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Vaughn v. General Foods Corp.

decided: July 29, 1986.

AL VAUGHN, MARJORIE VAUGHN, ALGON CORPORATION AND SPRINGFIELD DRIVE-INS, INC., PLAINTIFFS-APPELLEES,
v.
GENERAL FOODS CORPORATION AND BURGER CHEF SYSTEMS, INC., DEFENDANTS-APPELLANTS



Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. H 82-621--Michael S. Kanne, Judge.

Wood, Jr., Easterbrook and Ripple, Circuit Judges.

Author: Ripple

RIPPLE, Circuit Judge.

In 1982, plaintiffs Al Vaughn, Marjorie Vaughn, Algon Corporation, and Springfield Drive-Ins, Inc. (Vaughns) instituted this diversity action against General Foods Corporation and Burger Chef Systems, Inc. (the Company) claiming that they had been fraudulently induced to invest in Burger Chef franchises. The Vaughns claimed that Burger Chef engaged in a ten-year plan to dispose of its business (the System) while representing to its franchisees that it planned to build the System into a "fast food contender." Following a jury trial on a claim of fraudulent misrepresentation,*fn1 a verdict was entered for the plaintiffs. The defendants filed a motion for a judgment notwithstanding the verdict (JNOV) pursuant to Fed. R. Civ. P. 50(b) or, in the alternative, for a new trial pursuant to Fed. R. Civ. P. 59. The district judge denied the motion. For the reasons detailed below, we reverse the judgment of the district court.

I

The Vaughns' relationship with Burger Chef began in 1963 when they opened their first Burger Chef fast food restaurant in the St. Louis, Missouri area. By 1967, the Vaughns owned and operated five Burger Chef restaurants and, in 1970, they acquired a sixth. In 1968, General Foods entered the hamburger fast food market by acquiring the Burger Chef chain as a wholly-owned subsidiary for $16 million and the assumption of substantial pre-existing liabilities. The business did not, however, proceed according to General Foods' expectations. Accordingly, in 1971, General Foods, as a result of significant losses, wrote down $80 million of its investment in Burger Chef. This write down was widely publicized and was well known to Burger Chef's franchisees. As a result of the write down, some 460 franchised and company-owned stores were closed, and General Foods considered selling its Burger Chef operation which consisted of the 908 remaining restaurants. However, no buyer could be found. Therefore, instead of selling the Burger Chef operation at that time, General Foods decided to "manage the loss" and shifted its focus to developing its "heartland" market in the Midwest. As part of its new strategy, General Foods discontinued its former practice of guaranteeing leases for franchisees and diminished the amounts of capital it infused into the System. The new strategy did not, however, yield the return that the Company had anticipated. Continuing financial difficulties caused the Company to begin voluntarily to waive and abate franchise fees.

In December 1975, General Foods commissioned the consulting firm of Booz-Allen & Hamilton to analyze the Company's marketing strategy. As a result of that firm's recommendations, another new plan was developed. Among the facets of that strategy were recruitment of new management experienced in the hamburger fast food industry and minimization of the risks of the franchise operation. In order to implement this new approach, General Foods hired Terrance Collins, an expert in the hamburger fast food industry, from McDonald's to serve as president and chief operating officer of Burger Chef. In August 1978, the Company's financial department devised a study on the salability of the Burger Chef System. This study, code-named "Project Beethoven," indicated that Burger Chef was now ranked fourth in the hamburger fast food market and that it still held second place in its "heartland" markets.

In late 1980, General Foods contracted with Goldman Sachs, an investment banking firm, to review its options with respect to Burger Chef. Goldman Sachs advised General Foods that the value of the System was unlikely to deteriorate and that they should reconsider selling the System after 1981. Goldman Sachs' reasoning was that, if the new strategy worked and the business turned around, its profitability would make it more salable. This reasoning would appear to have been sound. In 1981, Burger Chef finally showed a profit and, in summer 1981, General Foods received an unsolicited inquiry concerning the purchase of the System. Several months of negotiations resulted in the December 1981 agreement to sell Burger Chef to Hardee's, a competing chain. By the time that the System was sold to Hardee's for $43.5 million, General Foods had infused between $45 and $70 million in capital into the System in addition to the purchase price.

Shortly after the sale was consummated, the Vaughns instituted suit in the district court alleging that the defendants had violated the antitrust laws, had breached their fiduciary duties to the Vaughns, and had fraudulently misrepresented their intentions with respect to the Burger Chef System. On June 30, 1983, the Vaughns filed a first amended complaint, which contained claims only for breach of contract, breach of fiduciary duty, fraud and punitive damages. The breach of contract and breach of fiduciary duty claims were dismissed at the close of the plaintiffs' case.

At trial, the Vaughns attempted to prove that various statements made by General Foods and certain omissions, coupled with assertions contained in brochures and trade publications, created a false impression in the minds of the Vaughns and other franchisees that the System was viable and that it was supported fully by General Foods. According to the Vaughns, these statements and omissions constitute actionable fraud. Specifically, the Vaughns point to statements made in certain written documents. At trial, Mr. Vaughn testified that, in or around 1970, he became aware of these undated publications which reflected the Company's intent to expand its franchise operation. Tr. 827. One such document, an undated brochure designed to woo prospective franchisees to open a Burger Chef restaurant, stated:

WHY BURGER CHEF ?

A Burger Chef Restaurant franchise gives you the opportunity to be an independent business person while still being a part of a proven system. As a franchisee, you'll enjoy the full support and backing of one of the largest hamburger fast-food chains in the nation. Our plans call for aggressive but controlled growth, and a big part of our plan includes bringing new franchisees into the system.

As a wholly owned subsidiary of General Foods Corporation, Burger Chef Systems, Inc. has the financial stability which this multi-billion dollar, international food corporation brings to it.

Yet Burger Chef remains an independent autonomous corporate entity which is managed and directed by seasoned executives with many years of experience in the fast-food industry.

Plaintiffs' Ex. 762 at 5. The brochure also stated that the franchisor would provide the franchisee with a wide variety of support services:

GETTING YOU STARTED

Once your franchise application is approved, Burger Chef Systems will implement a systemized program to help you get your restaurant open and operating with the greatest possible ease. We'll provide you with the kind of support you need, when you need it -- and you'll be assisted by experienced personnel during each phase of the development process . . . and beyond.

MARKETING

You can be sure of customers from the moment your restaurant open for business because long before this important event you'll begin receiving the advantages of Burger Chef's marketing support services.

Outstanding television and radio commercials, newspaper ads, point-of-sale materials and more are available for your own use and combine to spread the word about Burger Chef -- and the quality it represents.

Burger Chef's Regional Field Marketing Representative will work with you and provide the help you need to turn your restaurant opening, grand opening and other future events into important community occasions. Burger Chef will make available numerous marketing and public relations tools to help you launch your business venture.

Utilizing the best of creative talent in the areas of advertising and promotion you'll receive the benefit of Burger Chef's fully coordinated advertising and promotion campaigns.

CONTINUING SUPPORT

After your restaurant is open, you'll continue to receive professional assistance and support from Burger Chef's regional operations and functional support departments.

A Burger Chef Field Consultant in your area is responsible for helping you achieve success. You can depend on this person who has already proven to be a successful restaurant manager. Your Field Consultant's years of experience assure you that no details in the operation will be overlooked. The Field Consultant is your personal link with Burger Chef Systems, who will provide you with information and direct you to company resources which will help you maximize sales and profits and operating ability. Periodic visits to your restaurant in response to your personal requests for help and annual comprehensive on-site reviews of your operation will provide you with the professional guidance and information you need to realize your restaurant's operational potential. But perhaps most important, your Field Consultant will be there anytime you need help.

Id. at 8, 10, 11.

Another such document, entitled "Burger Chef, Independence with Security," also was designed to encourage potential franchisees to join the Burger Chef System. Plaintiffs' Ex. 730. That brochure noted that the purchase of the Burger Chef System by General Foods gave the System:

access to the resources of a corporation that extends into almost every field of consumer food products. With General Foods, Burger Chef has continued its growth, providing fast, low-cost, quality food to new markets coast to coast and eventually overseas.

The future growth of Burger Chef depends upon findin qualified ambitious men, like yourself, who are sales and management oriented. The Burger Chef System is within the reach of the small investor providing him with the opportunity to be independent while offering the advantages of a large corporation. And with Burger Chef you are not starting a new or unknown business; opening a Burger Chef franchise is starting another outlet of a successfully established enterprise complete with the knowledge, research, and backing of the corporation and franchisees who have already made Burger Chef successful.

Each Burger Chef franchisee is an independent businessman who is also a member of the Burger Chef team -- a team composed of all the independent franchisees and company store managers with the support of Burger Chef. Each member of the team, whether franchisee, company store manager or at the corporate level, contributes his efforts, ideas, and work to make the Burger Chef System the successful combination of independent businesses with the advantages of a large corporation.

Id. at 2-3, 10. The booklet indicated that the franchisee would provide the monetary investment, enthusiasm, hard work and cooperation. In return, General Foods would provide a proven system, the financial advantages of a large corporation, marketing assistance and continuing help and advice.

Still another such undated document, also designed to solicit franchisees, stated:

BURGER CHEF BACKS YOU UP

What will Burger Chef do to help you in your business? We won't run your business for you . . . and you wouldn't want us to. We offer comprehensive suggestions in the key areas of:

Real Estate and Construction

-- site selection

-- site planning

-- building specifications/drawings

-- construction

Training

-- restaurant management training

-- manager training aids

-- hourly employee ...


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