Ayu's Global Tire v. Big O Tires CA2/4

Filed 5/24/13 Ayu‟s Global Tire v. Big O Tires CA2/4
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
AYU‟S GLOBAL TIRE, LLC et al., B236930
(Los Angeles County
Plaintiffs and Appellants, Super. Ct. No. BC420725)
v.
BIG O TIRES, LLC,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles, William F.
Highberger, Judge. Affirmed.
Hornberger Law Corporation and Nicholas W. Hornberger for Plaintiffs and
Appellants.
Bryan Cave, Jonathan Solish, Glenn J. Plattner, Kristy A. Murphy and
Nickolas B. Solish for Defendant and Respondent.
In the underlying action, the trial court granted summary judgment against
appellants Ayele Hailemariam and Ayu‟s Global Tire, LLC, in their action against
respondent Big O Tires, LLC (Big O). We affirm.
RELEVANT FACTUAL AND PROCEDURAL BACKGROUND
There are no material disputes about the following facts: Hailemariam had
been employed at Kaiser Permanente in the information technology business for 16
years and had managed several large projects. He had also completed some of the
requirements for a Masters of Business Administration degree. In 2005, he
investigated buying a tire store franchise from Big O, after ruling out two
competing tire store franchisors. In February 2008, Ayu‟s Global Tire entered into
a franchise agreement with Big O. Hailemariam, a member of Ayu‟s Global Tire,
guaranteed its obligations under the franchise agreement. In May 2008, appellants
began operating a Big O store in Hawthorne. In August 2009, they closed the
store.
On August 28, 2009, appellants initiated the underlying action against Big O
and several other parties, predicated on appellants‟ purchase of the franchise. In
November 2010, the trial court ruled that under the terms of the franchise
agreement, Colorado law governed appellants‟ nonstatutory causes of action.
The third amended complaint (TAC), filed November 30, 2010, alleged that
before appellants entered into the franchise agreement, Big O promised to provide
many services and benefits to support their franchise, but withheld unfavorable
information regarding the franchise‟s likelihood of success. The TAC further
alleged that Big O‟s promises and omissions induced appellants to enter into the
franchise agreement, and that Big O failed to honor its commitments after they did
so. Although the TAC asserted numerous claims against Big O and other
defendants, following a demurrer by Big O, a stipulation of the parties, and other
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developments, the TAC was effectively reduced to asserting claims solely against
Big O for declaratory relief, breach of contract, breach of the implied covenant of
good faith and fair dealing, and fraud in the inducement of a franchise sale.
In February 2011, Big O filed a motion for summary judgment or
adjudication on the operative causes of action in the TAC. In opposing the motion,
appellants abandoned their claim for declaratory relief. Following a hearing, the
trial court granted the motion, concluding that appellants‟ remaining claims failed
1
for want of a triable issue of fact. On September 14, 2011, judgment was entered
in favor of Big O and against appellants. This appeal followed.
DISCUSSION
Appellants contend the trial court erred in granting summary judgment with
respect to their claims for breach of contract and fraud in the inducement. As
explained below, we disagree.
A. Standard of Review
“On appeal after a motion for summary judgment has been granted, we
review the record de novo, considering all the evidence set forth in the moving and
opposition papers except that to which objections have been made and sustained.
[Citation.]” (Guz v. Bechtel National Inc. (2000) 24 Cal.4th 317, 334.) Thus, we
apply “„the same three-step process required of the trial court. [Citation.]‟”
(Bostrom v. County of San Bernardino (1995) 35 Cal.App.4th 1654, 1662
1
Prior to the hearing on the summary judgment motion, appellants requested leave
to file a fourth amended complaint, but withdrew their request before the trial court ruled
on the summary judgment motion. However, in granting summary judgment, the court
considered certain amendments to the TAC that appellants had proposed, and determined
that the amendments would establish no triable issues if permitted.
3
(Bostrom).) The three steps are (1) identifying the issues framed by the complaint,
(2) determining whether the moving party has made an adequate showing that
negates the opponent‟s claim, and (3) determining whether the opposing party has
raised a triable issue of fact. (Ibid.)
Generally, “the party moving for summary judgment bears an initial burden
of production to make a prima facie showing of the nonexistence of any triable
issue of material fact; if he carries his burden of production, he causes a shift, and
the opposing party is then subjected to a burden of production of his own to make a
prima facie showing of the existence of a triable issue of material fact.” (Aguilar v.
Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) Furthermore, in moving for
summary judgment, “all that the defendant need do is show that the plaintiff cannot
establish at least one element of the cause of action -- for example, that the plaintiff
cannot prove element X.” (Id. at p. 853.)
Although we independently assess the grant of summary judgment (Lunardi
v. Great-West Life Assurance Co. (1995) 37 Cal.App.4th 807, 819), our review is
subject to two constraints. Under the summary judgment statute, we examine the
evidence submitted in connection with the summary judgment motion, with the
exception of evidence to which objections have been appropriately sustained.
(Mamou v. Trendwest Resorts, Inc. (2008) 165 Cal.App.4th 686, 711; Code Civ.
Proc., § 437c, subd. (c).) Moreover, our review is governed by a fundamental
principle of appellate procedure, namely, that “„[a] judgment or order of the lower
court is presumed correct,‟” and thus, “„error must be affirmatively shown.‟”
(Denham v. Superior Court (1970) 2 Cal.3d 557, 664, italics omitted, quoting 3
Witkin, Cal. Procedure (1954) Appeal, § 79, pp. 2238-2239.) Appellants thus bear
the burden of establishing error on appeal, even though Big O had the burden of
proving its right to summary judgment before the trial court. (Frank and Freedus
v. Allstate Ins. Co. (1996) 45 Cal.App.4th 461, 474.) For this reason, our review is
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limited to contentions adequately raised in appellants‟ briefs. (Christoff v. Union
Pacific Railroad Co. (2005) 134 Cal.App.4th 118, 125-126.)
The two constraints narrow the scope of our inquiry. Here, the parties raised
numerous evidentiary objections to the showing proffered by their adversary,
which the trial court sustained in part and overruled in part. With the exception of
the objections discussed below, appellants do not challenge these rulings on
appeal, and to that extent, have forfeited any contention of error regarding the
rulings.
Appellants have also forfeited contentions that summary judgment was
improper with respect to their claims, to the extent they fail to challenge the trial
court‟s determinations regarding those claims. Because appellants do not discuss
their claim for breach of the implied covenant, we exclude that claim from our
review. (Wall Street Network, Ltd. v. New York Times Co. (2008) 164 Cal.App.4th
1171, 1177; Yu v. Signet Bank/Virginia (1999) 69 Cal.App.4th 1377, 1398; Reyes
v. Kosha (1998) 65 Cal.App.4th 451, 466, fn. 6.) Our review is further limited by
the narrow scope of appellants‟ contentions regarding their claims for fraud in the
inducement and breach of contract. Although those claims were predicated on
numerous specific allegations of misconduct, appellants challenge summary
judgment only with respect to some of those allegations. As appellants are
required “to point out the triable issues [they] claim[] are present,” we restrict our
review to those “issues which have been adequately raised and briefed.” (Lewis v.
County of Sacramento (2001) 93 Cal.App.4th 107, 116.)
B. Governing Principles
At the outset, we examine the principles applicable to appellants‟ claims for
breach of contract and fraud in the inducement, which are governed by Colorado
law. The TAC alleges that Big O induced appellants to execute the franchise
5
agreement by making certain promises and suppressing facts unfavorable to the
franchise‟s viability; the TAC further alleges that Big O breached the franchise
agreement by failing to honor its promises. In seeking summary judgment, Big O
contended that because the franchise agreement was fully integrated, appellants‟
claims failed in light of Colorado‟s parol evidence rule. Big O further maintained
that appellants could not establish the element of reasonable reliance required for
the claim for fraud in the inducement, and that Colorado‟s economic loss rule also
barred the fraud claim. As we explain below, because Big O‟s challenges to the
claims invoke interrelated doctrines, our inquiry initially focuses on appellants‟
2
fraud claim.
Under Colorado law, the parol evidence and economic loss rules are
ordinarily inapplicable to claims for fraud in the inducement. Regarding the
former, the Colorado Supreme Court has explained: “Integration clauses generally
permit contracting parties to limit future contractual disputes to issues relating to
the reciprocal obligations expressly set forth in the executed document.
[Citations.] Thus the terms of a contract intended to represent a final and complete
integration of the parties‟ agreement are enforceable and parol evidence offered to
2
Although appellants do not challenge the trial court‟s determination that their
claims are subject to Colorado law, the parties dispute whether the court‟s application of
the parol evidence and economic loss rules is reviewed de novo or for an abuse of
discretion. In Colorado, as in California, those rules are classified as substantive
principles of law. (Magnetic Copy Servs. v. Seismic Specialists (Colo.Ct.App. 1990) 805
P.2d 1161, 1164 [parol evidence rule]; Colorado Nat. Bank of Denver v. Adventura
Assoc. (D.Colo. 1991) 757 F.Supp. 1167, 1168, 1172 [economic loss rule]; Riverisland
Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169,
1174 [parol evidence rule]; JMP Securities Inc. v. Altair Nanotechnologies Inc., No. 11-
4498 SC (N.D. Cal. 2012) 880 F.Supp.2d 1029, 1037, 1042 [economic loss rule].)
Accordingly, we review the trial court‟s determinations regarding the rules as questions
of law. (See Juge v. County of Sacramento (1993) 12 Cal.App.4th 59, 67 [for purposes
of summary judgment, the determination of the existence of triable issues requires the
application of substantive legal principles, which presents a question of law].)
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establish the existence of prior or contemporaneous agreements is inadmissible to
vary the terms of such contract. [Citation.]” (Keller v. A.O. Smith Harvestore
Products (Colo. 1991) 819 P.2d 69, 72-73 (Keller).) The rule thus prevents parties
from asserting breach of contract claims predicated on alleged obligations not
stated in the relevant integrated agreement. (Nelson v. Elway (Colo. 1995) 908
P.2d 102, 108.) However, claims for fraud in the inducement are generally not
subject to the rule. (Keller, supra, 819 P.2d at p. 73; see also Bill Dreiling Motor
Co. v. Shultz (1969) 168 Colo. 59, 62 [450 P.2d 70, 71]; Karan v. Bob Post, Inc.
(Colo.App. 1974) 521 P.2d 1276, 1277-1278.)
Similarly, Colorado‟s economic loss rule is ordinarily inapplicable to claims
for fraud in the inducement. Under that rule, “a party suffering only economic loss
from the breach of an express or implied contractual duty may not assert a tort
claim for such a breach absent an independent duty of care under tort law.” (Town
3
of Alma v. Azco Constr., Inc. (Colo. 2000) 10 P.3d 1256, 1264.) However, tort
claims predicated on a noncontractual duty -- including claims for fraud in the
inducement -- are “simply outside the scope of the rule.” (Id. at p. 1263 & fn. 10.)
In view of these principles, our inquiry properly begins with an evaluation
of appellants‟ fraud claim. If there are triable issues regarding the fraud claim,
summary judgment was improper, regardless of whether the parol evidence rule
may bar the breach of contract claim; moreover, the application of the economic
loss rule to the fraud claim requires us to assess whether that claim relies on an
independent noncontractual duty. We therefore examine Colorado law governing
claims for fraud in the inducement.
3
For purposes of the rule, “[e]conomic loss is defined generally as damages other
than physical harm to persons or property.” (Town of Alma v. Azco Constr., Inc., supra,
10 P.3d at p 1263.)
7
Under Colorado law, reasonable reliance is an essential element of such
claims, regardless of whether they are predicated on an affirmative
misrepresentation or concealment of a material fact. To establish fraudulent
misrepresentation, a plaintiff must show that he or she relied on the
4
misrepresentation, and was justified in doing so. (Barfield v. Hall Realty,
Inc. (Colo.App. 2010) 232 P.3d 286, 290.) Similarly, when relying on a theory of
fraudulent concealment, a plaintiff must show that he or she relied on the
assumption that the concealed fact did not exist (Nielson v. Scott, supra, 53 P.3d at
pp. 779-780), and was justified in doing so (Colorado Coffee Bean, LLC v.
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Peaberry Coffee Inc. (Colo.App. 2010) 251 P.3d 9, 17 (Colorado Coffee Bean)).
These principles are applicable to claims for fraud in the inducement. (Squires v.
Goodwin (D. Colo. 2011) 829 F.Supp.2d 1062, 1075 [inducement by affirmative
misrepresentation]; see Colorado Coffee Bean, supra, 251 P.3d at pp. 15-17
[inducement by concealment].) Although the existence of reasonable reliance is
ordinarily consigned to the factfinder, it may be resolved as a question of law when
the relevant facts are not in dispute. (Nielson v. Scott, supra, at p. 780; Balkind v.
Telluride Mountain Title Co. (Colo.App. 2000) 8 P.3d 581, 587 (Balkind);
Colorado Coffee Bean, supra, at pp. 19-20; see M.D.C./Wood, Inc. v. Mortimer
(Colo. 1994) 866 P.2d 1380, 1382.)
4
In Colorado, “[t]he elements of fraudulent misrepresentation are: (1) a fraudulent
misrepresentation of material fact; (2) the plaintiffs‟ reliance on the material
representation; (3) the plaintiffs‟ right or justification in relying on the misrepresentation;
and (4) reliance resulting in damages.” (Nielson v. Scott (Colo.App. 2002) 53 P.3d 777,
779-780.)
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In Colorado, “[t]he elements of fraudulent concealment are: (1) concealment of a
material fact that in equity and good conscience should be disclosed; (2) knowledge on
the part of the party against whom the claim is asserted that such a fact is being
concealed; (3) ignorance of that fact on the part of the one from whom the fact is
concealed; (4) the intention that the concealment be acted upon; and (5) action on the
concealment resulting in damages.” (Nielson v. Scott, supra, 53 P.3d at p. 779.)
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For purposes of assessing the existence of reasonable reliance, Colorado
applies the doctrine of “inquiry notice.” (Sheffield Servs. Co. v. Trowbridge
(Colo.App. 2009) 211 P.3d 714, 725.) As the Colorado Supreme Court has
explained, under this doctrine, “„[w]hatever is notice enough to excite attention,
and put the party upon his guard, and call for inquiry, is notice of everything to
which such inquiry might have led. When a person has sufficient information to
lead him to a fact, he shall be deemed conversant of it. “The presumption is that, if
the party affected by any fraudulent transaction or management might, with
ordinary care and attention, have reasonably detected it, he reasonably had actual
knowledge of it.” “Concealment by mere silence is not enough. There must be
some trick or contrivance intended to exclude suspicion and prevent inquiry.”‟”
(Cherrington v. Woods (1955) 132 Colo. 500, 506 [290 P.2d 226, 228], quoting
Groves v. Chase (1915) 60 Colo. 155, 161 [151 P. 914, 915].) Thus, “„[w]here the
means of knowledge are at hand and equally available to both parties, and the
subject of purchase is alike open to their inspection, if the purchaser does not avail
himself of these means and opportunities, he will not be heard to say that he has
been deceived by the vendor‟s representations.‟” (Ibid., quoting Groves v. Chase,
supra, 151 P. at pp. 914-915.)
Under this doctrine, a party to a contract cannot show reasonable reliance on
misrepresentations regarding the contract when the party had full access to the
relevant facts. In Balkind, a title company told the plaintiffs -- falsely -- that some
real property they intended to buy was not subject to certain restrictions on its use.
Before the sale occurred, the seller mentioned the restrictions to the plaintiffs, who
also received title instruments describing them. (Balkind, supra, 8 P.3d at pp. 583-
584.) After the sale, the plaintiffs asserted fraud claims based on the title
company‟s misrepresentations. (Id. at p. 587.) In affirming summary judgment on
9
the claims, the appellate court concluded that the information available to the
plaintiffs precluded reasonable reliance on the misrepresentations. (Ibid.)
For purposes of the doctrine, the terms of a fully integrated contract and
related pre-contractual documents may conclusively demonstrate the absence of
reasonable reliance on misrepresentations or nondisclosures that purportedly
induced the contract. In Colorado Coffee Bean, the plaintiff bought a retail coffee
shop franchise after receiving the defendant‟s uniform franchise offering circular
(UFOC), which disclosed the gross sales of existing stores, but stated that it
contained no data regarding profits and no guarantee of profitability, and advised
prospective franchisees to conduct their own financial analyses. (Colorado Coffee
Bean, supra, 251 P.3d at p. 15, 18.) The franchise agreement itself was integrated,
and contained general exculpatory clauses disclaiming reliance on representations
not found in the agreement. (Id. at pp. 20-21.) The plaintiff asserted a claim for
fraudulent nondisclosure based on two theories, namely, that the franchisor had
concealed (1) losses at existing stores and (2) the franchisor‟s own losses. (Id. at
p. 18.)
Following a discussion of Colorado decisions and other authority, the
appellate court determined that suitably “„clear and specific language‟” in the
UFOC or the franchise agreement could prove the absence of reasonable reliance
on the purported omissions. (Colorado Coffee Bean, supra, 251 P.3d at pp. 19-20,
quoting Keller, supra, 819 P.2d at pp. 73-74.) Applying this determination, the
court concluded that the statements in the UFOC precluded reasonable reliance
under the first theory, but that the UFOC and franchise agreement contained no
terms sufficient to nullify reasonable reliance under the second theory. (Colorado
Coffee Bean, supra, at pp. 19-22; see also Universal Drilling Co. v. Camay
Drilling Co. (10th Cir. 1984) 737 F.2d 869, 872-873 (Universal Drilling) [fraud in
the inducement claim failed, as integration and exclusion of warranty clauses in
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written contract foreclosed reasonable reliance on alleged oral misrepresentations
regarding oil rig‟s operability].)
C. Appellants’ Claims
In assessing the propriety of summary judgment, we look first to appellants‟
allegations in the TAC, which frame the issues pertinent to a motion for summary
judgment. (Bostrom, supra, 35 Cal.App.4th at p. 1662 [“„“[I]t is [the complaint‟s]
6
allegations to which the motion must respond by establishing a complete defense
or otherwise showing there is no factual basis for relief on any theory reasonably
contemplated by the opponent‟s pleading. [Citations.]”‟”].) Here, the TAC
alleged that Hailemariam, who had never owned a business, intended to buy a tire
store franchise to operate after he retired. According to the TAC, before appellants
executed the franchise agreement, Big O‟s representatives made affirmative
misrepresentations and omitted material facts relevant to the agreement. This
misconduct allegedly induced appellants to execute the agreement. Moreover,
because many of the misrepresentations and omissions concerned contractual
obligations that Big O failed to honor, Big O also breached the agreement.
The TAC alleged that upon meeting with Big O‟s representatives,
Hailemariam disclosed that he did not know how to establish and operate a tire
store. Big O told him -- falsely -- that he needed no experience to be successful in
the tire business, and that his investment in a tire store was prudent. Although Big
O assured him that it would offer all the training that he needed to operate his
store, the training that he received was inadequate.
The TAC further alleged that Big O misrepresented and suppressed facts
6
Although the TAC is the operative complaint, our discussion also reflects the
allegations in the proposed fourth amended complaint, to the extent they are relevant to
the grant of summary judgment (see fn. 1).
11
regarding the benefits it rendered to franchisees. Big O provided exaggerated
estimates of the profits of a typical Big O store, and concealed that many of its
franchisees had failed. Although Big O promised to assist franchisees, including
supplying tires to them at competitive prices, it hid the fact that most of those tires
were available from other suppliers at lower prices; moreover, Big O compelled
franchisees to buy excessive amounts of tires. In addition, Big O falsely stated that
7
it developed new proprietary products and services.
The TAC further alleged that Big O falsely represented that it had expertise
in locating and outfitting stores, and provided an exaggerated estimate of the
profits that appellants could expect from their store. Big O gave Hailemariam a
demographic study of a particular area, and assured him that his store would
acquire five to six percent of the market share within that area. Hailemariam relied
on the study in preparing his “pro forma” financial statement, which he provided to
his lender and Big O. However, the pro forma “was not based on true facts and
was a grossly inaccurate projection of the business . . . and the profits [he] could
expect.” Relying upon Big O‟s advice, appellants paid an excessive rent for their
store, and invested heavily to remodel it in a failed effort to enhance their sales.
Big O also said that it would select the correct inventory and equipment for the
store, but chose an unsuitable inventory and required appellants to buy unnecessary
equipment.
7
The TAC also alleged Big O purported to operate an advertising program to which
franchisees were obliged to pay four percent of their gross sales, but did not reveal that
the program was ineffective because Big O did not require all franchisees to make their
contribution. On a related matter, the TAC further alleged that Big O operated a
“discriminatory” two-tiered franchise system: Business Format Franchises (BFFs) pay a
six percent royalty for tires, while Product Distribution Franchises (PDFs) pay a two
percent royalty, but purchase tires at a higher price. According to the TAC, the existence
of the two types of franchises created competition detrimental to appellants, who
operated a BFF store.
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D. Adequacy of Big O’s Showing
The initial question concerning the propriety of summary judgment is
whether Big O shifted the burden to appellants to raise triable issues of fact. As
explained below, Big O‟s showing was sufficient to do so.
1. Big O’s Evidence
In seeking summary judgment, Big O challenged the fraud claim, arguing
that its pre-agreement disclosures to appellants precluded reasonable reliance on
the purported misrepresentations (if any), and that appellants had no evidence that
Big O misrepresented or concealed any obligations or facts relevant to agreement.
On similar grounds, Big O contended that appellants‟ breach of contract claim
failed because appellants had no evidence that Big O breached its contractual
obligations, as stated in the franchise agreement.
Big O provided declarations and other evidence supporting the following
version of the underlying facts: When Hailemariam investigated buying a Big O
franchise, Big O sent him several copies of its UFOC. The cover page of each
UFOC stated: “Study [the UFOC] carefully. While it includes some information
about your contract, don‟t rely on it alone to understand your contract. . . . „If
possible, show your contract and this information to an advisor, like a lawyer or
accountant.‟” However, Hailemariam admitted in his deposition that he neither
read the UFOC carefully nor asked his lawyer to review it.
After receiving the UFOC, appellants executed the franchise agreement,
which contained an integration clause. Hailemariam also executed a separate
closing acknowledgment that stated: “I am not relying on any promises of Big O
which are not contained in the Big O franchise agreement.”
According to Big O, the purported pre-agreement misrepresentations and
omissions that appellants attributed to Big O contradicted the UFOC and the
13
franchise agreement, and were unsupported by the evidence disclosed during
discovery. Regarding Big O‟s alleged assurance that franchisees required no
experience in the tire business to succeed, Big O pointed to the UFOC, which
described the competitive nature of the tire market, and stated: “Your ability to
compete . . . will be largely and significantly dependent on your management, sales
and marketing capabilities, your involvement with your store, your financial
strength, general economic conditions, geographical area and specific location.” In
addition, the UFOC stated: “BIG O DOES NOT GUARANTEE THE SUCCESS
OR PROFITABILITY OF YOUR STORE IN ANY MANNER.” Big O also
submitted evidence that numerous franchisees had, in fact, been successful even
though they lacked experience in the tire business.
Regarding Big O‟s purported offer of training that guaranteed success, Big
O noted that Hailemariam testified in his deposition that he was told only that he
would receive training equivalent to “[T]ire 101.” Big O also submitted evidence
that it has an extensive training program. Hailemariam attended a training course,
and received more training “than the typical franchisee.” Following the course,
Big O trainers visited appellants‟ store to offer advice, and were prepared to give
him any additional training that he requested.
Regarding Big O‟s alleged misrepresentations concerning the profitability of
its franchisees, Big O pointed to an attachment to the UFOC, which displayed data
from 211 stores confirming Big O‟s own estimate of the average sales per store.
The UFOC further stated that Big O would substantiate the data upon request, and
invited prospective franchisees to conduct an independent investigation. Big O
also denied that it concealed failed franchises, noting that the UFOC enumerated
transferred, cancelled, and terminated franchises for specified periods preceding
the franchise agreement. In addition, Big O submitted evidence that the failed
franchises were not material to Hailemariam‟s decision to buy a Big O franchise,
14
as he testified that knowledge of them would probably not have affected his
decision to buy a Big O franchise.
Regarding Big O‟s purported misrepresentations concerning the provision of
tires, Big O pointed out that the UFOC stated that Big O did not guarantee a
specific supply of tires. Furthermore, the franchise agreement contained no
provision obliging Big O to supply tires to franchisees at competitive prices, and
imposed only limited obligations on Big O to assist franchisees. With respect to
these matters, the agreement required Big O to provide tires “to the extent
available,” but permitted Big O to set the recommended prices for the tires. In
executing the agreement, Hailemariam expressly acknowledged that no Big O
representative had guaranteed that he would receive a “specific or sufficient
8
amount of [p]roducts.”
Big O also submitted evidence that it honored its obligations of assistance to
appellants. As Big O observed, Hailemariam testified in his deposition that Big O
usually provided the tires that he requested, although he had to wait one day for
deliveries. In addition, Big O offered evidence that it supplied appellants with
competitively priced tires, adjusted tire prices to match their competitors, never
required them to buy an excessive inventory, and assisted them in many ways.
Regarding Big O‟s purported misrepresentations regarding the development
of products and services, Big O noted that Hailemariam testified in his deposition
that he recalled no specific pre-agreement assurances by Big O regarding
“anything new”; in addition, the franchise agreement did not oblige Big O to
develop new products or services. Big O also presented evidence that it offered
8
In reply to appellants‟ opposition to summary judgment, Big O acknowledged that
the agreement obliged it to make “„reasonable commercial efforts to maintain a
competitive source of supply‟” for the benefit of its franchises. (Italics added.)
However, Big O maintained that its evidence -- which we describe below -- showed that
it had complied with this provision.
15
many products and services, including a warranty program, and that it did in fact
9
develop new products.
Regarding Big O‟s purported misrepresentations concerning Hailemariam‟s
store, Big O noted that the UFOC entrusted the “final decision” regarding a store‟s
location to the franchisee, and disclaimed Big O‟s liability for that decision.
According to Big O‟s showing, Big O representatives assisted Hailemariam as he
scouted sites for a store. In 2008, after a three-year search, Hailemariam selected
an established Firestone tire store in Hawthorne as the site for appellants‟ business.
Hailemariam negotiated the purchase of the store and its equipment with the
assistance of his counsel.
Big O submitted evidence that it never advised appellants that their store
would be profitable, noting that Hailemariam testified in his deposition that no one
told him what his gross profits were likely to be. According to Big O, it merely
provided Hailemariam with some data that he used in creating his pro forma. The
data included the financial information in the UFOC, as well as demographic data
that Big O obtained from an unaffiliated company to assist Hailemariam in
preparing his pro forma. Hailemariam also had information from Big O stores
operated by Tad Kyle and from other franchises, as well as the records of the tire
business at the location he had chosen. Hailemariam performed his own
calculations in creating the pro forma, and also used the services of an accountant.
9
Regarding Big O‟s purported misrepresentations concerning its advertising
program, Big O noted that both the UFOC and the franchise agreement stated that Big O
was permitted to refrain from requesting contributions to the program. Furthermore,
regarding Big O‟s purported misrepresentations concerning its two-tiered franchise
system, Big O observed that the UFOC described the system in detail. Big O also noted
that Hailemariam, in executing the agreement, acknowledged the existence of the two-
tiered system.
16
Regarding the store‟s rent, remodeling, equipment, and inventory, Big O
denied that it breached its contractual obligations, and further maintained that
appellants could not have reasonably relied on any pre-agreement
misrepresentations or omissions. Regarding the parties‟ contractual obligations,
the UFOC identified “„[s]ite selection and acquisition/lease‟” as among the
franchisee‟s obligations, and also stated that the cost of appropriate equipment and
fixtures ranged from $100,000 to $220,000, depending on whether the franchisee
bought new or used equipment. The franchise agreement required appellants to
install equipment, fixtures, and signs that Big O approved; in addition, the
agreement obliged Big O to assist appellants in selecting their initial inventory.
According to Big O‟s evidence, Hailemariam negotiated the acquisition of
the store and its existing equipment. He also decided to remodel the store due to
its shabby state, rejected a proposal submitted by Big O‟s preferred contractor, and
instead selected his own contractor to perform the renovations. Big O advised him
that certain modifications he proposed were unnecessary and expensive. When
Big O offered Hailemariam three options concerning equipment, he rejected the
option that Big O recommended, chose a more expensive option valued at
$177,906, and later bought more equipment. In selecting appellants‟ initial tire
inventory, Big O used a predictive model based on tires sales near appellants‟
store, and afforded them the right to return unsold tires.
2. Analysis
We conclude that Big O‟s showing shifted the burden to appellants to raise
triable issues concerning their claims. Regarding the fraud claim, Big O
challenged the existence of many of the purported pre-agreement
misrepresentations and omissions on the basis of Hailemariam‟s own deposition
testimony; in addition, Big O presented evidence that appellants could not
17
reasonably have relied on the purported pre-agreement misrepresentations and
omissions (if any), in light of the disclosures in the UFOC and the provisions of the
franchise agreement. Furthermore, regarding the breach of contract claim, Big O
presented evidence that it complied with its obligations, as stated in the franchise
agreement. Accordingly, we must examine appellants‟ showing to determine the
propriety of summary judgment.
E. Fraud in the Inducement
For the reasons discussed above (see pt. B., ante), our inquiry into the
existence of triable issues begins with appellants‟ fraud claim.
1. Appellants’ Showing
In opposing summary judgment, appellants relied primarily on a declaration
from Hailemariam, who stated that he became interested in buying a Big O
10
franchise in 2005. He was inexperienced, and came to trust Bill Ketchem, a Big
O franchise development director, who appeared to have his best interests at heart.
Ketchem misadvised Hailemariam that “there was minimal risk to the venture as
10
Our summary of appellants‟ showing reflects the trial court‟s rulings on Big O‟s
evidentiary objections, insofar as the rulings concern the evidence relevant to the fraud
claim. We omit the evidence to which the trial court sustained objections, and address
appellants‟ challenges to the rulings in our discussion of the existence of triable issues
regarding the fraud claim (see pt. E.2.c., post). However, we include the evidence that
the trial court may have barred solely under the parol evidence rule, namely, certain items
of evidence regarding the existence of the misrepresentations alleged in the TAC. As
explained above (see pt. B., ante), the parol evidence rule is applicable only to the breach
of contract claim; moreover, the trial court appears to have excluded the evidence only
for purposes of the breach of contract claim, as the court focused on whether appellants
reasonably relied on the purported misrepresentations in determining that the fraud claim
was subject to summary judgment. We address appellants‟ challenges to the rulings
under the parol evidence rule in our discussion of the breach of contract claim (see pt.
F.1., post).
18
long as [he] followed the Big O systems.” In addition, Ketchem and other Big O
employees, including Roger Anderson and Duane Freshnock, made false
statements regarding the efficacy of Big O‟s training program, the profitability of
its stores, its ability to supply tires, and its products and services. They did not
disclose that many franchisees had complaints regarding Big O‟s supply and
pricing of tires, and that one large franchisee had terminated his franchises due to
these problems. Big O‟s representatives also told Hailemariam that he needed no
experience to succeed, but failed to reveal a memorandum from Freshnock to
Anderson that expressed his concerns regarding the high failure rate of new
franchisees who lacked experience in the tire business.
According to Hailemariam, he relied on Big O to select the appropriate
location for the store because he did not know how to do so. Although
Hailemariam “involve[d] himself in the process, . . . Big O . . . took the lead.” In
addition, because he had no experience with pro formas, he also relied on data and
advice from Big O in preparing his pro forma. Unknown to Hailemariam,
Anderson prepared a pro forma “for internal use only” projecting that appellants‟
store would earn approximately $70,000 per year less in profits than stated in
Hailemariam‟s pro forma. Nonetheless, Big O encouraged Hailemariam to seek
financing based on his own pro forma.
Relying on Big O‟s advice, Hailemariam bought new equipment from Big
O, which he later learned was unnecessary and overpriced. Big O also selected his
inventory, which turned out to be inappropriate. Although Big O promised
continuing assistance, its aid was “meaningless and useless.” After opening the
store, appellants lost money every month until August 2009, when they ended their
business because their financial resources were exhausted.
In addition to Hailemariam‟s declaration, appellants submitted a declaration
from Tad Kyle, who had owned a business that operated several Big O stores. He
19
opined that Anderson‟s pro forma, though “unrealistic, [was] certainly more
realistic” than Hailemariam‟s pro forma, which he viewed as relying on excessive
estimates of the store‟s market share, sales, and gross profits. Appellants also
submitted copies of Anderson‟s pro forma and an e-mail dated January 29, 2008,
from Freshnock to Anderson. Freshnock‟s e-mail enumerated several proposals
intended to assist appellants‟ store, and then stated: “Jim . . . any other[]
[measures] that you would like to recommend . . . feel free. We must come up
with a plan to stop these new [o]wners with no experience from failing at such a
high rate.”
2. No Triable Issues
In granting summary judgment on the fraud claim, the trial court determined
that appellants failed to show reasonable reliance on any pre-agreement
misrepresentations or omissions. We agree.
Under the circumstances, Colorado‟s “inquiry notice” doctrine precludes
appellants from establishing the existence of reasonable reliance. That doctrine
provides that parties asserting claims for fraud in the inducement are presumed to
know the terms of the contract when “a reasonably prudent man” would have read
the contract before signing it. (Clayton Brokerage Co. v. Stansfield (D.Colo 1984)
582 F.Supp. 837, 841.) Here, Hailemariam received multiple copies of the UFOC,
which became part of the franchise agreement by virtue of the integration clause.
For purposes of Colorado‟s inquiry notice doctrine, the express warnings in the
UFOC to “study [it] carefully” and seek professional advice, coupled with the large
financial investment required of a franchisee, were sufficient to “„excite
[Hailemariam‟s] attention, . . . and call for inquiry‟” into the UFOC and agreement.
(Cherrington v. Woods, supra, 290 P.2d at p. 228.)
20
However, Hailemariam engaged in no such inquiry, despite ample
opportunity to do so. As the trial court observed, although Hailemariam negotiated
with Big O for three years before executing the franchise agreement and relied on
an attorney in obtaining the lease for his store, he paid little attention to the UFOC
and the agreement, and never sought legal advice regarding them. Because
appellants must be charged with full knowledge of the terms and disclosures in
these documents, the fraud claim fails for want of triable issues regarding
reasonable reliance, notwithstanding any oral misrepresentations or omissions by
Big O. (Colorado Coffee Bean, supra, 251 P.3d at pp. 19-21; Universal Drilling,
supra, 737 F.2d at pp. 872-873.)
Appellants challenge the grant of summary judgment regarding the fraud
claim on several grounds, which we address below.
a. No Necessity for Experience
Appellants contend there are triable issues whether Big O engaged in fraud
by informing Hailemariam that no experience was necessary for running a Big O
franchise. We disagree. Under Colorado law, “„[t]he gist of a fraudulent
misrepresentation is the producing of a false impression upon the mind of the other
party . . . .‟” (Corder v. Laws (1961) 148 Colo. 310, 314 [366 P.2d 369, 372].) For
this reason, a party may engage in fraud by making a true statement that
nonetheless creates a false impression unless other facts are disclosed. (Berger v.
Security Pacific Information Systems, Inc. (Colo.App. 1990) 795 P.2d 1380, 1383-
1384.) As explained below, appellants failed to show the existence of fraud in
connection with Big O‟s purported representation.
To begin, the record discloses no evidence that the purported representation
to Hailemariam was, in fact, false. The formulation of the representation upon
which appellants rely is found in Hailemariam‟s declaration, which states: “I was
21
told that I did not need experience.” In seeking summary judgment, Big O
submitted evidence that there were at least 41 successful Big O franchisees with no
prior experience in the tire industry. Appellants offered no evidence challenging
this showing.
Moreover, to the extent the representation may have suggested that
appellants‟ store would succeed despite Hailemariam‟s inexperience, the record
does not show that Big O failed to disclose other pertinent facts. The UFOC
describes the competitive nature of the tire sales market and states: “BIG O DOES
NOT GUARANTEE THE SUCCESS OR PROFITABILITY OF YOUR STORE
IN ANY MANNER.” Because appellants must be charged with full knowledge of
this disclaimer, they cannot show that they reasonably regarded the purported
representation as an assurance of success. (Colorado Coffee Bean, supra, 251 P.3d
at pp. 19-21; Universal Drilling, supra, 737 F.2d at pp. 872-873.)
In an effort to show the existence of a triable issue regarding the truth of the
representation, appellants direct our attention to Freshnock‟s January 2008 e-mail
to Anderson, in which he proposed measures to assist appellants‟ store, asked
Anderson to suggest other measures, and stated, “We must come up with a plan to
stop these new [o]wners with no experience from failing at such a high rate.”
Although the e-mail shows that Big O was aware that the failure rate for
inexperienced franchisees was high, the statement in the e-mail is consistent with
the representation purportedly made to Hailemariam, and thus raises no issues
material to its truth. Nor does the e-mail show that Big O concealed the failure rate
among inexperienced franchisees: aside from disclaiming any guaranty of success,
the UFOC disclosed those franchises that had been transferred, cancelled, and
terminated, and provided contact information for franchisees who had “[l]eft the
[s]ystem” (see pt. E.2.c.iv., post). Appellants‟ fraud claim thus fails, insofar as it
22
relies on Big O‟s alleged statement that no experience was necessary to operate a
franchise.
b. Big O’s Pro Forma
Appellants maintain that Big O fraudulently concealed its own pro forma
financial analysis of their store, which Big O relied upon in approving appellants‟
franchise. They argue that Big O was obliged to disclose its pro forma, and
engaged in fraud by failing to do so. We reject this contention.
Under Colorado law, “[t]o succeed on a claim for fraudulent concealment or
non-disclosure, a plaintiff must show that the defendant had a duty to disclose
material information. [Citation.] A defendant has a duty to disclose to a plaintiff
with whom he or she deals material facts that „in equity or good conscience‟
should be disclosed. [Citation.]” (Mallon Oil Co. v. Bowen/Edwards Assocs., Inc.
(Colo. 1998) 965 P.2d 105, 111.) For purposes of determining the existence of the
duty, Colorado courts find guidance from section 551(2) of the Restatement
Second of Torts, which enumerates several situations in which the duty arises, only
11
one of which is potentially pertinent here. (See ibid.)
Under section 551(2)(e) of the Restatement Second of Torts, a party to a
business transaction is subject to a duty to disclose “facts basic to the transaction, if
he knows [(1)] that the other is about to enter into it under a mistake as to them,
and [(2)] that the other, because of the relationship between them, the customs of
the trade or other objective circumstances, would reasonably expect a disclosure of
those facts.” For purposes of this rule, the phrase “facts basic to the transaction”
refers to facts “assumed by the parties as a basis for the transaction itself.”
(Rest.2d Torts, § 551, com. j, p. 123.) Such a fact “goes to the basis, or essence, of
11
See footnote 13, post.
23
the transaction, and is an important part of the substance of what is bargained for
or dealt with. Other facts may serve as important and persuasive inducements to
enter into the transaction, but not go to its essence. These facts may be material,
but they are not basic. If the parties expressly or impliedly place the risk as to the
existence of a fact on one party . . . the other party has no duty of disclosure.”
(Ibid., italics added.)
Regarding Big O‟s pro forma, the record establishes the following facts.
The UFOC states: “We do not furnish or authorize our salespersons to furnish to
prospective franchisees in connection with the offer of franchises any oral or
written information from which a specific level or range of actual or potential
sales, costs, income or profits of a Big O store or franchise, may be ascertained,
except [the general sales data specified in an appendix to the UFOC].”
Furthermore, in executing the franchise agreement, Hailemariam expressly
acknowledged that he had received no such assurances from any Big O employee.
Hailemariam, in creating his pro forma, performed his own calculations, and
also used the services of an accountant. The pro forma projected first-year sales of
approximately $1.4 million and a gross profit of 62 percent. Hailemariam
submitted the draft pro forma to Anderson, who questioned whether Hailemariam‟s
estimate of his market share was sufficiently conservative, and suggested that he
lower his sales projections for the store‟s start-up period. In response,
Hailemariam adjusted his estimate of the store‟s performance for the initial months
of the start-up period.
After Hailemariam submitted his pro forma, Anderson independently
prepared a pro forma “„for internal use only‟” regarding appellants‟ store. The pro
forma projected lower sales and gross profits for the store than Hailemariam‟s pro
forma. In submitting appellants‟ application for a franchise to Big O, Anderson
provided only his own pro forma to the approval committee, which awarded a
24
franchise to appellants. Regarding this conduct, Anderson testified in his
deposition that he did not disclose his pro forma to appellants because he believed
that it constituted an “earnings claim.”
Relying on Hailemariam‟s declaration, appellants argue that Anderson was
obliged to disclose the existence of Big O‟s pro forma, and that they reasonably
took Anderson‟s silence regarding it to be an assurance that Hailemariam‟s pro
forma was “realistic.” Regarding these matters, Hailemariam stated that if he had
been aware of Big O‟s pro forma, he never would have submitted his own pro
forma to lenders to obtain the financing that Big O encouraged him to seek.
In our view, there are no triable issues regarding whether Big O‟s pro forma
constituted a fact “basic to the transaction,” for purposes of triggering a duty to
disclose. (Rest.2d Torts, § 551, com. j, p. 123.) To begin, because the UFOC
stated that no Big O employee was authorized to disclose “any oral or written
information from which a specific level or range of actual or potential sales, costs,
income or profits of a Big O store or franchise,” the UFOC “expressly . . . place[d]
the risk as to the existence of [such] fact[s]” on appellants (Rest.2d Torts, § 551,
com. j, p. 123). In view of the UFOC‟s disclaimer, Big O had no duty to disclose
12
its internal pro forma or its contents. (Ibid.)
There is also no evidence that the existence of Big O‟s pro forma went “to
the basis, or essence, of the transaction” for purposes of a duty to disclose,
notwithstanding Hailemariam‟s declaration. (Rest.2d Torts, § 551, com. j, p. 123.)
To establish a duty to disclose under section 551(2)(e) of the Restatement Second
12
In so concluding, we reject Big O‟s contention that the then-effective federal
regulations concerning UFOCs barred it from disclosing Anderson‟s pro forma. Under
those regulations, franchisors were permitted to make representations of “a specific level
of potential sales, income, gross or net profit” to a prospective franchisee in a “written
document” provided that certain warnings were given and stringent requirements were
met. (Former 16 C.F.R. § 437.1(a), (b) (2008).)
25
of Torts, the plaintiff must show that the defendant knew that the plaintiff
reasonably expected the pertinent disclosure. (Burman v. Richmond Homes Ltd.
(Colo.App. 1991) 821 P.2d 913, 918 (Burman).) Here, both pro formas portrayed
appellants‟ store as viable, but projected different levels of sales and profits.
Nothing before us suggests that Hailemariam told Anderson that achieving the
specific high sales and profits in Hailemariam‟s pro forma was critical to his
decision to go forward with the transaction, or that a particular level of profit was
“an important part of the substance of what [he] bargained for.” (Rest.2d Torts,
§ 551, com. j, p. 123.) On the contrary, when Anderson questioned Hailemariam‟s
draft pro forma, Hailemariam adjusted his pro forma, without suggesting that his
previous figures were critical to his decision to go forward.
We also conclude there are no triable issues regarding whether Hailemariam
reasonably relied on Anderson‟s conduct as an assurance that he need not prepare a
more conservative estimate of the store‟s prospects. Under the “inquiry notice”
doctrine, appellants are properly charged with the information they could have
discovered upon proper notice. (Burman, supra, 821 P.2d at p. 919.) Here,
Anderson‟s skepticism regarding Hailemariam‟s projected market share placed
him on notice that it was appropriate to explore more conservative financial
assumptions. The record discloses no evidence of any obstacle that would have
prevented Hailemariam from developing less optimistic estimates akin to those
found in Big O‟s pro forma. In sum, appellants‟ claim that Big O fraudulently
13
concealed its pro forma fails for want of a triable issue.
13
In view of our conclusions, we observe that none of the other situations in which a
duty to disclose may arise are present here. Regarding those situations, section 551(2) of
the Restatement Second of Torts states that the party to a business transaction must
disclose the following facts: “(a) matters known to him that the other is entitled to know
because of a fiduciary or other similar relation of trust and confidence between them; and
[¶] (b) matters known to him that he knows to be necessary to prevent his partial or
(Fn. continued on next page.)
26
c. Excluded Portions of Hailemariam’s Declaration
Appellants argue that the trial court incorrectly excluded key portions of
Hailemariam‟s declaration on the ground that his statements contradicted his
deposition testimony or other discovery responses. As explained below, we find
no reversible error.
i. Governing Principles
Our review of the rulings is governed by “the well settled rule that “„[a]
party cannot create an issue of fact by a declaration which contradicts his prior
[discovery responses]. [Citation.] In determining whether any triable issue of
material fact exists, the trial court may, in its discretion, give great weight to
admissions made in deposition and disregard contradictory and self-serving
affidavits of the party.‟” (Benavidez v. San Jose Police Department (1999) 71
Cal.App.4th 853, 860, quoting Preach v. Monter Rainbow (1993) 12 Cal.App.4th
1441, 1451.) This rule is traceable to D’Amico v. Board of Medical Examiners
(1974) 11 Cal.3d 1, 22, which explained that for purposes of the summary
judgment statute, “admissions against interest” have an especially high credibility
ambiguous statement of the facts from being misleading; and [¶] (c) subsequently
acquired information that he knows will make untrue or misleading a previous
representation that when made was true or believed to be so; and [¶] (d) the falsity of a
representation not made with the expectation that it would be acted upon, if he
subsequently learns that the other is about to act in reliance upon it in a transaction with
him.” Here, Big O was not in a fiduciary relationship with Hailemariam, and it
disclaimed any duty to provide appellants with financial information not found in the
UFOC; moreover, Anderson made no representation that called for subsequent
clarification or elaboration.
27
value when they are obtained “in the context of an established pretrial procedure
whose purpose is to elicit facts.”
14
ii. Ketchem’s Remarks
Appellants contend the trial court improperly excluded evidence that
Ketchem advised Hailemariam not to read the UFOC. Regarding this matter, the
trial court sustained Big O‟s objection to Hailemariam‟s statement that after he
received the UFOC, Ketchem told him that the UFOC “was simply a formality,”
and that “he would tell [Hailemariam] about the business.” Hailemariam‟s
declaration further stated that he paid little attention to the UFOC in light of these
remarks. Big O argued that Hailemariam‟s description of Ketchem‟s remarks
contradicted Hailemariam‟s deposition testimony. The trial court agreed.
Pointing to Scalf, supra, 128 Cal.App.4th 1510, appellants maintain that the
trial court erred. As explained in Scalf, a party‟s declaration statements should not
be excluded when the party made only “„tacit admissions or fragmentary and
equivocal concessions‟” in discovery, or when there is “other credible evidence
that contradicts or explains that party‟s [discovery responses] or otherwise
demonstrates there are genuine issues of factual dispute.” (128 Cal.App.4th at
14
At the outset, we reject appellants‟ suggestion that the trial court‟s determinations
under the rule are properly reviewed de novo. Although our Supreme Court recently
declined to specify the appropriate standard of review for the trial court‟s evidentiary
determinations in connection with summary judgment (Reid v. Google, Inc. (2010) 50
Cal.4th 512, 535), the majority of appellate courts examine them for an abuse of
discretion (see, e.g., Caloroso v. Hathaway (2004) 122 Cal.App.4th 922, 928-929;
Walker v. Countrywide Home Loans, Inc. (2002) 98 Cal.App.4th 1158, 1169), including
determinations under the rule at issue here (Preach v. Monter Rainbow, supra, 12
Cal.App.4th at p. 1451; Benavidez v. San Jose Police Dept., supra, 71 Cal.App.4th at
p. 860; Scalf v. D.B. Log Homes, Inc. (2005) 128 Cal.App.4th 1510, 1525 (Scalf)).
However, for the reasons explained below, we would find no reversible error regarding
the rulings, even were we to review them de novo.
28
pp. 1523-1525, quoting Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465,
482, overruled on another ground in Riverisland Cold Storage, Inc. v. Fresno-
Madera Production Credit Assn., supra, 55 Cal.4th at p. 1182.) Here, appellants
argue that the portions of Hailemariam‟s deposition that Big O cited in connection
with its objection have little bearing on Hailemariam‟s declaration statements.
Although we agree that the cited portions of the deposition (as found in the
record) do not support the exclusion of Hailemariam‟s declaration statements, we
nonetheless reject appellants‟ contention, as we may affirm the trial court‟s ruling
on any grounds properly supported by the record. (Philip Chang & Sons
Associates v. La Casa Novato (1986) 177 Cal.App.3d 159, 172-173). In excluding
the declaration statements, the trial court appears to have considered portions of
Hailemariam‟s deposition other than those cited by Big O cited in support of its
objection. In those portions of the deposition, Hailemariam testified that he never
discussed the UFOC with any Big O representative at any time prior to executing
the franchise agreement, and otherwise paid little attention to the UFOC. We
therefore see no basis to reverse the trial court‟s ruling.
iii. Reduction in Big O’s Tire Lines and
Failure to Develop New Products
Appellants contend the court improperly barred Hailemariam‟s declaration
statement that despite Big O‟s assurances that it was developing new products, no
one told him that Big O had in fact reduced the number of its proprietary tire lines
during the period from 2000 to 2008. In our view, the court did not err, as
Hailemariam testified in his deposition that he recalled no specific pre-agreement
assurances from Big O regarding “anything new,” and his declaration offered no
explanation for the departure from prior testimony.
29
Nor would we regard the ruling as prejudicial if it were incorrect. The
franchise agreement and UFOC set forth Big O‟s obligations to appellants in
detail; furthermore, it is undisputed that Hailemariam, in executing the franchise
agreement, signed a separate closing acknowledgment that stated: “I am not
relying on any promises of Big O which are not contained in the Big O franchise
agreement.” Because the franchise agreement contains no term obliging Big O to
develop new products or services, appellants could not have reasonably relied on
assurances or omissions regarding new products. In addition, appellants cannot
show reasonable reliance with respect to Big O‟s purported concealment of the
number of its tire lines, as the record establishes that Hailemariam visited Big O
Stores during the three-year negotiation period, and was thus well-positioned to
discover that number.
iv. Remaining Rulings
For the reasons discussed below, it is unnecessary for us to examine whether
the trial court properly excluded Hailemariam‟s other declaration statements, as
those statements raise no triable issues regarding appellants‟ fraud claim. In the
excluded portions of the declaration, Hailemariam stated (1) that he “had to rely
solely on Big O in choosing a [store] location” because he “had no idea how to
pick a suitable location”; (2) that he relied “totally” on Big O to choose his store‟s
equipment because he “had no idea what type of equipment” to choose; (3) that
after Big O told Hailemariam that he “[had] to have an experienced manager for 18
months” and promise to hire one, it chose a “good manager” who quit before the
18-month period ended; and (4) that no one told him that a large franchisee with 28
years in Big O‟s system had terminated his business due to Big O‟s inability to
supply tires.
Regarding item (1), the UFOC identified “site selection and
30
acquisition/lease” as among the franchisee‟s obligations, and further stated: “[T]he
final decision about whether to acquire a given approved site . . . shall be your sole
decision. . . . Our approval of a site . . . does not constitute a representation or
warranty of any kind as to the suitability of the site for a Big O store . . . . It only
indicates that we believe that the site falls within the acceptable criteria established
by us.” This language in the UFOC precludes reasonable reliance on any oral
representations that Big O‟s would choose a successful store location. (Colorado
Coffee Bean, supra, 251 P.3d at pp. 19-20.)
Regarding items (2) and (3), the UFOC and franchise agreement impose
limited duties on Big O regarding the selection of equipment for new stores and the
hiring of managers. Big O‟s sole duty regarding the selection of equipment for a
new store was to provide a “prototype . . . equipment layout”; furthermore, the
UFOC and agreement permit the franchisee to delegate store operations only to “a
[m]anager employed by the [f]ranchisee . . . subject to approval by Big O.”
With respect to the former duty, the record discloses that after Big O
proposed three equipment packages for the store, Hailemariam selected one of
them. Although neither the UFOC nor the agreement specifically disclaim Big O‟s
liability for equipment packages that it proposed, the UFOC states that Big O did
not guarantee “in any manner” that Hailemariam‟s store would be successful;
moreover, as noted above, in executing the agreement, Hailemariam acknowledged
that he relied on no promises not contained in it. Accordingly, appellants could not
have reasonably relied on any oral representation that Big O would propose
equipment that assured the success of their store. (Universal Drilling, supra, 737
F.2d at pp. 872-873.)
The purported promise regarding the manager also raises no triable issues
regarding the existence of fraud in the inducement. The promise itself cannot be
regarded as a tortious misrepresentation under Colorado law. As explained in
31
Nelson v. Gas Research Inst. (Colo.App. 2005) 121 P.3d 340, 343, “[f]raud
requires more than the mere nonperformance of a promise or the failure to fulfill
an agreement to do something at a future time. [Citation]. . . . . Such promises are
actionable only where there is proof that the defendant had the present intention
not to fulfill the promise. [Citation.]” According to Hailemariam‟s declaration,
Big O selected a “good manager” who left appellants‟ employment only after they
executed the agreement and opened their store. There is thus no evidence that Big
O lacked the intention to fulfill the promise when it was made. In addition, for the
reasons explained above, appellants could not have reasonably relied on the
promise, in view of the limited obligations imposed upon Big O in the UFOC and
franchise agreement.
Finally, regarding item (4), the UFOC enumerated franchises that had been
transferred, cancelled, or terminated prior to appellants‟ execution of the franchise
agreement, and provided contact information for franchisees who had “[l]eft the
[s]ystem.” These disclosures appear to have included the specific former
15
franchisee that Big O purportedly concealed. Accordingly, nothing before us
suggests that Big O failed to disclose information regarding failed or terminated
franchises material to Hailemariam‟s decision to go forward. In sum, appellant‟s
fraud claim fails for want of triable issues of fact.
15
Hailemariam‟s declaration described the person in question as a large franchisee
with 28 years in Big O‟s system, but did not name him. As Big O‟s brief notes, however,
the description applies to a specific former franchisee identified elsewhere in appellants‟
evidentiary showing, namely, David Sauter. As Big O further observes, the UFOC
provided contact information for Sauter as a franchisee who had left Big O‟s system.
Appellants‟ reply brief does not challenge Big O‟s identification of the former franchisee
as Sauter.
32
F. Breach of Contract Claim
We turn to appellants‟ challenges to the grant of summary judgment on the
breach of contract claim. They argue (1) that for purposes of the application of the
parol evidence rule, the integration clause in the franchise agreement does not
incorporate the UFOC into the agreement, and (2) that there are triable issues
regarding their claim. As explained below, we disagree.
1. Scope of the Integration Clause
Appellants maintain that the UFOC is not a part of the franchise agreement,
notwithstanding the integration clause. They argue that the definition of the term
“Agreement” contained within the franchise agreement itself does not refer to the
UFOC, as it states only: “Agreement – This Agreement, the Summary Pages and
all Riders and Schedules hereto.” In addition, they assert that the integration
clause does not encompass any document unsigned by Hailemariam, including the
UFOC. We reject this contention.
Under Colorado law, in interpreting a contract provision, courts look first to
the “plain and ordinary meaning” of the provision‟s language, viewed in the
context of the entire contract. (Engineered Data Prods., Inc. v. Nova Office
Furniture, Inc. (D.Colo. 1994) 849 F.Supp. 1412, 1417.) Here, the integration
clause states: “Franchisee acknowledges that this [a]greement, the documents
referred to herein, . . . and other agreements signed concurrently . . . , if any,
constitute the entire, full and complete [a]greement . . . . This [a]greement
terminates and supersedes any prior agreement between the parties concerning the
same subject matter and any oral or written representations which are inconsistent
with the terms of this instrument and its accompanying Franchise Offering
33
Circular.” (Italics added.) The integration clause thus incorporates the UFOC
16
within the franchise agreement by expressly referring to it.
2. No Triable Issues
Appellants also contend there are triable issues whether Big O complied
with the agreement. They argue that Big O breached its contractual obligation to
appellants “to enhance the[ir] competitive posture” by (1) selling tires to other
franchisees at a lower price, (2) directing Hailemariam to sell unsuitable or
discontinued tire lines, (3) selling Hailemariam unnecessary equipment, and (4)
providing products and services indistinguishable from competitors. We disagree.
Because the franchise agreement is fully integrated, we apply the parol
evidence rule and disregard appellants‟ showing regarding promises external to the
agreement, including those items of evidence that the trial court excluded under the
rule. At the outset, we observe that the agreement imposed no obligation on Big O
to “to enhance [appellants‟] competitive posture.” Concerning this purported
obligation, appellants point to Big O‟s statement in a section entitled “Recitals”
that “[s]ince its inception,” Big O has acted “to enhance the competitive posture of
its franchisees.” However, under Colorado law, recitals do no enlarge the duties
imposed in a contract. As the Colorado Supreme Court has explained, “„[w]hile
recitals may have a material influence on the construction of the instrument and the
determination of the intent of the parties, they are not strictly any part of the
contract. Hence recitals where wider than the contractual stipulations cannot
16
Because we conclude that the franchise agreement includes the UFOC, we do not
address appellants‟ contention that federal regulations prohibit the use of an integration
clause in a franchise agreement to disclaim reliance on representations made in a UFOC.
Appellants have identified no representation in the UFOC that Big O attempts to avoid by
reference to the integration clause.
34
extend them.‟” (Las Animas Consol. Canal Co. v. Hinderlider (Colo. 1937) 100
17
Colo. 508, 511-512 [68 P.2d 564, 566], quoting 13 C.J. § 502, p. 538.)
Regarding the sale of tires to other franchisees, the agreement contains no
provision obliging Big O to supply tires to franchisees at uniform prices. Although
the agreement obliged Big O to make “reasonable commercial efforts to maintain a
competitive source of supply for the benefit of its franchises,” the agreement
required Big O to provide tires only “to the extent available,” and permitted Big O
to set the recommended prices for the tires. Furthermore, as the trial court noted,
the UFOC states: “The prices charged to [appellants] . . . shall be established by
Big O . . . from time to time.” Accordingly, the agreement imposed no
18
requirement on Big O to sell tires to all franchises at the same price.
Regarding the selection of tires, the agreement obliged Big O only to
“assist[]” appellants in selecting their initial inventory. Although the record
establishes Big O selected an initial inventory for appellants and afforded them the
right to return unsold tires, appellants maintain that Big O breached the agreement
by selecting an inadequate initial inventory. However, as the franchise agreement
disclaimed Big O‟s liability for the success of appellant‟s store, the agreement
conveyed no guarantee or warranty by Big O regarding the adequacy of the
inventory.
Regarding the selection of equipment, the agreement obliged Big O to
propose a “prototype . . . equipment layout” for the store, and authorized Big O to
require appellant to buy equipment that it approved; in addition, the agreement
17
On a related matter, we observe that appellants do not discuss the implied
covenant of good faith and fair dealing in connection with their breach of contract claim.
For this reason, they have forfeited any contention that Big O breached the covenant in
exercising any discretion afforded it under the provisions of the franchise agreement.
18
The agreement also disclosed that Big O sold tires at different prices to the two
types of franchisee.
35
stated that the cost of appropriate equipment and fixtures ordinarily ranged from
$100,000 to $220,000, depending on whether the franchisee bought new or used
equipment. The record establishes that when Big O offered Hailemariam three
options concerning equipment, he chose an option valued at $177,906, and later
bought more equipment. In view of these facts, we see no breach of the
agreement.
Finally, regarding Big O‟s products and services, the agreement contains no
provision requiring Big O to provide distinctive products or services. Furthermore,
as noted above (see E.2.c.ii., ante), the trial court properly excluded Hailemariam‟s
declaration statements regarding assurances of new products and services on the
ground that the statements contradicted Hailemariam‟s deposition testimony. We
therefore conclude that summary judgment was properly granted on appellants‟
claims.
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DISPOSITION
The judgment is affirmed. Big O is awarded its costs.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
MANELLA, J.
We concur:
WILLHITE, Acting P. J.
SUZUKAWA, J.
37