Monday, April 09, 2007

Parlour Enterprises, Inc. v. Kirin Group (Cal. Ct. App. - April 6, 2007)

We used to have a Farrell's Ice Cream Parlour in nearby Springfield Mall when I was a kid growing up in Virginia. It was one of those places built and designed largely to entice kids -- an early Chuck-E-Cheese (without the games) or our local Corvette Diner -- but with a family atmosphere. Alongside Shakey's Pizza, which my family went to far more often, the nearby Farrell's was the dream place to eat.

I always wondered what happened to the Farrell's, since I see them no longer. But, thanks to this opinion, I now know. In exquisite detail. Ironically, the only Farrell's that were left are in Southern California -- one in San Diego and one in Santa Clarita -- and only the latter currently remains. I guess kids in the modern era are simply not into the "pig out on ice cream" concept. At least in public.

Actually, the jury in the underlying case thought otherwise, and awarded the plaintiff in this case $6.7 million in damages, including $6.5 million in lost profits, because defendants allegedly wrongfully terminated the right of plaintiff to develop and subfranchise Farrell's in Southern California. But Justice Rylaarsdam reverses the award of lost profits, and permits plaintiff to recover only $200,000, on the ground that the award of lost profits was speculative as a matter of law.

The opinion contains a decent discussion of what it takes for lost profits of a new business to be recoverable, so it's a helpful opinion on that score. It also demonstrates, albeit implicitly, how important it is for plaintiffs to retain competent experts on the damages side. Here, for example, I think that plaintiff would've been able to recover the extra $6.5 million had their expert -- Robert Wunderlich -- done a decent (or at least more complete) job. You've got to read the whole opinion to see the (extermely superficial) content of the expert testimony and why it was insufficient. But, for example, look at what Justice Ryllarsdam says -- basically in its entirety -- about one part of Wunderlich's expert testimony:

"Wunderlich used the projections only as a starting point for his calculations. He also considered market data about 'a couple of dozen ice cream parlors,' plus a publicly-traded restaurant chain called Friendly’s, which he claimed was 'relatively similar to the Farrell’s concept.' The only evidence of similarity, however, is Wunderlich’s testimony that it 'is a chain of about 300 or so restaurants, which is similar to Farrell’s in that it has both the ice cream end and the food end.' But many restaurants serve both ice cream and food; that alone does not make them sufficiently similar to Farrell’s for purposes of proving lost prospective profits. (Kids’ Universe, supra, 95 Cal.App.4th at p. 884.) Although one way to prove prospective profits is through the experience of similar businesses, Wunderlich’s cursory description of Friendly’s business model failed to establish its profit and loss experience is sufficiently similar to Farrell’s to be relevant to the question of plaintiffs’ alleged lost profits."

Which is funny, since even I could testify that Friendly's and Farrell's are pretty darn similar. But the expert didn't, and hence the $6.5 million disappears.