Cottman Transmission Systems, LLC v. Kershner

• Decision Date: 22 June 2007
• Docket Number: Civil Action No. 05-6369.
• Citation: 492 F.Supp.2d 461
• Parties: COTTMAN TRANSMISSION SYSTEMS, LLC, et al. v. Dale KERSHNER, et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

492 F.Supp.2d 461

COTTMAN TRANSMISSION SYSTEMS, LLC, et al. v. Dale KERSHNER, et al.

Civil Action No. 05-6369.

United States District Court, E.D. Pennsylvania.

June 22, 2007.

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Alan Poliner, James Goniea, AAMCO Transmissions, Inc., William B. Jameson, Cottman Transmission Systems, LLC, Horsham, PA, Dady & Garner PA, Minneapolis, MN, Joseph Schumacher, Sandra G. Gibbs, Wiggin & Dana LLP, Conshohocken, PA, for Plaintiffs.

Barbara A. Bagdon, Dady & Garner P.A., Minneapolis, MN, William John Brennan, Butera, Beausang, Cohen & Brennan, King of Prussia, PA, for Defendants.

Ronald K. Gardner, Dady & Garner PA, J. Michael Dady, William S. Fulton, Jr., Dady & Garner PA, Minneapolis, MN.

Diane M. Welsh, Esq., Philadelphia, PA, pro se.

MEMORANDUM

EDUARDO C. ROBRENO, District Judge.

In 2005, numerous former and current franchisees (the "Franchisees") of Cottman Transmission Systems, LLC filed suit against Cottman and its in-house advertising agency, Ross Advertising, Inc. (collectively, "Cottman"), in the District of Minnesota.¹ This initial action spawned the filing of various actions across several other states, all of which have been consolidated and are now before this Court. See Order of January 5, 2007 (doc. no. 54). Presently before the Court is the Franchisees' Second Motion for Leave to File a Second Amended Complaint (doc. no. 62). For the reasons set forth below, the Court will grant in part and deny in part the instant motion.

I. BACKGROUND

The Cottman franchise system is a chain of stores that perform repairs to automobile transmissions. The essence of the Franchisees' claims in this action is that Cottman misrepresented its franchise system — for example by inflating the average earnings of Cottman stores — to induce the Franchisees to enter into a franchise agreement with Cottman. Once ensnared in the agreement's clutches, the Franchisees allege, Cottman required them to make steep investments and pay expensive fees to Cottman. Moreover, according to the Franchisees, Cottman failed to provide the support it promised under the franchise agreement, making the successful operation of a Cottman franchise difficult, if not outright impossible. Perhaps the most serious of the allegations is that Cottman maximized its profits by "churning" franchise stores at the Franchisees' expense. When a franchisee's store failed, Cottman would coerce the franchisee to continue to operate the failing store just long enough to sell the store and its equipment back to Cottman at a significant loss. Then, as the Franchisees tell it, Cottman resold the same store and equipment, at a significant profit, to the next franchisee unfortunate enough to be duped by Cottman's representations into entering into the franchise agreement.

II. MOTION FOR LEAVE TO FILE A SECOND AMENDED COMPLAINT

Franchisees now seek leave to amend their complaint² to: (1) add nine new plaintiff franchisees; (2) add American Driveline Systems, Inc. and American Capital Strategies, Ltd. as party defendants; (3) reinstate claims against Todd P. Leff, Cottman's President and Chief Executive Officer; (4) add facts relating to the merger between Cottman and AAMCO Transmissions that support the Franchisees' claim for breach of contract and violation of the implied covenant of good faith and fair dealing; (5) add a cause of action against Cottman under the Missouri Franchise law; and (6) add, at a future, date seven trustees of the bankruptcy estates of former Cottman franchisees when those trustees have received court approval to participate in the litigation.

A. Legal Standard for Amendment of Complaints

Rule 15 of the Federal Rules of Civil Procedure allows a party the right to amend its complaint once as a matter of course at any time before any answer is served. See Fed.R.Civ.P. 15(a). Otherwise a party may amend its complaint only by leave of court, and "leave shall be freely given when justice so requires." Id. The Supreme Court has mandated that a plaintiff "be afforded an opportunity to test his claim on the merits" rather than having the claim dismissed by denying him leave to amend his complaint:

In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be `freely given.'

Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). As the Third Circuit has articulated the standard, a district court has discretion to deny a request to amend if it is apparent from the record that (1) the moving party has demonstrated undue delay, bad faith, or dilatory motives, (2) the amendment would be futile, or (3) the amendment would prejudice the other party. Grayson v. Mayview State Hosp., 293 F.3d 103, 108 (3d Cir. 2002) (citing Foman, 371 U.S. at 182, 83 S.Ct. 227).

Here, Cottman argues that the Franchisees' proposed amendments are futile. In inquiring as to when amendment would be futile, the Court applies the same standard used in a motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief may be granted. See McGreevy v. Stroup, 413 F.3d 359, 371 (3d Cir.2005); Milburn v. Girard, 441 F.Supp. 184, 187 (E.D.Pa.1977) ("If the amendment sets forth a claim upon which, as a matter of law, plaintiff is not entitled to relief, leave to amend should be denied."). Denying amendments on the ground of futility allows the court to whittle away legally incognizable claims at the amendment stage instead of forcing another round of motion practice under Rule 12(b)(6). See, e.g., McGreevy, 413 F.3d at 371 n. 6 (affirming a district court's dismissal, on the ground of futility, of a claim asserted in plaintiff's original complaint).

B. Franchise Statute Claims Against Todd P. Leff

Todd P. Leff is the President and Chief Executive Officer of Cottman and American Driveline. Leff Dec., Ex. A. to Cottman's Resp. Three subsets of Franchisees seek leave to assert claims against Leff under the franchise disclosure statutes in California (Count 3), Wisconsin (Count 28) and New York (Count 39). Cottman argues, however, that the Franchisees signed agreements that state that Pennsylvania law will govern the instant disputes, not the law of the location of their present or former franchises, and thus that the proposed amendments would be futile. Whether the claims under the state franchise statutes of California, Wisconsin, and New York are futile depends on the outcome of a choice-of-law analysis. That analysis requires the Court to determine whether the choice-of-law agreement between the parties precludes assertion of these particular statutory claims. Because the Court concludes that it does not, the Court will grant the Franchisees leave to amend their complaint to add these three specific counts.

1. Choice of Law Standard

Where federal jurisdiction is based on diversity of citizenship, such as in the instant case, the Court must apply the choice-of-law rules of the state in which it sits. St. Paul Fire & Mar. Ins. Co. v. Lewis, 935 F.2d 1428, 1431 n. 3 (3d Cir. 1991) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941)). This Court sits in the Eastern District of Pennsylvania. Thus, Pennsylvania choice-of-law rules apply.

Under Pennsylvania choice-of-law rules, "the first question to be answered in addressing a potential conflict of laws dispute is whether the parties explicitly or implicitly have chosen the relevant law." Assicurazioni Generali, S.P.A. v. Clover, 195 F.3d 161, 164 (3d Cir.1999). Generally, if the parties have agreed to the applicable law, that agreed-upon law shall be given effect. Id. A choice-of-law clause may be invalidated, however, if (1) the chosen state has no substantial relationship to the parties or the transaction, or (2) if application of the law of the chosen state would be contrary to a policy of a state with a materially greater interest than the chosen state in the determination of the particular issue. Kruzits v. Okunza Mach. Tool, Inc., 40 F.3d 52, 55 (3d Cir. 1994) (citing Schifano v. Schifano, 324 Pa.Super. 281, 471 A.2d 839, 843) (Pa.Super. Ct.1984, Restatement (Second) of Conflict of Laws § 187).³

Here, the Franchisees executed franchise agreements that provide as follows:

This Agreement and all related agreements have been entered into in the Commonwealth of Pennsylvania and any matter whatsoever which arises out of or is connected in any way with the Agreement or the franchise shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania.

License Agreement ¶ 29. The first question is easily answered. The parties clearly chose Pennsylvania law to govern disputes that arose between them. However, the second question still remains: Should the choice-of-law provision be invalidated as to the Franchisees' statutory claims for other reasons?

2. Substantial Relationship

Pennsylvania has a substantial relationship to the parties and the transaction in this case. Cottman's corporate headquarters are in Pennsylvania. The franchise agreement requires the Franchisees to travel to Cottman's home office in Pennsylvania to attend its three-week training class prior to opening a new Cottman franchise. At the end of a successful training class, the franchise agreement is finally negotiated and executed between the parties in Pennsylvania. Thereafter, payments made by a franchisee under the License Agreement are sent to Cottman at its home office in Pennsylvania. Thus, the choice-of-law provision should not be invalidated on the grounds that Pennsylvania has no "substantial relationship to the parties or the transaction." Kruzits, 40 F.3d at 55.

3. Policy...