Case: Parlour Enterprises, Inc. v. The Kirin Group, Inc., No. G036525 (Cal. Ct. App. 6/19/07)

The One Sentence Summary: Lost profits awarded by jury for breach of franchise agreement were reversed due to speculative expert testimony based on unreliable proforma financial projections and market data for other restaurants not shown to be sufficiently similar to plaintiffs’ restaurants.


What They Were Fighting About: Defendant Kirin Group bought the trademarks and trade names to Farrell’s Ice Cream Parlours in 1996 and entered into written agreements in 2000 giving plaintiff Parlour Enterprises the exclusive right to develop Farrell’s subfranchises in California. Parlour would receive some up-front fees as well as royalties based on a percentage of net sales. Unable to find enough investors to finance the opening of the minimum number of California restaurants required by the agreements (only one restaurant had been opened), Parlour set up limited partnerships to fund the construction of additional Farrell’s restaurants. Prior to their completion, Kirin terminated the agreements. Parlour (along with the limited partnerships) filed suit alleging causes of action including breach of contract, fraud, negligent misrepresentation, and interference with prospective business advantage. Jury trial resulted in judgment for Parlour and the limited partnerships and a damages award of $6.6 million for lost profits, lost franchise fees, and additional expenses incurred.

Court Holdings:

    • Court of appeal reversed all but $130,000 of the jury’s $6.6 million damages award on the grounds that the evidence on which it was based was speculative expert opinions that should have been excluded by the trial court. Most significant is the part of the court’s written decision regarding lost profits.

 

    • Lost profits for an unestablished business may be recovered if the evidence makes reasonably certain both their occurrence and extent. Expert testimony may provide a sufficient basis for a damages award of lost profits if it is supported by a substantial factual basis rather than mere speculation and hypothetical scenarios.

 

    • Applying these legal principles, the court of appeal concluded that plaintiffs’ expert opinions on lost profits were based on unreliable proforma financial projections from an offering circular prepared by Parlour and given to potential investors. Such projections were mere assumptions, not based on operational results of an actual business substantially similar to the lost opportunity.

 

  • In addition to unreliable projections, plaintiffs’ expert relied on market data for a dozen smaller ice cream parlours and for the “Friendly’s” restaurant chain. However, because both Friendly’s and the smaller ice cream parlours had different business models than Farrell’s, they were not sufficiently similar businesses upon which to base a calculation of plaintiffs’ alleged lost profits.