Court Opinion

ID: 2787618
Source: CourtListenerOpinion
Date Created: 2015-03-19 17:00:58.657131+00
Date Added: 2024-06-11T11:06:05.327259
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                              No. 13-2189

DAVID SCHWARTZ, d/b/a Rent A Wreck; RENT A WRECK INC., d/b/a
Bundy Auto Sales,

                 Plaintiffs – Appellees,

           v.

RENT A WRECK OF AMERICA, INC.; BUNDY AMERICAN, LLC,

                 Defendants – Appellants,

           and

J.J.F MANAGEMENT SERVICES, INC.,

                 Defendant.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.     Peter J. Messitte, Senior District
Judge. (1:07-cv-01679-PJM)

Argued:   January 27, 2015                  Decided:   March 10, 2015

Before WILKINSON, KING, and DUNCAN, Circuit Judges.

Affirmed by unpublished opinion.        Judge Duncan wrote       the
opinion, in which Judge Wilkinson and Judge King joined.

ARGUED: Daniel Janssen, QUARLES & BRADY LLP, Milwaukee,
Wisconsin, for Appellants.    Roger Charles Simmons, GORDON &
SIMMONS, LLC, Frederick, Maryland, for Appellees. ON BRIEF: E.
King Poor, QUARLES & BRADY LLP, Milwaukee, Wisconsin, for
Appellants. Jacob I. Weddle, GORDON & SIMMONS, LLC, Frederick,
Maryland, for Appellees.

Unpublished opinions are not binding precedent in this circuit.

                                2
DUNCAN, Circuit Judge:

       This case comes before us a second time.                        On remand from

our first opinion, a jury found that the parties’ implied-in-

fact franchise agreement does not violate California competition

law.       Defendants-Appellants Rent-A-Wreck of America, Inc., and

Bundy American, LLC (collectively, “RAWA”) argue on appeal that

this       verdict     should    not   stand       because     the     district     court

misallocated the burden of proof and improperly prevented them

from presenting to the jury their theory of the case.                             Finding

no error, we affirm.

                                             I.

       This appeal presents a dispute between the creators of the

“Rent-A-Wreck” car rental brand, Plaintiffs-Appellees David S.

Schwartz and Rent-A-Wreck, Inc. (collectively, “Schwartz”), and

RAWA, the current owner of that brand.                       In the 1970s and 80s,

Schwartz began using the Rent-A-Wreck name and assigned most of

his interest in that name to RAWA. 1                Importantly for this appeal,

Schwartz reserved the exclusive right to sell or operate Rent-A-

Wreck franchises          in    West   Los   Angeles,      where      he   continued   to

operate      a   car   rental    business        under   the   name    “Bundy     Rent–A–

       1
       For a detailed description of the origin and evolution of
the parties’ relationships, see our previous opinion, Schwartz
v. Rent A Wreck Am. Inc., 468 F. App’x 238 (4th Cir. 2012).

                                             3
Wreck.”         RAWA’s         efforts         to       have    this       exclusive-territory

agreement declared invalid are the subject of this appeal.

                                                    A.

       In   June     2007,         Schwartz      filed         suit    against       RAWA    in     the

United      States      District       Court        for     the       District       of   Maryland.

Schwartz sought, in relevant part, a declaratory judgment that

he    enjoys      the     exclusive            right       to     operate        a   Rent-A-Wreck

franchise      in       the     Los       Angeles         territory.              RAWA      filed     a

counterclaim         under      California              Business      and       Professions       Code

§ 16600,       seeking         a     declaration            that       Schwartz’s         purported

franchise rights are unenforceable under California law because

those rights preclude RAWA from competing in that territory.

See    generally        Cal.       Bus.    &    Prof.       Code       §    16600    (“Except        as

provided     in    this       chapter,         every      contract         by   which     anyone     is

restrained        from    engaging         in       a    lawful       profession,         trade,     or

business of any kind is to that extent void.”).

       A jury heard the parties’ claims in April 2010.                                      It found

that Schwartz has a “contract . . . with [RAWA] with respect to

[Schwartz’s] operation of a used car rental business in West Los

Angeles,” Schwartz v. Rent A Wreck Am. Inc., 468 F. App’x 238,

243–44 (4th Cir. 2012), and that the contract affords Schwartz

an    “[e]xclusive        [Rent-A-Wreck]                franchise      .    .    .   in    West     Los

Angeles,” id. at 244.

                                                    4
       After    the    jury    announced      its    verdict,     RAWA    moved   under

Federal     Rule      of    Civil   Procedure       50   to    set     aside   portions

thereof.        RAWA       argued   that    the     court     “must    grant   judgment

notwithstanding the verdict on the jury’s finding that [Schwartz

has]   an   exclusive         franchise     contract     because       California   law

provides that noncompetition agreements of this nature are void

ab initio.”        Defs.’ Mem. Supp. Mot. J. Notwithstanding Verdict

3, Schwartz v. J.J.F. Mgmt. Servs., Inc., No. 1:07-cv-01679-PJM

(D. Md. May 18, 2010), ECF No. 308-1.

       The district court denied RAWA’s motion.                       It held that the

agreement is valid because RAWA and Schwartz have a “franchise

agreement,” and “franchise agreements . . . are not void under

California law as . . . non-competitive.”                      Tr. Mot. Proceedings

59, Schwartz, No. 1:07-cv-01679-PJM (D. Md. July 21, 2010), ECF

No. 353.       Schwartz appealed.

                                            B.

       On appeal, we held that the exclusive-territory provision

does not violate California law if “(1) the implied contract

found by the jury is a franchising agreement, whereby RAWA can

maintain some control as is necessary to protect its trademark,

trade name, and goodwill; and (2) the exclusivity arrangement

does not foreclose competition in a substantial share of the

affected line of commerce.”                Schwartz, 468 F. App’x at 251.            We

also “conclude[d] that the question of whether the exclusive

                                             5
territory at issue would foreclose competition in a substantial

share of the market for rental cars is a question of fact for

the jury.”           Id.       Because “[t]his issue was not presented to the

jury    .   .    .     ,       we    vacate[d]       the    district        court’s          denial   of

[RAWA’s] Rule 50(b) motion” and “instruct[ed] the district court

to    submit     to        a    jury    the     question        of    whether          the    exclusive

territory       provision             forecloses          competition        in     a       substantial

share of the market for rental cars.”                           Id.

                                                     C.

       On   remand,            the    district       court      submitted         to    a    jury   both

questions we identified: (1) whether RAWA maintains sufficient

control over Schwartz to protect its trademark, trade name, and

goodwill;       and        (2)       whether     the       exclusive-territory                provision

forecloses competition for rental cars.                                 Prior to trial, the

court held that RAWA would bear the burden of proof on both

issues.     The court also rejected RAWA’s attempts to redefine the

affected        line       of        commerce    as       the    market       for       Rent-A-Wreck

franchises because, among other reasons, our previous opinion

had referred to the market for rental cars.                                 The court explained

that RAWA could define “an appropriate market for rental cars in

whatever way [it] so choose[s]”--for example, by defining it as

the    market        for       the     type     of    rental         cars    that       Rent-A-Wreck

franchises rent--but RAWA could not define the market in terms

of    Rent-A-Wreck             franchises       themselves.            J.A.       823.        In    other

                                                     6
words, the district court limited RAWA to a market in which the

consumers are those who rent cars from establishments like Rent-

A-Wreck,    rather     than    those       who    seek    to   operate    Rent-A-Wreck

franchises.

     A three-day jury trial began on June 18, 2013.                               On the

first day, RAWA reiterated its view that the affected line of

commerce is “the sell [sic] of Rent-A-Wreck franchises,” not, as

the court had ruled, “the rental of cars.”                            J.A. 932.        RAWA

explained      that,    in    light    of        the   court’s    rejection       of    its

preferred market definition, it would not present any evidence

that the exclusive-territory agreement forecloses competition.

See J.A. 933; see also J.A. 1393–94.                     RAWA argued instead that

the parties’ contract is not a franchise agreement because RAWA

lacks control over Schwartz, and that the exclusive-territory

provision      is   therefore     invalid.               The   jury     rejected       this

argument; it found that RAWA “has the right to exercise some

control    over     [Schwartz]    as       is     necessary      to    protect     RAWA’s

trademark, trade name, and good will.”                    J.A. 902.      The jury also

found   that    Schwartz’s      exclusive-territory              agreement    does      not

foreclose competition in a substantial share of the market for

rental cars.        J.A. 902.         In accordance with this verdict, the

court     entered      judgment       in    favor        of    Schwartz      on    RAWA’s

counterclaim and closed the case.                 RAWA appealed.

                                             7
                                           II.

       This   appeal        presents      two    issues:   first,   whether    the

district court erred by assigning RAWA the burden of proving

that the exclusive-territory agreement forecloses competition;

and second, whether the district court erred by preventing RAWA

from   presenting      to    the   jury    its   preferred   definition   of   the

relevant market. 2      We address each issue in turn.

                                           A.

       RAWA   first    argues      that    Schwartz    should   have   borne   the

burden of proving that the exclusive-territory agreement does

not foreclose competition.             Schwartz responds that RAWA properly

bore the burden of proof because it was the party claiming that

the agreement violated California competition law.                      We agree

with Schwartz.

       2
       RAWA also argues on appeal that the district court erred
by determining precisely how much control RAWA can exercise over
Schwartz.   See Appellants’ Br. at 15–30.   This argument is not
properly before us because the district court entered no
judgment concerning RAWA’s specific franchise rights.   The jury
found that RAWA could exercise some control over Schwartz, but
neither the jury nor the district defined the contours of that
control.     Because the district court entered no judgment
concerning RAWA’s specific franchise rights, we may not decide
whether any such ruling would have been in error.    See Everett
v. Pitt Cnty. Bd. of Educ., 678 F.3d 281, 291 (4th Cir. 2012)
(“[W]e review judgments, not opinions . . . .”    (alteration in
original) (quoting Crosby v. City of Gastonia, 635 F.3d 634, 643
(4th Cir. 2011) (internal quotation marks omitted)).      If the
parties continue to disagree over how much control RAWA can
exercise   over   Schwartz,  they  are  free   to  resolve  that
disagreement through, for example, private negotiations or a
state-law breach-of-contract action.

                                            8
                                         1.

       We review de novo the district court’s allocation of the

burden of proof.          See Everett v. Pitt Cnty. Bd. of Educ., 678

F.3d 281, 288 (4th Cir. 2012).                A federal court sitting in

diversity, we apply state substantive law and federal procedural

law.       See, e.g., Anand v. Ocwen Loan Servicing, LLC, 754 F.3d

195, 198 (4th Cir. 2014).             Because “the assignment of the burden

of proof is a rule of substantive law,” Dir., Office of Workers’

Comp. Programs, Dep’t of Labor v. Greenwich Collieries, 512 U.S.

267, 271 (1994), “our role is to apply the governing state law,

or, if necessary, predict how the state’s highest court would

rule on an unsettled issue.”             Horace Mann Ins. Co. v. Gen. Star

Nat’l Ins. Co., 514 F.3d 327, 329 (4th Cir. 2008).

                                         2.

       RAWA brought its counterclaim under California Business and

Professions Code § 16600, which reads: “Except as provided in

this chapter,[ 3] every contract by which anyone is restrained

from engaging in a lawful profession, trade, or business of any

kind is to that extent void.”              We held in our previous opinion

that       §   16600   permits   an   exclusive-territory   provision   in   a

       3
       “The chapter excepts noncompetition agreements in the sale
or dissolution of corporations (§ 16601), partnerships (ibid.;
§ 16602), and limited liability corporations (§ 16602.5).”
Edwards v. Arthur Andersen LLP, 189 P.3d 285, 290-91 (Cal.
2008).

                                          9
franchise agreement if, in relevant part, the provision “does

not foreclose competition in a substantial share of the market.”

Schwartz, 468 F. App’x at 250–51; see also Comedy Club, Inc. v.

Improv W. Assocs., 553 F.3d 1277, 1292 (9th Cir. 2009).                  Now, we

must decide which party bears the burden of establishing whether

an     exclusive-territory          provision      forecloses     competition. 4

Neither the California State Legislature nor the Supreme Court

of California has addressed this precise question.                 Our task is

therefore      to   predict   how   the    California   Supreme    Court   would

answer it.      We predict that it would hold as the district court

did: The party claiming that an exclusive-territory provision is

void   under    § 16600   bears     the   burden   of   showing   that   § 16600

prohibits that provision.

       4
       RAWA maintains that we have already decided this issue
because our previous opinion “appears to place the burden on
Schwartz.” Appellants’ Br. at 33. RAWA misreads the following
passage from our opinion:

       [W]e conclude that [Schwartz is] entitled to the
       exclusive territory provision if two circumstances can
       be met: (1) the implied contract found by the jury is
       a franchising agreement, whereby RAWA can maintain
       some control as is necessary to protect its trademark,
       trade name[,] and goodwill; and (2) the exclusivity
       arrangement does not foreclose competition in a
       substantial share of the affected line of commerce.

Id. at 33–34 (first alteration in original) (quoting Schwartz,
468 F. App’x at 251).    This quotation does not establish which
party bears the burden of proof.     Instead, our use of passive
voice--“can be met”--allowed the district court to decide in the
first instance which party should bear that burden.

                                          10
       California law generally places the burden of proof on the

party   who     seeks       relief      from    the    court.           This    principle        is

codified      at    California       Evidence         Code    §    500,     which      provides:

“Except as otherwise provided by law, a party has the burden of

proof as to each fact the existence or nonexistence of which is

essential      to     the    claim      for     relief       or     defense         that    he   is

asserting.”          No statute or court decision alters this general

rule    for    § 16600       claims.           In   fact,         the   Supreme       Court      of

California has recognized that a party bringing a claim under

§ 16600 generally must “allege facts sufficient to constitute a

cause   of     action       for   unfair       competition          under      . . .       section

16600.”       Blank v. Kirwan, 703 P.2d 58, 69 (Cal. 1985); cf.

Dayton Time Lock Serv., Inc. v. Silent Watchman Corp., 124 Cal.

Rptr. 678, 682 (Ct. App. 1975) (noting plaintiff’s failure to

“develop material evidence” to support its claim under § 16600

that “performance           of    the    [exclusive-dealing]              contract         [would]

foreclose competition in a substantial share of the affected

line of commerce”).

       There is no reason to believe that the Supreme Court of

California would carve out an exception to this general rule for

a   claim     that    an    exclusive-franchise              agreement         is    void    under

                                               11
§ 16600. 5   California courts consider the following factors when

“determining      whether     the    normal      allocation     of    the     burden   of

proof    should    be   altered”:     (1)     “the     knowledge      of   the    parties

concerning      the     particular       fact”       to    be   proved;       (2)    “the

availability      of    the   evidence      to   the      parties”;   (3)     “the   most

desirable result in terms of public policy in the absence of

proof of the particular fact”; and (4) “the probability of the

existence or nonexistence of the fact.”                     Amaral v. Cintas Corp.

No. 2, 78 Cal. Rptr. 3d 572, 596 (Ct. App. 2008) (quoting Lakin

v. Watkins Associated Indus., 863 P.2d 179, 189 (Cal. 1993))

(internal    quotation        mark   omitted).            Applying    these      factors,

courts   have     shifted     “the   normal      allocation     of    the     burden   of

     5
       RAWA argues that the Northern District of California’s
opinion in Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034
(N.D. Cal. 1990), “required” the district court here to place
the burden of proof on Schwartz.    Appellants’ Br. at 31.   But
Scott--which is of course not binding on the district or this
court--does not support RAWA’s position.       In that case, a
franchisor brought breach-of-contract and unfair-competition
claims against some of its former franchisees.      Id. at 1036.
The franchisor alleged that the former franchisees had violated
a restrictive covenant they had signed by using the franchisor’s
trade secrets to compete unfairly with current franchisees. Id.
at 1036, 1043. The court began its analysis by recognizing that
post-employment covenants not to compete are unenforceable under
California law unless a “former employee uses a former
employer’s   trade   secrets    or   otherwise   commits  unfair
competition,” in which case “a judicially created exception to
section 16600” applies. Id. at 1043. The court then placed the
burden of proving the existence of a trade secret on the
franchisor.   Id. at 1038.   This holding is consistent with our
holding today: like the Scott court, we place the burden of
proof on the party bringing the claim.

                                          12
proof . . . in spoliation of evidence cases, negligence per se

actions, and product liability cases based on design defect.”

Nat’l Council Against Health Fraud, Inc. v. King Bio Pharm.,

Inc., 133 Cal. Rptr. 2d 207, 214–15 (Ct. App. 2003) (footnote

and citations omitted).              For these types of cases, the burden of

proof   shifts      to   the     defendant      where     “there    is   a     substantial

probability      the     defendant       has    engaged    in    wrongdoing       and     the

defendant’s wrongdoing makes it practically impossible for the

plaintiff to prove the wrongdoing.”                     Cassady v. Morgan, Lewis &

Bockius LLP, 51 Cal. Rptr. 3d 527, 537 (Ct. App. 2006) (quoting

Nat’l Council Against Health Fraud, 133 Cal. Rptr. 2d at 214)

(internal quotation mark omitted).

     Here,    none       of    the    four     factors    weighs    in   favor       of   the

conclusion     that       RAWA’s         § 16600       counterclaim       is     a    “rare

instance[]” in which “the burden of proof set forth in Evidence

Code section 500 [should be] altered.”                    Id.    With respect to the

first   and   second          factors,      Schwartz     would     not   have    superior

knowledge      of        whether        the         exclusive-territory          provision

forecloses competition or greater access to evidence of such

foreclosure.         Nor,      under     the   third     factor,    do   public       policy

considerations         suggest       that    exclusive-territory         provisions        in

franchise agreements should be unenforceable in the absence of

proof that they foreclose competition.                      Indeed, such exclusive

dealing     arrangements         can     be     pro-competitive,         as    when       they

                                               13
“provide an incentive for the marketing of new products and a

guarantee of quality-control distribution.”                                Dayton Time Lock

Serv., 124 Cal. Rptr. at 682.                          Finally, with respect to the

fourth   factor,        we   have       no   reason      to   believe       that   exclusive-

franchise   agreements            so    frequently        foreclose        competition      that

courts should presume that they have anticompetitive effects.

We therefore conclude that the baseline rule applies: RAWA bears

the burden of proving its § 16600 claim.                         Accordingly, we affirm

the district court’s allocation of that burden.

                                                 B.

     RAWA     next       argues         that     the      district         court    erred     by

preventing RAWA from presenting its preferred market definition

to the jury.         Though RAWA repeatedly attempted before and at

trial to define the affected line of commerce as the market for

Rent-A-Wreck franchises, it now claims that it tried to define

that line as the market for “older [rental] vehicles, generally

from two to eight years old.”                         Appellants’ Br. at 36; accord

Reply Br. at 10.              Schwartz responds that the district court

“encouraged”       RAWA      to        proffer        evidence      that    the     exclusive-

territory     agreement        forecloses             competition      in    a     rental    car

market, but RAWA refused.                    Appellees’ Br. at 56–57.                 For two

reasons, we find no error.

     First,       the     district           court     did    not     prevent      RAWA     from

defining    the    relevant         market       as     one   for    older       rental   cars.

                                                 14
Contrary     to    what     it    now    argues,    RAWA    proposed         the    following

market     definition       for    trial:      “The   line       of   commerce       in    this

dispute     is     the     sale    of    Rent-A-Wreck        brand         franchises,     for

renting and leasing used motor vehicles that are less than eight

years old.”         J.A. 790 (emphasis added); accord J.A. 819, 932.

The district court rejected that definition, but made clear that

RAWA could delineate “an appropriate market for rental cars in

whatever way [it] so choose[s], defining that market as rental

cars, rental cars older than 8 years old, etc.”                            J.A. 823.       RAWA

then chose not to define any rental car market.                            See, e.g., J.A.

819.      Having made this choice, RAWA cannot now claim that the

district court prevented it from advocating a market for older

rental vehicles.

         Second, the district court rightly rejected RAWA’s attempts

to define the market as one for Rent-A-Wreck franchises.                               In our

previous opinion, we “instruct[ed] the district court to submit

to   a    jury    the     question       of   whether      the     exclusive        territory

provision forecloses competition in a substantial share of the

market     for     rental     cars.”          Schwartz,      468      F.    App’x    at    251

(emphasis        added).         Because      franchises     are      not     rental      cars,

RAWA’s     preferred       market       definition    was    inconsistent           with    our

mandate and therefore impermissible.                    The district court did not

err by enforcing our mandate.                  See Scott v. Mason Coal Co., 289

F.3d 263, 267 (4th Cir. 2002) (“[W]hen we remand a case, the

                                               15
lower court must ‘implement both the letter and spirit of the .

. . mandate.’” (second alteration in original) (quoting United

States v. Bell, 5 F.3d 64, 66 (4th Cir. 1993)).

                              III.

     For the foregoing reasons, the judgment of the district

court is

                                                      AFFIRMED.

                               16