894 F. 2d 1344 - Hall Levine Advertising Inc Hall Levine Advertising Inc v. Montgomery Ward & Co Inc

MEMORANDUM**

Most of the underlying facts are not contested in this contract dispute arising under California law. Montgomery Ward ("Ward") handled its own electronic advertising in the greater Los Angeles area from 1964 through January 1981. In February, 1981, Ward entered into an oral agreement with advertising agency Hall & Levine ("Hall"), whereby Hall would handle all of Ward's electronic advertising until December 31, 1981. According to the oral agreement, Hall would provide the following services:

(1) Plan, negotiate, buy and place media time;

(2) Create and produce radio and some television spots and place that production;

(3) Distribute or "traffic" all these spots to the stations in time to be on the air; and

(4) Guarantee that the advertisements had been run as agreed.

In return, Hall would receive as commission, 15% of gross media billings. This fee arrangement was standard in the industry.

The relationship between Hall and Ward operated in the following way. A decision would be made (by Ward) to run ads. Hall would then negotiate and reserve air time with various media stations for those ads. It would also take all steps necessary to produce the ads, such as renting a production studio and hiring talent. After the ads had run, the stations would send Hall invoices. Hall would check the invoices to insure that all the ads placed had actually run.

Hall would bill Ward on a monthly basis after the ads had aired. Hall would forward the bills it received from the radio stations (which included its own 15% commission) to Ward. Ward would pay Hall the full amount and Hall would transmit 85% of the payment to the media, keeping 15% for itself as commission.

Relations between the parties went smoothly until August 9, 1988 when Hall suddenly informed Ward that it had gone out of business. At that time, Hall had already reserved radio spots for Ward until the end of the year. Ward responded to Hall's declaration by directly paying media stations $377,458 for advertisements placed by Hall from August through December 1981. In addition, it hired Barbara Buck to complete the October, November and December ad production.

Hall, the debtor in possession in Chapter 11, filed suit against Ward to recover its account receivable for the services it had rendered to Ward before the bankruptcy. Hall claimed Ward owed it $444,068, the full value of the ads placed by Hall, subject to nominal offsets. This amount included both $377,458, which Ward paid to the media, as well as $66,610 in commission, which Ward never paid.

The district court rejected most of Hall's contentions. First, it found that Hall's going out of business constituted a material breach of its oral agreement with Ward. Second, the court found the contract between Hall and Ward unseverable. Third, the court found that Ward justifiably paid the media directly, as Hall was Ward's agent and Ward could be held directly liable for the media contracts which Hall had obtained. Fourth, the court held that Hall's failure to fulfill all of its contractual obligations barred it from recovering the value of the benefit it conferred upon Ward. Finally, the district court concluded that because both parties sought all or nothing, the court could award only those amounts acknowledged by Ward to be due, which amounted to $19,506.55. We address the lower court's determinations in turn.

First, we uphold the district court's finding that Hall materially breached its agreement with Ward. A material breach is one that results in the substantial frustration of a contract's purpose. See Superior Motels v. Rinn Motor Hotels, 241 Cal.Rptr. 487, 495 (Cal.Ct.App.1987); see also 4A Corbin, Contracts Sec. 943 (1964 and Supp.1989). Hall entered a full service media contract with Ward, whereby it agreed to perform all functions necessary to ensure the airing of Ward's ads. The facts indicate that Hall neither produced all copy nor purchased all air time for the electronic media spots which Hall ultimately paid for. Further, Hall failed to guarantee or distribute any electronic media advertisements after October 9, 1981. The sum total of these omissions resulted in a situation whereby Ward's ads would not have aired had Ward not completed production, distribution and payment for the ads. Hall's breach, therefore, was material as its omissions resulted in the substantial frustration of the contract's purpose, which was to ensure the airing of Ward's ads.

Second, we affirm the lower court's holding that the agreement between Hall and Ward was unseverable. The heart of severable contracts is that they are capable of division into discreet matching parts. Keene v. Harling, 38 Cal.Rptr. 513, 515 (1964); Gross v. Maytex Knitting Mills of California, 254 P.2d 163, 167 (Cal.Ct.App.1953) (en banc); 1 Witkin Summary of California Law Sec. 803 (9th ed.1987). Generally, contracts which apportion monetary consideration on the basis of each job or function performed are severable. Keene, 38 Cal.Rptr. at 517.

Hall contends that each successful placement of an ad that ran constitutes a separate instance of performance. This claim is without merit as the placement of ads constitutes but one part of the total work required to air an ad. Production, distribution, guaranteeing and media payment are additional integral parts of the ad airing process. Here, payments to Hall were not apportioned between Hall's production and placement functions and the lower court stated that it could not ascertain the value of a "time buying contract alone." Moreover, the contract between the two parties was neither intended to be severable nor capable of division into discreet matching parts as it was a full service media contract, encompassing both the placement and the production of ads.

Third, we affirm the lower court's holding that Hall was an agent of Ward, with the power to bind it in contract. Under well established principles of agency law, an agency relationship arises "from the joint manifestation of consent by one person that another shall act on his behalf and subject to his control, and of consent by that other so to act." Nelson v. Serwold, 687 F.2d 278, 282 (9th Cir.1982); Grace Line, Inc. v. Todd Shipyards Corp., 500 F.2d 361, 373 (9th Cir.1974), citing Restatement (Second) of Agency Second Sec. 1 (1957); Store of Happiness v. Carmona & Allen, 312 P.2d 1104, 1107 (Cal.Ct.App.1957).

Here, Ward and Hall entered into an express agreement whereby Hall was to be Ward's advertising agency and place ads with media stations on Ward's behalf. In Store of Happiness, a California court found a virtually identical agreement between an advertiser and an ad agency to constitute a sufficient manifestation of joint consent to form an agency relationship. Id. That case involved facts similar to those in the case at bar. There, as here, an advertiser hired an ad agency to procure television spots in return for a 15% commission of gross media billings. There, as here, the media stations billed the advertising agency directly, whereupon the ad agency would bill the advertiser. Id.

The trial court's finding of an agency relationship between Ward and Hall is further supported by the fact that Ward controlled the substance of the ads placed on the air by Hall, as control by a principal over its agent is a major consideration in determining whether an agency relationship exists. Stilson v. Moulton-Niguel Water Dist., 98 Cal.Rptr. 914, 918 (Cal.Ct.App.1971); see also, Nelson, 687 F.2d at 282. Finally, the fact that Hall at all times disclosed Ward as its principal further indicates the existence of an agency relationship. See Scholastic Book Clubs v. Board of Equalization, 255 Cal.Rptr. 77, 79 (Cal.Ct.App.1989); Pollack v. Lytle, 175 Cal.Rptr. 81, 85 (Cal.Ct.App.1981) (an agency relationship can be inferred from the conduct of the parties). Thus, the facts in this case support the district court's finding of agency. Ward, as Hall's principal, paid the media stations $377,458 out of contractual obligation and Hall is not entitled to recover this amount. See Nelson, 687 F.2d at 282.

We now turn to the district court's apparent holding that Hall could not recover the reasonable value of the benefit it conferred upon Ward, where Hall breached its express contract with Ward. We disagree. Under California law, a breaching party may recover the value of the benefit it conferred upon a nonbreaching party, even where the breach is willful, if the nonbreaching party with knowledge that the breach has occurred or will occur retains or accepts the benefit of the breaching party's part performance. Roseleaf Corp. v. Radis, 264 P.2d 964, 970-71 (Cal.Ct.App.1953), citing Restatement of the Law of Contracts, Secs. 357, 257 (1932) ("Restitution in Favor of a Plaintiff Who is Himself in Default"); see also American Surety Co. of New York v. United States, 368 F.2d 475, 477 (9th Cir.1966); 55 Cal.Jur.3d Restitution Sec. 66 (1980 and Supp.1989); Parker v. Maier Brewing Co., 4 Cal.Rptr. 825, 827 (Cal.App.1960) (allowed recovery in quantum meruit where express contract existed).

The district court found, and the facts indicate, that Ward knowingly accepted the benefit of and clearly benefited from Hall's reservation of air time. Hall's fortuitous partial performance enabled Ward to air its ads in the Los Angeles area until the end of the year by merely hiring one or more people to create, produce and place ads in the time slots already negotiated for and reserved by Hall. Thus, Hall's partial performance conferred a substantial benefit upon Ward and under California law, Hall may recover the value of that benefit to prevent unjust enrichment.

We now address the issue of calculating the value of the benefit received by Ward. In California, where a nonbreaching party voluntarily accepts a breaching party's part performance, the court may adopt, as a proper measure of liability, the contract price less damages or the value to the nonbreaching party of the breaching party's part performance. Roseleaf, 264 P.2d at 971; see also LuMetta v. United States Robotics, Inc., 824 F.2d 768, 770 (9th Cir.1987) (terms of an unenforceable contract admitted as evidence of the value of the benefit conferred by plaintiff). According to Restatement of Contracts, Sec. 357(3), where a nonbreaching party accepts the benefit of a breaching party's part performance "the measure of the defendant's benefit from the plaintiff's part performance ... is the price fixed by the contract for such part performance, or, if no price is so fixed, a rateable proportion of the total contract price."

Here, the oral agreement between Ward and Hall provided that Hall would receive a 15% commission on gross media billings. The parties do not dispute that the gross media billings during the period in question amount to $444,068, with Hall's 15% commission totaling $66,610. On remand, the district court should award Hall a rateable portion of the $66,610 commission attributable to Hall's reservation of ad spots and any other functions which it performed for Ward, subject to offsets for damages incurred by Ward pursuant to Hall's breach.1 The district court has already awarded Hall $19,506. This amount may form part of the award which Hall is entitled to recover under the above analysis.

Ward asserts that Hall may not recover the value of the benefit it conferred because it failed to introduce evidence of such value. In fact, however, Hall did introduce evidence of the value of the benefit it conferred. First, it specifically alleged the value to be the contract price minus Ward's damages. As discussed above, this method of calculation has been approved both by California courts and by this court. See Roseleaf, 264 P.2d at 971; Lumetta, 824 F.2d at 770; American Surety, 368 F.2d at 479. Second, upon the district court's request, Hall apportioned its total claim between the value of its placement services and the value of its production services.

We further hold that Hall is not entitled to prejudgment interest on any amount which it recovers. California Civil Code Sec. 3287(a) provides for prejudgment interest where the damages a person is entitled to recover is certain, or capable of being made certain by calculation. In an action in quantum meruit where there exists an express contract "but where the value of the services can only be established by evidence and is not susceptible of computation from the face of the contract or by reference to established market values, interest is not recoverable prior to judgment." Parker, 4 Cal.Rptr. at 828 (Cal.Ct.App.1960). The oral agreement between Ward and Hall yields no indication of the value of Hall's part performance nor is there any evidence of a readily ascertainable market value for Hall's reservation of ad spots alone. The facts, therefore, support the lower court's finding that the value of the benefit which Hall conferred upon Ward remained uncertain at all times, precluding recovery of prejudgment interest.

We now turn to Hall's request that we order the district court on remand to admit the testimony of its expert. Hall does not allege that the district court committed prejudicial error in excluding Hall's expert. A district court has broad discretion to include or exclude expert testimony based on relevance and other factors and we will not interfere with that discretion where no prejudice has been asserted. Campbell Industries v. M/V Gemini, 619 F.2d 24, 27 (9th Cir.1980).

Lastly, we reject Ward's plea for attorney's fees and its costs in opposing this appeal as Hall's appeal is not frivolous. Hall properly challenged the district court's denial of its claim for recovery for the value of the benefit that it conferred upon Ward by its reservation of ad spots until the end of 1981.

AFFIRMED IN PART; REVERSED AND REMANDED IN PART, each party to bear its own costs.