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Koufakis v. Carvel

decided: April 24, 1970.


Lumbard, Chief Judge, and Medina and Feinberg, Circuit Judges.

Author: Lumbard

LUMBARD, Chief Judge:

The appellants Thomas Carvel and Franchise Licensors, Inc. appeal from a judgment against Franchise Licensors*fn1 for $126,000 awarded, after a jury trial in the Eastern District of New York, to the appellee John Koufakis for breach of his franchise contract to operate Carvel Store Number 184 in Queens Village as an ice cream dealer. The jury by special verdict found that the appellants committed a substantial breach of the contract by improperly terminating it, and awarded $187,500 in compensatory damages; it also found that no punitive damages should be awarded. The trial judge granted a motion for a new trial which was based in part on the improper and prejudicial arguments of plaintiff's trial counsel, unless the plaintiff agreed to a remittitur of $61,500. Although both parties appealed, the appellee is now content with a verdict for $126,000. We reverse and order a new trial because of the numerous grossly prejudicial arguments made by plaintiff's counsel in summation and during trial, against which the trial judge's comments and charge gave little or no protection. As there must be a new trial, we also consider whether the question of punitive damages should have been submitted to the jury and whether the jury should have been allowed to evaluate the likelihood that the franchise would have been renewed after it expired.


A summary of the record shows that there was sufficient evidence to leave to the jury the question whether the appellants had improperly terminated Koufakis' franchise contract.

On June 2, 1958, John Koufakis and Carvel Stores of New York, Inc.,*fn2 entered into a Dealer's Franchise Agreement whereby Koufakis was to run Carvel Store Number 184 until July 31, 1968, a period of ten years. The preamble to this agreement, which emphasized the importance of maintaining the high quality standards of Carvel products, stated:

"This Frozen Dairy Product is made in accordance with a Carvel formula, consisting of high quality ingredients and is sold in fine sanitary stores, which are created in accordance with patented designs and specifications. The public has been accustomed to seek Carvel Frozen Dairy Products at these unique Carvel Stores * * *, and to purchase therefrom Carvel's Frozen Dairy Products manufactured in accordance with the Carvel formula and none other. The Dealer desires to operate a Carvel Store and Carvel is willing and agrees that the Dealer operate a Carvel Store in accordance with the terms of this agreement."

A "Standard Operating Procedure Manual" was expressly incorporated as "an integral part" of the franchise agreement, which provided that the store was to be "maintained and operated in accordance with the specific provisions of the Manual." The agreement further provided that:

"During the term of this agreement, the Dealer agrees to sell at the Carvel Store, Carvel's Frozen Dairy Products solely in accordance with the Manual and will sell no other product except as hereinafter expressly otherwise provided. If at any time the Dealer fails to maintain and operate a Carvel Store in accordance with the definition contained in the agreement and in the Manual, then the Dealer's failure to do so shall be deemed to be a breach of a vital term of this agreement and shall entitle Carvel, upon giving written notice to the Dealer, to terminate this agreement."

Carvel was also given the right to inspect the store "at any and all times desired by Carvel." Koufakis was obligated "promptly [to] correct any errors or omissions found by [Carvel] inspectors and officers." As regards the procedure for termination, the agreement stated:

"In the event that the Dealer should breach any of the terms of this agreement, or default in the performance of any of the obligations under the Manual, * * * and should such breach not be remedied to the satisfaction of Carvel within forty-eight (48) hours or such later time as Carvel may specify in a written notice to that effect mailed to the Dealer and then this agreement shall terminate fully and in all respects, and the Dealer shall then have no further rights hereunder."

As to renewal of the franchise, the agreement specified a ten-year initial term and, in the following paragraph, recited that "This agreement shall be automatically renewed for an additional period of -- 0 -- years. * * *"

There was testimony that Koufakis was on the "C.O.D. list" throughout the period of his dealership -- that is, that he was to pay cash for all supplies delivered to him. Inspections of Koufakis' store did take place, and minor defects in operation were called to his attention. In June 1962, Carvel inspectors discovered non-Carvel ices stored in his freezer. Koufakis' explanation was that these ices were being stored there for a short time before being served at an outing for a Little League team which he sponsored and that they were not there for sale to the public. Carvel's attorneys apparently accepted this explanation, but they did make it clear to Koufakis that the presence of non-Carvel items in the store was a serious matter; in fact, they had Koufakis sign a $5000 confession of judgment to apply to future instances of such behavior.

Koufakis called as a witness Salvatore Russo, who was credit manager and later head of the accounting department for the Carvel organization until his voluntary departure on April 2, 1963. Russo testified that Koufakis was considered a slow-paying account, an "irritant," and a nonconformist by the officials at the central offices of Carvel. Regarding such nonconforming dealers as a group, Russo further stated that he attended a staff meeting of Carvel officers in March 1963, at which time Thomas Carvel remarked "Look, we are going to get a corporation set up, and put all these guys into that corporation. Eventually we will work them out of the Carvel system."

The evidence showed that Koufakis, under subpoena, had testified on November 5, 1963 (after the above-described staff meeting), before a trial examiner of the Federal Trade Commission, which was then conducting an inquiry into Carvel's franchising practices.*fn3 One of Koufakis' contentions was that this testimony so angered Thomas Carvel and others in the organization that they determined to get rid of him.

On August 24, 1965, Koufakis was notified that an inspection of his store had revealed some operational deficiencies and he was given 48 hours' notice to correct them; Koufakis apparently corrected the defects and sent a letter to Carvel on September 1, 1965, stating that he had taken corrective action and thanking Carvel for the inspections which assisted him to "judge my help."

On July 17, 1966, Martin Mannino, a Carvel field representative, inspected Store Number 184. He took samples of the various products and product components on the premises; these samples were stored by him in an ice chest in the trunk of his car during that day, and in his home freezer overnight. They were delivered the following day to St. Lawrence Dairy Testing Laboratory, an independent testing firm which regularly made tests for Carvel. Mannino testified that he bought other samples of take-home products -- primarily pre-packaged pints of various flavors of ice cream stored in three display freezers -- during "a period of ten days, [or] two weeks" thereafter. The St. Lawrence laboratory reports introduced in evidence by Carvel indicate that such samples were taken July 15, 16, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31, 1966. On July 30, July 31, and August 1, 1966, samples were apparently taken from Koufakis' freezers from which ice cream cones were dispensed. All of these samples were also delivered to St. Lawrence, although there was no testimony concerning the conditions under which they were transported from the store to the lab. As to the samples taken on July 17, Mannino testified that he left duplicate samples, in sterile jars, at Store Number 184 for Koufakis. The laboratory reports on this two-week series of samples showed some degree of dilution, contamination, or both, of some or all of the various products tested. It was Koufakis' claim that the samples were improperly taken and kept, that the tests were not properly made and reported, and that Carvel falsified the test results.

Carvel sent a letter to Koufakis on July 21, 1966, stating that the company was concerned about the results of the tests which had been completed and reported as of that date. Carvel again gave Koufakis 48 hours' notice to correct the conditions or face termination. Koufakis testified that after receiving this letter and before he received the two telegrams effecting termination as of August 1, 1966, he called Leonard Toboroff, an attorney for Carvel who had signed the July 21 letter, to find out more precisely the nature of the contamination and dilution which the tests showed.*fn4 Toboroff gave no specific answer, but told Koufakis that he would check further and suggested calling back the next day. Koufakis did so, and still received no specific answers as to the locus of the problem. Then Koufakis called Jacob Goodman, who, according to Koufakis, was "the one who sent those [termination] telegrams, maybe both." Koufakis stated that Goodman

"gave me the same story. And the next day we were terminated. So * * * we never found out why he terminated the contract, he never let us know * * *."

Sometime at the end of July, Koufakis had the duplicate samples left by Mannino during his July 17th inspection picked up by Bernard Tzall, who worked at an independent laboratory known as Certified Laboratories, Inc. Tzall testified that he took ten samples in all from Koufakis' store: five which he was told had been taken by the Carvel inspector (Mannino's duplicates), and five others that Tzall took while there. Tzall stated that he ran no tests for dilution on these ten samples; he did, however, test them for contamination and found that two samples contained some bacterial contamination in excess of limits set by City of New York health regulations. On August 4, 1966, after termination, Tzall returned to the store to pick up four more samples -- duplicates of those taken by a Carvel inspector on August 1. At this time, Tzall also took a sample from an open can of white mix in the freezer of Store Number 184. As to these five samples, he testified that his tests showed that there was no improper dilution or contamination.*fn5

Meanwhile, on July 29, 1966, Koufakis received a telegram again requesting that he stop diluting and contaminating Carvel's products. Thereafter John W. Stewart, general manager of the Carvel Corporation, made the decision to terminate Koufakis' franchise and on August 2, Franchise Licensors sent a telegram to Koufakis terminating his dealership.


At oral argument, we questioned counsel about the existence of federal jurisdiction, since the case was presented to us in the briefs as essentially a breach of contract action by Koufakis against Thomas Carvel and Franchise Licensors, all of them residents of New York.

Although the matter is not entirely free from doubt, we think the district court had jurisdiction of the issues raised by the pleadings in the two suits which were consolidated for trial.

The complaint filed in the Eastern District by Franchise Licensors on August 3, 1966, raised the issue of trademark infringement. It charged that, despite termination of his franchise, Koufakis was "continuing to represent himself as a Carvel Dealer and * * * attempting to palm off non-Carvel products from Carvel Store #184" and that such conduct constituted "infringement of the Carvel trademarks registered in the United States Patent Office in violation of 15 U.S.C.A. 1125." Because of these allegations, and because of other alleged breaches of the franchise agreement which Franchise Licensors claimed were also infringement of the Carvel trademarks,*fn6 Franchise Licensors sought money damages and injunctive relief.

Koufakis' answer, filed on September 9, 1966, contained a broad counterclaim alleging that the "Carvel complex" had wrongfully terminated the franchise pursuant to a fraudulent and malicious conspiracy designed to drum Koufakis out of the organization and that such actions "violated all of the terms and provisions of the contract between the parties." The counterclaim also alleged that agents and employees of Carvel had engaged in this course of conduct "with deliberate malice and intent to injure [Koufakis] in his business, good name, character, fame and reputation," and that Koufakis was in fact so injured. This business and personal libel aspect of Koufakis' case apparently was abandoned; there certainly was no proof as to such injury at trial. As relief, the counterclaim sought costs, legal fees, "punitive, exemplary and compensatory damages" of $1,000,000, and equitable relief. On May 2, 1967, Franchise Licensors filed a reply to the Koufakis counterclaim.

Thereafter numerous preliminary motions came before almost every judge in the Eastern District -- a situation which happily is no longer possible since the judges of the Eastern District adopted the individual calendar system as of October 1, 1969.

After Judge Dooling had castigated both parties in July 1967 for smothering the simple issues in papers of "incredible prolixity," the matter was further complicated by Koufakis' filing a 57-page complaint, on August 25, 1967, in the New York Supreme Court for the County of Queens. The complaint made essentially the same charges asserted in the federal counterclaim; however, it named Thomas Carvel as an individual defendant and nine other corporations in the Carvel complex as corporate defendants, not including Franchise Licensors. This action was removed to federal court by the defendant Thomas Carvel on October 5, 1967, on the ground that the complaint as drawn charged Carvel and the several corporations with violations of the Sherman Act, the Clayton Act, and the Federal Trade Commission Act,*fn7 despite the fact that the complaint did not mention or cite any of these statutes and ignoring the fact that treble damages were not sought.

By memorandum and order dated January 5, 1968, Judge Weinstein granted Koufakis' motion to consolidate the removed action with the trademark infringement suit. In his opinion he alluded to the fact that the basis for removal jurisdiction was that the state-court complaint raised issues under the federal antitrust laws. We express no opinion on the correctness of this finding that federal jurisdiction of the removed action was proper,*fn8 for we believe that the removed action was actually of little importance; it added nothing of substance to the issues already before the federal court.

It is clear that the first move in the litigation between the parties was Franchise Licensors'; the action commenced on August 3, 1966, against Koufakis for trademark infringement was properly initiated in federal court. Franchised Stores of New York, Inc. v. Winter, 394 F.2d 664 (2d Cir. 1968); 28 U.S.C. § 1338(a). Franchise Licensors' related causes of action sounding in common-law unfair competition and breach of contract were also properly before the district court. Franchised Stores of New York, Inc. v. Winter, supra, at 670; 28 U.S.C. § 1338(b), Hazel Bishop, Inc. v. Perfemme, Inc., 314 F.2d 399 (2d Cir. 1963).

We further hold that Koufakis' counterclaim in this action was compulsory under rule 13(a) of the Federal Rules of Civil Procedure, which provides:

A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.

See generally, 3 Moore, Federal Practice, §§ 13.12, 13.13 (1968 ed., and 1969 Supp.). The counterclaim that the "Carvel complex" was engaged in a fraudulent scheme to breach the franchise agreement by wrongfully terminating Koufakis' dealership certainly arose out of the same transaction or occurrence that was the subject matter of Franchise Licensors' complaint.

The exceptions contained in rule 13 (a)*fn9 do not apply here, and thus "any claim which is logically related to another claim that is being sued on is properly the basis for a compulsory counterclaim." 3 Moore, supra, para. 13.13 at p. 33, see also Moore v. New York Cotton Exchange, 270 U.S. 593, 46 S. Ct. 367, 70 L. Ed. 750 (1926); Artvale, Inc. v. Rugby Fabrics Corp., 232 F. Supp. 814, 821-822 (S.D.N.Y.1964), aff'd 363 F.2d 1002 (2d Cir. 1966) (patent infringement suit, defendant counterclaimed for breach of contract not to sue for infringement, held compulsory counterclaim). There can be no doubt that this is such a case. Casting aside the abandoned allegations of libel, the issues are both simple and logically related. If Koufakis prevailed on his counterclaim that Franchise Licensors had breached the agreement by wrongfully terminating his franchise, Franchise Licensors' claim that Koufakis had infringed Carvel's trademark by improperly holding himself out as a Carvel dealer after termination had to fail. Similarly, Franchise Licensors contended that Koufakis had breached the agreement by selling diluted and contaminated products, and that this justified termination; Koufakis counterclaimed that this was not so and that the laboratory tests relied on by Franchise Licensors were either erroneous or fraudulent. Thus, proof related to the quality of the products sold in the store just prior to termination was relevant to the claims of both parties.

The subsequent action in state court added nothing new to the action by way of substantive claims. The only new element was the addition of the nine corporate defendants and Thomas Carvel as an individual defendant. At the pretrial conference, Judge Weinstein persuaded the attorneys to stipulate that the only parties defendant to Koufakis' claims would be Franchise Licensors and Thomas Carvel; the other nine corporations dropped out of the litigation at that time. Consequently the sum total of changes introduced by the removal and consolidation was the addition of Thomas Carvel as an individual defendant to Koufakis' claims. We therefore regard it as proper to consider Koufakis' compulsory ...

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