FOR IMMEDIATE RELEASE - September, 1, 1998

Meineke Franchisees Appeal!

September 1. In response to the recent reversal of this landmark case by the Fourth Circuit of the U.S. Court of Appeals, the following petition for rehearing had been filed:


IN THE
United States Court of Appeals
FOR THE FOURTH CIRCUIT


97-1808(L)
97-1848


MEINEKE DISCOUNT MUFFLER SHOPS, INC.; NEW HORIZONS ADVERTISING, INC.; GNK PARTS INDUSTRIES CORP.; GKN PLC; RONALD SMYTHE; GENE ZHISS; TED PEARCE,



Appellants/Cross-Appellees,
v.
KELLY BROUSSARD; JIM STEPHENS; MARK ZUCKERMAN;
ARNOLD FISCHTAL; JOHN HAGAR; VINCENT MATERA;
DENIS WICKHAM; MARY ANN WICKHAM; KENEX CORP.;
RALPH YARUSSO,


Appellees/Cross-Appellants.


Appeal from the United States District Court
for the Western District of North Carolina


APPELLEES/CROSS-APPELLANTS' PETITION FOR REHEARING
AND SUGGESTION FOR REHEARING EN BANC
James J. McCabe John J. Soroko Wayne A. Mack Mark B. Schoeller Duane, Morris & Heckscher One Liberty Place Philadelphia, PA 19103 (215) 979-1000

Thomas J. Ashcraft 212 South Tryon Street Suite 1430 Charlotte, NC 28281 (704) 333-2300
Michael A. Carvin Charles J. Cooper Michael W. Kirk R. Ted Cruz Cooper, Carvin & Rosenthal, PLLC 2000 K Street, N.W. Washington, D.C. 20006 (202) 82208950
Attorneys for Appellees/Cross-Appellants

September 1, 1998
INTRODUCTION
The panel opinion in this case reversed the judgment entered on a unanimous jury verdict following a seven-week trial in favor of a class of Meineke franchisees against their franchisor, its affiliates, and its officers on claims for breach of contract, breach of fiduciary duty, fraud, and violation of the North Carolina Unfair Trade Practices Act. In the judgment of undersigned counsel, the panel overlooked numerous material facts and points of law as set forth in the pages that follow.
The primary basis for the panel's ruling was its conclusion that the district court had erred in certifying the class, a decision that was no only erroneous but also effectively provides Fourth Circuit defendants with ready means to frustrate class-action lawsuits while a motion for class certification is pending. But, even more troubling, the panel held that the names plaintiffs could not, as a matter of law, maintain claims for breach of fiduciary duty, fraud, and violation of the North Carolina Unfair Trade Practices Act even though defendants did not appeal the jury verdicts against them on these claims.
Because neither the jury's findings nor the district court's legal rulings on these claims were appealed, the panel received no briefing on them whatsoever. Accordingly, it is not surprising that the panel's opinion simply ignores the wealth of evidence and North Carolina law supporting the judgments against defendants on these claims. Moreover, the sense of the panel's ruling - that a plaintiff may not maintain a tort action whenever the parties also happen to have a contractual relationship - effectively immunizes countless defrauders, breachers of fiduciary duties, and unfair trade practitioners from the penalties that the North Carolina legislature and North Carolina common law have established for these serious business torts. It is simply wrong for a panel of this Court to preclude, as a matter of law, causes of action sustained by a unanimous jury verdict, following a seven-week trial, when the defendants themselves could find no basis to challenge them. Even defendants' counsel admitted at oral argument that he was "not here to defend every aspect of the behavior in this case." Tr. at 23. I. THE PANEL'S RULING FRUSTRATES CLASS ACTIONS IN THIS CIRCUIT The Court's principal holding in this case - that the presence of plaintiffs in the class who had signed releases created an irreconcilable conflict that required the entire class be decertified - provides Fourth Circuit defendants with the means to frustrate class-action lawsuits while certification motions are pending. The basic facts underlying this "conflict" are quite simply. In 1993, plaintiffs discovered defendants' eleven-year-long pattern of skimming from and lying about their "WAC" advertising trust fund and filed this lawsuit. While the motion for class certification was pending, defendants barraged the franchisees with literature - literature we believe was fraudulently deceptive - and induced a number of them to sign "EDP" releases settling their claims . Defendants did not bring the alleged "conflict" to the district court's attention until more than year after the class had been certified in a motion to decertify filed a month before trial. Because the district court agreed that there was sufficient evidence of fraud in the releases to go to the jury, the court re-affirmed its certification of the entire class, subject to a determination of the validity of the releases. After a seven-week trial, the jury found for plaintiffs on nearly every ground, but rejected the claim that the releases were fraudulently procured. Accordingly, the district court enforced their releases and excluded them from the judgment. The panel opinion baldly states that the result was "manifest conflicts of interest...that the district court simply, and erroneously, ignored." Slip op. at 12 (emphasis added). This characterization is simply false. The district court literally bent over backwards to consider and address the alleged "conflict." Senior Judge Robert D. Potter received 46 pages of briefing on the matter, heard oral argument, and issued a 26-page opinion ad then a second 48-page opinion specifically considering and resolving the matter. J.A. 412-37, 2669-716. It was the Fourth Circuit panel, not the district court, that "simply, and erroneously, ignored" the whole of the district court's opinion, and its careful reasoned analysis on this issue - a particularly egregious lapse in view of the fact that the standard of review on this issue is abuse of discretion. E.g., McClain v. South Carolina Nat'l Bank, 105 F.3d 898, 902 (4th Cir. 1997). Instead, this Court held that the presence of the EDP dealers in the class created an irreconcilable conflict. Slip op. at 11-15. The panel considered that fact that the non-EDP dealers were seeking money damages to be in fatal conflict with the EDP dealers' inability to receive any such damages because of the releases they had signed. And, the fact that they had signed releases meant that they had "the right to insist that money damages against Meineke not be pursued in their names." Slip op. at 15. The panel opinion not only "simply ignored" the district court's opinion, it ignored everything plaintiffs said about this alleged "conflict." First, as plaintiffs repeatedly stressed on appeal (and as the opinion entirely omitted), three of the named plaintiffs, Kelly Broussard, Arnold Fischthal, and Kenex Corporation, themselves signed releases that were at issue in this case. J.A. 2760. They thus had more than ample reason to vigorously press the interests of releases, as they in fact did. Second, the entire premise of the alleged "conflict" is that the EDP releases could benefit only from restitution of the advertising fund, whereas the other dealers sought monetary damages. But, if the releases are valid, the EDP dealers are entitled to absolutely nothing. They get no damages, no injunctive relief, and they are entitled to no portion of any WAC replenishment, as the district court recognized. Their claims are released; they have no entitlement to any relief, restitutionary or otherwise, for wrongs that they have legally forgiven. The panel opinion's conclusion that the election of monetary damages conflicted with the "the only relief EDP franchisees could pursue" (restitution makes no sense at all. If the releases were valid, there was no relief the EDP franchisees could pursue, restitutionary or otherwise. The illogic of the panel's conclusion is brought sharply into focus by asking the question, how would the litigation have been different if the EDP releases had not been included in the class. The panel identified the only difference: the EDP dealers would have been excluded from the class before trial rather than after the jury found the releases had not been fraudulently procured. The panel insists that this difference in timing is significant because the "EDP franchisees... have a right to insist that money damages against Meineke not be pursued in their names." Slip op. at 15. But we are at a loss to understand the panel's concern because the procedure employed by the district court manifestly impaired no substantive right of the EDP dealers. If the district court had first determined the validity of the releases and then conducted trial on the merits with a class that included only non-EDP dealers, the judgment and the injunction would have flowed only to those dealers - exactly as it in fact did at the end of trial. Nor are we aware of any "right" of the EDP dealers to be excluded form the definition of the class during the merits trial - it is not as though their status was in any way misrepresented to the trial court or the jury, both of which were fully aware of the EDP releases. In short, the adequacy of the named plaintiffs' representation of the EDP dealers cannot rationally turn on the timing of the district court's resolution of the validity of the releases. And even if it could be seriously maintained that the district court abused its discretion by not resolving the validity of the releases in advance of trial on the merits, it is inconceivable that a seven-week jury trial, involving dozens of witnesses and 6,691 pages of testimony should be discarded over so harmless an error. It simply makes no sense to penalize franchisees who did not sign releases and won because other franchisees signed releases and failed to overturn their validity. Because the Court enforced the releases, the EDP dealers effectively "opted out" of the classwide relief and their interests were not harmed at all by the relief granted to the remaining class members. See In re A.H. Robins Co., Inc., 880 F.2d 709, 745 (4th Cir.) (ability to effectively opt-out provides "everything that an express opt-out provision could give [such] a class member"), cert. denied, 493 U.S. 959 (1989); Califano v. Yamasaki, 442 U.S. 682, 704 (1979) (explaining that if no relief is granted to members improperly included in a class, there is "no basis for altering the relief actually granted" to the class); see also Bittinger v. Tecumseh Products Co., 123 F.3d 877, 884 (6th Cir. 1997) (some class members signing releases is "not enough to justify rejection of class certification"). Equally important, this Court's resolution of the EDP dealer issue cannot diminish or adversely affect the judgment awarded to the other class members. Califano, 442 U.S. at 704. The several "alternative" grounds cited by the panel for decertifying the class all suffered from similar fatal flaws:

  • The panel's conclusion that the presence of different versions of the franchise contracts at issue created an irreconcilable conflict ignored, inter alia, that defendant Meineke's general counsel, Ted Pearce, testified at trial that all the contracts were "fairly uniform with only minor differences from year to year," J.A. 3636, and that the provision which the panel opinion now deems pivotal, slip op. at 15-16, was utterly "extraneous," J.A. 3670, 3675. And defendants never requested separate jury findings regarding their liability under different versions of the contract, nor did they object to the interrogatory submitted to the jury.
  • The panel's conclusion that plaintiffs' proof of fraud and misrepresentation depended on highly "individualized" facts and audiotapes and so was improper for class treatment ignored, inter alia, the fact that defendants did not object at trial on this ground, J.A. 3296-312, and the fact that the plaintiffs' fraud case was expressly predicated solely on uniform written communications with all class members. The audiotapes were not introduced to demonstrate fraud, and the District Court gave the jury a limiting instruction that they were not to be considered on that issue, J.A. 3314-a limiting instruction that the panel chose not to address.
  • The panel's conclusion that the reliance element of fraud and negligent misrepresentation was "not readily susceptible to class-wide proof," slip op. at 18, ignored, inter alia, the fact that, under North Carolina law, fraud by a fiduciary creates a presumption of reliance. Watts v. Cumberland County Hosp. Sys., Inc., 343 S.E. 2nd 879, 884 (N.C. 1986).
  • The panel's conclusion that individual differences as to knowledge precluded class-wide treatment of whether the statute of limitations should be tolled ignored, inter alia, the fact that defendants waived this argument by not presenting it below and also this Court's admonition that "[c]ourts passing upon motions for class certification have generally refused to consider the impact of such affirmative defenses as the statute of limitations on the potential representative's case." International Woodworkers of Am., AFL-CIO v. Chesapeake Bay Plywood Corp., 659 F.2d 1259, 1270 (4th Cir. 1981).
  • And the panel's conclusion that "each putative class member's claim for lost profits was inherently individualized and thus not easily amenable to class treatment," slip op. at 20, ignored, inter alia, that nobody (not even defendants) argued that the total amount of lost profits was inaccurate, the lost profits calculations were based on defendants' own business calculations, and any individualization of lost profits would go only to the allocation of damages, which defendants lack standing to challenge and does not preclude class certification in any event, see H. Newbert & A. Conte, Newberg on Class Actions, ?3.22, at 3-156 (3d ed. 1992); Chisolm v. United States Postal Service, 665 F.2d 482, 493 n.12 (4th Cir. 1981).
The panel opinion does not address these undeniable record facts and controlling legal authorities, let alone distinguish or explain them away.
II. THE PANEL ERRED IN REVERSING THE CAUSES OF ACTION SUSTAINED BY THE JURY AND THE DISTRICT COURT AND NOT APPEALED BY DEFENDANTS.
The panel opinion accuses the district court of "nothing less than misconceiving the basic character of the lawsuit." Slip op. at 25. With all due respect, it is the panel, not the district court, that has "misconceive[ed] the basic character" of this case for its conception of the case not only differed from that of Judge Potter and the jury, but also from that of even the defendants themselves. Unlike the panel, the defendants had no illusions concerning the propriety of the named plaintiffs' claims for breach of fiduciary duty, fraud, and violation of the North Carolina Unfair Trade Practices Act ("UTPS"): Meineke did not seek summary judgment on the fraud and UTPA claims, see J.A. 1088-1145, and defendants did not challenge the verdicts in their briefs in this Court.
Despite defendants' failure to appeal the liability verdicts against them on these claims, the panel held that "[t]he district court erred . . . by allowing plaintiffs to advance tort and UTPA counts paralleling their breach of contract claims." Slip. op. at 26. The panel made no effort to analyze the record to determine whether plaintiff had presented the jury with evidence sufficient to support the elements of these causes of action. Instead, the panel simply asserted that in order to maintain these tort causes of action in an action also alleging breach of contract, "[s]omething more is required." Slip op. at 27. But the North Carolina Supreme Court case cited by the panel, Newtown v. Standard Fire Ins. Co., 229 S.E. 2d 297 (N.C. 1976), holds precisely the opposite.
In Newtown, the North Carolina Supreme Court explained that "where there is an identifiable tort even though the tort also constitutes, or accompanies, a breach of contract, the tort itself may give rise to a claim for punitive damages." 229 S.E. 2d at 301. The Court went on to repudiate prior North Carolina precedent ;holding that "despite the sufficiency of plaintiff's proof of actionable fraud inducing the plaintiffs to enter the contract . . . additional elements of aggravation must accompany the fraud to warrant punitive damages . . . Insofar as Swinton v. Realty Co. requires some kind of aggravated conduct in addition to actionable fraud . . . that case is overruled." Id. at 301-02. In short, North Carolina law unexceptionably provides that a plaintiff may maintain tort causes of action such as those found by the jury in this case if all of the standard elements are proven.
As noted above, the panel did not bother to ascertain whether the named plaintiffs had presented evidence sufficient to support the jury's findings that defendants were liable for fraud, breach of fiduciary duty, and unfair trade practices. At trial, plaintiffs introduced voluminous evidence supporting the jury's verdict on their fraud, negligent misrepresentation, and North Carolina Unfair Trade Practice claims. Both the jury and the trial judge independently found that fraud and unfair trade practices had been committed by the defendants. In the words of Judge Potter, "plaintiffs . . . presented evidence that defendants concealed their misappropriations of WAC funds by false and misleading representations made with intent to deceive." 953 F. Supp. at 1106. Had defendants appealed the jury's liability decisions on these claims, the panel would have learned that the evidence supporting each element of each of these torts was not only sufficient, but abundant:
  • Meineke concealed the profits it was making on advertising from the dealers (JA 3423-27);
  • Meineke's president, Ron Smythe, testified that "it wasn't appropriate" to disclose information to the dealers regarding Meineke's profits on advertising (JA 3427);
  • In marketing materials given to prospective franchisees, Meineke indicated that dealers receive advertising services from Meineke in exchange for "license fees and royalties" (JA 6661);
  • Uniform Offering Circulars distributed to dealers before they purchased their franchises made no mention of, or misrepresented, the commissions and profits Meineke was taking from the advertising fund (JA 3422-28, 9486-88; see also JA 3257-60), which was directly contrary to franchising standards (JA 3570-72);
  • The same annual audits contained reconciliations of the advertising fund's "income" and its various "expenses" but did not mention "commissions," "rebates" or even "discounts" in the listing of such expenses (e.g., JA 6873-6922);
  • When dealers began asking questions, GKN instructed Meineke to delay providing information concerning profits from advertising and then to "exaggerat[e]" its expenses because such profits were an acknowledged "point of vulnerability" (JA 6796-97).
The panel once again "misconceiv[ed] the basic character of the lawsuit" when it turned to the jury's unappealed finding that the defendant had breached their fiduciary duty to the plaintiffs. In particular, while the panel correctly observed that North Carolina law does not impute a fiduciary duty merely on the basis of a franchise relationship, it failed to recognize that the claim in this case was not a generalized "fiduciary relationship between franchisee and franchisor," see slip op. at 29, but rather a particularized claim that defendants had expressly contracted to a fiduciary obligation with respect to the management of the advertising fund.
The panel ignored the fact that the franchise agreements in this case gave rise to a fiduciary relationship with respect to the advertising fund because they required Meineke to segregate the funds and stated that the money in the advertising fund was to be used "for the benefit of" the franchisees. E.g., J.A. 3663-64; 5699, 6162. In a corporate resolution creating the advertising fund, Meineke pledged that the monies from the fund would not be commingled with the account of Meineke and its affiliates, and that it would act as merely a conduit for the franchisees' advertising contributions. J.A. 6662. Thousands of written statements were sent to the franchisees explicitly labeling the fund a "trust fund" e.g., J.A. 6873-6922, and defendants made numerous other admissions, including testimony from Meineke officers introduced into evidence at trial, expressly conceding that Meineke was a fiduciary in administering the fund. E.g., J.A. 3332-34, 3686, 3705-15, 4362-87, 6667-69, 6680, 6833-34, 7179, 7261; see also J.A. 3401-04, 3752, 7278, 7281-82. None of this evidence was even mentioned by the panel.
Where all parties to a franchise contract agree that certain franchise funds are to be placed in a segregated "trust fund that Meineke administers," J.A.. 3336, and used exclusively for the benefit of the dealers, North Carolina law permits the jury to find that a fiduciary relationship is created, see, e.g., Curl v. Key, 316 S.E.2d 272, 275 (N.C. 1984); indeed, Meineke itself has taken the position in verified pleadings that a fiduciary duty arises from administration of the advertising fund. J.A. 7179. Moreover, Meineke officials repeatedly admitted as much in audiotape statements admitted at trail for the purpose of establishing the fiduciary obligation with respect to the advertising fund. See, e.g., J.A. 3335 ("We're a trustee of the [WAC] account. We're just a custodian of the funds."); J.A. 3334-35 ("Meineke is nothing more than a custodian of those funds."); J.A. 3333 ("There's no profit at all."); J.A. 3332 ("That's not our money. We don't make any money on advertising."); J.A. 3332 ("[T]here is absolutely no profitability on our part or piece of the action."); J.A. 3335 ("The money has nothing to do with us. That's your money, okay.")
The panel also erroneously criticized the trial court for instructing the jury that a fiduciary duty exists "any time one person reposes a special confidence in another," and that the fiduciary relationship extends to "any possible case" in which this special confidence resulted in domination and influence on one side of the relationship. This jury instruction was a verbatim quote from the North Carolina Supreme Court itself, repeated countless times by North Carolina appellate courts. In Abbitt v. Gregory, 160 S.E. 896, 906 (N.C. 1931), the North Carolina Supreme Court stated that the fiduciary relationship "not only includes all legal relations, such as attorney and client, broker and principal, . . ., but it extends to any possible case in which a fiduciary relationship exists in fact, and in which there is confidence reposed on one side, and resulting domination and influence on the other." See also, e.g., Adams v. Moore, 385 S.E.2d 799, 801 (N.C. App. 1989) ("For under our law a fiduciary relationship can be found to exist anytime one person reposes a special confidence in another") (citing Abbitt). For this reason, no doubt, appellants did not even think to challenge the district court's correct recitation of North Carolina state law, which the panel now reverses on appeal.
III. THE PANEL'S DISMISSAL OF ALL CLAIMS AGAINST MEINEKE'S CORPORATE PARENTS IGNORED BINDING NORTH CAROLINA LAW.
The panel's far-reaching conclusion that Meineke's corporate parents are immune from any and all liability in this case likewise ignores both North Carolina law and the actual factual record in this case. For example, not a single word of the opinion is devoted to the jury's unanimous finding that GKN committed fraud directly for, inter alia, its express instruction to Meineke to "delay publishing" Meineke's illicit profits and to water them down as much as possible by "exaggerat[ing]" costs and "add[ing] in as much general overhead expenses as we could reasonably justify" because those profits were a "point of vulnerability" which could "indicat[e] a guilty conscience" and could subject GKN to "possible future Court action." J.A. 6796-97. And, although the panel grudgingly acknowledges, slip op. at 33, that piercing the corporate veil is, in North Carolina, a factual question reversible only for insufficiency of the evidence, Glenn v. Wagner, 329 S.E.2d 326, 333 (N.C. 1985), the panel in effect conducts a de novo review of the issue. Rather than consider the nine-factor test established by the North Carolina Supreme Court in Glenn, and rather than even mention the abundance of evidence cited by plaintiffs that GKN and PIC satisfied each and every factor, Appellees' Br. at 31-32, the panel simply concluded that, in its opinion, GKN, PIC, and Meineke had "an ordinary parent-subsidiary relationship," slip op. at 33.
CONCLUSION
For the foregoing reasons, plaintiffs respectfully request that the Court grant this petition for rehearing or accept our suggestion for rehearing en banc.
September 1, 1998
Respectfully submitted,
James J. McCabe John J. Soroko Wayne A. Mack Mark B. Schoeller Duane, Morris & Heckscher One Liberty Place Philadelphia, PA 19103 (215) 979-1000
Thomas J. Ashcraft 212 South Tryon Street Suite 1430 Charlotte, NC 28281 (704) 333-2300
Michael A. Carvin Charles J. Cooper Michael W. Kirk R. Ted Cruz Cooper, Carvin & Rosenthal, PLLC 2000 K Street, N.W. Washington, D.C. 20006 (202) 82208950


Attorneys for Appellees/Cross-Appellants


PH2\289562.1

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