Cottman Transmission Systems, Inc. v. Martino

Decision Date20 September 1994
Docket NumberNo. 94-1129,94-1129
Citation36 F.3d 291
PartiesCOTTMAN TRANSMISSION SYSTEMS, INC., a Pennsylvania Corporation, Appellee v. Leonardo MARTINO and Trans One II, Inc., a Michigan Corporation, Appellants.
CourtU.S. Court of Appeals — Third Circuit

Anthony D. Rosati (argued), Rosati Associates, P.C., West Bloomfield, MI and Brad K. Robbins, Melrose Park, PA, for appellants.

Todd P. Leff, Esquire (argued), Cottman Transmission Systems, Inc., Fort Washington, PA, for appellee.

Before: SLOVITER, Chief Judge, ROTH and WEIS, Circuit Judges.

OPINION OF THE COURT

WEIS, Circuit Judge.

In this breach of contract, unfair competition, and Lanham Act case, we determine that venue does not lie in a district where the individual defendant did not conduct his business and did not carry out any infringing activities. Therefore, a default judgment will be vacated, and the case will be transferred to the district where the defendant resides and carries on his business. Even though the individual defendant's wholly owned corporation, a co-defendant, may have waived an objection to venue by failing to have an attorney appear on its behalf, we will nevertheless vacate the judgment against the company as well so that the entire action may be transferred to the same district.

Plaintiff Cottman Transmission Systems, Inc. is a nationwide franchisor incorporated under the laws of Pennsylvania and maintains its principal place of business in that state. Cottman licenses the use of its trademark in connection with the operation of transmission repair facilities throughout the United States. Defendant Leonardo Martino is a Michigan resident and the sole stockholder of co-defendant Trans One II, Inc., a Michigan corporation that operates a transmission repair business in that state.

In 1988, Martino entered into a franchise agreement with A-1 Transmissions, Inc., also a Michigan corporation. Three years later, A-1 assigned its franchises to Cottman. In conformance with that assignment, Martino and Trans One executed a franchise agreement with Cottman on August 26, 1991. However, Cottman still asserted an ability to enforce the original A-1 agreement if necessary.

After some months of operation under the newly formed franchise, Cottman became dissatisfied with Martino's performance, particularly because of inaccurate reporting of sales and delinquent license fee payments. On March 4, 1992, Cottman filed suit against Martino and Trans One in the Court of Common Pleas of Montgomery County, Pennsylvania, alleging fraud and breach of the Cottman franchise agreement. Venue and jurisdiction in Montgomery County were established by a forum selection clause in the Cottman agreement, and judgment was entered against defendants by default.

Because the Cottman agreement signed by Martino and others failed to comply with a provision of a Michigan statute, Cottman offered its franchisees in April 1992 the opportunity to rescind their contracts. Martino asserts that he accepted that offer on April 8, 1992. Cottman disputes the date of termination, but concedes that by May, the Cottman-Martino agreement was no longer in effect. In the spring of 1992, Martino and Trans One instituted suits against Cottman in the Michigan state courts.

On December 17, 1992, Cottman filed the present suit against Martino and Trans One in the United States District Court for the Eastern District of Pennsylvania, asserting three causes of action:

(1) a violation of the Lanham Act by the defendants' unauthorized use of Cottman's trademarks after "Spring, 1992";

(2) breach of the A-1 franchise agreement's covenant not to compete; and

(3) unfair competition in the operation of a new transmission repair center in Michigan under the name of "U.S.A. Transmissions," which Martino and Trans One had formed in April 1992.

The Martino litigation was consolidated with several other suits previously brought by Cottman in the Eastern District of Pennsylvania against a number of its former Michigan franchisees. Martino, appearing pro se, challenged personal and subject matter jurisdiction as well as venue in that district. Trans One did not retain an attorney and, consequently, filed no pleadings recognized by the district court. The district court, citing its earlier opinion in the cases against the Cottman franchisees, Cottman Transmission Sys., Inc. v. Metro Distrib., Inc., 796 F.Supp. 838 (E.D.Pa.1992), held that venue was proper.

In the Metro case, the court cited the forum selection clause in the Cottman franchise agreement and rejected the defendants' objections to venue. As further support for its ruling, the district court referred to transactions between the parties such as payments made by the Michigan franchisees to Cottman in Pennsylvania, their ordering of parts and supplies from Cottman's Pennsylvania offices, and the fact that the franchisees "otherwise voluntarily accepted 'long-term and exacting regulation' of their businesses by Cottman." Id. at 843 (citing Cottman License Agreement p 7).

When Martino and Trans One failed to appear at a scheduled trial on the merits, defaults were entered against them on the claims set forth in Cottman's three-count complaint. After a hearing, the district court entered judgment on the Lanham Act count in the amount of $355,438 but declined to award damages on the counts that asserted breach of the A-1 contract and unfair competition, finding that an additional recovery would be "merely duplicative" of the relief already granted. The court also awarded attorneys' fees under the Lanham Act and enjoined Martino and Trans One from using the Cottman or A-1 trademarks.

On appeal, Martino and Trans One challenge a number of district court rulings. Because we find the venue question to be dispositive, we do not address the other alleged errors. See LeRoy v. Great W. United Corp., 443 U.S. 173, 180, 99 S.Ct. 2710, 2714, 61 L.Ed.2d 464 (1979); Cameron v. Thornburgh, 983 F.2d 253, 257 n. 3 (D.C.Cir.1993).

In ruling on Martino's challenges to venue, the district court overlooked the important distinction between the case at hand and Metro. In that case, the suits were based on a breach of the Cottman franchise agreement, and its terms were critical. The pertinent provision stated that "[w]ith respect to any legal proceedings arising out of [the Cottman] Agreement, [franchisee] and COTTMAN consent to the jurisdiction and venue of ... the United States District Court for the Eastern District of Pennsylvania, and any legal proceedings arising out of [that] Agreement shall be brought only in such court[ ]...." Cottman License Agreement p 27.

However, the present complaint against Martino does not arise under the Cottman franchise agreement, but under the A-1 franchise agreement and the Lanham Act. Any doubt on this point was removed when counsel for Cottman, in argument before the district court, stated: "[O]ur claim against Mr. Martino, which is before you, does not include any claim under the Cottman license agreement." Counsel explained his client's position to be that after the Cottman agreement was rescinded, Martino reverted to being a franchisee of A-1 Transmissions. Having taken an assignment from A-1, Cottman contended that it therefore had the right to enforce the A-1 franchise agreement. As counsel remarked, "We wish them to go back to the A-1 license."

Because the present suit does not arise under the Cottman franchise agreement, the choice of venue provision of that contract has no application, and we delete it from further consideration. The A-1 franchise agreement does not contain a forum selection clause, and we therefore look to the record to determine whether, under the pertinent statutory provisions, venue was proper in the Eastern District of Pennsylvania.

I.

28 U.S.C. Sec. 1391(a)(2) provides that in diversity cases, suit may be brought in "a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated." In actions that are not founded solely on diversity, the venue requirements can be found in Sec. 1391(b). See, e.g., Indianapolis Colts, Inc. v. Metropolitan Baltimore Football Club, Ltd., 34 F.3d 410, 412 (7th Cir.1994) (trademark infringement); Dakota Indus., Inc. v. Dakota Sportswear, Inc., 946 F.2d 1384, 1392 (8th Cir.1991) (same). Section 1391(b)(2) repeats precisely the wording of section 1391(a)(2).

Section 1391 was amended in 1990 by the Judicial Improvements Act of 1990 in response to a recommendation of the Federal Courts Study Committee. See Report of the Fed. Courts Study Comm. 94 (Comm.Print 1990). The Report pointed out that the reference in the earlier version of section 1391(b) to the district "in which the claim arose" led to wasteful litigation whenever several different forums were involved in the transactions leading up to the dispute. The House Report noted that the new language was in accord with that recommended earlier by an American Law Institute study. See H.R.Rep. No. 734, 101st Cong., 2d Sess. 23 (1990), reprinted in 1990 U.S.C.C.A.N. 6860, 6869.

The amendment changed pre-existing law to the extent that the earlier version had encouraged an approach that a claim could generally arise in only one venue. However, the current statutory language still favors the defendant in a venue dispute by requiring that the events or omissions supporting a claim be "substantial." Events or omissions that might only have some tangential connection with the dispute in litigation are not enough. Substantiality is intended to preserve the element of fairness so that a defendant is not haled into a remote district having no real relationship to the dispute.

The Federal Courts Study Committee's recommendation was based on the underlying aim of simplifying litigation rather than displacing the existing policy that showed...

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