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April 20, 2014

Franchisees Who Faked Evidence In Court Case Permitted To Continue Litigating

It should be obvious to anyone reading these words that it is never a good idea to lie to a court of law.  That's a pretty basic concept, right?  Lying in court documents is called "perjury," and it's a crime in every State in the union.  So it's always interesting to hear a story about someone who failed to grasp this fairly simple concept -- and how they got caught doing it.  This time it was the Husains, longtime McDonald's franchisees, who lied to a court in Northern California in litigation against their franchisor.

The decision in Husain v. McDonald’s Corp. was handed down by the California Court of Appeals on March 28, 2013.  The story goes something like this:

The Husains are longtime McDonald’s franchisees, having owned up to five different McDonald’s franchises located in northern California since the early 1980s.  In June 2005, the Husains entered into an agreement with a third party to purchase an additional 7 restaurants.  Of those, 3 of the franchise agreements were nearing the end of their 20-year franchise terms.  As part of the purchase, the Husains asked McDonald's whether it would agree to provide them with new 20-year franchise agreements when the 3 expiring agreements came to the end of their respective terms. 

McDonald's offered to extend the Husains' expiring terms by letter, which offer had to be countersigned and agreed to by the Husains to become effective.  McDonald’s claimed the offer was never accepted and expired on its own terms, leaving the Husains without renewal franchise agreements for the 3 expiring restaurants.  The Husains sued to enforce McDonald’s alleged promise to them. McDonald’s filed a cross-complaint to compel the Husains to relinquish the 3 restaurants to the company.

To "prove" that they had, indeed, accepted McDonald's offer to extend the expiring franchise terms, the Husains produced a certificate of mailing with a United States Postal Service postmark dated before the offer expired, alleging that the agreement had been properly accepted.  McDonald’s countered by producing evidence that the post office that had supposedly provided the certificate of mailing was closed on the date bearing the postmark, and that the postmark stamp on the certificate was not in use until 2008.

Based on this evidence, McDonald’s claimed that the Husains had committed perjury and fabricated evidence, and sought terminating sanctions -- in other words, McDonald's asked the Court to sanction the Husains by not permitting them to continue litigating their case.  The trial court denied the motion, finding that at most McDonald’s would be entitled only to dismissal of a cause of action the Husains had already dismissed, and that there was a factual dispute regarding the fabrication charges that could not be determined at the motion stage.

Renewed Motion for Terminating Sanctions

Four weeks into the trial and after the Husains had presented their case-in-chief, McDonald’s filed a renewed motion for terminating sanctions. The motion was based on McDonald’s contentions that Mr. Husain: (1) presented falsified invoice information to overstate his investment in the franchise; (2) falsified the certificate of mailing; and (3) repeatedly mentioned his wife’s recurring breast cancer in violation of a court order on a motion in limine on that subject.  McDonald’s argued that the sanctions were required under California Code of Civil Procedure Sec. 2023.030 and pursuant to the inherent power of the court.

The trial court found the Husains committed perjury, provided false evidence in discovery, and willfully and repeatedly violated its order on McDonald’s motion in limine regarding the mention of Mrs. Husain’s breast cancer.  The court ordered terminating sanctions, finding that “[n]o lesser sanction would be appropriate or would ensure compliance and a fair trial.”  The court dismissed the Husains’ complaint with prejudice, and struck their answer to McDonald’s cross-complaint.  The court also dissolved the preliminary injunction in the Husains’ favor and granted McDonald’s an injunction preventing the Husains from continuing to occupy the restaurants and use its trademarks.  The Husains appealed.

Appeal

The appellate court began by observing that “[b]ecause a terminating sanction is a drastic measure that denies a party the right to a trial on the merits, our courts have limited its use to only the rarest and most extreme cases of litigation misconduct when no lesser sanction can preserve the fairness of the trial and restore balance to the adversary system.”  The Court found the Husain's conduct reprehensible, but that it did not necessarily justify terminating sanctions.  

Examining the Husains’ conduct, the appellate court reasoned that the discovery statutes relating to document production, depositions, and interrogatories do not authorize terminating sanctions unless a party refuses to obey a court order relating to that discovery.  The court found that the Husains had not in fact disobeyed any discovery order by doctoring evidence, and that the end result of their tampering was “of little or no consequence to the litigation.” Based on this, the court found that the discovery statutes did not authorize terminating sanctions.

The appellate court also found that the trial court’s inherent powers did not justify terminating sanctions because McDonald’s failed to show that “the Husains’ misconduct deprived it of a fair adversary trial in any sense.”  McDonald’s, the appellate court reasoned, had the opportunity to effectively cross-examine Mr. Husain and place his credibility at doubt.  In other words, McDonald's had the opportunity at trial to use Mr. Husain's actions against him. The court also found that Mr. Husain’s violations of the trial court’s orders on McDonald’s motions in limine “could not have so impaired McDonald’s ability to defend itself as to throw the fairness of the trial into question.”  The court reasoned that some lesser sanctions would have fully protected McDonald’s right to a fair trial.  

Because it found that terminating sanctions were not justified, the court of appeals set aside the terminating sanctions and ordered the trial court to schedule a new trial date -- in effect, permitting the Husains to continue litigating their case against McDonalds.  Presumably, the serious issues of the franchisees' credibility, along with any lesser sanctions the trial court enters due to their perjury, will be a significant enough consequence to them to ensure that they are not able to benefit from their fraud on the court.

© Copyright 2014 Armstrong Teasdale LLP. All rights reserved

About the Author

Matthew Kreutzer, Franchise Attorney, Armstrong Teasdale, law firm
Partner

Matt Kreutzer serves as Chair of the firm's Franchise, Distribution and Antitrust practice group and is a Certified Specialist in Franchise and Distribution Law by the California State Bar's Board of Legal Specialization. He has spent more than a decade working with individuals and companies on issues relating to franchise law and is well-versed in all stages of the franchise relationship. 

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