David Schwartz v. Rent A Wreck of America, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-2189
DAVID SCHWARTZ, d/b/a Rent A Wreck; RENT A WRECK INC., d/b/a
Bundy Auto Sales,
Plaintiffs – Appellees,
v.
RENT A WRECK OF AMERICA, INC.; BUNDY AMERICAN, LLC,
Defendants – Appellants,
and
J.J.F MANAGEMENT SERVICES, INC.,
Defendant.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Peter J. Messitte, Senior District
Judge. (1:07-cv-01679-PJM)
Argued: January 27, 2015 Decided: March 10, 2015
Before WILKINSON, KING, and DUNCAN, Circuit Judges.
Affirmed by unpublished opinion. Judge Duncan wrote the
opinion, in which Judge Wilkinson and Judge King joined.
ARGUED: Daniel Janssen, QUARLES & BRADY LLP, Milwaukee,
Wisconsin, for Appellants. Roger Charles Simmons, GORDON &
SIMMONS, LLC, Frederick, Maryland, for Appellees. ON BRIEF: E.
King Poor, QUARLES & BRADY LLP, Milwaukee, Wisconsin, for
Appellants. Jacob I. Weddle, GORDON & SIMMONS, LLC, Frederick,
Maryland, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
DUNCAN, Circuit Judge:
This case comes before us a second time. On remand from
our first opinion, a jury found that the parties’ implied-in-
fact franchise agreement does not violate California competition
law. Defendants-Appellants Rent-A-Wreck of America, Inc., and
Bundy American, LLC (collectively, “RAWA”) argue on appeal that
this verdict should not stand because the district court
misallocated the burden of proof and improperly prevented them
from presenting to the jury their theory of the case. Finding
no error, we affirm.
I.
This appeal presents a dispute between the creators of the
“Rent-A-Wreck” car rental brand, Plaintiffs-Appellees David S.
Schwartz and Rent-A-Wreck, Inc. (collectively, “Schwartz”), and
RAWA, the current owner of that brand. In the 1970s and 80s,
Schwartz began using the Rent-A-Wreck name and assigned most of
his interest in that name to RAWA. 1 Importantly for this appeal,
Schwartz reserved the exclusive right to sell or operate Rent-A-
Wreck franchises in West Los Angeles, where he continued to
operate a car rental business under the name “Bundy Rent–A–
1
For a detailed description of the origin and evolution of
the parties’ relationships, see our previous opinion, Schwartz
v. Rent A Wreck Am. Inc., 468 F. App’x 238 (4th Cir. 2012).
3
Wreck.” RAWA’s efforts to have this exclusive-territory
agreement declared invalid are the subject of this appeal.
A.
In June 2007, Schwartz filed suit against RAWA in the
United States District Court for the District of Maryland.
Schwartz sought, in relevant part, a declaratory judgment that
he enjoys the exclusive right to operate a Rent-A-Wreck
franchise in the Los Angeles territory. RAWA filed a
counterclaim under California Business and Professions Code
§ 16600, seeking a declaration that Schwartz’s purported
franchise rights are unenforceable under California law because
those rights preclude RAWA from competing in that territory.
See generally Cal. Bus. & Prof. Code § 16600 (“Except as
provided in this chapter, every contract by which anyone is
restrained from engaging in a lawful profession, trade, or
business of any kind is to that extent void.”).
A jury heard the parties’ claims in April 2010. It found
that Schwartz has a “contract . . . with [RAWA] with respect to
[Schwartz’s] operation of a used car rental business in West Los
Angeles,” Schwartz v. Rent A Wreck Am. Inc., 468 F. App’x 238,
243–44 (4th Cir. 2012), and that the contract affords Schwartz
an “[e]xclusive [Rent-A-Wreck] franchise . . . in West Los
Angeles,” id. at 244.
4
After the jury announced its verdict, RAWA moved under
Federal Rule of Civil Procedure 50 to set aside portions
thereof. RAWA argued that the court “must grant judgment
notwithstanding the verdict on the jury’s finding that [Schwartz
has] an exclusive franchise contract because California law
provides that noncompetition agreements of this nature are void
ab initio.” Defs.’ Mem. Supp. Mot. J. Notwithstanding Verdict
3, Schwartz v. J.J.F. Mgmt. Servs., Inc., No. 1:07-cv-01679-PJM
(D. Md. May 18, 2010), ECF No. 308-1.
The district court denied RAWA’s motion. It held that the
agreement is valid because RAWA and Schwartz have a “franchise
agreement,” and “franchise agreements . . . are not void under
California law as . . . non-competitive.” Tr. Mot. Proceedings
59, Schwartz, No. 1:07-cv-01679-PJM (D. Md. July 21, 2010), ECF
No. 353. Schwartz appealed.
B.
On appeal, we held that the exclusive-territory provision
does not violate California law if “(1) the implied contract
found by the jury is a franchising agreement, whereby RAWA can
maintain some control as is necessary to protect its trademark,
trade name, and goodwill; and (2) the exclusivity arrangement
does not foreclose competition in a substantial share of the
affected line of commerce.” Schwartz, 468 F. App’x at 251. We
also “conclude[d] that the question of whether the exclusive
5
territory at issue would foreclose competition in a substantial
share of the market for rental cars is a question of fact for
the jury.” Id. Because “[t]his issue was not presented to the
jury . . . , we vacate[d] the district court’s denial of
[RAWA’s] Rule 50(b) motion” and “instruct[ed] the district court
to submit to a jury the question of whether the exclusive
territory provision forecloses competition in a substantial
share of the market for rental cars.” Id.C.
On remand, the district court submitted to a jury both
questions we identified: (1) whether RAWA maintains sufficient
control over Schwartz to protect its trademark, trade name, and
goodwill; and (2) whether the exclusive-territory provision
forecloses competition for rental cars. Prior to trial, the
court held that RAWA would bear the burden of proof on both
issues. The court also rejected RAWA’s attempts to redefine the
affected line of commerce as the market for Rent-A-Wreck
franchises because, among other reasons, our previous opinion
had referred to the market for rental cars. The court explained
that RAWA could define “an appropriate market for rental cars in
whatever way [it] so choose[s]”--for example, by defining it as
the market for the type of rental cars that Rent-A-Wreck
franchises rent--but RAWA could not define the market in terms
of Rent-A-Wreck franchises themselves. J.A. 823. In other
6
words, the district court limited RAWA to a market in which the
consumers are those who rent cars from establishments like Rent-
A-Wreck, rather than those who seek to operate Rent-A-Wreck
franchises.
A three-day jury trial began on June 18, 2013. On the
first day, RAWA reiterated its view that the affected line of
commerce is “the sell [sic] of Rent-A-Wreck franchises,” not, as
the court had ruled, “the rental of cars.” J.A. 932. RAWA
explained that, in light of the court’s rejection of its
preferred market definition, it would not present any evidence
that the exclusive-territory agreement forecloses competition.
See J.A. 933; see also J.A. 1393–94. RAWA argued instead that
the parties’ contract is not a franchise agreement because RAWA
lacks control over Schwartz, and that the exclusive-territory
provision is therefore invalid. The jury rejected this
argument; it found that RAWA “has the right to exercise some
control over [Schwartz] as is necessary to protect RAWA’s
trademark, trade name, and good will.” J.A. 902. The jury also
found that Schwartz’s exclusive-territory agreement does not
foreclose competition in a substantial share of the market for
rental cars. J.A. 902. In accordance with this verdict, the
court entered judgment in favor of Schwartz on RAWA’s
counterclaim and closed the case. RAWA appealed.
7
II.
This appeal presents two issues: first, whether the
district court erred by assigning RAWA the burden of proving
that the exclusive-territory agreement forecloses competition;
and second, whether the district court erred by preventing RAWA
from presenting to the jury its preferred definition of the
relevant market. 2 We address each issue in turn.
A.
RAWA first argues that Schwartz should have borne the
burden of proving that the exclusive-territory agreement does
not foreclose competition. Schwartz responds that RAWA properly
bore the burden of proof because it was the party claiming that
the agreement violated California competition law. We agree
with Schwartz.
2
RAWA also argues on appeal that the district court erred
by determining precisely how much control RAWA can exercise over
Schwartz. See Appellants’ Br. at 15–30. This argument is not
properly before us because the district court entered no
judgment concerning RAWA’s specific franchise rights. The jury
found that RAWA could exercise some control over Schwartz, but
neither the jury nor the district defined the contours of that
control. Because the district court entered no judgment
concerning RAWA’s specific franchise rights, we may not decide
whether any such ruling would have been in error. See Everett
v. Pitt Cnty. Bd. of Educ., 678 F.3d 281, 291 (4th Cir. 2012)
(“[W]e review judgments, not opinions . . . .” (alteration in
original) (quoting Crosby v. City of Gastonia, 635 F.3d 634, 643
(4th Cir. 2011) (internal quotation marks omitted)). If the
parties continue to disagree over how much control RAWA can
exercise over Schwartz, they are free to resolve that
disagreement through, for example, private negotiations or a
state-law breach-of-contract action.
8
1.
We review de novo the district court’s allocation of the
burden of proof. See Everett v. Pitt Cnty. Bd. of Educ., 678
F.3d 281, 288 (4th Cir. 2012). A federal court sitting in
diversity, we apply state substantive law and federal procedural
law. See, e.g., Anand v. Ocwen Loan Servicing, LLC, 754 F.3d
195, 198 (4th Cir. 2014). Because “the assignment of the burden
of proof is a rule of substantive law,” Dir., Office of Workers’
Comp. Programs, Dep’t of Labor v. Greenwich Collieries, 512 U.S.
267, 271 (1994), “our role is to apply the governing state law,
or, if necessary, predict how the state’s highest court would
rule on an unsettled issue.” Horace Mann Ins. Co. v. Gen. Star
Nat’l Ins. Co., 514 F.3d 327, 329 (4th Cir. 2008).
2.
RAWA brought its counterclaim under California Business and
Professions Code § 16600, which reads: “Except as provided in
this chapter,[ 3] every contract by which anyone is restrained
from engaging in a lawful profession, trade, or business of any
kind is to that extent void.” We held in our previous opinion
that § 16600 permits an exclusive-territory provision in a
3
“The chapter excepts noncompetition agreements in the sale
or dissolution of corporations (§ 16601), partnerships (ibid.;
§ 16602), and limited liability corporations (§ 16602.5).”
Edwards v. Arthur Andersen LLP, 189 P.3d 285, 290-91 (Cal.
2008).
9
franchise agreement if, in relevant part, the provision “does
not foreclose competition in a substantial share of the market.”
Schwartz, 468 F. App’x at 250–51; see also Comedy Club, Inc. v.
Improv W. Assocs., 553 F.3d 1277, 1292 (9th Cir. 2009). Now, we
must decide which party bears the burden of establishing whether
an exclusive-territory provision forecloses competition. 4
Neither the California State Legislature nor the Supreme Court
of California has addressed this precise question. Our task is
therefore to predict how the California Supreme Court would
answer it. We predict that it would hold as the district court
did: The party claiming that an exclusive-territory provision is
void under § 16600 bears the burden of showing that § 16600
prohibits that provision.
4
RAWA maintains that we have already decided this issue
because our previous opinion “appears to place the burden on
Schwartz.” Appellants’ Br. at 33. RAWA misreads the following
passage from our opinion:
[W]e conclude that [Schwartz is] entitled to the
exclusive territory provision if two circumstances can
be met: (1) the implied contract found by the jury is
a franchising agreement, whereby RAWA can maintain
some control as is necessary to protect its trademark,
trade name[,] and goodwill; and (2) the exclusivity
arrangement does not foreclose competition in a
substantial share of the affected line of commerce.
Id. at 33–34 (first alteration in original) (quoting Schwartz,
468 F. App’x at 251). This quotation does not establish which
party bears the burden of proof. Instead, our use of passive
voice--“can be met”--allowed the district court to decide in the
first instance which party should bear that burden.
10
California law generally places the burden of proof on the
party who seeks relief from the court. This principle is
codified at California Evidence Code § 500, which provides:
“Except as otherwise provided by law, a party has the burden of
proof as to each fact the existence or nonexistence of which is
essential to the claim for relief or defense that he is
asserting.” No statute or court decision alters this general
rule for § 16600 claims. In fact, the Supreme Court of
California has recognized that a party bringing a claim under
§ 16600 generally must “allege facts sufficient to constitute a
cause of action for unfair competition under . . . section
16600.” Blank v. Kirwan, 703 P.2d 58, 69 (Cal. 1985); cf.
Dayton Time Lock Serv., Inc. v. Silent Watchman Corp., 124 Cal.
Rptr. 678, 682 (Ct. App. 1975) (noting plaintiff’s failure to
“develop material evidence” to support its claim under § 16600
that “performance of the [exclusive-dealing] contract [would]
foreclose competition in a substantial share of the affected
line of commerce”).
There is no reason to believe that the Supreme Court of
California would carve out an exception to this general rule for
a claim that an exclusive-franchise agreement is void under
11
§ 16600. 5 California courts consider the following factors when
“determining whether the normal allocation of the burden of
proof should be altered”: (1) “the knowledge of the parties
concerning the particular fact” to be proved; (2) “the
availability of the evidence to the parties”; (3) “the most
desirable result in terms of public policy in the absence of
proof of the particular fact”; and (4) “the probability of the
existence or nonexistence of the fact.” Amaral v. Cintas Corp.
No. 2, 78 Cal. Rptr. 3d 572, 596 (Ct. App. 2008) (quoting Lakin
v. Watkins Associated Indus., 863 P.2d 179, 189 (Cal. 1993))
(internal quotation mark omitted). Applying these factors,
courts have shifted “the normal allocation of the burden of
5
RAWA argues that the Northern District of California’s
opinion in Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034(N.D. Cal. 1990), “required” the district court here to place
the burden of proof on Schwartz. Appellants’ Br. at 31. But
Scott--which is of course not binding on the district or this
court--does not support RAWA’s position. In that case, a
franchisor brought breach-of-contract and unfair-competition
claims against some of its former franchisees. Id. at 1036.
The franchisor alleged that the former franchisees had violated
a restrictive covenant they had signed by using the franchisor’s
trade secrets to compete unfairly with current franchisees. Id.
at 1036, 1043. The court began its analysis by recognizing that
post-employment covenants not to compete are unenforceable under
California law unless a “former employee uses a former
employer’s trade secrets or otherwise commits unfair
competition,” in which case “a judicially created exception to
section 16600” applies. Id. at 1043. The court then placed the
burden of proving the existence of a trade secret on the
franchisor. Id. at 1038. This holding is consistent with our
holding today: like the Scott court, we place the burden of
proof on the party bringing the claim.
12
proof . . . in spoliation of evidence cases, negligence per se
actions, and product liability cases based on design defect.”
Nat’l Council Against Health Fraud, Inc. v. King Bio Pharm.,
Inc., 133 Cal. Rptr. 2d 207, 214–15 (Ct. App. 2003) (footnote
and citations omitted). For these types of cases, the burden of
proof shifts to the defendant where “there is a substantial
probability the defendant has engaged in wrongdoing and the
defendant’s wrongdoing makes it practically impossible for the
plaintiff to prove the wrongdoing.” Cassady v. Morgan, Lewis &
Bockius LLP, 51 Cal. Rptr. 3d 527, 537 (Ct. App. 2006) (quoting
Nat’l Council Against Health Fraud, 133 Cal. Rptr. 2d at 214)
(internal quotation mark omitted).
Here, none of the four factors weighs in favor of the
conclusion that RAWA’s § 16600 counterclaim is a “rare
instance[]” in which “the burden of proof set forth in Evidence
Code section 500 [should be] altered.” Id. With respect to the
first and second factors, Schwartz would not have superior
knowledge of whether the exclusive-territory provision
forecloses competition or greater access to evidence of such
foreclosure. Nor, under the third factor, do public policy
considerations suggest that exclusive-territory provisions in
franchise agreements should be unenforceable in the absence of
proof that they foreclose competition. Indeed, such exclusive
dealing arrangements can be pro-competitive, as when they
13
“provide an incentive for the marketing of new products and a
guarantee of quality-control distribution.” Dayton Time Lock
Serv., 124 Cal. Rptr. at 682. Finally, with respect to the
fourth factor, we have no reason to believe that exclusive-
franchise agreements so frequently foreclose competition that
courts should presume that they have anticompetitive effects.
We therefore conclude that the baseline rule applies: RAWA bears
the burden of proving its § 16600 claim. Accordingly, we affirm
the district court’s allocation of that burden.
B.
RAWA next argues that the district court erred by
preventing RAWA from presenting its preferred market definition
to the jury. Though RAWA repeatedly attempted before and at
trial to define the affected line of commerce as the market for
Rent-A-Wreck franchises, it now claims that it tried to define
that line as the market for “older [rental] vehicles, generally
from two to eight years old.” Appellants’ Br. at 36; accord
Reply Br. at 10. Schwartz responds that the district court
“encouraged” RAWA to proffer evidence that the exclusive-
territory agreement forecloses competition in a rental car
market, but RAWA refused. Appellees’ Br. at 56–57. For two
reasons, we find no error.
First, the district court did not prevent RAWA from
defining the relevant market as one for older rental cars.
14
Contrary to what it now argues, RAWA proposed the following
market definition for trial: “The line of commerce in this
dispute is the sale of Rent-A-Wreck brand franchises, for
renting and leasing used motor vehicles that are less than eight
years old.” J.A. 790 (emphasis added); accord J.A. 819, 932.
The district court rejected that definition, but made clear that
RAWA could delineate “an appropriate market for rental cars in
whatever way [it] so choose[s], defining that market as rental
cars, rental cars older than 8 years old, etc.” J.A. 823. RAWA
then chose not to define any rental car market. See, e.g., J.A.
819. Having made this choice, RAWA cannot now claim that the
district court prevented it from advocating a market for older
rental vehicles.
Second, the district court rightly rejected RAWA’s attempts
to define the market as one for Rent-A-Wreck franchises. In our
previous opinion, we “instruct[ed] the district court to submit
to a jury the question of whether the exclusive territory
provision forecloses competition in a substantial share of the
market for rental cars.” Schwartz, 468 F. App’x at 251
(emphasis added). Because franchises are not rental cars,
RAWA’s preferred market definition was inconsistent with our
mandate and therefore impermissible. The district court did not
err by enforcing our mandate. See Scott v. Mason Coal Co., 289
F.3d 263, 267 (4th Cir. 2002) (“[W]hen we remand a case, the
15
lower court must ‘implement both the letter and spirit of the .
. . mandate.’” (second alteration in original) (quoting United
States v. Bell, 5 F.3d 64, 66 (4th Cir. 1993)).
III.
For the foregoing reasons, the judgment of the district
court is
AFFIRMED.
16