A Second Look at JRS Products, Inc. v. Matsushita Electric Corp.

JRS Products, Inc. v. Matsushita Electric Corporation of America, 115 Cal.App.4th 168, 8 Cal.Rptr.3d 840 (2004) (JRS Products), decided earlier this year, provides important clarification of the scope of remedies available under California law to franchisees who have been wrongfully terminated. The California Appellate Court decision holds, among other things, that the California Franchise Relations Act (CFRA) does not bar a franchisee from recovering damages for breach of contract for wrongful termination.

The holding is significant because for years California practitioners representing franchisors have relied upon Boat & Motor Mart v. Sea Ray Boats, Inc., 825 F.2d 1285 (9th Cir. 1987) (Sea Ray) for the proposition that, pursuant to the CFRA, a franchisee's remedy was limited to the repurchase of its inventory by the franchisor. The court in JRS Products distinguished the Sea Ray case on the ground that the franchisee in Sea Ray, unlike the franchisee in JRS Products, had waived its common law right to recover damages under the contract. The court reasoned that, absent such a waiver, the franchisee was entitled to seek damages for common law breach of contract associated with the wrongful termination.

If the court's opinion had merely held that a franchisee's remedies for wrongful termination are not limited to those expressly provided for in the CFRA, this alone would have been a significant clarification of California law. However, the court did not stop there. A careful reading of the JRS Products opinion reveals that the court has made an even more startling pronouncement: A violation of the statutory provisions of the CFRA gives rise to a common law claim for breach of contract.

JRS Products involved allegations by a Panasonic fax machine dealer, JRS Products, that it had been wrongfully terminated by Panasonic. The “dealer” contract between the parties provided that Panasonic had the right to terminate JRS Products without cause with 90 days notice. When Panasonic became displeased with certain of JRS Products' activities, it sent a letter to JRS Products providing notice that the dealership would be terminated in 90 days.

JRS Products sued Panasonic, contending, among other things, that the relationship of the parties was that of franchisor/franchisee and that the termination was governed by the provision of the CFRA. JRS Products prevailed on this issue at the trial level. Panasonic, faced with a ruling that it was a franchisor under California law, admitted that its termination of JRS Products failed to comply with the provisions of the CFRA and that, therefore, it had violated the statute, but argued that the provisions of the CFRA and the holding in Sea Ray limited the remedy available to JRS Products to the repurchase of its inventory by Panasonic.

The court disagreed, holding that section 20037 of the CFRA, which states       “[e]xcept as expressly provided herein, nothing in this article shall abrogate the right of a franchisee to sue under any other law,” provided a basis for JRS Products to assert a claim for common law breach of contract arising from the wrongful termination of its contract with Panasonic. The court distinguished Sea Ray on the ground that the franchisee in that case had expressly waived the right to recover contract damages.

So far, so good. The court meaningfully distinguished the Sea Ray case and, having held that the CFRA does not preclude a franchisee from asserting a cause of action for common law breach of contract arising from a wrongful termination, should have concluded its analysis and remanded the case to the trial court for consideration of the issue of whether Panasonic had, in fact, breached the terms of its contract with JRS Products. However, the court did not stop its analysis at this point. Instead, it went on to state that “the violation of the Act became the basis of JRS's common law breach of contract claim,” thus, implying that a statutory violation, by itself, and without regard to the language actually contained in the contract, can give rise to a common law claim for breach of contract.

This holding smears the boundaries between statutory rights and remedies and those traditionally derived under common law. The pertinent question is, “Which provision of the contract did Panasonic breach?” The answer is, of course, Panasonic did not violate any of the express terms of its contract with JRS Products when it terminated JRS Products, without cause, on 90 days notice. Even if, as the court held, “the provision allowing Panasonic to terminate without good cause is void because it contravenes the express terms of the [CFRA],” the wrongful termination still constituted merely a violation of the provisions of the CFRA and not a violation of the contract between Panasonic and JRS Products. Why, then, does the court in JRS Products conclude that the statutory violation of the CFRA by Panasonic gives rise to a common law claim for breach of contract?

The answer may lie in the procedural posture of the appeal and in the opinion's fourth sentence. Procedurally, the court was considering cross-appeals. Panasonic appealed a jury verdict in favor of JRS Products that was based on JRS Products' claim that Panasonic had tortiously interfered with JRS Products' prospective economic advantage. The court reversed the jury award holding that the tortious interference claim was defective because “a party to a contract cannot recover damages in tort for breach of contract.” JRS Products cross-appealed the dismissal of, among other things, its breach-of-contract claim.

Apparently, during the course of briefing and argument, the court must have concluded that Panasonic, while arguing that its actions did not give rise to tort liability, had conceded that it actually had breached its contract with JRS Products. The fourth line of the opinion is revealing. It states: “We reverse the ensuing judgment because, as the franchisor argues on appeal, its conduct, though wrongful, consisted exclusively of breaching the contract.”

Apparently, the breach of contract having been deemed conceded by Panasonic, the court did not feel compelled to identify the authority for its seemingly offhand, but controversial, conclusion that “the violation of the Act became the basis of JRS's common law breach of contract claim.” The practical implication of the court's holding is that common law damages are now available to franchisees as a remedy for a statutory violation of the CFRA, even though the statute does not provide for that remedy.

The court concludes its analysis by stating, “[t]he fact that the [CFRA] renders a provision in the agreement void as a matter of law … does not convert a common law claim into a statutory claim.” However, the court appears to have done the exact opposite.

On May 12, 2004 the California Supreme Court declined to review the JRS Products decision.

JRS Products, Inc. v. Matsushita Electric Corporation of America , 115 Cal.App.4th 168, 8 Cal.Rptr.3d 840 (2004) ( JRS Products ), decided earlier this year, provides important clarification of the scope of remedies available under California law to franchisees who have been wrongfully terminated. The California Appellate Court decision holds, among other things, that the California Franchise Relations Act (CFRA) does not bar a franchisee from recovering damages for breach of contract for wrongful termination.

The holding is significant because for years California practitioners representing franchisors have relied upon Boat & Motor Mart v. Sea Ray Boats, Inc. , 825 F.2d 1285 (9th Cir. 1987) ( Sea Ray ) for the proposition that, pursuant to the CFRA, a franchisee's remedy was limited to the repurchase of its inventory by the franchisor. The court in JRS Products distinguished the Sea Ray case on the ground that the franchisee in Sea Ray, unlike the franchisee in JRS Products, had waived its common law right to recover damages under the contract. The court reasoned that, absent such a waiver, the franchisee was entitled to seek damages for common law breach of contract associated with the wrongful termination.

If the court's opinion had merely held that a franchisee's remedies for wrongful termination are not limited to those expressly provided for in the CFRA, this alone would have been a significant clarification of California law. However, the court did not stop there. A careful reading of the JRS Products opinion reveals that the court has made an even more startling pronouncement: A violation of the statutory provisions of the CFRA gives rise to a common law claim for breach of contract.

JRS Products involved allegations by a Panasonic fax machine dealer, JRS Products, that it had been wrongfully terminated by Panasonic. The “dealer” contract between the parties provided that Panasonic had the right to terminate JRS Products without cause with 90 days notice. When Panasonic became displeased with certain of JRS Products' activities, it sent a letter to JRS Products providing notice that the dealership would be terminated in 90 days.

JRS Products sued Panasonic, contending, among other things, that the relationship of the parties was that of franchisor/franchisee and that the termination was governed by the provision of the CFRA. JRS Products prevailed on this issue at the trial level. Panasonic, faced with a ruling that it was a franchisor under California law, admitted that its termination of JRS Products failed to comply with the provisions of the CFRA and that, therefore, it had violated the statute, but argued that the provisions of the CFRA and the holding in Sea Ray limited the remedy available to JRS Products to the repurchase of its inventory by Panasonic.

The court disagreed, holding that section 20037 of the CFRA, which states       “[e]xcept as expressly provided herein, nothing in this article shall abrogate the right of a franchisee to sue under any other law,” provided a basis for JRS Products to assert a claim for common law breach of contract arising from the wrongful termination of its contract with Panasonic. The court distinguished Sea Ray on the ground that the franchisee in that case had expressly waived the right to recover contract damages.

So far, so good. The court meaningfully distinguished the Sea Ray case and, having held that the CFRA does not preclude a franchisee from asserting a cause of action for common law breach of contract arising from a wrongful termination, should have concluded its analysis and remanded the case to the trial court for consideration of the issue of whether Panasonic had, in fact, breached the terms of its contract with JRS Products. However, the court did not stop its analysis at this point. Instead, it went on to state that “the violation of the Act became the basis of JRS's common law breach of contract claim,” thus, implying that a statutory violation, by itself, and without regard to the language actually contained in the contract, can give rise to a common law claim for breach of contract.

This holding smears the boundaries between statutory rights and remedies and those traditionally derived under common law. The pertinent question is, “Which provision of the contract did Panasonic breach?” The answer is, of course, Panasonic did not violate any of the express terms of its contract with JRS Products when it terminated JRS Products, without cause, on 90 days notice. Even if, as the court held, “the provision allowing Panasonic to terminate without good cause is void because it contravenes the express terms of the [CFRA],” the wrongful termination still constituted merely a violation of the provisions of the CFRA and not a violation of the contract between Panasonic and JRS Products. Why, then, does the court in JRS Products conclude that the statutory violation of the CFRA by Panasonic gives rise to a common law claim for breach of contract?

The answer may lie in the procedural posture of the appeal and in the opinion's fourth sentence. Procedurally, the court was considering cross-appeals. Panasonic appealed a jury verdict in favor of JRS Products that was based on JRS Products' claim that Panasonic had tortiously interfered with JRS Products' prospective economic advantage. The court reversed the jury award holding that the tortious interference claim was defective because “a party to a contract cannot recover damages in tort for breach of contract.” JRS Products cross-appealed the dismissal of, among other things, its breach-of-contract claim.

Apparently, during the course of briefing and argument, the court must have concluded that Panasonic, while arguing that its actions did not give rise to tort liability, had conceded that it actually had breached its contract with JRS Products. The fourth line of the opinion is revealing. It states: “We reverse the ensuing judgment because, as the franchisor argues on appeal, its conduct, though wrongful, consisted exclusively of breaching the contract.”

Apparently, the breach of contract having been deemed conceded by Panasonic, the court did not feel compelled to identify the authority for its seemingly offhand, but controversial, conclusion that “the violation of the Act became the basis of JRS's common law breach of contract claim.” The practical implication of the court's holding is that common law damages are now available to franchisees as a remedy for a statutory violation of the CFRA, even though the statute does not provide for that remedy.

The court concludes its analysis by stating, “[t]he fact that the [CFRA] renders a provision in the agreement void as a matter of law … does not convert a common law claim into a statutory claim.” However, the court appears to have done the exact opposite.

On May 12, 2004 the California Supreme Court declined to review the JRS Products decision.