Broussard v. Meineke Discount Muffler Shops, Inc.

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

KELLY BROUSSARD; JIM STEPHENS;

MARK ZUCKERMAN; ARNOLD FISCHTHAL;

JOHN HAGAR; VINCENT MATERA; DENIS

WICKHAM; MARY ANN WICKHAM;

KENEX CORPORATION; RALPH YARUSSO,

Plaintiffs-Appellees,

v.

MEINEKE DISCOUNT MUFFLER SHOPS,

INCORPORATED; NEW HORIZONS

ADVERTISING, INCORPORATED; GKN

PARTS INDUSTRIES; GKN, plc; RONALD

SMYTHE; GENE ZHISS; TED PEARCE,

Defendants-Appellants,

and

MICHIGAN FRANCHISEES, which consists

No. 97-1808

of: Peter D. Beyer, Ronald S. Slack,

Susan I. Slack, Sherman J. Radford,

Jayne Radford, William J. Varney,

Sr., William J. Varney, Jr., Sher-Jay

and Sons, Incorporated, and

M.A.T.M., Incorporated,

Defendant.

ATL INTERNATIONAL, INCORPORATED;

BLIMPIE INTERNATIONAL, INCORPORATED;

BURGER KING CORPORATION; DOCTOR'S

ASSOCIATES, INCORPORATED;

FOODMAKER, INCORPORATED; GOLDEN

CORRAL CORPORATION; HARDEE'S FOOD

SYSTEMS, INC.; INTERNATIONAL DAIRY

QUEEN, INCORPORATED; MCDONALD'S

CORPORATION; MOBIL OIL CORPORATION;

THE SOUTHLAND CORPORATION;

SECRETARY OF COMMERCE OF THE

STATE OF NORTH CAROLINA; AMERICAN

COUNCIL OF LIFE INSURANCE; SECURITIES

INDUSTRY ASSOCIATION; BRITISH

AMERICAN BUSINESS COUNCIL OF NORTH

CAROLINA, INCORPORATED; AMERICAN

ASSOCIATION OF FRANCHISEES AND

DEALERS; AMERICAN FRANCHISEE

ASSOCIATION; SAL LOBELLO; GOODWIN

MANAGEMENT GROUP, INC.; STEVEN D.

LOYE FAMILY LIMITED PARTNERSHIP;

PS&F ENTERPRISES INC.; STEPHEN

PARASCONDOLA; ROBERT OTT,

Amici Curiae.

KELLY BROUSSARD; JIM STEPHENS;

MARK ZUCKERMAN; ARNOLD FISCHTHAL;

JOHN HAGAR; VINCENT MATERA; DENIS

WICKHAM; MARY ANN WICKHAM;

KENEX CORPORATION; RALPH YARUSSO,

Plaintiffs-Appellants,

v.

No. 97-1848

MEINEKE DISCOUNT MUFFLER SHOPS,

INCORPORATED; NEW HORIZONS

ADVERTISING, INCORPORATED; GKN

PARTS INDUSTRIES; GKN, plc; RONALD

SMYTHE; GENE ZHISS; TED PEARCE,

Defendants-Appellees,

and

2

MICHIGAN FRANCHISEES, which consists

of: Peter D. Beyer, Ronald S. Slack,

Susan I. Slack, Sherman J. Radford,

Jayne Radford, William J. Varney,

Sr., William J. Varney, Jr., Sher-Jay

and Sons, Incorporated, and

M.A.T.M., Incorporated,

Defendant.

ATL INTERNATIONAL, INCORPORATED;

BLIMPIE INTERNATIONAL, INCORPORATED;

BURGER KING CORPORATION; DOCTOR'S

ASSOCIATES, INCORPORATED;

FOODMAKER, INCORPORATED; GOLDEN

CORRAL CORPORATION; HARDEE'S FOOD

SYSTEMS, INC.; INTERNATIONAL DAIRY

QUEEN, INCORPORATED; MCDONALD'S

CORPORATION; MOBIL OIL CORPORATION;

THE SOUTHLAND CORPORATION;

SECRETARY OF COMMERCE OF THE

STATE OF NORTH CAROLINA; AMERICAN

COUNCIL OF LIFE INSURANCE; SECURITIES

INDUSTRY ASSOCIATION; BRITISH

AMERICAN BUSINESS COUNCIL OF NORTH

CAROLINA, INCORPORATED; AMERICAN

ASSOCIATION OF FRANCHISEES AND

DEALERS; AMERICAN FRANCHISEE

ASSOCIATION; SAL LOBELLO; ROBERT

OTT; STEPHEN PARASCONDOLA; PS&F

ENTERPRISES INC.; STEVEN D. LOYE

FAMILY LIMITED PARTNERSHIP; GOODWIN

MANAGEMENT GROUP, INC.,

Amici Curiae.

Appeals from the United States District Court

for the Western District of North Carolina, at Charlotte.

Robert D. Potter, Senior District Judge.

(CA-94-255-3-P)

3

Argued: May 5, 1998

Decided: August 19, 1998

Before WILKINSON, Chief Judge, and ERVIN and

MICHAEL, Circuit Judges.

_________________________________________________________________

Reversed and remanded by published opinion. Chief Judge Wilkinson

wrote the opinion, in which Judge Ervin and Judge Michael joined.

_________________________________________________________________

COUNSEL

ARGUED: Kenneth Winston Starr, KIRKLAND & ELLIS, Wash-

ington, D.C., for Appellants. Charles Justin Cooper, COOPER &

CARVIN, P.L.L.C., Washington, D.C., for Appellees. ON BRIEF:

Steven G. Bradbury, Christopher Landau, Adam G. Ciongoli, Brett

M. Kavanaugh, KIRKLAND & ELLIS, Washington, D.C.; E.

Osborne Ayscue, Jr., Catherine E. Thompson, Thomas D. Myrick,

Corby C. Anderson, SMITH, HELMS, MULLISS & MOORE,

L.L.P., Charlotte, North Carolina, for Appellants. Michael A. Carvin,

Michael W. Kirk, R. Ted Cruz, COOPER & CARVIN, P.L.L.C.;

James J. McCabe, John J. Soroko, Wayne A. Mack, Mark B. Schoel-

ler, DUANE, MORRIS & HECKSCHER, Philadelphia, Pennsylva-

nia; Thomas J. Ashcraft, Charlotte, North Carolina, for Appellees.

Theodore B. Olson, Theodore J. Boutrous, Jr., Sean E. Andrussier,

GIBSON, DUNN & CRUTCHER, L.L.P., Washington, D.C., for

Amici Curiae ATL International, et al. Andrew A. Vanore, Jr.,

NORTH CAROLINA DEPARTMENT OF JUSTICE, Raleigh, North

Carolina, for Amicus Curiae Secretary of Commerce. Phillip E.

Stano, AMERICAN COUNCIL OF LIFE INSURANCE, Washing-

ton, D.C.; Stuart J. Kaswell, Fredda L. Plesser, SECURITIES

INDUSTRY ASSOCIATION, New York, New York, for Amici

Curiae American Council of Life Insurance, et al. Edgar Love, III,

Kiran H. Mehta, Stanford D. Baird, KENNEDY, COVINGTON,

LOBDELL & HICKMAN, L.L.P., Charlotte, North Carolina, for

Amicus Curiae British American Business Council. Mario L. Her-

4

man, Washington, D.C.; J. Michael Dady, DADY & GARNER, P.A.,

Minneapolis, Minnesota, for Amici Curiae Association of Fran-

chisees, et al. John K. Bush, Janet P. Jakubowicz, GREENEBAUM,

DOLL & MCDONALD, P.L.L.C., Louisville, Kentucky, for Amici

Curiae Lobello, et al.

_________________________________________________________________

OPINION

WILKINSON, Chief Judge:

This case is a study in the tensions that can beset the franchisor-

franchisee relationship. Ten owners of Meineke Discount Muffler

franchises sued franchisor Meineke Discount Muffler Shops, Inc.

("Meineke"), Meineke's in-house advertising agency New Horizons

Advertising, Inc. ("New Horizons"), three officers of Meineke, and

Meineke's corporate parents GKN plc ("GKN") and GKN Parts

Industries Corporation ("PIC"). Plaintiffs claimed that Meineke's han-

dling of franchise advertising breached the Franchise and Trademark

Agreements ("FTAs") that Meineke had entered into with every

franchisee. Plaintiffs also advanced a raft of tort and statutory unfair

trade practices claims arising out of the same conduct. The plaintiff-

franchisees purported to advance these claims on behalf of a nation-

wide class of current and former Meineke dealers. Plaintiffs won a

$390 million judgment against Meineke and its affiliated parties.

On appeal, defendants maintain that the suit was erroneously certi-

fied as a class action and challenge several other legal rulings by the

district court. Because the class the district court certified does not

conform to the requirements of Federal Rule of Civil Procedure 23(a),

we reverse the class certification. And because the class action pos-

ture, along with at least three fundamental legal errors, deprived

defendants of a fair trial on the precise issue of contractual breach that

is properly the focus of this case, we reverse the judgment below,

vacate the award of damages, and remand the case for further pro-

ceedings consistent with this opinion.

I.

The plaintiff class consisted of "all persons or entities throughout

the United States that were Meineke franchisees operating at any time

5

during or after May of 1986." As a Meineke franchisee, each putative

class member is or has been a party to one or more FTAs with

Meineke. FTAs expire after a fixed period, usually 15 years, at which

point the franchise can be renewed or terminated. During the time rel-

evant to this lawsuit, Meineke periodically revised the FTA, so sev-

eral different versions of the contract are at issue in this action. Under

all versions of the FTA, each franchisee was to pay Meineke an initial

franchise fee (which is sometimes waived) and thereafter some per-

centage of its weekly gross revenue (generally 7-8%) as a royalty.

Franchisees also paid Meineke ten percent of weekly revenues to fund

national and local advertising. Initially, franchisees made these adver-

tising contributions directly to a third-party advertising agency, M&N

Advertising ("M&N"), which placed ads on a commission basis. After

late 1982, franchisees paid their ten percent contributions to a central

account maintained by Meineke, the Weekly Advertising Contribu-

tion ("WAC") account.

Franchise advertising is addressed in two sections of the FTAs.

Among other things, Section 3.1 of all versions of the FTA obliges

Meineke "[t]o purchase and place from time to time advertising pro-

moting the products and services sold by FRANCHISEE." The FTAs

provide that "all decisions regarding whether to utilize national,

regional or local advertising, or some combination thereof, and

regarding selection of the particular media and advertising content,

shall be within the sole discretion of MEINEKE and such agencies or

others as it may appoint." In FTAs executed from 1989 through 1991,

Section 3.1 was introduced by a clause that indicated Meineke would

provide the services identified in that section"[i]n consideration for

the payment of Franchisee's initial license fee." However, until 1990,

every FTA also provided that "MEINEKE agrees that it will expend

for media costs, commissions and fees, production costs, creative and

other costs of such advertising, with respect to MEINEKE fran-

chisees, an amount equal to the total of all sums collected from all

franchisees under and pursuant to Section 7.17 hereof." Section 7.17

of the FTA describes payments to the WAC account.

Three categories of disbursements from the WAC account, totaling

approximately $32.2 million, are at the heart of this lawsuit. First,

Meineke used just over $1.1 million of WAC funds to defend and set-

tle a suit brought by M&N for past and future commissions when, in

6

1986, Meineke stopped doing business with M&N and established

New Horizons to handle advertising placement in-house. As had

M&N, New Horizons placed some advertisements on its own and

engaged the services of outside agencies to place the rest. These out-

side agencies were paid a total of almost $14 million in commissions

from the WAC account, the second category of disputed expenditures.

Third, New Horizons itself was paid approximately $17.1 million in

commissions from the WAC account for the advertisements it placed.

At a dealers' meeting in April 1993, a Meineke official read from

a December 1992 Uniform Franchise Offering Circular ("UFOC")

that disclosed New Horizons' 5-15% commission rates. Plaintiffs

knew before the meeting that New Horizons took commissions from

WAC funds but claim they were unaware that its rates were so high.

As one of the named plaintiffs explained, he had not seen the UFOC

in question "because I hadn't bought a shop in three or four years and

. . . you don't get an offering circular unless you're buying a shop."

Shortly after the meeting, plaintiffs filed this lawsuit, charging that

Meineke had no right to pay New Horizons (or any other entity) any

commissions from the WAC account for the purchase or placement

of advertising. Rather, according to plaintiffs, WAC funds were to be

used only to pay for the advertisements themselves, and Meineke was

to perform the purchase and placement duty in return for franchisees'

royalty fees. In addition to this alleged breach of the FTAs, plaintiffs

charged Meineke and the other defendants variously with breach of

fiduciary duty, aiding and abetting breach of fiduciary duty, fraud,

unjust enrichment, negligence, negligent misrepresentation, inten-

tional interference with contractual relations, and unfair and deceptive

trade practices in violation of the North Carolina Unfair Trade Prac-

tices Act ("UTPA"), N.C. Gen. Stat. § 75-1.1.1

_________________________________________________________________

1 Plaintiffs' complaint also alleged violations of the analogous Texas

Deceptive Trade Practices - Consumer Protection Act, Tex. Bus. & Com.

Code Ann. §§ 17.41 et seq., and RICO, 18 U.S.C. §§ 1962(c) and (d).

With respect to the Texas act, the district court ruled after trial that both

North Carolina and Texas choice of law rules directed that only the

North Carolina UTPA applies to this dispute, a ruling neither party chal-

lenges. The district court dismissed the RICO claims before trial, and

plaintiffs do not press them on appeal.

7

In January 1995, Meineke offered all its franchisees a new fran-

chise package, the Enhanced Dealer Program ("EDP"). In exchange

for releasing Meineke from all claims arising out of past dealings,

specifically including the claims at issue in this lawsuit, franchisees

who accepted the EDP received a reduced royalty rate, a guaranteed

reduction in New Horizons' commission rates, greater control over

local advertising, and other benefits like a free computer system and

the chance to obtain an additional franchise at a discount. Plaintiffs

urged their fellow franchisees not to accept the EDP, warning that by

doing so franchisees would be "signing away [their] rights to be in the

class" and asserting that the EDP did "not go nearly far enough as a

settlement offer" because it "ask[ed] franchisees to trade legal rights

for too little change." Nevertheless, more than half of Meineke's

existing franchisees accepted the EDP before the offer expired on

March 15, 1995. No named plaintiff accepted the EDP.

On May 11, 1995, the district court certified a non-opt-out class of

"all persons or entities throughout the United States that were

Meineke franchisees operating at any time during or after May of

1986." The district court also disposed of numerous pretrial motions.

Most relevant here, the court denied GKN's motion for summary

judgment, holding that the issue of "piercing the corporate veil" to

impose vicarious liability on GKN for the acts of its subsidiaries was

one for the jury. The court denied two motions by Meineke to depose

absent class members. And the court denied Meineke's motion to

sever issues related to the EDP and other releases executed by fran-

chisees.

Trial lasted seven weeks. The cornerstone of plaintiffs' contract

case was language that appeared only in some versions of the FTA.

And plaintiffs' tort and statutory unfair trade practices claims promi-

nently featured 171 taped excerpts of statements made by Meineke

representatives at so-called "final review sessions" that preceded the

execution of any franchise agreement -- all but one of the sessions

involving absent class members. Plaintiffs' expert outlined a damages

formula, by which he purported to calculate the lost profits damages

of all class members on a "global" basis. He testified that every

Meineke franchisee lost $8.16 in sales for each dollar of allegedly

misallocated WAC funds and projected a 34% profit margin for all

franchisees. To show that Meineke, New Horizons, and PIC were

8

"mere instrumentalities" of their parent, plaintiffs introduced evidence

that GKN was aware New Horizons was financed with WAC funds

and that GKN secretly encouraged Meineke to maximize New Hori-

zons' profitability. Meineke and the other defendants advanced a con-

trary interpretation of the FTAs, denied all wrongdoing, and denied

that GKN had exercised control over its subsidiaries sufficient to jus-

tify veil-piercing. Defendants also interposed the defense of statute of

limitations.

The jury returned a verdict against Meineke for breach of contract

and against Meineke and New Horizons for breach of fiduciary duty,

negligence, and unjust enrichment. The jury found that GKN and PIC

had utilized Meineke and New Horizons as mere instrumentalities,

and that PIC was merely an instrumentality of GKN, which justified

piercing the corporate veil and imposing vicarious liability on GKN.

Along with Meineke and New Horizons, GKN, PIC, and three offi-

cers of Meineke were found to have themselves committed fraud,

made negligent misrepresentations, and violated the UTPA. The jury

also found that New Horizons, GKN, PIC, and the three individual

defendants were directly liable for aiding and abetting Meineke's and

New Horizons' breach of fiduciary duty and for interfering with

plaintiffs' contractual relations with Meineke. And the jury deter-

mined that none of plaintiffs' claims was barred by statutes of limita-

tions ranging from three to ten years, finding that plaintiffs had no

actual knowledge of the challenged conduct outside the various limi-

tations period and/or ascribing any delay in filing suit to plaintiffs'

reasonable reliance on Meineke's fraudulent concealment of its

wrongdoing.

The jury awarded plaintiffs $196,956,596 in compensatory dam-

ages, which, over Meineke's objection, was not allocated among the

various theories of liability or among defendants. The jury awarded

a total of $150 million in punitive damages: $70 million against

Meineke; $7 million against New Horizons; $1.8 million against PIC;

$70 million against GKN; and $1.2 million total against the three

Meineke officers. Required by the district court to make a choice,

plaintiffs elected to forgo the punitive award in favor of trebling the

compensatory award under the UTPA, see N.C. Gen. Stat. § 75-16.

After trebling, the court entered a $590,869,788 judgment for plain-

tiffs.

9

On March 6, 1997, the district court ruled on two categories of

releases signed by some class members: (1) releases executed in con-

nection with the EDP ("EDP releases"), and (2) releases executed in

the normal course of business, as when a franchise was terminated or

renewed ("non-EDP releases"). The jury had rejected plaintiffs' argu-

ment that these releases were procured by fraud, duress, or undue

influence on the part of Meineke. Accordingly, the district court held

that the EDP releases executed by about half the plaintiff class waived

all claims advanced in this lawsuit against the defendants. The court

found that non-EDP releases covered only those claims arising before

the releases were executed and that non-EDP releases which named

Meineke and its "affiliates" released GKN, while releases of Meineke

and its "stockholders" did not include GKN.

On May 22, 1997, the trial court disposed of the parties' post-

judgment motions. The court calculated the effect of the releases,

entering final judgment in plaintiffs' favor for around $390 million (a

reduction of approximately 35%). In addition, the court granted plain-

tiffs' request for a permanent injunction against Meineke's "taking

commissions or fees or otherwise deriving any profit from the WAC

Fund on account of activities undertaken to purchase and place adver-

tising for those class members who are currently operating Meineke

franchises but have not (1) entered Meineke's EDP program, or (2)

executed franchise agreements after March 1995." Both parties appeal.2

II.

We first consider Meineke's challenge to the ruling that had the

largest impact on the conduct of this lawsuit, class certification. As

a prerequisite to certifying the class, the district court had to find that

the class of "all persons or entities throughout the United States that

were Meineke franchisees operating at any time during or after" the

creation of New Horizons satisfied the four criteria of Federal Rule

of Civil Procedure 23(a): numerosity, commonality, typicality, and

adequacy of representation. As the Supreme Court has said, the final

three requirements of Rule 23(a) "tend to merge," with commonality

_________________________________________________________________

2 Hereafter, we shall generally refer to defendants collectively as

"Meineke," except when necessary to distinguish among GKN and its

various subsidiaries.

10

and typicality "serv[ing] as guideposts for determining whether . . .

maintenance of a class action is economical and whether the named

plaintiff's claim and the class claims are so interrelated that the inter-

ests of the class members will be fairly and adequately protected in

their absence." General Tel. Co. v. Falcon , 457 U.S. 147, 157 n.13

(1982). The class the district court certified falls well short of the

Rule 23(a) threshold in several respects.3

A.

The first obstacle to class treatment of this suit is a conflict of inter-

est between different groups of franchisees with respect to the appro-

priate relief. The Supreme Court and this court have long interpreted

the adequate representation requirement of Rule 23(a)(4) to preclude

class certification in these circumstances. Amchem Prods., Inc. v.

Windsor, 117 S. Ct. 2231, 2250-51 (1997); General Tel. Co. v.

EEOC, 446 U.S. 318, 331 (1980); Kidwell v. Transportation Commu-

nications Int'l Union, 946 F.2d 283, 305-06 (4th Cir. 1991); Lukenas,

538 F.2d at 596. The Supreme Court "has repeatedly held [that] a

class representative must be part of the class and`possess the same

interest and suffer the same injury' as the class members." East Texas

Motor Freight Sys. Inc. v. Rodriguez, 431 U.S. 395, 403 (1977) (quot-

ing Schlesinger v. Reservists Comm. to Stop the War, 418 U.S. 208,

216 (1974)). The premise of a class action is that litigation by repre-

sentative parties adjudicates the rights of all class members, so basic

due process requires that named plaintiffs possess undivided loyalties

to absent class members. See, e.g., In re General Motors Corp. Pick-

Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 785, 796 (3d

Cir. 1995). "The problem of actual and potential conflicts is a matter

of particular concern in a case such as this one because the [district

court certified the class under Federal Rule of Civil Procedure 23(b)]

_________________________________________________________________

3 Meineke also challenges the district court's finding that the class

should be certified as a non-opt-out class under Rule 23(b). "It is, how-

ever, unimportant to determine whether the action meets the criteria of

[section (b)], if . . . plaintiffs' action failed to qualify for class action

treatment under . . . section (a) of Rule 23, qualifications which a party

must satisfy as a basis for class certification before compliance with sec-

tion (b) of Rule 23 is considered. . . ." Lukenas v. Bryce's Mountain

Resort, Inc., 538 F.2d 594, 596 (4th Cir. 1976).

11

which does not allow class members to opt out of the class action."

Retired Chicago Police Ass'n v. City of Chicago, 7 F.3d 584, 598 (7th

Cir. 1993). But it takes no special scrutiny of the putative class to dis-

cern the manifest conflicts of interest within it-- conflicts that the

district court simply, and erroneously, ignored.

The class of Meineke franchisees the district court certified can be

grouped into three categories: (1) former franchisees; (2) current fran-

chisees who accepted the EDP ("EDP franchisees"); and (3) current

franchisees who did not accept the EDP ("non-EDP franchisees").

Broken down this way, it is clear that the remedial"interests of those

within the single class are not aligned." Amchem, 117 S. Ct. at 2251.

The first group, former franchisees, have an interest only in maximiz-

ing any damages Meineke would have to pay. But because of the EDP

releases, EDP franchisees are unable to benefit from a damage award.

In fact, one group of EDP franchisees sought to intervene below and

appear as amici on appeal, claiming that their ongoing business rela-

tionship with Meineke and their interests in the long-term financial

health of the company were imperiled by plaintiffs' efforts to wring

a large damage award out of defendants. These EDP franchisees

strenuously urged that, in the interests of both franchisees and

franchisor, "the sole and exclusive monetary remedy in this case

should be restitution to the WAC account." The interest of former

franchisees in damages and of many EDP franchisees in restitution

reveals an obvious initial schism within the putative class regarding

the appropriate remedy for Meineke's alleged wrongdoing.

Nor were plaintiffs, who are current non-EDP franchisees, able to

mediate this conflict. Like former franchisees, non-EDP franchisees

do stand to benefit from damages, and it is hard to imagine a larger

award than the one at issue here. Nevertheless, in making the class

certification decision the district court might reasonably have been

concerned that plaintiffs' residual, forward-looking interest, as current

franchisees, in Meineke's continued viability would have tempered

their zeal for damages and prejudiced the backward-looking interests

of former franchisees. See, e.g., Southern Snack Foods, Inc. v. J & J

Snack Foods Corp., 79 F.R.D. 678, 680 (D.N.J. 1978) (citing Aamco

Automatic Transmissions, Inc. v. Tayloe, 67 F.R.D. 440 (E.D. Pa.

1975); Thompson v. T.F.I. Cos., Inc., 64 F.R.D. 140 (N.D. Ill. 1974);

DiCostanzo v. Hertz Corp., 63 F.R.D. 150 (D. Mass. 1974);

12

Matarazzo v. Friendly Ice Cream Corp., 62 F.R.D. 65 (E.D.N.Y.

1974); Seligson v. Plum Tree, Inc., 61 F.R.D. 343 (E.D. Pa. 1973);

Van Allen v. Circle K Corp., 58 F.R.D. 562 (C.D. Cal. 1972); Free

World Foreign Cars, Inc. v. Alfa Romeo S.p.A., 55 F.R.D. 26

(S.D.N.Y. 1972)).

That potential conflict of interest apparently did not materialize,

but the conflict between plaintiffs and EDP franchisees quite clearly

did. Initially, pursuing any litigation at all was in tension with the evi-

dent desire of many EDP franchisees to put the advertising dispute

with Meineke behind them. The EDP releases did not preclude EDP

franchisees from getting the benefit of any advertising funds Meineke

restored to the WAC account. Nevertheless, at least three times during

the course of this litigation, plaintiffs explicitly disavowed any claim

for restitution to or replenishment of the WAC account, focusing

instead on a damage award. This election of remedies may have bene-

fitted non-EDP franchisees and former franchisees, but at the expense

of the EDP franchisees who made up half of the class. Pursuing a

damage remedy that was at best irrelevant and at worst antithetical to

the long-term interests of a significant segment of the putative class

added insult to the injury of abandoning the only remedy in which

that segment (the EDP franchisees) was interested. Plaintiffs' strategy

thus illustrates the error of allowing them to sue on behalf of "all"

Meineke franchisees.4

In a case involving a plaintiff class with a similar conflict in reme-

dial interests, the Seventh Circuit also found that class certification

was inappropriate. Gilpin v. American Fed'n of State, Cty., and Mun.

Employees AFL-CIO, 875 F.2d 1310 (7th Cir. 1989). In Gilpin nine

nonunion employees sued a union to recover fees the union charged

nonunion members of a collective bargaining unit. The employees

sought to represent approximately 10,000 other nonunion employees,

_________________________________________________________________

4 Because we hold that plaintiffs cannot represent the interests of EDP

franchisees, see, e.g., Melong v. Micronesian Claims Comm'n, 643 F.2d

10, 13 (D.C. Cir. 1980) (noting settled law "that proposed class members

who have executed releases can not be represented by individuals who

have not executed a release"), we do not consider the cross-appeal on the

validity of the EDP releases.

13

but the court ruled the case could not proceed as a class action, rea-

soning that

[a] potentially serious conflict of interest within the class

precluded the named plaintiffs from representing the entire

class [of nonunion workers] adequately. Two distinct types

of employee will decline to join the union representing their

bargaining unit. The first is the employee who is hostile to

unions on political or ideological grounds. The second is the

employee who is happy to be represented by a union but

won't pay any more for that representation than he is forced

to. The two types have potentially divergent aims. The first

wants to weaken and if possible destroy the union; the sec-

ond, a free rider, wants merely to shift as much of the cost

of representation as possible to other workers, i.e., union

members. The "restitution" remedy sought by . . . the nine

named plaintiffs, is consistent with -- and only with -- the

aims of the first type of employee.

875 F.2d at 1313 (citations omitted). Much the same could be said of

the Meineke franchisees lumped together in the class certified below

-- three distinct groups "have potentially divergent aims," and the

remedy sought by plaintiffs "is consistent with-- and only with --

the aims" of former and like-minded non-EDP franchisees.

The instant class action failed to recover from the error of includ-

ing the EDPs. The error was not cured by the district court's post-trial

order effectuating the releases signed by many class members. Even

though this ruling did reduce the damages Meineke owed, it could not

repair the harm that was already done to some class members' inter-

ests. First, those EDP franchisees who had sought to settle the dispute

with Meineke were nevertheless forced into non-opt-out class litiga-

tion. And because of plaintiffs' desire for money damages, any inter-

est EDP franchisees had in replenishment of the WAC account was

not advanced at trial at all. And, as we have noted, plaintiffs -- osten-

sibly on behalf of all Meineke franchisees-- repeatedly and explic-

itly waived any restitutionary claim. If we allowed class certification

to stand, thereby binding EDP franchisees to plaintiffs' choice of rem-

edy, the only relief EDP franchisees could pursue would be fore-

closed. Second, the post-trial reduction in damages made barely a

14

dent in the big damage award and did not undo the harm to those EDP

franchisees who never wanted to be in court. Of course, EDP fran-

chisees have no right to prevent non-released parties from pursuing

damages against Meineke, but EDP franchisees do have the right to

insist that money damages against Meineke not be pursued in their

names.

B.

The pointed "adversity among subgroups" of the class the district

court certified, Amchem, 117 S. Ct. at 2251, and the prejudice EDP

franchisees suffered as a result, seriously infected the class certifica-

tion. But the putative class fell short of the commonality and typical-

ity requirements of Rule 23(a)(2) and (3) in other ways. "The

typicality and commonality requirements of the Federal Rules ensure

that only those plaintiffs or defendants who can advance the same fac-

tual and legal arguments may be grouped together as a class." Mace

v. Van Ru Credit Corp., 109 F.3d 338, 341 (7th Cir. 1997). Five sig-

nificant variations in franchisees' "factual and legal arguments" make

it clear that this case failed to present common questions of law or

fact, see Fed. R. Civ. P. 23(a)(2), and that plaintiffs' claims were any-

thing but typical of the claims of the class, see Fed. R. Civ. P.

23(a)(3).

First, plaintiffs simply cannot advance a single collective breach of

contract action on the basis of multiple different contracts. As the dis-

trict court itself recognized, Meineke FTAs "may vary from year to

year and from franchisee to franchisee." Thus, because Meineke fran-

chisees (and plaintiffs themselves) signed FTAs containing materially

different contract language, the actual contractual undertaking of each

was subject to several critical variables. Approximately half of the

contracts signed by class members suggest Meineke was authorized

to use WAC funds for "media costs, commissions and fees, produc-

tion costs, creative and other costs of . . . advertising." Contracts con-

taining this language are more favorable to Meineke. The reference

to "commissions and fees" can be argued to validate the payments

from the WAC account, as "commissions" paid to New Horizons and

other advertising placement services are what plaintiffs dispute. And

the reference to "other costs" can be read as a catch-all category into

which the cost of purchasing and placing advertising may well fall.

15

However, about a quarter of the contracts, including some with the

provision referenced above, contain language indicating that Meineke

should purchase and place advertising "[i]n consideration for the pay-

ment of Franchisee's initial license fee" only. This clause makes

plaintiffs' case stronger, as it suggests consideration for purchasing

and placing advertising must come from some source other than the

WAC account. In yet another variation among FTAs, Meineke in

some instances waived the license fee that certain versions of the FTA

recite as consideration for the promise to purchase and place, raising

a wholly distinct set of interpretive issues. Evidently, the breach of

contract action that is the cornerstone of plaintiffs' case raises numer-

ous uncommon questions, and the contract claims of plaintiffs are not

typical of claims of franchisees who entered into FTAs containing dif-

ferent language.

In a case much like this one, Sprague v. General Motors

Corporation, the Sixth Circuit also found that class certification was

inappropriate. 133 F.3d 388 (6th Cir.), cert. denied, ___ S. Ct. ___,

1998 WL 174775 (1998). There plaintiffs were former GM employ-

ees who had taken advantage of the company's early retirement pro-

gram. After their retirement, GM reduced the level of benefits to

which retirees were entitled, and the retirees sought to bring a class

action for breach of contract. As in the instant case, GM had entered

into a separate contract with each class member. In these circum-

stances, the Sixth Circuit found commonality lacking because

"[p]roof that GM had contracted to confer vested benefits on one

early retiree would not necessarily prove that GM had made such a

contract with a different early retiree." Id. at 398. For the same rea-

son, the court also found typicality lacking: "The premise of the typi-

cality requirement is simply stated: as goes the claim of the named

plaintiff, so go the claims of the class. That premise is not valid here."

Id. at 399. Nor is it here -- the differences between the FTAs raise

the distinct possibility that there was a breach of contract with some

class members, but not with other class members. In such a case, the

plaintiffs cannot amalgamate multiple contract actions into one.

Second, subjecting plaintiffs' tort and statutory claims to class

treatment was likewise problematic. Plaintiffs built their breach of

fiduciary duty, fraud, and negligent misrepresentation claims on the

shifting evidentiary sands of individualized representations to fran-

16

chisees; these claims have as their starting point what Meineke said

to franchisees and how Meineke portrayed its responsibilities vis-a-

vis the WAC account. Despite their proffer of standardized docu-

ments or other communications disseminated to the entire class to

establish these representations, plaintiffs in fact relied heavily on

audiotapes of non-standard final review sessions between franchisees

and Meineke representatives. In some of these sessions, for example,

Meineke's role was portrayed as a mere custodian of WAC funds, in

others as a trustee, and in others some combination of both. We are

struck by the sheer number of separate statements that were put

before the jury to prove a "common" message, and find the Sprague

court's rationale for refusing class certification in a similar situation

persuasive: "The district court took testimony from more than three

hundred class members in an effort to obtain a purportedly representa-

tive sample of the representations and communications made by [the

defendant]. That it was necessary to do so strongly suggests to us that

class-wide relief was improper." 133 F.3d at 399.

The oral nature of the final review sessions makes them a particu-

larly shaky basis for a class claim. Fifth Circuit caselaw even suggests

a per se prohibition against class actions based on oral representa-

tions. See Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482

F.2d 880, 882-83 (5th Cir. 1973). As the Seventh Circuit has indi-

cated, "claims based substantially on oral rather than written commu-

nications are inappropriate for treatment as class actions unless the

communications are shown to be standardized." Retired Chicago

Police, 7 F.3d at 597 n.17. There has been no such showing here. And

even to the extent that plaintiffs did introduce UFOCs and other writ-

ten and standardized communications with franchisees, there is no

evidence that all franchisees received, read, and relied on the same lit-

erature. If written communications with putative class members "con-

tain material variations, emanate from several sources, or do not

actually reach the [putative class members], they are no more valid

a basis for a class action than dissimilar oral representations." Simon,

482 F.2d at 882. Thus we conclude as we did in Lukenas that "the

rights of these parties, arising as they do out of fraudulent representa-

tions which may vary widely between purchasers, are hardly suitable

for class treatment." 538 F.2d at 596; accord In re American Medical

Sys., Inc., 75 F.3d 1069, 1081 (6th Cir. 1996).

17

Third, the reliance element of plaintiffs' fraud and negligent mis-

representation claims were not readily susceptible to class-wide proof.

Under North Carolina law, these claims turn on whether each franchi-

see reasonably relied on Meineke's representations. See, e.g., Helms

v. Holland, 478 S.E.2d 513, 517 (N.C. Ct. App. 1996) ("Justifiable

reliance is an essential element of both fraud and negligent misrepre-

sentation."); Carlson v. Branch Banking & Trust Co., 473 S.E.2d 631,

637 (N.C. Ct. App. 1996), rev. denied, 483 S.E.2d 162 (N.C. 1997).

North Carolina courts recognize that "[w]hen the circumstances are

such that a plaintiff seeking relief from alleged fraud must have

known the truth, the doctrine of reasonable reliance will prevent him

from recovering for a misrepresentation which, if in point of fact

made, did not deceive him." Johnson v. Owens , 140 S.E.2d 311, 314

(N.C. 1965). Specifically, if a plaintiff had an alternative source for

the information that is alleged to have been concealed from or misrep-

resented to him, his ignorance or reliance on any misinformation is

not reasonable. E.g., C.F.R. Foods, Inc. v. Randolph Development

Co., 421 S.E.2d 386, 389 (N.C. Ct. App. 1992). In this case, proof of

reasonable reliance would depend upon a fact-intensive inquiry into

what information each franchisee actually had about the operation of

the WAC account. Such information might come from conversations

with Meineke representatives at final review sessions or on other

occasions, conversations with other franchisees, independent analysis

of the applicable FTA, audit statements of the WAC account, differ-

ent editions of the UFOC, and so on.

In Zimmerman v. Bell we affirmed a denial of class certification in

the analogous securities fraud context because "[t]o recover in an

action for securities fraud, individual class members must demon-

strate that the omitted information was not otherwise available to

them." 800 F.2d 386, 390 (4th Cir. 1986). There, as here, each class

member potentially had access to several alternative sources of the

information alleged to have been fraudulently concealed from him. Id.

In this circumstance, we reasoned that "[b]ecause the extent of knowl-

edge of the omitted facts or reliance on misrepresented facts will vary

from [class member] to [class member], the question of whether the

omission was material might require an individual inquiry for each

[class member]" that made class treatment impossible. Id. Claims like

common law fraud and negligent misrepresentation are no different.

In fact, recognizing the inherent individuality of the required analysis,

18

the Fifth Circuit has flatly held that "a fraud class action cannot be

certified when individual reliance will be an issue." Castano v. Ameri-

can Tobacco Co., 84 F.3d 734, 745 (5th Cir. 1996). And the Sixth

Circuit has indicated that claims that "require[ ] proof of what state-

ments were made to a particular person, how the person interpreted

those statements, and whether the person justifiably relied on those

statements to his detriment" are not susceptible to class-wide treat-

ment. Sprague, 133 F.3d at 398. We agree that because reliance "must

be applied with factual precision," plaintiffs' fraud and negligent mis-

representation claims do not provide "a suitable basis for class-wide

relief." Jensen v. SIPCO, Inc., 38 F.3d 945, 953 (8th Cir. 1994) (dis-

cussing analogous estoppel claim).5

Fourth, tolling the statute of limitations on each of plaintiffs'

claims depends on individualized showings that are non-typical and

unique to each franchisee. As we discussed above, the alleged misrep-

resentations and obfuscations on which plaintiffs base their argument

for tolling differed from franchisee to franchisee. The trial court's

analysis of equitable tolling should thus have taken the form of indi-

vidualized inquiry into what each franchisee knew about Meineke's

operation of the WAC account and when he knew it. The representa-

tions made to each franchisee varied considerably, with some fran-

chisees being informed about New Horizons' role in Yellow Pages

advertising and others being given assurances that"we don't make

any money on advertising." In Lukenas we recognized that a "consid-

erable difference in right, so far as tolling the statute [of limitations]

is concerned," arises when some class members might be able to point

to fraudulent misrepresentations while others cannot. 538 F.2d at 597.

This "difference in right" precluded class certification there, as it

should have here.

Moreover, even assuming that Meineke downplayed or underesti-

mated the amount of payments from the WAC account to New Hori-

zons and other advertising buying agencies, the fact of these

payments was unquestionably known by some franchisees from the

very beginning. In 1986 Meineke prepared and distributed to fran-

_________________________________________________________________

5 Plaintiffs' reliance on Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994),

is misplaced. As the court noted in that case, Teague did not involve a

challenge to class certification. Id. at 995 n.24.

19

chisees an audit of the WAC account, which detailed the creation of

New Horizons, its role in Yellow Pages advertising, and that

"[a]dvertising commissions paid to M&N Advertising and New Hori-

zons Advertising, Inc. during 1986 were based on standard industry

practice." This message was repeated in several progressively more

detailed annual audits of the WAC account, and several franchisees

testified that they in fact reviewed these audits. Whether and when

each franchisee received, read, and understood the audit is crucial to

whether their contract claim against Meineke is time-barred by North

Carolina's three year statute of limitations on contract claims. As the

Ninth Circuit has recognized, when the defendant's"affirmative

defenses (such as . . . the statute of limitations) may depend on facts

peculiar to each plaintiff's case," class certification is erroneous. In re

Northern Dist. of Cal. Dalkon Shield IUD Prods. Liab. Litig., 693

F.2d 847, 853 (9th Cir. 1982).

Finally, each putative class member's claim for lost profits dam-

ages was inherently individualized and thus not easily amenable to

class treatment. We have previously recognized that the need for indi-

vidual proof of damages bars class certification in some antitrust

cases. See Windham v. American Brands, Inc., 565 F.2d 59, 66 (4th

Cir. 1977) (en banc) (describing damages for antitrust violation). In

Windham we held proof of damages was "always strictly individual-

ized," and we invalidated "[g]eneralized or class-wide proof of dam-

ages" because proof of actual, individual damages was a critical

element of a plaintiff's antitrust claim. Id. "The gravamen of the com-

plaint is not the conspiracy; the crux of the action is injury, individual

injury." Id.

This rationale for individualized proof of damages extends beyond

the setting of a federal claim in antitrust. Indeed, the

North Carolina courts have long held that damages for lost

profits will not be awarded based upon hypothetical or spec-

ulative forecasts of losses. . . . Instead, we have chosen to

evaluate the quality of evidence of lost profits on an individ-

ual case-by-case basis in light of certain criteria to deter-

mine whether damages have been proven with "reasonable

certainty."

20

Iron Steamer, Ltd. v. Trinity Restaurant, Inc. , 431 S.E.2d 767, 770

(N.C. Ct. App. 1993) (emphasis added); see also McNamara v. Wil-

mington Mall Realty Corp., 466 S.E.2d 324, 329-32 (N.C. Ct. App.

1996) (undertaking fact-specific inquiry into lost profits, accounting

for numerous variables that affect profits for a single shop), rev.

denied, 471 S.E.2d 72, 73 (N.C. 1996).

Plainly plaintiffs' claim for lost profits damages was not a natural

candidate for class-wide resolution; the calculation of lost profits is

too "dependent upon consideration of the unique circumstances perti-

nent to each class member." Boley v. Brown , 10 F.3d 218, 223 (4th

Cir. 1993). As plaintiffs' expert admitted on cross-examination, the

profitability of each Meineke franchise depends on any number of

factors, including both tangible factors like market saturation, shop

location, and the local economy, and intangibles like the level of ser-

vice at each shop and the management skills of the franchisee. The

district court allowed the jury to calculate lost profits without refer-

ence to any of these factors. Moreover, plaintiffs' expert based his

lost profits testimony on abstract analysis of "averages": the average

effect of ads on sales; an average profit margin based on a sample of

franchisees' financial data selected by plaintiffs' counsel to be "ap-

propriately dispersed geographically and appropriately dispersed in

terms of the size of the stores"; and an estimate of "on average how

many additional cars would have come in per week in the typical

Meineke dealer's shop had the additional advertising dollars been

spent." The expert admitted that he had "not attempted to calculate the

damages that any individual franchisee has suffered in this case,"

focusing instead on the fictional "typical franchisee operation." Plain-

tiffs attempted to substitute this "hypothetical or speculative" evi-

dence, divorced from any actual proof of damages, for the proof of

individual damages necessary to meet North Carolina's "reasonable

certainty" standard of proof for lost profits awards, Iron Steamer, 431

S.E.2d at 770. That this shortcut was necessary in order for this suit

to proceed as a class action should have been a caution signal to the

district court that class-wide proof of damages was impermissible.

The class the district class certified was thus no more than "a

hodgepodge of factually as well as legally different plaintiffs,"

Georgine v. Amchem Prods, Inc., 83 F.3d 610, 632 (3d Cir. 1996),

aff'd, Amchem, supra, that should not have been cobbled together for

21

trial: franchisees' contractual rights and obligations differ; Meineke

directed different representations to different franchisees; franchisees

relied on these representations in a different manner or to a different

degree; each franchisee's entitlement to toll the statute of limitations

is fact-dependent; and the profits lost by franchisees also differed

according to their individual business circumstances. Plaintiffs do not

"advance the same factual and legal arguments" as the class they are

supposed to represent. And frankly, in these circumstances, we doubt

that any set of claims is common to or typical of this class. Mace, 109

F.3d at 341.

We recognize that a class action may be the most economical and

efficient means of litigation in many circumstances, and we do not

intend to discourage its use when the claims of named plaintiffs can

truly be called representative of class members whose resources

would not permit individual lawsuits. To be sure, a"trial court has

broad discretion in deciding whether to certify a class, but that discre-

tion must be exercised within the framework of Rule 23." American

Medical Sys., 75 F.3d at 1079 (citing Gulf Oil Co. v. Bernard, 452

U.S. 89, 100 (1981)). We also do not suggest that the commonality

and typicality elements of Rule 23 require that members of the class

have identical factual and legal claims in all respects. See Hanlon v.

Chrysler Corp., ___ F.3d ___, 1998 WL 296890, at *3 (9th Cir. June

9, 1998); Sprague, 133 F.3d at 399 (typicality satisfied if class claims

fairly encompassed by those of named representatives even if not

identical). Here it is plain that

the district court abused its discretion in certifying the class

. . . . Some class members may have signed the same form,

some may have received the same documents, or some may

have attended the same meetings . . ., but taken as a whole

the class claims were based on widely divergent facts.

Class-wide relief was awarded here without any necessary

connection to the merits of each individual claim. Rule 23

does not permit that result.

Sprague, 133 F.3d at 399. The disparate nature of the claims pre-

cludes class treatment, and we must reverse the certification ruling of

the district court.

22

III.

Often, when a class is decertified, the court evaluates the viability

of the named plaintiffs' claims standing alone. See, e.g., Sprague, 133

F.3d at 399 (conducting this analysis). But the setting of this case as

a class action so infected the proceedings that we cannot do that here.

The practical effect of the district court's certification ruling was felt

at every stage of trial.

Specifically, plaintiffs enjoyed the practical advantage of being

able to litigate not on behalf of themselves but on behalf of a "perfect

plaintiff" pieced together for litigation. Plaintiffs were allowed to

draw on the most dramatic alleged misrepresentations made to

Meineke franchisees, including those made in final review sessions

with absent class members, with no proof that those"misrepresenta-

tions" reached them. And plaintiffs were allowed to stitch together the

strongest contract case based on language from various FTAs, with

no necessary connection to their own contract rights. In fact, plain-

tiffs' opening argument and their examination of Meineke's General

Counsel highlighted the introductory clause to Section 3.1 that

appeared in only one quarter of FTAs -- this language was displayed

on an illuminated screen next to the jury.

In addition, the class action posture of the case complicated

Meineke's efforts to establish the defense of statute of limitations.

Normally a claim would have been time-barred if Meineke had shown

that the claimant knew about the challenged conduct outside the limi-

tations period. See, e.g., Brooks v. Ervin Constr. Co., 116 S.E.2d 454,

459 (N.C. 1960) ("in an action grounded on fraud, the statute of limi-

tations begins to run from the discovery of the fraud or from the time

it should have been discovered in the exercise of reasonable dili-

gence"). But in this class action the statutes of limitations did not bar

the claims despite evidence that some class members, and even some

named plaintiffs, knew about the challenged payments from the WAC

account outside the relevant limitations periods.

And Meineke may not have received a fair trial on the breach-of-

contract issue because the trial highlighted inappropriate theories of

tort and statutory liability, see Section IV, infra. Although it is routine

to advance multiple theories of liability in a single suit, see Fed. R.

23

Civ. Pro. 8(e)(2), in this case plaintiffs' non-contract theories of lia-

bility may well have impacted the jury's consideration of the contract

claims. And because the jury did not apportion its compensatory dam-

age award among theories of liability, calling into question the valid-

ity of plaintiffs' recovery on any one theory imperils the entire

damage award. Barber v. Whirlpool Corp., 34 F.3d 1268, 1278 (4th

Cir. 1994) ("[T]he jury's award of damages cannot stand if either of

the two underlying claims is reversed because the general verdict

form did not apportion damages between the claims . . . .").

In sum, plaintiffs portrayed the class at trial as a large, unified

group that suffered a uniform, collective injury. And Meineke was

often forced to defend against a fictional composite without the bene-

fit of deposing or cross-examining the disparate individuals behind

the composite creation. Fundamentally, the district court lost sight of

the fact that a class action is "an exception to the usual rule that litiga-

tion is conducted by and on behalf of the individual named parties

only." Califano v. Yamasaki, 442 U.S. 682, 700-01 (1979). It is axi-

omatic that the procedural device of Rule 23 cannot be allowed to

expand the substance of the claims of class members. See 28 U.S.C.

§ 2072(b) (Federal Rules "shall not abridge, enlarge or modify any

substantive right"). Thus courts considering class certification must

rigorously apply the requirements of Rule 23 to avoid the real risk,

realized here, of a composite case being much stronger than any

plaintiff's individual action would be. Because the class action device

permitted plaintiffs to strike Meineke with selective allegations,

which may or may not have been available to individual named plain-

tiffs or franchisees, the judgment below cannot stand.

IV.

We respect the fact that class actions may play some role in

franchisee-franchisor relations. E.g., Remus v. Amoco Oil Co., 794

F.2d 1238 (7th Cir. 1986) (considering whether change in franchisor's

general policies constituted breach of contract with franchisees or vio-

lation of state Fair Dealership Law). However, any class that is certi-

fied must carefully observe the requirements of Rule 23. While we do

24

not wish to micromanage any retrial, we underscore three errors

which must not recur.6

A.

The first error involves nothing less than misconceiving the basic

character of the lawsuit. The district court ignored North Carolina law

limiting the circumstances under which an ordinary contract dispute

can be transformed into a tort action. It is true that this suit is one that

has aroused strong feelings. Plaintiffs claim they were cheated "every

single week for over ten years by their own fiduciary, in connection

with the administration of a common advertising trust fund for the

benefit of all Meineke dealers." Defendants charge they have been

swindled by the legal system itself, in a suit that"represents in micro-

cosm much of what has gone awry in the American civil justice sys-

tem." Beneath these intense feelings lies a simple fact: the parties

differ fundamentally on their rights and obligations under the Fran-

chise and Trademark Agreements that govern every aspect of their

relationship. Typically thirty-five pages long, the FTAs cover such

subjects as confidentiality and Meineke's intellectual property, roy-

alty fees and record keeping, training provided by Meineke, standards

of operation, transferability of the franchise, and termination. Among

the subjects that the agreements address, albeit in different ways and

often through different provisions, is that of advertising and how such

advertising is to be funded. As we earlier discussed, the topic of

advertising is addressed in Sections 3.1 and 7.17 of the FTAs.

At bottom then, this lawsuit centers on a dispute between Meineke

and its franchisees over the interpretation of different FTAs and over

Meineke's performance under those FTAs. This is a straightforward

_________________________________________________________________

6 We recognize that the parties have raised numerous issues on appeal

and cross appeal. However, in view of the fact that we have reversed the

judgment in its entirety, we think it unnecessary and in some instances

gratuitous to resolve all the many claims of error addressed herein. It

should be evident from our discussion of the evidence in this case that,

given the multiplicity of contracts and the variations in language among

them, it simply is not possible at this point to determine whether or not

judgment would be appropriate on certain of these contracts as a matter

of law.

25

contract dispute, yet it somehow managed to become a massive tort

action in the end. As one of the named plaintiffs, Kelly Broussard,

testified, in the months before this lawsuit was filed, some franchisees

were growing increasingly dissatisfied with the cost, amount and

quality of Meineke's advertising. Under all versions of the FTA, how-

ever, decisions about advertising strategy were within Meineke's sole

discretion. So plaintiffs could not address their primary complaint of

a poor advertising strategy directly. Instead plaintiffs filed this law-

suit, charging that the FTAs prescribed how Meineke could operate

the WAC account and characterizing Meineke's exercise of its discre-

tion not only as tortious conduct, but as conduct that constituted

unfair trade practices as well.

The district court erred, however, by allowing plaintiffs to advance

tort and UTPA counts paralleling their breach of contract claims. The

crux of this matter is and always has been a contract dispute. The

defendants believe that Meineke was perfectly entitled under the vari-

ous FTAs to pay advertising commissions from the WAC account.

The plaintiffs say Meineke absolutely was not. Whatever view the

parties take of the various FTA provisions at issue did not justify

transforming what was essentially a breach of contract action with

finite damages into a massive tort suit resulting in a $390 million

award. In this, plaintiffs' case is remarkably like Strum v. Exxon

Company, where we found a similar "attempt by the plaintiff to man-

ufacture a tort dispute out of what is, at bottom, a simple breach of

contract claim" to be "inconsistent both with North Carolina law and

sound commercial practice." 15 F.3d 327, 329 (4th Cir. 1994).

The list of tort claims brought against the Meineke defendants was

extensive: breach of fiduciary duty, aiding and abetting breach of

fiduciary duty, fraud, unjust enrichment, negligence, negligent mis-

representation, intentional interference with contractual relations, and

unfair trade practices in contravention of the North Carolina Unfair

Trade Practices Act, N.C. Gen. Stat. § 75-1.1. And by any measure,

whether in terms of punitive damages for torts or statutory trebling for

unfair trade practices, the non-contract component of plaintiffs'

recovery made up a significant portion of the nearly $390 million

total award.7 Punitive damages are generally not recoverable for

breach of contract, and for good reason. As we explained in Strum:

_________________________________________________________________

7 The jury awarded plaintiffs $150 million in punitive damages on their

claims of aiding and abetting breach of fiduciary duty, fraud, intentional

26

The distinction between tort and contract possesses more

than mere theoretical significance. Parties contract partly to

minimize their future risks. Importing tort law principles of

punishment into contract undermines their ability to do so.

Punitive damages, because they depend heavily on an indi-

vidual jury's perception of the degree of fault involved, are

necessarily uncertain. Their availability would turn every

potential contractual relationship into a riskier proposition.

Id. at 330.

In recognition of the fundamental difference between tort and con-

tract claims, and in order to keep open-ended tort damages from dis-

torting contractual relations, North Carolina has recognized an

"independent tort" arising out of breach of contract only in "carefully

circumscribed" circumstances. Id. at 330-31 (citing Newton v. Stan-

dard Fire Ins. Co., 229 S.E.2d 297, 301 (N.C. 1976)). The district

court failed to limit plaintiffs' tort claims to only those claims which

are "identifiable" and distinct from the primary breach of contract

claim, as North Carolina law requires. See Newton, 229 S.E.2d at 301.

For example, plaintiffs' collection of tort claims includes an allega-

tion of fraud and a complaint that Meineke negligently managed the

WAC account. But it is plain that "[t]he mere failure to carry out a

promise in contract . . . does not support a tort action for fraud."

Strum, 15 F.3d at 331 (citing Hoyle v. Bagby , 117 S.E.2d 760, 762

(N.C. 1961); In re Baby Boy Shamp, 347 S.E.2d 848, 853 (N.C. Ct.

App. 1986)). Something more is required, and given Meineke's plau-

sible argument for an interpretation of the FTAs that validates its con-

duct, that something more seems lacking here. In addition, as in

Strum, it appears plaintiffs' "claim for gross negligence really arises

out of [Meineke's] performance on the contract, not out of the type

of distinct circumstances necessary to allege an independent tort." Id.

at 332-33.

_________________________________________________________________

interference with contractual relations, and willful and wanton negli-

gence. But because the jury also found that Meineke's tortious conduct

constituted unfair and deceptive trade practices under the UTPA, plain-

tiffs chose to substitute the larger figure of treble compensatory damages

as the punitive component of their award.

27

Likewise, the district court should not have allowed the UTPA

claim to piggyback on plaintiffs' breach of contract action. It has been

said that because "[p]roof of unfair or deceptive trade practices enti-

tles a plaintiff to treble damages," a UTPA count"constitutes a boiler-

plate claim in most every complaint based on a commercial or

consumer transaction in North Carolina." Allied Distributors, Inc. v.

Latrobe Brewing Co., 847 F. Supp. 376, 379 (E.D.N.C. 1993). To

correct this tendency, and to keep control of the extraordinary dam-

ages authorized by the UTPA, North Carolina courts have repeatedly

held that "a mere breach of contract, even if intentional, is not suffi-

ciently unfair or deceptive to sustain an action under [the UTPA,]

N.C.G.S. § 75-1.1." Branch Banking & Trust Co. v. Thompson, 418

S.E.2d 694, 700 (N.C. Ct. App. 1992); see also Moseley & Moseley

Builders, Inc. v. Landin, Ltd., 389 S.E.2d 576, 580 (N.C. Ct. App.

1990); Coble v. Richardson Corp. of Greensboro , 322 S.E.2d 817,

823-24 (N.C. Ct. App. 1984); Canady v. Crester Mortgage Corp., 109

F.3d 969, 975 (4th Cir. 1997). Even though "[i]n a sense, unfairness

inheres in every breach of contract when one of the contracting par-

ties is denied the advantage for which he contracted," United Roast-

ers, Inc. v. Colgate-Palmolive Co., 649 F.2d 985, 992 (4th Cir. 1981),

North Carolina law requires a showing of "substantial aggravating cir-

cumstances" to support a claim under the UTPA. Branch Banking,

418 S.E.2d at 700 (adopting interpretation of UTPA in Bartolomeo v.

S.B. Thomas, Inc., 889 F.2d 530, 535 (4th Cir. 1989)). And "the

courts have consistently recognized that § 75-1.1 does not cover every

dispute between two parties. The courts differentiate between contract

and deceptive trade practice claims, and relegate claims regarding the

existence of an agreement, the terms contained in an agreement, and

the interpretation of an agreement to the arena of contract law."

Hageman v. Twin City Chrysler-Plymouth Inc., 681 F. Supp. 303,

306-07 (M.D.N.C. 1988). Given the contractual center of this dispute,

plaintiffs' UTPA claims are out of place.

On remand the observation made by this court in Strum should

guide the district court's consideration of plaintiffs' tort claims: "We

think it unlikely that an independent tort could arise in the course of

contractual performance, since those sorts of claims are most appro-

priately addressed by asking simply whether a party adequately ful-

filled its contractual obligations." 15 F.3d at 333. If Meineke has

failed to fulfill its contractual obligations, the remedy is contract dam-

28

ages, not the blank check afforded to juries when they are authorized

to return a punitive award.

B.

The district court erred by allowing plaintiffs to advance their

claims for breach of fiduciary duty when there is no indication that

North Carolina law would recognize the existence of a fiduciary rela-

tionship between franchisee and franchisor. "Rather," in North Caro-

lina "parties to a contract do not thereby become each others'

fiduciaries; they generally owe no special duty to one another beyond

the terms of the contract and the duties set forth in the U.C.C."

Branch Banking, 418 S.E.2d at 699. This general rule has particular

applicability here, for the FTAs contain an integration clause, which

provides that "[t]his Agreement constitutes and contains the entire

agreement and understanding of the parties with respect to the subject

matter hereof. There are no representations, undertakings, agree-

ments, terms, or conditions not contained or referred to herein." This

clause emphasizes that the nature of the franchise relationship at issue

here is to be determined by reference to the written contractual instru-

ment that both parties signed, discouraging the imposition of extra-

contractual obligations based upon the welter of conflicting oral state-

ments and representations that plaintiffs introduced at trial.

Moreover, the North Carolina Court of Appeals has also said:

Our review of reported North Carolina cases has failed to

reveal any case where mutually interdependent businesses,

situated as the parties were here [in equal bargaining posi-

tions and at arms' length], were found to be in a fiduciary

relationship with one another. We decline to extend the con-

cept of a fiduciary relation to the facts of this case.

Tin Originals, Inc. v. Colonial Tin Works, Inc. , 391 S.E.2d 831, 833

(N.C. Ct. App. 1990). Tin Originals involved a manufacturer and the

company that was the exclusive distributor of the manufacturer's

product. The Tin Originals court rejected the argument that the par-

ties' interdependence imparted a fiduciary flavor to their relations.

Rather the court emphasized that North Carolina law requires a

degree of "superiority and influence" to have developed as a result of

29

this interdependence in order to hold one party to a fiduciary's

responsibilities. Id.

Though plaintiffs and some amici would portray franchisees as

helpless Davids to the franchisor's Goliath, size, as that story teaches,

is not a reliable indicator of strength or influence. Nor is it what North

Carolina courts mean by superiority. Only when one party figura-

tively holds all the cards -- all the financial power or technical infor-

mation, for example -- have North Carolina courts found that the

"special circumstance" of a fiduciary relationship has arisen. E.g.,

Lazenby v. Godwin, 253 S.E.2d 489 (N.C. Ct. App. 1979). By all

lights, Meineke franchisees are independent, sophisticated, if some-

times small, businessmen who dealt with Meineke at arms' length and

pursued their own business interests. Tin Originals says that these cir-

cumstances do not give rise to a fiduciary relationship.

We have not found, and the parties have not identified, any North

Carolina case retreating from Tin Originals. And as a federal court

exercising concurrent jurisdiction over this important question of state

law we are most unwilling to extend North Carolina tort law farther

than any North Carolina court has been willing to go. Our hesitation

is strengthened by the refusal of courts in many other jurisdictions to

superimpose fiduciary duties on a franchisor-franchisee relationship.

See, e.g., Original Great Am. Chocolate Chip Cookie Co., Inc. v.

River Valley Cookies, Ltd., 870 F.2d 273, 280 (7th Cir. 1992)

("parties to a contract are not each other's fiduciaries -- even if the

contract is a franchise") (citations omitted); O'Neal v. Burger Chef

Sys., Inc., 860 F.2d 1341, 1349 (6th Cir. 1988) ("in general, franchise

agreements do not give rise to fiduciary or confidential relationships

between the parties. This observation is in accordance with the vast

majority of courts which have considered this issue"); Boat & Motor

Mart v. Sea Ray Boats, Inc., 825 F.2d 1285, 1292 (9th Cir. 1987)

("The relation between a franchisor and a franchisee is not that of a

fiduciary to a beneficiary."); Jack Walters & Sons Corp. v. Morton

Bldg., Inc., 737 F.2d 698, 711 (7th Cir. 1984) ("The common law of

Wisconsin does not make the franchisor a fiduciary of his

franchisees.").8

_________________________________________________________________

8 We recognize that in exceptional circumstances, when the franchisor

really does hold all the cards, a fiduciary duty may exist. See, e.g.,

Walker v. U-Haul Co., 734 F.2d 1068, 1075 (5th Cir. 1984). This is not,

however, the exceptional case.

30

A fiduciary bears the extraordinary obligation, as the district court

explained to the jury, "never [to] place his personal interest over that

of the persons for whom he is obliged to act." The near-universal

rejection of imposing fiduciary duties in the franchise setting reflects

a recognition that these obligations are out of place in a relationship

involving two business entities pursuing their own business interests,

which of course do not always coincide. Not only is importing fidu-

ciary concepts into the ordinary franchise relationship unworkable, it

is unnecessary. At the outset of the franchise relationship, franchisees

are protected by federal regulations imposing mandatory disclosure

obligations on franchisors. See 16 C.F.R. Part 436. And during the life

of the franchise, franchisees are protected by the full panoply of con-

tract remedies for any breach of the franchise agreement. The market

imposes a further, overriding restraint on the franchisor. There exists

a grapevine among franchisees and franchisors do earn reputations. A

franchise system marred by bad franchisor-franchisee relations is

unlikely to expand -- or survive.

These points are underscored by the malleable standard the jury

used to find a fiduciary duty in this case. The court instructed the jury

that such a duty exists "any time one person reposes a special confi-

dence in another" and that the fiduciary relationship "extends to any

possible case" in which this special confidence resulted in "domina-

tion and influence" on one side of the relationship. This broad basis

for imposing fiduciary status leaves open the real possibility of retro-

actively imposing fiduciary duties on one half of a contractual rela-

tionship if the jury accepts the post hoc claims of the other half to

have reposed "special confidence" in its contract partner. These

claims are all too easy to make at the point of litigation, when the

contractual relationship has already broken down and when there is

likely to be substantial animosity between contracting parties. And

surprising the allegedly "dominant" party with fiduciary responsibili-

ties at this point would strip that party of the benefit of its bargain --

the very contract through which it thought to describe and limit its

obligations. Given the elasticity of the standard the district court used,

it would be difficult to circumscribe any holding that imported fidu-

ciary concepts into the franchise relationship. Without a clearer signal

from the North Carolina courts -- or from the North Carolina legisla-

ture -- that they are willing to break with the great majority of other

31

jurisdictions and lower the threshold for imposing fiduciary obliga-

tions, we are unwilling to do so ourselves on their behalf.

C.

Finally, the district court erred by allowing the jury to consider

claims against PIC and GKN.

The court first erred in permitting plaintiffs to pierce the corporate

veil. Disregarding the corporate form to impose vicarious liability on

PIC and GKN was plainly impermissible under North Carolina law.

A corporate parent cannot be held liable for the acts of its subsidiary

unless the corporate structure is a sham and the subsidiary is nothing

but a "mere instrumentality" of the parent. B-W Acceptance Corp. v.

Spencer, 149 S.E.2d 570, 575 (N.C. 1966) (establishing instrumental-

ity rule). In order to find that a subsidiary is a mere instrumentality,

North Carolina requires plaintiffs to show that the parent exercises

"[c]ontrol, not mere majority or complete stock control, but complete

domination, not only of finances, but of policy and business practice

in respect to the transaction attacked so that the corporate entity as to

this transaction had at the time no separate mind, will or existence of

its own." Glenn v. Wagner, 329 S.E.2d 326, 330 (N.C. 1985).

In this case there is no evidence of such "complete domination."

Meineke exhibits none of the characteristics North Carolina courts

have identified as indicative of sham incorporation. Initially, plaintiffs

make no allegation that Meineke is inadequately capitalized. See

Glenn, 329 S.E.2d at 330 (citing Commonwealth Mut. Fire Ins. Co.

v. Edwards, 32 S.E. 404 (N.C. 1899)). In point of fact, as of 1994,

Meineke had total assets of over $14.5 million and net income of over

$10 million. Plaintiffs make much of the fact that Meineke itself is

judgment-proof against the verdict entered below. But this is a func-

tion of the astronomical size of that award rather than of any under-

capitalization. Further, Meineke has observed all corporate

formalities. See id. (citing Hammond v. Williams, 3 S.E.2d 437 (N.C.

1939)). The company holds regular shareholder and board meetings.

It generates its own independently audited financial statements and

keeps its own accounts. It has its own articles of incorporation, by-

laws, minute books, shares, and seal. Moreover, Meineke does not

lack an independent identity. See id. at 331 (citing Waff Bros., Inc. v.

32

Bank of North Carolina, N.A., 221 S.E.2d 273 (N.C. 1976)). Rather

Meineke was independently incorporated in 1972, more than ten years

before GKN even acquired an indirect ownership interest in it

(through PIC) in 1983. And Meineke has retained its independent

identity to this day. It is a well-known franchise chain; its connection

to GKN is not in the least apparent to its customers. The company has

at all times been run by its own officers and employees, who have

made significant business decisions for Meineke independently of

GKN.

There is no evidence that GKN, located in the United Kingdom,

was involved in the day-to-day operations of Meineke, headquartered

in North Carolina. GKN did not concern itself with Meineke's FTAs

or UFOCs until after this lawsuit was filed. And there is no evidence

of GKN's involvement in establishing New Horizons or managing the

WAC account. In fact GKN's direct involvement with Meineke has

been limited to dealing with occasional special problems that arise.

And though GKN does participate on Meineke's Board of Directors,

it has never had majority control of Meineke's Board and in fact has

a policy of ensuring that it never has majority control of any subsid-

iary's board. Finally, there is no evidence that GKN's diverse sub-

sidiaries are excessively fragmented into separate corporations. See

id. (citing Fountain v. West Lumber Co., 76 S.E. 533 (N.C. 1912)).

We recognize that veil piercing may present a jury question in

North Carolina. But the question cannot reach a jury (and, if it has,

the jury's verdict cannot stand) without evidence supporting the claim

that one corporation is merely an instrumentality of another. Here the

evidence suggests an ordinary parent-subsidiary relationship between

GKN, PIC, and Meineke. Plaintiffs emphasize that Meineke and GKN

share funds; that GKN's "bottom line" ultimately reflects Meineke's

profits; and that GKN urged Meineke to enhance profitability and

identified New Horizons as a profit center for the company. Far from

signaling sham incorporation or complete domination of Meineke by

GKN, this evidence supports an entirely benign interpretation. As the

owner (through PIC) of all Meineke's stock, GKN has a natural inter-

est in maximizing the return on that investment. Its communications

with Meineke and its limited oversight -- as well as the profit motive

they reflect -- portray not a sham structure but a legitimate and rou-

tine parent-subsidiary relationship.

33

To hold that GKN's involvement justified disregarding the corpo-

rate form would place North Carolina well outside the mainstream of

corporate law. The United States Supreme Court just recently has had

occasion to consider and confirm the "general principle of corporate

law deeply ingrained in our economic and legal systems that a parent

corporation (so-called because of control through ownership of

another corporation's stock) is not liable for the acts of its subsidia-

ries." United States v. Bestfoods, 118 S. Ct. 1876, 1884 (1998) (inter-

nal quotation marks omitted). Deviating from this rule would

destabilize the business and investment climate in North Carolina in

disregard of the courts and legislative body of that state. Particularly

in view of the participation by the North Carolina Secretary of Com-

merce as amicus curiae in support of GKN and PIC, we will not chart

such a chaotic course.

Plaintiffs advanced several theories of direct liability in an effort

to circumnavigate these principles of corporate law, among them aid-

ing and abetting breach of fiduciary duty and intentional interference

with contractual relations.

Plaintiffs' claim that PIC and GKN aided and abetted Meineke's

breach of fiduciary duty fails for two reasons. First, a cause of action

for aiding and abetting breach of fiduciary duty depends on the exis-

tence of a fiduciary duty, which, as the preceding section shows, does

not exist between Meineke and its franchisees. Even placing aside

that basic obstacle to aider and abettor liability in this case, liability

is still inappropriate here. Imposing liability for aiding and abetting

a breach of fiduciary duty requires a finding that GKN or PIC was "a

substantial factor" in Meineke's alleged breach of duty. Blow v.

Shaughnessy, 364 S.E.2d 444, 447 (N.C. Ct. App. 1988). But there is

no evidence here that GKN or PIC played a role in Meineke's estab-

lishment of the WAC account or New Horizons or in Meineke's deci-

sions about how to fund New Horizons and franchise advertising, the

very conduct plaintiffs allege breached Meineke's duty. All the evi-

dence shows is that GKN knew a profit center when it saw one and

encouraged its subsidiary to expand it. The decisions about creating

and funding the account were made by Meineke independently of

GKN and PIC, and if these decisions breached a duty, liability for the

breach rests solely with Meineke.

34

Plaintiffs' claim that GKN intentionally interfered with contractual

relations also should not have been submitted to the jury. The ele-

ments of this claim are:

First, that a valid contract existed between the plaintiff and

a third person . . . . Second, that the outsider had knowledge

of the plaintiff's contract with the third person. Third, that

the outsider intentionally induced the third person not to

perform his contract with the plaintiff. Fourth, that in so

doing the outsider acted without justification. Fifth, that the

outsider's act caused the plaintiff actual damages.

Peoples Security Life Ins. Co. v. Hooks, 367 S.E.2d 647, 649-50 (N.C.

1988) (emphasis omitted) (quoting Childress v. Abeles, 84 S.E.2d

176, 181 (N.C. 1954) (citations omitted)).

We do not think that the fourth element is satisfied here. There is,

of course, evidence that GKN and PIC were interested in increasing

the profitability of New Horizons: GKN approved bonuses for

increasing New Horizons's profitability and PIC considered New

Horizons to be a "profit center." The fourth prong, however, requires

that the defendant have acted "without justification." "For interference

with a contract to be tortious, `plaintiff's evidence must show that the

defendant acted without any legal justification for his action . . . .'"

Carolina Water Serv., Inc. v. Town of Atlantic Beach, 464 S.E.2d 317,

321 (N.C. Ct. App. 1995) (quoting Varner v. Bryan, 440 S.E.2d 295,

298 (N.C. Ct. App. 1994)).

Under North Carolina law, there was justification here. As the

owner through PIC of all Meineke's stock, GKN is protected by a

form of qualified privilege for "non-outsiders." See Wilson v.

McClenny, 136 S.E.2d 569, 578 (N.C. 1964) ("As stockholders they

had a financial interest in the corporation . . . .[B]ecause of their

financial interest . . . they had a qualified privilege . . . ."). "In the con-

text of interference with contract by an insider . .. the element that

the defendant acted without justification is potentially vitiated by the

defendant's corporate position. Officers, directors, shareholders, and

other corporate fiduciaries have `a qualified privilege to interfere with

contractual relations between the corporation and a third party.'"

Embree Constr. Group, Inc. v. Rafcor, Inc., 411 S.E.2d 916, 924

35

(N.C. 1992) (quoting Wilson, 136 S.E.2d at 578); see also Smith v.

Ford Motor Co., 221 S.E.2d 282, 292-93 (N.C. 1976). Indeed, the

North Carolina Supreme Court has emphasized that such parties hav-

ing "`an interest in the activities of a corporation or the duty to advise

or direct such activities should be immune from liability for inducing

the corporation to breach its contract, assuming their actions are in

pursuit of such interests or duties. Public policy demands that so long

as these parties act in good faith and for the best interests of their cor-

poration, they should not be deterred by the danger of personal liabil-

ity.'" Wilson, 136 S.E.2d at 578 (quoting Alfred Avins, Liability for

Inducing a Corporation to Breach Its Contract, 43 Cornell L.Q. 55, 65

(1957)).

Here, we believe for several reasons that the privilege should

obtain. GKN and PIC, as parents and shareholders in Meineke, took

an interest in Meineke's bottom line and implored Meineke to

increase its profitability by pursuing an advertising strategy which it

was at least arguably entitled to pursue under the contract. Although

we cannot and do not decide whether Meineke's various contractual

contentions will ultimately prevail on remand, see supra note 6, we

do think it incorrect to hold GKN and PIC liable on a tortious interfer-

ence theory when the contract language itself admits of respectable

arguments from both sides in this case as to whether Meineke's con-

duct comported with the FTA conditions. Such good-faith actions

taken by shareholders -- urging the corporation to maximize profits

-- are privileged under North Carolina law and cannot form the basis

of a tortious interference claim.

Any apparent tension between North Carolina's recognition of a

qualified privilege and its reluctance to pierce the corporate veil is

easily resolved. Shareholders who take an active interest in the affairs

of the corporation are "non-outsiders" and thus protected from tor-

tious interference claims by the qualified privilege. And if those

shareholders do not completely dominate the affairs of the corpora-

tion, the corporate veil will not be pierced and they will be shielded

from vicarious liability. Setting up such a safe harbor preserves the

advantages of limited liability while encouraging shareholders to

actively monitor corporate affairs.

It is true that the qualified privilege may be waived and liability

may be imposed where an insider's "acts involve individual and sepa-

36

rate torts . . . or where his acts are performed in his own interest and

adverse to that of his firm." Wilson, 136 S.E.2d at 578 (internal quota-

tion marks omitted). Yet there can be no contention that individual

self-dealing, as opposed to corporate well-being, was at issue in these

decisions. Assiduous parental attention, extended in good faith, to the

profitability of a subsidiary is not tortious misconduct. To make it

such would be to repeal the qualified privilege conferred by North

Carolina law. Again, the basic action here is one for breach of con-

tract, and GKN and PIC were not parties to any contract with the

plaintiffs. Thus, despite plaintiffs' theories of veil-piercing and paren-

tal tort liability, there is no basis under North Carolina law for liabil-

ity on GKN or PIC. As a result, we instruct the district court that

GKN and PIC must be dismissed from the action on remand.

V.

We do not dismiss the action against Meineke, however. The plain-

tiffs in this lawsuit may have some legitimate grievance with

Meineke's conduct. They retain a variety of contract remedies for any

breach that may have occurred. Those remedies include, where appro-

priate, restitution to the WAC account and consequential contract

damages in the form of franchisees' lost profits. See generally John

D. Calamari & Joseph M. Perillo, The Law of Contracts § 14-5, at

595-96, § 15-4, at 651-53 (3d ed. 1987). And it is not inconceivable

that a class action might be used in a carefully controlled manner to

achieve the economies and efficiencies for which that device was

intended. But in various ways this lawsuit managed to wander way

beyond its legitimate origins, and at the end it spun completely out of

control, with a diffuse class and proliferating theories of liability. In

fact, this lawsuit came close to visiting corporate ruin on Meineke

over what is a vigorous but straightforward contract dispute, totally

losing sight of the basic principle that in size and in nature a legal

remedy must bear some degree of proportion to the extent of the legal

wrong actually committed. If we permitted this judgment to stand,

commercial disputes and contract law would be transformed -- a

string of tort claims advanced in a sprawling class action would put

many companies -- and their corporate parents-- out of business.

We do respect the important role of juries in striking the balance

between injury and recompense. Nevertheless, like the class action

37

device, the jury's function must be exercised under the guidance and

within the framework of basic principles of law. Without respect for

law neither the class action device nor the jury system can serve the

important functions for which they were intended. Because the most

primary principles of procedure and the most settled precepts of com-

mercial law were not observed here, the judgment of the district court

is reversed in its entirety, and the case is remanded for further pro-

ceedings consistent with this opinion.

REVERSED AND REMANDED

38