Petition for Writ of Certiorari — Johnson v. Pacific Lighting Land Co.

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IN THE |

Supreme Court of the United States

OCTOBER T'ERM, 1987

NORMAN R. JOHNSON AND LOUISE C. JOHNSON, et al.,

Petitioner, :

We

PACIFIC LIGHTING LAND COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

KENNETH L. ALLEN

ANDREW M. FEDERHAR

BILBY & SHOENHAIR, P.C.

One S. Church, 15th Floor

Tucson, Arizona 85702-0871

(602) 792-4800

DON B. ENGLER

RICHARD D. ENGLER

E.NGLER, ENGLER, WEIL & NELSON

1455 W. 16th Street

Yuma, Arizona 85364

(602) 783-2161

Attorneys for Petitioners

Norman R. Johnson and

Louise C. Johnson, et al.

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20003

QUESTION PRESENTED FOR REVIEW

May a grower’s agent acting as a fiduciary under the

Federal Perishable Agricultural Commodities Act and the

law of agency be required to disgorge its profits because

it has deliberately violated its trust at the expense of its

principals.

LIST OF PARTIES

The Plaintiffs in this action are:

Norman R. Johnson and Louise C. Johnson, Freeman

L. Vacher and Hilma I. Vacher, Fred W. Kamrath

and Vera M. Kamrath, Gerada El Lipfel, D. Clark

Conder and Rhea G. Conder, Russell S. Braman and

Mae O. Braman, William Ford Montgomery and

Nellie Mae Montgomery, Ella M. Gerlinger, Albert

M.‘Cann and Mary E. Cann, and Crew Development

Co., Ine., a California corporation, as representatives

of citrus growers contracting with Blue Goose

Growers, Inc., dba Yuma Citrus Co. during 1973-

1978.

The Defendant in this action is:

Blue Goose Growers, Inc., dba Yuma Citrus Co. and

Clark Packers Co.; a wholly-owned subsidiary of

Pacific Lighting Corporation, a California public

utility.

(i)

TABLE OF CONTENTS

ls Gace iia Sac ee vara de-eh-enevataotean

ha clas bu Si cre et dd Hk tn th achat

STATUTES AND REGULATIONS INVOLVED ----

STAiomews OF Ime CASE ...................-

REASONS FOR GRANTING THE WRIT ~____--__--

I. The Ninth Circuit Has Overruled Governing

i pena okey me eae

II. The Ninth Circuit’s Construction Of § 469 Di-

rectly Contradicts The Decisions of Other Cir-

cuits, Federal Trial Courts and State Courts

Within The Ninth Circuit’s Diversity Jurisdic-

REE RE SI er ee See

III. The Ninth Circuit Has Significantly Reduced The

Protection Given Growers Under The PACA-_-

eae eek a chime a aera een

(iii)

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12

14

16

17

19

iv

TABLE OF AUTHORITIES

Cases Page

American Timber and Trading Co. v. Niedermeyer,

276 Or. 1135, 558 P.2d 1211 (1976) ____---_-_- 17

Matter of Arlan’s Dept. Stores, Inc., 615 F.2d 925

Es ts SN ch sch ek bes eine eae 17

Case-Swayne Company v. Sunkist Growers, Inc.,

389 U.S. 384, 393, 88 S.Ct. 528, 533 (1967) _--. 5,14

Cooke v. Iverson, 94 Idaho 929, 500 P.2d 830

RENE A. Fe OW Sara aR Se oa ESN ee ea 17

Haymes v. Rogers, 70 Ariz. 408, 222 P.2d 789

eRe Nap Ry SAS ORL SLL pallens te een es 15

Heyman v. Kline, 344 F.Supp. 1110 (Conn.

NE etka ein amet eee eee alk eae intel aeeseaeapets 16, 17

Irwin v. Murphy, 91 Ariz. 148, 302 P.2d 534, 537

RP ahaha Romie aa ae ener eee es 14

Lightning Delivery Co. v. Matteson, 45 Ariz. 92,

F 2 ef GF Sh | eee anne 14

Roy H. Long Realty Company, Inc. v. Vanderkolk,

26 Ariz.App. 226, 547 P.2d 497 (1976) .____-- 15, 16

Mahue v. Hughes Tool Co., 569 F.2d 459 (9th Cir. Y

A coh Rian RE NER ye aa RE ere 17

Mandell, Spector, Rudolph Co. v. United States,

364 F.2d 889, 893 (3rd Cir. 1966) .______-______ 7

J.C. Peacock, Inc. v. Hasco, 196 Cal.App. 2d 353,

Be Se Ee, CED hak drew ctn nen eeninmnn 17

In Re O.P.M. Leasing Services, Inc., 21 B.R. 986

I EI 5 IID chic oa dic nsec Sp oy: ciensoecins ec nade stain ante nites 17

Richard v. Bluegrass Mining Co., 127 F.2d 291

RE I ai Sk 17

United States v. Bowen, 290 F.2d 40 (1961 5th

tS Ee eect Le Ey Sn at SOO 17

Wilshire Oil Co. of Texas v. Riffe, 406 F.2d 1061

fo Re 0 eee eee 16

Wilson v. Calvert, 96 F.Supp. 597 (Az. 1951) .___- 18

Wise v. First Nat. Bank, 49 Ariz. 146, 65 P.2d

1154 (1937)

Vv

TABLE OF AUTHORITIES—Continued

Statutes and Regulations

Pe a OED cacnccadnccecatontnoenmaneiea

EOD vice ands enennnwehneetenmes

Te EEE i dacdcnnsnnccnnnsnenneesie

PEE BE dint conk adadeadnasanaseaeannal

ee ED ng aids one nknadendaenle

Oe EE ED ccna coenpeconscneeaneeans

OT PE ittnnddnacunsacdsneneenianeen

SS BE coc nneccnnsnnasbussamnnnbee

Chapter 1, Division 20 of the California Agricul-

Chapter 1, Division 20 of the California Agricul-

Cee CE BOE ecinsndbndoenenebnniewtees

Chapter 1, Division 20 of the California Agricul-

bees Gees Bee oacusencccsncnwennusenass

Miscellaneous

Annot., 21 A.L.R. 2d, 840, 843 (1952) __---=_---

Arndt, The Law of California Co-Operative Mar-

keting Association, 8 Calif.L.Rev. 281 (1920) ---

Byrne, Jr., Reevaluation of the Restatement as a

Source of Law in Arizona, 15 Ariz.L.Rev. 1021

(TRIE) ccndchcasdciedunrsssdeanudareneenseke

Campbell, The Perishable Agriculture Commodi-

ties Regulatory Program, Davidson, 1 AGRICUL-

TUR: Ti Gee CRE see ea nccwewonenessnn

Meyer, The Law of Co-Operative Marketing, 15

Celt L. Bev. GG, O94 (ISBT) .nnninncusccnnesnns

Section 469 of the Restatement (Second) of

DES 5. dict neem aaa ncn

U.S. Department of Agriculture, 1910 YEARBOOK __

U.S. Department of Agriculture, 1914 YEARBOOK _-_

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13

13

IN THE

Supreme Court of the Untied States

OCTOBER TERM, 1987

No.

NORMAN R. JOHNSON AND LOUISE C. JOHNSON, et a/.,

Petitioner,

V.

PACIFIC LIGHTING LAND COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

The named representative Plaintiffs request that a

Writ of Certiorari be issued to review a judgment of the

United States Court of Appeals for the Ninth Circuit in

this case.

OPINION BELOW

The opinion of the United States Court of Appeals for

the Ninth Circuit is reported at 817 F.2d 601 (1987).

(Appendix A)

JURISDICTION

The judgment of the United States Court of Appeals

for the Ninth Circuit was entered on May 18, 1987.

(Appendix B) A timely Petition for Rehearing was de-

nied on August 21, 1987. (Appendix C) The mandate

was issued on September 1, 1987.

2

This Petition is filed within the time permitted by 28 |

U.S.C. Section 2101(c). This Court’s jurisdiction arises |

from 28 U.S.C. Section 1254/1).

STATUTES AND REGULATIONS INVOLVED

This case involves provisions of the Perishable Agricul-

tural Commodities Act, 7 U.S.C. §§ 499(a)-499(s) (Ap-

pendix D), its implementing regulations, 7 CFR §§ 46.1-

45.45 (Appendix E), and Chapter 1, Division 20 of the

California Agricultural Code, §§ 54001-54294. (Appendix

F)

STATEMENT OF THE CASE

This case involves a judgment of $4,340,000 won by

240 growers of citrus fruit against a commercial packing

house licensed by Sunkist Growers, Inc. Sunkist has his-

torically controlled 60 to 80 percent of the lemons and

oranges grown in California and Arizona. Sunkist de-

scribes itself as a “non-stock, non-profit cooperative mar-

keting association of approximately 7500 California and

Arizona citrus growers.” Amended Answer of Sunkist

Growers, Inc., filed September 2, 1977, In the Matter of

Sunkist Growers, Inc., Before the Federal Trade Com-

mission, Docket No. D-9100 at 2. Filed in 1978, this

litigation is the first such action in the eighty year his-

tory of cooperative marketing in the industry. The judg-

ment obtained by the growers after thirteen days of

trial presided over by the late. Honorable Walter Early

Craig, senior judge of the United States District Court

for the District of Arizona, was set aside in its entirety

by the United States Court of Appeals for the Ninth

Circuit.

A brief resume of the industry is necessary for an in-

formed understanding of this case and its importance to

federal and state agricultural law and policy. For many

decades, legislators have sought with varying degrees of

success to protect both the grower and the consumer from

abuses in the marketing of agricultural products. The

ee

3

agro-economic conditions of the early years of the in-

dustry were ruinous to the grower. The grower had to

receive a price at least equivalent to his cost of produc-

tion to survive. The reality, however, was something

different:

[T]he price has usually been determined without ref-

erence to cost [of] production and with little thought

to the ultimate effect of supply and demand. Usually

the grower either sold to a speculative buyer several

months before the product was ripe, or took a gam-

bling chance and sold through a commission man.

Sometimes the buyers agreed among themselves to fix

a maximum price, or to apportion the producing ter-

ritory; sometimes only one buyer would appear in a

given district; and on some occasions there would be

no buyer at all.

Selling on commission had its unpleasant features.

The marketing hazards were borne by the farmer;

he was often entirely dependent upon the integrity

of an unknown and distant agent. It was not un-

common for neighboring growers to receive entirely

disproportionate returns for the same products; nor

was it uncommon for growers to sell their crops far

below the cost of production, and it was by no means

a rare occurrence when fruit rotted on the trees or

was fed to the hogs. Arndt, The Law of California

Co-Operative Marketing Association, 8 Calif. L. Rev.

281, 282-83 (1920).

This situation didn’t do the consumer any good either.

Chaos and economic irrationality were intriusic to this

system of individual selling. It was not unusual for pur-

chase contracts to change hands as many as “six or eight

times” after the produce had left the fields, each of these

hands dipping into the consumer’s pocket for a share of

the profit. Nor was it unusual for the market to be

glutted in one locality with tons of produce wasting in

the fields, while in another locality an artificial scarcity

of the same kind of produce would exist with prices soar-

ing. The upshot was that: “There was no relation be-

tween the amount paid by the consumer and the amount

received by the producer, while neither the amount paid

or received had any relation to the cost of production.”

Id.

In the eyes of the early reformers, the fundamental

problem was that the grower was a producer, not a mar-

keter, and that he stood alone. The three factors which

enter into the distribution of farm produce are packing,

shipping, and selling. Id. at 282. But the grower con-

centrated on production and lacked the specialized -train-

ing and knowledge, facilities, and capital required to

effectively market what he grew. Meyer, The Law of

Co-Operative Marketing, 15 Calf. L. Rev. 85, 94 (1927).

Many thought that the resolution to the “greatest prob-

lem of agricultural economics—the problem of marketing

agricultural products” was simply to promote cooperative

associations of growers. For example, the U.S. Depart-

ment of Agriculture declared that cooperative organiza-

tion “is considered to be a primary and fundamental

project,” U.S. Department of Agriculture, 1914 YEAR-

BOOK at 210, because “[n]o other agency is so powerful

in bringing about better farming, better methods of han-

dling the industry, a greater prosperity, and a better

group of farmers who are successfully organized to pro-

tect and develop their agricultural interests.” U.S. De-

partment of Agriculture, 1910 YEARBOOK at 391, 393.

Unfortunately, just as soon as farmers in the early

1900’s began to market their produce in a cooperative

fashion, many of those who were responsible for or had

exploited the opportunities provided by the helplessness

of the farmer individually marketing his own produce,

sought to capture and prostitute the cooperative form to

their own selfish interests. Thus, by 1920 it could be

said:

No general rule can be made for co-operative asso-

ciations; cach must be considered individually. Some

5

associations are co-operative in name only; some are

owned and controlled by large packing corporations

who have hidden their ownership and reaped the

benefits of the goodwill acquired by the ostensible

co-operative character of their subsidiaries. Other

so-called co-operative associations have been merely

parts of real-estate schemes to sell orchard land;

others have been used by professional promoters to

victimize farmers; others have been organized for

the benefit of financiers instead of producers; stil!

others have joined hands with the distributors in il-

legal combinations. Arndt, Marketing Associations,

supra at 289.

Manifestly, something more had to be done. Major

legislative reforms followed at both the federal and state

levels. Limiting the benefits of cooperative organization

to “only actual producers of agricultural products” was

one of the most important aspects of these corrective

statutes. Thus, the Copper-Volstead Act, 7 U.S.C. § 291,

which clarified and extended the antitrust exemption of

the Clayton Act for agricultural cooperatives was quite

clear on this point: “The Act states those whose collec-

tive activity is privileged under it; that enumeration is

limited in quite specific terms to producers of agricul-

tural products.” Case-Swayne Company v. Sunkist

Growers, Inc., 389 U.S. 384, 398, 88 S.Ct. 528, 533

(1967). And the model cooperative marketing act

drafted by Arnold Sapiro, the chief exponent of the so-

called “California Plan” for cooperative marketing,

sought to limit membership in cooperatives to growers

only. Co-Operative Marketing, supra at 87. (In Califor-

nia, this act became Chapter 1, of Division 20 of the

California Food and Agricultural Code; the legislation

under which Sunkist is organized. Amended Answer of

Sunkist, supra. ) ss

A recognition of the victimization of the grower by

the processors and dealers upon whom he depended to get

his fruit from field to market marked another major

6

aspect of statutory reform. In 1930, Congress enacted

the Perishable Agricultural Commodities Act (herein-

after cited as the PACA) to suppress “unfair and fraud-

ulent practices” in a $50 billion industry which was “par-

ticularly susceptible to such practices in view of the high

perishability of fresh fruits and vegetables.” Campbell,

The Perishable Agricultural Commodities Regulatory Pro-

gram, Davidson, 1 AGRICULTURAL LAW 321, 322 (1981).

As subsequenlty stated in congressional reports:

The Perishable Agricultural Commodities Act is

admittedly and intentionally a “tough” law. It was

enacted in 1930 for the purpose of providing a meas-

ure of control and regulation over a branch of indus-

try which is engaged almost exclusively in interstate

commerce, which is highly competitive, and in which

the opportunities for sharp practices, irresponsible

business conduct, and unfair methods are numerous.

S. Rep. No. 2507, 84th Cong. 2d Sess. 3-4 (1956) ;

H.R. Rep. No. 1196, 84th Cong., Ist Sess. 2 (1955).

The requirements and proscriptions of the PACA and

its implementing regulations are most strict and de-

tailed. For example, it is unlawful for commission mer-

chants, dealers, or brokers to use unfair or unreasonable

practices in weighing produce, to make false or mislead-

ing statements in the receipt or sale of produce, to refuse

to correctly account for proceeds of sale, or ultimately

to fail to perform any duty arising from an undertaking

to handle or sell produce. 7 U.S.C. 499 (b).

Growers must be provided with written contracts or

statements describing the terms and conditions under

which their produce will be processed and marketed.

Breaches of these contracts are also violations of the

PACA. 7 C.F.R. 46-32(a). Agents are liable to their

growers for damages arising from such breaches, 7 C.F.R.

$ 46-32(a) and for losses caused by their negligence. 7

C.F.R. § 46-32 (f).

7

Commission merchants, dealers, and brokers acting as

agents under the PACA are in a fiduciary relationship

with their growers and owe them the highest degree of

loyalty. Campbell, Perishable Agricultural Commodities,

supra at 344. Violations of these duties are considered

the “ ‘most serious and flagrant type possible under the

act’.” Mandell, Spector, Rudolph Co. v. United States,

364 F.2d 889, 893 (3rd Cir. 1966).

The PACA has been described as being one of the

most successful federal regulatory programs. Unfortu-

nately, the PACA is administered principally by only

about eighty-five employees in the U.S. Department of

Agriculture. This small number must oversee the activi-

ties of 16,000 dealers, commission merchants and brokers

engaged in the marketing of perishable agricultural com-

modities in interstate or foreign commerce. These same

employees must respond to about 25,000 requests a year

for informal assistance and investigate 3,000 complaints

received annually. Campbell, Perishable Agricultural

Commodities, supra at 324-26.

However, the PACA does not purport to limit growers

to the administrative remedies provided under the Act,

“but on the contrary leaves them free to sue in any

court, state or federal, of competent jurisdiction.” An-

not., 21 A.L.R. 2d, 840, 843 (1952).

This action arises within the citrus industry in the

southwestern United States. Coincidentally, this is where

large scale cooperative marketing began. And it began

with Sunkist.

1 “The co-operative marketing system was first applied on a large

scale in California. In 1905, there was organized the California

Fruit Growers’ Exchange, an association controlling 46 percent of

the California citrus fruit crop.” Meyer, Co-Operative Marketing,

supra at 86. The Exchange became Sunkist. Arndt, Marketing

Associations, supra at 282.

8

The defendant, Pacific Lighting Land Company, is a

holding company that owned Yuma Citrus Company

(YCC), a commercial packing house licensed under the

PACA. During 1973-78, the plaintiff growers contracted

with YCC to pick, prepare, and ship their fruit to mar-

ket. During each of the years at issue, YCC had com-

plete control of the harvesting, pooling, packing, process-

ing, and marketing of its contracting growers’ fruit.

Further, YCC collected and disbursed all proceeds from

the sale of the fruit of its growers.

In October of 1978, the growers filed suit in state court.

Insofar as pertinent herein, the growers alleged: (1)

breach of contract, (2) violation of state antitrust laws,

and (3) violation of the PACA. YCC removed to federal

court under 28 U.S.C. § 13831 based upon the PACA

claim.

Trial was held in April, 1984. The growers asserted

that YCC had specifically contracted to act as their agent

and, further, was denominated a “growers agent” under

the PACA.2 As an agent under the PACA and the law

of contracts, YCC owed its principals, the growers, fidu-

ciary duties. The growers presented evidence that YCC

violated these duties by committing the following acts of

willful disobedience and disloyalty:

(1) Conversion: Sunkist sent YCC $50.00 in sales

proceeds to be distributed to the growers. The grow-

ers never received this money because YCC diverted

the funds into its own income account and kept them.

Further, YCC intercepted and kept $1,300,000 in

price refund and patronage rebates it obtained

through the purchase of large volumes of supplies

2A “‘Growers’ agent’”’ means any person operating at shipping

point who sells or distributes produce in commerce for or on behalf

of growers or others and whose operations may include the plant-

ing, harvesting, grading, packing and furnishing containers, sup-

plies or other services.” 7 C.F.R. § 46.2(q). With the exception of

planting, YCC performed all of-these services.

9

paid for by the growers and used in the packing of

the growers’ fruit. These refunds and rebates were

obtained by YCC from Fruit Grower's Supply

(FGS), a Sunkist nonprofit agricultural cooperative,

which like its parent is organized under Chapter 1 of

Division 20 of the California Agricultural Code.

(2) Fraud: In violation of state law, YCC

charged the growers an exhorbitant amount for pack-

ing. The overcharges totalled $120,000. To conceal

and retain these charges, YCC deposited the money

into a fictitious “contingency fund.”

(3) Secret Profits: YCC realized a secret, im-

proper profit of over $655,909.82 in charges assessed

against its growers for picking and hauling their

fruit. YCC also profited secretly at its growers’ ex-

pense by doubling its packing charges for certain

fruit and manipulating fruit weight figures in order

to increase other costs charged to growers.

(4) Pursuit of An Adverse Interest: YCC Ac-

corded preferential treatment to large growers at the

expense of smaller growers contracting with YCC.

For example, one large grower having only worthless

frozen fruit was allowed to participate in sale pro

ceeds, thus skimming money from smaller growers

who had contributed marketable fruit. Additionally,

YCC also permitted its largest grower, Citibank of

New York, to skim money from smaller growers by

giving Citibank money for the purported sale of fruit

that was never picked. (YCC even charged the

smaller growers “costs” for packing the nonexistent

fruit.) Also, YCC surreptitiously gave Citibank a

contract that guaranteed that in the event there was

a loss in the sale of its fruit, it would never be re-

quired to pay charges in excess of that loss. This

meant that should proceeds from the sale of Citi-

bank’s fruit fail to cover the packing costs, the dif-

ference would be made up by taking money from

the other growers. In summary, YCC deliberately

sacrificed the interests of smali growers in order to

court the business of two of its largest growers.

VX eT

10

(5) Improper Accountings: YCC kept its grow-

ers ignorant of these defaleations by failing to prop-

erly account to them.

The growers “sought two distinct alternative types of

relief. The first was damages for losses to the entire class

of growers due to alleged overcharges or the failure of

YCC to pay amounts due to the growers. The alternative

type of relief was to recover from YCC all of its profits

for the five year period.” Johnson, supra.

With regard to the second measure of damages, the

growers argued to the jury that YCC’s many deliberate

breaches of its fiduciary duties warranted a partial recov-

ery of the compensation they had paid to YCC while it

had acted as their agent in handling their fruit. Specifi-

cally, they contended that YCC was not entitled to retain

the profits it had extracted from its growers, and they

sought a recovery of any monies paid to YCC over and

above its basic costs of operation.

The growers requested and the court gave the follow-

ing jury instruction:

If an agent betrays his principal, such misconduct

and breach of his duty of utmost good faith owed

towards his principal results in the agent losing his

right to compensation for services to which he might

otherwise be entitled.

The jury rendered a verdict awarding damages of

$3,900,000 on the breach of contract claim and $440,000

on the antitrust claim. The jury also found the defend-

ant liable on the PACA claim but did not award damages

(which in any event would have been duplicative of the

contract award as under Arizona law the PACA and its

implementing rules and regulations are deemed to have

been incorporated within the terms and conditions of

YCC’s grower contracts).

11

YCC appealed the jury’s awards under the breach of

contract claim and the antitrust claim. It did not appeal

the verdict on the PACA claim.

The United States Court of Appeals for the Ninth Cir-

cuit reversed both verdicts. The reversal of the antitrust

verdict is not the subject of this Petition. The reversal

of the jury’s award under the contract claim is.

In arriving at its decision, the Court of Appeals ad-

duced that:

Although the jury was instructed on both measures

of damages, the case was tried and argued to the

jury almost entirely on the latter theory. The plain-

tiffs asked for an award of all of YCC’s profits for

the five years and it is clear that this was the basis

of the jury’s award.’

In the view of the Ninth Circuit:

There is no doubt that plaintiffs would be entitled to

recover damages suffered as a result of any alleged

defects in performance by YCC. The question this

court faced is whether the award could be based on

all of YCC’s profits. The case relied upon by plain-

tiffs held that an agent is not entitled to compensa-

tion when the ageht breaches its fiduciary duty to its

principal. That case, however, relied on a provision

of the Restatement of Agency dealing with a defense

that a principal may assert when the agent is suing

for compensation. Here, the growers contracted for

services in packing and shipping fruit and YCC per-

formed those services. The class may be entitled to

a refund of improper charges and the damages they

may have suffered from defective performance, but

not to a disgorgement of all profits for the entire five

year period. Johnson, supra.

3 The growers strongly dispute this finding on two bases: First,

it is factually inaccurate. Second, such divination is beyond the

proper scope and purpose of appellate review. However, the grow-

ers concede the practical futility of further argument on this point.

12

REASONS FOR GRANTING THE WRIT

The unifying theme of YCC’s defense, which proved

so unavailing at trial but spectacularly successful upon

appeal, was bottomed upon the distinction that it “ran a

commercial (as opposed to a cooperative) for-profit citrus

packing house.” As such, YCC argued that it was wrong

to treat it as a fiduciary owing a duty of utmost good

faith. And it was certain error to hold YCC to a fidu-

ciary remedy rather than to the measure of damages for

a breach of contract committed within an ordinary com-

mercial context.

But this case presents the classic fiduciary situation.

YCC was in exclusive control of its growers’ fruit, the

monies obtained from the sale of that fruit, and all es-

sential elements of information generated by the harvest-

ing, pooling, packing, processing, and marketing of the

fruit entrusted to YCC. The Ninth Circuit’s rationale

that though a principal may refuse to pay a faithless

agent should the agent sue the principal, the principal

may not sue to recover the compensation he has already

paid a faithless agent, is not supportable is either logic

or law.

Other circuit courts of appeal have considered this

point, as have federal trial courts and the courts of most

of the states within the Ninth Circuit’s diversity juris-

diction. The Ninth Circuit’s decision is in conflict with

every holding of these courts. Moreover, the Ninth Cir-

cuit has directly overruled the governing law of the State

of Arizona.

Further, the Ninth Circuit Court’s decision contravenes

federal policy as to cooperative marketing. On the one

hand, Congress and the U.S. Department of Agriculture

have deemed it necessary to clearly impose a fiduciary

status and duties upon a PACA licensee such as YCC.

On the other, the Ninth Circuit has eviscerated the most

practical remedy available to growers who collectively

13

have been victimized by the willful violation of these very

same fiduciary duties. In essence, the Ninth Circuit has

created a specially blessed status for fiduciaries licensed

under the PACA. Growers’ agents are entitled to retain

their compensation, regardless of their breach of trust.

No other fiduciary in any field of commerce enjoys this

privilege.

Finally, the mindset revealed by YCC’s defense and the

acceptance of that defense without qualification by the

Ninth Circuit emphasizes the necessity of dealing yet once

again with what is one of the most intractable problems

in modern agriculture: What can and must be done to

keep nonproducers from infiltrating and manipulating

for pecuniary gain the cooperative organizations of ac-

tual producers of agricultural products. What happened

with the FGS monies is an excellent illustration of this

problem.

Chapter 1, Division 20 of the California Agricultural

Code, works in three ways to prevent nonproducers from

capturing cooperative organizations. First, those persons

forming an agricultural cooperative association must be

engaged in the production of farm products. § 54061.

Second, an agricultural cooperative association may ad-

mit as members only such persons as are engaged in the

production of a product which is to be handied by or

through the association, or who use or employ any serv-

ice or facility offered by the association on or in connec-

tion with land which is used for the production of an

agricultural product. § 54231. Third—and this perhaps

is the most important restriction of all—the cooperative

associations shall be nonprofit “since they are not or-

ganized to make profit for themselves, as such, or for

their members as such, but only for their members as

producers.” § 54033. (Emphasis supplied)

YCC did not produce anything. It was not a grower.

YCC’s membership in FGS and collection of $1,300,000

14

in prices refund and patronage rebates intended for its

growers was wholly illegal and prohibited under Chapter

1, Division 20 of the California Agricultural Code.

What perhaps is most telling about their situation,

however, is that the FGS is the supply affiliate of Sunkist

and “The majority of the Board of Directors for Sunkist

are also members of the FGS Board of Directors.” Sun-

kist Growers, Inc., 1979 Annual Report, Financial Re-

view, II. Yet those same individuals permitted a commer-

cial packing house to receive and pocket the money that

should have gone to YCC’s growers. Indeed, this is not

the first time that Sunkist has permitted nonproducers

to share in the benefits of the “Sunkist system,” as a

reading of the Case-Swayne, decision, supra, will docu-

ment.

Given the lack of protection afforded to its growers by

Sunkist, the Ninth Circuit’s suggestion in its opinion that

the growers could look to Sunkist to police the activities

of its commercial packing house is a small comfort in the

first instance and appallingly naive in the second. Clearly

judicial intervention is necessary, but hardly the sort of

intervention provided by the Ninth Circuit.

I. The Ninth Circuit Has Overruled Governing State Law.

The Supreme Court of Arizona “has consistently held

that it will generally follow the Restatement of Law un-

less a different rule has been pronounced by the court in

prior decisions or by legislative enactment.” Jrwin v.

Murphy, 91 Ariz. 148, 302 P.2d 584, 587 (1956). This

is because that court believes the Restatement is “an

authority which the bench and bar of the country regard

as the highest.” Lightning Delivery Co. v. Matteson, 45

Ariz. 92, 99, 39 P.2d 988 (1985). Indeed, Arizona has

been criticized as having “the dubious distinction of being

the only state expressly to have opened to the door to

affording primary precedential authority to the Restate-

15

ment.” Byrne, Jr., Reevaluation of the Restatement as

a Source of Law in Arizona, 15 Ariz. L. Rev. 1021, 1031

(1973). Suffice to say that Arizona’s jurisprudence is

marked by a large number of decisions citing the Re-

statement as authority for the resolution of judicia! ques-

tions in cases in which there is no controlling Arizona

common law or statute. Id. at 1030.

Section 469 of the Restatement of Agency states as

follows:

An agent is entitled to no compensation for con-

duct which is disobedient or which is a breach of

his duty or loyalty; if such conduct constitutes a

willful and deliberate breach of his contract of serv-

ice, he is not entitled to compensation even for prop-

erly performed services for which no compensation

is apportioned.

This section of the Restatement (Second) was cited by

the Arizona Supreme Court in the case of Haymes v.

Rogers, 70 Ariz. 408, 222 P.2d 789 (1950), in which the

court said: “If an agent betrays his principal, such mis-

conduct and breach of duty results in the agent’s losing

his right to compensation for services to which he would

otherwise be entitled.”

That same § 469 under comment “e,” declares that a

principal may maintain an action to recover compensation

paid in ignorance of his agent’s deliberate disloyalty and

disobedience. Comment “e’”’ states as follows:

If the principal, in ignorance of the agent’s faulty

conduct, pays to the agent compensation or indem-

nity to which he is not entitled, the principal can

maintain an action to recover the amount.

This application of 469 was recognized in Roy H. Long

Realty Company, Inc. v. Vanderkolk, 26 Ariz. App. 226,

547 P.2d 497 (1976), a case in which the principal was

suing his agent.

°

16 _

Thus, there are two Arizona decisions approving § 469 of

the Restatement as law in the State of Arizona: Haymes

and Long. Neither opinion imposes any qualification

whatsoever upon the application of § 469 to suits in which

principals seek to recover compensation paid to delib-

erately disobedient or disloyal agents. Section 469 itself

clearly does not impose any such qualification. On the

contrary, it plainly states that the recovery of compensa-

tion paid is an appropriate measure of damages.

The Ninth Circuit’s construction of § 469 as being

limited to establishing a defense that may be used by a

principal when being sued by a faithless agent seeking

compensation for services tainted by intentional breaches

of fiduciary duty, directly contradicts the controlling rules

of decision of the forum state of Arizona and the plain

language of the Restatement itself. This is not just bad

law, it is not law at all.

YCC’s conversion, fraud, secret profits, pursuit of an

adverse interest, and failure to account were intentional

acts. The growers’ measure of the damages under § 469

of the Restatement was and is appropriate. Indeed, the

growers could have asked for the recovery of all of the

compensation paid to YCC instead of simply that com-

pensation which was net profit to the packing house.

II. The Ninth Circuit’s Construction of § 469 Directly Con-

tradicts The Decisions of Other Circuits, Federal Trial

Courts and State Courts Within The Ninth Circuit's

Diversity Jurisdiction and Itself.

Its construction of § 469 in this case places the Ninth

Circuit-in direct conflict with:

A. The Tenth Circuit Court of Appeals. Wilshire Oil

Co. of Texas v. Riffe, 406 F.2d 1061 (10th Cir. 1969) ;

B. The decisions of the federal trial courts which have

construed § 469 as providing a measure of damages in

suits by principals against unfaithful agents. Heyman v.

17

Kline, 344 F. Supp. 1110 (Conn. 1970), rev’d. on other

grounds, 456 F.2d 123 (2nd Cir. 1972), cert. denied, 409

U.S. 847, 93 S.Ct. 53, 34 L.Ed.2d 88 (1972); In Re

O.P.M. Leasing Services, Inc., 21 B.R. 986 (S.D.N-Y.

1982) ;

C. The decisions of the courts of Arizona’s sister states

within the Ninth Circuit’s diversity jurisdiction that have

construed the application of § 469 to such suits. J.C. Pea-

cock, Ine. Hasco, 196 Cal. App. 2d. 358, 16 Cal. Rptr.

518 (1961) ; Cooke v. Iverson, 94 Idaho 929, 500 P.2d 830

(1972); American Timber and Trading Co. v. Nieder-

meyer, 276 Or. 1135, 558 P.2d 1211 (1976); Cogan v.

Kidder, Mathews & Segner, Inc., 97 Wash.2d 658, 648

P.2d 875 (1982);

D. The general rule of which § 469 is but a distilla-

tion. “Recovery Back by Employer of Compensation Paid

to Employee as Result of Mistake or the Employee's

Fraud,” 88 ALR2d. 1437. “Principal’s Right to Recover

Compensation Paid by Him or by Third Person to Un-

faithful Agent or Broker,” 134 ALR 1346;

kK. The decisions of the Courts of Appeal for the See-

ond, Fifth and Sixth Circuits construing the general

rule. Matter of Arlan’s Dept. Stores, Inc., 615 F.2d 925

(2nd Cir. 1979); United States v. Bowen, 290 F.2d 40

(1961 5th Cir.); Richard v. Bluegrass Mining Co., 127

F.2d 291 (6th Cir. 1942) ;

F. Ironically enough, itself. Maheu v. Hughes Tool

Co., 569 F.2d 459 (9th Cir. 1978).

Ill. The Ninth Circuit Has Significantly Reduced The Pro-

duction Given Growers Under The PACA.

Aside from its fiduciary status as a commission mer-

chant under the common law of agency, YCC obtained a

license and acted as a growers’ agent under the PACA.

In short, it voluntarily assumed the fiduciary duties im-

18

posed by the PACA—duties imposed for the protection of

growers.

The growers alleged and proved the same improper

acts with the same evidence under both their breach of

contract claims and their PACA claim. On the one hand,

a violation of a grower’s contract is a violation under

the PACA: on the other hand, under Arizona law, the

PACA became part of these contracts. Wise v. First

Nat. Bank, 49 Ariz. 146, 65 P.2d 1154 (1937); Wilson

v. Calvert, 96 F. Supp. 597 (Az. 1951). Thus, a violation

of the PACA also is a violation of the contract.

From this it follows that an award of damages under

both claims would have been duplicative. In closing ar-

gument, the growers requested that the jury find in their

favor as to both claims, but award damages only under

either the PACA claim or the breach of contract claim—

not both. This the jury did, choosing to award damages

under the contract claim and not under the PACA claim.

The PACA “was designed primarily for the protection

of the producers of perishable agricultural products.”

S. Rep. No. 2507, supra; H.R. Rep. No. 1196, supra. To

achieve this protection, Congress made it abundantly

clear that licensees under the PACA were fiduciaries,

having the duties and liabilities attendant to that status.

And though the detailed regulations promulgated under

the PACA to govern the conduct of licensees are control-

ling to the extent they cover a particular matter, the

rights and remedies of growers are also defined by the

“entire field of contract and sales law.” Campbell, Per-

ishable Agricultural Commodities, supra at 323, 367. The

corpus juris of principal and agent relationships is one

of the most important elements of that entire field of law.

Congress never contemplated that the protection con-

ferred by imposing a fiduciary status upon licensees

under the PACA would be judicially vitiated by removal

19

of one of the most important remedies available to a

principal: the right to recover the compensation paid to

an agent who deliberately and secretly breached the trust

reposed in him or her. But this is what the Ninth Circuit

has done with its decision in this case.

CONCLUSION

For the foregoing reasons, this Petition for a Writ of

Certiorari should be granted.

Respectfully submitted,

KENNETH L. ALLEN

ANDREW M. FEDERHAR

BILBY & SHOENHAIR, P.C.

One S. Church, 15th Floor

Tucson, Arizona 85702-0871

DON B. ENGLER

RICHARD D. ENGLER

ENGLER, ENGLER, WEIL & NELSON

1455 W. 16th Street

Yuma, Arizona 85364

Attorneys for Petitioners

Norman R. Johnson and

Louise C. Johnson, et al.

- BEST AVAILABL

APPENDICES

y eS

APPENDIX TABLE OF CONTENTS

Opinion of the Ninth Circuit Court of Appeals ._-

Order of the United States District Court ._____-

Order denying Petition for Rehearing ___-__-_~-. ;

Perishable Agricultural Commodities Act: 7

Sela BEE hatte wdcnncune incu tiasaias da apioonasaion a

Regulations (other than rules of practice) under

the Perishable Agricultural Commodities Act: 7

C.F.R. § 46.2(q); 7 C.F.R. § 46-32(a); 7 C.F.R.

I i a a el ee

Chapter 1, Division 20 of the California Food and

Agricultural Code: §§ 54033, 54061 and 54231___

Page

2a

16a

18a

19a

22a

24a

la

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 84-2834; 85-1600

NORMAN R. JOHNSON and LOUISE C. JOHNSON, et al.,

Plaintiffs-A ppellees /

Cross-A ppellants,

Vv.

PACIFIC LIGHTING LAND COMPANY,

Defendant-A ppellant/

Cross-A ppellee.

D.C. No. CIV 78-877-WEC

Argued and Submitted

December 3, 1985—Phoenix, Arizona

Filed May 18, 1987

Before: James R. Browning, Joseph T. Sneed and

Procter Hug, Jr., Circuit Judges.

2a

Opinion by Judge Hug

Appeal from the United States District Court

for the District of Arizona

Walter E. Craig, District Judge, Presiding

OPINION

HUG, Circuit Judge:

This is a class action by a group of citrus fruit grow-

ers against a commercial packing house that picked,

hauled, packaged, and shipped the fruit to market. The

action is based on three theories: (1) breach of contract;

(2) violation of state antitrust laws; and (3) violation

of the federal Perishable Agricultural Commodities Act

(“PACA”). The case was filed in state court and re-

moved to federal court under 28 U.S.C. § 1331 (1982)

based on the claim under the federal statute. The re-

maining two claims are pendent state claims. The jury

rendered a verdict awarding damages of $3,900,000 on

the breach of contract claim and $440,000 on the anti-

trust claim. The jury also found the defendant liable on

the PACA claim, but awarded no damages. The defend-

ant’s motion for a judgment not withstanding the ver-

dict or, in the alternative, for a new trial, was denied.

Defendant appeals from judgment on the verdict of

$4,340,000 and the denial of the motion. The plaintiffs

appeal the denial of their motion for attorneys’ fees to

be assessed against the defendant.

Defendant, Pacific Lighting Land Company, is a holding

company that owned Yuma Citrus Company (“YCC”), a

commercial packing house, during 1973-1978, the years

at issue in this case. The plaintiffs were certified to

represent a group of 240 citrus fruit growers in the

3a

Yuma, Arizona area that had contracted with YCC to

pick, haul, pack, and ship their fruit to market during

any of those years.

The issues raised on YCC’s appeal are:

(1) Whether the district court should have di-

rected a verdict for YCC on the state antitrust claim;

(2) Whether the district court properly instructed

the jury on the measure of damages on the contract

claim;

(3) Whether the district court should have di-

rected a verdict for YCC on the question of the

plaintiffs’ entitlement to rebates from a supplier of

packing materials;

(4) Whether it was error to admit hearsay state-

ments from a former manager of YCC; and

(5) Whether the district court properly excluded

certain evidence of trade standards and commercial

practice.

We reverse and remand for a new trial. Therefore, we

do not reach plaintiffs’ cross-appeal of the order denying

attorneys’ fees.

I.

FACTS

In order to understand the issues presented on this

appeal, it is necessary to understand the nature of the

“Sunkist System,” of which the plaintiff class of grow-

ers were members. Sunkist Growers, Ine. (“Sunkist’’)

is a nonprofit coooperative marketing association. It is

the central marketing agent for the fruit growers and

it operates a federated system with local associations and

district exchanges, which is designated the “Sunkist Sys-

tem” and utilizes the “Sunkist” trademark.

4a

The local associations of growers in some instances

operate cooperative packing houses. In other instances,

the growers contract individually with commercial pack-

ing houses licensed by Sunkist. The growers represented

by the plaintiffs in this case were all growers that con-

tracted with YCC to perform the packing house func-

tions. YCC was licensed as a commercial packing house

by Sunkist and operated as a profit-making entity. YCC

executed a written license agreement with Sunkist, agree-

ing to operate for the growers and the Sunkist System.

YCC subsequently entered into written contracts with

the growers. During the 1973-74 and the 1974-75 sea-

sons, YCC utilized a form contract entitled “Contract to

Handle Fruit.” During the 1975-76, 1976-77, and 1977-

78 seasons, a form contract entitled “Agency Agree-

ment” was utilized. These two contracts, though similar,

varied in some respects. These three documents—the li-

cense and the two contracts with the growers—are the

contracts that YCC allegedly breached.

In support of the antitrust claim, the plaintiffs alleged

that YCC conspired with other packing houses in the

Yuma area to limit the quantity of lemons harvested and

shipped in order to enhance the market price for lemons.

The plaintiffs contend that the market price had fallen

when the lemons eventually were sold, causing the grow-

ers to lose $440,000.

Plaintiffs also contended that YCC wrongfully retained

rebates it received from Fruit Growers Supply (“FGS”)

for packing materials purchased and utilized by YCC

in packing and shipping the growers’ fruit. FGS is a

cooperative, the members of which are local associations

that operate packing houses and commercial packing

houses licensed by the Sunkist System. FGS sells pack-

ing materials, such as crates and cardboard cartons, to

packing houses on a nonprofit basis. Assessments are

paid by the members to FGS and rebates are made to

the packing houses by FGS after its costs are deter-

5a -

mined. The plaintiffs contended that they were entitled

to the rebates because these were intended for the bene-

fit of the growers.

II.

THE ANTITRUST CLAIM

The growers contended, and the jury found, that YCC

had violated the Arizona antitrust statute, Ariz. Rev.

Stat. Ann. §§ 44-1401 to -1415 (1967 & Supp. 1986), by

conspiring to withhold the growers’ fruit from market.

YCC argues that the trial judge should have directed a

verdict in its favor because, inter alia, the growers did

not demonstrate any anticompetitive effect or injury and

thus failed to state a claim under the Arizona statute.

The following facts were brought out at trial.

Because the supply of fruit usually exceeds the demand,

fruit is normally marketed under a federal “pro-rate”

system, which allows each grower to ship only a certain

percentage of his fruit. However, in 1975, a poor har-

vest, especially in California crops, was predicted and this

limitation was lifted, thus allowing each grower to mar-

ket all of his fruit. The growers claimed that several

packing houses, including YCC, agreed to hold back a

portion of the fruit available for market in order to

maintain a higher price. The growers contend that when

the California crop proved to be much larger than ex-

pected and prices dropped sharply, the growers’ fruit

that had not been marketed was sold at a lower price

and they suffered a $440,000 loss.

Under section 44-1402 of the Arizona statue, “[a]

contract, combination or conspiracy between two or more

persons in restraint of, or to monopolize, trade or com-

merce, any part of which is within this state, is unlaw-

ful.” Further, section 44-1412 states that “in construing

this [statute], the courts may use as a guide interpre-

tations, given by the federal courts to comparable fed-

eral antitrust statutes.” We review the interpretation

6a

of the Arizona statute de novo. Matter of McLinn, 739

F.2d 1395, 1397 (9th Cir. 1984) (en banc). We have

found no Arizona cases which address the question of

antitrust injury posed here; therefore, we refer to fed-

eral court decisions in our analysis. See Three Phoenix

Co. v. Pace Industries, Inc., 135 Ariz. 113, 659 P.2d

1258, 1260 (1983) (United States Supreme Court Sher-

man Act decisions used to construe Arizona antitrust

statute).

In effect, YCC argues that, although the growers may

have suffered a $440,000 loss on their crops, this injury

is not “the type that the statute was intended to fore-

stall.’” Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429

U.S. 477, 487-88 (1977) (quoting Wyandotte Transp. Co.

Co. v. United States, 389 U.S. 191, 202 (1967)). See

also Associated General Contractors of California, Ine. v.

California State Council of Carpenters, 459 U.S. 519,

540 (1983); Blue Shield of Virginia v. McCready, 457

U.S. 465, 481-83 (1982); Exhibitors’ Service, Inc. v.

American Multi-Cinema, Inc., 788 F.2d 574, 578 (9th

Cir. 1986); Bubar v. Ampco Foods, Inc., 752 F.2d 445,

449 (9th Cir.), cert. denied, 472 U.S. 1018 (1985).

Plaintiffs must prove antitrust injury, which is to

say injury of the type the antitrust laws were in-

tended to prevent and that flows from that which

makes defendants’ acts unlawful. The injury should

reflect the anticompetitive effect either of the viola-

tion or of anticompetitive acts made possible by the

violation. It should, in short, be “the type of loss

that the claimed violations . . . would be likely to

cause.”

Brunswick, 429 U.S. at 489 (quoting Zenith Radio Corp.

v. Hazeltine Research, Inc., 395 U.S. 100, 125 (1969) )

(empahis in original); Blue Shield, 457 U.S. at 482.

Here, the growers’ loss did not stem from anticom-

petitive actions. If the alleged conspiracy had been suc-

7a

cessful, the growers would have benefitted from the

artifically higher prices for their fruit.’ The growers

sought damages for the profits they would have realized

had competition been reduced. This is not the type of

injury that the statute was intended to forestall. Blue

Shield, 457 U.S. at 482; Brunswick, 429 U.S. at 488;

Aurora Enterprises, Inc. v. National Broadcasting Co.,

688 F.2d 689, 692-93 (9th Cir. 1982). Thus, we hold

as a matter of law that the growers, by failing to demon-

strate antitrust injury, failed to state a claim under the

Arizona antitrust statute and that the trial court should

have directed a verdict for YCC on this issue.

It is possible that the failure to ship the fruit to

market at an earlier time could have amounted to a

breach of contract by YCC. However, the claim was not

submitted to the jury on that basis. A separate verdict

form was submitted to the jury and the $440,000 was

awarded because of an antitrust violation.

ITI.

BREACH OF CONTRACT

Plaintiffs base their contract claim on three documents:

(1) YCC’s license agreement with Sunkist; (2) YCC’s

form contract with the growers for the 1973-74 and

1974-75 seasons; and (3) YCC’s form contract with the

growers for the 1975-76, 1976-77, and 1977-78 seasons.

The license agreement provided that YCC “shall have

an agreement with Growers . . . for whom it provides

services under [the license] agreement which shall obli-

gate [YCC] to return to such Growers the net proceeds

from the marketing of said Growers’ fruit by Sunkist

. ., after deduction of [YCC’s] costs and agreed reason-

able charges.”

'It is the fruit buyers and ultimately the consumers who would

have suffered the antitrust injury in this case.

eis |

8a

Both of the form contracts with the growers provided

that YCC would charge the growers “the current com-

mercial charge” for its services.? Either contract could

be terminated at the ciose of any season. Thus, the li-

cense requirement that YCC charge the growers its “costs

plus agreed reasonable charges” was translated in both

of the contracts with the growers as the “current com-

mercial charge’ for YEC’s services. The reasonableness

of the entire charge, both costs and profits, was left to

be determined by competitive market conditions. At that

time, there were several other competing packing houses

with which these growers could have contracted, and the

growers were free to change packing houses from season

to season.

It is the two forms of agreement between YCC and the

_ growers that are the real contracts in issue, not the

license agreement with Sunkist. The license agreement

provided the nature of the contract that YCC was to

reach with the growers. If Sunkist contended there was

a variance, it could have insisted on modification. The

license agreement provided that the “Packer (YCC) shall,

upon request, furnish to Sunkist or District Exchange

a written copy or statement of the substantial terms of

its agreement with the Growers for whom it packs fruit

pursuant to this license.” There is no indication in the

record whether this occurred. It is clear that had the

growers believed their agreement with YCC did not con-

form to the license requirements, they could have pro-

tested through their representatives in the Sunkist Sys-

tem or insisted on a different contract with YCC. The

2 The contract for the first two years provided that YCC harvest

and deliver the fruit to the packing house at its cost if the grower

desired the service. In the contract for the last three years, the

charges for these services were also to be at the “current com-

mercial charge.” As a practical matter, this made no difference,

since these harvesting and hauling services were performed by a

subcontractor, and these subcontractor charges were passed on to

the growers.

9a

remedy under the license agreement, if the growers’

contracts did not fulfill its requirements, was to compel

YCC to enter into a contract with a different formulation

of charges. Absent such a protest, the contracts between

YCC and the growers must be considered to be a permis-

sible interpretation of the license requirement, particu-

larly since the parties operated under these contracts for

five years. Thus it is not the license, but the contracts

actually executed between the growers and YCC, that

are determinative of the rights of the parties in this law

suit.

There were two distinct alternative types of relief

sought by the plaintiffs for breach of contract. The first

was damages for losses to the entire class of growers due

to alleged overcharges or the failure of YCC to pay

amounts due to the growers. The alternative type of re-

lief sought was to recover from YCC all of the profits for

the five-year period. The theory of this latter requested

relief is that YCC had completely failed to carry out its

contractual fiduciary duties as an agent. Thus, the grow-

ers argued, YCC was entitled to no compensation for its

services.

Although the jury was instructed on both measures of

damages, the case was tried and argued to the jury al-

most entirely on the latter theory. The plaintiffs asked

for an award of all of YCC’s profits for the five years

and it is clear that this was the basis of the jury’s award.

Plaintiffs contended that there were numerous failings

in YCC’s performance, some of the major ones being:

1. The plan by which the fruit of the growers

was pooled for marketing was defective, resulting in

an unfair distribution of the proceeds among the

growers. A mathematics professor testified that the

method was statistically unsound. This, of course,

would have resulted in a benefit to some growers and

a detriment to others. It would not have benefited

YCC or damaged the growers as a class.

10a

2. The method of accounting and reporting to

growers was deficient and not in accordance with the

federal regulations under the PACA. A government

auditor testified concerning the defects for the 1975-

76 season. He did not find, however, that this had

resulted in any underpayments to growers.

3. YCC allowed one or more growers to enter the

pool late in the season one year, after some of their

fruit had frozen, resulting in a lesser average price

for the fruit and a consequent loss to the other grow-

ers in the pool.

4. Rebates from FGS to YCC for packing mate-

rials were not passed through to the growers as

plaintffs contended they should have been.

5. Contingency charges were not properly ac-

counted for, resulting in overcharges to the growers.

There is no doubt that plaintiffs would be entitled to

recover any damages that the class had suffered from

such defects in performance. The question is whether the

award could be based on all of YCC’s profits for the

entire five-year period, irrespective of the actua] damage

to the plaintiff class.

The plaintiffs’ contention that the proper measure of

damages is the forfeiture of all of the profits of YCC for

the five-year period is based on the Arizona case of

Haymes v. Rogers, 70 Ariz. 408, 222 P.2d 789 (1950).

That case involved a real estate broker who sought to

recover a real estate commission of $425 for his services

in the sale of a piece of real property. The seller de-

fended on the ground that the broker had acted in bad

faith in representing him because he had revealed to the

buyer that he thought the seller would take $8,500 in-

stead of his asking price of $9,500. The seller eventually

sold the property for the $8,500 but refused to pay the

commission. The Arizona Supreme Court stated:

lla

[A] broker or salesman owes the utmost good faith

to his principal as does any other person acting as

agent or in a fiduciary capacity. If an agent betrays

his principal, such misconduct and breach of duty

results in the agent’s losing his right to compensa-

tion for services to which he would otherwise be

entitled.

Id. at 790. The court cited as authority Restatement of

Agency, section 469. The plaintiffs note that it is well

established law in Arizona that in the absence of case

law to the contrary, the Restatement will be followed as

the proper statement of law. Green Acres Trust v. Lon-

don, 142 Ariz. 12, 688 P.2d 658, 669 (App. 1983), re-

versed on other grounds, 141 Ariz. 609, 688 P.2d 617

(1984).

Section 469 of Restatement (Second) of Agency states:

An agent is entitled to no compensation for conduct

which is disobedient or which is a breach of his

duty of loyalty; if such conduct constitutes a wilful

and deliberate breach of his contract of service, he

is not entitled to compensation even for properly

performed services for which no compensation is

apportioned.

This provision of the Restatement (Second) of Agency

is in Chapter 14, which deals with the duties and liabili-

ties of the principal to the agent. This particular pro-

vision deals with a defense that a principal may assert

when the agent is suing for compensation, as was the

situation in Haymes. Other provisions of the Restate-

ment (Second) of Agency in Chapter 13 deal with the

duties and liabilities of the agent to the principal.

Section 400 of the Restatement (Second) of Agency

states:

An agent who commits a breach of his contract with

his principal is subject to liability to the principal

12a

in accordance with the principles stated in the Re-

statement of Contracts.

Comment (b) states:

b. Damages. In an action for a breach of con-

tract, the agent is subject to liability for harm to

the interests of the principal caused by the agent’s

failure to perform, and also for loss of profits which

were reasonably to be anticipated and which would

have been made had the promised service been per-

formed.

YCC did perform valuable services for the growers

over the five-year period. It harvested, hauled, packed,

and shipped the fruit to market. It may have breached

its contract in some respects as plaintiffs allege, in which

case the plaintiff class is entitled to the damages it

proves the breaches actually caused to the class. Fur-

thermore, if the plaintiffs establish that YCC charged

more than the contractual rate specified, the “current

commercial charge,” then the plaintiff class would be

entitled to reimbursement for the charges that were in

excess of the “current commercial charge.”

If an agent makes a secret and unlawful profit, such

as the situation in Thomas v. Newcomb, 26 Ariz. 47, 221

P. 226 (1923), when the agent told his principal chat the

cost of land was $2,560 more than it actually was and

pocketed the $2,560, then he is required to pay that

amount to his principal. It is clear that he must dis-

gorge the entire secret profit, either under a theory of

damages or as a constructive trustee for his principal.

An analogous situation occurred in Edwards v. Hauff,

140 Ariz. 373, 682 P.2d 1 (App. 1984). In that case,

an agent who had been engaged by the principal to man

age its property and acquire other investment properties

for it, secretly acquired property for himself. He used

the principal’s funds for a down payment and then sub-

13a

stituted his own. He was held to be a constructive trus-

tee of the property for the principal and was denied

compensation for his services in acquiring the property.

This is a case in which the agent was secretly dealing

for himself in complete disregard of his duty to his

principal.

These cases are entirely different from the case at

hand. Here, thegrowers contracted for services in pack-

ing and shipping fruit. YCC performed those services.

The growers contend that they were charged more than

the contract charge, that they were due certain rebates,

and that the pooling, accounting, and reporting were

poorly done. The class may be entitled to a refund of

improper charges and the damages they may have suf-

fered from defective performance, but not to a disgorge-

ment of all profits for the entire five-year period.

The instructions to the jury that permitted the award

of this measure of damages were in error. The proper

measure of damages is the loss the class of growers suf-

~fered from any breach of contract by YCC. See Rio

Grande Oil Co. v. Pankey, 50 Ariz. 529, 73 P.2d 707

(1937).

IV.

FGS REBATE

YCC contends that it was entitled to a directed ver-

dict on the issue of whether the rebates it received from

FGS for the purchase of packing supplies should have

been passed through to the growers. The contractual

arrangements clearly indicate that YCC;as the packing

house, was to receive the rebates. This, of course, re-

duces the cost of the services provided by YCC. The

issue is then whether, in light of these reduced costs, the

charge made to the growers was in excess of the “cur-

rent commercial charge.” It is quite possible that with

the reduced costs resulting from the FGS rebates, the

charge to the growers exceeded the “current commercial

rate.”

This is a proper question for the jury to resolve. —

14a

- V.

WARNER’S STATEMENTS

YCC strenuously argues that it was error for the dis-

trict judge to allow three witnesses to testify to state-

ments made by Art Warner, a former manager of YCC.

It was anticipated that plaintiffs would call Warner as

a witness at trial. A week before trial, Warner had a

conference with counsel and several other witnesses,

preparatory to trial. Warner had suffered a stroke some

time before and was in fragile health. The day before

trial, he furnished a doctor’s certificate that to testify

would endanger his health. All parties agree that he

was unavailable. His deposition had not been taken. The

plaintiffs sought to have several witnesses testify as to

his statements at the conference in the attorneys’ office.

At a motion in limine hearing, the district judge en-

tered an order allowing such testimony under Fed. R.

Evid. 804(b) (5). This was clearly error. There were

no “equivalent circumstantial guarantees of trustworthi-

ness” in this situation as required by the rule. Warner

was not under oath, he was responding to questions of

his attorney, which would normally elicit favorable re-

sponses, and there would be subtle pressures to be in

accord with other favorable witnesses present in the

attorneys’ office.

Plaintiffs assert this was harmless error in light of

other statements made by Warner while he was manager

and were thus party admissions. We need not make this

determination since the case is being reversed on other

grounds. However, we note that this is a difficult posi-

tion to sustain in light of the requirement of 804(b) (5)

(B) that the out-of-court statements be “more proba-

tive on the point for which [they are] offered than any

other evidence which the proponent can procure through

reasonable efforts.” In any event, these statements of

15a

Warner made in the attorneys’ office should not be per-

mitted on retrial.

VI.

OTHER EVIDENCE

YCC contends it was error to exclude evidence of the

charges made by other packing houses on the ground

it was irrelevant. We need not determine whether it

was error to exclude the particular evidence excluded

by the district court. Evidence of the charges of other

packing houses in the area is certainly relevant to de-

termining the “current commercial rate” under the terms

of the contract. It would be necessary to have evidence

to establish what the “current commercial rate” was in

order to determine whether the grower class had been

overcharged.

REVERSED and REMANDED.

l6a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 84-2834, 85-1600

NORMAN R. JOHNSON, and LOUISE C. JOHNSON, et al.,

Plaintiffs-A ppellees/

Cross-A ppellants,

vs.

PACIFIC LIGHTING LAND COMPANY,

Defendant-A ppellant,

Cross-A ppellee.

DC CV 78-0877 WEC

[Filed Sept. 3, 1987]

Appeal from the United States Distriet Court

for the District of Arizona (Phoenix)

JUDGMENT

THIS CAUSE came on to be heard on the Transcript

of the Record from the United States District Court for

the District of Arizona (Phoenix) and was duly sub-

mitted.

17a

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court, that the judgment

of the said District Court in this Cause be, and hereby

is reversed and remanded. COSTS TAXED

Filed and entered May 18, 1987

18a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 84-2834, 85-1600

NoRMAN R. JOHNSON and LouISE C. JOHNSON, et al.,

Plaintiffs-A ppellees

Cross-A ppellants,

v.

PACIFIC LIGHTING LAND COMPANY,

Defendant-A ppellant

Cross-A ppellee.

D.C. No. CIV 78-877-WEC

(Filed Aug. 21, 1987]

Appeal from the United States District Court

for the District of Arizona

Before: BROWNING, SNEED, and HUG Circuit Judges

ORDER

The panel has voted unanimously to deny the petition

for rehearing and to reject the suggestion for rehearing

en bance.

The full court has been advised of the en banc sug-

gestion and no judge of the court has requested a vote

on it. Fed. R. App. P. 35(b).

The petition for rehearing is denied and the suggestion

for a rehearing en banc is rejected.

19a

APPENDIX D

Perishable Agricultural Commodities Act:

7 U.S.C. § 499 (b)

§499b. Unfair Conduct.

It shall be unlawful in or in connection with any trans-

action in interstate or foreign commerce—

(1) For any commission merchant, dealer, or broker

to engage in or use any unfair, unreasonable, discrimina-

tory, or deceptive practice in connection with the weigh-

ing, counting, or in any way determining the quality of

any perishable agricultural commodity received, bought,

sold, shipped, or handled in interstate or foreign com-

merce;

(2) For any dealer to reject or fail to deliver in

accordance with the terms of the contract without reason-

able cause any perishable agricultural commodity bought

or sold or contracted to be bought, sold, or consigned in

interstate or foreign commerce by such dealer;

(3) For any commission merchant to discard, dump,

or destroy without reasonable cause, any perishable agri-

cultural commodity received by such commission mer-

chant in interstate or foreign commerce;

(4) For any commission merchant, dealer, or broker

to make, for a fraudulent purpose, any false or mislead-

ing statement in connection with any transaction involv-

ing any perishable agricultural commodity which is re-

ceived in intersttae or foreign commerce by such com-

mission merchant, or bought or sold, or centracted to be

bought, sold, or consigned, in such commerce by such

dealer, or the purchase or sale of which in such commerce

is negotiated by such broker; or to fail or refuse truly

and correctly to account and make full payment promptly

in respect of any transaction in any such commodity to

the person with whom such transaction is had; or to fail,

20a

without reasonable cause, to perform any specification or

duty, express or implied, arising out of any undertaking

in connection with any such transaction;

(5) For any commission merchant, dealer, or broker

to misrepresent by word, act, mark, stencil, label, state-

ment, or deed, the character, kind, grade, quality, quan-

tity, size, pack, weight, condition, degree of maturity,

or State, country, or region of origin of any perishable

agricultaural commodity received, shipped, sold, or offered

to be sold in interstate or foreign commerce; Provided,

That any commission merchant, dealer, or broker who has

violated this paragraph may, with the consent of the

Secretary, admit the violation or violations and pay a

monetary penalty not to exceed $2,000 in lieu of a formal

proceeding for the suspension or revocation of license,

any payment so made to be deposited into the Treasury

of the United States as miscellaneous receipts;

(6) For any commission merchant, dealer, or broker,

for a fraudulent purpose, to remove, alter, or tamper

with any card, stencil, stamp, tag, or other notice placed

upon any container or railroad car containing any per-

ishable agricultural commodity, if such card, stencil,

stamp, tag, or other notice contains a certificate or state

ment under authority of any Federal or State inspector

or in compliance with any Federal or State law or regu-

lation as to the grade or quality of the commodity con-

tained in such container or railroad car or the State or

country in which such commodity was produced;

(7) For any commission merchant, dealer or broker,

without the consent of an inspector, to make, cause, or

permit to be made any change by way of substitution or

otherwise in the contents of a load or lot of any perish-

able agricultural commodity after it has been officially

inspected for grading and certification, but this shall] not

prohibit resorting and discarding inferior produce.

2la

June 10, 1930, c. 436, 2, 46 Stat. 5382; Apr. 13, 1934,

c. 120, 2, 3, 48 Stat. 585; June 19, 1936, c. 602, 1, 49

Stat. 1533; Aug. 20, 1937, ¢ 719, §§ 2-4, 50 Stat. 725,

726; June 29, 1940, c. 456, §§ 3, 4, 54 Stat. 696; Apr. 6,

1942, c. 211, 56 Stat. 200; July 30, 1956, c. 786, §$ 1,

70 Stat. 726; Aug. 10, 1974, Pub.L. °3-369, 88 Stat. 423.

22a

APPENDIX E

Regulations Under The Perishable

Agricultural Commodities Act,

7 C.F.R. § 46.2(q); 7 C.F.R. § 46-32 (a) ;

7 C.F.R. § 46-32 (f)

$46.2 Definitions

(q) “Growers’ agent” means any person operating at

shipping point who sells or distributes produce in com-

merce for or on behalf of growers or others and whose

operations may include the planting, harvesting, grading,

packing, and furnishing containers, supplies, or other

services.

. . * *

§ 46.32 Duties of growers’ agents

(a) General. The duties, responsibilities, and extent

of the authority of a growers’ agent depend on the type

of contract made with the growers and agents should be

reduced to a written contract clearly defining the duties

and responsibilities of both parties and the extent of the

agent’s authority in distributing the produce. When such

agreements between the parties are not reduced to writ-

ten contracts, the agent shall have available a written

statement describing the terms and conditions under

which he will handle the produce of the grower during the

current season and shall mail or deliver this statement

to the grower or deliver this statement to the grower on

or before receipt of the first lot. A grower will be con-

sidered to have agreed to these terms if, after receiving

such statement, he delivers his produce to the agent for

handling in the usual manner. In the event an unsolicited

lot of produce is accepted by an agent for handling in

his usual manner, he shall promptly deliver or mail a

copy of such statement to the grower. A copy of this

statement, showing the name of the grower and the date

the statement was delivered to the grower, shall be re-

23a

tained in the agent’s files. An agent who does not have

in his files either writen contracts or a written statement

as required herein is failing to prepare and maintain

full and complete records as required by the act. Pro-

vided, That regulations or bylaws of cooperative market-

ing associations may be used in lieu of individual agree-

ments or contracts to determine the methods of account-

ing and settlement with their grower members. A agent

who fails to perform any specification or duty, express

or implied, is in violation of the act and may be held

liable for any damages resulting therefrom and for other

penalties provided under the act for such failure.

* * * *

§ 46.32

(f) Negligence of agent. A growers’ agent may be

held liable for any loss or damage resulting to the grow-

ers due to his negligence or failure to perform any speci-

fication or duty, express or implied, arising out of any

undertaking in connection with transactions subject to

the act.

* * a *

24a

APPENDIX F

Chapter 1, Division 20 Of The

California Food and Agricultural Code:

§§ 54033, 54061, and 54231

§ 54033. Nonprofit nature of associations

Associations which are organized pursuant to this

chapter are “nonprofit,” since they are not organized to

make profit for themselves, as such, or for their members,

as such, but only for their members as producers.

(State.1967, ¢. 15.)

* « * *

§ 54061. Persons auuthorized to form association; pur-

poses

Three or more natural persons, a majority of whom

are residents of this state, who are engaged in the pro-

duction of any product, may form an association pur-

suant to this chapter for the purpose of engaging in any

activity in connection with any of the following:

(a) The production, marketing, or selling of the prod-

ucts of its members.

(b) The harvesting, preserving, drying, processing,

canning, packing, grading, storing, handling, shipping,

or utilization of any product of its members, or the man-

ufacturing or making of the byproducts of any product

of its members.

(ec) The manufacturing, selling, or supplying to its

members of machinery, equipment or supplies.

(d) The financing of the activities which are specified

by this section.

(e) Any one or more of the activities which are speci-

fied in this section. (Stats.1967, ¢. 15.)

o * * *

25a

§ 54231. Qualifications of members or stockholders

Under the terms and conditions which are prescribed

in the bylaws adopted by it, an association may admit

as members or issue common stock to only such persons

as are engaged in the production of any product which

is to be handled by or through the association, or that

use or_employ any service or facility offered by the asso-

ciation on, or in connection with, land which is used for

the production of any product, including the lessees and

tenants of land which is used for the production of such

product and any lessors and landlords that receive as

rent all or part of the crop which is raised on the leased

premises.

(Stats. 1967, ¢.15.)