stating that Pennsylvania has not adopted section 766ASummary of this case from Karpf v. Mass. Mut. Life Ins. Co.
CIVIL ACTION No. 03-5467
April 5, 2004
MEMORANDUM AND ORDER
This action arises out of a dispute between Plaintiff Cottman Transmission Systems, LLC ("Cottman") and its franchisee, Defendant Ronald Bence. In response to Plaintiff's complaint, Defendant asserted the following counterclaims: breach of contract; violation of the Michigan Franchise Investment Law ("MFIL"); tortious interference with existing contracts; and tortious interference with prospective contracts. Presently before this Court is Plaintiff's motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) on all of Defendant's counterclaims except for breach of contract. For the following reasons, Plaintiff's motion is granted.
In September 2000, Defendant entered into several agreements with Cottman to acquire and operate a Cottman Transmission Center in East Lansing, Michigan. As part of this transaction, the parties executed a license agreement ("License Agreement") that granted Defendant the right to use the Cottman name and trademarks. The License Agreement also contained a choice of law provision that specified that "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 ¶ 28.) The License Agreement, including its choice of law provision, was reviewed by Defendant's Michigan-based attorney before it was executed. (Todd Leff Aff. ¶ 6.)
In November 2002, Cottman initiated an audit of Defendant's franchise which, in turn, provoked a series of events that culminated in the instant action. According to Cottman, the audit revealed that Defendant was under-reporting sales in violation of the License Agreement, a charge that Defendant has consistently denied. Nonetheless, on February 3, 2003, Cottman responded by disconnecting the telephone lines at Defendant's franchise and redirecting all calls to nearby franchises until February 7, 2003, when Cottman assumed management of Defendant's franchise.
II. STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(c) permits a party to move for judgment "after the pleadings are closed but within such time as not to delay the trial." FED. R. CIV. P. 12(c). A party moving for judgment on the pleadings under Rule 12(c) must demonstrate that there are no disputed material facts and that judgment should be entered in its favor as a matter of law. See Jablonski v. Pan Amer. World Airways, Inc., 863 F.2d 289, 290 (3d Cir. 1988). In evaluating a Rule 12(c) motion, a court must view the pleadings in the light most favorable to, and draw all inferences in favor of, the nonmoving party. See Soc'y Hill Civic Ass'n v. Harris, 632 F.2d 1045, 1054 (3d Cir. 1980).
As a practical matter, the standard governing motions for judgment on the pleadings pursuant to Rule 12(c) is similar to that governing motions to dismiss under Rule 12(b)(6). See Children's Seashore House v. Waldman, 197 F.3d 654, 657 n. 1 (3d Cir. 1999).
Plaintiff moves for judgment on the pleadings with respect to Defendant's counterclaim under the MFIL and his counterclaims for tortious interference with both current and prospective contracts. I will address each claim in turn.
A. Michigan Franchise Investment Law
Plaintiff asserts that Defendant's counterclaim under Michigan law is barred by the choice of law provision contained in the License Agreement. In opposition, Defendant argues that his claim under MFIL is not barred as there is no similar protection provided under Pennsylvania law. Pennsylvania courts generally enforce express choice of law provisions in contracts provided that: (1) the transaction bears a "reasonable relationship" to the state whose law is chosen to govern; and (2) the chosen law does not violate a "strong public policy" that would otherwise protect a party. Cottman Transmission Sys., Inc. v. Melody, 869 F. Supp. 1180, 1183 (E.D. Pa. 1994). This standard is designed to honor the intent of contracting parties, Nationwide Mut. Ins. Co. v. West, 807 A.2d 916, 920 (Pa.Super. 2002), particularly where, as in this case, both parties to the contract were represented by counsel. In determining if application of the chosen law would be contrary to a fundamental policy of the other state, a court must examine whether there are "significant differences" between the two states' laws and whether "the choice of Pennsylvania law would cause a `substantial erosion' of the quality of protection afforded" under the other state's law. Cottman, 869 F. Supp. at 1186 ( citing Banek Inc. v. Yogurt Ventures, U.S.A., Inc., 6 F.3d 357, 362 (6th Cir. 1993)).
When jurisdiction is based on diversity of citizenship, the district court applies the choice of law rules of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Accordingly, Pennsylvania choice of law rules apply in this action.
The standards under Pennsylvania law derive from § 187 of the Restatement (Second) of Conflict of Laws. Section 187 states that the parties' choice of law provision will govern unless:
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of a particular issue, and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187(2) (2004).
In the present case, the first prong of the choice of law inquiry is clearly satisfied. Defendant's purchase of the Cottman franchise bears a reasonable relationship to Pennsylvania because Cottman's principal place of business is located in Pennsylvania, the License Agreement, Note and other contract documents were executed at Cottman's home office in Pennsylvania, and Defendant attended Cottman's training program at the Pennsylvania office. Cottman, 869 F. Supp. at 1184 (finding reasonable relationship in similar circumstances.)
Under the second prong, this Court must decide whether applying Pennsylvania law in lieu of the Michigan Franchise Investment Law, MICH. COMP. LAWS ANN. § 445.1501 (2004), would violate the strong public policy of Michigan. Defendant's claim under MFIL is that Cottman failed to provide the requisite disclosures pursuant to MICH. COMP. LAWS ANN. § 445.1508(1)-(3) (2004). (Compl. ¶¶ 156-162.) The main thrust of these MFIL claims, however, is that Defendant was not provided with sufficient and accurate information when he entered into the franchise relationship with Cottman. As Cottman points out, under Pennsylvania common law, Defendant may pursue a claim for fraud or material misrepresentation and still be eligible for damages or rescission, the same remedies that are available under MFIL for a violation of disclosure obligations. See MICH. COMP. LAWS ANN. § 445.1531; Nat'l Bldg. Leasing v. Byler, 381 A.2d 963, 965 (1977).
Thus, even though Pennsylvania does not have a law mandating disclosure requirements analogous to the MFIL, Bence has not demonstrated that he will suffer a substantial erosion of the protections afforded a franchisee if left to a common law action for fraud and material misrepresentation. See Banek, 6 F.3d at 363 (holding that application of Georgia law instead of MFIL would not violate fundamental policy of Michigan and noting that plaintiff could pursue common law fraud claim); Cottman, 869 F. Supp. at 1187 ("[M]erely because Pennsylvania does not have a statute analogous to the CFIL [California Franchise Investment Law] does not mean that there has been a `substantial erosion' of protections afforded a franchisee."). Furthermore, while the MFIL exhibits Michigan's public policy of protecting franchisees, it demonstrates a simultaneous desire to make Michigan an attractive location for such businesses by permitting franchisors to include choice of law clauses in their franchise contracts. Banek, 6 F.3d at 360. Thus, Defendant will not suffer a substantial erosion of his protections and the fundamental public policy interests of Michigan will not be obviated by the application of Pennsylvania law in this case. Therefore, Plaintiff's motion for judgment on the pleadings on Defendant's MFIL claim is granted.
Defendant is granted leave to amend his counterclaim in accordance with this ruling.
B. Tortious Interference
Count III of Defendant's counterclaims alleges tortious interference with his existing contractual relations. Specifically, Defendant claims that by diverting incoming phone calls to other franchises, Cottman interfered with Defendant's business relationships with current customers. Plaintiff contends that Bence's claim is noncognizable under Pennsylvania law.
The Pennsylvania Supreme Court has adopted § 766 of the Restatement (Second) of Torts, which provides that:
One who intentionally and improperly interferes with the performance of a contract . . . between another and a third party by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.
RESTATEMENT (SECOND) OF TORTS § 766 (2004); Nathanson v. Med. Coll. of Pa., 926 F.2d 1368, 1388 (3d Cir. 1991). In contrast, and importantly for this case, the Pennsylvania courts have not adopted § 766A, which addresses interference directed at parties such as the instant Defendant:
One who intentionally and improperly interferes with the performance of a contract . . . between another and a third person, by preventing the other from performing the contract or causing his performance to be more expensive or burdensome, is subject to liability to the other for the pecuniary loss resulting to him.
RESTATEMENT (SECOND) OF TORTS § 766A; see also Gemini Physical Therapy Rehab., Inc. v. State Farm Mut. Auto. Ins. Co., 40 F.3d 63, 66 (3d Cir. 1994) (holding that Pennsylvania Supreme Court would not adopt § 766A); Leopold Graphics, Inc. v. CIT Group/Equip. Fin., Inc., No. Civ. A. 01-6028, 2002 WL 1397449, at *4, 2002 U.S. Dist. LEXIS 11633, at *11 (E.D. Pa. June 26, 2002) (noting absence of any Pennsylvania cases recognizing cause of action for tortious interference with contract in absence of alleged act directed toward third party). Defendant asserts that Cottman's actions hindered his ability to perform his contracts with his customers, not that his customers were induced to breach their contracts with him. Given that the claim set forth in Count III is premised upon tortious action directed at Defendant himself, the allegations are not cognizable under Pennsylvania law. See Gemini, 40 F.3d at 66 (upholding district court's dismissal of claim under § 766A).
Count IV of Defendant's counterclaims alleges tortious interference with prospective contractual relations. This claim is similarly noncognizable under Pennsylvania law. Section 776B, the Restatement provision dealing with interference with prospective contracts, is parallel to § 776: Section 766B(a) deals with interference directed at third parties and § 766B(b) deals with interference directed at one in the position of Defendant in this case. Neither Defendant nor this Court has identified any Pennsylvania case adopting § 766B(b) or recognizing a cause of action for tortious interference in the absence of any act directed by the tortfeasor toward a third party. See Leopold, 2002 WL 1397449, at *5 (noting absence of Pennsylvania cases adopting § 766B(b)); Alien v. Washington Hosp., 34 F. Supp.2d 958, 965 (W.D.Pa. 1999) ("Pennsylvania courts would declare noncognizable, a claim for intentional interference with existing or prospective contracts, where the interference was directed toward the plaintiff, rather than toward a third party."). In this case, the alleged tortious conduct was directed at Defendant, not at Defendant's prospective customers. Therefore, in the absence of Pennsylvania authority to the contrary, this Court must grant Plaintiff's motion for judgment on the pleadings.
In conclusion, I grant Plaintiff's motion for judgment on the pleadings. An appropriate Order follows.
ORDERAND NOW, this 5th day of April, 2004, upon consideration of Plaintiff Cottman Transmission Systems, LLC's Motion for Judgment on the Pleadings, Defendant Ronald Bence's response thereto, and for the foregoing reasons, it is hereby ORDERED that:
1. Plaintiff's Motion for Judgment on the Pleadings (Document No. 9) is GRANTED. Accordingly, Counts II, III, and IV of Defendant's counterclaim are DISMISSED.
2. Plaintiff is GRANTED leave to amend his answer and counterclaims.