPF sent Phelps two letters. The first was a letter entitled "Notice of Default and Notice of Termination" (termination notice). SPF stated, "On or before September 28, 2018, [RD] closed in your region. We received no communication from you about this franchisee, its status, or that it was going to close. Section 5.5 of your MDA requires that you provide general field support for your Franchisees and that you facilitate communications between Franchisees and [SPF]. [SPF] received no information from you regarding any financial challenges faced by this Franchisee. [¶] In September 2018, [SPF] President and CEO, Larry Oberly, had scheduled a trip to [S]outhern California to visit the franchisees in your region, including [RD]. Mr. Oberly scheduled the appointment with [RD] for Friday afternoon, September 28, 2018. On Wednesday afternoon, September 26, 2018, [RD] called Mr. Oberly. During that conversation, Mr. Oberly was told to 'not bother coming to our studio because we are closing at the end of the week. Our lease is up on the 30th and there's no reason to meet.' Mr. Oberly was able to get [RD] to meet with him that day, September 26th. Upon arriving at their studio, the office was already closed and all the equipment and media was sold and removed from the premises. During the meeting, [RD] informed Mr. Oberly that they told you three months prior that they were probably going to close their studio. [¶] This decided lack of communication constitutes defaults under both Sections 5.5 and 5.7 of the obligations set out in your MDA. Your lack of contact with your franchisees, particularly with [RD], and your failure to relay critical information about this struggling Franchisee form the basis for [SPF] to invoke Section 12.2.9 of your MDA. Section 12.2.9 provides that [SPF] may terminate your MDA at its option when a Franchise Agreement executed under your MDA is terminated. As such, we are terminating your MDA effective immediately as there is no possibility of curing the default under Section 12.2.9."
The second letter was titled "Notice of Default and Demand to Cure" (default letter). It provided: "On August 30, 2018, September 21, 2018, November 15, 2018, December 12 and 13, 2018, and January 2, 2019, you were sent e[-]mails to attend a mandatory training program for Master Developers. We never received a response from you and you failed to attend one of the two sessions offered. This constitutes a default under Section 5.6 of the obligations set out in your MDA. While SP[F] is not offering these specified Master Development training sessions at this time, you may, nevertheless, cure this default (i) by attending the Franchisee Training Session scheduled for February 11-15 or March 11-15, 2019, and (ii) by attending a certified franchise sales compliance training session, https://www.franchise.org/ifa-fran-guard-O, or other program which must be preapproved by David Steinman, at your expense on or before March 01, 2019. [¶] Should you fail to cure the defaults noted above within the allotted deadline, SP[F] will proceed to terminate your Franchise Agreement." There is no evidence Phelps cured the default.
VI. Lawsuit and Motion for Preliminary Injunction
In 2019, Phelps filed a complaint against SPF for declaratory relief, violation of the CFRA, breach of contract, and breach of the implied covenant of good faith and fair dealing. Shortly thereafter, Phelps filed his motion for preliminary injunction. He requested the trial court grant the following: "preliminary injunction pending trial in this action ordering SPF to cease and desist: (1) enforcing its purported termination [of] the [MDA] between Phelps and [SPF]; and (2) any other activities involving terminating or enforcing termination of any of Phelps'[s] rights under the MDA."
The court denied Phelps's motion for preliminary injunction. It determined Phelps "failed to demonstrate the likelihood of prevailing on the merits. It appears that [SPF] did not breach the [MDA], but opted to terminate the MDA pursuant to [s]ection 12.2.9. . . . Although the MDA does not specifically define the term 'Franchise Agreement' used in [s]ection 12.2.9, it appears that the term is not ambiguous. The term refers to the agreement between an [i]ndividual [f]ranchisee in [Phelps's] region and [SPF]. Specifically, the MDA provides that '. . . [Phelps] accepts and assumes, the right and obligations to develop the number of [c]enters . . . ,' and that '[e]ach [c]enter to be developed hereunder shall be established and operated pursuant to a separate Franchise Agreement'. . . The MDA also defines [i]ndividual [f]ranchisee as 'a [p]erson, unaffiliated with [Phelps], who operates a [SPF] franchise in the [d]evelopment [a]rea pursuant to a valid franchise agreement with Franchisor.' . . . Thus, it appears that the term 'Franchise Agreement' in [s]ection 12.2.9 is not ambiguous." The court also determined Phelps failed to establish a threat of irreparable harm because monetary relief is an adequate remedy. It reasoned, "[Phelps] was a Regional Developer. . . . Thus, it appears that [Phelps's] only losses will be the royalty payments under the MDA. . . . These damages are ascertainable '. . . based on [SPF's] simple formula using [SPF's] readily-available business records.'" The MDA also defined an "'Individual Franchisee'" as "a Person, unaffiliated with Developer, who operates a [SPF] franchise in the Development Area pursuant to a valid franchise agreement with Franchisor." Ultimately, trial court determined the term "Franchise Agreement" used in the section 12.2.9 termination provision referred to an agreement between an individual franchisee located in Phelps's region and SPF.
Phelps urges a different reading of the termination provision, based upon extrinsic evidence contained in the FDD. He fails to demonstrate, however, the trial court failed to consider the FDD in reaching its decision. Pursuant to California law, courts may preliminarily consider extrinsic evidence to determine a contract's meaning. However, once the court "decides that the contract is not reasonably susceptible to more than one interpretation, the court can reject the assertion of ambiguity. [Citations.]" (Skilstaf, Inc. v. CVS Caremark Corp. (9th Cir. 2012) 669 F.3d 1005, 1015.) We presume the trial court considered the FDD and determined it did not alter the MDA's interpretation. Furthermore, even if the FDD presented an alternate interpretation of the termination provision, "[w]hen the competent parol evidence is in conflict, and thus requires resolution of credibility issues, any reasonable construction will be upheld as long as it is supported by substantial evidence. [Citation.]" (Winet v. Price (1992) 4 Cal.App.4th 1159, 1166.) We cannot say the trial court's construction of the termination provision was unreasonable. Therefore, Phelps was unable to show a likelihood of success on the merits as to the termination provision. B. CFRA
Phelps contends that by failing to address the CFRA in its written order, the trial court necessarily determined either the CFRA did not apply or that SPF's termination of Phelps did not violate the CFRA. We have no reason to believe the court ignored the CFRA. (See Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1450 (Whyte).) Although the court failed to cite the statute in its order, the parties briefed the issue in the motion for preliminary injunction and made references to the statute at the hearing. It appears the court determined SPF's termination of Phelps did not violate the CFRA. We find no error.
On appeal, the parties do not dispute the CFRA applies to the MDA. Section 20015 provides: "[t]he provisions of this chapter apply to any franchise where either the franchisee is domiciled in this state or the franchised business is or has been operated in this state." It is undisputed that the franchised business was operated in California.
We next consider whether SPF's termination of Phelps violated the CFRA. Phelps first asserts the MDA's termination provision violated the CFRA because it provided for immediate termination with an opportunity to cure. Not so. Section 20021 provides a list of grounds for providing immediate notice of termination. It includes subdivision (g): "The franchisee repeatedly fails to comply with one or more requirements of the franchise, whether or not corrected after notice." In both the termination and default letters, SPF detailed numerous, repeated failures by Phelps to comply with MDA requirements, including failing to update SPF if any franchisees were struggling and providing support to franchisees in his region.
Additionally, SPF terminated the MDA with notice for his ongoing failure to attend mandatory training meetings. SPF sent Phelps multiple notices to attend the required trainings. SPF's default letter provided Phelps with the opportunity to cure the default, which never occurred.
Phelps asserts "SPF's argument about a second notice and opportunity to cure relating to Phelps purportedly failing to attend training meetings is irrelevant here" because the trial court's decision did not address any other basis for termination of the MDA. As explained above, however, an order need not state every ground upon which it relies. (Whyte, supra, 101 Cal.App.4th at p. 1450.) SPF's termination of Phelps did not violate the CFRA, and Phelps cannot show a likelihood of success on the merits. C. Personal Services Contract
Phelps also asserts the CFRA mandates injunctive relief. Not so. The CFRA provides: "[a] court may grant preliminary and permanent injunctions for a violation or threatened violation of this chapter." (§ 20035.) The grant of injunctive relief is merely permissive and within the trial court's discretion.
Civil Code section 3390 establishes that "'[t]he following obligations cannot be specifically enforced: [a]n obligation to render personal service; [a]n obligation to employ another in personal service.'" (Barndt v. County of Los Angeles (1989) 211 Cal.App.3d 397, 404.) Whether the MDA is a personal service contract is a question of fact. (Husain v. McDonald's Corp. (2012) 205 Cal.App.4th 860, 869 (Husain).) Sufficient evidence supports the trial court's finding the MDA was a personal services contract.
The trial court properly relied on Woolley v. Embassy Suites, Inc. (1991) 227 Cal.App.3d 1520 (Woolley). While the underlying agreement at issue in Woolley was a management contract and not a franchise agreement, the issues presented are analogous to those in this matter. (Id. at p. 1531.) In Woolley, hotel owners brought suit against hotel manager for breach of contract, negligence, fraud, and other wrongdoing. (Id. at p. 1525.) Manager applied for injunctive relief barring termination of the contracts pending the outcome of arbitration. (Id. at p. 1526.) The trial court issued a preliminary injunction, but the appellate court reversed. (Id. at p. 1536.) It analyzed the factual underpinnings of a personal services contract not subject to injunctive relief following termination of the contract. (Id. at pp. 1533-1534.) They included the "rendition of services which require the exercise of special skill and judgment" which were "wide ranging and involve daily discretionary activities." (Ibid.) Manager's performance under the agreement required distinctly personal and non-delegable conduct unique to that manager. (Ibid.) The agreement between the owners and manager required the manger to exercise special skill and judgment and "call[ed] for a series of complex and delicate business decisions" based on "mutual cooperation and trust . . . between the parties." (Ibid.) Based on the manager's duties, the appellate court held the agreement was a personal services contract. (Ibid.) Therefore, the owners could not be enjoined from terminating the manager's contract without cause. Notably, the court also held that the "remedy for wrongful termination is damages, as in any other breach of contract action." (Id. at p. 1530.)
Phelps asserts the more analogous case is Husain, supra, 205 Cal.App.4th 860. There, the appellate court held a restaurant franchise agreement was not a personal service contract. (Id. at p. 872.) The franchisor, McDonald's, had "comprehensive control . . . over every material aspect of the restaurant's operations so the uniformity of the McDonald's customer experience could be assured in every one of its locations[.]" (Id. at p. 869.) The franchisee, pursuant to the agreement, had to provide services to customers in a manner strictly controlled by McDonald's. (Ibid.) The franchisee had to comply with all business policies, practices, and procedures imposed by McDonald's, including the food served, maintenance of the buildings, equipment, lighting and seating, and parking lot maintenance. (Ibid.) The appellate court explained, "McDonald's is not paying the [franchisees] in order to benefit from their special skills, taste, or managerial judgment, but has granted them a franchise based on their willingness and ability to faithfully carry out the McDonald's [s]ystem and secure for McDonald's the target flow of revenues it expects to achieve from the franchised locations. McDonald's relies on its right to control the [franchisees'] performance, not on their special tastes or abilities." (Id. at pp. 870-871.)
The MDA is more akin to the agreement in Woolley than that of Husain. The MDA is distinctly personal and of a non-delegable character, requiring Phelps to exercise unique individual business decisions in the selection, training, and oversight of franchisees. During oral argument on the motion, Phelps' counsel conceded there is an element of discretion in Phelps' performance of his obligations under the MDA. SPF did not have control over Phelps's day-to-day operations. The MDA gave Phelps almost total discretion in finding, training, and assisting franchisees. While SPF provided general advice, guidance, and initial training, it did not control how Phelps complied with his duties under the MDA. Like the manager in Woolley, Phelps was the manager of his own territory.
Phelps contends affirming the order denying the preliminary injunction would result in precedent automatically transmuting all franchise agreements to personal services contracts. He also asserts a franchise agreement may never be characterized as a personal services contract. His contentions lack legal support. As demonstrated above, the court's inquiry is fact-specific and based on the unique nature of the parties' contractual relationship. There was ample evidence to support the trial court's ruling the MDA constituted a personal services contract.
III. Irreparable Harm
The trial court determined Phelps failed to establish a threat of irreparable harm because monetary relief was an adequate remedy. We find no error.
Injunctive relief is an appropriate remedy where a moving party "has no adequate alterative remedy, and will suffer irreparable harm if the injunction is denied." (Davenport v. Blue Cross of California (1997) 52 Cal.App.4th 435, 450.) Irreparable harm is shown by intangible injuries, such as damage to recruitment efforts and goodwill, or when the loss of a property right threatens one's livelihood. (Donahue Schriber Realty Group, Inc. v. Nu Creation Outreach (2014) 232 Cal.App.4th 1171, 1184-1185.) Where the damages are easily ascertained and calculable, however, money damages are the proper remedy rather than injunctive relief. (Canova v. Trustees of Imperial Irrigation Dist. Employee Pension Plan (2007) 150 Cal.App.4th 1487, 1493.)
In support of its decision, the trial court specifically noted Phelps did not operate a SPF storefront that was forced to close. The court's finding reinforced the uncontroverted evidence that Phelps did not need to: de-brand a store or materials; lay off workers; nor suffer any lost operation costs as a result of the termination. Phelps asserts he was harmed by loss of the goodwill and reputation he generated as a developer under the MDA. He fails to support his assertion with an evidentiary citation. Our review of the record demonstrates the only description of harm to Phelps's goodwill and reputation was by argument of his counsel, which was not evidence. (Fuller v. Tucker (2000) 84 Cal.App.4th 1163, 1173.)
Phelps also asserts, for the first time on appeal, that the MDA created a property right that must be enforced. This issue was not before the trial court, and we deem it forfeited. (Kern County Dept. of Child Support Services v. Camacho (2012) 209 Cal.App.4th 1028, 1038 ["It is axiomatic that arguments not raised in the trial court are forfeited on appeal."). The trial court determined Phelps's only losses would be royalty payments under the MDA. Because the evidence showed these damages were easily ascertainable and calculable based on SPF's readily available business records, there was no irreparable harm.
The trial court did not abuse its discretion when balancing the likelihood of success on the merits and the threat of irreparable harm. We find no error.
DISPOSITION
The order is affirmed. SPF shall recover its costs on appeal.
O'LEARY, P. J. WE CONCUR: MOORE, J. GOETHALS, J.