Opinion
A100565
10-29-2003
BENSON BARBECUES, L.P., et al., Plaintiffs and Respondents, v. ADVANCED MANUFACTURING AND DEVELOPMENT, INC., Defendant and Appellant.
Benson Barbecues L.P., a limited partnership, and its general partner, Benson Barbecues, Inc. (collectively Benson) sued Advanced Manufacturing and Development, Inc. (AM&D) for fraud and breach of contract; the breach of contract claim was abandoned during trial; the jury returned three special verdicts against AM&D for $1,139,967.25 each on theories of intentional misrepresentation, negligent misrepresentation, and concealment; judgment was entered against AM&D for $1,139,967.25. AM&Ds motions for new trial and for judgment notwithstanding the verdict were denied. AM&D has appealed from the judgment, and from the order denying judgment NOV.
AM&D also purports to appeal from the order denying a new trial; while that order is not directly appealable, it is reviewable on appeal from the judgment. (Deschene v. Pinole Point Steel Co. (1999) 76 Cal.App.4th 33, 37, fn. 1.)
AM&D maintains that there was no fraud because it made no misrepresentation, and it had no duty of disclosure that would make it liable for fraudulent concealment. AM&D argues that, even if it committed fraud, it cannot be held liable because Benson could not reasonably rely on the information it provided. AM&D also contends that excessive damages were awarded. The issues are essentially factual and the judgment is supported by substantial evidence. Accordingly, we affirm.
I. FACTS
Skip Murry formed Benson to develop his idea for a high-end barbecue grill with distinctive features. He had previously worked in real estate, and had no experience developing a product. He hired a consultant and put together a business plan to raise capital. At a trade show in March 1998, he exhibited a prototype of the barbecue to Joel Shattuck, who worked for the company that published the Frontgate "Ultimate Grill" catalog of luxury barbecues. Shattuck was interested in including the Benson barbecue in the 1999 Frontgate catalog. He thought that Frontgate could sell 300 to 500 of the barbecues for Bensons projected price of $7,000 per unit.
Murry needed a manufacturer for the barbecue and he was referred to AM&D, a sheet metal company. AM&D was founded by Gary Ramos, who had sold the business but stayed on as the president and CEO. Murry met with Ramos at AM&Ds plant in Willits in May or June of 1998. Ramos said he told Murry that AM&D was "the greatest thing since sliced bread and pay toilets," and Murry was impressed with AM&Ds facility.
In a June 15, 1998, letter from Ramos to Murry, AM&D proposed to build a prototype barbecue for Benson, and furnish Benson with a "drawing package" for the unit, by October 1, 1998, for $25,000. The letter provided for a $30,000 deposit from Benson by August 1, 1998, toward an order of 25 units at $4,000 each for delivery in December 1998. The letter contemplated manufacture of 500 units by March 1, 1999, and 300 units a month thereafter. The letter noted that "substantial engineering changes" would be required to the prototype Benson had brought to AM&D, and estimated that approximately $300,000 in tooling—machinery to fabricate parts—would be required to manufacture the barbecue for $3,000 as Benson hoped. Murry executed the letter agreement on behalf of Benson, and returned it to Ramos on June 30, 1998, along with the initial $25,000 deposit, and a draft manufacturing agreement with AM&D for a five-year term.
Production contemplated in the June 1998 agreement was never accomplished. AM&D eventually built only a couple of prototype barbecues, and sold Benson parts rather than assembled units, before their dealings ended, in acrimony, 18 months later.
Murry and Ramos understood that the "drawing package" to be furnished along with the prototype for the $25,000 payment included a "bill of materials"—a listing of the barbecues parts—as well as drawings that showed how the parts were assembled. Gary Mann, the AM&D engineering manager in charge of the Benson barbecue and other products during the second half of 1998, testified that the Benson project involved creation of a "costed" bill of materials, showing the cost, including labor and materials, of each component and the unit as a whole. Ramos said that a drawing package enables the product to be reproduced, and there was a risk that the customer could go to another manufacturer once the package was delivered. He said that the 25 barbecues to be provided in the first "preproduction" run were to be "turnkey" units, which meant fully-assembled, in a box, ready for the end user, and that the initial run would give AM&D "a pretty good feel" for the cost to build the units. He said that AM&D "had no idea" whether it would make a profit on the initial run and "hope[d] at best to break even." Murry said that the main purpose of the initial run was to determine the cost to manufacture the barbecue, which would dictate the products ultimate selling price. Murry hoped that the barbecue could be sold for around $7,000, and quoted that price in his initial discussions with Frontgate.
Murry wrote Ramos on October 14, 1998, and proposed that the initial run of 25 units be financed with assignments to AM&D of customer purchase orders. Ramos wrote back requesting the $ 30,000 deposit for the initial production run, and "hard POs [purchase orders] for the additional balance of the order from your approved distributors" to "give AM&D coverage for our liabilities for this order." The $30,000 deposit was paid by Benson in two installments in November 1998.
Significant design and engineering changes were made to the barbecue as the project proceeded, and a prototype had not been fully assembled by November 1998, when Shattuck and another Frontgate representative visited the AM&D plant. Ramos said AM&D put on a "dog and pony show" to convince Frontgate that it was a "world class manufacturer." Frontgate made various design suggestions that increased the cost of the barbecue. A working prototype was furnished to Frontgate in December 1998, and was photographed for the Frontgate catalog to be mailed in April 1999. Shattuck said that he hounded Benson and AM&D for a firm cost figure for the barbecue as the February 1999 printing deadline for the catalog approached.
Murry advised Shattuck on February 6, 1999, that Benson and AM&D had met earlier in the week "to finalize product specifications, delivery schedules and production costs." On February 13, Bob Bragdon, head of AM&Ds quoting department, sent Benson a quotation of $4,650 for the top-of-the-line model 500 barbecue, along with a note that "[t]his pricing reflects the sales price derived in the AM&D / Benson meeting of February 2, 1999." At trial, Murry described this quotation as showing "what their cost of producing our products would be." Benson set the wholesale price to Frontgate at $6,200, and Frontgate set the retail price in the catalog at $9,950. Shattuck was much less excited to be carrying a barbecue that would sell for $10,000, rather than $7,000 as originally planned, and thought that the product would not sell as well at the higher price.
Ramos was demoted at AM&D in early 1999, and John Hammett took over as AM&Ds president and CEO around February 1. Hammett said that he intended to honor AM&Ds contracts, but did not think the June 1998 agreement with Benson "had relevance to the business going forward" because neither side had performed its commitments under that agreement. Hammett said Ramos told him that the June 1998 agreement was no longer in effect, that AM&D and Benson were making a "fresh start," and that their relationship "was to be redefined as [they went] forward." Contrary to Hammett, Ramos testified that, at the time he was demoted, he thought Benson was still entitled to receive 25 barbecues from AM&D for $4,000 each pursuant to the June 1998 agreement.
Ramos admitted having a lien on any recovery by Benson against AM&D to satisfy a $50,000 judgment he had obtained against Benson, but denied that his testimony was influenced by that financial incentive.
Ramos said Hammett was worried about product liability exposure associated with the barbecue and with getting paid by Benson for AM&Ds work, but Hammett said he was enthusiastic about the barbecue when he first met Murry in February 1999, and thought that the product "was going to be good for AM&D." Hammett said that he did not expect AM&D to make any profit on the initial production run of barbecues, but that he went to AM&Ds quoting department on February 13 to confirm that the $4,650 price quoted to Benson "was based on our costs" and that "we could be profitable at that price in the long run." Ramos had never returned the draft manufacturing agreement Murry sent in June 1998; Hammett gave Murry his notes on the draft on February 14 and indicated that he had sent the document to counsel.
Benson received an $80,015 purchase order from Frontgate on February 22. The next day, Hammett advised Murry that Ramos had guaranteed payment of the $80,000 AM&D anticipated spending on parts for the initial Frontgate order. Hammett testified that it was unusual for AM&D to accept such a guarantee, but that the arrangement AM&D proposed—where Benson would cover the ongoing cost of materials, and AM&D would invest its labor and engineering time—was normal practice with a new customer. Benson sent AM&D a February 26 purchase order for 43 units, listing $5,130 as the cost of the model 500 barbecue, rather than $4,650 as previously quoted. Murry testified that a $480 premium was charged because the order was for less than 50 units, and production was to be expedited so the units would be ready in 8 weeks when the Frontgate catalog was mailed.
Hammett sent Murry a redraft of a five-year manufacturing contract on March 12, with prices for the units left blank. On March 16, Frontgate sent Benson a purchase order for $114,848; on April 7, Benson sent AM&D a purchase order for $453,898. On April 15, Hammett sent Murry a letter stating that AM&D was "kicking off your next large order," and would need payment of $248,225 by April 27 to cover materials. Although AM&D was "still aiming for shipment of the first truckload [to Frontgate] the week of April 26," Hammett said the shipment might be delayed pending safety certification of the barbecue by Underwriters Laboratories (UL). AM&D was "still aiming for delivery of the UL machine for testing early next week," but Hammett thought it best "to hold back on assembly of the barbecues until we have the results of UL [testing]."
Murry wrote Hammett on April 25 and 26, complaining among other things of AM&Ds failure to fill the initial Frontgate order before the catalog was mailed. Shattuck wrote Murry on April 29, expressing Frontgates disappointment that it had not received any Benson barbecues, and predicting that sales would be hurt because units were not in stock. On April 30 and May 7, manufacturing agreements prepared by AM&D were exchanged between the parties and their attorneys. These agreements, which provided for a one-year term and a $4,650 price for the model 500 barbecue, were never signed.
On May 11, Frontgate advised Murry that it had sold only two Benson barbecues, and canceled its initial $80,015 order. On May 20, Murry sent Hammett copies of the purchase orders Benson had received, which included the second Frontgate order and totaled $673,268, and asked him to advise what financial arrangements AM&D would accept to build the units. Hammett wrote back that day stating that AM&D would accept either payment upon shipping of an order with advance deposits for materials, or assignments of rights to invoice creditworthy Benson customers directly.
A barbecue was delivered to UL for testing in June. On June 18, AM&D sent Benson a proposed "Supply Agreement" for assembly of 43 units, less the unit sent to UL, pursuant to Bensons February order. Ramos executed a guarantee of Bensons payments under this proposed agreement. Hammett testified that the agreement was withdrawn after the barbecue failed the UL test, and Murry told him that, instead of making the changes UL specified, Benson would seek safety certification from another organization. Hammett said he was no longer willing to allow AM&D to assemble the barbecue at that point because he was concerned about AM&Ds product liability exposure after failure of the UL test. Ramos said that he and Hammett discussed the reasons AM&D refused to assemble the barbecue, and that Hammett was concerned with "the pricing that was in place," as well as product liability.
When Murry learned that AM&D would not build the barbecue, he decided, with Ramoss encouragement, that Benson would open its own assembly facility in Willits. Murry said that the alternative would have been to cancel the orders Benson had received, which at the time totaled $500,000 to $700,000. Murry said he relied on Ramos to set up and operate the Benson facility, which opened in July. AM&D permitted Ramos to work with Benson subject to certain conditions, and had his office moved to the Benson facility. Benson hired Bragdon, the quoting officer from AM&D, and obtained loans from Murrys investors, as well as Ramos and his partners, to finance the operation. The barbecue UL had tested was sent to a different rating organization, ITL, and was certified by ITL on July 15.
Ramos negotiated with AM&D on behalf of Benson to buy the parts AM&D had on hand for the barbecue. On July 14, Murry wrote Hammett a letter confirming Bensons agreements to pay AM&D $50,000 for a bill of materials for the units in the February purchase order, and $100,000 for parts and drawings to complete that order. Hammett acknowledged at trial that there was no market for the parts AM&D had been assembling for Benson, and that AM&D would have taken a loss on the parts unless Benson bought them. Hammett said that he was willing to suffer that loss in order to avoid product liability exposure, and that he hoped Benson would use AM&D as its long-term supplier of sheet metal components for the barbecue. In August, Hammett quoted Murry the prices AM&D would charge for fabricated sheet metal parts for future Benson orders.
On August 20, Murry wrote Hammett a letter noting that Benson had paid AM&D $130,000 pursuant to the July 14 agreement but had not received all of the parts needed to complete the February purchase order. According to the letter, it had been understood that payment of the remaining $20,000 would be withheld until Benson received all of the items covered by the agreement. Murry wrote Hammett again on September 5, demanding the drawings and parts he thought Benson was owed. Hammett prepared an accounting of all transactions between AM&D and Benson from June 1998, which showed that Benson owed AM&D $25,157.73 as of September 30, 1999. By December 1999, AM&D and Benson had reached an impasse, with AM&D withholding the drawings and bill of materials, and Benson refusing to pay the balance AM&D demanded.
In the meantime, Benson had hired Ron Budish, AM&Ds chief engineer on the barbecue project, and had chosen a sheet metal supplier other than AM&D. When Benson selected the other vendor in November 1999, Ramos, pursuant to his arrangement with AM&D, stopped working for Benson, and Hammett directed Ramos to disassociate himself from AM&Ds business. Murry said that he and Budish worked "constantly" for at least three months to produce a costed bill of materials for the barbecue. When the bill of materials was finished in December 1999, Benson discovered that it would cost $6,460 to manufacture the product. "We were probably out of business," Murry testified, "right there at that point."
Murry explained that Benson had "made the decision to go into the assembly facility based on representations that AM&D had given us as to what it would cost to build a Benson 500. That was $4,650. So, all of our financial projections were based on the cost of $4,650 not $6,460." $4,650 was the amount that had been quoted by AM&D in February 1999, and repeated in manufacturing contracts proposed by AM&D in April and May 1999, to sell the assembled model 500 barbecues to Benson. The price for the model 500 in Bensons February 1999 purchase order was more than $4,650, but included a premium for expedited delivery of a small order; thus, Murry regarded the $4,650 figure as "the only pricing that they [AM&D] ever gave me." Murry testified that "[w]e assumed and were told by Gary Ramos that an estimate of profit in [the $4,650 figure] would be approximately 20 percent. So we made the determination that to build a product would cost $3,720." Based on that cost, he had calculated that the units would retail for about $8,300. However, when Benson completed the bill of materials it appeared that the retail price would be about $11,500, and thus that the barbecue would be too expensive to market.
Thereafter "we basically just hung on by our fingernails," Murry said, borrowing money to stay in business until the next trade show in March 2000. "[W]e were trying to survive and we were selling barbecues to, for instance, Barbecues Galore for $6,995." Benson came "out of the [trade] show and really didnt have any orders. And that was just about the end of it." Murry said that after they finished the bill of materials, he and Budish immediately started working on ways to reduce the manufacturing cost of the barbecue. He said they were "in the process of doing [that]" in May 2000, "when we had to close the doors" on the business.
The $1,139,967.25 awarded in damages equaled all of the losses Murry said Benson suffered after opening its assembly plant in July 1999. Murry said that he blamed AM&D for the losses, in part because of AM&Ds failure to fulfill its contractual obligations. He testified that the losses were "a result of the fact that they did not provide us with the drawing package and the bill of materials," and "they didnt build the 25 preproduction units." He said that the main purpose of the initial production run had been to determine the manufacturing cost. He said that "if they would have built the 25 units back in December or January," it would have been apparent that the barbecue would wholesale for more than $9,000, and "there was just no way to do that. . . . I wouldnt have thought about it for 10 seconds. . . . We could have stopped right there and nobody, you know, Frontgate wouldnt have incurred their losses, I wouldnt have incurred our losses."
Murry also, as noted above, blamed Bensons losses on the $ 4,650 price AM&D had quoted for the barbecue. "Thats the only thing that was ever provided to me. Thats the only thing I could rely on," Murry said. Murry said that, after AM&D refused to assemble the barbecue, Ramos "assured me we could probably build it for less than $4,650," but he did not rely on Ramoss cost estimate because Ramos "did not have anything to do in arriving at those costs with AM&D." Murry understood the AM&D quote to mean that AM&D could build the barbecue for $4,650, and thought that AM&D "totally mis[led] me" with that figure. Murry acknowledged that he retained consultants, accountants and attorneys, received Ramoss assistance, and hired Bragdon and Budish from AM&D when he decided to manufacture the barbecue. "And is it your testimony to this jury that with all that established," Murry was asked, "Benson lost all of this money because John Hammett said in February of 1999, he could build this product for $4,950 [sic] or whatever he said?" Murry replied, "Yes," and observed in response to further questions that the February 1999 quote was repeated in subsequent manufacturing agreements AM&D proposed.
Murry also said that he was never informed of the computer problems AM&D encountered trying to generate a costed bill of materials for the barbecue. AM&D manager Mann recalled that "Budish, the engineering supervisor, was struggling, because this was a big topic of discussion trying to develop this cost of billing materials [sic] so that the company could go to Skip and say, this is what it is costing us, or this is what [it] is going to cost you to have us build the product." Mann said that AM&Ds computer program for the bill of materials was generating some "strange figures." He thought that the problem was discovered around the time Benson was deciding whether to assemble the units itself, and that the problem was corrected shortly after Benson opened its manufacturing facility.
Budish testified that design changes to the barbecue were essentially finished by February or March 1999, and that AM&Ds first full bill of materials for the product, run in April 1999, showed a total cost of $5,600 per unit on production runs of 100 units. In August 1999, when Budish ran his last bill of materials at AM&D before leaving for Benson, the total cost shown on the bill had climbed to $8,800 per unit. He said that the cost information in the bill became more complete as time went on, but that the program AM&D used to generate the bill produced errors.
II. DISCUSSION
A. Fraud
AM&D contends that there was no misrepresentation because it merely furnished Benson with a $4,650 price quotation, and it was not and could not be proven that AM&D misrepresented its own pricing. AM&D reasons that, because the record shows that it was willing to sell assembled barbecues to Benson for that price subject to certain conditions, there was no false or untrue statement "as to a past or existing material fact" as required for the claims of intentional and negligent misrepresentation. (BAJI Nos. 12.31, 12.45 (9th ed. 2002).) Benson conceded below that it was not relying on a "false promise" theory of fraud, and the jury was not instructed on that theory. (See BAJI No. 12.40 (9th ed. 2002) [promise made without intent to perform].) AM&D submits that the misrepresentation verdicts cannot be salvaged on the theory that its price quote was an implied representation of its manufacturing costs, because in posttrial briefing Benson denied any reliance on an implied representation theory, and because there is no liability under California law for negligent implied representations in any event (see Diediker v. Peelle Financial Corp. (1997) 60 Cal.App.4th 288, 298).
AM&D contends that the alternative ground for the judgment—the verdict on concealment—is also insupportable. A party is not liable for fraudulent concealment of facts unless it had a legal duty to disclose them (Kovich v. Paseo Del Mar Homeowners Assn. (1996) 41 Cal.App.4th 863, 870), and AM&D argues that there was no such duty in this instance. This argument rests mainly on two propositions. One is that a party has no duty to disclose what it does not know. (E.g., Estate of Shay (1925) 196 Cal. 355, 365.) AM&D maintains that, because it never determined its own manufacturing costs for the barbecue, it cannot be held liable for failing to disclose its "true" costs to Benson.
Second, citing a decision of the Supreme Court of Alabama, AM&D contends that the seller in a commercial transaction, as a matter of law, has no duty to reveal to the buyer how the sales price was derived or the amount of profit to be earned on the sale. (Ex Parte Ford Motor Credit Co. (Ala. 1997) 717 So.2d 781, 787.) Here, the duty to disclose allegedly arose when Benson was deciding whether to manufacture the barbecue itself, and thereby become, in AM&Ds words, its "competitor in the manufacturing business. Benson thus moved further away," AM&D reasons, "from the type of relationship with AM&D that might create a duty to disclose. . . . AM&D knows of no legal authority . . . requiring a business to disclose its manufacturing costs or profit margins to another firm that is entering the same market. To impose a duty to disclose under that circumstance would be antithetical to the basic relationship between competitors in a free market and could pose problems under the antitrust laws. The public policy effects of imposing an affirmative duty of a seller to disclose its profit margin to a competitor would be unprecedented and traumatic to commercial relationships in this State."
Two fallacies underlie AM&Ds principal arguments. The first is that the representations at issue—the $4,650 quotation made in February 1999 and repeated in the April and May 1999 manufacturing agreements AM&D proposed—involved only the sales price for the barbecue, and not its manufacturing cost. The " `gist " of an action for misrepresentation or concealment "`is fraudulently producing a false impression upon the mind of the other party. " (Sime v. Malouf (1949) 95 Cal.App.2d 82, 100, italics added.) Thus, how a statement is couched is ultimately less important than how the statement would reasonably be understood. Murry testified that he understood the price quotations to mean not just that AM&D would sell Benson the barbecue for $4,650, but also that AM&D could profitably manufacture the barbecue for $4,650.
This understanding was confirmed in cross-examination as follows: "Q. . . . [A]re you telling us that when John Hammett said he would build those units for you at that price that you heard him say that anybody could build this barbecue any place in the State of California at any time for that price and you should rely on that representation? [¶] A. I had nothing else to rely on. [¶] Q. Is that what you understood him to be saying? [¶] He didnt say anything like that. [¶] Q. Thats what I am getting at. [¶] A. He said he could build these for $4,650. [¶] Q. Correct, he could do it? AM&D could do it? [¶] A. Right."
Whether Murrys understanding was reasonable was a disputable issue for the trier of fact. On the one hand, the quotations on their face were statements about price, and might have been understood as such. On the other hand, Benson had hired AM&D to do more than simply manufacture the barbecue; it had contracted to receive drawings and a bill of materials from AM&D that would confirm the barbecues production costs. In the context of the parties contractual relationship, Benson could reasonably interpret the information AM&D provided to refer to cost as well as price. Moreover, since costs ordinarily influence prices and businesses do not ordinarily undertake to lose money, Benson could reasonably infer that AM&Ds price was reflective of its manufacturing costs, and that those costs were less than the price it was quoting. Hammett said that he confirmed, in February 1999, that the initial $4,650 quotation "was based on our costs." Ramos said that he did not know whether AM&D would profit from the first production run of barbecues, and Hammett testified that AM&D did not expect to profit on the initial sales, but whether Murry should have understood that AM&D was willing to sell at a loss was, at best for AM&D, an argument for the jury.
AM&D argues that it never had any reliable cost information to give Benson, and that Benson must have understood this. Again, however, this assertion about what should have been understood was debatable under the evidence. AM&D maintains that Murry must have known that the costs had not been determined because he said that the main purpose of the initial production run was to determine the manufacturing costs, and that run was never completed. This would be a stronger argument if the issue were Murrys understanding of the original $4,650 quotation in February 1999, because it was not clear at that point how far manufacturing of the barbecue had progressed. However, the question is what Murry would have understood of the quotation in July of 1999, when he was deciding whether Benson would manufacture the barbecues. By that time, the quotation had been repeated in April and May in manufacturing agreements proposed by AM&D. Further, Hammett had informed Murry in an April 15 letter that AM&D was "aiming for shipment of the first truckload [to Frontgate] the week of April 26," subject to UL certification of the products safety. This letter and the proposed manufacturing agreements could, at least arguably, have created a reasonable impression by July 1999 that the initial production run was virtually complete and far enough along to give AM&D a good handle on its production costs.
Which brings us to the second fallacy in AM&Ds central arguments: that what it allegedly failed to disclose was "the `true cost of manufacturing the barbecue." Benson presented a different theory of concealment in arguments to the jury: that AM&D should have advised that it did not know what the manufacturing costs were. Benson noted that Budish "never trusted the bill of materials" he developed at AM&D, and argued, "So either they knew that it was wrong or they knew they were having problems. They knew that their machines werent telling them the right thing and in no event did they tell Benson Barbecues, say, our software isnt spitting this stuff out. We didnt really know what the cost of manufacture is, Mr. Murry, but here is your price anyway, but you cant trust this price. We dont know ourselves. We are having serious computer problems. No one said anything. That was concealed."
Therefore, the issue with respect to fraudulent concealment is whether AM&D had a duty to disclose that its cost information was unreliable in order to rectify the misimpression, created by its repeated price quotations and professed progress on the initial order, that it had determined it could manufacture the barbecue for $4,650. A relevant consideration is that AM&D stood to profit by that misimpression. "[E]ach case in which it is claimed that fraud is involved must be considered on its own facts," in light of "the circumstances and condition of the parties." (Koch v. Williams (1961) 193 Cal.App.2d 537, 541.) Here, the circumstances include the inventory of parts AM&D had gathered for the barbecue, which according to the evidence were worth over $100,000 to AM&D if they could be sold to Benson, and worth nothing if they could not. Thus, it was not in AM&Ds interest to cast doubt on the projects viability by disclosing the unreliability of its cost information to Benson. Rather, it was in AM&Ds interest to encourage Benson to manufacture the barbecue and buy the otherwise worthless parts. Benson and AM&D were not, as AM&D would have it, competitors when the disclosure should allegedly have been made; by that time AM&D had no interest in building the barbecue. They were in the position of buyer and seller of the barbecue parts.
Buyer and seller is one of the relationships in which a duty of disclosure may arise. (LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 337.) "Concealment may constitute actionable fraud where seller knows of facts which materially affect the desirability of property and which he knows are unknown to the buyer." (Koch v. Williams, supra, 193 Cal.App.2d at p. 541.) The duty of disclosure may be "fact dependent and a question for the trier of fact, not a question of law." (Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 614; see also Charpentier v. Los Angeles Rams Football Co. (1999) 75 Cal.App.4th 301, 312, fn. 9 [existence of legal duty to disclose was "for the jury to sort out"].) Recognition of a duty of disclosure in this case is consistent with well-settled principles, and the issue is largely one of disputable inferences. Accordingly, there are no grounds to reverse the jurys finding of fraudulent concealment.
Nondisclosure or concealment of material facts may constitute actionable fraud where "the defendant makes representations but does not disclose facts which materially qualify the facts disclosed, or which render his disclosure likely to mislead." (Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 294; see Civ. Code, § 1710, subd. 3 [deceit includes "suppression of a fact, by one who . . . gives information of other facts which are likely to mislead for want of communication of that fact"]; Heliotis v. Schuman (1986) 181 Cal.App.3d 646, 651; 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 703, p. 805 ["where one who is under no duty to speak nevertheless does so . . . he is bound . . . not to suppress facts which materially qualify those stated, for misleading half truths may be actionable"]; BAJI No. 12.37 (9th ed. 2002).) Consistent with this rule, AM&D could be found to have had a duty to dispel the false impression it had created about the cost of building the barbecue.
AM&D asserts that it never had any reliable cost information to give Benson, but Hammett testified that he confirmed in February 1999, when the $4,650 figure was first quoted, that this figure was "based on our costs" and that the barbecue could be profitable for AM&D at that price. It appears that AM&D had some confidence in its initial cost calculations, and that AM&D remained reasonably confident of its costs up to May 1999, when it was still proposing to build the barbecue for $4,650. However, Budish and Mann testified that AM&D eventually realized—according to Mann, right around the time Benson was deciding whether to buy the barbecue parts from AM&D and take over the manufacturing—that its cost figures were unreliable. Moreover, according to Budish, the cost numbers AM&D was generating were substantially higher than the $4,650 figure that had been quoted to Benson. Thus, when AM&D decided against manufacturing the barbecue it had good reason to be worried about the products price, as Ramos said Hammett confided, as well as its safety, but AM&D did not disclose any pricing problem to Benson.
It was a jury question whether advice that AM&Ds cost figures were suspect, and in any event higher than originally anticipated, would have materially affected Bensons decision to manufacture the barbecue and buy the parts from AM&D. Information is considered material if " `a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question (Rest. 2d Torts, § 538, subd. (2)(a); see also Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 188, fn. 5), and as such materiality is generally a question of fact unless the `[information] is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it. (Rest.2d Torts, § 538, com. e, p. 82.)" (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 977.) That AM&D had not, contrary to the impression it created, determined that it could profitably build the barbecue for $ 4,650 was not "obviously unimportant" information to Benson in deciding whether to take over the manufacturing itself. The jury could reasonably find that the information was material to Bensons decision.
It is irrelevant to AM&Ds liability for concealment that AM&D may have had no reason to question the $4,650 quotations when they were made. "One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated . . . [¶] . . . subsequently acquired information that he knows will make untrue or misleading a previous representation that when made was true or believed to be so." (Rest.2d Tort, § 551, subd. (2)(c); see Koch v. Williams, supra, 193 Cal.App.2d at p. 541; Stevens v. Marco (1956) 147 Cal.App.2d 357, 379-380.)
This case is distinguishable from Jappe v. Mandt (1955) 130 Cal.App.2d 426, which AM&D cites for the proposition that there is "no duty on the part of a seller in an arms-length transaction to tell the buyer of circumstances that might cause the latter to lose money on the deal." The plaintiff in that case alleged that the defendant fraudulently induced him to purchase a municipal garbage collection business by falsely assuring him that the route was valuable and failing to tell him that the city was planning to award the contract to a third party. The trial court found that the defendant had made no representation about the businesss profitability and did not know of the citys plans until after the business was purchased. The city had taken no action before the parties transacted, and while the defendant was aware that a city contract " `was possibly in the wind, " "[t]he idea was still in the conversation and rumor stage." (Id. at p. 429.) The Court of Appeal noted that the plaintiff had a "full opportunity to make a complete investigation of all facets of the business" before he bought it, and held that, "[u]nder such circumstances defendant was not legally bound to tell the prospective buyer of any rumors or reports that were `in the wind, that the city might `possibly enter this field." (Ibid.)
The defendant in Jappe v. Mandt, unlike AM&D, made no statements that would have given the plaintiff a false impression of a material fact, and whereas the plaintiff in that case had the opportunity to make a full investigation, Benson could not have been expected to know of the problems with AM&Ds computer program. More importantly, the court in Jappe v. Mandt did not announce any broad rule of nondisclosure for arms-length purchase transactions; it addressed the disclosure issue, as we are doing, in view of the particular facts of the case. It may be true that sellers need not ordinarily warn buyers that they may be getting a bad deal, but this does not mean that situations cannot arise when such a disclosure is necessary.
"It is extremely difficult to be specific as to the factors that give rise to . . . [a] reasonable expectation of disclosure" in business transactions. (Rest.2d Torts, § 551, subd. (e), com. l., p. 125.) As a very general matter, a duty of disclosure has been found where "the advantage taken of the plaintiffs ignorance is so shocking to the ethical sense of the community, and is so extreme and unfair, as to amount to a form of swindling, in which the plaintiff is led by appearances into a bargain that is a trap, of whose essence and substance he is unaware." (Ibid.) Thus, a seller may have a duty to disclose a fact "when he knows that the buyer is unaware of the fact, could not easily discover it, would not dream of entering into the bargain if he knew and is relying upon the sellers good faith and common honesty to disclose any such fact if it is true." (Ibid.) Under all of the circumstances here, whether Benson was swindled in this sense by AM&D was a question for the jury.
Our holding that a duty of disclosure could be found in this case has no antitrust implications and will not disrupt commerce. Again, AM&D may be correct that a seller need not ordinarily reveal its costs to the buyer, but the Alabama case for that proposition did not go so far as to suggest that, as a matter of law, such a disclosure could never be required. What that court "decline[d] to recognize" was "a common law duty that would require the seller of a good or service, absent special circumstances, to reveal to its purchaser a detailed breakdown of how the seller derived the sales price of the good or service, including the amount of profit to be earned on the sale." (Ex Parte Ford Motor Credit Co., supra, 717 So.2d at p. 787, italics added.) The "special circumstances" here are that: (1) the buyer retained the seller to provide cost information, as well as a product; (2) the seller provided apparently reliable information indicative of the products cost; (3) the seller later learned that its cost calculations were unreliable; and (4) the seller failed to reveal that subsequent knowledge when it stood to profit from the misconception the original information might foreseeably have created. From all of these facts, a jury could reasonably decide that the subsequent knowledge should have been disclosed.
Since the finding of concealment is supported by the law and the evidence, it is unnecessary to address AM&Ds arguments that there was no intentional or negligent misrepresentation. "Where one finding sustained by sufficient evidence will support the judgment, an appellate court will presume the judgment was based on such finding, and questions relative to the other findings become immaterial." (Sanfran Co. v. Rees Blow Pipe Mfg. Co. (1959) 168 Cal.App.2d 191, 201.)
B. Reliance
Reasonable reliance is an element of a cause of action for fraudulent concealment (Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at p. 974), and AM&D contends that it is missing here. " `Except in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiffs reliance is reasonable is a question of fact. " (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.) Reliance can be considered reasonable unless it is "preposterous or irrational." (Van Meter v. Bent Construction Co. (1956) 46 Cal.2d 588, 595.) This is not one of the rare cases where the plaintiffs reliance was so preposterous or irrational as to be unreasonable as a matter of law.
AM&Ds threshold argument on the issue is that Benson admitted that it did not rely on AM&Ds pricing when it decided to manufacture the barbecue. However, Murry expressly testified to such reliance; he said Benson decided to open its assembly facility "based on representations that AM&D had given us as to what it would cost to build a Benson 500. That was $4,650." Murry did acknowledge that he did not understand the $4,650 figure to refer to Bensons cost to build the barbecue; he understood it to reflect AM&Ds costs, not Bensons. The question, then, is whether it was unreasonable for Murry to believe that Benson could manufacture the barbecue for the same cost as AM&D if Benson opened its own facility. On the one hand, AM&D was an established manufacturer, and Murry had no experience in manufacturing. On the other hand, Murry had the assistance of Ramos on loan from AM&D, and was able to hire others who had worked on the barbecue at AM&D. Whether Murrys optimism was unjustified under the circumstances was a matter of opinion.
To quote from Murrys cross-examination: "Q. When Hammett said to you in February of 1999 that AM&D would commit its resource[s] to build those barbecues for $ 4,650 apiece, under the terms that were set out for you, did you understand him to be saying that you could build that barbecue for $4,650? A. Absolutely not." (See also fn. 3, ante.)
AM&D submits that Benson should have investigated its costs before it undertook to manufacture the barbecue, and that AM&D should not bear the consequences of Bensons bad business decision. AM&D maintains that "[a]nyone with even a modicum of business sense would not open a factory without confirming what its manufacturing costs would be," and "no reasonable business would rely on a five-month-old price quotation as the sole basis for making a seven-figure investment when entering a new market."
There are a number of problems with this argument. First, Benson was not relying entirely on a five-month-old price quotation; as we have observed, the quotation was repeated shortly before Benson decided to manufacture the barbecue, when it could have been reasonably understood to accurately reflect AM&Ds costs. Second, Benson was not required to show that the misleading quotation was the "sole basis" for its decision to build the barbecue. "[F]raud need not be the sole cause [of the plaintiffs decision]; reliance is established where the [fraud] substantially influenced his choice, even though other influences operated as well." (5 Witkin, Summary of Cal. Law, supra, Torts, § 711, p. 811; see also Rest.2d Torts, § 546 [reliance need only be "a substantial factor in determining the course of conduct that results in [the] loss"].) Third, defrauded plaintiffs are not held to a hypothetical reasonable person standard of conduct; they can recover unless their actions in reliance on the fraud are manifestly unreasonable in light of their own knowledge and experience. (Seeger v. Odell (1941) 18 Cal.2d 409, 415.)
These authorities dispose of the argument, raised improperly for the first time in AM&Ds reply brief (Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764), that Bensons decision to manufacture the barbecue was caused by AM&Ds refusal to build it, not by AM&Ds price quotations, and thus that there was no causal link between the fraud and the decision that led to Bensons losses. A jury could reasonably find that the quotations substantially factored into Bensons decision, even if they were not its immediate cause.
In deciding whether Bensons reliance was manifestly unreasonable, the jury was entitled to weigh considerations ignored in AM&Ds briefs. Murry testified that when Benson was deciding how to proceed, its alternatives were to begin manufacturing the barbecue, or lose orders worth $500,000 to $700,000. It could be inferred from that testimony that time was of the essence when the decision was made, and that Benson, having been strung out for months by AM&D, had no choice but to plunge into the manufacturing if it wanted to save its business. Whether the gamble was worth the risk in view of the potential rewards was a matter for debate. Reliance on the price quotation also looks less naive when it is remembered that, as Benson was opening its facility in July 1999, it was bargaining (a second time) for a bill of materials that would have confirmed AM&Ds manufacturing costs. Given AM&Ds professed progress on the barbecue, Benson could have anticipated prompt receipt of an accurate bill of materials, and had no reason to anticipate that AM&D would never produce one.
AM&D notes that Benson had the assistance of Ramos and various professionals it hired, including people who had worked on the barbecue at AM&D, and that Benson was eventually able to produce a bill of materials for itself. AM&D thinks these facts should preclude any recovery because they show that Benson had the means to investigate manufacturing costs on its own, and thus effective access to the concealed information, at the time of its alleged reliance. However, this reasoning, at least arguably, overlooks the reality of the situation. Benson was apparently faced with an immediate decision, and the evidence showed that a bill of materials could not be produced overnight. According to Murry, it took Budish three months to produce Bensons bill of materials after it appeared that one would not be forthcoming from AM&D. Thus, Murry could plausibly claim that when Benson made the manufacturing decision it had nothing, other than AM&Ds price quotation, on which to rely in estimating its costs.
AM&D contends that Benson could not demonstrate reasonable reliance because it hired Budish, the person in charge of developing a bill of materials for AM&D, and, as a matter of law, Budishs knowledge had to be imputed to Benson at that point. However, since Budish was not retained until after Benson had opened its facility, Benson did not have the benefit of his knowledge when it made the manufacturing decision. The jury could find that "the die had been cast" by the time Benson hired Budish, and may have learned from him that AM&D did not in fact have any reliable cost information.
AM&Ds witness Howard Honeycutt testified that Budish joined Benson after Benson started manufacturing the barbecue. Bensons facility opened in July 1999; Budish testified that he left AM&D in August 1999.
Evidence showed that AM&D held itself out as an expert manufacturer, and that Benson relied from the outset on that expertise. AM&D encouraged Benson to take over the manufacturing, not only by failing to disclose the unreliability of its cost information, but also by lending Ramos to the enterprise. It was well within the evidence for the jury to find that there was reasonable reliance on AM&Ds fraud. AM&Ds contentions to the contrary are all at bottom jury arguments "presented in the wrong court." (Wilkenson v. Linnecke (1967) 251 Cal.App.2d 291, 294.)
C. Damages
AM&D argues that excessive damages were awarded because Benson failed to act reasonably to mitigate its losses. Like the issue of reasonable reliance, whether the plaintiff has acted reasonably in mitigating damages is a question of fact unless the evidence supports only one conclusion. (West v. Bechtel Corp. (2002) 96 Cal.App.4th 966, 985.) This is not an unusual case where the issue can be decided as a matter of law.
AM&D suggests in passing that Benson should have gone out of business as soon as it hired Budish, and presumably learned from him that AM&D did not have reliable cost information. As has been noted, Benson hired Budish after it had made the investments required to begin its manufacturing operations. By folding at that point, Benson stood to lose those investments along with substantial pending orders for the barbecue. Whether Benson was obliged to give up and take those losses in view of the uncertainty about costs was a judgment call for the jury.
AM&Ds main argument on mitigation is that Benson should have discontinued its operations in December 1999, when Budish completed the bill of materials showing that Bensons manufacturing costs would be much higher than anticipated. AM&D seizes on Murrys retrospective assessment that Benson was "probably out of business right there at that point," but "[t]he reasonableness of the efforts of the injured party must be judged in the light of the situation confronting him at the time the loss was threatened and not by the judgment of hindsight" (Green v. Smith (1968) 261 Cal.App.2d 392, 396).
Murry said that Benson continued to sell barbecues after the bill of materials was completed; insofar as it appears from the record Benson had a number of barbecues to sell, and it is not apparent why it should have gone out of business rather than sell them. Murry said that after December 1999, in addition to selling barbecues, Benson attended a trade show and tried to find a way to lower its manufacturing costs before shutting its doors. Given the interest and orders the barbecue had generated, these additional efforts to carry on the business were not, as a matter of law, manifestly unreasonable.
Hammett calculated that AM&D provided Benson with parts sufficient to build 39 barbecues, and Benson wrote AM&D a letter on November 13, 1999, confirming that it had received the parts needed to complete assembly of the "last four barbecues."
III. CONCLUSION
I concur: Sepulveda, J. & Rivera, J.
I concur in the judgment.