Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County, No. GIN052421, Michael B. Orfield, Judge.
HALLER, J.
This case arises from the sale of a business that distributes plastic bags (known as "polyethylene bags" or "poly bags") for various commercial and consumer uses. International Poly Bag, Inc. (IPB) purchased the plastic bag business from Mars Liu and Liu's wholly owned business, International Poly Bag and International Polyethylene Products, Inc. (International). The purchase agreement prohibited Liu from competing with IPB for seven years.
Although International may be a distinct legal entity from Liu, this distinction is not material to many of the issues raised on appeal. We thus sometimes refer collectively to these parties as Liu.
Three years after the sale, IPB sued Liu and International, alleging breach of contract and asserting several tort causes of action. International filed a cross-complaint, alleging IPB defaulted on a $160,000 promissory note executed as part of the purchase agreement. International also named IPB's principals, Scott and Janet Neill, as defendants based on their guaranty of the promissory note.
At trial, the court granted Liu's motion for directed verdict on IPB's tort claims. The jury then reached verdicts on the parties' contract claims. On IPB's claim, the jury found Liu breached the contract and IPB incurred damages of $176,361.22. On International's claim, the parties stipulated IPB owed $63,028.52 on the promissory note, but the court agreed with IPB's arguments that International was not entitled to recover this amount based on the jury's findings that Liu breached the purchase contract.
Thus, the court entered judgment in IPB's favor for $176,361.22 plus interest, attorney fees, and costs. The court also issued an injunction prohibiting Liu from engaging in various activities that compete with IPB and/or interfere with IPB's business relationships during the remaining term of the contract.
Both sides appeal. Liu challenges the amount of the damages award and the court's ruling that International was precluded from recovering on the promissory note. We determine the contentions pertaining to the damages award are without merit, but agree the court erred in ruling International was barred from recovering amounts owed on the promissory note. In its appeal, IPB contends the court erred in granting the directed verdict on its tort claims. This contention is without merit.
Accordingly, we reverse the judgment on International's cross-complaint against IPB. Based on this reversal, we reverse the attorney fees and costs award. In all other respects we affirm the judgment.
FACTUAL AND PROCEDURAL SUMMARY
A. Parties Enter into Agreement for Sale of Poly Bag Business
In 2003, Liu sought to sell the assets of his poly bag distribution business, and was contacted by Scott Neill, who expressed interest in purchasing the business. Neill told Liu he was an experienced chief financial officer, but had no experience in running businesses on his own and wanted to purchase a business that would not require his full time attention. Liu assured Neill that the business could be operated with an absentee owner. Liu also showed Neill written documentation that the business had earned an average 35 percent profit margin during the previous three years. Liu told Neill he would continue to work with him after the sale, including to assist Neill in marketing the company throughout the United States. Based on these representations, Neill and his wife decided to purchase the business.
Once a deal was reached, the Neills formed IPB as the entity that would purchase the business. On July 11, 2003, IPB and Liu entered into a written agreement for the purchase of substantially all of the assets of Liu's corporation (Purchase Agreement). The purchase price was $1.1 million, consisting of $840,000 in cash, and two promissory notes ($160,000 and $100,000). As part of the transaction, the parties intended that Liu would assist the Neills in marketing the poly bag product and would not compete with IPB's business, but that Liu could continue his own business selling poly bag products under specified circumstances. To implement this intent, the parties included several provisions in the Purchase Agreement.
First, the Purchase Agreement contained noncompetition and nonsolicitation provisions. Under these provisions, Liu was prohibited from "directly or indirectly" competing with IPB or soliciting the business of IPB's customers or interfering with any similar relationships. These provisions applied for seven years, and barred all competitive activities throughout the United States and Mexico. But the Agreement contained an important exception to these provisions, which allowed Liu to continue to market/sell poly bags, if Liu first presented the opportunity to IPB and IPB rejected the opportunity.
This provision stated: Liu is "permitted to continue to pursue and engage with prospective customers located in the United States and Mexico that are seeking polyethylene bag products for their own use or for distribution, towards the end of gaining their business. During the 7-year term provided for in this Section, when an order is placed by such prospect with [Liu], [Liu] shall, within 48 hours of receiving such order, present the order to [IPB] for [IPB's] acceptance or rejection. [IPB] shall have 24 hours to make its determination and communicate its decision to [Liu]... If [IPB] elects to accept the order, [Liu] agree[s] to ship product to [IPB] as orders are placed by the prospect as if [IPB] were a master distributor for [Liu]."
The Agreement also contained a provision in which Liu agreed to change the name of his corporation (International Poly Bag and International Polyethylene Products, Inc.) to a name that is "sufficiently dissimilar to [International Poly Bag Inc.'s] present name... to avoid confusion." Liu additionally agreed that his family's manufacturing business in China (Shanghai Synergy) would supply IPB with product inventory under the same terms and conditions that Shanghai Synergy had previously supplied the product to Liu and to third parties.
B. Events Occurring After the Sale
Three months after IPB purchased the business, the Neills found the profits were only 20 to 25 percent of total revenue, and not 35 percent as had been represented by Liu. Additionally, although Liu had promised to help Neill in the business, he did not provide assistance or explain the reason for the lower profits. Liu also never changed the name of his former business.
In early 2004, IPB began purchasing poly bags from a manufacturer at a lower cost than the price charged by the Liu family's manufacturing company (Shanghai Synergy). When Liu discovered that IPB was not purchasing the poly bags from Shanghai Synergy, Liu became very angry and upset.
In April or May 2004, Liu had a conversation with Scott Neill, during which Liu expressed strong dissatisfaction that IPB was not ordering the bags from Shanghai Synergy, and stated he intended to start competing with IPB and that Neill "wouldn't be able to prove it." From this conversation, Neill believed Liu was going to try to drive IPB out of business. By September 2004, IPB stopped purchasing any product from Shanghai Synergy.
The next month, Liu began to sell his own poly bags directly to Roplast Industries (Roplast), a customer that had previously purchased bags from Liu. On October 18, Liu sent an e-mail to Roplast, stating that all payments to IPB should be sent to an address, which was Liu's home, rather than to IPB. Thereafter, in 2005, Liu began selling poly bags directly to Roplast, through another one of Liu's businesses called Transamerica Poly & Packaging, without informing IPB of these sales or providing IPB the opportunity to enter into these transactions with Roplast. At trial, IPB presented evidence that the total sales by Liu (and/or his businesses) to Roplast in violation of the agreement were $349,719.22.
During this time, Liu also sold a substantial volume of plastic bags to another company, Unisource Worldwide, Inc. Liu first learned about Unisource through Neill, who gave him this information with the expectation that Liu would bring the customer back to IPB for the sales. However, Liu never told IPB about the Unisource sales or offered IPB the opportunity to participate in the sales. At trial IPB presented evidence that Liu's total sales to Unisource in violation of the agreement were $154,170.
In addition to the sales to Roplast and Unisource, Liu attempted to solicit another customer, Terence Green, the president of National Poly Group, to purchase poly bags directly from Liu's companies. Liu did not mention he was working for (or with) IPB, and instead represented that he was selling the product through his own companies, Ziphouse and Transamerica Poly & Packaging. The proposed sales, however, were never completed because Green returned the bags after discovering they were contaminated with arsenic.
By early 2006, the Neills found they could not keep operating the business because of declining profitability. In March 2006, the Neills sold the business for $380,000. As part of this agreement, the buyer agreed to give the Neills a 10 percent interest in the company, and the Neills agreed to "split" any recovery with the buyer in IPB's lawsuit against Liu. IPB then stopped making monthly payments on the promissory note to Liu.
C. The Lawsuit and Trial
Two months later, IPB sued Liu, alleging breach of contract, numerous tort causes of action, and a violation of Business and Professions Code section 17200. International cross-complained, alleging that IPB owed an outstanding balance on the promissory note and seeking to hold the Neills liable based on their guaranty on the note.
The trial proceeded in three phases. In the first phase, the court "blue-penciled" the noncompetition and nonsolicitation clauses to apply only to competitive activities occurring in California.
In the second phase (the jury trial), the parties presented the evidence summarized above. At the conclusion of the evidence, the court granted a directed verdict on IPB's tort claims. Thus, only the parties' contract claims remained for the jury's determination. On its contract claim, IPB argued that Liu violated the Purchase Agreement by engaging in sales transactions with Roplast and Unisource without first offering these sales opportunities to IPB. IPB sought damages reflected by the profits IPB would have earned if it had sold the products to Roplast and Unisource. As explained in more detail below, IPB argued that it would have earned a net profit of 20 to 25 percent or 35 percent of the total Roplast/Unisource sales revenue ($503,889.22). IPB also argued that Liu violated the Purchase Agreement by failing to change the name of his corporation, but did not specifically seek additional damages resulting from this breach.
IPB also did not present evidence, or seek damages, based on an argument that Liu was responsible for the reduced value of the company as reflected by the difference between the purchase price in 2003 ($1.1 million) and the selling price in 2006 ($380,000).
With respect to the cross-complaint, the parties stipulated that IPB owed $63,028.52 on one of the promissory notes. IPB argued, however, it was not liable to pay this amount because of Liu's material breaches of the Purchase Agreement. As will be discussed below, the court agreed with this argument and instructed the jury accordingly.
After instructions and closing argument, the jury returned a verdict on the parties' contract claims. On IPB's claim, the jury found Liu breached the contract and that IPB's damages were $176,361.22, which was equivalent to 35 percent of the total revenue earned from the Roplast/Unisource sales. On the cross-complaint, the jury found Liu did not prove he did "all, or substantially all, of the significant things that the contract required [him] to do," and that he was not excused from complying with the contract. Based on these findings and according to the court's instructions, the jury returned this verdict without reaching the question whether IPB breached its obligations under the note or the amount of damages for the breach.
During the final phase of the trial, the court held a bench trial on IPB's claim that Liu violated Business and Professions Code section 17200. The court found IPB did not prove this claim, but enjoined Liu from any further violations of the Purchase Agreement's noncompetition and nonsolicitation provisions for the remaining term of the contract, and ordered Liu to change the name of his business to a name "sufficiently dissimilar" to IPB's name.
DISCUSSION
I. Liu's Challenges to Damages Award
A. Damages Measure
Liu contends the jury verdict must be reversed because the jury applied the wrong measure of damages. Specifically, Liu argues the jury improperly measured the damages by the gain to the seller, rather than the loss to the buyer.
Before addressing this contention, it is important to identify the issues that Liu does not dispute for purposes of asserting this argument. First, Liu does not challenge that the evidence supports he breached the contract by engaging in the transactions with Unisource and Roplast, and that he received a total amount on these sales of $503,889.22 that otherwise should have gone to IPB. He also does not challenge that lost profits is a proper measure of the damages for these breaches, and that IPB was entitled to recover the amounts it would have earned if IPB had sold the product to these customers. Liu additionally concedes that the jury was properly instructed on lost profits damages.
This instruction read: "To recover damages for lost profits, [IPB] must prove that it is reasonably certain it would have earned profits but for [Liu's] breach of the contract. [¶] [Y]ou must determine the gross, or total, amount [IPB] would have received if the contract had been performed and then subtract from that amount the costs [IPB] would have had if the contract had been performed. [¶] You do not have to calculate the amount of the lost profits with mathematical precision, but there must be a reasonable basis for computing the loss."
Liu's sole argument instead is that the jury improperly measured the damages solely by the gain to the seller, rather than the loss to the buyer. We agree that generally this measure is improper. (See Gregory v. Spieker (1895) 110 Cal. 150, 155.) But the record does not support that the jury applied this measurement.
The court specifically instructed the jury it was required to determine the amount of IPB's loss by determining the total amount IPB would have received and subtracting the total amount of IPB's costs, if the contract had been performed. Liu concedes this instruction directed the jurors "to base their calculation on the amount '[IPB] would have received', not what LIU would have received." (Italics added.) Thus, the instruction properly informed the jury that it was to focus on the plaintiff's damages and not the defendant's profits.
Absent evidence to the contrary, we are required to presume the jury followed the court's instruction. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 803-804.) Liu nonetheless contends the jury must have disregarded this instruction and awarded the amount of Liu's profits because the damage award is equivalent to 35 percent of the total amount of revenue earned by Liu from the Roplast and Unisource sales. In asserting this argument, Liu ignores that evidence of the amount of profits earned by a breaching party may be relevant and admissible to show the amount of profits the plaintiff would have earned if there had not been a breach. (See Gregory v. Spieker, supra, 110 Cal. at p. 155.) Evidence relevant to a lost profits determination may include the historical performance of the business and/or the profits of similar enterprises. (See Kids' Universe v. In2Labs (2002) 95 Cal.App.4th 870, 886.)
During closing arguments, IPB's counsel explained that mathematical precision was not necessary, and that based on the evidence the jury could award 20 to 25 percent (IPB's average profit earned) or 35 percent (the average profit earned by Liu before he sold the business) of the total Roplast/Unisource sales amount. In urging the jury to adopt the 35 percent figure, counsel did not suggest the figure was proper solely because it was the percentage of profits earned by Liu. Instead, IPB's counsel argued that this figure was appropriate because IPB would have earned this same amount if Liu had not breached the contract in numerous ways. IPB's counsel emphasized that this 35 percent figure was appropriate because the costs of supplying the poly bag product to Unisource and/or Roplast would have been the same as the cost to Liu (based, in part, on Liu's contractual agreement to supply the product to IPB at his same cost). In response, Liu's counsel argued the jury could not apply the 35 percent figure because the evidence did not support that IPB had ever earned this amount. The jury found IPB's evidence and argument more persuasive and the damages awarded reflects that it adopted the 35 percent figure.
Based on the jury instructions and counsels' arguments, we are required to presume the jury understood the logical relevance of the 35 percent figure and did not apply an improper damage measure.
Liu alternatively challenges the sufficiency of the evidence to show that IPB would have earned the same amount of profits on the Roplast and Unisource sales as the profits earned by Liu. However, this contention is waived. The challenge reflects an argument that the damages were excessive because there was no evidence to support that IPB's profits would have been equivalent to Liu's profits or that IPB otherwise would have earned 35 percent profit. Liu waived the issue by failing to raise this excessiveness of damages argument in a new trial motion. (Schroeder v. Auto Driveaway Co. (1974) 11 Cal.3d 908, 918-919 & fn. 7; Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 122.)
Liu argues that his failure to move for a new trial did not constitute a waiver because his challenge to the damage amount did not turn on conflicting evidence, or other factual questions. We disagree. The issue as to the percentage of profits that IPB would have earned from the Roplast and Unisource sales was a factual issue dependent on the credibility of witnesses and an evaluation of conflicting facts. (See County of Los Angeles v. Southern Cal. Edison Co. (2003) 112 Cal.App.4th 1108, 1121-1122.) Thus, Liu waived the issue by failing to raise it in a motion for a new trial.
In any event, on our review of the record, there was substantial evidence to support the amount of the damage award. California has long recognized "the general principle that damages for the loss of prospective profits are recoverable where the evidence makes reasonably certain their occurrence and extent." (Grupe v. Glick (1945) 26 Cal.2d 680, 693; see Sanchez-Corea v. Bank of America (1985) 38 Cal.3d 892, 907.) It is enough to demonstrate a reasonable probability that profits would have been earned except for the defendant's conduct. (Kerner v. Hughes Tool Co. (1976) 56 Cal.App.3d 924, 937, accord Maggio, Inc. v. United Farm Workers (1991) 227 Cal.App.3d 847.) Moreover, where " 'the fact of damages is certain, the amount of damages need not be calculated with absolute certainty. [Citations.] The law requires only that some reasonable basis of computation of damages be used, and the damages may be computed even if the result reached is an approximation.'..." (Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1585, italics omitted.)
Under these principles, sufficient evidence supported the jury's finding that IPB would have earned 35 percent profit from the Roplast/Unisource sales. The evidence showed the 35 percent profit figure represented Liu's average profit from 1999 to 2002. Although IPB did not experience these same profit margins, the record supports that Liu's other breaches of the contract — including his failure to assist Liu in marketing the business and in repeatedly violating the noncompetition provisions — caused IPB to experience the lower profit rate. Additionally, the jury could have found that because Liu used numerous aliases and various international bank accounts and e-mails, it was probable that he had improperly diverted other sales from IPB and that there was a basis to give IPB the benefit of the doubt in selecting a reasonable damage estimate. Liu argues, as he did at trial, that the lower profit figure was caused by IPB's actions in reducing the compensation of his independent contractors, rather than Liu's actions. However, the jury necessarily rejected this factual argument when it found in favor of IPB.
Liu also relies on the rule that a party should "present 'the best evidence... [of damages] of which the nature of the case is capable.' " (See S. C. Anderson, Inc. v. Bank of America (1994) 24 Cal.App.4th 529, 538.) However, Liu did not request the jury to be so instructed, and the question whether IPB's evidence was the "best evidence" is a factual question. Moreover, it is not clear this rule applies to a lost profit damages calculation where, as here, the defendant's conduct caused the uncertainty as to the precise amount IPB would have earned.
As an appellate court, we must accept all factual inferences supporting the verdict, and cannot reweigh the evidence. (San Diego Metropolitan Transit Development Bd. v. Handlery Hotel, Inc. (1999) 73 Cal.App.4th 517, 528.) Based on the entire record, the jury could reasonably conclude IPB would have earned 35 percent profit on the sales if Liu had not breached the contract by failing to cooperate with the Neills and by engaging in sales and marketing activities that were prohibited by the parties' agreement.
B. Gross v. Net Profits
In a related argument, Liu argues the jury used an improper measure of damages by awarding "gross profits," rather than "net profits."
It is commonly understood that profits, by definition, represent a net figure, i.e., total revenue minus total costs. (See Webster's Collegiate Dict. (10th ed. 1999) p. 931 [defining profits to mean "the excess of returns over expenditure" or the "net income usu[ally] for a given period of time"].) But for purposes of this argument, Liu relies on a definition of "gross profits" that refers to an amount of profits from sales before certain business operation costs are deducted: " ' "Net profits are the gains made from sales 'after deducting the value of the labor, materials, rents, and all expenses, together with the interest of the capital employed.' [Citation.]" ' [Citation.]" (Resort Video, Ltd. v. Laser Video, Inc. (1995) 35 Cal.App.4th 1679, 1700; accord Electronic Funds Solutions, LLC v. Murphy (2005) 134 Cal.App.4th 1161, 1180.) Defining the terms in this way, the courts have recognized that the proper measure of lost profits recovery is " 'net profits, not gross profits.' " (Electronic Funds Solutions, supra, 134 Cal.App.4th at p. 1180; Gerwin v. Southeastern Cal. Assn. of Seventh Day Adventists (1971) 14 Cal.App.3d 209, 222.)
In this case, the evidence does not support Liu's argument that the jury awarded gross, rather than net, profits. First, Liu concedes the jury was properly instructed on the net profit concept, i.e., that to calculate lost profits, the jury should first determine the gross amount of revenue IPB would have received absent the competition, "and then subtract from that amount the costs IPB would have had if the contract had been performed." To the extent Liu believed a more specific explanation of gross versus net profits was needed, he could have asked the court to instruct the jury.
Moreover, there is nothing in the record supporting a conclusion that the jury disregarded this instruction and applied a gross (rather than net) profit measure. Both counsel made clear to the jurors that IPB was entitled to recover only the net lost profits, i.e., the amount it would have earned if it had sold the product to Roplast and Unisource, after deducting all costs to the business. The evidence also supported that the 35 percent figure was a net — rather than a gross — profit amount. Liu testified that the 35 percent profit was an "average" amount of profits his company had earned during the three-year period before he sold the business to IPB. There is nothing to indicate that Liu did not subtract all business costs in calculating this 35 percent figure.
To support his argument that the jury used the wrong measurement, Liu cites to a portion of Neill's testimony in which he discussed his understanding of Liu's written representations before the sale was made. Viewed in context, Neill's testimony does not establish the 35 percent figure necessarily referred to gross rather than net profits.
In asserting his "net profit versus gross profit" argument, Liu identifies only one cost item that he says was not properly considered by the jury. Liu cites an April 2004 e-mail in which Neill confirmed that IPB would pay Liu "50% of the gross profit (Sales less product cost, freight, duty and any other directly related costs) on sales for which you are solely responsible." However, this evidence does not support that IPB would have necessarily been required to pay this 50 percent commission to Liu on the Roplast/Unisource sales. Based on the record, the jury could have found that Liu was not "solely responsible" for these sales. For example, the evidence showed that Neill was the party who originally referred Unisource to Liu.
Based on our conclusion that the record does not support that the jury awarded "gross," rather than "net" profits, we need not reach Liu's argument pertaining to the fixed cost exception to the gross profits rule. (See Automatic Vending Co. v. Wisdom (1960) 182 Cal.App.2d 354, 358; Tomlinson v. Wander Seed & Bulb Co. (1960) 177 Cal.App.2d 462, 474.)Moreover, to the extent Liu believed the estimated profit percentages did not include business operation costs and/or that these costs were not fixed, he had every opportunity to present this evidence to the jury.
C. Excessive Damages Based on Sales Made to Roplast
Liu also contends the award was excessive because a certain amount of revenues that IPB claimed were received by Liu (about $24,000) were actually sent directly to IPB, and "[t]herefore, the award was excessive by $11,691.99." Because Liu is arguing that the damages were excessive, the argument was waived because Liu did not assert the contention in a motion for new trial. (Schroeder v. Auto Driveaway Co., supra, 11 Cal.3d at pp. 918-919.)
II. International's Challenges to Court's Ruling on Cross-Complaint
International contends the court erred in ruling it was barred as a matter of law from recovering the balance owed on the promissory note because the jury found Liu breached the Purchase Agreement. We agree with this contention.
The cross-complaint was brought solely by Liu's company (International).
A. Factual Background
In purchasing the business, Mr. Neill (on behalf of IPB) executed the Purchase Agreement and two separate promissory notes. The $160,000 note at issue here required IPB to pay monthly installments of $2,387 to Liu from August 2003 through July 10, 2010.
Shortly before IPB filed the lawsuit, IPB stopped making the monthly payments on the $160,000 promissory note. In its cross-complaint, International sought to recover the outstanding amounts owed on the note plus interest. At trial, the parties stipulated that the principal balance on the note was $63,028.52, and that under the note terms, International had the right to call this amount due based on a default.
Over Liu's objection, the court instructed the jury that to recover amounts owed on the promissory note, International was required to prove Liu substantially complied with the Purchase Agreement. On the special verdict form, the jury found Liu did not substantially comply and was not excused from this compliance. Based on these findings, the court ruled International could not recover on its cross-complaint for amounts due on the promissory note.
During the third phase of the trial, the court, on its own motion, expressed concern with the propriety of this ruling. The court stated: "I think my decision on the cross-complaint has invited some error. I can't let go of the issue that a jury has decided that the defendant breached the contract and therefore owes $100,000 plus and yet the plaintiff doesn't have to pay the agreed sales price for the company. [¶]... [¶]... I don't find any basis in the law whatsoever that the plaintiff would get not only fully reimbursed for a breach of contract, but also would be somehow off the hook for paying on the note to purchase the company.... [¶]... I invite you to take a look at this closely... [¶]... [¶]... I believe a set-off... would be appropriate under the circumstances to remove that issue as far as appeal is concerned."
Despite these comments, the court denied Liu's motion for a judgment notwithstanding the verdict, which included an argument that the court's ruling on the cross-complaint was legally erroneous because it resulted in an improper double recovery for IPB.
B. Analysis
International contends the court erred in ruling it was barred from recovering on the cross-complaint. International maintains the parties' promises were independent covenants and therefore the breach of the Purchase Agreement did not legally excuse IPB's failure to pay the amount due on the note. The argument is a correct statement of California law.
When covenants are independent, each party has the obligation to continue to perform the contract even in the face of a breach. (Verdier v. Verdier (1955) 133 Cal.App.2d 325, 334.) The nonbreaching party then has the option of suing for damages, or rescinding the contract and returning the parties to status quo. Generally, the issue whether promises are independent depends on the intent of the parties. (Medico-Dental etc. Co. v. Horton & Converse (1942) 21 Cal.2d 411, 419; Verdier, supra, at p. 334; Starr v. Davis (1930) 105 Cal.App. 632 (Starr).) The law favors a construction that covenants are independent, and not conditions precedent, to prevent a forfeiture and to avoid inequitable results. (See Helzel v. Superior Court (1981) 123 Cal.App.3d 652, 663; 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 812, p. 906.)
Under these principles, the courts long ago recognized that a breach of a promise not to compete is an independent covenant and does not excuse the other party from fulfilling its promise to pay amounts owed on a promissory note. (Starr, supra, 105 Cal.App. 632.) In Starr, the buyer purchased a florist business, and paid in part with a promissory note. (Id. at p. 633.) When the buyer stopped paying on the note, the seller sued the buyer to recover the balance due. (Ibid.) The buyer admitted he owed a balance on the note, but argued the seller's violation of a noncompetition provision in the purchase agreement excused any further obligation on the note. (Ibid.) The reviewing court rejected this argument. (Id. at pp. 634-636.) First, the court noted that the effect of the seller's argument "would be to say that as a penalty for [the seller's] breach, [the buyer] might keep the business without paying therefor.... Such is not the law." (Id. at pp. 634-635.) The court additionally found the fact that the promises were to be performed at different times (one year for the payment on the note; two years for the promise not to compete) reflected that the parties did not intend a breach of the noncompete agreement would excuse the buyer's obligations on the note. (Id. at pp. 635-636.)
Here, as in Starr, the promissory note reflected a promise to pay the purchase price of the business in installments over time. There is nothing in the note showing that those payments are dependent on any particular promises made in the Purchase Agreement. To the contrary, under the terms of the note, Liu had the right to declare the entire unpaid balance immediately due and payable upon receipt of written notice of a default. Although the parties incorporated the promissory note in the Purchase Agreement, the promissory note was an independent agreement that the purchase price could be paid over time at an agreed interest rate. There is nothing in this agreement reflecting an intent that IPB was entitled to stop making the payments at whatever point it believed there was a breach of the noncompetition provision of the Purchase Agreement.
IPB argues this case is distinguishable from Starr because "the term of the [promissory note] and the duration of the covenant not to compete are identical — 7 years." However, Starr was not based solely on the fact that the promise not to compete applied for a two-year period whereas the note was to be paid after one year. Although the court found these provisions to be relevant to its intent analysis, the essence of the court's holding was its view that it would be unjust to permit the buyer of the business to continue to operate the business and receive damages for a breach of the agreement, but have no obligation to pay the balance of the purchase price. (Starr, supra, 105 Cal.App. at pp. 634-636.)
We reach a similar conclusion in this case. Liu delivered full possession and title to the business which IPB then owned and operated for years. IPB was awarded lost profit damages for the sales it lost because of Liu's breach of the noncompetition/nonsolicitation provisions. IPB also sought and obtained an injunction that requires Liu to abide by the terms of the Purchase Agreement during the seven-year contractual period, including prohibiting Liu from competing with IPB's business, and requiring Liu to change the name of his business or to dissolve his business. Because this judgment affirms the continuing validity of the contract and legally binds Liu to comply with these terms, IPB is equally bound to perform its part of the bargain and pay the amount owed on the note. Any other conclusion would give IPB an arbitrary windfall that bears no connection to its claimed damages. The parties could not have intended this result.
In reaching this conclusion, it is important to understand that IPB did not seek to rescind the contract based on a material breach. A rescission action is "an action to recover any money or thing owing to him by any other party to the contract" (Civ. Code, § 1692), and is dependent on a showing that the plaintiff restored the benefits received under the contract. (Civ. Code, § 1691, subd. (b).) A rescission extinguishes the contract. (Civ. Code, §§ 1688, 1691.) "Rescission not only terminates further liability but restores the parties to their former position by requiring each to return whatever he or she received as consideration under the contract, or, where specific restoration cannot be had, its value." (1 Witkin, Summary of Cal. Law, supra, Contracts, § 926, p. 1023; see Nmsbpcsldhb v. County of Fresno (2007) 152 Cal.App.4th 954, 959; Joshua Tree T. Co. v. Joshua Tree L. Co. (1950) 100 Cal.App.2d 590, 596.) Thus, if IPB proved a rescission claim, it would have been entitled to terminate its payment obligations, but would not have any continuing right to the business.
IPB did not seek this relief, and instead sought to affirm and enforce the agreement by obtaining damages for Liu's breaches of the agreement and an order requiring Liu to continue to comply with the contractual obligations. In its judgment, the court affirmatively endorsed these continuing contractual obligations and ordered injunctive relief requiring Liu to perform his part of the bargain. Because the contract was not cancelled, IPB is legally obligated to comply with its promises to pay the balance of the purchase price for the business.
IPB argues it is not liable to pay the promissory note because the jury may have found Liu breached other provisions of the Purchase Agreement, such as the clause requiring Liu to change the name of his business or the requirement that Liu cooperate with IPB after the sale of the business. However, IPB presented no evidence that these additional contractual provisions were intended to be conditions precedent to IPB's promise to make the monthly payments on the promissory note. Additionally, at trial IPB did not assert a defense to the cross-complaint on the basis that these additional breaches reduced the value of the business and therefore it had no obligation to pay the balance of the note. Instead, the only issue raised was the legal question of whether International was entitled to recover at all for amounts owed on the promissory note despite Liu's breach of the Purchase Agreement.
The cases relied upon by IPB are factually inapposite and not helpful to its position. (See Kane v. Sklar (1954) 122 Cal.App.2d 480, 481-483 [defendant was not required to pay money under the contract after plaintiff voluntarily withdrew from contract]; DeGarmo v. Goldman (1942) 19 Cal.2d 755, 759-769 [claim for equitable relief and not for breach of contract].)
III. Cross-Appeal: Directed Verdict
IPB contends the court erred in granting a directed verdict on each of its tort causes of action: (1) intentional misrepresentation; (2) intentional interference with prospective economic advantage; (3) negligent interference with prospective business relationships; and (4) intentional interference with contract.
A. Review Standards
" 'A directed verdict may be granted, when, disregarding conflicting evidence, and indulging every legitimate inference which may be drawn from the evidence in favor of the party against whom the verdict is directed, it can be said that there is no evidence of sufficient substantiality to support a verdict in favor of such party, if such a verdict has been rendered.' " (Newing v. Cheatham (1975) 15 Cal.3d 351, 358-359; Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107, 1119.) The judgment must be reversed if the party resisting the motion produced sufficient evidence to support a jury verdict. (McMahon v. Albany Unified School Dist. (2002) 104 Cal.App.4th 1275, 1282.) An appellate court reviews the trial court ruling granting a directed verdict de novo. (Magic Kitchen LLC v. Good Things Internat., Ltd. (2007) 153 Cal.App.4th 1144, 1154.) Applying these principles, we evaluate whether there was evidence supporting each alleged tort cause of action.
B. Intentional Misrepresentation
In its intentional misrepresentation claim, IPB alleged Liu falsely promised he would comply with the noncompetition and nonsolicitation provisions in the Purchase Agreement. IPB alleged Liu knew this promise was false and/or made the representation recklessly; Liu made the representation with the intent to defraud IPB; and IPB justifiably relied on the representation in entering into the Purchase Agreement.
Although IPB presented evidence to show that Liu made other alleged false promises, IPB relies solely on the promise not to compete to support its intentional misrepresentation claim.
IPB's claim that Liu made a promise with no intent to abide by the promise asserts a promissory fraud cause of action. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) To recover on a promissory fraud claim, the plaintiff must prove the defendant did not intend to perform the promise at the time it was made. (Ibid.) To meet this burden, the plaintiff must show more than mere nonperformance. (See Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 30-31; Conrad v. Bank of America (1996) 45 Cal.App.4th 133, 157.) As the California Supreme Court has stated: " '[S]omething more than nonperformance is required to prove the defendant's intent not to perform his promise.' [Citations.] To be sure, fraudulent intent must often be established by circumstantial evidence.... [F]raudulent intent has been inferred from such circumstances as defendant's insolvency, his hasty repudiation of the promise, his failure even to attempt performance, or his continued assurances after it was clear he would not perform.... However, if plaintiff adduces no further evidence of fraudulent intent than proof of nonperformance of an oral promise, he will never reach a jury." (Tenzer, supra, 39 Cal.3d at pp. 30-31.)
As evidence of Liu's intent not to abide by his noncompetition promise, IPB asserts Liu's breach of the promise was "instant." An immediate breach of a promise can be circumstantial evidence of an intent not to perform a promise. (See Tenzer, supra, 39 Cal.3d at p. 30.) However, IPB did not produce evidence showing Liu immediately breached the promise not to compete. Instead, IPB's evidence shows that Liu's decision to violate the noncompetition provision was first triggered in April or May 2004 by IPB's decision to purchase the poly bag product from a different manufacturer. IPB then made several more purchases from Liu's manufacturing company, but stopped all orders in September 2004. It was not until the next month, October 2004, that Liu began engaging in solicitation/competition activities prohibited by the contract (by sending an e-mail to Roplast to send payments to his home address). These activities, occurring more than 15 months after the parties entered into the Purchase Agreement, do not show that Liu did not intend to abide by the agreement at the time he signed it.
IPB alternatively argues evidence of Liu's intent not to perform can be inferred from his failure to change the name of his business despite Neill's repeated requests that he do so. However, there was no evidence showing a logical connection between the failure to change the name of the business and Liu's promise to abide by the noncompetition provisions. The name of Liu's corporation was "International Poly Bag and International Polyethylene Products, Inc." IPB presented no evidence that Liu used this name to compete with IPB or to confuse potential customers. On the contrary, the evidence showed Liu used IPB's name itself (in requesting that Roplast send IPB's checks to Liu's home address) and Liu's other business names, Transamerica Poly & Packaging and Ziphouse. With respect to IPB's name, the evidence showed that Liu was entitled to use this name because he was authorized to represent IPB in marketing the product for the Neills. Additionally, IPB presented no evidence or argument that the other names that Liu used to compete with IPB's business (Transamerica Poly & Packaging and Ziphouse) caused any confusion.
On our review of the entire record, we agree with the trial court that IPB failed to produce any evidence that Liu did not intend to abide by his promises not to compete when he made them. Therefore, an essential element of the intentional misrepresentation claim was missing. The court properly granted a directed verdict on this claim.
Based on this conclusion, we do not reach the court's alternate basis for its directed verdict ruling on this claim, pertaining to the lack of evidence showing fraud damages.
C. Intentional Interference Claim
The trial court granted a directed verdict on IPB's intentional interference with prospective economic advantage claim based on its finding there was no evidence to support that Liu's interference was independently wrongful. IPB contends the court erred in reaching this conclusion.
To state a claim for intentional interference with economic advantage, a plaintiff must show "the defendant's interference was wrongful 'by some measure beyond the fact of the interference itself.' " (Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392-393.) An "act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard." (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1159; see also Della Penna, supra, 11 Cal.4th at p. 408 (conc. opn. of Mosk, J.).)
In attempting to satisfy this standard, IPB states that "in this case the wrongful acts which were independent of the interference itself consist of [Liu's] entire scheme of wrongfully competing against [IPB] by stealing [IPB's] sales and customers, diverting payments to [Liu], and attempting to conceal all of that from [IPB] through a willful pattern of continuous, deceitful conduct."
These activities, however, merely describe the facts underlying the breach of contract claim. A defendant's conduct that is wrongful because it breaches the parties' contract cannot, as a matter of law, support the independently wrongful element of an interference claim. (See JRS Products, Inc. v. Matsushita Electric Corp. of America (2004) 115 Cal.App.4th 168, 179-183; PAI Corp. v. Integrated Sci. Solutions, Inc. (N.D. Cal. 2009) 73 Fed. R. Serv.3d (Callaghan) 481.) Otherwise, any breach of contract claim would be "transmuted into tort liability by claiming that the breach interfered with the promisee's business." (JRS Products, supra, 115 Cal.App.4th at p. 183.) Under California law, if the alleged wrongful conduct is essentially a breach of contract, the conduct does not provide the basis for tort liability on a claim for interference with prospective economic advantage. (JRS Products, supra, 115 Cal.App.4th at pp. 179-183; see PAI Corp., supra; First Advantage Background Services Corp. v. Private Eyes, Inc. (N.D. Cal. 2007) 2007 U.S. Dist. LEXIS 67941.)
IPB argues Liu's actions were independently wrongful because they consisted of "stealing customers" or acting "through a willful pattern of continuous, deceitful conduct." However, these actions were wrongful because they constituted a breach of the Purchase Agreement. For example, the fact that Liu did not tell IPB of his deals with Roplast and Unisource (acted in a "deceitful manner") and engaged in transactions with Unisource after Neill identified Unisource as a potential buyer ("stole" IPB's customers) are not independent tortious or criminal acts. Generally a business has no duty to disclose its transactions to another competitor and may seek to persuade customers to transfer their business. Liu's "secretive" or "deceptive" behavior was wrongful because the Purchase Agreement prohibited Liu from engaging in this conduct.
In its reply brief, IPB contends the independent wrongfulness element was established by evidence that Liu affirmatively committed fraud: "Liu misrepresented the profit margins of the business, the existing competition, and his willingness to change the name of his own business." However, none of these alleged statements was the means by which IPB alleged that Liu interfered with IPB's prospective relations with its customers. Thus, they cannot establish the wrongfulness element.
IPB also relies on Neill's April/May 2004 conversation with Liu in which Liu expressed frustration that IPB was not purchasing bags from Shanghai Synergy and that Liu intended to compete with IPB and destroy IPB's business. IPB argues that this conversation constituted "intimidation" and thus was "wrongful." However, again this conversation was not the means by which Liu allegedly interfered with IPB's prospective business relations; instead it was merely evidence that Liu intended to breach the contract.
Finally, IPB relies on Liu's October 2004 e-mail to Roplast asking the company to send IPB payments to his home address, and argues this evidence constituted "deceit" and thus was independently wrongful. However, the evidence showed the payments sent by Roplast were compensation for poly bag products sold by Liu to Roplast. Thus, the e-mail communication was a means by which Liu breached the contract and did not constitute an independent wrongful act. Additionally, although IPB argued the e-mail reflects an attempt to "steal" money from IPB, the evidence showed that Liu sent the e-mail as part of his scheme to sell his own product to Roplast (and thus breach the noncompetition provision), rather than to redirect money that should have gone to IPB.
IPB presented no evidence of an independent wrongful act by Liu. Thus, the trial court correctly dismissed the intentional interference with economic advantage cause of action.
D. Negligent Interference Claim
The court also granted a directed verdict on IPB's claim that Liu negligently interfered with its prospective business relations. The court's ruling was proper. This claim fails for the same reason as the intentional interference cause of action. As with the intentional interference claim, a plaintiff must prove the independently wrongful element. (Lange v. TIG Ins. Co. (1998) 68 Cal.App.4th 1179, 1187.) For the reasons discussed above, IPB did not satisfy this requirement.
E. Intentional Interference with a Contract
The trial court granted a directed verdict on IPB's claim for intentional interference with contract based on its conclusion there was "no evidence that [Liu's] conduct prevented [IPB] from performing under a particular contract with a third party or made it more expensive or difficult."
In its opening brief, IPB mentions the court's dismissal of this claim, but does not set forth the court's ruling or provide any basis for a contention that the court erred in granting the directed verdict on this claim. Thus, IPB waived any challenge to the court's ruling. (See Landry v. Berryessa Union School Dist. (1995) 39 Cal.App.4th 691, 699-700.) Although IPB discusses the issue in its reply brief, arguments raised for the first time in a reply brief are generally waived. (See American Drug Stores, Inc. v. Stroh (1992) 10 Cal.App.4th 1446, 1453.)
Moreover, even if we were to reach the issue, we find IPB's arguments asserted in its reply brief to be without merit. IPB acknowledges that to prove an intentional interference with contract claim, a plaintiff must show that the defendant interfered with a valid and enforceable contract between the plaintiff and a third party. (See Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55.)
To establish the valid and enforceable contract, IPB cites to a trial exhibit which is an e-mail from Neill to Liu, stating "IPB will accept Roplast as a customer upon presentation to Mark of copies of Roplast's purchase orders. Please provide the data needed to invoice Roplast upon shipment of product." IPB also cites to Liu's trial testimony that Roplast began to purchase bags from IPB after that e-mail. This evidence does not establish a valid and enforceable contract between IPB and Roplast. At most it shows IPB agreed to supply Roplast with bags under any future purchase order. This understanding between IPB and Roplast does not show an enforceable contract between these parties.
IV. Attorney Fees and Costs
The court found IPB was the prevailing party and awarded IPB attorney fees and costs. Based on our reversal of the judgment on the cross-complaint, the trial court will be required to reevaluate these awards. Thus, we reverse the attorney fees and costs award, and remand for the court to reconsider the awards. This reversal does not reflect any opinion on the merits of the award, or whether any modifications are necessary.
DISPOSITION
We reverse the judgment on the cross-complaint and the attorney fees and cost award, and remand for proceedings consistent with this opinion. We affirm the judgment in all other respects. The parties to pay their own costs on appeal.
WE CONCUR: NARES, Acting P. J., McINTYRE, J.