Copeland v. Baskin Robbins U.S.A.

After Copeland accepted the terms in the May 1999 letter, the parties continued negotiating over the terms of the co-packing agreement. Among the issues to be settled were the price Baskin Robbins would pay for the ice cream, the flavors Copeland would produce, quality standards and controls, who would bear the loss from spoilage, and trademark protection. Copeland testified he believed in June 1999 he reached an oral agreement with Baskin Robbins on a price for the ice cream of his cost plus 85 cents per tub. He conceded, however, the parties had not agreed on how the cost component was to be determined and so far as he knew there was no written memorandum of this pricing agreement. None of the other issues were settled before Baskin Robbins allegedly breached the contract.

In July 1999, Baskin Robbins wrote to Copeland breaking off negotiations over the co-packing arrangement and returning his $3,000 deposit. The letter explained Baskin Robbins’ parent company had “recently . . . made strategic decisions around the Baskin Robbins business” and “the proposed co-packing arrangement [is] out of alignment with our strategy.” Therefore, Baskin Robbins informed Copeland, “we will not be engaging in any further negotiations of a co-packing arrangement.”^[1] Although Baskin Robbins offered to proceed with the agreement for the sale and lease of the Vernon plant assets it did not insist on doing so, apparently accepting Copeland’s view the lack of a co-packing agreement was a “deal-breaker.”

In his suit for breach of contract, Copeland alleged he and Baskin Robbins entered into a contract which provided Baskin Robbins would enter into a co-packing agreement with Copeland under the terms set out in the May

Copeland chose a third course. Rather than insist the parties had formed a co-packing contract and Baskin Robbins had breached it, he claimed the May 1999 letter constituted a contract to negotiate the remaining terms of the co-packing agreement and Baskin Robbins breached this contract by refusing without excuse to continue negotiations or, alternatively, by failing to negotiate in good faith. This path too has its difficulties. No reported California case has held breach of a contract to negotiate an agreement gives rise to a cause of action for damages.^[4] On the other hand numerous California cases have expressed the view the law provides no remedy for breach of an “agreement to agree” in the future.^[5] We believe, however, these difficulties could be overcome in an appropriate case.

Furthermore, as we will demonstrate below, purported contracts which the courts have dismissed as mere “agreements to agree” are distinguishable from contracts to negotiate in at least two respects.

A contract to negotiate the terms of an agreement is not, in form or substance, an “agreement to agree.” If, despite their good faith efforts, the parties fail to reach ultimate agreement on the terms in issue the contract to negotiate is deemed performed and the parties are discharged from their obligations. Failure to agree is not, itself, a breach of the contract to negotiate.^[8] A party will be liable only if a failure to reach ultimate agreement resulted from a breach of that party’s obligation to negotiate or to negotiate in good faith.^[9] For these reasons, criticisms of an “agreement to agree” as “absurd” and a “contradiction in terms”^[10] do not apply to a contract to negotiate an agreement.

In addition, it is important to note courts which have found purported contracts to be unenforceable “agreements to agree” have focused on the enforceability of the underlying substantive contract, not on whether the agreement to negotiate the terms of that contract is enforceable in its own right.^[11] In Autry v. Republic Productions Inc., for example, after stating the law “provides [no] remedy for breach of an agreement to agree” the court

Our decision in Beck v. American Health Group illustrates the distinction between an “agreement to agree” and a contract to negotiate the terms of an agreement.

In Beck v. American Health Group, the plaintiff sued the defendant for breach of contract. The alleged contract was contained in a letter to the plaintiff from the defendant’s executive director which began: “ ‘It is a pleasure to draft the outline of our future agreement. . . .’” After outlining the terms of the agreement, the letter concluded: “ ‘If this is a general understanding of the agreement, I ask that you sign a copy of this letter, so that I might forward it to Corporate Counsel for the drafting of a contract. When we have a draft, we will discuss it and hopefully shall have a completed contract and operating unit in the very near future.’ ”^[13] Noting that “ ‘preliminary negotiations or an agreement for future negotiations are not the functional equivalent of a valid, subsisting agreement’ ” we concluded the letter “did not constitute a binding contract, but was merely ‘an agreement to agree’ which cannot be made the basis of a cause of action.” We based our conclusion on the words of the letter which “manifest an intention of the parties that no binding contract would come into being until the terms of the letter were embodied in a formal contract to be drafted by corporate counsel.”^[14]

Assume, however, the defendant in Beck v. American Health Group did not present the plaintiff with a draft contract and an opportunity to negotiate its terms as promised in its letter. Instead, the defendant presented the plaintiff with a final contract on a take-it-or-leave-it basis, refusing to negotiate any of the contract terms the plaintiff found unacceptable. Under the law as we see it, the plaintiff could have a cause of action for breach of contract on the theory the letter signed by the parties constituted a contract to negotiate the terms of an agreement and the defendant breached that contract by refusing to negotiate.

The Channel Home Centers case is illustrative. There the parties executed a letter of intent to enter into the lease of a store in a shopping center. The letter stated, inter alia, Grossman the lessor “ ‘will withdraw the Store from the rental market, and only negotiate the above described leasing transaction to completion.’ ” After Channel Home Centers expended approximately $25,000 in activities associated with the negotiations, Grossman unilaterally terminated negotiations. The following day Grossman leased the store to one of Channel Home Centers’ competitors, Mr. Good Buys. Channel Home Centers sued Grossman for breach of contract based on the letter of intent. After a court trial, the court awarded judgment to Grossman.^[16] The Third Circuit Court of Appeals reversed. Distinguishing this case from one alleging merely the breach of an agreement to agree the court pointed out: “[I]t is Channel’s position that [the letter of intent] is enforceable as a mutually binding obligation to negotiate in good faith. By unilaterally terminating negotiations with Channel and precipitously entering into a lease agreement with Mr. Good Buys, Channel argues, Grossman acted in bad faith and breached his promise to ‘withdraw the Store from the rental market and only negotiate the above-described leasing transaction to completion.’ ”^[17] The court concluded under Pennsylvania law an agreement to negotiate in good faith is an enforceable contract.

Baskin Robbins maintains there are sound public policy reasons for not enforcing a contract to negotiate an agreement. In doing so, we would be injecting a covenant of good faith and fair dealing into the negotiation process whether or not the parties specifically agreed to such a term.^[18] Citing Professor Farnsworth,^[19] Baskin Robbins argues that instead of having a salutary effect on contract negotiations, imposing a regime of good faith and fair dealing would actually discourage parties from entering into negotiations, especially where the chances of success were slight. Alternatively,

We find Baskin Robbins’s policy arguments unpersuasive.

Allowing a party to sue for breach of a contract to negotiate an agreement would not inject a covenant of good faith and fair dealing into the negotiation process in violation of the parties’ intent. When two parties, under no compulsion to do so, engage in negotiations to form or modify a contract neither party has any obligation to continue negotiating or to negotiate in good faith.^[20] Only when the parties are under a contractual compulsion to negotiate does the covenant of good faith and fair dealing attach, as it does in every contract.^[21] In the latter situation the implied covenant of good faith and fair dealing has the salutary effect of creating a disincentive for acting in bad faith in contract negotiations.

Professor Farnsworth’s criticisms were not directed toward a cause of action for breach of a contract to negotiate the terms of an agreement. On the contrary, Farnsworth supports such a cause of action.^[22] Rather, his criticisms were directed at the theory propounded by some European courts and legal scholars that, even absent a contractual agreement to negotiate, a general obligation of fair dealing arises out of the negotiations themselves.^[23] We rejected this theory of liability in Los Angeles Equestrian Center, Inc. v. City of Los Angeles,^[24] as did the court in Racine & Laramie.^[25]

Arguing bad faith is an uncertain concept which could cost the defendant millions of dollars in expectation damages is also without merit. For the reasons we explain below, the appropriate remedy for breach of a contract to negotiate is not damages for the injured party’s lost expectations

Recovery for unjust enrichment in the context of contract negotiations is usually based on ideas disclosed or services rendered during the negotiations.^[28] Where, as here, the negotiations are over the sale of goods, the subject matter of the contract is not an idea nor does the potential seller typically confer a precontractual service on the potential buyer.

A cause of action for promissory fraud is based on “[a] promise made without any intention of performing it.”^[29] In many cases the defendant may have intended to negotiate in good faith when it contracted to do so but changed its mind later when, for example, a more attractive contracting partner came along.^[30]

Thus, we conclude neither unjust enrichment nor promissory fraud provides a party an adequate vehicle for relief when its negotiating partner breaks off negotiations or negotiates in bad faith.

The doctrine of promissory estoppel is generally used to enforce the defendant’s clear and unambiguous promise when the plaintiff has reasonably and foreseeably relied on it.^[31] We agree a cause of action for promissory estoppel might he if the defendant made a clear, unambiguous promise to negotiate in good faith and the plaintiff reasonably and foreseeably relied

Finally, we believe there are sound public policy reasons for protecting parties to a business negotiation from bad faith practices by their negotiating partners. Gone are the days when our ancestors sat around a fire and bargained for the exchange of stone axes for bear hides. Today the stakes are much higher and negotiations are much more complex. Deals are rarely made in a single negotiating session. Rather, they are the product of a gradual process in which agreements are reached piecemeal on a variety of issues in a series of face-to-face meetings, telephone calls, e-mails and letters involving corporate officers, lawyers, bankers, accountants, architects, engineers and others.^[35] As Professor Farnsworth observes, contracts today are not formed by discrete offers, counteroffers and acceptances. Instead they result from a gradual flow of information between the parties followed by a series of compromises and tentative agreements on major points which are finally refined into contract terms.^[36] These slow contracts are not only time-consuming but costly. For these reasons, the parties should have some assurance “their investments in time and money and effort will not be wiped out by the other party’s footdragging or change of heart or taking advantage of a vulnerable position created by the negotiation.”^[37] This concept is not new to California law. In Drennan v. Star Paving Co. the court applied the doctrine of promissory estoppel to hold that where a general contractor used the bid of a subcontractor in formulating its own successful bid for a job the court would imply a promise by the subcontractor not to revoke its bid in order “to preclude the injustice that would result if the offer could be revoked after the offeree had acted in detrimental reliance thereon.”^[38]

For obvious reasons, damages for breach of a contract to negotiate an agreement are measured by the injury the plaintiff suffered in relying on the

II. Baskin Robbins Is Entitled to Summary Judgment Because It Has Shown Copeland Cannot Establish Reliance Damages.

A defendant is entitled to summary judgment if it “show[s] that one or more elements of the cause of action . . . cannot be established” by the plaintiff.^[42] The defendant may not make this showing through argument alone but may do so through the plaintiff’s discovery responses if those responses demonstrate “the plaintiff does not possess, and cannot reasonably obtain, needed evidence” to establish his cause of action.^[43]

As we explained in part I, ante, reliance damages are the only form of recovery available in an action on a contract to negotiate an agreement. Baskin Robbins has shown through Copeland’s complaint and discovery responses he cannot establish reliance damages.^[44]

The only damages Copeland seeks in his complaint are derived from what he would have received if the underlying contract had been consummated, e.g., the profits he hoped to earn through the co-packing agreement and other ice cream sales. Satisfactory proof of such damages is impossible because there is no way to know what the eventual terms of the co-packing agreement would have been, or even if the parties would have reached an agreement.^[45] Copeland’s complaint disavowed reliance damages, e.g., time spent, expenses incurred, opportunities missed while negotiating with Baskin Robbins.

Disposition

The judgment is affirmed.

Woods, J., and Perluss, J., concurred.