Unpublished Disposition, 933 F.2d 1015 (9th Cir. 1991)

MEMORANDUM^* 

In these cross-appeals, Stephen J. Cannell Productions, Inc. ("Cannell") appeals from the entry of summary judgment in favor of LJN Toys, Inc. ("LJN") on Cannell's claims for breach of contract, promissory fraud, and promissory estoppel (No. 89-55764), while LJN appeals from the summary judgment dismissal of its counterclaims for breach of contract, conversion, and fraud (No. 89-55766). The district court had jurisdiction over this diversity action pursuant to 28 U.S.C. § 1332. We have jurisdiction to hear these timely appeals under 28 U.S.C. § 1291. We reverse in part the entry of summary judgment against Cannell and reverse summary judgment against LJN on its counterclaims.

* These appeals arise from an unsuccessful effort to develop an animated children's television show and a related line of toys. In the spring of 1987, Cannell, which was to have developed the show, sought out a manufacturer to act as licensee for a toy line based on the show. It was understood that the licensee would, in addition to developing the product line, purchase a significant amount of spot advertising time from the show's intended syndicator, LBS Communications, Inc. ("LBS"). According to Cannell, the advertising commitment was a necessary prerequisite to the entire project, for without it the show would not be syndicated in enough markets to justify either the costs of producing the show or developing the toy line.

Among the toy manufacturers approached by Cannell was LJN. Cannell claims that in May 1987, LJN orally agreed to proceed with the project, and in so doing agreed to purchase at least $1.5 million in spot advertising. LJN also allegedly orally agreed to inform Cannell immediately if it would be unable to purchase that amount. The parties signed a Merchandising License Agreement ("the Agreement") several months later. The Agreement was contingent upon "the completion of negotiations between [LJN] and [LBS] whereby [LJN] shall purchase certain spot advertising from [LBS]," but did not otherwise mention LJN's alleged prior oral commitments. It also contained a liquidated damages clause, which provided that Cannell's "sole and exclusive remedy" in the event of a breach was to retain LJN's $400,000 advanced royalty payment, and an integration clause.

The underlying litigation ensued when LJN withdrew from the project in November 1987. The district court disposed of the entire case prior to trial, granting LJN's motion for summary judgment on all of Cannell's causes of action and granting, sua sponte, summary judgment in favor of Cannell on LJN's counterclaims. Both parties timely appealed.

II

The district court granted summary judgment against Cannell on its breach of contract claim after finding that the Agreement's liquidated damages clause was enforceable. R.T. 3-5. We hold that the district court erred in so doing, as material questions of fact exist as to the validity of that clause.¹ 

* Prior to 1978, California law generally disfavored contractual agreements which limited damages to a stipulated amount.²  Under former Civil Code sections 1670 and 1671, a liquidated damages clause was presumptively invalid unless the proponent of the clause established by clear and convincing evidence " 'that it would be impracticable or extremely difficult to fix the amount of actual damages' " and " 'that the amount stated as liquidated damages [was] the result of a reasonable endeavor by the parties to state an amount that bears a reasonable relationship to actual damages.' " Barbera v. Sokol, 101 Cal. App. 3d 725, 732, 161 Cal. Rptr. 843, 847 (1980) (quoting United Sav. & Loan Ass'n v. Reeder Dev. Corp., 57 Cal. App. 3d 282, 298-99, 129 Cal. Rptr. 113, 123 (1976)).

In 1978, the California legislature abandoned this statutory presumption of invalidity by adopting "a new general rule favoring the enforcement of liquidated damages provisions," Cal.Civ.Code Sec. 1671, Law Revision Commission Comment to 1977 Amendment (West 1985), which shifted the burden of proof to the party seeking to invalidate a liquidated damages clause. Under revised section 1671, "a provision in a contract liquidating the damages for the breach of a contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." Cal.Civ.Code Sec. 1671(b) (West 1985).

Although section 1671 has rightly been characterized as a radical departure from the former statutory regime, see, e.g., ABI, Inc. v. City of Los Angeles, 153 Cal. App. 3d 669, 684-85, 200 Cal. Rptr. 563, 573 (1984), apart from a shift in the burden of proof from the proponent to the opponent of a liquidated damages clause, the essential inquiry remains the same: Whether "the damages provided in the contract bear [a reasonable relationship] to the range of harm that reasonably could be anticipated at the time of the making of the contract." Cal.Civ.Code Sec. 1671, Law Revision Commission Comment to 1977 Amendment (West 1985). Under the new statute, a court should consider a broader range of factors in making this determination than under the former regime,³  yet "the sine qua non" of a valid liquidated damages clause under the new statute, as under the old, is whether it bears a reasonable relationship to the range of ascertainable harm. ABI, Inc., 153 Cal. App. 3d at 685, 200 Cal. Rptr. at 573. See also Sweet, Liquidated Damages in California, 60 Calif. L. Rev. 84, 142-43 (1972) (emphasizing, in a study prepared for Law Revision Commission, the centrality of the reasonableness inquiry to a statutory regime in which liquidated damages clauses are favored).

B

The parties disagree as to whether the range of harm was reasonably ascertainable at the time of contracting. In reviewing a grant of summary judgment, however, we must assume the truth of the evidence set forth by Cannell, as the nonmoving party. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 (9th Cir. 1987). Cannell's evidence suggests that the range of harm that reasonably could have been anticipated from lost production costs and expenses was from zero to more than $3 million, depending on when a breach occurred.⁴  If LJN performed fully, Cannell would obviously suffer no resulting harm.⁵  If LJN breached early in the production process, Cannell would lose whatever amount of money it had spent on production costs. If LJN breached late in the production process, Cannell's production-related losses could be as high as $3,575,000, the total anticipated production costs for the show.⁶ 

The failure of the Agreement to set varying amounts of liquidated damages consistent with this sliding scale of anticipatable damages suggests that the clause may well have been unreasonable. See Smith v. Royal Mfg. Co., 185 Cal. App. 2d 315, 324, 8 Cal. Rptr. 417, 423 (1960) (stating that a liquidated damages clause is unreasonable " [w]here a fixed sum is agreed upon as liquidated damages for one of several breaches of varying degree"). In any event, once Cannell created material questions of fact as to the range of anticipatable damages and whether the $400,000 was reasonable in relation to that range, the district court should have denied LJN's motion for summary judgment. As we discussed above, although the Law Revision Commission has identified a number of factors to be considered in the enforcement of liquidated damages provisions, the sine qua non of validity is the reasonableness of the relationship of stipulated to anticipated damages. Once Cannell established material questions of fact as to that relationship, summary judgment was inappropriate. We therefore reverse and remand.

III

The district court granted summary judgment against Cannell on its promissory fraud cause of action after finding that extrinsic evidence of LJN's alleged oral promises was barred under the parol evidence rule. R.T. 9:9--9:19; 15:2--15:25. We reverse.

As a general matter, the parol evidence rule does not prevent a party from offering extrinsic evidence to establish illegality or fraud. Continental Airlines Inc. v. McDonnell Douglas Corp., 216 Cal. App. 3d 388, 419, 264 Cal. Rptr. 779, 795 (1989); Cal.Civ.Proc.Code Sec. 1856(g). This is true even if the contract, like the one at issue here, contains an explicit integration clause, disclaiming any prior agreements or understandings. Oak Indus., Inc. v. Foxboro Co., 596 F. Supp. 601, 607 (1984) (applying California law). When, however, promissory fraud is alleged, this "fraud exception" to the parol evidence rule is inapplicable "unless the false promise is independent of or consistent with the written instrument. It does not apply where ... parol evidence is offered to show a fraudulent promise directly at variance with the terms of the written agreement." Continental Airlines, 216 Cal. App. 3d at 419, 264 Cal. Rptr. at 795-96 (citations omitted). See also Bank of America Nat'l Trust & Sav. Ass'n v. Pendergrass, 4 Cal. 2d 258, 263, 48 P.2d 659 (1935); Price v. Wells Fargo Bank, 213 Cal. App. 3d 465, 484, 261 Cal. Rptr. 735, 745 (1989); Oak Indus., 596 F. Supp. at 608. The "limited purpose" of this "exception to the fraud exception" is to "avoid [ ] ... undermining ... the parol evidence rule by permitting every breach of contract to be pleaded as the tort of fraud." Oak Indus., 596 F. Supp. at 608.

The cases in which parol evidence of fraud has been barred under this exception have involved an irreconcilable conflict between the express terms of a written agreement and an alleged extrinsic promise. For example, in the Pendergrass case, in which the California Supreme Court adopted this rule, the plaintiff alleged that a lender had made oral assurances that a promissory note would not be payable on demand despite express language in the instrument to that effect. 4 Cal. 2d at 263, 48 P.2d 659. A similar fact situation occurred in Bank of America Nat'l Trust & Sav. Ass'n v. Lamb, 179 Cal. App. 2d 498, 502, 3 Cal. Rptr. 877, 879-80 (1960), where the plaintiff claimed, contrary to the written terms of an instrument, that the defendant bank fraudulently promised her that she would not be personally liable on a guarantee. See also Continental Airlines, 216 Cal. App. 3d at 419, 264 Cal. Rptr. at 796 (contract stating that airplane landing gear "is not likely" to rupture fuel tank held to be directly at variance with sales brochure that fuel tank "will not rupture"); Price, 213 Cal. App. 3d at 486, 261 Cal. Rptr. at 746-47 (alleged oral promises of special loan collection treatment at variance with express written terms of loan agreement).

When, however, there is no such conflict between written and parol agreements, a plaintiff has properly stated a claim for fraud in the inducement, and the parol evidence rule does not bar evidence of the alleged fraudulent promise. See Oak Industries, 596 F. Supp. at 608-609.

The false promise at issue is LJN's alleged oral agreement to "advise [Cannell] if a $1.5 million spot television advertising purchasing commitment was unacceptable or became 'a problem.' " Cannell's First Amended Complaint, C.R. 10, p. 14, p 34. Cannell alleges that LJN made this promise to induce Cannell into awarding it the toy contract, never planning, however, to spend more than $1 million on spot advertising, id., and intending, for a variety of competitive reasons, to delay informing Cannell that the $1.5 million commitment would not be met until after the production process was well underway, id. p 35.

The Agreement expressly leaves open the amount of LJN's obligation to purchase spot advertising. Rather than stipulate an amount or range, it merely recites that the entire contract is contingent upon the completion of LJN's negotiations with a third party over the purchase of "certain spot advertising." C.R. 38, Ex. B, p. 2, p 11(iii).

Cannell's proffered evidence of LJN's oral commitment to purchase spot advertising thus is not "directly at variance with the terms of the written agreement," Continental Airlines, 216 Cal. App. 3d at 419, 264 Cal. Rptr. at 795-96 (citation omitted), since the Agreement does not specify the amount of LJN's commitment. Rather, because the terms of the Agreement suggest that it reflects a prior understanding between the parties, and since both parties, although disagreeing as to amount, concede that such an understanding was reached, C.R. 40, Ex. C, at 198:18-198: 25; id. at 530:16-531:10, the parol evidence is "consistent with the written instrument," Continental Airlines, 216 Cal. App. 3d at 419, 264 Cal. Rptr. at 795-96 (citation omitted), and admissible under the fraud exception to the parol evidence rule.

We therefore conclude that summary judgment was improper on Cannell's promissory fraud claim since the district court erred in ruling, as a matter of law, that parol evidence was inadmissible to establish the alleged fraudulent inducements to contracting.⁷ 

IV

We hold that the district court properly granted LJN's motion for summary judgment on Cannell's cause of action for promissory estoppel since the alleged oral agreement was supported by consideration.

It is well settled that a cause of action for promissory estoppel fails if consideration has been given for the alleged promise. Raedeke v. Gibraltar Sav. & Loan Ass'n, 10 Cal. 3d 665, 672-73, 111 Cal. Rptr. 693, 697, 517 P.2d 1157, 1161 (1974); Youngman v. Nevada Irrigation Dist., 70 Cal. 2d 240, 250, 74 Cal. Rptr. 398, 405, 449 P.2d 462 (1969).

The promise on which Cannell alleges it reasonably and detrimentally relied is "LJN's promise immediately to inform [Cannell] and LBS if the $1.5 million Advertising Purchase Commitment was unacceptable or became 'a problem' ". Cannell's First Amended Complaint, C.R. 10, p. 13. p 31.

The record shows that this promise was supported by consideration. It was made after Mandell threatened to withdraw from the project unless LJN agreed to let Cannell know if the $1.5 million advertising commitment was a "problem." C.R. 38, Ex. A, at 250:3-250:5. After Mandell explicitly stated that Cannell's further participation was "contingent on that commitment," id. at 250:5, LJN agreed to Cannell's demand, id. at 250:10-250:13. Given this bargained-for exchange, Cannell gave consideration for LJN's promise, and its promissory estoppel cause of action therefore failed as a matter of law.

V

We have little trouble in concluding that the district court erred in granting summary judgment sua sponte against LJN on its counterclaims.

Summary judgment was improper as to LJN's first, second, and third counterclaims because LJN was not given a "full and fair opportunity to ventilate the issues involved in the motion." United States v. Grayson, 879 F.2d 620, 625 (9th Cir. 1989) (quoting Cool Fuel, Inc. v. Connett, 685 F.2d 309, 312 (9th Cir. 1982)). The court also erred in dismissing all of LJN's counterclaims on the erroneous assumption that LJN "admitt [ed] in this proceeding that they breached the contract." R.T. 5. LJN stipulated, for purposes of its motion for summary judgment only, that it had made the alleged oral assurances, C.R. 37, p. 2, but did not otherwise concede that it had breached the Agreement. Summary judgment was thus improper, as material questions of fact remain as to whether LJN breached the Agreement.

VI

In sum, we AFFIRM the entry of summary judgment with respect to Cannell's Second Cause of Action (promissory estoppel), but REVERSE the entry of summary judgment on Cannell's First (breach of contract) and Third (promissory fraud) Causes of Action. We REVERSE the district court's sua sponte entry of summary judgment on all of LJN's counterclaims. We REMAND for further proceedings.