Broussard v. Meineke Discount Muffler Shops, Inc. ( 1998 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
KELLY BROUSSARD; JIM STEPHENS;
MARK ZUCKERMAN; ARNOLD FISCHTHAL;
JOHN HAGAR; VINCENT MATERA; DENIS
WICKHAM; MARY ANN WICKHAM;
KENEX CORPORATION; RALPH YARUSSO,
Plaintiffs-Appellees,
v.
MEINEKE DISCOUNT MUFFLER SHOPS,
INCORPORATED; NEW HORIZONS
ADVERTISING, INCORPORATED; GKN
PARTS INDUSTRIES; GKN, plc; RONALD
SMYTHE; GENE ZHISS; TED PEARCE,
Defendants-Appellants,
and
MICHIGAN FRANCHISEES, which consists
No. 97-1808
of: Peter D. Beyer, Ronald S. Slack,
Susan I. Slack, Sherman J. Radford,
Jayne Radford, William J. Varney,
Sr., William J. Varney, Jr., Sher-Jay
and Sons, Incorporated, and
M.A.T.M., Incorporated,
Defendant.
ATL INTERNATIONAL, INCORPORATED;
BLIMPIE INTERNATIONAL, INCORPORATED;
BURGER KING CORPORATION; DOCTOR'S
ASSOCIATES, INCORPORATED;
FOODMAKER, INCORPORATED; GOLDEN
CORRAL CORPORATION; HARDEE'S FOOD
SYSTEMS, INC.; INTERNATIONAL DAIRY
QUEEN, INCORPORATED; MCDONALD'S
CORPORATION; MOBIL OIL CORPORATION;
THE SOUTHLAND CORPORATION;
SECRETARY OF COMMERCE OF THE
STATE OF NORTH CAROLINA; AMERICAN
COUNCIL OF LIFE INSURANCE; SECURITIES
INDUSTRY ASSOCIATION; BRITISH
AMERICAN BUSINESS COUNCIL OF NORTH
CAROLINA, INCORPORATED; AMERICAN
ASSOCIATION OF FRANCHISEES AND
DEALERS; AMERICAN FRANCHISEE
ASSOCIATION; SAL LOBELLO; GOODWIN
MANAGEMENT GROUP, INC.; STEVEN D.
LOYE FAMILY LIMITED PARTNERSHIP;
PS&F ENTERPRISES INC.; STEPHEN
PARASCONDOLA; ROBERT OTT,
Amici Curiae.
KELLY BROUSSARD; JIM STEPHENS;
MARK ZUCKERMAN; ARNOLD FISCHTHAL;
JOHN HAGAR; VINCENT MATERA; DENIS
WICKHAM; MARY ANN WICKHAM;
KENEX CORPORATION; RALPH YARUSSO,
Plaintiffs-Appellants,
v.
No. 97-1848
MEINEKE DISCOUNT MUFFLER SHOPS,
INCORPORATED; NEW HORIZONS
ADVERTISING, INCORPORATED; GKN
PARTS INDUSTRIES; GKN, plc; RONALD
SMYTHE; GENE ZHISS; TED PEARCE,
Defendants-Appellees,
and
2
MICHIGAN FRANCHISEES, which consists
of: Peter D. Beyer, Ronald S. Slack,
Susan I. Slack, Sherman J. Radford,
Jayne Radford, William J. Varney,
Sr., William J. Varney, Jr., Sher-Jay
and Sons, Incorporated, and
M.A.T.M., Incorporated,
Defendant.
ATL INTERNATIONAL, INCORPORATED;
BLIMPIE INTERNATIONAL, INCORPORATED;
BURGER KING CORPORATION; DOCTOR'S
ASSOCIATES, INCORPORATED;
FOODMAKER, INCORPORATED; GOLDEN
CORRAL CORPORATION; HARDEE'S FOOD
SYSTEMS, INC.; INTERNATIONAL DAIRY
QUEEN, INCORPORATED; MCDONALD'S
CORPORATION; MOBIL OIL CORPORATION;
THE SOUTHLAND CORPORATION;
SECRETARY OF COMMERCE OF THE
STATE OF NORTH CAROLINA; AMERICAN
COUNCIL OF LIFE INSURANCE; SECURITIES
INDUSTRY ASSOCIATION; BRITISH
AMERICAN BUSINESS COUNCIL OF NORTH
CAROLINA, INCORPORATED; AMERICAN
ASSOCIATION OF FRANCHISEES AND
DEALERS; AMERICAN FRANCHISEE
ASSOCIATION; SAL LOBELLO; ROBERT
OTT; STEPHEN PARASCONDOLA; PS&F
ENTERPRISES INC.; STEVEN D. LOYE
FAMILY LIMITED PARTNERSHIP; GOODWIN
MANAGEMENT GROUP, INC.,
Amici Curiae.
Appeals from the United States District Court
for the Western District of North Carolina, at Charlotte.
Robert D. Potter, Senior District Judge.
(CA-94-255-3-P)
3
Argued: May 5, 1998
Decided: August 19, 1998
Before WILKINSON, Chief Judge, and ERVIN and
MICHAEL, Circuit Judges.
_________________________________________________________________
Reversed and remanded by published opinion. Chief Judge Wilkinson
wrote the opinion, in which Judge Ervin and Judge Michael joined.
_________________________________________________________________
COUNSEL
ARGUED: Kenneth Winston Starr, KIRKLAND & ELLIS, Wash-
ington, D.C., for Appellants. Charles Justin Cooper, COOPER &
CARVIN, P.L.L.C., Washington, D.C., for Appellees. ON BRIEF:
Steven G. Bradbury, Christopher Landau, Adam G. Ciongoli, Brett
M. Kavanaugh, KIRKLAND & ELLIS, Washington, D.C.; E.
Osborne Ayscue, Jr., Catherine E. Thompson, Thomas D. Myrick,
Corby C. Anderson, SMITH, HELMS, MULLISS & MOORE,
L.L.P., Charlotte, North Carolina, for Appellants. Michael A. Carvin,
Michael W. Kirk, R. Ted Cruz, COOPER & CARVIN, P.L.L.C.;
James J. McCabe, John J. Soroko, Wayne A. Mack, Mark B. Schoel-
ler, DUANE, MORRIS & HECKSCHER, Philadelphia, Pennsylva-
nia; Thomas J. Ashcraft, Charlotte, North Carolina, for Appellees.
Theodore B. Olson, Theodore J. Boutrous, Jr., Sean E. Andrussier,
GIBSON, DUNN & CRUTCHER, L.L.P., Washington, D.C., for
Amici Curiae ATL International, et al. Andrew A. Vanore, Jr.,
NORTH CAROLINA DEPARTMENT OF JUSTICE, Raleigh, North
Carolina, for Amicus Curiae Secretary of Commerce. Phillip E.
Stano, AMERICAN COUNCIL OF LIFE INSURANCE, Washing-
ton, D.C.; Stuart J. Kaswell, Fredda L. Plesser, SECURITIES
INDUSTRY ASSOCIATION, New York, New York, for Amici
Curiae American Council of Life Insurance, et al. Edgar Love, III,
Kiran H. Mehta, Stanford D. Baird, KENNEDY, COVINGTON,
LOBDELL & HICKMAN, L.L.P., Charlotte, North Carolina, for
Amicus Curiae British American Business Council. Mario L. Her-
4
man, Washington, D.C.; J. Michael Dady, DADY & GARNER, P.A.,
Minneapolis, Minnesota, for Amici Curiae Association of Fran-
chisees, et al. John K. Bush, Janet P. Jakubowicz, GREENEBAUM,
DOLL & MCDONALD, P.L.L.C., Louisville, Kentucky, for Amici
Curiae Lobello, et al.
_________________________________________________________________
OPINION
WILKINSON, Chief Judge:
This case is a study in the tensions that can beset the franchisor-
franchisee relationship. Ten owners of Meineke Discount Muffler
franchises sued franchisor Meineke Discount Muffler Shops, Inc.
("Meineke"), Meineke's in-house advertising agency New Horizons
Advertising, Inc. ("New Horizons"), three officers of Meineke, and
Meineke's corporate parents GKN plc ("GKN") and GKN Parts
Industries Corporation ("PIC"). Plaintiffs claimed that Meineke's han-
dling of franchise advertising breached the Franchise and Trademark
Agreements ("FTAs") that Meineke had entered into with every
franchisee. Plaintiffs also advanced a raft of tort and statutory unfair
trade practices claims arising out of the same conduct. The plaintiff-
franchisees purported to advance these claims on behalf of a nation-
wide class of current and former Meineke dealers. Plaintiffs won a
$390 million judgment against Meineke and its affiliated parties.
On appeal, defendants maintain that the suit was erroneously certi-
fied as a class action and challenge several other legal rulings by the
district court. Because the class the district court certified does not
conform to the requirements of Federal Rule of Civil Procedure 23(a),
we reverse the class certification. And because the class action pos-
ture, along with at least three fundamental legal errors, deprived
defendants of a fair trial on the precise issue of contractual breach that
is properly the focus of this case, we reverse the judgment below,
vacate the award of damages, and remand the case for further pro-
ceedings consistent with this opinion.
I.
The plaintiff class consisted of "all persons or entities throughout
the United States that were Meineke franchisees operating at any time
5
during or after May of 1986." As a Meineke franchisee, each putative
class member is or has been a party to one or more FTAs with
Meineke. FTAs expire after a fixed period, usually 15 years, at which
point the franchise can be renewed or terminated. During the time rel-
evant to this lawsuit, Meineke periodically revised the FTA, so sev-
eral different versions of the contract are at issue in this action. Under
all versions of the FTA, each franchisee was to pay Meineke an initial
franchise fee (which is sometimes waived) and thereafter some per-
centage of its weekly gross revenue (generally 7-8%) as a royalty.
Franchisees also paid Meineke ten percent of weekly revenues to fund
national and local advertising. Initially, franchisees made these adver-
tising contributions directly to a third-party advertising agency, M&N
Advertising ("M&N"), which placed ads on a commission basis. After
late 1982, franchisees paid their ten percent contributions to a central
account maintained by Meineke, the Weekly Advertising Contribu-
tion ("WAC") account.
Franchise advertising is addressed in two sections of the FTAs.
Among other things, Section 3.1 of all versions of the FTA obliges
Meineke "[t]o purchase and place from time to time advertising pro-
moting the products and services sold by FRANCHISEE." The FTAs
provide that "all decisions regarding whether to utilize national,
regional or local advertising, or some combination thereof, and
regarding selection of the particular media and advertising content,
shall be within the sole discretion of MEINEKE and such agencies or
others as it may appoint." In FTAs executed from 1989 through 1991,
Section 3.1 was introduced by a clause that indicated Meineke would
provide the services identified in that section"[i]n consideration for
the payment of Franchisee's initial license fee." However, until 1990,
every FTA also provided that "MEINEKE agrees that it will expend
for media costs, commissions and fees, production costs, creative and
other costs of such advertising, with respect to MEINEKE fran-
chisees, an amount equal to the total of all sums collected from all
franchisees under and pursuant to Section 7.17 hereof." Section 7.17
of the FTA describes payments to the WAC account.
Three categories of disbursements from the WAC account, totaling
approximately $32.2 million, are at the heart of this lawsuit. First,
Meineke used just over $1.1 million of WAC funds to defend and set-
tle a suit brought by M&N for past and future commissions when, in
6
1986, Meineke stopped doing business with M&N and established
New Horizons to handle advertising placement in-house. As had
M&N, New Horizons placed some advertisements on its own and
engaged the services of outside agencies to place the rest. These out-
side agencies were paid a total of almost $14 million in commissions
from the WAC account, the second category of disputed expenditures.
Third, New Horizons itself was paid approximately $17.1 million in
commissions from the WAC account for the advertisements it placed.
At a dealers' meeting in April 1993, a Meineke official read from
a December 1992 Uniform Franchise Offering Circular ("UFOC")
that disclosed New Horizons' 5-15% commission rates. Plaintiffs
knew before the meeting that New Horizons took commissions from
WAC funds but claim they were unaware that its rates were so high.
As one of the named plaintiffs explained, he had not seen the UFOC
in question "because I hadn't bought a shop in three or four years and
. . . you don't get an offering circular unless you're buying a shop."
Shortly after the meeting, plaintiffs filed this lawsuit, charging that
Meineke had no right to pay New Horizons (or any other entity) any
commissions from the WAC account for the purchase or placement
of advertising. Rather, according to plaintiffs, WAC funds were to be
used only to pay for the advertisements themselves, and Meineke was
to perform the purchase and placement duty in return for franchisees'
royalty fees. In addition to this alleged breach of the FTAs, plaintiffs
charged Meineke and the other defendants variously with breach of
fiduciary duty, aiding and abetting breach of fiduciary duty, fraud,
unjust enrichment, negligence, negligent misrepresentation, inten-
tional interference with contractual relations, and unfair and deceptive
trade practices in violation of the North Carolina Unfair Trade Prac-
tices Act ("UTPA"), N.C. Gen. Stat. § 75-1.1.1
_________________________________________________________________
1 Plaintiffs' complaint also alleged violations of the analogous Texas
Deceptive Trade Practices - Consumer Protection Act, Tex. Bus. & Com.
Code Ann. §§ 17.41 et seq., and RICO, 18 U.S.C. §§ 1962(c) and (d).
With respect to the Texas act, the district court ruled after trial that both
North Carolina and Texas choice of law rules directed that only the
North Carolina UTPA applies to this dispute, a ruling neither party chal-
lenges. The district court dismissed the RICO claims before trial, and
plaintiffs do not press them on appeal.
7
In January 1995, Meineke offered all its franchisees a new fran-
chise package, the Enhanced Dealer Program ("EDP"). In exchange
for releasing Meineke from all claims arising out of past dealings,
specifically including the claims at issue in this lawsuit, franchisees
who accepted the EDP received a reduced royalty rate, a guaranteed
reduction in New Horizons' commission rates, greater control over
local advertising, and other benefits like a free computer system and
the chance to obtain an additional franchise at a discount. Plaintiffs
urged their fellow franchisees not to accept the EDP, warning that by
doing so franchisees would be "signing away [their] rights to be in the
class" and asserting that the EDP did "not go nearly far enough as a
settlement offer" because it "ask[ed] franchisees to trade legal rights
for too little change." Nevertheless, more than half of Meineke's
existing franchisees accepted the EDP before the offer expired on
March 15, 1995. No named plaintiff accepted the EDP.
On May 11, 1995, the district court certified a non-opt-out class of
"all persons or entities throughout the United States that were
Meineke franchisees operating at any time during or after May of
1986." The district court also disposed of numerous pretrial motions.
Most relevant here, the court denied GKN's motion for summary
judgment, holding that the issue of "piercing the corporate veil" to
impose vicarious liability on GKN for the acts of its subsidiaries was
one for the jury. The court denied two motions by Meineke to depose
absent class members. And the court denied Meineke's motion to
sever issues related to the EDP and other releases executed by fran-
chisees.
Trial lasted seven weeks. The cornerstone of plaintiffs' contract
case was language that appeared only in some versions of the FTA.
And plaintiffs' tort and statutory unfair trade practices claims promi-
nently featured 171 taped excerpts of statements made by Meineke
representatives at so-called "final review sessions" that preceded the
execution of any franchise agreement -- all but one of the sessions
involving absent class members. Plaintiffs' expert outlined a damages
formula, by which he purported to calculate the lost profits damages
of all class members on a "global" basis. He testified that every
Meineke franchisee lost $8.16 in sales for each dollar of allegedly
misallocated WAC funds and projected a 34% profit margin for all
franchisees. To show that Meineke, New Horizons, and PIC were
8
"mere instrumentalities" of their parent, plaintiffs introduced evidence
that GKN was aware New Horizons was financed with WAC funds
and that GKN secretly encouraged Meineke to maximize New Hori-
zons' profitability. Meineke and the other defendants advanced a con-
trary interpretation of the FTAs, denied all wrongdoing, and denied
that GKN had exercised control over its subsidiaries sufficient to jus-
tify veil-piercing. Defendants also interposed the defense of statute of
limitations.
The jury returned a verdict against Meineke for breach of contract
and against Meineke and New Horizons for breach of fiduciary duty,
negligence, and unjust enrichment. The jury found that GKN and PIC
had utilized Meineke and New Horizons as mere instrumentalities,
and that PIC was merely an instrumentality of GKN, which justified
piercing the corporate veil and imposing vicarious liability on GKN.
Along with Meineke and New Horizons, GKN, PIC, and three offi-
cers of Meineke were found to have themselves committed fraud,
made negligent misrepresentations, and violated the UTPA. The jury
also found that New Horizons, GKN, PIC, and the three individual
defendants were directly liable for aiding and abetting Meineke's and
New Horizons' breach of fiduciary duty and for interfering with
plaintiffs' contractual relations with Meineke. And the jury deter-
mined that none of plaintiffs' claims was barred by statutes of limita-
tions ranging from three to ten years, finding that plaintiffs had no
actual knowledge of the challenged conduct outside the various limi-
tations period and/or ascribing any delay in filing suit to plaintiffs'
reasonable reliance on Meineke's fraudulent concealment of its
wrongdoing.
The jury awarded plaintiffs $196,956,596 in compensatory dam-
ages, which, over Meineke's objection, was not allocated among the
various theories of liability or among defendants. The jury awarded
a total of $150 million in punitive damages: $70 million against
Meineke; $7 million against New Horizons; $1.8 million against PIC;
$70 million against GKN; and $1.2 million total against the three
Meineke officers. Required by the district court to make a choice,
plaintiffs elected to forgo the punitive award in favor of trebling the
compensatory award under the UTPA, see N.C. Gen. Stat. § 75-16.
After trebling, the court entered a $590,869,788 judgment for plain-
tiffs.
9
On March 6, 1997, the district court ruled on two categories of
releases signed by some class members: (1) releases executed in con-
nection with the EDP ("EDP releases"), and (2) releases executed in
the normal course of business, as when a franchise was terminated or
renewed ("non-EDP releases"). The jury had rejected plaintiffs' argu-
ment that these releases were procured by fraud, duress, or undue
influence on the part of Meineke. Accordingly, the district court held
that the EDP releases executed by about half the plaintiff class waived
all claims advanced in this lawsuit against the defendants. The court
found that non-EDP releases covered only those claims arising before
the releases were executed and that non-EDP releases which named
Meineke and its "affiliates" released GKN, while releases of Meineke
and its "stockholders" did not include GKN.
On May 22, 1997, the trial court disposed of the parties' post-
judgment motions. The court calculated the effect of the releases,
entering final judgment in plaintiffs' favor for around $390 million (a
reduction of approximately 35%). In addition, the court granted plain-
tiffs' request for a permanent injunction against Meineke's "taking
commissions or fees or otherwise deriving any profit from the WAC
Fund on account of activities undertaken to purchase and place adver-
tising for those class members who are currently operating Meineke
franchises but have not (1) entered Meineke's EDP program, or (2)
executed franchise agreements after March 1995." Both parties appeal.2
II.
We first consider Meineke's challenge to the ruling that had the
largest impact on the conduct of this lawsuit, class certification. As
a prerequisite to certifying the class, the district court had to find that
the class of "all persons or entities throughout the United States that
were Meineke franchisees operating at any time during or after" the
creation of New Horizons satisfied the four criteria of Federal Rule
of Civil Procedure 23(a): numerosity, commonality, typicality, and
adequacy of representation. As the Supreme Court has said, the final
three requirements of Rule 23(a) "tend to merge," with commonality
_________________________________________________________________
2 Hereafter, we shall generally refer to defendants collectively as
"Meineke," except when necessary to distinguish among GKN and its
various subsidiaries.
10
and typicality "serv[ing] as guideposts for determining whether . . .
maintenance of a class action is economical and whether the named
plaintiff's claim and the class claims are so interrelated that the inter-
ests of the class members will be fairly and adequately protected in
their absence." General Tel. Co. v. Falcon , 457 U.S. 147, 157 n.13
(1982). The class the district court certified falls well short of the
Rule 23(a) threshold in several respects.3
A.
The first obstacle to class treatment of this suit is a conflict of inter-
est between different groups of franchisees with respect to the appro-
priate relief. The Supreme Court and this court have long interpreted
the adequate representation requirement of Rule 23(a)(4) to preclude
class certification in these circumstances. Amchem Prods., Inc. v.
Windsor, 117 S. Ct. 2231, 2250-51 (1997); General Tel. Co. v.
EEOC, 446 U.S. 318, 331 (1980); Kidwell v. Transportation Commu-
nications Int'l Union, 946 F.2d 283, 305-06 (4th Cir. 1991); Lukenas,
538 F.2d at 596. The Supreme Court "has repeatedly held [that] a
class representative must be part of the class and``possess the same
interest and suffer the same injury' as the class members." East Texas
Motor Freight Sys. Inc. v. Rodriguez, 431 U.S. 395, 403 (1977) (quot-
ing Schlesinger v. Reservists Comm. to Stop the War, 418 U.S. 208,
216 (1974)). The premise of a class action is that litigation by repre-
sentative parties adjudicates the rights of all class members, so basic
due process requires that named plaintiffs possess undivided loyalties
to absent class members. See, e.g., In re General Motors Corp. Pick-
Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 785, 796 (3d
Cir. 1995). "The problem of actual and potential conflicts is a matter
of particular concern in a case such as this one because the [district
court certified the class under Federal Rule of Civil Procedure 23(b)]
_________________________________________________________________
3 Meineke also challenges the district court's finding that the class
should be certified as a non-opt-out class under Rule 23(b). "It is, how-
ever, unimportant to determine whether the action meets the criteria of
[section (b)], if . . . plaintiffs' action failed to qualify for class action
treatment under . . . section (a) of Rule 23, qualifications which a party
must satisfy as a basis for class certification before compliance with sec-
tion (b) of Rule 23 is considered. . . ." Lukenas v. Bryce's Mountain
Resort, Inc., 538 F.2d 594, 596 (4th Cir. 1976).
11
which does not allow class members to opt out of the class action."
Retired Chicago Police Ass'n v. City of Chicago, 7 F.3d 584, 598 (7th
Cir. 1993). But it takes no special scrutiny of the putative class to dis-
cern the manifest conflicts of interest within it-- conflicts that the
district court simply, and erroneously, ignored.
The class of Meineke franchisees the district court certified can be
grouped into three categories: (1) former franchisees; (2) current fran-
chisees who accepted the EDP ("EDP franchisees"); and (3) current
franchisees who did not accept the EDP ("non-EDP franchisees").
Broken down this way, it is clear that the remedial"interests of those
within the single class are not aligned." Amchem, 117 S. Ct. at 2251.
The first group, former franchisees, have an interest only in maximiz-
ing any damages Meineke would have to pay. But because of the EDP
releases, EDP franchisees are unable to benefit from a damage award.
In fact, one group of EDP franchisees sought to intervene below and
appear as amici on appeal, claiming that their ongoing business rela-
tionship with Meineke and their interests in the long-term financial
health of the company were imperiled by plaintiffs' efforts to wring
a large damage award out of defendants. These EDP franchisees
strenuously urged that, in the interests of both franchisees and
franchisor, "the sole and exclusive monetary remedy in this case
should be restitution to the WAC account." The interest of former
franchisees in damages and of many EDP franchisees in restitution
reveals an obvious initial schism within the putative class regarding
the appropriate remedy for Meineke's alleged wrongdoing.
Nor were plaintiffs, who are current non-EDP franchisees, able to
mediate this conflict. Like former franchisees, non-EDP franchisees
do stand to benefit from damages, and it is hard to imagine a larger
award than the one at issue here. Nevertheless, in making the class
certification decision the district court might reasonably have been
concerned that plaintiffs' residual, forward-looking interest, as current
franchisees, in Meineke's continued viability would have tempered
their zeal for damages and prejudiced the backward-looking interests
of former franchisees. See, e.g., Southern Snack Foods, Inc. v. J & J
Snack Foods Corp., 79 F.R.D. 678, 680 (D.N.J. 1978) (citing Aamco
Automatic Transmissions, Inc. v. Tayloe, 67 F.R.D. 440 (E.D. Pa.
1975); Thompson v. T.F.I. Cos., Inc., 64 F.R.D. 140 (N.D. Ill. 1974);
DiCostanzo v. Hertz Corp., 63 F.R.D. 150 (D. Mass. 1974);
12
Matarazzo v. Friendly Ice Cream Corp., 62 F.R.D. 65 (E.D.N.Y.
1974); Seligson v. Plum Tree, Inc., 61 F.R.D. 343 (E.D. Pa. 1973);
Van Allen v. Circle K Corp., 58 F.R.D. 562 (C.D. Cal. 1972); Free
World Foreign Cars, Inc. v. Alfa Romeo S.p.A., 55 F.R.D. 26
(S.D.N.Y. 1972)).
That potential conflict of interest apparently did not materialize,
but the conflict between plaintiffs and EDP franchisees quite clearly
did. Initially, pursuing any litigation at all was in tension with the evi-
dent desire of many EDP franchisees to put the advertising dispute
with Meineke behind them. The EDP releases did not preclude EDP
franchisees from getting the benefit of any advertising funds Meineke
restored to the WAC account. Nevertheless, at least three times during
the course of this litigation, plaintiffs explicitly disavowed any claim
for restitution to or replenishment of the WAC account, focusing
instead on a damage award. This election of remedies may have bene-
fitted non-EDP franchisees and former franchisees, but at the expense
of the EDP franchisees who made up half of the class. Pursuing a
damage remedy that was at best irrelevant and at worst antithetical to
the long-term interests of a significant segment of the putative class
added insult to the injury of abandoning the only remedy in which
that segment (the EDP franchisees) was interested. Plaintiffs' strategy
thus illustrates the error of allowing them to sue on behalf of "all"
Meineke franchisees.4
In a case involving a plaintiff class with a similar conflict in reme-
dial interests, the Seventh Circuit also found that class certification
was inappropriate. Gilpin v. American Fed'n of State, Cty., and Mun.
Employees AFL-CIO, 875 F.2d 1310 (7th Cir. 1989). In Gilpin nine
nonunion employees sued a union to recover fees the union charged
nonunion members of a collective bargaining unit. The employees
sought to represent approximately 10,000 other nonunion employees,
_________________________________________________________________
4 Because we hold that plaintiffs cannot represent the interests of EDP
franchisees, see, e.g., Melong v. Micronesian Claims Comm'n, 643 F.2d
10, 13 (D.C. Cir. 1980) (noting settled law "that proposed class members
who have executed releases can not be represented by individuals who
have not executed a release"), we do not consider the cross-appeal on the
validity of the EDP releases.
13
but the court ruled the case could not proceed as a class action, rea-
soning that
[a] potentially serious conflict of interest within the class
precluded the named plaintiffs from representing the entire
class [of nonunion workers] adequately. Two distinct types
of employee will decline to join the union representing their
bargaining unit. The first is the employee who is hostile to
unions on political or ideological grounds. The second is the
employee who is happy to be represented by a union but
won't pay any more for that representation than he is forced
to. The two types have potentially divergent aims. The first
wants to weaken and if possible destroy the union; the sec-
ond, a free rider, wants merely to shift as much of the cost
of representation as possible to other workers, i.e., union
members. The "restitution" remedy sought by . . . the nine
named plaintiffs, is consistent with -- and only with -- the
aims of the first type of employee.
875 F.2d at 1313 (citations omitted). Much the same could be said of
the Meineke franchisees lumped together in the class certified below
-- three distinct groups "have potentially divergent aims," and the
remedy sought by plaintiffs "is consistent with-- and only with --
the aims" of former and like-minded non-EDP franchisees.
The instant class action failed to recover from the error of includ-
ing the EDPs. The error was not cured by the district court's post-trial
order effectuating the releases signed by many class members. Even
though this ruling did reduce the damages Meineke owed, it could not
repair the harm that was already done to some class members' inter-
ests. First, those EDP franchisees who had sought to settle the dispute
with Meineke were nevertheless forced into non-opt-out class litiga-
tion. And because of plaintiffs' desire for money damages, any inter-
est EDP franchisees had in replenishment of the WAC account was
not advanced at trial at all. And, as we have noted, plaintiffs -- osten-
sibly on behalf of all Meineke franchisees-- repeatedly and explic-
itly waived any restitutionary claim. If we allowed class certification
to stand, thereby binding EDP franchisees to plaintiffs' choice of rem-
edy, the only relief EDP franchisees could pursue would be fore-
closed. Second, the post-trial reduction in damages made barely a
14
dent in the big damage award and did not undo the harm to those EDP
franchisees who never wanted to be in court. Of course, EDP fran-
chisees have no right to prevent non-released parties from pursuing
damages against Meineke, but EDP franchisees do have the right to
insist that money damages against Meineke not be pursued in their
names.
B.
The pointed "adversity among subgroups" of the class the district
court certified, Amchem, 117 S. Ct. at 2251, and the prejudice EDP
franchisees suffered as a result, seriously infected the class certifica-
tion. But the putative class fell short of the commonality and typical-
ity requirements of Rule 23(a)(2) and (3) in other ways. "The
typicality and commonality requirements of the Federal Rules ensure
that only those plaintiffs or defendants who can advance the same fac-
tual and legal arguments may be grouped together as a class." Mace
v. Van Ru Credit Corp., 109 F.3d 338, 341 (7th Cir. 1997). Five sig-
nificant variations in franchisees' "factual and legal arguments" make
it clear that this case failed to present common questions of law or
fact, see Fed. R. Civ. P. 23(a)(2), and that plaintiffs' claims were any-
thing but typical of the claims of the class, see Fed. R. Civ. P.
23(a)(3).
First, plaintiffs simply cannot advance a single collective breach of
contract action on the basis of multiple different contracts. As the dis-
trict court itself recognized, Meineke FTAs "may vary from year to
year and from franchisee to franchisee." Thus, because Meineke fran-
chisees (and plaintiffs themselves) signed FTAs containing materially
different contract language, the actual contractual undertaking of each
was subject to several critical variables. Approximately half of the
contracts signed by class members suggest Meineke was authorized
to use WAC funds for "media costs, commissions and fees, produc-
tion costs, creative and other costs of . . . advertising." Contracts con-
taining this language are more favorable to Meineke. The reference
to "commissions and fees" can be argued to validate the payments
from the WAC account, as "commissions" paid to New Horizons and
other advertising placement services are what plaintiffs dispute. And
the reference to "other costs" can be read as a catch-all category into
which the cost of purchasing and placing advertising may well fall.
15
However, about a quarter of the contracts, including some with the
provision referenced above, contain language indicating that Meineke
should purchase and place advertising "[i]n consideration for the pay-
ment of Franchisee's initial license fee" only. This clause makes
plaintiffs' case stronger, as it suggests consideration for purchasing
and placing advertising must come from some source other than the
WAC account. In yet another variation among FTAs, Meineke in
some instances waived the license fee that certain versions of the FTA
recite as consideration for the promise to purchase and place, raising
a wholly distinct set of interpretive issues. Evidently, the breach of
contract action that is the cornerstone of plaintiffs' case raises numer-
ous uncommon questions, and the contract claims of plaintiffs are not
typical of claims of franchisees who entered into FTAs containing dif-
ferent language.
In a case much like this one, Sprague v. General Motors
Corporation, the Sixth Circuit also found that class certification was
inappropriate. 133 F.3d 388 (6th Cir.), cert. denied, ___ S. Ct. ___,
1998 WL 174775 (1998). There plaintiffs were former GM employ-
ees who had taken advantage of the company's early retirement pro-
gram. After their retirement, GM reduced the level of benefits to
which retirees were entitled, and the retirees sought to bring a class
action for breach of contract. As in the instant case, GM had entered
into a separate contract with each class member. In these circum-
stances, the Sixth Circuit found commonality lacking because
"[p]roof that GM had contracted to confer vested benefits on one
early retiree would not necessarily prove that GM had made such a
contract with a different early retiree." Id. at 398. For the same rea-
son, the court also found typicality lacking: "The premise of the typi-
cality requirement is simply stated: as goes the claim of the named
plaintiff, so go the claims of the class. That premise is not valid here."
Id. at 399. Nor is it here -- the differences between the FTAs raise
the distinct possibility that there was a breach of contract with some
class members, but not with other class members. In such a case, the
plaintiffs cannot amalgamate multiple contract actions into one.
Second, subjecting plaintiffs' tort and statutory claims to class
treatment was likewise problematic. Plaintiffs built their breach of
fiduciary duty, fraud, and negligent misrepresentation claims on the
shifting evidentiary sands of individualized representations to fran-
16
chisees; these claims have as their starting point what Meineke said
to franchisees and how Meineke portrayed its responsibilities vis-a-
vis the WAC account. Despite their proffer of standardized docu-
ments or other communications disseminated to the entire class to
establish these representations, plaintiffs in fact relied heavily on
audiotapes of non-standard final review sessions between franchisees
and Meineke representatives. In some of these sessions, for example,
Meineke's role was portrayed as a mere custodian of WAC funds, in
others as a trustee, and in others some combination of both. We are
struck by the sheer number of separate statements that were put
before the jury to prove a "common" message, and find the Sprague
court's rationale for refusing class certification in a similar situation
persuasive: "The district court took testimony from more than three
hundred class members in an effort to obtain a purportedly representa-
tive sample of the representations and communications made by [the
defendant]. That it was necessary to do so strongly suggests to us that
class-wide relief was improper." 133 F.3d at 399.
The oral nature of the final review sessions makes them a particu-
larly shaky basis for a class claim. Fifth Circuit caselaw even suggests
a per se prohibition against class actions based on oral representa-
tions. See Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482
F.2d 880, 882-83 (5th Cir. 1973). As the Seventh Circuit has indi-
cated, "claims based substantially on oral rather than written commu-
nications are inappropriate for treatment as class actions unless the
communications are shown to be standardized." Retired Chicago
Police, 7 F.3d at 597 n.17. There has been no such showing here. And
even to the extent that plaintiffs did introduce UFOCs and other writ-
ten and standardized communications with franchisees, there is no
evidence that all franchisees received, read, and relied on the same lit-
erature. If written communications with putative class members "con-
tain material variations, emanate from several sources, or do not
actually reach the [putative class members], they are no more valid
a basis for a class action than dissimilar oral representations." Simon,
482 F.2d at 882. Thus we conclude as we did in Lukenas that "the
rights of these parties, arising as they do out of fraudulent representa-
tions which may vary widely between purchasers, are hardly suitable
for class treatment." 538 F.2d at 596; accord In re American Medical
Sys., Inc., 75 F.3d 1069, 1081 (6th Cir. 1996).
17
Third, the reliance element of plaintiffs' fraud and negligent mis-
representation claims were not readily susceptible to class-wide proof.
Under North Carolina law, these claims turn on whether each franchi-
see reasonably relied on Meineke's representations. See, e.g., Helms
v. Holland, 478 S.E.2d 513, 517 (N.C. Ct. App. 1996) ("Justifiable
reliance is an essential element of both fraud and negligent misrepre-
sentation."); Carlson v. Branch Banking & Trust Co., 473 S.E.2d 631,
637 (N.C. Ct. App. 1996), rev. denied, 483 S.E.2d 162 (N.C. 1997).
North Carolina courts recognize that "[w]hen the circumstances are
such that a plaintiff seeking relief from alleged fraud must have
known the truth, the doctrine of reasonable reliance will prevent him
from recovering for a misrepresentation which, if in point of fact
made, did not deceive him." Johnson v. Owens , 140 S.E.2d 311, 314
(N.C. 1965). Specifically, if a plaintiff had an alternative source for
the information that is alleged to have been concealed from or misrep-
resented to him, his ignorance or reliance on any misinformation is
not reasonable. E.g., C.F.R. Foods, Inc. v. Randolph Development
Co., 421 S.E.2d 386, 389 (N.C. Ct. App. 1992). In this case, proof of
reasonable reliance would depend upon a fact-intensive inquiry into
what information each franchisee actually had about the operation of
the WAC account. Such information might come from conversations
with Meineke representatives at final review sessions or on other
occasions, conversations with other franchisees, independent analysis
of the applicable FTA, audit statements of the WAC account, differ-
ent editions of the UFOC, and so on.
In Zimmerman v. Bell we affirmed a denial of class certification in
the analogous securities fraud context because "[t]o recover in an
action for securities fraud, individual class members must demon-
strate that the omitted information was not otherwise available to
them." 800 F.2d 386, 390 (4th Cir. 1986). There, as here, each class
member potentially had access to several alternative sources of the
information alleged to have been fraudulently concealed from him. Id.
In this circumstance, we reasoned that "[b]ecause the extent of knowl-
edge of the omitted facts or reliance on misrepresented facts will vary
from [class member] to [class member], the question of whether the
omission was material might require an individual inquiry for each
[class member]" that made class treatment impossible. Id. Claims like
common law fraud and negligent misrepresentation are no different.
In fact, recognizing the inherent individuality of the required analysis,
18
the Fifth Circuit has flatly held that "a fraud class action cannot be
certified when individual reliance will be an issue." Castano v. Ameri-
can Tobacco Co., 84 F.3d 734, 745 (5th Cir. 1996). And the Sixth
Circuit has indicated that claims that "require[ ] proof of what state-
ments were made to a particular person, how the person interpreted
those statements, and whether the person justifiably relied on those
statements to his detriment" are not susceptible to class-wide treat-
ment. Sprague, 133 F.3d at 398. We agree that because reliance "must
be applied with factual precision," plaintiffs' fraud and negligent mis-
representation claims do not provide "a suitable basis for class-wide
relief." Jensen v. SIPCO, Inc., 38 F.3d 945, 953 (8th Cir. 1994) (dis-
cussing analogous estoppel claim).5
Fourth, tolling the statute of limitations on each of plaintiffs'
claims depends on individualized showings that are non-typical and
unique to each franchisee. As we discussed above, the alleged misrep-
resentations and obfuscations on which plaintiffs base their argument
for tolling differed from franchisee to franchisee. The trial court's
analysis of equitable tolling should thus have taken the form of indi-
vidualized inquiry into what each franchisee knew about Meineke's
operation of the WAC account and when he knew it. The representa-
tions made to each franchisee varied considerably, with some fran-
chisees being informed about New Horizons' role in Yellow Pages
advertising and others being given assurances that"we don't make
any money on advertising." In Lukenas we recognized that a "consid-
erable difference in right, so far as tolling the statute [of limitations]
is concerned," arises when some class members might be able to point
to fraudulent misrepresentations while others cannot. 538 F.2d at 597.
This "difference in right" precluded class certification there, as it
should have here.
Moreover, even assuming that Meineke downplayed or underesti-
mated the amount of payments from the WAC account to New Hori-
zons and other advertising buying agencies, the fact of these
payments was unquestionably known by some franchisees from the
very beginning. In 1986 Meineke prepared and distributed to fran-
_________________________________________________________________
5 Plaintiffs' reliance on Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994),
is misplaced. As the court noted in that case, Teague did not involve a
challenge to class certification. Id. at 995 n.24.
19
chisees an audit of the WAC account, which detailed the creation of
New Horizons, its role in Yellow Pages advertising, and that
"[a]dvertising commissions paid to M&N Advertising and New Hori-
zons Advertising, Inc. during 1986 were based on standard industry
practice." This message was repeated in several progressively more
detailed annual audits of the WAC account, and several franchisees
testified that they in fact reviewed these audits. Whether and when
each franchisee received, read, and understood the audit is crucial to
whether their contract claim against Meineke is time-barred by North
Carolina's three year statute of limitations on contract claims. As the
Ninth Circuit has recognized, when the defendant's"affirmative
defenses (such as . . . the statute of limitations) may depend on facts
peculiar to each plaintiff's case," class certification is erroneous. In re
Northern Dist. of Cal. Dalkon Shield IUD Prods. Liab. Litig., 693
F.2d 847, 853 (9th Cir. 1982).
Finally, each putative class member's claim for lost profits dam-
ages was inherently individualized and thus not easily amenable to
class treatment. We have previously recognized that the need for indi-
vidual proof of damages bars class certification in some antitrust
cases. See Windham v. American Brands, Inc., 565 F.2d 59, 66 (4th
Cir. 1977) (en banc) (describing damages for antitrust violation). In
Windham we held proof of damages was "always strictly individual-
ized," and we invalidated "[g]eneralized or class-wide proof of dam-
ages" because proof of actual, individual damages was a critical
element of a plaintiff's antitrust claim. Id. "The gravamen of the com-
plaint is not the conspiracy; the crux of the action is injury, individual
injury." Id.
This rationale for individualized proof of damages extends beyond
the setting of a federal claim in antitrust. Indeed, the
North Carolina courts have long held that damages for lost
profits will not be awarded based upon hypothetical or spec-
ulative forecasts of losses. . . . Instead, we have chosen to
evaluate the quality of evidence of lost profits on an individ-
ual case-by-case basis in light of certain criteria to deter-
mine whether damages have been proven with "reasonable
certainty."
20
Iron Steamer, Ltd. v. Trinity Restaurant, Inc. , 431 S.E.2d 767, 770
(N.C. Ct. App. 1993) (emphasis added); see also McNamara v. Wil-
mington Mall Realty Corp., 466 S.E.2d 324, 329-32 (N.C. Ct. App.
1996) (undertaking fact-specific inquiry into lost profits, accounting
for numerous variables that affect profits for a single shop), rev.
denied, 471 S.E.2d 72, 73 (N.C. 1996).
Plainly plaintiffs' claim for lost profits damages was not a natural
candidate for class-wide resolution; the calculation of lost profits is
too "dependent upon consideration of the unique circumstances perti-
nent to each class member." Boley v. Brown , 10 F.3d 218, 223 (4th
Cir. 1993). As plaintiffs' expert admitted on cross-examination, the
profitability of each Meineke franchise depends on any number of
factors, including both tangible factors like market saturation, shop
location, and the local economy, and intangibles like the level of ser-
vice at each shop and the management skills of the franchisee. The
district court allowed the jury to calculate lost profits without refer-
ence to any of these factors. Moreover, plaintiffs' expert based his
lost profits testimony on abstract analysis of "averages": the average
effect of ads on sales; an average profit margin based on a sample of
franchisees' financial data selected by plaintiffs' counsel to be "ap-
propriately dispersed geographically and appropriately dispersed in
terms of the size of the stores"; and an estimate of "on average how
many additional cars would have come in per week in the typical
Meineke dealer's shop had the additional advertising dollars been
spent." The expert admitted that he had "not attempted to calculate the
damages that any individual franchisee has suffered in this case,"
focusing instead on the fictional "typical franchisee operation." Plain-
tiffs attempted to substitute this "hypothetical or speculative" evi-
dence, divorced from any actual proof of damages, for the proof of
individual damages necessary to meet North Carolina's "reasonable
certainty" standard of proof for lost profits awards, Iron Steamer, 431
S.E.2d at 770. That this shortcut was necessary in order for this suit
to proceed as a class action should have been a caution signal to the
district court that class-wide proof of damages was impermissible.
The class the district class certified was thus no more than "a
hodgepodge of factually as well as legally different plaintiffs,"
Georgine v. Amchem Prods, Inc., 83 F.3d 610, 632 (3d Cir. 1996),
aff'd, Amchem, supra, that should not have been cobbled together for
21
trial: franchisees' contractual rights and obligations differ; Meineke
directed different representations to different franchisees; franchisees
relied on these representations in a different manner or to a different
degree; each franchisee's entitlement to toll the statute of limitations
is fact-dependent; and the profits lost by franchisees also differed
according to their individual business circumstances. Plaintiffs do not
"advance the same factual and legal arguments" as the class they are
supposed to represent. And frankly, in these circumstances, we doubt
that any set of claims is common to or typical of this class. Mace, 109
F.3d at 341.
We recognize that a class action may be the most economical and
efficient means of litigation in many circumstances, and we do not
intend to discourage its use when the claims of named plaintiffs can
truly be called representative of class members whose resources
would not permit individual lawsuits. To be sure, a"trial court has
broad discretion in deciding whether to certify a class, but that discre-
tion must be exercised within the framework of Rule 23." American
Medical Sys., 75 F.3d at 1079 (citing Gulf Oil Co. v. Bernard, 452
U.S. 89, 100 (1981)). We also do not suggest that the commonality
and typicality elements of Rule 23 require that members of the class
have identical factual and legal claims in all respects. See Hanlon v.
Chrysler Corp., ___ F.3d ___, 1998 WL 296890, at *3 (9th Cir. June
9, 1998); Sprague, 133 F.3d at 399 (typicality satisfied if class claims
fairly encompassed by those of named representatives even if not
identical). Here it is plain that
the district court abused its discretion in certifying the class
. . . . Some class members may have signed the same form,
some may have received the same documents, or some may
have attended the same meetings . . ., but taken as a whole
the class claims were based on widely divergent facts.
Class-wide relief was awarded here without any necessary
connection to the merits of each individual claim. Rule 23
does not permit that result.
Sprague, 133 F.3d at 399. The disparate nature of the claims pre-
cludes class treatment, and we must reverse the certification ruling of
the district court.
22
III.
Often, when a class is decertified, the court evaluates the viability
of the named plaintiffs' claims standing alone. See, e.g., Sprague, 133
F.3d at 399 (conducting this analysis). But the setting of this case as
a class action so infected the proceedings that we cannot do that here.
The practical effect of the district court's certification ruling was felt
at every stage of trial.
Specifically, plaintiffs enjoyed the practical advantage of being
able to litigate not on behalf of themselves but on behalf of a "perfect
plaintiff" pieced together for litigation. Plaintiffs were allowed to
draw on the most dramatic alleged misrepresentations made to
Meineke franchisees, including those made in final review sessions
with absent class members, with no proof that those"misrepresenta-
tions" reached them. And plaintiffs were allowed to stitch together the
strongest contract case based on language from various FTAs, with
no necessary connection to their own contract rights. In fact, plain-
tiffs' opening argument and their examination of Meineke's General
Counsel highlighted the introductory clause to Section 3.1 that
appeared in only one quarter of FTAs -- this language was displayed
on an illuminated screen next to the jury.
In addition, the class action posture of the case complicated
Meineke's efforts to establish the defense of statute of limitations.
Normally a claim would have been time-barred if Meineke had shown
that the claimant knew about the challenged conduct outside the limi-
tations period. See, e.g., Brooks v. Ervin Constr. Co., 116 S.E.2d 454,
459 (N.C. 1960) ("in an action grounded on fraud, the statute of limi-
tations begins to run from the discovery of the fraud or from the time
it should have been discovered in the exercise of reasonable dili-
gence"). But in this class action the statutes of limitations did not bar
the claims despite evidence that some class members, and even some
named plaintiffs, knew about the challenged payments from the WAC
account outside the relevant limitations periods.
And Meineke may not have received a fair trial on the breach-of-
contract issue because the trial highlighted inappropriate theories of
tort and statutory liability, see Section IV, infra. Although it is routine
to advance multiple theories of liability in a single suit, see Fed. R.
23
Civ. Pro. 8(e)(2), in this case plaintiffs' non-contract theories of lia-
bility may well have impacted the jury's consideration of the contract
claims. And because the jury did not apportion its compensatory dam-
age award among theories of liability, calling into question the valid-
ity of plaintiffs' recovery on any one theory imperils the entire
damage award. Barber v. Whirlpool Corp., 34 F.3d 1268, 1278 (4th
Cir. 1994) ("[T]he jury's award of damages cannot stand if either of
the two underlying claims is reversed because the general verdict
form did not apportion damages between the claims . . . .").
In sum, plaintiffs portrayed the class at trial as a large, unified
group that suffered a uniform, collective injury. And Meineke was
often forced to defend against a fictional composite without the bene-
fit of deposing or cross-examining the disparate individuals behind
the composite creation. Fundamentally, the district court lost sight of
the fact that a class action is "an exception to the usual rule that litiga-
tion is conducted by and on behalf of the individual named parties
only." Califano v. Yamasaki, 442 U.S. 682, 700-01 (1979). It is axi-
omatic that the procedural device of Rule 23 cannot be allowed to
expand the substance of the claims of class members. See 28 U.S.C.
§ 2072(b) (Federal Rules "shall not abridge, enlarge or modify any
substantive right"). Thus courts considering class certification must
rigorously apply the requirements of Rule 23 to avoid the real risk,
realized here, of a composite case being much stronger than any
plaintiff's individual action would be. Because the class action device
permitted plaintiffs to strike Meineke with selective allegations,
which may or may not have been available to individual named plain-
tiffs or franchisees, the judgment below cannot stand.
IV.
We respect the fact that class actions may play some role in
franchisee-franchisor relations. E.g., Remus v. Amoco Oil Co., 794
F.2d 1238 (7th Cir. 1986) (considering whether change in franchisor's
general policies constituted breach of contract with franchisees or vio-
lation of state Fair Dealership Law). However, any class that is certi-
fied must carefully observe the requirements of Rule 23. While we do
24
not wish to micromanage any retrial, we underscore three errors
which must not recur.6
A.
The first error involves nothing less than misconceiving the basic
character of the lawsuit. The district court ignored North Carolina law
limiting the circumstances under which an ordinary contract dispute
can be transformed into a tort action. It is true that this suit is one that
has aroused strong feelings. Plaintiffs claim they were cheated "every
single week for over ten years by their own fiduciary, in connection
with the administration of a common advertising trust fund for the
benefit of all Meineke dealers." Defendants charge they have been
swindled by the legal system itself, in a suit that"represents in micro-
cosm much of what has gone awry in the American civil justice sys-
tem." Beneath these intense feelings lies a simple fact: the parties
differ fundamentally on their rights and obligations under the Fran-
chise and Trademark Agreements that govern every aspect of their
relationship. Typically thirty-five pages long, the FTAs cover such
subjects as confidentiality and Meineke's intellectual property, roy-
alty fees and record keeping, training provided by Meineke, standards
of operation, transferability of the franchise, and termination. Among
the subjects that the agreements address, albeit in different ways and
often through different provisions, is that of advertising and how such
advertising is to be funded. As we earlier discussed, the topic of
advertising is addressed in Sections 3.1 and 7.17 of the FTAs.
At bottom then, this lawsuit centers on a dispute between Meineke
and its franchisees over the interpretation of different FTAs and over
Meineke's performance under those FTAs. This is a straightforward
_________________________________________________________________
6 We recognize that the parties have raised numerous issues on appeal
and cross appeal. However, in view of the fact that we have reversed the
judgment in its entirety, we think it unnecessary and in some instances
gratuitous to resolve all the many claims of error addressed herein. It
should be evident from our discussion of the evidence in this case that,
given the multiplicity of contracts and the variations in language among
them, it simply is not possible at this point to determine whether or not
judgment would be appropriate on certain of these contracts as a matter
of law.
25
contract dispute, yet it somehow managed to become a massive tort
action in the end. As one of the named plaintiffs, Kelly Broussard,
testified, in the months before this lawsuit was filed, some franchisees
were growing increasingly dissatisfied with the cost, amount and
quality of Meineke's advertising. Under all versions of the FTA, how-
ever, decisions about advertising strategy were within Meineke's sole
discretion. So plaintiffs could not address their primary complaint of
a poor advertising strategy directly. Instead plaintiffs filed this law-
suit, charging that the FTAs prescribed how Meineke could operate
the WAC account and characterizing Meineke's exercise of its discre-
tion not only as tortious conduct, but as conduct that constituted
unfair trade practices as well.
The district court erred, however, by allowing plaintiffs to advance
tort and UTPA counts paralleling their breach of contract claims. The
crux of this matter is and always has been a contract dispute. The
defendants believe that Meineke was perfectly entitled under the vari-
ous FTAs to pay advertising commissions from the WAC account.
The plaintiffs say Meineke absolutely was not. Whatever view the
parties take of the various FTA provisions at issue did not justify
transforming what was essentially a breach of contract action with
finite damages into a massive tort suit resulting in a $390 million
award. In this, plaintiffs' case is remarkably like Strum v. Exxon
Company, where we found a similar "attempt by the plaintiff to man-
ufacture a tort dispute out of what is, at bottom, a simple breach of
contract claim" to be "inconsistent both with North Carolina law and
sound commercial practice." 15 F.3d 327, 329 (4th Cir. 1994).
The list of tort claims brought against the Meineke defendants was
extensive: breach of fiduciary duty, aiding and abetting breach of
fiduciary duty, fraud, unjust enrichment, negligence, negligent mis-
representation, intentional interference with contractual relations, and
unfair trade practices in contravention of the North Carolina Unfair
Trade Practices Act, N.C. Gen. Stat. § 75-1.1. And by any measure,
whether in terms of punitive damages for torts or statutory trebling for
unfair trade practices, the non-contract component of plaintiffs'
recovery made up a significant portion of the nearly $390 million
total award.7 Punitive damages are generally not recoverable for
breach of contract, and for good reason. As we explained in Strum:
_________________________________________________________________
7 The jury awarded plaintiffs $150 million in punitive damages on their
claims of aiding and abetting breach of fiduciary duty, fraud, intentional
26
The distinction between tort and contract possesses more
than mere theoretical significance. Parties contract partly to
minimize their future risks. Importing tort law principles of
punishment into contract undermines their ability to do so.
Punitive damages, because they depend heavily on an indi-
vidual jury's perception of the degree of fault involved, are
necessarily uncertain. Their availability would turn every
potential contractual relationship into a riskier proposition.
Id. at 330.
In recognition of the fundamental difference between tort and con-
tract claims, and in order to keep open-ended tort damages from dis-
torting contractual relations, North Carolina has recognized an
"independent tort" arising out of breach of contract only in "carefully
circumscribed" circumstances. Id. at 330-31 (citing Newton v. Stan-
dard Fire Ins. Co., 229 S.E.2d 297, 301 (N.C. 1976)). The district
court failed to limit plaintiffs' tort claims to only those claims which
are "identifiable" and distinct from the primary breach of contract
claim, as North Carolina law requires. See Newton, 229 S.E.2d at 301.
For example, plaintiffs' collection of tort claims includes an allega-
tion of fraud and a complaint that Meineke negligently managed the
WAC account. But it is plain that "[t]he mere failure to carry out a
promise in contract . . . does not support a tort action for fraud."
Strum, 15 F.3d at 331 (citing Hoyle v. Bagby , 117 S.E.2d 760, 762
(N.C. 1961); In re Baby Boy Shamp, 347 S.E.2d 848, 853 (N.C. Ct.
App. 1986)). Something more is required, and given Meineke's plau-
sible argument for an interpretation of the FTAs that validates its con-
duct, that something more seems lacking here. In addition, as in
Strum, it appears plaintiffs' "claim for gross negligence really arises
out of [Meineke's] performance on the contract, not out of the type
of distinct circumstances necessary to allege an independent tort." Id.
at 332-33.
_________________________________________________________________
interference with contractual relations, and willful and wanton negli-
gence. But because the jury also found that Meineke's tortious conduct
constituted unfair and deceptive trade practices under the UTPA, plain-
tiffs chose to substitute the larger figure of treble compensatory damages
as the punitive component of their award.
27
Likewise, the district court should not have allowed the UTPA
claim to piggyback on plaintiffs' breach of contract action. It has been
said that because "[p]roof of unfair or deceptive trade practices enti-
tles a plaintiff to treble damages," a UTPA count"constitutes a boiler-
plate claim in most every complaint based on a commercial or
consumer transaction in North Carolina." Allied Distributors, Inc. v.
Latrobe Brewing Co., 847 F. Supp. 376, 379 (E.D.N.C. 1993). To
correct this tendency, and to keep control of the extraordinary dam-
ages authorized by the UTPA, North Carolina courts have repeatedly
held that "a mere breach of contract, even if intentional, is not suffi-
ciently unfair or deceptive to sustain an action under [the UTPA,]
N.C.G.S. § 75-1.1." Branch Banking & Trust Co. v. Thompson, 418
S.E.2d 694, 700 (N.C. Ct. App. 1992); see also Moseley & Moseley
Builders, Inc. v. Landin, Ltd., 389 S.E.2d 576, 580 (N.C. Ct. App.
1990); Coble v. Richardson Corp. of Greensboro , 322 S.E.2d 817,
823-24 (N.C. Ct. App. 1984); Canady v. Crester Mortgage Corp., 109
F.3d 969, 975 (4th Cir. 1997). Even though "[i]n a sense, unfairness
inheres in every breach of contract when one of the contracting par-
ties is denied the advantage for which he contracted," United Roast-
ers, Inc. v. Colgate-Palmolive Co., 649 F.2d 985, 992 (4th Cir. 1981),
North Carolina law requires a showing of "substantial aggravating cir-
cumstances" to support a claim under the UTPA. Branch Banking,
418 S.E.2d at 700 (adopting interpretation of UTPA in Bartolomeo v.
S.B. Thomas, Inc., 889 F.2d 530, 535 (4th Cir. 1989)). And "the
courts have consistently recognized that § 75-1.1 does not cover every
dispute between two parties. The courts differentiate between contract
and deceptive trade practice claims, and relegate claims regarding the
existence of an agreement, the terms contained in an agreement, and
the interpretation of an agreement to the arena of contract law."
Hageman v. Twin City Chrysler-Plymouth Inc., 681 F. Supp. 303,
306-07 (M.D.N.C. 1988). Given the contractual center of this dispute,
plaintiffs' UTPA claims are out of place.
On remand the observation made by this court in Strum should
guide the district court's consideration of plaintiffs' tort claims: "We
think it unlikely that an independent tort could arise in the course of
contractual performance, since those sorts of claims are most appro-
priately addressed by asking simply whether a party adequately ful-
filled its contractual obligations." 15 F.3d at 333. If Meineke has
failed to fulfill its contractual obligations, the remedy is contract dam-
28
ages, not the blank check afforded to juries when they are authorized
to return a punitive award.
B.
The district court erred by allowing plaintiffs to advance their
claims for breach of fiduciary duty when there is no indication that
North Carolina law would recognize the existence of a fiduciary rela-
tionship between franchisee and franchisor. "Rather," in North Caro-
lina "parties to a contract do not thereby become each others'
fiduciaries; they generally owe no special duty to one another beyond
the terms of the contract and the duties set forth in the U.C.C."
Branch Banking, 418 S.E.2d at 699. This general rule has particular
applicability here, for the FTAs contain an integration clause, which
provides that "[t]his Agreement constitutes and contains the entire
agreement and understanding of the parties with respect to the subject
matter hereof. There are no representations, undertakings, agree-
ments, terms, or conditions not contained or referred to herein." This
clause emphasizes that the nature of the franchise relationship at issue
here is to be determined by reference to the written contractual instru-
ment that both parties signed, discouraging the imposition of extra-
contractual obligations based upon the welter of conflicting oral state-
ments and representations that plaintiffs introduced at trial.
Moreover, the North Carolina Court of Appeals has also said:
Our review of reported North Carolina cases has failed to
reveal any case where mutually interdependent businesses,
situated as the parties were here [in equal bargaining posi-
tions and at arms' length], were found to be in a fiduciary
relationship with one another. We decline to extend the con-
cept of a fiduciary relation to the facts of this case.
Tin Originals, Inc. v. Colonial Tin Works, Inc. , 391 S.E.2d 831, 833
(N.C. Ct. App. 1990). Tin Originals involved a manufacturer and the
company that was the exclusive distributor of the manufacturer's
product. The Tin Originals court rejected the argument that the par-
ties' interdependence imparted a fiduciary flavor to their relations.
Rather the court emphasized that North Carolina law requires a
degree of "superiority and influence" to have developed as a result of
29
this interdependence in order to hold one party to a fiduciary's
responsibilities. Id.
Though plaintiffs and some amici would portray franchisees as
helpless Davids to the franchisor's Goliath, size, as that story teaches,
is not a reliable indicator of strength or influence. Nor is it what North
Carolina courts mean by superiority. Only when one party figura-
tively holds all the cards -- all the financial power or technical infor-
mation, for example -- have North Carolina courts found that the
"special circumstance" of a fiduciary relationship has arisen. E.g.,
Lazenby v. Godwin, 253 S.E.2d 489 (N.C. Ct. App. 1979). By all
lights, Meineke franchisees are independent, sophisticated, if some-
times small, businessmen who dealt with Meineke at arms' length and
pursued their own business interests. Tin Originals says that these cir-
cumstances do not give rise to a fiduciary relationship.
We have not found, and the parties have not identified, any North
Carolina case retreating from Tin Originals. And as a federal court
exercising concurrent jurisdiction over this important question of state
law we are most unwilling to extend North Carolina tort law farther
than any North Carolina court has been willing to go. Our hesitation
is strengthened by the refusal of courts in many other jurisdictions to
superimpose fiduciary duties on a franchisor-franchisee relationship.
See, e.g., Original Great Am. Chocolate Chip Cookie Co., Inc. v.
River Valley Cookies, Ltd., 870 F.2d 273, 280 (7th Cir. 1992)
("parties to a contract are not each other's fiduciaries -- even if the
contract is a franchise") (citations omitted); O'Neal v. Burger Chef
Sys., Inc., 860 F.2d 1341, 1349 (6th Cir. 1988) ("in general, franchise
agreements do not give rise to fiduciary or confidential relationships
between the parties. This observation is in accordance with the vast
majority of courts which have considered this issue"); Boat & Motor
Mart v. Sea Ray Boats, Inc., 825 F.2d 1285, 1292 (9th Cir. 1987)
("The relation between a franchisor and a franchisee is not that of a
fiduciary to a beneficiary."); Jack Walters & Sons Corp. v. Morton
Bldg., Inc., 737 F.2d 698, 711 (7th Cir. 1984) ("The common law of
Wisconsin does not make the franchisor a fiduciary of his
franchisees.").8
_________________________________________________________________
8 We recognize that in exceptional circumstances, when the franchisor
really does hold all the cards, a fiduciary duty may exist. See, e.g.,
Walker v. U-Haul Co., 734 F.2d 1068, 1075 (5th Cir. 1984). This is not,
however, the exceptional case.
30
A fiduciary bears the extraordinary obligation, as the district court
explained to the jury, "never [to] place his personal interest over that
of the persons for whom he is obliged to act." The near-universal
rejection of imposing fiduciary duties in the franchise setting reflects
a recognition that these obligations are out of place in a relationship
involving two business entities pursuing their own business interests,
which of course do not always coincide. Not only is importing fidu-
ciary concepts into the ordinary franchise relationship unworkable, it
is unnecessary. At the outset of the franchise relationship, franchisees
are protected by federal regulations imposing mandatory disclosure
obligations on franchisors. See 16 C.F.R. Part 436. And during the life
of the franchise, franchisees are protected by the full panoply of con-
tract remedies for any breach of the franchise agreement. The market
imposes a further, overriding restraint on the franchisor. There exists
a grapevine among franchisees and franchisors do earn reputations. A
franchise system marred by bad franchisor-franchisee relations is
unlikely to expand -- or survive.
These points are underscored by the malleable standard the jury
used to find a fiduciary duty in this case. The court instructed the jury
that such a duty exists "any time one person reposes a special confi-
dence in another" and that the fiduciary relationship "extends to any
possible case" in which this special confidence resulted in "domina-
tion and influence" on one side of the relationship. This broad basis
for imposing fiduciary status leaves open the real possibility of retro-
actively imposing fiduciary duties on one half of a contractual rela-
tionship if the jury accepts the post hoc claims of the other half to
have reposed "special confidence" in its contract partner. These
claims are all too easy to make at the point of litigation, when the
contractual relationship has already broken down and when there is
likely to be substantial animosity between contracting parties. And
surprising the allegedly "dominant" party with fiduciary responsibili-
ties at this point would strip that party of the benefit of its bargain --
the very contract through which it thought to describe and limit its
obligations. Given the elasticity of the standard the district court used,
it would be difficult to circumscribe any holding that imported fidu-
ciary concepts into the franchise relationship. Without a clearer signal
from the North Carolina courts -- or from the North Carolina legisla-
ture -- that they are willing to break with the great majority of other
31
jurisdictions and lower the threshold for imposing fiduciary obliga-
tions, we are unwilling to do so ourselves on their behalf.
C.
Finally, the district court erred by allowing the jury to consider
claims against PIC and GKN.
The court first erred in permitting plaintiffs to pierce the corporate
veil. Disregarding the corporate form to impose vicarious liability on
PIC and GKN was plainly impermissible under North Carolina law.
A corporate parent cannot be held liable for the acts of its subsidiary
unless the corporate structure is a sham and the subsidiary is nothing
but a "mere instrumentality" of the parent. B-W Acceptance Corp. v.
Spencer, 149 S.E.2d 570, 575 (N.C. 1966) (establishing instrumental-
ity rule). In order to find that a subsidiary is a mere instrumentality,
North Carolina requires plaintiffs to show that the parent exercises
"[c]ontrol, not mere majority or complete stock control, but complete
domination, not only of finances, but of policy and business practice
in respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of
its own." Glenn v. Wagner, 329 S.E.2d 326, 330 (N.C. 1985).
In this case there is no evidence of such "complete domination."
Meineke exhibits none of the characteristics North Carolina courts
have identified as indicative of sham incorporation. Initially, plaintiffs
make no allegation that Meineke is inadequately capitalized. See
Glenn, 329 S.E.2d at 330 (citing Commonwealth Mut. Fire Ins. Co.
v. Edwards, 32 S.E. 404 (N.C. 1899)). In point of fact, as of 1994,
Meineke had total assets of over $14.5 million and net income of over
$10 million. Plaintiffs make much of the fact that Meineke itself is
judgment-proof against the verdict entered below. But this is a func-
tion of the astronomical size of that award rather than of any under-
capitalization. Further, Meineke has observed all corporate
formalities. See id. (citing Hammond v. Williams, 3 S.E.2d 437 (N.C.
1939)). The company holds regular shareholder and board meetings.
It generates its own independently audited financial statements and
keeps its own accounts. It has its own articles of incorporation, by-
laws, minute books, shares, and seal. Moreover, Meineke does not
lack an independent identity. See id. at 331 (citing Waff Bros., Inc. v.
32
Bank of North Carolina, N.A., 221 S.E.2d 273 (N.C. 1976)). Rather
Meineke was independently incorporated in 1972, more than ten years
before GKN even acquired an indirect ownership interest in it
(through PIC) in 1983. And Meineke has retained its independent
identity to this day. It is a well-known franchise chain; its connection
to GKN is not in the least apparent to its customers. The company has
at all times been run by its own officers and employees, who have
made significant business decisions for Meineke independently of
GKN.
There is no evidence that GKN, located in the United Kingdom,
was involved in the day-to-day operations of Meineke, headquartered
in North Carolina. GKN did not concern itself with Meineke's FTAs
or UFOCs until after this lawsuit was filed. And there is no evidence
of GKN's involvement in establishing New Horizons or managing the
WAC account. In fact GKN's direct involvement with Meineke has
been limited to dealing with occasional special problems that arise.
And though GKN does participate on Meineke's Board of Directors,
it has never had majority control of Meineke's Board and in fact has
a policy of ensuring that it never has majority control of any subsid-
iary's board. Finally, there is no evidence that GKN's diverse sub-
sidiaries are excessively fragmented into separate corporations. See
id. (citing Fountain v. West Lumber Co., 76 S.E. 533 (N.C. 1912)).
We recognize that veil piercing may present a jury question in
North Carolina. But the question cannot reach a jury (and, if it has,
the jury's verdict cannot stand) without evidence supporting the claim
that one corporation is merely an instrumentality of another. Here the
evidence suggests an ordinary parent-subsidiary relationship between
GKN, PIC, and Meineke. Plaintiffs emphasize that Meineke and GKN
share funds; that GKN's "bottom line" ultimately reflects Meineke's
profits; and that GKN urged Meineke to enhance profitability and
identified New Horizons as a profit center for the company. Far from
signaling sham incorporation or complete domination of Meineke by
GKN, this evidence supports an entirely benign interpretation. As the
owner (through PIC) of all Meineke's stock, GKN has a natural inter-
est in maximizing the return on that investment. Its communications
with Meineke and its limited oversight -- as well as the profit motive
they reflect -- portray not a sham structure but a legitimate and rou-
tine parent-subsidiary relationship.
33
To hold that GKN's involvement justified disregarding the corpo-
rate form would place North Carolina well outside the mainstream of
corporate law. The United States Supreme Court just recently has had
occasion to consider and confirm the "general principle of corporate
law deeply ingrained in our economic and legal systems that a parent
corporation (so-called because of control through ownership of
another corporation's stock) is not liable for the acts of its subsidia-
ries." United States v. Bestfoods, 118 S. Ct. 1876, 1884 (1998) (inter-
nal quotation marks omitted). Deviating from this rule would
destabilize the business and investment climate in North Carolina in
disregard of the courts and legislative body of that state. Particularly
in view of the participation by the North Carolina Secretary of Com-
merce as amicus curiae in support of GKN and PIC, we will not chart
such a chaotic course.
Plaintiffs advanced several theories of direct liability in an effort
to circumnavigate these principles of corporate law, among them aid-
ing and abetting breach of fiduciary duty and intentional interference
with contractual relations.
Plaintiffs' claim that PIC and GKN aided and abetted Meineke's
breach of fiduciary duty fails for two reasons. First, a cause of action
for aiding and abetting breach of fiduciary duty depends on the exis-
tence of a fiduciary duty, which, as the preceding section shows, does
not exist between Meineke and its franchisees. Even placing aside
that basic obstacle to aider and abettor liability in this case, liability
is still inappropriate here. Imposing liability for aiding and abetting
a breach of fiduciary duty requires a finding that GKN or PIC was "a
substantial factor" in Meineke's alleged breach of duty. Blow v.
Shaughnessy, 364 S.E.2d 444, 447 (N.C. Ct. App. 1988). But there is
no evidence here that GKN or PIC played a role in Meineke's estab-
lishment of the WAC account or New Horizons or in Meineke's deci-
sions about how to fund New Horizons and franchise advertising, the
very conduct plaintiffs allege breached Meineke's duty. All the evi-
dence shows is that GKN knew a profit center when it saw one and
encouraged its subsidiary to expand it. The decisions about creating
and funding the account were made by Meineke independently of
GKN and PIC, and if these decisions breached a duty, liability for the
breach rests solely with Meineke.
34
Plaintiffs' claim that GKN intentionally interfered with contractual
relations also should not have been submitted to the jury. The ele-
ments of this claim are:
First, that a valid contract existed between the plaintiff and
a third person . . . . Second, that the outsider had knowledge
of the plaintiff's contract with the third person. Third, that
the outsider intentionally induced the third person not to
perform his contract with the plaintiff. Fourth, that in so
doing the outsider acted without justification. Fifth, that the
outsider's act caused the plaintiff actual damages.
Peoples Security Life Ins. Co. v. Hooks, 367 S.E.2d 647, 649-50 (N.C.
1988) (emphasis omitted) (quoting Childress v. Abeles, 84 S.E.2d
176, 181 (N.C. 1954) (citations omitted)).
We do not think that the fourth element is satisfied here. There is,
of course, evidence that GKN and PIC were interested in increasing
the profitability of New Horizons: GKN approved bonuses for
increasing New Horizons's profitability and PIC considered New
Horizons to be a "profit center." The fourth prong, however, requires
that the defendant have acted "without justification." "For interference
with a contract to be tortious, ``plaintiff's evidence must show that the
defendant acted without any legal justification for his action . . . .'"
Carolina Water Serv., Inc. v. Town of Atlantic Beach, 464 S.E.2d 317,
321 (N.C. Ct. App. 1995) (quoting Varner v. Bryan, 440 S.E.2d 295,
298 (N.C. Ct. App. 1994)).
Under North Carolina law, there was justification here. As the
owner through PIC of all Meineke's stock, GKN is protected by a
form of qualified privilege for "non-outsiders." See Wilson v.
McClenny, 136 S.E.2d 569, 578 (N.C. 1964) ("As stockholders they
had a financial interest in the corporation . . . .[B]ecause of their
financial interest . . . they had a qualified privilege . . . ."). "In the con-
text of interference with contract by an insider . .. the element that
the defendant acted without justification is potentially vitiated by the
defendant's corporate position. Officers, directors, shareholders, and
other corporate fiduciaries have ``a qualified privilege to interfere with
contractual relations between the corporation and a third party.'"
Embree Constr. Group, Inc. v. Rafcor, Inc., 411 S.E.2d 916, 924
35
(N.C. 1992) (quoting Wilson, 136 S.E.2d at 578); see also Smith v.
Ford Motor Co., 221 S.E.2d 282, 292-93 (N.C. 1976). Indeed, the
North Carolina Supreme Court has emphasized that such parties hav-
ing "``an interest in the activities of a corporation or the duty to advise
or direct such activities should be immune from liability for inducing
the corporation to breach its contract, assuming their actions are in
pursuit of such interests or duties. Public policy demands that so long
as these parties act in good faith and for the best interests of their cor-
poration, they should not be deterred by the danger of personal liabil-
ity.'" Wilson, 136 S.E.2d at 578 (quoting Alfred Avins, Liability for
Inducing a Corporation to Breach Its Contract, 43 Cornell L.Q. 55, 65
(1957)).
Here, we believe for several reasons that the privilege should
obtain. GKN and PIC, as parents and shareholders in Meineke, took
an interest in Meineke's bottom line and implored Meineke to
increase its profitability by pursuing an advertising strategy which it
was at least arguably entitled to pursue under the contract. Although
we cannot and do not decide whether Meineke's various contractual
contentions will ultimately prevail on remand, see supra note 6, we
do think it incorrect to hold GKN and PIC liable on a tortious interfer-
ence theory when the contract language itself admits of respectable
arguments from both sides in this case as to whether Meineke's con-
duct comported with the FTA conditions. Such good-faith actions
taken by shareholders -- urging the corporation to maximize profits
-- are privileged under North Carolina law and cannot form the basis
of a tortious interference claim.
Any apparent tension between North Carolina's recognition of a
qualified privilege and its reluctance to pierce the corporate veil is
easily resolved. Shareholders who take an active interest in the affairs
of the corporation are "non-outsiders" and thus protected from tor-
tious interference claims by the qualified privilege. And if those
shareholders do not completely dominate the affairs of the corpora-
tion, the corporate veil will not be pierced and they will be shielded
from vicarious liability. Setting up such a safe harbor preserves the
advantages of limited liability while encouraging shareholders to
actively monitor corporate affairs.
It is true that the qualified privilege may be waived and liability
may be imposed where an insider's "acts involve individual and sepa-
36
rate torts . . . or where his acts are performed in his own interest and
adverse to that of his firm." Wilson, 136 S.E.2d at 578 (internal quota-
tion marks omitted). Yet there can be no contention that individual
self-dealing, as opposed to corporate well-being, was at issue in these
decisions. Assiduous parental attention, extended in good faith, to the
profitability of a subsidiary is not tortious misconduct. To make it
such would be to repeal the qualified privilege conferred by North
Carolina law. Again, the basic action here is one for breach of con-
tract, and GKN and PIC were not parties to any contract with the
plaintiffs. Thus, despite plaintiffs' theories of veil-piercing and paren-
tal tort liability, there is no basis under North Carolina law for liabil-
ity on GKN or PIC. As a result, we instruct the district court that
GKN and PIC must be dismissed from the action on remand.
V.
We do not dismiss the action against Meineke, however. The plain-
tiffs in this lawsuit may have some legitimate grievance with
Meineke's conduct. They retain a variety of contract remedies for any
breach that may have occurred. Those remedies include, where appro-
priate, restitution to the WAC account and consequential contract
damages in the form of franchisees' lost profits. See generally John
D. Calamari & Joseph M. Perillo, The Law of Contracts § 14-5, at
595-96, § 15-4, at 651-53 (3d ed. 1987). And it is not inconceivable
that a class action might be used in a carefully controlled manner to
achieve the economies and efficiencies for which that device was
intended. But in various ways this lawsuit managed to wander way
beyond its legitimate origins, and at the end it spun completely out of
control, with a diffuse class and proliferating theories of liability. In
fact, this lawsuit came close to visiting corporate ruin on Meineke
over what is a vigorous but straightforward contract dispute, totally
losing sight of the basic principle that in size and in nature a legal
remedy must bear some degree of proportion to the extent of the legal
wrong actually committed. If we permitted this judgment to stand,
commercial disputes and contract law would be transformed -- a
string of tort claims advanced in a sprawling class action would put
many companies -- and their corporate parents-- out of business.
We do respect the important role of juries in striking the balance
between injury and recompense. Nevertheless, like the class action
37
device, the jury's function must be exercised under the guidance and
within the framework of basic principles of law. Without respect for
law neither the class action device nor the jury system can serve the
important functions for which they were intended. Because the most
primary principles of procedure and the most settled precepts of com-
mercial law were not observed here, the judgment of the district court
is reversed in its entirety, and the case is remanded for further pro-
ceedings consistent with this opinion.
REVERSED AND REMANDED
38