AAMCO Transmissions, Inc. v. Harris

• Decision Date: 13 March 1991
• Docket Number: Civ. A. No. 89-5533.
• Citation: 759 F. Supp. 1141
• Parties: AAMCO TRANSMISSIONS, INC. v. William D. HARRIS.
• Court: U.S. District Court — Eastern District of Pennsylvania

759 F. Supp. 1141

AAMCO TRANSMISSIONS, INC. v. William D. HARRIS.

Civ. A. No. 89-5533.

United States District Court, E.D. Pennsylvania.

March 13, 1991.

Karen A. von Dreusche, Bala Cynwyd, Pa., for plaintiff.

Duane, Morris & Heckscher, Wayne A. Mack, Jr. and Nancy Conrad, Philadelphia, Pa., for defendant.

MEMORANDUM

LOUIS H. POLLAK, District Judge.

This case arises out of a franchise agreement between plaintiff, AAMCO Transmissions, Inc. (ATI) and defendant, William Harris.¹ ATI commenced this diversity action in June of 1989, alleging breach of the franchise agreement and violations of the Lanham Act. Harris has asserted a variety of counterclaims. Now before the court is ATI's motion for summary judgment on Harris' counterclaims. For the reasons discussed below, ATI's motion is granted in part and denied in part.

The background facts are not in dispute. Harris and ATI entered into a franchise agreement on April 17, 1986. The terms of the agreement provided that ATI would permit Harris to use the AAMCO trademark and would provide training and assistance with advertising. In return, Harris would remit to ATI a portion of the profits earned from the operation of an AAMCO transmission shop located in Bremerton, Washington. Less than a month after Harris and ATI executed the franchise agreement, ATI learned that it was being investigated by the attorneys general of thirteen states, including Washington, about some of AAMCO's operational and customer service practices. The investigation culminated in consent judgments entered and made public on February 18, 1987. ATI informed its franchisees of the investigation by letter dated May 7, 1987.

Harris asserts seven counterclaims: 1) fraud; 2) breach of contract; 3) breach of implied covenant of good faith and fair dealing; 4) breach of fiduciary duty; 5) intentional interference with prospective contractual relations; 6) negligence; and 7) violation of sections 19.100.170 and 19.100.180 of the Washington Franchise Investment Protection Act (WFIPA). The principal thrust of these counterclaims is that ATI fraudulently failed to disclose the civil investigation before the agreement became binding.² Harris also alleges that ATI failed to comply with certain obligations under the franchise agreement, specifically to provide on-going training and assistance with advertising.

ATI has moved for summary judgment on all these counterclaims. For the reasons discussed in the following pages, we conclude that summary judgment should be granted on (1) the counterclaims for fraud, intentional interference with prospective contractual relations, and negligence, and the counterclaim under the WFIPA, because they are time-barred; and (2) the counterclaim for breach of fiduciary duty because it is insufficient as a matter of law. We further conclude that summary judgment should be denied on the counterclaims for breach of implied duty of good faith and fair dealing and breach of contract because there are material issues of fact to be resolved by a fact-finder.

DISCUSSION:

I.

ATI contends that several of Harris' counterclaims are time-barred. Harris learned of the investigation, at the very latest, within a day or so after May 7, 1987, the day on which ATI sent a letter to all AAMCO franchisees about the investigation. Harris asserted his counterclaims on September 18, 1989, when he filed his answer to ATI's complaint. Thus, two years and four months elapsed between the time that Harris became aware of the investigation and the time that he first asserted his claims against ATI.

We will first address the common law counterclaims for fraud, negligence, and intentional interference with prospective contractual relations. Then we will address the counterclaim arising under the Washington Franchise Investment Protection Act (WFIPA). In addressing these issues, we start from two interrelated premises. The first is that a federal court sitting in diversity must follow the choice of law rules prevailing in the state courts of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., Inc., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). The second is that the courts of Pennsylvania generally treat statutes of limitations as "procedural," applying Pennsylvania's statutes of limitations not only to wholly domestic causes of action but also to causes of action arising in other jurisdictions³ (unless, pursuant to Pennsylvania's borrowing statute, a Pennsylvania court is directed to apply a shorter limitation statute of another jurisdiction.⁴)

(A)

With these principles in mind, we first consider the counterclaims for fraud, negligence, and intentional interference with prospective contractual relations.

42 Pa.Cons.Stat.Ann. § 5524, a two-year statute of limitations, provides, in relevant part:

The following actions and proceedings must be commenced within two years....

(3) An action for taking, detaining or injuring personal property....

(7) ... Any ... action or proceeding to recover damages for injury to person or property which is founded on negligent, intentional, or otherwise tortious conduct or any other action or proceeding sounding in trespass, including deceit or fraud....

42 Pa.Cons.Stat.Ann. § 5524(3), (7) (West Supp.1988). The claims for fraud and negligence are covered by section 5524(7). Section 5524(3) has been construed as applying to claims for intentional interference with prospective contractual relations. Mazzanti v. Merck and Co., Inc., 770 F.2d 34, 36 (3d Cir.1985). Therefore, since Harris' claims for fraud, negligence, and intentional interference with prospective contractual relations were not commenced within two years, they are time-barred.

(B)

Harris also asserts a counterclaim under the Washington Franchise Investment Protection Act (WFIPA).⁵ He alleges that ATI violated various provisions of the WFIPA, 1) by failing to advise him that ATI was being investigated by the Washington attorney general prior to Harris' purchase of the franchise; 2) by misrepresenting to him that ATI had lawful and established procedures and valuable good will that would assure a profitable franchise; and 3) by violating the WFIPA's duty of good faith in allowing a severe customer relations problem to develop and generally failing to protect the value of its trademark.

Harris argues that there is a limitations period that is built into the WFIPA under which this counterclaim is not time-barred. Although, as discussed above, the general rule is that federal courts sitting in Pennsylvania apply Pennsylvania statutes of limitations as a "procedural" matter, Harris argues that when a statute which creates a cause of action provides a limitations period within which the statutory cause of action must be brought, that provision is "substantive" and becomes part of the cause of action which the Pennsylvania courts would apply.

It is not necessary to decide this issue. The thrust of Harris' argument is that a violation of the WFIPA constitutes an unfair or deceptive practice under the Washington Unfair Business Practices Act (WUBPA) and, thus, the WFIPA violation would be governed by the WUBPA's four-year limitation period. However, because the provisions of the WFIPA that ATI allegedly breached are not the provisions designated as constituting an unfair or deceptive practice under the WUBPA, the WUBPA limitations period is not applicable to the Harris counterclaim under the WFIPA.⁶

Thus, we turn to what Pennsylvania statute of limitations would apply to this counterclaim. Because there is no express statute of limitations, there being no analogous Pennsylvania franchise law, one proceeds by analogy to find the appropriate source for a statute of limitations. Ammlung v. City of Chester, 494 F.2d 811, 814 (3d Cir.1974). ATI suggests that either the two-year limitation applicable to common law actions for fraud or the one-year limitation contained in the Pennsylvania Securities Act would provide an appropriate limitation period.

Securities law does not provide an appropriate analogy from which to draw a statute of limitations applicable to Harris' counterclaim under the WFIPA. Although the Pennsylvania Securities Act, 70 Pa. Cons.Stat.Ann. § 1-401 (West Supp.1988), contains language almost identical to that in the WFIPA, the consistent distinction that has been made between securities and more participation-oriented investments like franchises precludes an analogy to securities law. When parties attempt to bring a claim concerning a franchise agreement under securities law, they usually argue that it is a species of "investment contract." However, Pennsylvania follows the United States Supreme Court's definition of the term "investment contract" in federal securities law, which has been held not to include franchise agreements.

In Martin v. ITM/Intern Trading & Marketing, 343 Pa.Super. 250, 494 A.2d 451, 453 (1985), the court held that where a plaintiff, in return for advancing money to the defendant for the purpose of purchasing gold bars, was, by agreement, to receive a demand note for the money advanced plus the right to a 25 percent return in profit, such agreement was a "security" within the meaning of the Pennsylvania Securities Act of 1972. The Martin court noted that in light of the dearth of Pennsylvania appellate cases examining such an "investment contract," federal case law could provide guidance, especially since the Pennsylvania Securities Act contained a definition of "security" that was very similar to the definitions of "security" set forth in the Securities Exchange Act of 1933 and the Securities Exchange Act of 1934. Both the Pennsylvania and federal definitions included the term "investment contract." Thus, the Martin court looked to the definition of "investment contract" enunciated in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).

In SEC v. W.J. Howey Co., the Supreme Court stated that an investment contract is one...