Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_09-cv-02401/USCOURTS-casd-3_09-cv-02401-2/pdf.json

Nature of Suit Code: 196
Nature of Suit: Franchise
Cause of Action: 28:1332 Diversity-(Citizenship)

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

DOS BEACHES, LLC and MELINDA M.

RAYTER,

Plaintiff,

CASE NO. 09CV2401-LAB (RBB)

ORDER ON DEFENDANT’S

MOTION TO DISMISS

vs.

MAIL BOXES ETC., INC. and UNITED

PARCEL SERVICE, INC.,

Defendant.

Dos Beaches has filed an amended complaint containing a single claim alleging that

Mail Boxes Etc., franchisor of a UPS Store operated by Dos Beaches, breached the

covenant of good faith and fair dealing in their contractual relationship. Now pending is

MBE’s motion to dismiss.

I. Legal Standards

The relevant law hasn’t changed since the Court last dismissed Dos Beaches’

complaint. The Court will restate it here. 

A. Motion to Dismiss 

A 12(b)(6) motion to dismiss for failure to state a claim challenges the legal sufficiency

of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In considering such a

motion, the Court accepts all allegations of material fact as true and construes them in the

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light most favorable to Dos Beaches. Cedars-Sinai Med. Ctr. v. Nat’l League of Postmasters

of U.S., 497 F.3d 972, 975 (9th Cir. 2007). To defeat a 12(b)(6) motion, a complaint’s factual

allegations needn’t be detailed; they must simply be sufficient to “raise a right to relief above

the speculative level . . . .” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). However,

“some threshold of plausibility must be crossed at the outset” before a case can go forward. 

Id. at 558 (internal quotations omitted). A claim has “facial plausibility when the plaintiff

pleads factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). 

“The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than

a sheer possibility that a defendant has acted unlawfully.” Id. 

While the Court must draw all reasonable inferences in Dos Beaches’ favor, it need

not “necessarily assume the truth of legal conclusions merely because they are cast in the

form of factual allegations.” Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th

Cir. 2003) (internal quotations omitted). In fact, the Court does not need to accept any legal

conclusions as true. Iqbal, 129 S.Ct. at 1949. A complaint does not suffice “if it tenders

naked assertions devoid of further factual enhancement.” Id. (internal quotations omitted). 

Nor does it suffice if it contains a merely formulaic recitation of the elements of a cause of

action. Bell Atl. Corp., 550 U.S. at 555. 

B. Covenant of Good Faith and Fair Dealing

The covenant of good faith and fair dealing, “implied by law in every contract, exists

merely to prevent one contracting party from unfairly frustrating the other party’s right to

receive the benefits of the agreement actually made.” Guz v. Bechtel Nat. Inc., 24 Cal.4th

317, 349 (2000). The covenant finds particular application—although it is not limited

to—“situations where one party is invested with a discretionary power affecting the rights of

another. Such power must be exercised in good faith.” Carma Developers, Inc. v. Marathon

Development California, Inc., 2 Cal.4th 342, 372 (1992); see also Locke v. Warner Bros.,

Inc., 57 Cal.App.4th 354, 363 (Cal. Ct. App. 1997). There are two important points to be

made about the scope of the covenant. 

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First, there’s no prerequisite that the underlying contract be breached in order for the

covenant of good faith and fair dealing to be breached. “Were it otherwise, the covenant

would have no practical meaning, for any breach thereof would necessarily involve breach

of some other term of the contract.” Carma, 2 Cal.4th at 373. 

Second, the covenant of good faith and fair dealing is still tethered to the underlying

contract, and cannot impose duties that aren’t contemplated by it. “It is universally

recognized the scope of conduct prohibited by the covenant of good faith is circumscribed

by the purposes and express terms of the contract.” Id. The covenant “cannot impose

substantive duties or limits on the contracting parties beyond those incorporated in the

specific terms of their agreement.” Guz, 24 Cal.4th at 349. See also Carma, 2 Cal.4th at

374 (“We are aware of no reported case in which a court has held the covenant of good faith

may be read to prohibit a party from doing that which is expressly permitted by agreement. 

On the contrary, as a general matter, implied terms should never be read to vary express

terms.”); Los Angeles Equestrian Ctr., Inc. v. City of Los Angeles, 17 Cal.App.4th 432, 447

(Cal. Ct. App. 1993) (“If there exists a contractual relationship between the parties . . . the

implied covenant is limited to assuring compliance with the express terms of the contract,

and cannot be extended to create obligations not contemplated in the contract.”).

The covenant, in other words, “is designed to effectuate the intentions and reasonable

expectations of parties reflected by mutual promises within the contract.” Nein v. HostPro,

Inc., 174 Cal.App.4th 833, 852 (Cal. Ct. App. 2009). It’s not limited to the express duties in

the contract, but it’s not the functional equivalent of an addendum or rider to the contract,

either.

II. Discussion

Dos Beaches points to seven things MBE allegedly did in breach of the covenant of

good faith and fair dealing. Any one, individually, could give rise to a claim, and so the Court

will address them individually.

A. Location of Dos Beaches’ Franchise

The first grievance of Dos Beaches giving rise to its claim is that MBE determined the

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location of Dos Beaches’ UPS Store Franchise and misrepresented how profitable the

franchise would be in that location. (SAC ¶¶ 15–17.)

This can’t be right. The Franchise Agreement is clear that the franchisee first selects

a location, for MBE to accept before the Franchise Agreement is even official. Moreover,

the franchisee makes its selection on the understanding that it is ultimately responsible for

it and cannot later attempt to hold MBE liable for any assistance it may have offered.

You understand that while MBE or its Area Franchisee may

assist you in selecting a site for your Center and provide input

regarding the terms and conditions of the lease and may assist

in negotiating the lease, the ultimate decision and final

responsibility on whether to accept the site and the lease is

yours. You hereby release and hold MBE and its Area

Franchisee harmless from any liability resulting from their efforts

to assist you in selecting a site or negotiating a lease . . . . You

also understand that there is a risk that the site you select or the

lease you sign may not meet all of your expectations or desires.

(Offering Circular ¶ 3.) Dos Beaches signed the Franchise Agreement first, on September

7, 2004. And Dos Beaches, not MBE, named the location of its franchise: 341 East 81st

Street in Merrillville, Indiana. It wasn’t until MBE later signed the Franchise Agreement, on

September 29, 2004, that it accepted the East 81st Street location and the Franchise

Agreement became a binding contract. The Franchise Agreement is clear on this:

The location of Franchisee’s Center, set forth on page one of

this Agreement, has been accepted by MBE. Nevertheless,

MBE’s acceptance of the location set forth above as the

Location shall in no way constitute a representation nor an

express or implied warranty as to the viability or success of a

Center at such location. Upon MBE’s acceptance of such

proposed location, such location shall be deemed to be the

“Location”, as defined herein below.

(Franchise Agreement at 6.) If Dos Beaches believed it hadn’t been given a meaningful

opportunity to scout out its own franchise location, and that MBE forced the location on it,

the solution was simple: Dos Beaches should have never signed the Franchise Agreement

on September 7, 2004 and presented it to MBE for acceptance.

There are at least two reasons, then, why Dos Beaches can’t state a claim here for

breach of the covenant of good faith and fair dealing. First, there wasn’t a live contract

between the parties when the franchise location was chosen such that the covenant of good

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faith and fair dealing even existed. And second, given that the Franchise Agreement clearly

places the burden on the franchisee to select a location and releases MBE from any liability

arising out of this selection, Dos Beaches’ claim would plainly violate the principle that the

covenant “cannot impose substantive duties or limits on the contracting parties beyond those

incorporated in the specific terms of their agreement.” Guz, 24 Cal.4th at 349. Indeed,

letting Dos Beaches’ claim go forward would effectively write those express terms out of the

Franchise Agreement.

B. Display of the UPS Logo

The Franchise Agreement gives Dos Beaches the right to use and display the UPS

logo. (Franchise Agreement at 2.) There’s no dispute about that. Dos Beaches alleges,

however, that MBE breached the covenant of good faith and fair dealing by: (1) insisting on

negotiating a commercial lease on Dos Beaches’ behalf; and (2) negotiating a lease that

precluded Dos Beaches from displaying the UPS logo. (SAC ¶¶ 18–23.)

Dos Beaches runs into the same problem here as it does above. The Franchise

Agreement expressly places the ultimate responsibility for accepting a lease on Dos

Beaches, and it releases MBE from any liability resulting from its own efforts to assist in

negotiating a lease. (Offering Circular ¶ 3.) Allowing Dos Beaches to sue MBE for

negotiating an inadequate lease would, again, essentially write these terms out of the

Franchise Agreement, and the covenant of good faith and fair dealing isn’t that powerful. 

Moreover, the lease between Dos Beaches and its landlord was entered into on September

7, 2004, before the Franchise Agreement was accepted by MBE—that is, before the

Franchise Agreement became a binding contract and the covenant of good faith and fair

dealing came into play. (Franchise Agreement at Ex. I-1.) If Dos Beaches was

uncomfortable with its lease, it either shouldn’t have signed it or the Franchise Agreement.

C. Interference with Lease Modification

According to Dos Beaches, when its UPS Store was underperforming it entered into

talks with its landlord to both lower the rent and modify the lease to allow it to display the

UPS logo—and MBE interfered. Dos Beaches alleges that MBE both “eliminat[ed] the

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reduction of rent” (which seems like something only the landlord could do) and eliminated

any incentive for the landlord to work with Dos Beaches by saying a competitor, Max

Molinaro, would be taking over the space. (SAC ¶ 25.)

MBE tries to eliminate this claim by arguing that Dos Beaches “does not refer to any

express benefit conferred it under the Franchise Agreement that MBE unfairly interfered

with.” (Dkt. No. 38 at 10.) Obviously, MBE is seizing here on the principle that a claim for

breach of the covenant of good faith and fair dealing “is limited to assuring compliance with 

the express terms of the contract . . . .” Angeles Equestrian Ctr., 17 Cal.App.4th at 447. But

there is a relevant express term here. As noted, the Franchise Agreement places the

responsibility for negotiating a lease on Dos Beaches. It even advises Dos Beaches to retain

an attorney or real estate broker to negotiate the lease. With this warning, Dos Beaches

could have sensibly expected that MBE wouldn’t intervene in its lease negotiations in a

manner adverse to Dos Beaches’ interests. By executing the Franchise Agreement, in other

words, Dos Beaches bargained for the benefit, among other things, of negotiating its own

lease, and the covenant of good faith and fair dealing exists precisely to “prevent one

contracting party from unfairly frustrating the other party’s right to receive the benefits of the

agreement actually made.” Guz, 24 Cal.4th at 349. To the extent Dos Beaches alleges that

MBE interfered with this benefit, it has stated a claim for breach of the covenant of good faith

and fair dealing. True, the Franchise Agreement releases MBE from any liability for its

efforts in assisting in lease negotiations, but that doesn’t mean it also releases MBE from

liability for impeding lease negotiations.

D. Refusal to Provide Marketing Materials

Dos Beaches alleges that MBE promised it marketing materials before it signed the

Franchise Agreement, but that MBE subsequently “did not supply Plaintiff with marketing

materials of the same quantity and quality as the marketing materials that it provided to other

franchisees.” (SAC ¶ 30.)

There’s an obvious problem with trying to state a claim here for breach of the

covenant of good faith and fair dealing. Nowhere in the Franchise Agreement are

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promotional materials mentioned. Indeed, Dos Beaches only alleges that they were

promised before the Franchise Agreement was executed, presumably as an enticement. 

The covenant, however, can’t impose duties or obligations “beyond those incorporated in the

specific terms of the[ ] agreement.” Guz, 24 Cal.4th at 349. It is strictly intended to satisfy

the “reasonable expectations of parties reflected by mutual promises within the contract.” 

Nein, 174 Cal.App.4th at 852 (emphasis added). The promise of promotional materials,

however, is completely extraneous to the Franchise Agreement, and again, holding MBE to

such a promise would either re-write the Franchise Agreement or impose a supplemental

agreement altogether. That’s not the purpose of the covenant of good faith and fair dealing.

E. Refusal to Grant Request to Relocate

Frustrated with the success of its UPS Store at its initial location, Dos Beaches began

to try to grow its customer base in another area with the goal of relocating to that area. MBE

refused to grant Dos Beaches permission to move, however, and Dos Beaches claims this

was a breach of the covenant of good faith and fair dealing. (SAC ¶¶ 32–34.)

The Court previously suggested that this particular claim might be plausible because

it at least has some grounding in the Franchise Agreement. Specifically, the Franchise

Agreement allows the franchisee to relocate with MBE’s written consent:

Franchisee may relocate Franchisee’s Center (even within the

Territory) only with MBE’s prior written consent, and upon such

terms and conditions as MBE may prescribe in the Manuals,

which may include: (I) modification of the boundaries of the

Territory; and (ii) upgrading, renovating or remodeling the

proposed new location to the then-current design, and other

criteria or specifications indicated in the Manuals.

(Franchise Agreement at 2.) The implication of this is that if Dos Beaches’ first location

turned out to be a dud, MBE would be open to a relocation on certain terms. This was a

reasonable expectation on Dos Beaches’ part having executed the Franchise Agreement. 

To be sure, this isn’t a promise that a relocation would be authorized no matter what, but the

Court refused to rule out the possibility that the unreasonable refusal of a relocation request

may constitute a breach of the covenant of good faith and fair dealing:

Consider the Relocation Claim, for example. Here, Rayter

points to a particular contractual provision that allows for

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relocation “only with MBE’s prior written consent, and upon such

terms and conditions as MBE may prescribe in the Manuals . .

. .” If Rayter contends that Defendants were completely and

deliberately unreasonable in considering her request for

relocation, the Court can envision a credible argument that this

“unfairly frustrat[ed] [Rayter’s] right to receive the benefits of the

agreement actually made.” Guz, 24 Cal.4th at 349.

(Dkt. No. 35 at 20.) MBE now argues that the Court was wrong, and that MBE “did not agree

that it would exercise its discretion to permit Dos Beaches to [relocate] either reasonably or

in good faith.” (Dkt. No. 38 at 13.) Rather, “the Franchise Agreement gave MBE the right

to refuse consent without limitation.” (Id.) MBE relies upon Third Story Music, Inc. v. Waits, 

41 Cal.App.4th 798 (Cal Ct. App. 1995).

In Waits, the court set out to resolve “an apparent inconsistency between the principle

that the covenant of good faith should be applied to restrict exercise of a discretionary power

and the principle that an implied covenant must never vary the express terms of the parties’

agreement.” Id. at 804. Or, to put it another way, “When an agreement expressly gives to

one party absolute discretion over whether or not to perform, when should the implied

covenant of good faith and fair dealing be applied to limit its discretion?” Id. at 802. Here’s

the answer: when the agreement would be illusory without the covenant.

The conclusion to be drawn is that courts are not at liberty to

imply a covenant directly at odds with a contract’s express grant

of discretionary power except in those relatively rare instances

when reading the provision literally would, contrary to the parties’

clear intention, result in an unenforceable, illusory agreement.

Id. at 808. The court went on to explain that an illusory promise in an agreement doesn’t

make the agreement itself illusory, provided it is supported by consideration.

The TSM/Warner agreement states that Warner may market the

Waits recordings, or “at its election” refrain from all marketing

efforts. Read literally, as the trial court did and respondent

would have us do, this is a textbook example of an illusory

promise. At the same time, there can be no question that the

parties intended to enter into an enforceable contract with

binding promises on both sides. Were this the only

consideration given by Warner, a promise to use good faith would necessarily be im

The illusory promise was not, however, the only consideration

given by the licensee. . . . It follows that, whether or not an

implied covenant is read into the agreement, the agreement

would be supported by consideration and would be binding.

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Id. at 808. Waits clearly cuts in MBE’s favor. Even if there is an illusory quality to MBE’s

discretion to approve Dos Beaches’ relocation, the Franchise Agreement isn’t just a

relocation agreement; there are plenty of other terms supported by ample consideration on

both sides. That ends the argument here. Under Waits, the Court cannot imply a covenant

of good faith and fair dealing with respect to the relocation clause of the Franchise

Agreement.

F. Divulging Confidential Information to a Competitor

Dos Beaches claims that MBE passed its confidential research on an alternative

location to a favored competitor-franchisee, who then opened a UPS Store at that location. 

According to Dos Beaches, “[t]his essentially took the time, money and work that Plaintiff had

invested in a targeted market area and converted it for the benefit of a competing franchisee,

inflicting financial harm on Plaintiff’s business by eliminating its ability to earn a profit.” (SAC

¶ 38.)

The Franchise Agreement explicitly states that Dos Beaches has the exclusive right

to operate a UPS Store within a certain territory, but it also gives MBE more or less total

freedom to franchise other UPS Stores outside of that territory—no matter how close they

are to Dos Beaches’ UPS Store and no matter if they take away customers from Dos

Beaches.

Except as set forth in this Section 1.2, neither MBE or its

Affiliates will own or operate a Center, as that term is specifically

defined herein, nor license or franchise others to do so at any

site located within the Territory.

MBE expressly reserves (for itself and for its Designees) the

exclusive, unrestricted right to produce, franchise, license, sell,

distribute and market any products or services (under any

brands, including but not limited to the Marks) from any Retail

Outlets (including, but not limited to, traditional Centers or NonTraditional Sites) the physical premises of which are located

outside of the Territory, regardless of (I) the proximity of such

Retail Outlet to the Franchisee’s Center at the Location, or (ii)

whether or not such products or services are purchased by

customers whose residences or places of business are located

within the Territory.

(Franchise Agreement at 2.) So, simply allowing Molinaro to open a competing UPS Store

outside of Dos Beaches’ territory cannot give rise to a claim for breach of the covenant of

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good faith and fair dealing. Can the disclosure of Dos Beaches market research to Molinaro

state a claim, though? The Court doesn’t believe so. First, it has already found that there’s

no language whatsoever in the Franchise Agreement pertaining to the disclosure of a

franchisee’s information, and returning to a recurring principle, the Court cannot create

obligations under the covenant of good faith and fair dealing that aren’t incorporated or

contemplated in the Franchise Agreement’s terms. Second, the purpose of the covenant is

to “prevent one contracting party from unfairly frustrating the other party’s right to receive the

benefits of the agreement actually made,” Guz, 24 Cal.4th at 349, and Dos Beaches can’t

argue that the disclosure of certain information to Molinaro frustrated its own right to operate

a profitable UPS Store in its defined territory. The information was presumably useful only

insofar as it helped Molinaro open a UPS Store outside of Dos Beaches’ territory, and that

is expressly allowed by the Franchise Agreement. 

G. Refusal to Grant Second Request to Relocate

Dos Beaches’ final basis for its claim that MBE breached the covenant of good faith

and fair dealing is that a second request to relocate was unreasonably handled by MBE. 

This cannot be the basis of a claim for the same reason that the rejection of its first

relocation request cannot be the basis of a claim: the Franchise Agreement gives MBE

discretion to reject a relocation request, and the covenant of good faith and fair dealing can’t

govern the exercise of that discretion when, as a whole, the Franchise Agreement is

supported by consideration on both sides.

III. Conclusion

MBE’s motion to dismiss is GRANTED IN PART AND DENIED IN PART. Dos

Beaches’ claim for breach of the covenant of good faith and fair dealing survives on one,

narrow basis: the Franchise Agreement gives Dos Beaches the responsibility and right to

negotiate a lease, but in the end MBE inserted itself into Dos Beaches’ lease renegotiations

and thwarted Dos Beaches’ objectives. The Court certainlyunderstands Dos Beaches’ other

grievances, but for the reasons given they cannot be the basis of a claim that MBE breached

the covenant.

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The Court acknowledges that when it last ruled on MBE’s motion to dismiss, it hinted

that Dos Beaches may have a more substantial claim that it is allowing here. (See Dkt. No.

35 at 20–21.) The explanation for this is simple: the complaint the Court was considering

then simply wasn’t clear at all as to what the specific bases of Dos Beaches’ claim were, and

the Court was forced to charitably speculate.

The Defendants and the Court still have no idea what specific

conduct of the Defendants is behind Rayter’s claim. Again, the

claim itself just incorporates by reference every single grievance

against the Defendants, accompanied by the statement that [the]

implied covenant was breached . . . . The Court considered

thirteen different acts of Defendants that, in Rayter’s mind,

apparently give rise to a breach of contract claim. It is

completely unclear whether she believes that all of them, or

some subset of them, also give rise to a claim for breach of the

covenant of good faith and fair dealing . . . .

(Dkt. No. 35 at 19.) Now that Dos Beaches’ Second Amended Complaint offers explicit and

specific bases for its claim, it’s clear that many of those bases fail. In fact, almost all of them

do. They fail because they either: (1) involve conduct that pre-dates the execution of the

Franchise Agreement; (2) would eviscerate particular discretions the Franchise Agreement

gives to MBE; or (3) attempt to ladle onto the Franchise Agreement obligations on MBE’s

part that simply don’t appear in, or aren’t contemplated by, its express terms.

It is time for this case to go forward, even if it does so with hardly a pulse. It survives

a motion to dismiss on the most narrow of bases: the Franchise Agreement gives Dos

Beaches the responsibility for negotiating a lease, but when it attempted to do so MBE

inserted itself unnecessarily and adversely.

IT IS SO ORDERED.

DATED: May 23, 2012

HONORABLE LARRY ALAN BURNS

United States District Judge

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