PA Federal Business Decisions Volume 16, No. 1
Kelly A. Williams and Henry M. Sneath, Business Decisions Editors (Originally published in the March 2011 edition of the Pennsylvania Bar Association’s Civil Litigation Update)
Members of Shareholder Group Fail to Plead Sufficient Facts to Overcome Motion to Dismiss
In Barnard v. Verizon Communications, Inc.,, No. 10-1304, 2011 U.S. Dist. LEXIS 8948 (E.D. Pa. Jan. 31, 2011) (opinion by J. Pratter), an unofficial shareholder group (the “Committee”) of former investors in Idearc, Inc. (“Idearc”) filed suit against Verizon Communications, Inc. (“Verizon”) and J.P. Morgan Chase Bank, N.A. (“JP Morgan”) on various claims as a result of Idearc’s spin-off from Verizon. Verizon and JP Morgan subsequently filed motions to dismiss the claims on the grounds that Plaintiffs failed to meet the necessary pleading requirements. The court agreed with Defendants and dismissed all claims with prejudice based on the determination that Plaintiffs failed to present a cognizable claim against either Defendant in the complaint that was amended twice.
This case arose out of the bankruptcy of Idearc as a result of the spin-off from Verizon. The Committee alleged that the spin-off and bankruptcy were elements of an elaborate scheme, which was orchestrated primarily by Verizon, as a fraudulent attempt to deprive the Committee of their Idearc shares. The Committee alleged that JP Morgan participated in the overall scheme in its role as the administrative and collateral agent for certain Idearc creditors, who received new stock in the company following the bankruptcy. Specifically, according to the second amended complaint, Verizon spun off its Yellow Pages publishing business, which became Idearc, in late 2006. However, before Idearc became an independent company, JP Morgan and Bear Stearns & Co. agreed to trade $7 billion in previously-held Verizon debt for Idearc debt. Idearc also issued $2 billion in debt to Verizon. Essentially, Idearc began with a significant amount of liability, while Verizon significantly reduced its own indebtedness. Subsequently, Idearc was forced to file for Chapter 11 bankruptcy, which resulted in a reorganization plan that canceled all of Idearc’s stock to its current holders, i.e., the Committee, and issued new shares to its creditors.
The Committee asserted seven claims against Defendants. In Count I, the Committee asserted a claim under Section 206 of the Communications Act, which regulates “common carriers,” or certain regulated telecommunications firms. Section 206 does not impose duties or restriction upon common carriers but provides a private right of action for persons alleged to have been injured by a carrier’s violations of another provision of the common-carrier chapter of the Communications Act. The court attempted to determine the legal theory being asserted and concluded that the Committee was alleging that Verizon committed fraud by offloading debt onto Idearc. However, the court found that no discernible claim under Section 206 existed because the Committee failed to point to another portion of the common-carrier chapter which was allegedly violated by Verizon’s conduct. In so holding, the court stated that the Communications Act regulates the telecommunications business; however, it does not provide a hook for suing common carriers for securities or common-law fraud.
In Counts II and III, the Committee alleged that Defendants committed securities fraud under Section 10(b) of the Exchange Act and Rule 10b-5. Securities fraud litigation is governed by the Private Securities Litigation Reform Act of 1995, which imposes certain pleading requirements for such securities fraud actions: (1) the complaint must specify each statement alleged to have been misleading, the reasons why the statements were misleading and if a statement or omission is made on information and belief, the complaint must specify all facts on which that belief is formed; and (2) the complaint must state with particularity the facts giving rise to a strong inference that the defendant acted with the required state of mind.
Specifically, in Count II, the Committee alleged that Verizon and JP Morgan planned and orchestrated the spin-off and failed to disclose in applicable registration statements that the true purpose was to offload Verizon debt and transfer ownership of Idearc to its creditors. However, the court noted that the second amended complaint failed to meet the requirements above because it lacked details such as the omission of material facts from an SEC filing or any particular statements attributable to Verizon.
Also, in addressing Count III, the court discussed Section 20A of the Exchange Act, which provides that an insider, who trades stock while in possession of material, nonpublic information, is liable to those who traded contemporaneously with the insider. In this regard, the court concluded that the second amended complaint failed to include facts to support a private action for insider trading. For instance, Count III failed to allege that the Committee members traded contemporaneously with Verizon.
In Count IV, the Committee alleged that Defendants committed common-law fraud and undue influence. The court initially noted that undue influence is not an independent cause of action but a defense to contract formation. However, the court attempted to decipher a cause of action in that the claim suggested that Defendants coerced Idearc into taking on Verizon debt pursuant to a written agreement, and as a result of such undue influence, the Committee was requesting that the court cancel some of the debt that Idearc incurred prior to the spin-off. However, the court stressed that any treatment of the claims arising out of the debt exchange was plainly within the province of the bankruptcy court. Thus, the court confirmed that it would not challenge such rulings, risking the possibility of conflicting judgments. Moreover, with regard to the common law fraud claim, the court compared the claim to the securities fraud claim, wherein the elements were almost identical and drew the same conclusion as with Count II.
In Count V, Plaintiffs alleged that JP Morgan unlawfully converted the Committee members’ equity interest in Idearc through its dominance of the bankruptcy proceeding. Also, Count V included an assertion that JP Morgan extinguished the Committee’s equity interest prematurely prior to post-judgment motions or an appeal. The court focused on the fact that the bankruptcy court explained that neither conversion theory was viable and issued a confirmation order. Thus, Count V was a collateral attack on the confirmation Order based on an implausible theory of conversion, and was dismissed.
In Count VI, Plaintiffs asserted a Bivens claim on the grounds that Defendants infringed on the Committee’s federal constitutional rights; however, the court held that such a claim could not be asserted against private entities such as corporations.
Finally, in Count VII, the court ruled that the “direct right of action” claim for fraud was the same as the claims presented in Counts II-IV.
– Contributed by Esq., Houston Harbaugh, Pittsburgh, Pennsylvania;
Court Adopts Bifurcated Rule 9(b) Pleading Standard in Patent False Marking Case
In Hollander v. Ranbaxy Laboratories, Inc., No. 10-793, 2011 U.S. Dist. LEXIS 6938 (E.D. Pa. Jan. 24, 2011) (opinion by J. Baylson), Plaintiff brought a false marking claim against Defendant under 35 U.S.C. § 292. Plaintiff alleged that Defendant marked certain dermatology products with expired patent numbers. Defendant moved for judgment on the pleadings under Rule 12(c), arguing that a § 292 claim is a fraud-based claim, and Plaintiff failed to plead with particularity under Rule 9(b) that Defendant intended to deceive the public. Plaintiff also moved for judgment on the pleadings, arguing that Defendant admitted in its answer that it had no right to use the patent in question. The court denied both motions.
As to Defendant’s motion for failure to meet the pleading standards of Rule 9(b), the court noted that the Federal Circuit has not ruled whether Rule 9(b) applies to false marking claims and that the lower courts are split on this issue. To state a claim under § 292, a plaintiff must allege that defendant (1) marked an unpatented article (2) with the intent to deceive the public. Ultimately, the court concluded that § 292 claims are hybrid fraud claims. Only the factual allegation of the first element must be pled with particularity. The factual allegations of intent to deceive the public need only be pled generally. The court noted that the rigorous standards of Rule 9(b) are often relaxed when the information is peculiarly within the other party’s knowledge or control.
In finding that Plaintiff successfully pled a false marking claim, the court relied on several allegations in the complaint. First, the court noted that Plaintiff identified the traditional who, what, when, where, and how. Defendant allegedly marked its Ultravate product packaging with an expired patent number since 2007. The court further found that the allegations of intent to deceive the public were sufficient to state a claim. Defendant allegedly marked its product with the expired patent number two years before it acquired the rights to that patent. Moreover, Defendant was a highly sophisticated business entity with substantial experience obtaining and litigating patents. Also, Defendant knew that patents have limited lifetimes. Together, these allegations were sufficient to plead that Defendant intended to deceive the public.
The court rejected almost out of hand Plaintiff’s motion for judgment on the pleadings. Plaintiff argued that because Defendant in its answer admitted that it did not know the last assignee of the patent, Defendant could have no reasonable belief that it had the right to mark its products with that patent number. The court denied Plaintiff’s motion because Defendant denied in its answer that it intended to deceive the public. The court concluded that there was a material issue of fact, and Defendant was entitled to present a defense.
Plaintiff Met Jurisdictional Threshold as Well as Required Elements in Seeking Preliminary Injunction to Enforce Non-Compete Clause
Plaintiff Rita’s Water Ice Franchise Company, LLC (“Plaintiff”) successfully obtained a preliminary injunction against Defendants Shirley and Jeffrey Smith (“Defendants”) in Rita’s Water Ice Franchise Company, LLC v. S.A. Smith Enterprises, LLC, No. 10-4297, 2011 U.S. Dist. LEXIS 2595 (E.D. Pa. Jan. 11, 2011) (opinion by J. Slomsky).
In 2007, the parties entered into a franchise agreement in which Plaintiff received $35,000.00 and a royalty fee of six-and-a-half percent of Defendants’ estimated gross sales. In exchange, Defendants had the right to operate a Rita’s franchise, as well as the use of confidential and proprietary information regarding the establishment and operation of a Rita’s store (the “System”), including recipes and business practices. The agreement was for a term of ten years. Pursuant to the agreement, Defendants were required to cease using Plaintiff’s System and return all material that related to the System if the agreement was terminated. A non-compete clause was also included in the agreement and provided that Defendants could not operate a similar business within three miles of any Rita’s franchise location or within two years following termination of the agreement.
In 2010, Defendants terminated operations of their Rita’s franchise without notice or consent. Plaintiff subsequently sent a letter to Defendants notifying them that they were in breach of the franchise agreement. Soon thereafter, Defendants opened a business similar to Plaintiff’s at the same location. Plaintiff then notified Defendants that they were in violation of the agreement’s non-compete clause. In its motion for preliminary injunction, Plaintiff sought to enforce the restrictive covenant that would prevent Defendants from operating a similar business at the same location and sought the return of all materials related to the system.
The court first addressed whether it had jurisdiction. Defendants argued that the Plaintiff failed to alleged damages in excess of $75,000.00, the jurisdictional threshold. The court, however, noted that it was not simply the unpaid royalties of $35,000 that represented the total damages. Damages also stemmed from Plaintiff’s injury to goodwill, represented by ongoing and future lost profits based upon Defendants’ unfair competition, and the benefit gained from Defendants in the receipt and use of confidential information provided by Plaintiff. The court held that “[w]hen a party seeks injunctive relief, the amount in controversy is determined by ‘the value of the object of the litigation” and “by the value of the right sought to be protected by the equitable relief.” Furthermore, it is the perspective of the plaintiff that determines the value of relief sought. Thus, the court held that the total relief sought by Plaintiffs met the jurisdictional threshold.
In granting the preliminary injunction, the court held that Plaintiff met the following requirements: “(1) a reasonable probability of success on the merits; (2) irreparable harm if the relief sought is not granted; (3) that the harm to the moving party outweighs the possible harm to the non-moving party; and (4) that granting relief is in the public interest.” The court found that the non-compete clause of the franchise agreement was reasonably limited in both time and territory as required by Pennsylvania law. Defendants did not dispute the other two requirements for a non-compete clause to be enforceable, i.e., the non-compete clause in the franchise agreement was related to the sale of good will and that there was adequate consideration. As a result, the court found that there was a reasonable probability of success on the merits.
As to irreparable harm, the court noted that money damages alone are not sufficient irreparable harm but rather “loss of control of reputation, loss of trade, and loss of goodwill” are also considered. The court determined that Defendants’ operation of a similar business would irreparably harm Plaintiff and violate the non-compete clause of the agreement. The harm to Plaintiff also outweighed the harm to Defendants who were aware of the harm when the agreement was signed and when they opened a competing store at the same location. Finally, the court held that the public interest was served by fulfilling the contractual interests of the parties and maintaining the viability of franchise systems. With all requirements satisfied, the court ruled that Plaintiff was entitled to the injunctive relief sought.
Middle District Reconsiders Grant of Summary Judgment to Defendant on Claim for Disgorgement of Profits for Trademark Infringement
In Members 1st Federal Credit Union v. Metro Bank, 2011 U.S. Dist. LEXIS 6005 (M.D. Pa. Jan. 21, 2011) (opinion by J. Kane), the court addressed Plaintiff’s motion for reconsideration of the court’s order granting summary judgment to Defendant on Plaintiff’s claim for disgorgement of profit as the result of Defendants’ alleged trademark infringement. In seeking reconsideration, Plaintiff maintained that there was no dispute that it could show Defendants’ gross sales and that the court’s summary judgment decision was erroneously based on Defendants’ contention that Plaintiff could not demonstrate a link between Defendants’ profits and alleged breach.
On review of the issue, the court agreed that the summary judgment record established that Defendants’ summary judgment motion as to disgorgement of profits centered on whether Defendants’ profits were caused by the alleged unlawful infringement. Defendants did not, however, contest the fact of the profits themselves. As such, the court granted Plaintiff’s motion for reconsideration and substantively reviewed the merits of Plaintiff’s claim for disgorgement of profits.
As to the propriety of the summary judgment decision in Defendants’ favor on Plaintiff’s request for an award of disgorgement of profits, the court noted that such as award is appropriate where supported by “the principles of equity.” Such a determination will be made according to the six Banjo Buddies factors, which include: “(1) Whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.” Banjo Buddies, Inc. v. Renosky, 399 F.3d 168, 175 (3d Cir. 2005). Additionally, willful conduct by the infringer, though not required, is also an equitable factor to be considered.
If consideration of those factors supports an accounting of the alleged infringer’s profits, the Lanham Act provides for an award of profits if plaintiff proves defendants’ sales. As a practical matter, once a plaintiff has established a defendant’s gross sales, the burden then shifts to defendant to show that some of the sales were unrelated and unaided by the unlawful use of a mark.
In this instance, Defendants maintained that the documents relied upon by Plaintiff were insufficient to establish the portion of Defendants’ profits that were attributable to the alleged unlawful use of the mark, that the documents showed only Defendants’ income instead of their sales and that the documents revealed that Defendants suffered losses since they began using the subject mark, rather than profits. As to the first two arguments, the court recognized that Plaintiff need only show Defendants’ sales. The evidence relied upon by Plaintiff was sufficient to establish such sales; thus, it was Defendants’ burden to show any costs or deductions claimed as being unrelated to the use of the infringing mark. Based on the records presented, a question of material fact existed as to the extent of the sales that were unrelated. Therefore, Defendants could not be granted summary judgment on Plaintiff’s claim for disgorgement of profits. Similarly, as to Defendants’ assertion that the documents revealed losses rather than profits, the court found that such losses did not foreclose a claim of profit from the use of an infringing mark. To the contrary, such losses merely created a question of fact for the jury regarding the amount of profits to which Plaintiff was entitled.
In conclusion, because Plaintiff had set forth sufficient evidence of record to demonstrate a material question of fact regarding an accounting of Defendants’ profits, the court reversed its prior ruling and denied Defendants’ motion for summary judgment on that issue.
Federal Court Declines to Recognize Self-Critical Analysis Privilege Where Documents Were Generated Through Voluntary Self-Assessment Procedure
On December 29, 2010, the Middle District of Pennsylvania strictly limited the applicability of the self-critical analysis privilege, noting that it was not recognized by the Third Circuit and, in any event, only applied in very narrow circumstances.
In Craig v. Rite Aid Corp., 4:08-cv-2317, 2010 U.S. Dist. LEXIS 137773 (M.D. Pa. Dec. 29, 2010) (J. Carlson), Plaintiffs, a class of current and former assistant store managers at Rite Aid, brought a class action suit alleging violations of the Fair Labor Standards Act (“FLSA”) in Rite Aid’s alleged failure to make Plaintiffs eligible for certain categories of overtime pay. In 2008 and 2009, as part of an anticipated restructuring of its stores and operation procedures, Rite Aid had conducted a voluntary internal analysis of its compliance with the FLSA and other labor laws. Plaintiffs sought discovery of the documents generated in the course of this internal analysis. Rite Aid objected on the grounds that the documents were protected by the “self-critical analysis” privilege.
In his opinion, Magistrate Judge Martin C. Carlson noted that because it was undisputed that the requested documents were relevant to the claims against Rite Aid, disclosure could be avoided only if the self-critical analysis privilege applied. The court explained that the purpose of the privilege is to enable parties “to candidly evaluate their compliance with regulatory and legal requirements without creating evidence that may be used against them in future litigation.”
In determining whether to apply the privilege, the court noted that neither federal common law nor the Third Circuit had recognized the self-critical analysis privilege. In fact, the court pointed to a 2009 Third Circuit opinion which explicitly stated that the privilege “has never been recognized by this Court and we see no reason to recognize it now.” See Alaska Elec. Pension Fund v. Pharmacia Corp., 554 F.3d 342, 351 n. 12 (3d Cir. 2009). The district court also declined to recognize the privilege pursuant to Rule 501 of the Federal Rules of Evidence, which enables federal courts to “define new privileges by interpreting common law principles
. . . in light of reason and experience.” The district court refused to apply this new privilege, opining that the legislature was better suited than the judiciary to consider the balance of interests in creating new privileges. The district court also noted the policy pervasive in the Federal Rules of Civil Procedure promoting full disclosure of documents.
Moreover, the district court found that to the extent the self-critical analysis privilege had been previously applied in Pennsylvania federal courts, it was applied under limited circumstances to protect “mandatory reports and other materials that are prepared at the direction of the government.” To the extent Rite Aid’s self-assessment was voluntary and not responsive to a government mandate, it did not fit the narrow circumstances under which the privilege has been applied.
Ultimately, the district court held that the self-critical analysis privilege was not applicable to documents generated through Rite Aid’s voluntary internal assessment of its FLSA compliance and therefore, ordered that these documents must be produced to Plaintiffs.
– Contributed by Thomas G. Wilkinson and Tamar S. Wise, Cozen O’Connor, Philadelphia, Pennsylvania; twilkinson@cozen.com and twise@cozen.com
Judge Unclogs Issue on Redirection of Internet Traffic Between Competing Companies
In Fagnelli Plumbing Company, Inc. v. Gillece Plumbing and Heating, Inc., No. 10-cv-00679, 2011 U.S. Dist. LEXIS 15092 (W.D. Pa. Feb. 15, 2011) (opinion by J. Schwab), Plaintiff Fagnelli Plumbing Company, Inc. (“Fagnelli Plumbing”) and Defendants Gillece Plumbing and Heating, Inc., et al. (“Gillece Plumbing”) filed cross-motions for summary judgment. The court ruled in favor of Fagnelli Plumbing and found that there were no genuine issues of fact relating to the claims against Gillece Plumbing for a violation of the Anticybersquatting Consumer Protection Act (“ACPA”), a violation of the Lanham Act, 15 U.S.C. § 1125(a)(1)(A) and for common law trademark infringement and unfair competition.
Fagnelli Plumbing and Gillece Plumbing are competitors in the business of providing plumbing, heating and cooling services to residential and commercial customers in Western Pennsylvania. Fagnelli Plumbing purchased and registered the domain name “fagnelliplumbing.com” in 2000. Gillece Plumbing purchased and registered the domain name “fagnelli.com” in March 2007. In March 2010, a customer of Fagnelli Plumbing attempted to locate Fagnelli Plumbing’s contact information online, and after he entered www.fagnelli.com, he was redirected to a website advertising services provided by Gillece Plumbing. After learning that internet traffic was being redirected to Gillece Plumbing’s website and after sending Gillece Plumbing a cease and desist letter, Fagnelli Plumbing commenced the lawsuit on May 18, 2010.
With respect to Fagnelli Plumbing’s cybersquatting claim, the court analyzed the ACPA in conjunction with the issue of whether a mark is distinctive based on certain factors: (a) the degree of inherent or acquired distinctiveness of the mark; (b) the duration and extent of use of the mark in connection with the goods or services with which the mark is used; (c) the duration and extent of advertising and publicity of the mark; (d) the geographical extent of the trading area in which the mark is used; (e) the channels of trade for the goods and services with which the mark is used; (f) the degree of recognition of the mark in the trading areas and channels of trade used by the marks’ owner and the person against whom the injunction is sought; and (g) the nature and extent of use of the same or similar mark by third parties.
After analyzing each factor above, the court concluded that the name “Fagnelli” was a distinctive mark entitled to protection. Also, the court analyzed whether the registration of “fagnelli.com” was identical or confusingly similar to the name “Fagnelli.” The court noted that Fagnelli Plumbing’s burden was not, as Gillece Plumbing argued, to produce evidence of actual confusion, but rather to show there was a potential for confusion. Here, the court concluded that a likelihood of confusion existed because, inter alia, potential customers were, at one point, redirected to another plumbing company advertising some or all of the same services to the same geographic area. Finally, the court analyzed a list of factors set forth in 15 U.S.C. § 1125(d)(1)(B)(i) and determined that Gillece Plumbing acted in bad faith with the intent to profit.
In regard to the alleged Lanham Act violation, the court noted that generally the Lanham Act does not protect surnames unless they are distinctive or famous, yet held that “Fagnelli” acquired a distinct and secondary meaning in Western Pennsylvania at the time when Gillece Plumbing began to use the mark. The court also determined that Gillece Plumbing’s use of “Fagnelli” created a likelihood of confusion in the marketplace. Moreover, the court granted summary judgment on Fagnelli Plumbing’s claims for common law trademark infringement and unfair competition because the court found these claims to be identical to the violation of the Lanham Act claim.
In addition to granting Fagnelli Plumbing’s motion for summary judgment, the court also granted a permanent injunction prohibiting Gillece Plumbing from redirecting internet traffic from fagnelli.com or any other domain name using the word “Fagnelli,” and from owning the domain name fagnelli.com or any similar domain name. The court ruled that damages against Gillece Plumbing will be addressed in a later proceeding.
– Contributed by Esq., Houston Harbaugh, Pittsburgh, Pennsylvania;
Western District Holds Guarantor Personally Liable Under Commercial Credit Agreement
In 84 Lumber Co., L.P., v. Bryan Construction Co., 2:09-CV-1030, 2011 U.S. Dist. LEXIS 14174 (W.D. Pa. Feb. 14, 2011) (opinion by J. McVerry), the court addressed whether the sole owner of a construction company may be held liable under a commercial credit agreement as a personal guarantor. In June 1999, Defendant Bryan Construction Co. (“Bryan Construction”) began buying goods on credit from 84 Lumber pursuant to a written credit agreement (“the Agreement”). Bryan signed the Agreement on the sole signature line provided that followed this language:
BY SIGNING BELOW I HEREBY CERTIFY THAT I AM A PRINCIPAL OF THE ABOVE BUSINESS AND I DO PERSONALLY GUARANTEE THIS ACCOUNT AND PAYMENT OF ANY SUMS DUE BY THE ABOVE-NAMED BUSINESS, AND THAT I HAVE READ ALL OF THE TERMS AND CONDITIONS ON THE REVERSE SIDE OF THE APPLICATION AND THAT I UNDERSTAND AND AGREE TO THE SAME, AND THAT ALL OF THE INFORMATION CONTAINED IN THIS APPLICATION IS TRUE AND CORRECT TO THE BEST OF MY KNOWLEDGE.
Notably, just below the signature line, the Agreement stated that “if Applicant is a partnership, then all partners must sign the application. If the Applicant is a corporation, the President must sign the application.” The Agreement also provided the recovery of late fees, collection costs, and attorneys’ fees should the borrower breach the Agreement. Bryan admitted that he read and signed the Agreement.
Following the execution of the Agreement, 84 Lumber delivered materials on credit to Bryan Construction on numerous occasions between 1999 and 2005, and Bryan Construction appropriately paid the sums due. Over that period of time, Bryan Construction’s credit limit was increased incrementally from $25,000 to an ultimate credit limit of $175,000. However, in January 2009, Bryan Construction’s account became delinquent as a result of its involvement in a failed condominium project. In particular, Bryan Construction failed to pay 25 invoices amounting to a total debt of approximately $128,000. Bryan acknowledged that the debt was due to 84 Lumber.
Consistent with the terms of the Agreement, 84 Lumber sought to collect the debt from Bryan personally. After being unable to collect the debt, 84 Lumber filed suit in July 2009 against Bryan Construction and Bryan personally, asserting claims of breach of contract and unjust enrichment. Defendants timely removed the action to the Western District, and Bryan Construction filed an offer of judgment in the amount of roughly $128,000 in March 2010, which 84 Lumber promptly accepted. Judgment in favor of 84 Lumber was thereafter entered against Bryan Construction only. However, the judgment remained unpaid.
In light of the accepted offer of judgment, the only claims remaining in the action were 84 Lumber’s claims for breach of contract and unjust enrichment against Bryan personally. The parties each moved for summary judgment. As to the breach of contract claim, 84 Lumber asserted that the Agreement was unambiguous, entered into by a sophisticated businessman and explicitly provided that Bryan would be personally liable for “ANY SUMS DUE” to 84 Lumber. Bryan countered that the Agreement was an adhesion contract with unconscionable terms. In particular, Bryan maintained that the Agreement was unenforceable because it required presidents of corporations to sign without disclosing the impact of the personal guarantee. Moreover, Bryan maintained that the “ANY SUMS DUE” language was ambiguous because it did not refer to debts incurred after execution. Bryan further asserted that the previously accepted offer of judgment acted as res judicata and that even if he were personally liable under the Agreement, his liability must be limited to the initial credit limit of $25,000.
The court made short thrift of Bryan’s assertions. It concluded that the Agreement was not an adhesion contract in that Bryan, as a sophisticated businessman, had a meaningful choice and could have sought to alter or amend the Agreement. Moreover, the Agreement was neither vague nor ambiguous in any respect and therefore, was binding and enforceable against Bryan as to all debts incurred by Bryan Construction.
In so concluding, the court noted that a finding of unconscionability sufficient to deem a contract unenforceable requires both procedural and substantive unconscionability. As to the former, the party relying on unconscionability as a defense must prove unequal bargaining power such that one party was presented with a “take it or leave it” offer. As to substantive unconscionability, the party seeking to strike the Agreement must show that the terms unreasonably favor one party and that the disfavored party does not truly assent to the terms of the Agreement. However, the court noted that such assertions are hard to invoke by businessmen and that unconscionability will rarely be found in commercial contracts. In addition, the court found that the entry of judgment against Bryan Construction had no impact on 84 Lumber’s claims against Bryan personally. Based on the foregoing, the court granted summary judgment to 84 Lumber on its breach of contract claim against Bryan.
As to 84 Lumber’s unjust enrichment claim, the court noted that a party cannot recover under a theory of unjust enrichment if the Agreement between the two parties is governed by a written contract. Although a plaintiff may plead alternative theories of relief, the court’s disposition of the breach of contract claim left 84 Lumber unable to prevail on its claim on unjust enrichment.
The court further refused to limit Bryan’s personal liability to the original credit amount of $25,000 based on the clause “ALL SUMS DUE” language and based on the fact that 84 Lumber unilaterally set and increased the credit limit without any additional involvement by Bryan. Thus, 84 Lumber’s motion for summary judgment on that count was denied as moot.
Finally, as to the recoverable damages, the court found that the record was not sufficiently clear to enter judgment. Therefore, the court requested supplemental documentation of the damages recoverable under the Agreement.
Wound Care Specialist Not Wounded Enough to Obtain an Injunction
Judge Conti of the Western District of Pennsylvania recently refused to grant a preliminary injunction to a Plaintiff who sought to enforce a non-compete agreement against eight doctors and a hospital. Wound Care Centers, Inc. v. Catalane, No. 10-336, 2011 U.S. Dist. LEXIS 12084 (W.D. Pa. Feb. 8, 2011). Plaintiff Wound Care Centers, Inc. (“Wound Care”) established and helped to operate a specialized center for treating chronic, non-healing wounds at Defendant Ohio Valley General Hospital (“Ohio Valley”) beginning in 1992. Wound Care, Ohio Valley, and the treating physicians at the center executed a series of contracts which governed their relationship. The contracts included non-compete and confidentiality clauses which affected Ohio Valley and the doctors. In April 2010, following litigation over when Ohio Valley could terminate the contract, Ohio Valley ended its relationship with Wound Care. However, Ohio Valley continued to host the wound care center under a new name, and the doctors who had been treating patients there continued to do so.
Wound Care alleged that these acts violated non-compete and confidentiality clauses in the relevant contracts and sought an injunction, which Judge Conti refused to grant. Her essential findings were that: 1) over the 18 years of the center’s existence, the specialized knowledge associated with chronic wound care had become widely disseminated such that it was no longer confidential, and Wound Care did not treat it as such; 2) because Wound Care had no plans to open a new center at a different location near Ohio Valley, enforcing the non-compete clauses against the doctors would not benefit Wound Care; and 3) enforcing the non-compete clauses against the doctors might unduly harm them and their patients. For these reasons, she found that Wound Care had not established the “likelihood of success on the merits” or the “irreparable harm” necessary to issue an injunction.
– Contributed by Jason Spak, Esq., Houston Harbaugh, Pittsburgh, Pennsylvania; j spak@psmn.com
