Stark Packing Corp. v. Sunkist Growers, Inc.

Full title: STARK PACKING CORPORATION, Plaintiff and Respondent, v. SUNKIST GROWERS…

Court: California Court of Appeals, Fifth District

Date published: Jul 23, 2009

No. F052658 (Cal. Ct. App. Jul. 23, 2009)

Opinion

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Tulare County No. VCU197891-01. Melinda Myrle Reed, Judge.

Jones Day, Elwood Lui, Alan E. Friedman and Peter E. Davids for Defendant and Appellant.

Reed Smith, Paul D. Fogel, Raymond A. Cardozo, Dennis Peter Maio; Law Office of Joseph Uremovic and Joseph A. Uremovic for Plaintiff and Respondent.

OPINION

DAWSON, J.

A citrus packer sued Sunkist Growers, Inc. (Sunkist) for breach of contract based on the theory that its written packinghouse license agreement with Sunkist contained (1) an implied covenant that Sunkist would provide it with equitable marketing opportunities and (2) an implied covenant of good faith and fair dealing. The packer asserted Sunkist breached these implied covenants by playing favorites and not allocating it a fair share of fruit orders.

The trial court instructed the jury that the license agreement contained (1) an implied term “that all packers be provided equal marketing opportunity, but not equal results” and (2) an implied covenant of good faith and fair dealing. The jury found Sunkist violated the implied covenant of equal marketing opportunity and awarded the packer $8,368,000 in damages. The jury was one vote short of finding a breach of the implied covenant of good faith and fair dealing, and that claim was left unresolved.

Sunkist appealed, contending amongst other things that the trial court erred by deciding the contract contained an implied covenant of equitable marketing opportunity, by not applying the four-year statute of limitations to the contract claim, and by upholding the jury’s award of excessive damages.

We conclude the trial court erred in allowing the jury to delay the running of the four-year statute of limitations based on the packer’s delayed discovery of the breach of contract and reject the other claims of error.

To remedy the error regarding the statute of limitations, the packer will be given the option of (1) a new trial or (2) accepting a damages reduction that eliminates the recovery for injuries that happened more than four years before the complaint was filed.

If the reduction in damages is accepted, the judgment will be modified and affirmed in its modified form.

FACTS

Sunkist is a membership corporation organized as a nonprofit cooperative marketing association pursuant to chapter 1 of division 20 of California’s Food and Agricultural Code. As a membership corporation, Sunkist does not have capital stock and, consequently, does not have shareholders.

Stark Packing Corporation (Stark or Stark Packing) and John Norton, an assignee of Millwood Packing, Inc. (Millwood Packing)¹ were the plaintiffs in this matter. Stark Packing and Millwood Packing were private businesses that operated citrus packinghouses for profit. Their for-profit status prevented them from being members of Sunkist.

1 John Norton acquired Millwood Packing’s claims against Sunkist during Millwood Packing’s chapter 7 bankruptcy proceeding. During the time relevant to the breach of contract claim, Millwood Packing was a subsidiary of Stark Packing. Sunkist and Norton settled Millwood Packing’s claim while this appeal was pending.

Historical Background

The associations that eventually became Sunkist were organized in Southern California in 1893. (Case-Swayne Co., Inc. v. Sunkist Growers, Inc. (C.D.Cal. 1971) 355 F.Supp. 408, 412.) Through the associations, growers pooled their fruit at the packinghouse level, imposed uniform grading and branding, and then marketed it cooperatively. (Id. at p. 410.)

The evolution of Sunkist’s structure includes a reorganization in 1958. (Case-Swayne Co. v. Sunkist Growers (1967) 389 U.S. 384, 387, fn. 4.) After the reorganization, Sunkist had two classes of members—district exchanges and local associations. Each local association operated a packinghouse that prepared the fruit for market. The local associations were (1) cooperative associations formed by growers, (2) corporate growers large enough to operate their own packing facility, or (3) private business entities that owned and operated packinghouses for profit and did not grow their own fruit. (Id. at pp. 386-387.) The private corporations and partnerships, which also were known as “agency associations,” accounted for about 15 percent of the total number of local associations. (Id. at p. 387.)

Sunkist’s inclusion of for-profit business entities among its members resulted in antitrust litigation. In Case-Swayne Co. v. Sunkist Growers, supra, 389 U.S. 384, the United States Supreme Court addressed whether Sunkist’s structure complied with the Capper-Volstead Act (7 U.S.C. § 291) and, thus, came within an exemption to federal antitrust laws. The Capper-Volstead Act authorized persons engaged in the production of agricultural products, such as farmers and fruit growers, to act collectively in the processing and marketing of those products. The court determined that the private, for-profit packinghouses that did not grow fruit were not “[p]ersons engaged in the production of agricultural products” for purposes of the Capper-Volstead Act. (7 U.S.C. § 291.) As a result, the inclusion of these types of entities in Sunkist’s membership prevented Sunkist from qualifying for the antitrust exemption provided by the Capper-Volstead Act. (Case-Swayne Co. v. Sunkist Growers, supra, at pp. 395-396.)

The Supreme Court’s decision caused Sunkist to reorganize its corporate structure in an attempt to come within the Capper-Volstead Act exemption. (Case-Swayne Co., Inc. v. Sunkist Growers, Inc., supra, 355 F.Supp. at p. 409.) The new structure eliminated from Sunkist’s membership the privately owned packinghouses that did not grow fruit. (Id. at p. 415.) But Sunkist’s relationships with privately owned, for-profit packinghouses did not end. Instead, those relationships were defined by (1) a license agreement between the packinghouse and Sunkist and one of Sunkist’s district exchanges and (2) contracts between the packinghouses and local growers or a local cooperative.

Sunkist’s packinghouse license agreement with Stark Packing is the subject of this lawsuit. The All California Exchange was the district exchange in the license agreement.

Sunkist’s Current Structure

Currently, Sunkist’s members are divided into three classes: (1) growers, (2) local associations, and (3) district exchanges.

The member-growers are business organizations and natural persons engaged in the production of citrus fruit. Growers are required to be members of a local association or a district exchange.

Local associations are nonprofit cooperative associations of growers that act as local packinghouse organizations; they must be members of a district exchange.

District exchanges, such as the All California Exchange, are nonprofit cooperative associations of growers and local associations that act as regional marketing associations.²

2 Further historical details of Sunkist’s organizational structure are included in the federal cases that addressed Sunkist’s qualification for the antitrust exemption provided by the Capper-Volstead Act. (Case-Swayne Co. v. Sunkist Growers, supra, 389 U.S. 384; Case-Swayne Co., Inc. v. Sunkist Growers, Inc., supra, 355 F.Supp. 408 [Sunkist’s reorganized structure, which limited membership in the cooperative to growers and cooperative associations of growers, complied with the Capper-Volstead Act].)

The cooperative marketing system formed by Sunkist and its member district exchanges, local associations, and growers sometimes is referred to as the “Sunkist System.” The fundamental purpose of this system is to market the growers’ citrus fruit at the highest rate of return for the growers, consistent with their long-term interests. Towards this end, Sunkist processes some fruit before marketing.

A hierarchy of documents addresses Sunkist’s operations, including its marketing activity. The system-wide documents include Sunkist’s (1) amended articles of incorporation, (2) bylaws, (3) sales policy guidelines adopted by its board of directors, and (4) a marketing equity policy statement.

The idea of equitable marketing opportunity is not mentioned in the amended articles of incorporation, but it is mentioned in the latter three documents. And Sunkist’s amended articles of incorporation do briefly mention Sunkist’s marketing activity in a statement of Sunkist’s purpose. The second article states that the primary purpose of Sunkist is to furnish facilities and agencies through which citrus fruits of its members may be marketed, or processed and marketed, and to return to the producers the sales proceeds, less necessary operating and marketing expenses, based on the quality and value of the fruit.

Sunkist’s bylaws, as amended through May 7, 1999 (hereafter, bylaws), address marketing in section 9, which is set forth on pages 16 through 20 of that document.

Section 9.1 of the bylaws sets forth the marketing obligations of Sunkist’s members. First, all of the fruit produced on the acreage covered by a grower’s membership agreement must be “handled by a packing facility of a Local Association or by a packing facility licensed by Sunkist to perform such service.” Second, each local association must market all the fresh fruit it controls through the district exchange with which it is affiliated. Third, each district exchange must market all of the fruit it controls through Sunkist.

Section 9.2 of the bylaws is titled “Marketing Agency Created” and mentions Sunkist’s sole discretion regarding the manner in which it conducts marketing activities and Sunkist’s right to obtain information about the amount, volume, and value of the fruit marketed by its three types of members. Section 9.2 provides in part:

“Each Local Association and District Exchange designates and appoints Sunkist as its agent and the agent of its Growers in all matters concerning the marketing of its fresh fruit, and the processing and marketing of its products fruit. Full power and authority are conferred upon Sunkist as such agent to conduct its marketing activities in such manner as it, in its sole discretion, determines to be for the best interests of all of its members.”

Section 9.3 of the bylaws briefly sets forth Sunkist’s general marketing plan for fresh fruit and products fruit³ and identifies its basic purpose as marketing the growers’ citrus fruit at the highest rate of return to the growers.

3 A grower’s fruit is described as either “fresh fruit” or “products fruit.” Fresh fruit is destined only for fresh consumption and moves in normal fresh fruit channels. Products fruit means all fruit other than fresh fruit. For example, oranges used to make orange juice or orange juice concentrate are products fruit.

Section 9.4 of the bylaws, titled “Regulations Relating to Marketing Fresh Fruit,” appears to be the first provision that uses the term “equitably” in connection with marketing.⁴ It provides in part:

4 Section 9.6 of the bylaws, titled “Power Conferred by Statutes,” mentions Sunkist’s discretion and uses the term “equitable.” It provides that “Sunkist shall have, and in its discretion may exercise, on an equitable basis on behalf of District Exchanges, Local Associations and Growers any and all powers relating to the marketing of fruit and products that Sunkist [and its members are authorized by law] to exercise.” (Italics added.)

“(b) Quotas and Allocation — Sunkist may, by a majority vote of the authorized number of directors, determine the maximum amount of fresh fruit to be marketed currently and allocate the opportunity to ship equitably among its members; provided, however, that said majority [meets an 85 percent supermajority requirement]. Such allocation shall be binding upon District Exchanges and Local Associations.

“(c) Contact with Buyers — District Exchanges and Local Associations shall not solicit business from the trade or employ any solicitor or agent, or correspond with any buyer for the purpose of promoting the sale of their fresh fruit. The board shall adopt and maintain guidelines explaining how the foregoing provisions shall be interpreted and applied to current operations. All prices, quotation and allowances shall be issued and distributed solely by Sunkist. Copies of correspondence with district managers in the markets by any District Exchange must be sent to Sunkist; and by any Local Association to Sunkist and to the District Exchange with which it is affiliated. District Exchanges shall be entitled to receive, upon request, copies of Sunkist correspondence relating to their fruit.” (Italics added.)

In March 1987, section 9.4(c) of the bylaws was amended by adding the language italicized in the foregoing quote. Also in March 1987, Sunkist’s board of directors acted on the directive set forth in the amendment to section 9.4(c) by adopting a revised sales communication policy and compliance guidelines (hereafter, sales policy guidelines).

The sales policy guidelines are concerned primarily with prohibiting conduct by individual shippers or district exchanges that would give them an undue advantage over other Sunkist members. For example, violations include shippers communicating directly with customers about the terms of sale, providing undisclosed rebates to customers, or shipping fruit of a quality different from that listed on the manifest.

The preamble to the sales policy guidelines, which uses terms such as “equitable marketing effort” and “equal sales service,” states in full:

“The purpose of Sunkist as a cooperative relates primarily to achieving optimum economic results for our grower members. Towards this aim a principal concept throughout the history of the organization, as established in our bylaws and other official actions, has been and remains a united and cooperative marketing effort, made effective by the ability to speak with one voice for all of our shippers. Pricing by consensus between the Fresh Fruit Marketing Division in Sherman Oaks and district exchanges is hereby reaffirmed. The structure of our marketing procedures must be such that we can perform an equal sales effort on behalf of all shippers, and equal sales service to all markets, as far as practical considerations allow. However, equitable marketing effort is not meant to assure equal results for all because the Sunkist system does not attempt to level off differences related to the merit of individual shipper performance and/or natural advantages. Customer ordering by packinghouse brand preference shall continue to be the predominant method of sale. The purpose of the compliance program, therefore, is to confirm and strengthen this dedication of the Sunkist system to speak with one voice for all our shippers, to maintain an equitable marketing effort on behalf of all members and to offer an equitable service effort to all markets. Towards this purpose the compliance program is intended to help maintain our united and cooperative sales effort without sacrifice of service to our customers. Actually the compliance guidelines serve to clarify operating language long standing in Section 9.4 (c) of the Sunkist bylaws to which all parties are signatory.” (Italics added.)

A proper understanding of Sunkist’s sales policy and its subsequent clarification of that policy requires a familiarity with the United States citrus market in the late 1980’s and early 1990’s, particularly the federal government’s role in regulating that market through the use of marketing orders.⁵

5 We note that marketing orders are the subject of a five-article, two-comment symposium presented in volume 5 of the San Joaquin Agricultural Law Review (1995) at pages 1 through 179.

Federal Regulation of Citrus Market

A history of marketing orders for citrus fruit is set forth in Gaab, The California-Arizona Citrus Marketing Orders: Examples of Failed Attempts to Regulate Markets for Agricultural Commodities (1995) 5 San Joaquin Agric. L.Rev. 119 (hereafter Gaab, Citrus Marketing Orders), which states in part:

“Handlers of navel oranges grown in Arizona and designated parts of California were subject to regulation under marketing order 907 from 1953 until it was terminated in 1994. The order divided the growing region into four districts and authorized the Secretary [of the United States Department of Agriculture] to impose weekly volume restrictions on the amount of navel oranges that could be shipped to the domestic fresh-fruit market when he determined that the imposition of controls would tend to effectuate the purposes of the A[gricultural Marketing Agreement Act of 1937].” (Id. at p. 131, fns. omitted.)

Volume control, also known as “prorate” provisions, limited the quantity of a commodity a handler could ship to the fresh fruit markets during the specified period of time, typically a week. Excess produce was required to be held for later shipment or sold in the products fruit markets. (Gaab, Citrus Marketing Orders, supra, 5 San Joaquin Agric. L.Rev. at p. 128.) The volume control provisions were intended to prevent the prices from dropping below the cost of production by limiting the fruit supply that reached market during the height of the harvest season.

In 1992, the Secretary of Agriculture suspended the volume prorate provisions of the navel orange marketing order. (Gaab, Citrus Marketing Orders, supra, 5 San Joaquin Agric. L.Rev. at p. 137.) Subsequently, in 1994, “the Secretary terminated the California-Arizona citrus marketing orders that applied to navel and Valencia oranges and lemons.…” (Id. at p. 126 [asserting one motive for the termination was to end years of legal wrangling].)

At trial, Kevin Riddle, the president of the board of directors of Exeter Ivanhoe Citrus Association, a cooperative packinghouse associated with Sunkist, testified about the government’s citrus marketing orders. Riddle testified that the federal marketing orders, which he referred to as a prorate system, restricted the volume of product going to market and attempted “to provide an orderly flow of fruit to the market at a reasonable price.” The volume restrictions were intended to keep the price of fruit high enough to provide a fair return to the growers.

Sunkist’s Marketing Equity Policy Statement

In 1992, Sunkist’s board of directors adopted a marketing equity policy statement to clarify and supplement its 1987 sales policy guidelines, particularly the practices it would employ in the absence of federal volume regulations. The policy statement is significant in this litigation because it provided a basis for the implied covenant regarding equitable marketing opportunities. The policy statement is set forth in a one-page document that provides in full:

“Marketing Equity

“As Sunkist nears its centennial year, many historical documents have been dusted off, researched, and reviewed for inclusion in publicity and birthday celebration projects. Profitable sales and marketing equity are rooted in this federated cooperative’s charter. They’ve also been subject to discussion and debate, sometimes heated, from time to time throughout the company’s life. Such discussion serves to clear the air and provides new understanding and resolve when policies are put into writing.

“Directors did just that this month. They adopted a marketing equity policy statement to clarify and supplement the Preamble to Policy Guidelines which was ratified in March 1987, especially as it relates to practices to be employed in the absence of volume regulation [by the federal government]. The board, exchanges and shippers have indicated preference for a good communications system and informal approach to supply management, instead of a mandatory or voluntary internal allocation system. The topic will be reviewed a year from now.

“Policy Statement – Marketing Equity

“By enforcing compliance with Sunkist policies and regulations, and by fair and just application of the efforts of the staff, Sunkist shall provide equitable marketing opportunity for every affiliated shipper.

“Further, it is appreciated that the large volume managed by Sunkist generates marketing strength and effectively spreads costs for services that would otherwise be unaffordable for individual shippers. Accordingly, the maintenance of a large membership base is important to every member. In that interest it shall be the policy of Sunkist to periodically extend reasonable extra efforts to assist those shippers who are experiencing marketing difficulties relative to their peers. These extra efforts shall not include practices which would deny any other shipper of its rightful orders. Determination as to whether extra efforts should be applied will be based on a combination of domestic and export sales standing.

“Even though Sunkist will practice equity of opportunity, and will assist disadvantaged members, it is not expected nor promised that results will be equal among shippers.

“Inherently, ‘brand preference’ produces better demand and, therefore, better results for certain shippers. And ‘brand preference’ is fundamental to the success of the Sunkist system. Were Sunkist to give each shipper an arithmetical share of business and remove the right of selection from buyers, while those same buyers could exercise choice among independent shippers, we would fail. Furthermore, the motivation to keep quality high would be substantially reduced.

“Genuine fair advantages exist, and they will inevitably, produce benefits. Efforts to neutralize deserved advantages would consign Sunkist to mediocrity. Important differences in fundamental fruit quality exist from district to district and from one shipper to another. Elected differences in sorting, packing, picking and pooling can either enhance or injure marketing prospects. Attention to detail and service makes a significant difference. Packinghouse management which is motivated, efficient and cooperative usually achieves more than the opposite. Real equity gives reasonable credit for natural and deserved advantages.

“The promises of equity of opportunity and assistance to disadvantaged shippers cannot be properly kept without accurate inventory information. Accordingly, effective November 1, 1992 each shipper is required to provide ‘floor counts’ and future packing projections for oranges as uniformly requested by the fresh fruit marketing division.” (Italics added.)

At trial, John McGuigan, Sunkist’s vice-president of fresh fruit sales, was asked whether he viewed himself as working for all shippers when he performed his job. McGuigan replied, “Every day. I work for every one of the shippers inside of Sunkist equally. It’s the only way in a co-operative that it works.”

Riddle testified at trial that the equitable marketing policy was still in effect. Under the policy, Sunkist’s salespersons determine what volume of product they believe the market can take in a given week and still maintain a price regarded as reasonable. They also ask each shipper to give a projection of the size of the crop. The Sunkist salespersons give the local packinghouses a weekly objective for the amount of oranges that the packinghouse should prepare to pack. Sunkist then directs orders for fruit to packinghouses based on those objectives.

Stark Packing contends that packinghouses were able to game or cheat Sunkist’s system by overstating the size of the tree crop when providing Sunkist with estimates. By overstating, a packinghouse could increase the weekly objective it received from Sunkist and sell all of its growers’ fruit before season’s end. In contrast, a packinghouse that accurately estimated its growers’ crop would end the season with fruit left to harvest.

Stark Packing’s License Agreement

Sunkist and the All California Exchange entered two packinghouse license agreements with Stark Packing. The first was effective November 1, 1991, and second was effective November 1, 1993. The licenses were to last for a term of one year and continue thereafter from year to year, unless terminated as specified in paragraph No. 6. Among other things, paragraph No. 6 provided that any party could terminate the agreement by providing written notice to the other parties on or before August 1st of any year and the termination would be effective on the following November 1st.

The licenses granted by Sunkist authorized Stark Packing “to grade, pack, prepare for market and ship the citrus fruit of the member Growers of Sunkist, through District Exchange, in packing facilities” owned by Stark. The licenses also authorized Stark to use Sunkist’s trademarks and to adopt pooling arrangements with the consent of the growers.

In paragraph No. 3 of the license agreements, Stark Packing promised to (1) avoid commingling fruit or proceeds, (2) recognize Sunkist’s control of marketing, (3) avoid contacting buyers, and (4) comply with Sunkist’s directions regarding transportation. Specifically, paragraph No. 3 of the license agreements provided:

“(b) Shipping and Marketing Control. Packer recognizes that Growers market their fruit through the agencies of the Sunkist System. Market opportunities and sales are developed and consummated by the component agencies in common of said Sunkist System. Packer, as such, is not a member of the Sunkist System. In grading, packing and handling Growers’ fruit, fresh and products, Packer shall comply with instructions and regulations of Sunkist and District Exchange.

“(c) Contact with Buyers. It is agreed that Packer’s function is that of packing, not marketing, the fruit of such Growers. Accordingly, Packer shall not solicit business from the trade or employ any solicitor or agent or correspond with any buyer for the purpose of promoting the sale of fruit packed by it for Sunkist’s Growers.”

Paragraph No. 3(d) of the license agreements gave Sunkist the power and authority to specify the route and method of shipment, the facilities to be used, and pooling of transportation costs and charges. Stark Packing agreed “to comply with said routing, selection and pooling practices as authorized and directed by Sunkist.”

The only references to equity or inequity in the license agreements occur in the last two sentences of the recitals, which provide:

“It is necessary, in order to preserve the equities of Growers, that each packing facility avoid commingling the fruit of Growers, either physically or for accounting purposes, with fruit of persons not affiliated with the Sunkist System. Any such commingling might threaten dilution of returns or inequities in allocation of opportunities to ship fruit pursuant to sales opportunities developed by Sunkist for its Growers.” (Italics added.)

The circumstances surrounding the execution of Stark Packing’s license agreements include the fact that Brad Stark had been Stark Packing’s president since 1984 and had been on Sunkist’s board of directors since 1986. Brad Stark served as chairman of Sunkist’s board of directors in 1989. Consequently, Brad Stark was familiar with the Sunkist System and was aware of the bylaws and policies that Sunkist had adopted prior to the execution of the written license agreements.

Revised Sales Policy Guidelines

In February 2001, Sunkist’s board of directors revised the sales policy guidelines. Later that month, Sunkist sent the revised sales policy guidelines and a “supply management addendum” adopted in November 2000 to the district exchanges and packinghouse managers.

The supply management addendum addressed the gathering and use of tree crop estimates and described some of the capabilities of a software system (Kirkey) that would track each packinghouse’s tree crop estimate as well as its year-to-date domestic and export sales. The supply management addendum was designed to address the problem of packinghouses overestimating their tree crop. It allowed Sunkist’s board to impose a fine on any packinghouse that (1) consistently exceeded its weekly objective by more than 20 percent, (2) continued to build excess inventory, and (3) did not adjust its weekly production upon receiving written notice of noncompliance. In addition, if any packinghouse overstated its tree crop estimate by 20 percent or more without a reasonable explanation, Sunkist’s board could impose fines of $1 per overstated carton of fruit.

Stark’s Criticism of Sunkist

Brad Stark was concerned about packinghouses overestimating their tree crop and whether Stark Packing was being treated fairly. At trial, he testified that around 1996 or 1997 he began to receive information from Sunkist, in several different formats, “that showed each individual shipper of each individual exchange and what their weekly shipments were relative to their objective, and their increase and decrease in their inventories, which showed a snapshot of each week as far as which shipper was picking towards their objective and what they were shipping of their objective and whether or not they were accumulating inventory.”

Brad Stark also testified that McGuigan unilaterally cut off the information in 1999 or 2000 and told Stark that it was too much work and it caused too much controversy.

Stark Packing asserted that Brad Stark’s criticism of Sunkist’s failure to police packinghouses overestimating their tree crop caused Sunkist to retaliate against it. Stark Packing claims that, prior to the 1996-1997 season, it was able to harvest to the Sunkist-stated objectives and ship over 99 percent of the fruit that qualified for Sunkist’s highest two grades. Stark Packing asserts that, from the 1996-1997 season forward, it had to discard up to 15 percent of its fruit that graded fancy or choice.

In the fall of 2001, Stark Packing was concerned about the shipping orders it received and other issues. As a result, it terminated its relationship with Sunkist by filing a lawsuit seeking rescission of the license agreements.

PROCEEDINGS

The lawsuit began on November 2, 2001. Stark Packing and Donald B. Stark, Sr., as trustee of the Stark grower trusts, were the original plaintiffs. The claims of the grower trusts were dismissed voluntarily in February 2006. Millwood Packing became a plaintiff in the first amended complaint, but settled its claim while this appeal was pending. Thus, Stark Packing is the only plaintiff remaining in this appeal.

Paragraph No. 25.a. of the first amended complaint, which is part of the breach of contract cause of action, alleged Sunkist breached its obligations by seeking to advance the interests of certain other packers and growers, at plaintiff’s expense, by altering or selectively enforcing its sales and inspections policies. The first amended complaint’s breach of fiduciary duty cause of action specifically referenced Sunkist’s marketing equity policy and a duty to equitably distribute citrus orders. The allegations of the breach of fiduciary duty cause of action were incorporated into the contract cause of action.

The topic of equitable distribution of citrus orders was addressed by Sunkist in May 2006 when it filed a motion for summary adjudication of issues. Sunkist’s motion sought to eliminate Stark Packing’s claims regarding equity of marketing opportunity and breach of fiduciary duty. Sunkist asserted the claim regarding equitable marketing opportunity had no merit because (1) its policy statement was too vague to be enforceable as a contract provision, (2) it never stated it would market fruit on a pro rata basis, and (3) Stark Packing received almost exactly the same revenue it would have received had it sold a pro rata share of fruit at the average FOB price.

The trial court granted summary adjudication on the cause of action for breach of fiduciary duty, finding as a matter of law that Sunkist owed no fiduciary duty to Stark Packing. The court denied the motion for summary adjudication of Stark Packing’s marketing equity claims. The court concluded that the allegations in paragraph No. 25.a. of the first amended complaint did not present a separate cause of action or issue of duty and thus was not subject to summary adjudication.

After the trial court’s ruling, Stark Packing asserted in discovery responses that Sunkist breached implied terms derived from a number of different policies and writings, including an implied term to enforce marketing equity guidelines without bias for or against any packer or grower.

Sunkist challenged Stark Packing’s theory of implied terms by filing motions in limine before the start of trial. The motions sought to exclude evidence of implied terms on the grounds that, among other things, the conditions necessary for the insertion of implied terms into a written contract were not present and the implied terms asserted by Stark Packing were too vague to be enforced. The trial court denied the motions in limine, stating “those issues concerning the implied terms, I certainly expect to potentially deal with again at the close of the evidence or at some later point in this trial.” Thus, the trial court gave Stark Packing the opportunity to produce evidence to substantiate its claim that implied terms existed.

After Stark Packing presented its case, the trial court considered Sunkist’s motion for nonsuit together with Stark Packing’s proposed jury instructions. The trial court stated a tentative belief that Stark Packing’s proposed jury instruction “should be changed to say that there was an implied term [in] the packing house agreement that Sunkist would provide equitable marketing opportunity to its affiliated shippers. And that comes right out of the marketing equity policy.” The trial court also stated that the implied term “to me is supported by the evidence as well as the legal requirements for an implied term.”

Counsel for Sunkist responded by stating, “I don’t think at this point I am prepared to argue that that term cannot be implied as a matter of law, because as the Court says there is support for it and there are issues about whether the policy is part of the contract or not.” Counsel for Sunkist then stated he would assume for the moment that the implied term existed and proceeded to argue that the implied term should be qualified by a statement that Sunkist made no promise of equal results. Stark Packing’s attorney agreed to an instruction that added such a proviso to the implied term.

The trial court then stated: “So, I think I can rule right now to deny motion for nonsuit as to the breach of contract cause of action finding an implied term of the contract that Sunkist would provide equitable marketing opportunity but not necessarily results to its affiliated shippers including Stark Packing.…” Counsel for Sunkist stated for the record that he did not agree that that was an implied term of the contract, but felt he could not argue against it for purposes of the nonsuit.

Subsequently, the trial court instructed the jury that “[t]here was an implied term of the Packinghouse License Agreement that all packers be provided equal marketing opportunity, but not equal results.”⁶

6 The instruction, drafted by Sunkist’s trial counsel, refers to equal marketing opportunity. When discussing the instruction, the trial court referred to equitable marketing opportunity, which tracks the language in the marketing equity policy statement: “Sunkist shall provide equitable marketing opportunity for every affiliated shipper.” The difference between “equal” and “equitable” is not material to the outcome reached in this opinion, and we will use the phrase “equitable marketing opportunity.”

In the midst of the jury instructions concerning damages, the trial court also instructed the jury as follows:

“Stark Packing Corporation claims that Sunkist did not give all packinghouses equal marketing opportunity without guaranteeing equal results. In other words, Stark Packing Corporation claims that Sunkist acted unfairly or arbitrarily.

“A business policy or practice is not arbitrary or unfair if it is reasonably related to a valid business objective. Your determination of whether the action taken was arbitrary or unfair requires an examination of the entire context of the factual situation in which the action was taken or the conduct occurred. The action or conduct alleged to be unfair or arbitrary must be considered with respect to Sunkist’s type of business, and its legitimate business interests.”

The special verdict form submitted to the jury asked whether Sunkist breached the license agreement by (1) “[f]ailing to provide all packinghouses with equal marketing opportunity, even though it did not have to provide them with equal results” or (2) “[u]nfairly interfering with [Stark Packing’s] right to receive the benefits of the Packinghouse License Agreement.” By a vote of nine to three, the jury answered the first question “yes.” The second question received only eight “yes” votes, which was insufficient to resolve the question in favor of either party.⁷

7 The jury was instructed that at least nine jurors must agree on the answer to each question asked in the special verdict form. Because this claim was not resolved in the first trial, the cause of action for breach of the covenant of good faith and fair dealing should be presented to the jury if Stark Packing elects a new trial.

At trial, Brad Stark presented documents that showed how he calculated the damages suffered from the breach of the contract. Two categories of damages were (1) the packing income lost because the volume of fruit orders was less than it should have been and (2) charges relating to rehandling fruit that Stark Packing had packed but was not sold as fresh fruit. One of the documents was a table of the number of cartons of fruit that Stark Packing packed but did not sell in each season from 1996-1997 through 2000-2001. This number of cartons was multiplied by $1.15, which was Brad Stark’s estimate of the charges Sunkist should have paid for the rehandling of the packed fruit, and produced a total of $997,625 for rehandling charges. Also, Brad Stark multiplied the number of cartons that were packed but not sold by his estimate of the packing income Stark Packing would have earned, which produced a total of $2,939,873 of lost packing income.

Stark Packing’s claim for damages relating to lost assets was based on the contention that the breach of contract forced it out of business and caused the liquidation of its assets for approximately $16.7 million less than fair market value.

The jury awarded Stark Packing total damages of $8,368,000, which consisted of $2,646,000 for lost packing charges, $898,000 for rehandling charges, and $4,824,000 for lost assets.

Judgment was entered in accordance with the jury’s verdicts. The trial court denied Sunkist’s motions for judgment notwithstanding the verdict and for new trial. Sunkist filed a timely notice of appeal.

DISCUSSION

I. Standard of Review

Generally, appellate courts independently review questions of law and apply the substantial evidence standard to the findings of fact made in the superior court. (SFPP v. Burlington Northern & Santa Fe Ry. Co. (2004) 121 Cal.App.4th 452, 461.) The substantial evidence standard for review has been described by our Supreme Court as follows:

“Where findings of fact are challenged on a civil appeal, we are bound by the ‘elementary, but often overlooked principle of law, that … the power of an appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted,’ to support the findings below. (Crawford v. Southern Pacific Co. (1935) 3 Cal.2d 427, 429.) We must therefore view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor in accordance with the standard of review so long adhered to by this court.” (Jessup Farms v. Baldwin (1983) 33 Cal.3d 639, 660.)

II. Implied Terms and Written Contracts

Sunkist contends the implied covenant of equitable marketing opportunity is barred by applicable law and, therefore, we must reverse and order judgment in its favor. Sunkist, as appellant, must affirmatively show the trial court erred. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) Sunkist can carry this burden only by eliminating all possible grounds upon which the trial court might have based its decision that a covenant of equitable marketing opportunity existed.

Accordingly, we begin our analysis by reviewing some basic principles of contract law as well as the possible grounds for the trial court’s instruction that the covenant existed. After identifying the possible grounds, we will address whether Sunkist has demonstrated that none of the grounds support the existence of the covenant of equitable marketing opportunity.

As discussed post, we conclude that Sunkist has not demonstrated reversible error because the covenant of equitable marketing opportunity could exist as either (1) a reasonable interpretation of ambiguous contractual language and the undisputed extrinsic evidence relevant to the ambiguity or (2) a covenant inferred from the conduct of the parties to supplement the terms of their incomplete written agreement.

A. Principles of Contract Law

Initially we note that the term “implied covenant” has various meanings. To address this variation and provide background for our discussion of the parties’ contentions, we set forth a brief overview of principles of California contract law that are relevant to implied covenants.

1. Express or implied

California statute defines express contracts as those that are stated in words, either orally or in writing. (Civ. Code, §§ 1620, 1622.) In contrast, an “implied contract is one, the existence and terms of which are manifested by conduct.” (Id., § 1621.)

These definitions regarding entire contracts can be extended to express and implied terms. For example, the Restatement of Contracts Second provides: “A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct.” (Rest.2d Contracts, § 4, p. 14; see Masterson v. Sine (1968) 68 Cal.2d 222, 225 [in certain situations, extrinsic evidence may be used to prove elements of agreement not reduced to writing].) The difference between express and implied promises “lies merely in the mode of manifesting assent. Just as assent may be manifested by words or other conduct, sometimes including silence, so intention to make a promise may be manifested in language or by implication from other circumstances, including course of dealing or usage of trade or course of performance.” (Rest.2d Contracts, § 4, com. a, p. 14; see Binder v. Aetna Life Ins. Co. (1999) 75 Cal.App.4th 832, 850 [distinction between express and implied-in-fact contracts relates only to manifestation of assent].)

2. Inferred from conduct

Promises may be inferred from conduct when the parties have entered a written contract or when they have no written contract. In this appeal, we are concerned with situations where a written contract exists. Justice Mosk, writing for a unanimous California Supreme Court, set forth some basic principles regarding contract terms inferred from conduct when the parties have expressed other terms of their agreement in writing:

“The recognition of implied-in-fact contract provisions is part of the modern trend in contract law to reverse ‘“the common law presumption that the parties’ writing and the official law of contract are the definitive elements of the agreement. Evidence derived from experience and practice can now trigger the incorporation of additional, implied terms.”’ [Citation.] Whether the parties’ conduct creates such implied agreements is generally ‘a question of fact.’ [Citation.] Implied contractual terms ‘ordinarily stand on equal footing with express terms.’ [Citation.]” (Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454, 463, disapproved on another ground by Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 352, fn. 17.)

Justice Mosk’s statement that the creation of an implied agreement through conduct generally is a question of fact is based on the principles of California contract law that (1) a manifestation of mutual assent by the parties is essential to the existence of a contract, or a particular provision in a contract, and (2) the manifestation of mutual assent is a question of fact. (Alexander v. Codemasters Group Limited (2002) 104 Cal.App.4th 129, 141.) Furthermore, the factual question of “[m]utual assent is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings. [Citation.]” (Ibid.)

California’s application of an objective standard to determine when the parties’ conduct manifests a mutual assent was discussed at length by the California Supreme Court in Desny v. Wilder (1956) 46 Cal.2d 715, 734-739. The court recognized that use of the objective standard led to the conclusion that there are genuine implied-in-fact contracts of both the meeting-of-the-minds and the no-meeting-of-the-minds varieties. (Id. at pp. 736-737, citing Costigan, Implied-in-Fact Contracts and Mutual Assent (1920) 33 Harv. L.Rev. 376, 398.) The no-meeting-of-the-minds variety of implied-in-fact contract exists where the parties’ outward conduct meets an objective standard for the manifestation of assent despite the lack of actual mental assent (i.e., subjective assent). (Ibid.)

California contract law’s use of an objective standard for assent protects the reasonable expectations of the parties. (Building Industry Assn. of Central California v. City of Patterson (2009) 171 Cal.App.4th 886, 896; Ticor Title Ins. Co. v. Employers Ins. of Wausau (1995) 40 Cal.App.4th 1699, 1708.) The objective standard also underlies the California Supreme Court’s mention of reasonable reliance when discussing agreements inferred from conduct. In the employment law context, the court referenced an employee’s reasonable reliance on the employer’s personnel policies as a basis from which a trier of fact could infer an agreement to limit the grounds for terminating employment. (Guz v. Bechtel National, Inc., supra, 24 Cal.4th at p. 344.)

3. Inferred solely from express language

Some courts have used the term “implied covenant” to describe obligations derived from an interpretation of the express language of a written contract. (Addiego v. Hill (1965) 238 Cal.App.2d 842, 847 [contractual phrase “same terms” interpreted to mean “terms equal in value”].) Using the word “implied” in this way is not consistent with the statutory definitions given to express and implied contracts (see Civ. Code, §§ 1620-1622). It is, however, consistent with the way dictionaries define “imply.” For instance, Webster’s Third New International Dictionary (1986) at page 1135 defines “imply” to mean “to convey or communicate not by direct forthright statement but by allusion or reference likely to lead to natural inference: suggest.…” Thus, a drafter of a document may use words to imply a particular meaning without stating that meaning explicitly.

4. Inferred from ambiguous language and extrinsic evidence

Where contractual language is ambiguous, the resolution of that ambiguity may depend on inferences drawn from the language as well as extrinsic evidence. (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165-1166.) Whether contractual language is ambiguous is a question of law subject to independent review on appeal. (Id. at p. 1165.) The ultimate question of the construction of ambiguous language poses a question of law subject to independent review on appeal if the relevant extrinsic evidence is not conflicting. (Id. at p. 1166.)

5. Implied in law

Implied covenants also include covenants that are implied in law. (Desny v. Wilder, supra, 46 Cal.2d at pp. 735-736 [“contracts are either made in fact or the obligation is implied in law”].) Generally, a provision implied in law is “an obligation imposed by the court to bring about justice and equity, without regard to the intent of the parties and without regard to whether they have an agreement.” (1 Williston on Contracts (4th ed. 2007) § 1:6.) For example, existing legal standards generally are implied by law into a contract. (Building Industry Assn. of Central California v. City of Patterson, supra, 171 Cal.App.4th at p. 895; see 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 752, pp. 842-843, and cases cited therein.)

6. Summary

We will consider whether Sunkist has demonstrated that the covenant of equitable marketing opportunity cannot exist under any of these four types of so-called implied covenants: inferred from conduct, inferred solely from express language, inferred from ambiguous language and extrinsic evidence, and implied in law. If Sunkist has made such a demonstration, then it is entitled to reversal of the judgment.

B. Express Language

We begin addressing the rights and obligations that comprise the parties’ contractual relationship by examining the language used in their written contract. Paragraph No. 3 of the license agreement provided in part:

“(b) Shipping and Marketing Control. Packer recognizes that Growers market their fruit through the agencies of the Sunkist System. Market opportunities and sales are developed and consummated by the component agencies in common of said Sunkist System. Packer, as such, is not a member of the Sunkist System.”⁸

8 Paragraph No. 3(c) of the license agreement provided additional details regarding Sunkist’s control over marketing by stating that Packer’s function was packing, not marketing, and that Packer was not to solicit orders for fruit packed for Sunkist’s growers.

The first recital in the license agreement stated that the “‘Sunkist System’ … is organized and operates for the sole benefit of its Growers in the marketing of their citrus fruit produced in California and Arizona.”

Sunkist contends the foregoing language established a contractual relationship that was “flatly inconsistent with the term implied by the court” and further established that nonmember packinghouses had no contractual rights to Sunkist marketing opportunities. Sunkist further contends, citing Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861 and Winet v. Price, supra, 4 Cal.App.4th 1159, that this court should independently construe the license agreement because the extrinsic evidence is not conflicting.

Based on Sunkist’s contentions, we will undertake the standard analysis used to review a trial court’s interpretation of a written contract. That analysis is set forth in Winet v. Price and begins with the threshold question of whether the written provisions of the contract are ambiguous. (Winet v. Price, supra, 4 Cal.App.4th at p. 1165.)

1. Ambiguity

a. Rules of law

Appellate courts decide the question of ambiguity by considering all the credible extrinsic evidence concerning the parties’ intentions and determining whether the language is reasonably susceptible to more than one interpretation. (Winet v. Price, supra, 4 Cal.App.4th at p. 1165.) If, in light of the extrinsic evidence and the language itself, a contract is reasonably susceptible to more than one interpretation, the extrinsic evidence is admissible to aid in the ultimate construction of the contract. (Ibid.)

California law provides that the overriding goal of contract interpretation is to give effect to the parties’ mutual intentions as it existed at the time of contracting. (Civ. Code, § 1636.) Where ambiguity exists, the language “must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.” (Civ. Code, § 1649.) This rule does not concern subjective beliefs or understandings, but instead protects the objectively reasonable expectations of the parties. (Ticor Title Ins. Co. v. Employers Ins. of Wausau, supra, 40 Cal.App.4th at p. 1708; see Alexander v. Codemasters Group Limited, supra, 104 Cal.App.4th at p. 141 [the factual question of mutual assent is determined under an objective standard].)

Based on the foregoing rules of law, the question of ambiguity will be addressed from the perspective of an objectively reasonable person. Accordingly, we will consider what an objectively reasonable person would have thought after reading paragraph No. 3(b) of the license agreement.

b. Analysis regarding ambiguity

An objectively reasonable person would realize before reading the license agreement that there are three unambiguous ways it could have dealt with the question of Sunkist’s obligation to deliver fruit orders to Stark Packing. First, the license agreement could have made a clear statement avoiding the subject altogether. Second, it could have used clear language to address the subject and stated that Sunkist had no duty to deliver any fruit orders to Stark Packing.⁹ Third, clear language could have stated Sunkist had a duty to provide fruit orders to Stark Packing.

9 The language would have meant the same thing if phrased in terms of the correlative right of Stark Packing—that is, if it stated Stark Packing had no right to receive fruit orders from Sunkist.

Based on these possibilities, we first consider whether the license agreement unambiguously avoids or addresses the obligation to deliver fruit orders.

The license agreement does not state unequivocally that (1) the subject of fruit orders is beyond the scope of the agreement or (2) the subject is covered by a particular provision of the agreement. Furthermore, the agreement does not address the subject in clear, direct terms by stating that (1) Sunkist shall deliver fruit orders, (2) the delivery of fruit orders is committed to the sole and absolute discretion of Sunkist, or (3) Stark Packing has no right to receive any fruit orders.

Given the absence of a clear, direct statement and the references to marketing and sales in paragraph No. 3(b) of the license agreement, we will consider whether that language is clear or, alternatively, reasonably susceptible to more than one interpretation. The analytical technique we will use is to set forth the contractual language and, in italics, include the parties’ interpretations of what the language means. Then, we will determine whether the interpretations are reasonable.

With respect to the first sentence of paragraph No. 3(b) of the license agreement, Stark Packing contends, in effect, that it should be read as follows: Packer recognizes that Growers market their fruit through the agencies of the Sunkist System and the parties understand that marketing shall continue under this system (which may be amended from time to time to react to market conditions) until the agreement is terminated.

Sunkist argues the sentence should be read to mean: Packer recognizes that Growers market their fruit through the agencies of the Sunkist System but the parties understand that Sunkist might or might not continue to use that system to market the fruit Stark Packing packs for Growers and further understand that Stark Packing has no reasonable expectation that any fruit it packs under this agreement will be sold by Sunkist.

Alternatively, Sunkist argues the sentence means: Packer recognizes that Growers market their fruit through the agencies of the Sunkist System but Sunkist’s responsibility to market Growers’ fruit packed by Packer is not a topic addressed by this agreement.

As to the second and third sentences of paragraph No. 3(b) of the license agreement, Stark Packing appears to adopt the following interpretation: Marketing opportunities and sales are developed and consummated, and shall continue to be developed and consummated during the term of this agreement, by the component agencies in common of and in accordance with said Sunkist System. Packer, as such, is not a member of the Sunkist System and, therefore, shall not be involved in the development of marketing opportunities and sales, but shall rely on said system to generate sales.

In contrast, Sunkist asserts the following interpretation: Marketing opportunities and sales are developed and consummated by the component agencies in common of said Sunkist System and, consequently, Stark Packing as a nonmember has no right to receive any fruit orders from Sunkist and Sunkist can choose not to market any of Growers’ fruit packed by Stark Packing.¹⁰

10 Sunkist made this argument to the trial court. The trial court asked counsel for Sunkist whether the agreement meant that Sunkist could require the packer to deal exclusively with it and then turn around and say, “‘Too bad, I don’t like you, I am not going to market your fruit.[’] And the packer just has to deal with that.” Counsel replied, “That’s correct, Your Honor.”

Bluntly stated, we conclude that an objectively reasonable person, cognizant of the extrinsic evidence, would be confused by paragraph No. 3(b) of the license agreement. In particular, when considering what purpose or purposes were served by that provision’s references to the Sunkist System, an objectively reasonable person would conclude there is more than one reasonable possibility. On the one hand, the sole purpose could have been to prohibit the packer’s involvement in the marketing process. On the other hand, the provision also could have served a second purpose—indicating how the marketing of the growers’ fruit would occur.

For example, when Stark Packing “recognized” that the growers marketed their fruit through the Sunkist System and the system developed marketing opportunities and consummated sales, Stark Packing could have been agreeing to accept that system (both its positive and negative aspects) and Sunkist could have been assuring Stark Packing that during the term of the agreement the marketing of the fruit of the member-growers served by Stark Packing would be in accordance with the Sunkist System.

Alternatively, the first three sentences of paragraph No. 3(b) of the license agreement merely could have been background information for the last sentence, which states that Stark Packing shall comply with Sunkist’s instructions and regulations in grading, packing and handling the growers’ fruit.

Accordingly we conclude the provisions of paragraph No. 3(b) of the license agreement are ambiguous.

2. The relevant extrinsic evidence is not in conflict

“California courts have long recognized that the interpretation of a written instrument is a judicial function unless the interpretation turns upon the credibility of extrinsic evidence [citation].” (The Lundin/Weber Co. v. Brea Oil Co., Inc. (2004) 117 Cal.App.4th 427, 433.)

In this case, Sunkist reaches its conclusion that the interpretation of the contract is a question of law subject to independent review based on its assertion that “[t]here was no parol evidence of the parties’ intentions at the time of contracting.” If this assertion is correct, it follows that there is no conflict in or question of credibility concerning the extrinsic evidence.

Stark Packing argues, among other things, that extrinsic evidence was presented, and the most prominent piece of that evidence was the marketing equity policy statement.

We agree with Stark Packing that competent extrinsic evidence was admitted into evidence during the trial. The reference to the “Sunkist System” in paragraph No. 3(b) of the license agreement means that evidence showing what the system was and how it worked was relevant to explaining the meaning of that contract provision. That evidence includes the hierarchy of Sunkist documents that address Sunkist’s operations and its marketing activity, including its (1) amended articles of incorporation, (2) bylaws, (3) sales policy guidelines adopted by its board of directors, and (4) a marketing equity policy statement. The evidence also includes testimony by Sunkist’s officers and board members about how Sunkist operated. These witnesses included McGuigan, Riddle and Mark Gillette, a former board member of Sunkist.

We further conclude that the extrinsic evidence regarding the Sunkist System and Sunkist’s marketing operations were not in conflict. Even if conflicting inferences could be drawn from the evidence, that alone is not enough to create a question of fact that would (1) take the interpretation of the agreement away from the trial court and require the jury to determine the meaning of the agreement or (2) prevent independent review of the interpretation at the appellate level. (See Parsons v. Bristol Development Co., supra, 62 Cal.2d at p. 866, fn. 2 [possibility of drawing conflicting inferences from extrinsic evidence does not preclude independent review on appeal].)

The conclusion that the extrinsic evidence admitted is not conflicting leads to the further conclusion that the interpretation of the license agreement presents a question of law subject to our independent review. (Parsons v. Bristol Development Co., supra, 62 Cal.2d at p. 866 [when extrinsic evidence is not in conflict, an appellate court is required to determine independently contract’s meaning].)

3. Interpretation of the license agreement

Applying the objectively reasonable person standard to the extrinsic evidence and the language of the license agreement, we conclude (1) the most tenable interpretation of that agreement is that Sunkist was obligated to abide by the Sunkist System in marketing the fruit packed by Stark Packing and (2) that system includes the mandatory language in the marketing equity policy statement that “Sunkist shall provide equitable marketing opportunity for every affiliated shipper.”

First, Sunkist already had an obligation to abide by the Sunkist System. That obligation was owed to all of its grower-members, including the grower-members served by Stark Packing’s facility. Consequently, if Sunkist treated the growers for whom Stark Packing handled fruit in accordance with the Sunkist System, then it would follow inevitably that Stark Packing would receive fruit orders in accordance with that system. Therefore, extending the obligation to Stark Packing does not disrupt, and is consistent with, the existing relationships among the members of the cooperative.

Second, the conclusion that paragraph No. 3(b) of the license agreement had the dual purpose of limiting Stark Packing’s role in marketing and defining Sunkist’s role in how marketing would be conducted is justified by the fact that the limitation on Stark Packing is stated in more direct language in paragraph No. 3(c) and, therefore, the first three sentences in paragraph No. 3(b) would be redundant if it were intended only to limit Stark Packing’s role.

Third, a reasonable person in Sunkist’s position should have realized that the ambiguous language in paragraph No. 3(b) of the license agreement and the existence of mandatory language in Sunkist’s marketing equity policy statement regarding “affiliated shippers” would create a reasonable expectation on the part of the packer that the fruit it packed under a license agreement would be marketed in accordance with the marketing equity policy statement. (Civ. Code, § 1649.)

Based on our conclusion regarding the objectively reasonable meaning of the license agreement, we do not resort to the canon of construction that “the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.” (Civ. Code, § 1654.)

4. Alternate interpretation

As an alternative to the foregoing interpretation of the license agreement, we will analyze the possibility that the license agreement does not address the subject of Sunkist’s obligation to market the fruit packed by Stark Packing under the license agreement. Under this alternate interpretation, we will consider whether the written terms of the license agreement were supplemented with a covenant inferred from conduct.

C. Covenant Inferred from Conduct

1. Completeness of the written license agreement

The first argument made by Sunkist against a covenant inferred from conduct is that the packinghouse license agreement cannot be supplemented by such a covenant because the written agreement was a final and complete statement of the terms of the parties’ agreement. (Code Civ. Proc., § 1856, subd. (b).)¹¹ Sunkist contends its obligations to Stark Packing were completely covered by the packinghouse license agreement because the agreement explained the Sunkist System and the relationships of the parties. Sunkist also argues that the implied term would redefine the relationship established by the express terms of the license agreement.

11 Further statutory references are to the Code of Civil Procedure unless otherwise indicated.

If a written instrument is intended by the parties as the final expression of their agreement with respect to the terms, those terms cannot be contradicted by evidence of any prior or contemporaneous agreement. (§ 1856, subd. (a).) Also, if a writing is intended by the parties as a complete and exclusive statement of the terms of their agreement, then the writing may not be explained or supplemented by evidence of other terms. (§ 1856, subd. (b).)

The California Legislature has authorized courts to decide these questions regarding the parties’ intentions. Specifically, subdivision (d) of section 1856 provides:

“The court shall determine whether the writing is intended by the parties as a final expression of their agreement with respect to such terms as are included therein and whether the writing is intended also as a complete and exclusive statement of the terms of the agreement.”

Under the foregoing principles, extrinsic evidence of additional terms is excluded when (1) the additional term contradicts a written term that was intended to be final or (2) the additional term is merely explanatory of or supplemental to written terms intended to be complete and exclusive.

In this case, as an alternative to the interpretation of an ambiguous contract, the trial court impliedly found that (1) the implied covenant of equitable marketing opportunity did not contradict a written term intended as final and (2) the written packinghouse license agreement was not intended as a complete and exclusive statement of the terms of the agreement.

a. Contradiction and finality

Does the license agreement contain final terms that are contradicted by the implied covenant of equitable marketing opportunities?

Paragraph No. 3(b) of the license agreement does not explicitly create, define, limit or negate an obligation for Sunkist to present orders to Stark Packing. Therefore, the implied covenant of equitable marketing opportunity does not contradict directly an express provision of the license agreements.

Sunkist appears to contend a contradiction exists between the covenant and the sentence in paragraph No. 3(b) of the license agreement that stated the packer was not a member of the Sunkist System. Sunkist infers the sentence means that Stark Packing is not entitled to any benefit from the Sunkist System. We conclude this inference is not a tenable interpretation of the license agreement and, as a result, no contradiction exists between the implied covenant and the express language of the license agreement.

Because no express term is contradicted by the implied covenant, there is no need to address the finality of any express term.

b. Completeness

The license agreement did not address, one way or the other, the question of the completeness of its written provisions. Specifically, the license agreement did not state that it reflected the entire agreement of the parties. (See Masterson v. Sine, supra, 68 Cal.2d at p. 225 [instrument itself may state whether it is an exclusive embodiment of the parties’ agreement].) Conversely, the license agreement did not state that it was incomplete.

In the absence of an integration clause, courts addressing the completeness and exclusivity of a written agreement consider “whether the additional term is such that, if agreed upon, it would certainly have been included in the writing.” (Cal. Law Revision Com. com., reprinted at 20A West’s Ann. Code Civ. Proc. (2007 ed.) foll. § 1856, p. 11; see Masterson v. Sine, supra, 68 Cal.2d at pp. 228-229.)

In the circumstances of this case, we cannot conclude that the implied covenant of equitable marketing opportunity, if it were to exist at all, certainly would have been included in the written license agreements. (Masterson v. Sine, supra, 68 Cal.2d at p. 229.)

The license agreement clearly established Sunkist as the exclusive marketing agent for the fruit packed by Stark Packing. It did not explicitly identify or limit the obligations that Sunkist had in that role. Instead, the license agreement referred to the Sunkist System. As a result, Sunkist’s obligations as marketing agent are defined by the Sunkist System. By drafting license agreements to refer to the system, rather than explicitly including a covenant of equitable marketing opportunities, Sunkist maintained the flexibility of modifying its system to react to changes in the citrus market without having to amend each license agreement it had with a nonmember packer. Therefore, there is a reasonable explanation for why the specific covenant was not spelled out in the license agreement.

Accordingly, Sunkist has not demonstrated that the license agreement was complete as written.

2. Existence of the covenant inferred from conduct

Stark Packing relies on Scott v. Pacific Gas & Electric Co., supra, 11 Cal.4th 454 in arguing that (1) the trial court decided a question of fact when it determined the jury should be instructed that the covenant of equitable marketing opportunity existed and (2) the trial court’s finding that the covenant existed is supported by substantial evidence.

Sunkist’s claims of error do not include the possibility that the trial court decided a question of fact by determining the implied covenant of equitable marketing opportunity existed based on the conduct of the parties and the surrounding circumstances. Instead, Sunkist has asserted that “the trial court, not the jury, implied the term as a matter of law after finding that it met the requirements for implied terms.” As a result, Sunkist has not argued that the trial court erroneously usurped the role of the jury by deciding the question of fact regarding the implied covenant’s existence. (See Haycock v. Hughes Aircraft Co. (1994) 22 Cal.App.4th 1473 [trial court erred by instructing jury implied covenant existed; remanded for jury trial on that question of fact].)

Because Sunkist has not argued the trial court usurped the role of the jury, we will not consider whether the trial court erred on this basis. (Mastro v. Petrick (2001) 93 Cal.App.4th 83, 91-92 [issue not raised is considered waived].) Instead, we will proceed to the question whether the trial court’s finding is supported by substantial evidence.

We conclude that substantial evidence is present in the record to support a finding that the implied covenant of equitable marketing opportunities exists.

The relevant conduct includes Sunkist’s adoption of a marketing equity policy statement that referenced “affiliated shippers” not just members. The policy statement, together with Sunkist’s other documents that provide the context for understanding the policy, sufficiently support a finding of fact that an implied covenant existed and that Stark Packing reasonably relied on the policy. For example, the evidence shows (1) Stark Packing agreed with Sunkist to handle, pack, and ship fruit produced by Sunkist’s members and (2) Sunkist undertook the responsibility of treating its members fairly and equitably. If Sunkist treated its members fairly, a natural consequence would be that the packer handling the fruit for those members would receive a fair allocation of fruit orders. Conversely, Sunkist could not withhold orders from a packer without harming its members who used the packer to handle their fruit. Thus, a trier of fact could find that Stark Packing’s reliance on the marketing equity policy statement was reasonable.

We note, furthermore, that our conclusions regarding the inferences supported by the marketing equity policy statement are compatible with our Supreme Court’s decisions regarding other types of policies that support the existence of implied covenants. (See Guz v. Bechtel National, Inc., supra, 24 Cal.4th at p. 344 [employer’s personnel policies provide sufficient basis for finding an implied agreement to limit the grounds for terminating employment].)

Based on the foregoing, we conclude substantial evidence supports the finding of fact that the parties’ conduct objectively manifested a mutual assent to a covenant of equitable marketing opportunities.

3. Cousins requirements

Our conclusion that the evidence of the parties’ conduct supports the existence of the implied covenant is not altered by the often-quoted summary of restrictions set forth by the court in Cousins Inv. Co. v. Hastings Clothing Co. (1941) 45 Cal.App.2d 141 (Cousins):

“Summarized, therefore, the rule deducible from the foregoing authorities controlling the exercise of judicial authority to insert implied covenants may be stated as follows: (1) the implication must arise from the language used or it must be indispensable to effectuate the intention of the parties; (2) it must appear from the language used that it was so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (3) implied covenants can only be justified on the grounds of legal necessity; (4) a promise can be implied only where it can be rightfully assumed that it would have been made if attention had been called to it; (5) there can be no implied covenant where the subject is completely covered by the contract.” (Id. at p. 149; see Lippman v. Sears, Roebuck & Co. (1955) 44 Cal.2d 136, 142 [citing Cousins]; Stockton Dry Goods Co. v. Girsh (1951) 36 Cal.2d 677, 681 [citing Cousins].)¹²

12 In Cousins, the trial court determined a lease that set the rent due as a percentage of gross sales plus a monthly minimum included an implied covenant to remain in business on the premises until the end of the lease. (Cousins, supra, 45 Cal.App.2d at p. 143.) The appellate court reversed this determination, stating that if such a covenant had been intended it would have been stated in the skillfully drawn agreement. (Id. at p. 153.)

Witkin describes the rules summarized in Cousins as both the “conventional view” and the “strict test” for implied conditions and covenants. (1 Witkin, Summary of Cal. Law, supra, Contracts, §§ 795-796, pp. 886-888.) Witkin also states that the court in Addiego v. Hill, supra, 238 Cal.App.2d 842 declared and followed a far more liberal test:

“‘The modern trend of the law is to favor the enforcement of contracts and, if feasible, to carry out the intentions of the parties. Neither law nor equity requires that every term and condition be set forth in a contract. The usual and reasonable terms found in similar contracts may be considered, unexpressed provisions of the contract may be inferred from the writing, external facts may be relied upon, and custom and usage may be resorted to in an effort to supply a deficiency if it does not alter or vary the terms of the agreement.’” (1 Witkin, Summary of Cal. Law, supra, Contracts, § 796, p. 888, quoting Addiego v. Hill, supra, at p. 846.)

Both Cousins and Addiego v. Hill primarily involved the interpretation of written provisions rather than a contract provision inferred from conduct and the surrounding circumstances. Thus, they do not conflict with the principle set forth in Scott v. Pacific Gas & Electric Co., supra, 11 Cal.4th 454 that the existence of a contract term inferred from conduct is a question of fact.

The only restriction mentioned in Cousins that is relevant to a covenant inferred from the parties’ conduct concerns whether the subject of the covenant has been completely covered by the express terms of the written contract, an issue already addressed. (See part II.C.1, ante.)

In addition, we conclude the restrictions mentioned in Cousins do not affect the standard analysis used to resolve the meaning of ambiguous contractual language. Therefore, our interpretation of the license agreement in part II.B, ante, need not include a discussion of Cousins.

D. Conclusion

The evidence supports the determination that the parties manifested a mutual assent to the implied covenant of equitable marketing opportunities. Two alternate grounds support this determination. First, the license agreement is ambiguous, the extrinsic evidence relevant to the ambiguity is not in conflict, and the proper interpretation of the ambiguity leads to the conclusion that the covenant exists. Second, if the license agreement did not address the subject matter of the covenant, then the covenant can be inferred from the conduct of the parties and the surrounding circumstances.

III. Overly Broad Implied Term

A. Contentions

Sunkist argues that the implied term, as formulated by the court, was overly broad because it included specialty fruit varieties and fruit sold in the export market. Stark contends (1) the trial court properly construed the marketing equity policy statement when it defined the implied covenant and (2) Sunkist forfeited the argument that the instruction lacked clarity because it failed to ask for a more narrow instruction.

B. Analysis

Where a jury instruction is correct as far as it goes but is too general or incomplete, a party’s failure to request an additional or a qualifying instruction will operate as a waiver of that party’s right to challenge that instruction on appeal. (Suman v. BMW of North America, Inc. (1994) 23 Cal.App.4th 1, 9.)

Here, counsel for Sunkist drafted the instruction and did not alert the trial court to the possibility that the instruction should be written more narrowly. Consequently, we conclude that Sunkist forfeited the right to challenge the instruction on the ground that the instruction was overly broad.

Sunkist’s argument regarding overbreadth may be a variation of its argument that the term is too uncertain to be enforceable as a contractual obligation. That argument is addressed next.

IV. Implied Term Was Not Too Vague or Uncertain

Sunkist contends that the implied covenant was unenforceable as a matter of law because the scope of the duty was vague and failed to provide a rational basis for the assessment of damages. (See Robinson & Wilson, Inc. v. Stone (1973) 35 Cal.App.3d 396, 407 [no rational basis for remedy where a construction company does not complete a portion of a building for which no design plans exist].)

The parties both contend that the issue whether a contract term is sufficiently definite presents a question of law subject to independent review. (Ersa Grae Corp. v. Fluor Corp. (1991) 1 Cal.App.4th 613, 623.)

In this case, the trial court provided a further explanation of the implied covenant of equitable marketing opportunity by including an instruction modeled after the business judgment rule. As a result, the jury was instructed:

“A business policy or practice is not arbitrary or unfair if it is reasonably related to a valid business objective. Your determination of whether the action taken was arbitrary or unfair requires an examination of the entire context of the factual situation in which the action was taken or the conduct occurred. The action or conduct alleged to be unfair or arbitrary must be considered with respect to Sunkist’s type of business, and its legitimate business interests.”

The jury also was instructed that damages for lost packing charges and additional rehandling expenses need not be calculated “with mathematical precision, but there must be a reasonable basis for computing the loss.”

A. Rationality of Formula

The implied covenant of equitable marketing opportunity is not necessarily so indefinite as to provide no rational basis for computing damages. The calculation of lost packing income and increased rehandling expense presented by Stark Packing was straightforward. Lost packing income equaled (1) the number of cartons of fruit that Stark did not ship because Sunkist did not treat Stark equitably, multiplied by (2) the average packing income per carton. Similarly, the rehandling expense equaled (1) the number of cartons packed but not sold as a result of Sunkist’s failure to treat Stark Packing equitably, multiplied by (2) the amount of expenses incurred in rehandling each carton. Each formula is easily within the bounds of rationality.

B. Estimating Reduced Shipments

Sunkist’s main point appears to be that the jury did not have a rational basis for estimating how many more cartons of fruit Stark would have sold had Sunkist abided by its policy and treated Stark equitably.

We disagree with this argument because substantial evidence exists to support the sell-all-fruit-packed theory. (See part VII.B, post.)

V. Evidence Supports a Finding the Implied Covenant Was Breached

A. Contentions of the Parties

Sunkist contends that Stark Packing presented no evidence that any favored packer received better marketing opportunities than it did and, instead, based its case on evidence of unequal results. Sunkist further contends that Stark Packing presented no evidence that it was treated differently in the distribution of fruit orders for reasons unrelated to its merit or sales standing.

Sunkist also challenges the evidence that Stark Packing did present. First, Sunkist argues that evidence of unequal results was insufficient to establish a breach of the covenant of equitable marketing opportunity. Second, Sunkist argues that the evidence of episodes of unfair treatment did not establish a breach.

Stark Packing contends the evidence concerning results and incidents of animosity is circumstantial evidence that surpasses the threshold set by the deferential substantial evidence test. (See Jessup Farms v. Baldwin, supra, 33 Cal.3d at p. 660.)

B. Analysis

Under the substantial evidence standard of review, we must give Stark Packing the benefit of every reasonable inference and resolve all evidentiary conflicts in its favor. (Jessup Farms v. Baldwin, supra, 33 Cal.3d at p. 660.)

1. Unequal results provided some evidence of breach

Sunkist argues that unequal results alone could not prove a breach. We agree with Sunkist that unequal results do not necessarily establish that it allocated fruit orders inequitably. The more important question, however, is whether the evidence of unequal results reasonably supports an inference that Sunkist failed to provide marketing opportunities to Stark Packing on an equitable basis.

We conclude that conflicting inferences can be drawn from the evidence regarding the fruit shipments by packinghouses in District 1. One inference is that the differences in shipments resulted from legitimate differences among the packinghouses concerning the competitive merits of their operations and product. Another inference is the relatively poor results of some packinghouses occurred because Sunkist played favorites and did not abide by its equitable marketing policy statement. Applying the substantial evidence rule, we must conclude that the jury drew the latter inference, unless that inference was unreasonable.

We conclude that the inference was reasonable because it (1) is supported by logic and (2) is consistent with other circumstantial evidence.

First, there is a logical connection between Sunkist’s allocation of fruit orders and the results achieved by the packinghouses. If Sunkist treated Stark Packing inequitably, its results would suffer and the results of some other packinghouse or packinghouses would improve. While we recognize that other factors contribute to the relative success of the packinghouse, a potential cause of relatively poor results could be explained, in whole or in part, by inequitable treatment by Sunkist. Stated otherwise, the evidence regarding the results of packinghouses in District 1 provides some, but not conclusive, evidence that Sunkist acted inequitably.

Second, in attempting to prove its case, Stark Packing presented evidence that Brad Stark was critical of Sunkist management, that Sunkist management responded negatively to his criticism and developed an animosity to Brad Stark, and that this animosity was expressed in a variety of ways, including a reduction in orders. The evidence regarding management’s animosity towards Brad Stark was provided to explain Sunkist’s motive for its action. Specifically, this evidence countered Sunkist’s position that its actions were based on a legitimate business interest or valid business objective.

In short, Stark Packing presented evidence that Sunkist’s management had a motive to treat it unfairly and acted unfairly in certain instances not directly related to the allocation of orders. This evidence supports the inference that Sunkist’s management also treated Stark Packing unfairly when it allocated fruit orders.

2. Episodes of unfair treatment

Sunkist argues that evidence of episodes of unfair treatment¹³ did not establish a breach of the implied covenant to provide equitable marketing opportunities.

13 For example, substantial evidence supports a finding by the jury that Sunkist aided a competing packinghouse in recruiting one of Stark Packing’s largest growers.

We acknowledge that the evidence of unfair treatment did not necessarily prove that Sunkist failed to provide equitable marketing opportunities to Stark Packing. The relevant question is whether it is evidence that supports the inference that a breach occurred. We conclude that the episodes indicate that Sunkist treated Brad Stark and his companies poorly and, thus, support the inference that Sunkist also treated those companies inequitably in the context of providing orders for fruit.

Furthermore, the evidence regarding Sunkist’s motives and the evidence regarding results surpasses a substantial evidence threshold.

VI. Statute of Limitations

A. Background

Stark Packing initially filed its complaint on November 2, 2001, and claimed Sunkist had breached its packinghouse license agreement. The four-year statute of limitations set forth in section 337 applies to actions based on written contracts. This statute bars the recovery of damages accruing before November 2, 1997, unless an exception applies.

The trial court ruled that the discovery rule provided such an exception. As a result, the court allowed the jury to decide whether a delay in the running of the statute of limitations was justified. Specifically, question No. 8 of the special verdict form asked whether Sunkist proved that, as of November 2, 1997, Stark Packing knew, or should have known, that it was losing packing charges or incurring rehandling expenses. In a nine-to-three vote, the jury answered “no” to this question.

B. Contentions of the Parties

Sunkist argues the statute of limitations barred Stark Packing from seeking or recovering damages for breaches that occurred more than four years before Stark sued Sunkist. The discovery rule, Sunkist contends, does not apply to the breach of contract claim and, even if it does, the evidence shows Stark knew more than four years before it filed suit that Sunkist did not sell all of the fruit it packed in the 1996-1997 season and did not sell its pro rata share for that season.

Stark contends that Sunkist’s claim that the jury awarded damages for breaches more than four years old is based on speculation and that, in any event, any award of pre-1997 damages provides no basis for reversal.

C. Errors Concerning Discovery Rule Exception

1. Burden of proof

April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805 (April Enterprises) appears to be the first decision of the Courts of Appeal that stated the discovery rule could delay the running of the statute of limitations applicable to a breach of contract cause of action. The court stated that when a breach of contract claim is tried on its merits, “the plaintiff bears the burden of proof on the discovery issue. [Citation.]” (Id. at p. 832.) Accordingly, question No. 8 of the special verdict form used in this case contains error because it placed the burden of proof on the defendant, Sunkist.

During oral argument, counsel for Stark Packing suggested Sunkist may have been responsible for the misallocation of the burden of proof. The appellate record does not demonstrate that Sunkist proposed the question as stated in the special verdict form. Rather, the discussion of the special verdict form during the hearing on the posttrial motions indicates that counsel for Sunkist had objected to the presentation of the discovery issue to the jury. Consequently, we conclude the misallocation of the burden of proof on the discovery issue was not invited error and Sunkist did not waive the right to raise the point on appeal.

The question whether this instructional error was prejudicial is addressed post.

2. Discovery rule exception rarely applies to contract claims

In addition to the instructional error regarding burden of proof, we will consider the alternate theory of error raised by Sunkist—namely, that the discovery rule exception should not apply to a breach of contract claim like the one asserted by Stark Packing.

In April Enterprises, supra, 147 Cal.App.3d 805, the producer of a television program sued a television station for erasing certain videotapes of a program it had created as joint venturers. The trial court ruled that the producer’s claims for breach of fiduciary duty and breach of contract were time barred. The appellate court reversed and stated the trier of fact should determine whether the producer acted diligently in discovering the injury. (Id. at p. 833.)

In reversing, the appellate court considered whether the discovery rule should postpone the running of the statute of limitations to a breach of contract cause of action. (April Enterprises, supra, 147 Cal.App.3d at p. 830.) The court stated that its “research reveals that the discovery rule has not yet been held applicable to breach of contract actions except in narrow cases involving fraud [citations] or misrepresentation. [Citation.]” (Ibid.) Notwithstanding the lack of precedent, the court extended the discovery rule to breach of contract where (1) the breaches can be, and are, committed in secret and (2) the harm flowing from those breaches will not be reasonably discoverable by the plaintiffs until a future time. (Id. at p. 832.)

Consequently, we will examine whether both conditions exist in this case. With respect to learning of the harm, Brad Stark testified that Stark Packing was damaged because Sunkist failed to provide it with orders for the merchantable fruit that it picked and packed in accordance with the objectives set by Sunkist. As a result, fruit prepared for the fresh fruit market was diverted to the product fruit market. During oral argument, counsel for Stark Packing explained the harm suffered by stating that in the 1996-1997 season Stark Packing experienced a 15-fold increase in the fruit diverted to the products market after having been packed in accordance with weekly objectives.

Under Brad Stark’s theory of compensable harm, Stark Packing would have known of the alleged harm (a harm described by counsel as a 15-fold increase) as soon as fruit it had picked toward its objective was not sold as fresh fruit and diverted to the products market. Consequently, this is not a case where the harm experienced by the plaintiff was not discoverable until a future time. As a result, the breach of contract claim presented in this case does not satisfy both of the conditions set forth in April Enterprises, supra, 147 Cal.App.3d at page 832.

We conclude, as an alternative to the error regarding burden of proof, that it was error to present the discovery rule exception to the jury in this case.

3. Prejudice

We conclude the legal errors were prejudicial because the damages awarded by the jury for lost packing income and rehandling expenses exceeds the damage amounts requested by Stark Packing for the last four seasons within the four-year statutory period. For instance, the rehandling charges claimed by Stark Packing for the seasons from 1997-1998 through 2000-2001 totaled $790,793.20 and the amount awarded by the jury for rehandling charges was $898,000.

Stark Packing argues that prejudice has not been shown because the jury could have included extra interest expense in the awards of lost packing income and rehandling charges. Stark Packing refers to the testimony of Brad Stark regarding interest paid by Stark Packing on the money it borrowed to replace the funds it would have had if more of the fruit it packed had been sold. We reject this argument because the additional interest expense was categorically different from the lost packing income and rehandling charges. The jury instruction that defined lost packing income stated:

“To decide the amount of damages for lost packing charges, you must determine the gross, or total, amount of additional packing charges Stark Packing Corporation would have received if the Packinghouse License Agreement had been fully performed and then subtract from that amount the additional costs … that Stark Packing Corporation would have incurred in order to generate those additional packing charges.”

This formula of gross packing charges minus additional costs does not allow for an increase in the award of lost packing income to reflect additional interest expense that could have been avoided had more packing income been earned. Accordingly, we reject Stark Packing’s theory regarding why the errors related to the discovery rule were not prejudicial.

D. Remedy for Error

Under section 43, appellate courts have the authority to modify a judgment to correct an error and avoid the additional expense, delay, and hardship of a reversal and new trial. (9 Witkin, Cal. Procedure (5th ed. 2008) Appeal, § 855, p. 918.) A modification that decreases the amount of a money judgment may be conditioned upon the consent of the party that won the judgment. (See Cal. Rules of Court, rule 8.264(d) [conditional modification decreasing amount of judgment].) The decision to modify the amount of the judgment as a condition of affirmance typically is associated with “the interests of justice.” (Deevy v. Tassi (1942) 21 Cal.2d 109, 121.)

In this case, the harm to Sunkist from the error can be eliminated by reducing the award by the amount of damages claimed by Stark Packing for the 1996-1997 season. We recognize that this reduction probably is more than the jury attributed to that season and, consequently, will allow Stark Packing to choose between a new trial and a reduction of the judgment. Because of the resources that were expended in the first trial and the relatively small size of the error in comparison to the total amount of the judgment, we conclude the interests of justice will be furthered by giving Stark Packing the option of accepting a reduction in damages and avoiding the expense of a retrial.

The jury awarded Stark Packing $898,000 for rehandling charges. Stark Packing claimed $206,830 in rehandling charges for the 1996-1997 season. Therefore, we will reduce the award for rehandling charges to $691,170.

The jury awarded Stark Packing $2,646,000 in lost packing income. Stark Packing claimed it lost packing income of $583,099 in the 1996-1997 season. Therefore, we will reduce the award of lost packing income to $2,062,901.

VII. Excessive Damages

Stark arguably pursued two approaches to damages and those approaches were not necessarily compatible. We will call the first approach the “pro rata share theory” and will call the second approach the “sell-merchantable-fruit-packed theory.”

A. Pro Rata Share Theory

Stark’s pro rata share theory compares (1) the total tree crop for navel or Valencia oranges that Sunkist handled in District 1 for a particular season with (2) the amount of the tree crop shipped by each packinghouse in District 1. The comparison produces a percentage that Stark Packing regards as each packer’s pro rata share, and that percentage can be compared to each packer’s share of domestic sales.

For example, the 1996-1997 tree crop for navel oranges in District 1 totaled 37,587¹⁴ cars of fruit of which 1,681 cars (4.472 percent) came from Stark, 1,713 cars (4.557 percent) came from Millwood, and 1,398 cars (3.719 percent) came from Strathmore Packing, one of the other packinghouses in District 1. The pro rata share theory posits that if Sunkist allocated domestic orders for fresh fruit in accordance with a packer’s pro rata share of the tree crop, then (1) each packer’s percentage share of domestic sales would be the same as its percentage share of the tree crop and (2) Stark Packing would have received 4.472 percent of domestic sales.

14 The 37,587 cars of tree crop consist of (1) 27,804 cars sold in the domestic fresh fruit market, (2) 5,024 cars sold in the export market, and (3) 4,759 cars that went to products. A car of oranges is equivalent to 1,000 cartons.

The logical implication of the pro rata share theory is that Stark Packing was damaged when it did not get 100 percent of its pro rata share of domestic sales, and calculating those damages starts with determining the volume of fruit shipments necessary to reach Stark Packing’s pro rata share. (See Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960, 965 [goal of contract damages award is to place injured party in a position as good as it would have occupied had the contract not been breached].) It appears counsel for Stark Packing used this theory of damages in closing argument when he referred to other packinghouses selling 138 or 132 percent of their pro rata share and told the jury “we want you to pay us for what our share was.”

We will not describe in detail our calculations of the damage figures that can be justified based on the assumption that Stark Packing should have sold 100 percent of its pro rata share of domestic sales in each season for each type of citrus. It is enough to state that those figures are well below what the jury actually awarded for lost packing income and rehandling charges.¹⁵ Therefore, we conclude the evidence regarding pro rata shares for the various seasons, by itself, does not constitute substantial evidence to support the amount of the jury’s award.

15 Our calculations under the pro rata share theory are similar to those made by Sunkist and attached to its opening brief as an appendix.

Because the damages awarded by the jury for lost packing income and rehandling expenses are excessive under the pro rata share theory, we must consider whether the damages awarded are supported by Stark Packing’s other approach: the sell-merchantable-fruit-packed theory.

B. Sell-Merchantable-Fruit-Packed Theory

Stark Packing’s second approach is based on the assumption that it should have received orders for nearly all of the market quality fruit that it packed. Brad Stark used this approach to calculate the damages claimed in exhibits he presented at trial (e.g., exhibit Nos. 1716 and 1731). The packed but unsold cartons of market quality fruit provided the volume figures used to calculate (1) the claim for lost packing income and (2) the claim for rehandling charges, which was based on the effort and expense of unpacking the unsold cartons so the citrus could be transferred to the products market.

The jury awarded $898,000 for rehandling charges, which was approximately 90 percent of the $997,625 claimed by Stark. The jury awarded $2,646,000 for lost packing income, which was approximately 90 percent of the $2,939,873 claimed by Stark.

Sunkist challenges this approach to damages on the ground that the evidence does not support the predicate fact that Stark Packing would have sold all of the market quality fruit it packed if Sunkist had treated it equitably in accordance with the marketing equity policy statement. In denying Sunkist’s motion for new trial, the trial court rejected this argument by noting that “the records show that [Sunkist] did not sell [Stark’s] fair share or weekly objective.”

Stark Packing contends the damages awarded by the jury, which were less than the amounts claimed, should be upheld because the award fell within the range of options available to the jury and because the evidence shows Sunkist should have sold 99 percent of Stark’s most marketable fruit. Stark Packing also claims the damages award could reflect that it would have earned higher packing fees had the fruit it sold achieved a more favorable pricing. Finally, Stark Packing also raises the possibility that the jury could have corrected the rehandling charges and lost packing income to reflect that Stark had to pay interest on the money it borrowed to replace the funds it would have had if more of the fruit it packed had been sold.¹⁶

16 Brad Stark testified that Stark Packing and Millwood Packing lost $969,000 over the last five seasons of their operations and would have earned $6.8 million in profit if Sunkist had sold all the marketable fruit they packed. He also testified that the profit would have been about $10.2 million if corrected for the interest paid on money they had to borrow because Sunkist did not sell the fruit.

Brad Stark was asked during cross-examination to justify why Sunkist should have sold all the packed fruit that was graded in the top two categories, less certain packing adjustments. He responded, “That’s what Sunkist agreed to do when we signed up with them either as a grower or packer, is to market our fruit. They didn’t say we can only sell 80 percent. They said that they could market all of our fruit.”

In addition, Stark Packing argues it harvested, graded, and packed fruit based on the objectives set by Sunkist and it was justified in relying on the objectives. Stark refers to the testimony of Bill Roberson, the manager of Strathmore Packing Company from 1976 until 2003, to show that Sunkist did sell 99 percent of the fruit another packinghouse packed to meet its objective.

Stark Packing also cites Brad Stark’s testimony about six-week projections a group of shippers from Central California made to provide a better picture of what future inventory would be. The projections allowed Sunkist to know what was coming its way before the fruit was in the actual shipping container. Brad Stark testified that the group’s numbers were found to have “less than one percent variance from what the projections were as to the actual packouts.” From this evidence, Stark Packing appears to infer that Sunkist should have been able to send fruit orders more closely aligned with the objectives it set.

Resolving all evidentiary conflicts in favor of Stark Packing and giving it the benefit of every reasonable inference (Jessup Farms v. Baldwin, supra, 33 Cal.3d at p. 660), we conclude that the evidence is sufficient to support the amount of damages awarded by the jury. The jury could have found that Sunkist should have provided fruit orders that closely approximated the objectives relied upon by Stark Packing in determining how much fruit to pick. This underlying finding regarding the volume of business that Stark Packing would have done had Sunkist provided equitable marketing opportunities is sufficient to support the dollar amount of damages awarded.

In sum, we agree with the trial court’s determination that the damages awarded for lost packing income and rehandling charges were not excessive.

VIII. Loss of Assets Was Foreseeable

A. Background

In paragraph No. 27 of the first amended complaint, Stark Packing alleged that, as a result of Sunkist’s breach of contract, it has “been damaged in an amount that is not yet ascertained.…” Stark Packing’s prayer for relief requested “general and special damages in an amount according to proof at trial” as well as “consequential damages in an amount according to proof at trial.”

Stark Packing contends the lost packing income and rehandling charges crippled it, caused it to go into receivership, and led to the liquidation of its assets at “fire sale” prices. Brad Stark calculated Stark Packing’s total losses from being forced to sell under duress at approximately $16.76 million, of which $12 million was lost goodwill. The other $4.76 million in losses were calculated by Brad Stark by subtracting the $1.74 million received from the sale of Stark Packing’s two packinghouses from their estimated market value of $6.5 million.

Question No. 2 in the special verdict form asked whether Stark Packing had proven it was more likely than not that Sunkist’s breach of the packinghouse license agreement caused Stark Packing to lose packing charges, incur rehandling charges, or lose assets. In a nine-to-three vote, the jury answered “yes.” Question No. 3 in the special verdict form asked whether Stark Packing had proven the types of damages claimed were likely to occur in the ordinary course of events from a breach of the packinghouse license agreement. The jury answered “yes” for each type of damages claimed—that is, lost packing charges, rehandling charges, and loss of assets. Question No. 4 in the special verdict form asked whether Stark Packing had proven the types of damages it claimed were the kind of damage that both Sunkist and Stark Packing could have reasonably foreseen as a result of any breach at the time the contract was made. Again, the jury answered “yes” for each type of damages claimed.

Based on these findings, the jury proceeded to the question regarding the amount of damage suffered by Stark Packing and found damages of $4,824,000 due to the loss of assets.

The special verdict form, at the request of counsel for Sunkist, included the questions regarding the occurrence of the damages in the ordinary course of events and the foreseeability of damages. When discussing the special verdict form with the trial court, counsel for Sunkist contended that the lost assets were special damages and contested whether they were reasonably foreseeable when the contracts were entered. In contrast, counsel for Stark argued the lost asset damages were reasonably foreseeable because “[i]f you have a relationship with a packer and you cause that packer to lose his customers, the end result is they go broke and lose their assets. I mean that’s the obvious.” In addition, he argued that the loss of assets were not special damages or unusual for the situation because “you know, our position is that Sunkist knows packing houses go out of business when they lose growers who don’t have enough income to keep the doors open.” The trial court responded: “Yes. I am inclined to agree with [Stark Packing] on this. I think that it is not unusual that if a contract such as this is indeed breached, that financial ruin or other financial ramifications could occur.”

B. Contentions of the Parties

Sunkist contends substantial evidence does not support the jury’s findings that the lost asset damages were likely to occur in the ordinary course of events and were foreseeable at the time the contracts were made. Sunkist argues (1) it could not have foreseen that Stark Packing would go out of business as the result of a breach of the packinghouse license agreement and (2) Stark Packing’s business failure and the resulting loss of assets did not occur naturally or inevitably from any breach of the packinghouse license agreements. In addition, Sunkist contends Stark Packing did not specially plead damages related to lost assets as it was required to do.

Stark Packing contends a reasonably foreseeable consequence of Sunkist’s breach of the agreements in which the family-owned operations were committed exclusively to Sunkist’s growers was that Stark Packing would cease operating and lose its assets.

C. Analysis

The measure of damages for breach of a contract is “the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.” (Civ. Code, § 3300.) The goal of this measure of damages is to place the injured party in a position as good as it would have occupied had the contract not been breached. (Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist., supra, 34 Cal.4th at p. 965.)

If substantial evidence supports the jury’s findings that the loss of asset damages were likely to occur in the ordinary course of events from Sunkist’s breach of the packinghouse license agreements, then we need not separately analyze the jury’s finding regarding foreseeability. (See Civ. Code, § 3300.)

Viewing the evidence in the light most favorable to the verdict, we conclude there is sufficient support for the jury’s findings. Furthermore, based on those findings, we conclude that the lost asset damages are similar to the lost profit damages that need not be specially pleaded in a breach of contract action.¹⁷

17 “In cases involving breach of contract it has been held that loss of profits need not be specially pleaded. [Citations.]” (Myers v. Stephens (1965) 233 Cal.App.2d 104, 121.) Usually, lost profits are regarded as the direct and natural result of a breach of contract and, therefore, courts regard them as fairly within the contemplation of the parties when they entered the contract. (Ibid.)

The evidence that supports the jury’s findings includes (1) the exclusive nature of the packinghouse license agreement, which meant Sunkist controlled Stark Packing’s ability to generate revenue, (2) the competitive conditions in the marketplace for fresh citrus, which includes the recurring problem of oversupply, and (3) the competitive conditions among fruit packers, which includes competition among packers in the Sunkist system and competition in the marketplace from packers that are not affiliated with Sunkist. In this context, a jury could find that an ordinary and foreseeable result of Sunkist’s inequitable and hostile actions against Stark Packing, which included aiding another packer in recruiting one of Stark’s largest growers, was that Stark would be forced out of business and lose money on the liquidation of its assets.

Accordingly, Sunkist’s claims of error regarding the award of damages for loss of assets do not present a ground for eliminating those damages from the judgment.

IX. Antitrust Exemption

Sunkist argues it was legally necessary to omit any covenant of equitable marketing opportunity from the license agreement to safeguard Sunkist’s antitrust exemption. This argument is unconvincing.

The Capper-Volstead Act authorizes persons “engaged in the production of agricultural products,” such as farmers and fruit growers, to act collectively in the processing and marketing of those products (7 U.S.C. § 291). The statute specifically provides that cooperative “associations and their members may make the necessary contracts and agreements to effect [their] purposes.…” (Ibid.)

First, Sunkist has not demonstrated how a license agreement that requires Sunkist to provide equitable marketing opportunities to nonmember packinghouses is a contract that falls outside the statutory authorization.

Second, Sunkist has not shown that a license agreement with a covenant to provide equitable marketing opportunities gives a nonmember packinghouse the right to vote, control, or participate in the policy-making of the cooperative. (Case-Swayne Co., Inc. v. Sunkist Growers, Inc., supra, 355 F.Supp. at p. 415.) Similarly, Sunkist has not shown that such a contract would give the nonmember packinghouse any property rights in Sunkist, such as the right to capital credits. (Ibid.)

As a result, it appears that Stark Packing, like the licensed packinghouses described by the federal district court, was a nonmember with “no vote, control or property rights in Sunkist.” (Case-Swayne Co., Inc. v. Sunkist Growers, Inc., supra, 355 F.Supp. at p. 415.)

In sum, a contractual provision that obligates Sunkist to provide business to a nonmember packinghouse in exchange for that packinghouse committing its facility to the use of Sunkist’s member-growers does not endanger Sunkist’s antitrust exemption under the criteria employed by the federal district court in Case-Swayne Co., Inc. v. Sunkist Growers, Inc., supra, 355 F.Supp. 408.

X. Instruction Regarding the Creation of New Evidence

During the course of the jury’s deliberations, it came to the attention of the trial court that a juror had brought a blank spreadsheet into the jury room and the jurors were using the spreadsheet to calculate percentages. The trial court discussed the spreadsheet with counsel and asked what they requested be done about it.

Counsel for Sunkist proposed that it be returned to the jury and the jurors be allowed to use it to analyze the evidence. He also proposed that the jury be told that use of the spreadsheet had to be based on the material that was in evidence, such as compiling information from the exhibits admitted in evidence, and they could not go off into new areas. Counsel for Stark Packing asserted the jury should be told to decide the issues presented in the special verdict form based on the oral and documentary evidence admitted and not to create new evidence that has not been subject to cross-examination or the rules of evidence.

The trial court indicated that the jury could be instructed not to create new evidence and that nothing would be said about the spreadsheets. Counsel for Sunkist took the position that the jury should be allowed to use the spreadsheet and may have implied that any admonishment should mention the spreadsheet directly.

The trial court instructed the jury as follows:

“[Y]ou are to decide the issues in this case based on the evidence, that is the oral testimony and the documentary evidence that you have received during this trial. And you are not to create new evidence from either the testimony or the documents in deciding this case. [¶] Again, the essential issue there is you are not to create new evidence that has not been generated from this trial.”

Sunkist contends this instruction was prejudicially misleading and the jury almost certainly interpreted it as a direction to stop using the spreadsheets.

The trial court considered Sunkist’s argument in connection with Sunkist’s motion for a new trial and stated:

“I do not find that I made instructional error concerning telling the jurors they were not to create evidence. Certainly that’s the correct status of the law. The Court did not tell the jury that it could or could not use the spread sheet. The Court simply instructed the jurors not to create evidence. And I believe that was a proper instruction. [¶] I also reject [Sunkist’s] contention that any implication from the correct instruction somehow led this jury astray and that there was implied misconduct or misconduct inadvertently that rises to the level of causing the new trial to be granted.” (30 RT 3750:14-25)!

We agree with the trial court that the instruction given correctly stated the law. (See People v. Conkling (1896) 111 Cal. 616, 627-628 [jurors experimented outside courthouse by firing similar rifle to see powder marks created; experiments were misconduct].) Consequently, the test for error in giving that instruction is whether it was misleading. (Strandt v. Cannon (1938) 29 Cal.App.2d 509, 513.)

In the circumstances of this case, we conclude that the instruction was not likely to mislead the jury. The jurors were not told that they could not use the spreadsheets and they were not told to surrender their copies of the spreadsheet. This weakens the inference that they abandoned the use of the spreadsheet to organize their analysis of the evidence. Also, we cannot consider the declarations of jurors regarding how the instruction was interpreted and applied. (Mesecher v. County of San Diego (1992) 9 Cal.App.4th 1677, 1684.) Finally, even if the jurors chose not to use the spreadsheets, it does not necessarily follow that they were unable to understand and process the evidence and the arguments presented to them. Therefore, we conclude that the instruction does not constitute reversible error.

DISPOSITION

The judgment in favor of Stark Packing is reversed and remanded for retrial on all issues, unless Stark Packing shall, within 30 days from the date this opinion is filed, file with the clerk of this court and serve upon Sunkist its written consent to a reduction of the lost packing charges to $2,062,901 and a reduction of the rehandling charges to $691,170, in which event the judgment will be modified to award Stark Packing damages in those amounts. The modification will result in a reduced award totaling $7,578,071 ($2,062,901 in lost packing charges + $681,170 in rehandling charges + $4,824,000 in lost assets). If Stark Packing consents, its judgment against Sunkist will be affirmed in its entirety, as modified. (Cal. Rules of Court, rule 8.264(d).)

The parties shall bear their own costs on appeal.

WE CONCUR: ARDAIZ, P.J., HILL, J.