Jade Grp., Inc. v. Cottman Transmission Ctrs., LLC, CIVIL ACTION NO. 16-01237

• Decision Date: 13 July 2016
• Docket Number: CIVIL ACTION NO. 16-01237
• Parties: THE JADE GROUP, INC., et al., Plaintiffs, v. COTTMAN TRANSMISSION CENTERS, LLC, et al., Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

THE JADE GROUP, INC., et al., Plaintiffs, v. COTTMAN TRANSMISSION CENTERS, LLC, et al., Defendants.

CIVIL ACTION NO. 16-01237

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

JULY 13, 2016

PAPPERT, J.

MEMORANDUM

The Jade Group, Inc., Jade WR, Inc., B&C Transmissions, LLC, and CDL Transmission, LLC (collectively "Plaintiffs") are franchisees of Cottman Transmission Centers, LLC ("Cottman"), an automotive transmission repair franchise. They sued Cottman, its parent American Driveline Systems, Inc. ("American Driveline") and another American Driveline subsidiary, Global Powertrain Systems, LLC (collectively "Defendants") alleging breach of contract and tortious interference with contract and with Plaintiffs' business relationships. Plaintiffs allege that Cottman breached the terms of license agreements each entered into with Cottman (the "License Agreements") by, among other things, failing to maintain the goodwill and reputation of the franchise.

Before the Court is Defendants' motion to dismiss the complaint for failure to state a claim. They contend that the statute of limitations bars Plaintiffs' lawsuit and that, in any event, Plaintiffs have failed to state a claim because they have not alleged a breach of any contractual obligations in the License Agreements. They argue that all claims for tortious interference and declaratory relief must similarly fail because there is no underlying breach of contract. For the reasons that follow, the motion is granted in part and denied in part.

I.

Plaintiffs are four individual Cottman franchisees that entered into the License Agreements with Cottman at various points: B&C Transmissions, LLC ("B&C") on November 23, 1998; The Jade Group, Inc. ("Jade") on September 8, 2003; CDL Transmission, LLC ("CDL") on May 8, 2009; and Jade WR, Inc. ("Jade WR") on November 1, 2009. (Compl. ¶¶ 12-15, Exs. A-D.)

The License Agreements provide, in relevant part:

a. Section 5. Services Rendered by Cottman. Cottman is obligated to:

a. assist OPERATOR in obtaining a location and negotiating a lease;

b. assist OPERATOR with the layout of the CENTER and the installation of equipment;

c. assist OPERATOR in finding and evaluating personnel;

d. furnish to OPERATOR the Operator's Manual . . . for the purpose of providing guidance in the methods, procedures and techniques of operating a CENTER;

. . .

h. provide initial training and additional training programs and meetings; and

i. continue to develop, promote and protect the good will and reputation associated with the Cottman names and marks and other distinguishing aspects of the SYSTEM.¹

(See, e.g., id., Ex. A at 5-6.) Section 9 of the License Agreements state that Cottman must provide advertising services to franchisees in exchange for a weekly advertising fee. (Id. (Id. ¶ 26, Ex. A at 8-9.) The License Agreements also contain a non-compete clause, which states that for two years after termination of the agreement a franchisee shall not operate asimilar business "within a radius of ten [ ] miles of [its] former CENTER and three [ ] miles of any other CENTER in operation at the time of termination of any CENTER that has commenced operation during said two [ ] year period." (Id. ¶ 29, Ex. A at 15-16.)

A.

In March 2006, American Driveline acquired Cottman's "most significant competitor in the transmission repair business," AAMCO Transmissions, Inc. ("AAMCO"). (Id. ¶ 34.) At the time of the acquisition, American Driveline, AAMCO and Cottman's then-President and Chief Executive Officer ("CEO") Todd Leff stated that American Driveline intended to "phase out the Cottman brand within three years and convert existing Cottman centers to AAMCO centers." (Id. ¶ 35.) Although a "significant number" of Cottman franchisees switched to AAMCO centers, some "refused to do so or were not permitted to switch because they were located in close proximity to an existing AAMCO center." (Id. ¶ 36.)

Based on the "significant push-back" from many Cottman franchisees that refused to switch, "Cottman retreated from its announced position that it would phase out the Cottman brand." (Id. ¶ 37.) It not only permitted existing franchisees to continue to operate as Cottman centers, but also allowed them to acquire closed Cottman centers and re-open them under the Cottman name. (Id. ¶ 38.) Despite Cottman's statements that it did not intend to phase out the company, the number of Cottman franchises declined from over 400 in 2006 to approximately 74 by the end of 2011. (Id. ¶ 5; Defs.' Mot. to Dismiss ("Defs.' Mot."), Ex. 1, ECF No. 15.)

B.

At a Strategic Planning Committee ("SPC") meeting on November 30, 2011, Cottman President and CEO Randy Wright stated that one of the company's goals for 2012 was to grow the number of Cottman centers. (Compl. ¶ 40.) He announced that he had the support ofAmerican Driveline's CEO Marc Graham and that Cottman would begin the process by having existing Cottman franchisees acquire closed centers. (Id.) Cottman would then add new franchise locations, with the goal to grow the number of centers to 100 in 2012 and subsequently expand into new markets. (Id. ¶¶ 41-42.) He told existing Cottman franchisees that he would provide a list of potential new markets in order to aid the expansion. (Id.)

Cottman "reaffirmed its commitment to regrow the Cottman brand" throughout 2012. (Id. ¶ 43.) During a January 12, 2012 SPC meeting, Wright affirmed Cottman's goal to add 100 centers within one year and continue the expansion in subsequent years. (Id.) That message was reiterated during company conferences and newsletters, including Cottman's first and second quarter "Transmitter" newsletters, (Id., Exs. F, G), during a May 2012 Cottman National Convention and during a July 25, 2012 SPC meeting. (Id. ¶ 43.) Despite the company's statements about growing the number of Cottman centers, the number of stores decreased to 65 by the end of 2012. (Defs.' Mot., Ex. 1.)

In 2013, Cottman had made little progress toward meeting its goal of "regrow[ing]" the Cottman brand. (Compl. ¶ 46.) Despite Wright's plan to increase the number of Cottman centers to over 100, there were just 67 centers at the end of 2013. (Defs.' Mot., Ex. 1.) The company, however, did not give the franchisees any "reason to believe that they had changed their position with regard to their growth strategy for Cottman." (Id.)

C.

In September 2013, Brett Ponton replaced Graham as American Driveline's President and CEO. (Id. ¶ 47.) In January 2014, American Driveline vetoed a proposed internet advertising campaign which would have announced that Cottman was seeking new franchisees. (Id. ¶¶ 48-49.) After learning about the veto, certain franchisees asked to meet with Ponton "to raise theirconcerns about the lack of progress being made toward increasing the number of Cottman franchises and to understand why American Driveline had vetoed Cottman's proposed [i]nternet ad campaign." (Id. ¶ 50.)

At an SPC meeting the day before Cottman's Annual Convention in May 2014, Ponton announced that American Driveline intended to "focus its resources on its AAMCO brand going forward, and that no resources would be invested in growing the Cottman brand." (Id. ¶ 51.) Ponton also stated that he discussed American Driveline's goals with the company's Board of Directors (the "Board"), and that the Board "had established a business model in which AAMCO was to be the strong national brand and Cottman would be just a small, regional brand." (Id. ¶ 53.) He stated that "American Driveline and Cottman's business plan ha[d] not changed since 2006." (Id. ¶ 56.)

II.

On March 17, 2016 Plaintiffs filed a complaint against Defendants premised on the deterioration of the Cottman brand since American Driveline's acquisition of AAMCO. (ECF No. 1.) They alleged: (1) breach of contract and the implied covenant of good faith and fair dealing against Cottman for various breaches of the License Agreement; (2) tortious interference with the License Agreements against American Driveline; (3) tortious interference in their existing and prospective business relationships against American Driveline and GPS; and (4) a claim seeking a declaration that the License Agreement is terminated and its covenant not to compete is unenforceable. (Compl. ¶¶ 109-53.)

A.

In support of their allegations, Plaintiffs claim that Ponton's statement in 2014 that American Driveline's business plan has not changed "is not borne out by the facts." (Id.) Theycontend that "[p]rior to American Driveline's acquisition of AAMCO, there were more than 400 Cottman Centers across the United States and Canada. Today, there are only 56 Cottman Centers in operation." (Id. ¶ 55.) Plaintiffs allege that "[b]y reneging on its announced strategy to re-grow the Cottman brand, Cottman has breached its obligations under Section 5(i) of the License Agreements to "continue to develop, promote and protect the good will and reputation associated with the Cottman names and marks." (Id. ¶¶ 57-58, Exs. A-D.)

Plaintiffs contend that in addition to allowing the store count to decrease, Cottman has breached its obligation to promote and protect the company's goodwill under Section 5(i) in a number of other ways. First, Cottman "gutted" Cottman's National Intercenter Warranty Program ("Warranty Program"), which is an "important tool to persuade potential customer to patronize their Cottman Centers." (Id. ¶ 61.) Plaintiffs allege that with only 56 Cottman centers, the Warranty Program "is far less valuable" than it was when Cottman had over 400 stores nationwide. (Id.)

Second, Plaintiffs claim that Cottman encouraged existing and potential customers to use GPS remanufactured transmissions rather than having a Cottman center rebuild their transmission. (Id. ¶ 65.) Plaintiffs contend the cost to the franchisee of using a GPS remanufactured transmission "is significantly higher than the cost to rebuild transmissions, decreasing the franchisee's profitability." (Id. ¶ 66.) They allege that ...