Sherman Industries, Inc. v. Goldhammer

• Court: U.S. District Court — Eastern District of Pennsylvania
• Writing for the Court: LOUIS H. POLLAK
• Citation: Sherman Industries, Inc. v. Goldhammer, 683 F.Supp. 502 (E.D. Pa. 1988)
• Decision Date: 01 April 1988
• Docket Number: Civ. A. No. 86-1441.
• Parties: SHERMAN INDUSTRIES, INC. v. Joel S. GOLDHAMMER and Seidel, Gonda & Goldhammer, P.C.

683 F. Supp. 502

SHERMAN INDUSTRIES, INC. v. Joel S. GOLDHAMMER and Seidel, Gonda & Goldhammer, P.C.

Civ. A. No. 86-1441.

United States District Court, E.D. Pennsylvania.

April 1, 1988.

Benjamin E. Zuckerman, Norristown, Pa., for plaintiff.

Joel S. Goldhammer, Seidel, Gonda & Goldhammer, P.C. by James A. Drobile, David Smith, Schnader, Harrison & Segal, Philadelphia, Pa., for defendants.

MEMORANDUM

LOUIS H. POLLAK, District Judge.

This is a legal malpractice case arising out of unsuccessful patent litigation which exposed plaintiff to liability in excess of one million dollars. Plaintiff, Sherman Industries, Inc. ("Sherman"), a manufacturer of carwash equipment, is suing its former lawyer, Joel S. Goldhammer, Esq., and the law firm Seidel, Gonda & Goldhammer, P.C. (jointly referred to herein as "Goldhammer"). The essence of plaintiff's case is that defendants undertook to investigate a potential patent infringement and to advise plaintiff how to minimize the risks involved in developing its product, but that defendants gave inappropriate and inadequate advice and thereby caused plaintiff to incur substantial losses that should have been avoided. The case is now before me on defendants' motion for summary judgment.¹ Defendants contend that the claims asserted by plaintiff in its amended complaint are barred by the statute of limitations. For the reasons that follow, the claims are time-barred and the complaint is accordingly dismissed.

I.

The circumstances of defendants' representation of plaintiff, viewed in the light most favorable to plaintiff, are as follows: In 1980 Sherman retained Goldhammer to advise it on patent validity and infringement.² In particular, Goldhammer did a validity study of an existing patent on a piece of carwash equipment, a bag blower called "The Stripper," which was manufactured by a Sherman competitor, Proto-Vest, Inc., for use in drying cars after they have gone through a carwash. Goldhammer assured Sherman that Proto-Vest's patent was invalid. Goldhammer accordingly advised Sherman that it need not modify the design of its own bag blower, the Model 1885. Sherman proceeded to manufacture and sell its Model 1885. Goldhammer meanwhile represented Sherman in a declaratory judgment action against Proto-Vest claiming patent invalidity and non-infringement. Proto-Vest met Sherman's declaratory judgment action with a counterclaim against Sherman for patent infringement.

On June 1983, after a trial on liability issues only, the district court found Sherman liable for patent infringement, and enjoined it from manufacturing and selling its bag blower. Notwithstanding the defeat at trial, Goldhammer continued to advise Sherman that Proto-Vest's patent was invalid, and assured Sherman that the decision of the district court would be overturned on appeal. In reliance on Goldhammer's advice, Sherman appealed from the district court decision, and obtained a stay of the injunction so that it could continue to manufacture its bag blower pending disposition of the appeal.

In advising Sherman, Goldhammer repeatedly insisted that Sherman would win the lawsuit against Proto-Vest. The record shows that Goldhammer did explain after the loss at trial that if Proto-Vest ultimately prevailed, Sherman would have to pay royalties and lost profits.³ Sherman's officers paid more attention to Goldhammer's assurances of victory, however, than to minimizing the risks of loss. Sherman's officers did not ask Goldhammer to explain alternatives to suit, nor did they urge him to discuss further the downside risks of taking Proto-Vest to court.

On February 29, 1984, the Federal Circuit upheld the decision of the district court, and thereafter denied Sherman's petition for rehearing. Sherman nonetheless continued to retain Goldhammer, who began to prepare for the damages portion of the bifurcated trial.

Sherman began in the summer of 1984 to manufacture and sell a new version of its bag blower, the Model 1886. Sherman contends that the new model was similar to the predecessor model in all respects, except that it did not have the rectangular cross-section that the district court had found infringed Proto-Vest's patent. Amended Complaint ¶ 25.

Because Goldhammer himself apparently had been unaware of the appropriate measure of Proto-Vest's damages, it was not until some months after the appeal was lost that Goldhammer informed Sherman of the magnitude of the damages it might have to pay, and of the extent to which its decision to continue to manufacture the Model 1885 pending appeal might have further increased those damages. Goldhammer had not researched and investigated the damages question prior to the summer of 1984. See Amended Complaint, Exhibit E (letter from Goldhammer to Thacher, dated March 2, 1984, stating that Goldhammer had not conducted legal research into the applicable measure of damages). In his initial advice to Sherman that it might have to pay Proto-Vest for lost profits, Goldhammer had not offered any definition of lost profits. Thacher N.T. at 143. Interrogatories to Proto-Vest drafted by Goldhammer and served in July of 1984 sought information about Proto-Vest's "net profit." See Amended Complaint, Exhibit B. Sherman learned by the fall of 1984, however, that it was liable for Proto-Vest's lost gross profits, an amount substantially greater than the net profits that Sherman had known it might have to pay. See Thacher N.T., at 15, 144.

In October, 1985, Sherman terminated its attorney-client relationship with Goldhammer. Thereafter, Sherman hired new counsel, and Sherman and Proto-Vest determined not to proceed with a trial on the damages portion of the patent dispute. They settled the litigation for $1,375,000.00.

Sherman initiated this malpractice action on March 12, 1986. Goldhammer moved to dismiss the complaint as time-barred. I granted that motion on April 22, 1987, but gave plaintiff leave to file an amended complaint, which it did on May 11, 1987. Defendants now move for judgment in their favor on the ground that plaintiff has failed to raise a genuine issue with respect to the timeliness of the claims pleaded in its amended complaint.

II.

In both the original and amended complaints, plaintiff has alleged malpractice claims under contract and tort theories. The amended complaint alleges that the parties had "an express contract of employment whereby Defendants agreed to provide certain advice and to represent Sherman Industries with respect to a patent dispute between Plaintiff and Proto-Vest, Inc.," pursuant to which "Plaintiff directed and instructed Defendants to furnish certain specified legal services and advice." Complaint ¶ 10, 11. Plaintiffs also rely on defendants' professional duty to exercise due care: "by accepting employment by plaintiff in connection with the Proto-Vest patent dispute Defendants agreed to and were bound to exercise the necessary, proper and ordinary skill and knowledge required of them in connection therewith." Id. ¶ 13.

The law of Pennsylvania determines the appropriate statutes of limitations applicable to plaintiff's claims. The diversity of the parties' citizenship provides the jurisdictional basis for plaintiff's claims. Plaintiff is a New Jersey corporation. Defendant Joel Goldhammer is a citizen of Pennsylvania, and Seidel, Gonda & Goldhammer, P.C. is a Pennsylvania business. A federal court sitting in diversity applies the forum state's choice-of-law rules. A Pennsylvania court would apply the Pennsylvania statute of limitations because Pennsylvania is the forum. See Ross v. Johns-Manville Corp., 766 F.2d 823 (3d Cir.1985); Lustgarten v. Merrill Lynch, 528 F.Supp. 1125 (E.D.Pa. 1981).⁴ Pennsylvania has a four-year limitations period for "an action upon an express contract not founded upon an instrument in writing" or "an action upon a contract implied in law." 42 Pa.C.S. § 5525. A two-year statute of limitations applies to "any ... action or proceeding to recover damages for injury to person or property which is founded on negligent ... or otherwise tortious conduct." 42 Pa.C.S. § 5524(7).

Under Pennsylvania law, both contract and tort theories provide appropriate frameworks for claims of legal malpractice. As Judge Spaeth explained in Duke & Company v. Anderson, 275 Pa.Super. 65, 418 A.2d 613, 615 (1980):

... the client has a choice: either to sue the attorney in assumpsit, on the theory that the attorney in failing to follow specific instructions committed a breach of contract; or to sue the attorney in trespass, on the theory that the attorney failed to exercise the standard of care that he was obliged to exercise.

A plaintiff may combine tort and contract claims in one malpractice complaint, as Sherman has done in this case, by asserting that defendants have breached both specific contractual terms and a general lawyers' duty of care. See Guy v. Liederbach, 501 Pa. 47, 459 A.2d 744, 748 (1983).

One important limitation on pleading malpractice claims in Pennsylvania under a contract theory, however, is that a malpractice plaintiff may not sidestep the two-year limitation on tort actions by pleading tort claims as breaches of contract. See Stetson v. Carty, Civil Action No. 83-6071 (E.D.Pa. July 18, 1984), aff'd, 760 F.2d 261 (3d Cir.1985). As Chief Judge Fullam explained in Stetson, if allegations of a contractual relationship between plaintiff and defendants, and of an express or implied term of the contract establishing an obligation to exercise reasonable care, were to suffice to state a breach-of-contract malpractice case, "the two year limitations statute for tort actions would be a dead letter in ... malpractice cases." Id., slip op. at 3.

In sum, to sustain a claim of tortious malpractice, plaintiff must raise an issue whether defendants failed to exercise the standard of care that a reasonable attorney would exercise under the circumstances. Trice v. Mozenter, 356 Pa.Super 510, 515 A.2d 10, 13 (1986). To sustain a...