United States District Court, E.D. Pennsylvania
March 2, 2004.
MICHAEL CRAWFORD, STEVEN BELLI, DIRK FLOTE AND RAECO INVESTMENT PARTNERSHIP
SAP AMERICA, INC., SAP AG and HASSO PLATTNER.
The opinion of the court was delivered by: JOHN FULLAM, Senior District Judge
MEMORANDUM AND ORDER
Plaintiffs are RAECO Investment Partnership, Michael Crawford,
Steven Belli and Dirk Flote, who owned Data Dynamics, Inc., and
its successor-in-interest, Titan Technologies Group, LLC
("Titan"). Defendants are SAP AG, a large German software
concern, its wholly-owned subsidiary SAP America, Inc., and Hasso
Plattner, a German citizen who is co-Chairman and CEO of SAP AG
and Chairman of SAP America.
In March 1997, Data Dynamics entered into a "Provider
Agreement" with SAP America to act as SAP's exclusive sales agent
for computer software in a specified territory. A couple of
months later, before any significant sales had occurred,
plaintiffs decided to form a new company, Titan, to carry out the
contract, independently from Data Dynamics' other activities, and
SAP thereupon consented to the assignment of the Provider
Agreement to Titan. SAP had previously been very successful in marketing its
software program to large companies ("Fortune 500 companies");
its Provider Agreement was part of an effort by SAP America to
market its software program to smaller end-users, (i.e., those
having less than $200 million in annual revenues). Titan enjoyed
considerable success in marketing SAP's program, and the
"Provider Agreement" was proving quite profitable to both Titan
and SAP. In late 1998, however, plaintiffs sought to sell their
ownership interests in Titan to another company, Modis.
Defendants objected to the proposed sale, and Modis decided not
to go through with the purchase. A few months later, in mid-1999,
plaintiffs did sell their ownership interests in Titan to another
firm, Condor. Plaintiffs then brought this action, asserting
numerous claims arising out of their former relationship with
In its final form plaintiffs' (fourth) amended complaint
asserts claims for negligent misrepresentation, fraud and
misrepresentation, interference with contract, interference with
prospective advantage, violation of the New Jersey Franchise
Practices Act, breach of contract, breach of contract implied
covenant of faith and fair dealing, promissory estoppel,
equitable estoppel and breach of fiduciary duty. Defendants have
moved for summary judgment on all counts.
Most of plaintiffs' claims require little discussion. Since the plaintiffs were not parties to the Provider Agreement,
they cannot successfully assert claims for breach of that
contract. Neither can they successfully contend that they were
fraudulently induced to enter into the Provider Agreement.
Moreover, the summary judgment record is conspicuously lacking in
any evidence to support any claim of fraud or misrepresentation
by anyone in connection with the Provider Agreement.
If anyone was induced to enter into the Provider Agreement, it
was Titan. If there was a breach of the Provider Agreement, only
Titan has standing to complain. It is reasonably well settled
that a corporate shareholder does not have "standing to maintain
an action in his own right, as a shareholder, when the alleged
injury is inflicted upon the corporation and the only injury to
the shareholder is the indirect harm which consists in the
diminution of value of his corporate shares resulting from the
impairment of corporate assets." Kauffman v. Dreyfus Fund,
Inc., 434 F.2d 727, 732 (3d Cir. 1970), cert. denied,
401 U.S. 974 (1971). See also eds Adjusters, Inc. v. Computer Sciences
Corp., 818 F. Supp. 120 (E.D. Pa. 1993).
If, however, the Provider Agreement constituted a franchise
within the ambit of the New Jersey Franchise Practices Act, NJSA
56:10-1 et seq., plaintiffs would, at least under some
circumstances, have standing to complain about violations of that
statute, since it protects not only corporate franchisees, but "the individual officers, directors and other persons in active
control of the activities of each such entity," NJSA 56:10-3(b).
And plaintiffs undoubtedly have standing to pursue claims that
their individual rights were infringed because defendants
tortiously interfered with their contacts actual or prospective
to sell their shares in Titan to the Modis firm. These two sets
of potential claims will now be discussed.
I. Claims under the New Jersey Franchise Practices Act
A. Does the Act apply?
Read literally, it would seem that the statute is sufficiently
broad to encompass the Provider Agreement arrangements. The
statute defines "franchise" as follows:
"A written arrangement for a definite or indefinite
period, in which a person grants to another person a
license to use a trade name, trade mark, service
mark, or related characteristics, and in which there
is a community of interest in the marketing of goods
or services at wholesale, retail, by lease,
agreement, or otherwise." (§ 10-3).
The statute applies to any such arrangement where it is
contemplated that the franchisee will establish or maintain a
place of business in the State of New Jersey, and where the gross
sales exceed $35,000 per year and more than 20 percent of
revenues are generated by the franchise.
The Provider Agreement with Titan may very well not have been
the type of arrangement contemplated by the Legislature in enacting the franchise statute: Although Titan maintained a
place of business in New Jersey, most of its sales and other
activities took place at its customers' establishments; and the
computer software industry differs markedly from the kinds of
businesses which typically involve franchises, such as fast-food
chains or automobile dealerships.
The Provider Agreement between Titan and SAP included the
"¶ 18.9 Relationship. This Agreement shall not be
construed as creating a partnership, joint venture,
agency relationship, or granting a franchise under
any applicable laws."
For reasons not immediately apparent, the parties' briefs do not
focus upon the import of this language. The contract provision
may have been viewed as running afoul of a provision in the New
Jersey Franchise Practices Act which makes it a violation of the
statute for any franchisor:
"(a) To require a franchisee at the time of entering
into a franchise arrangement to assent to a release,
assignment, novation, waiver or estoppel which would
relieve any person from liability imposed by this
An argument can be made that when sophisticated businessmen,
after prolonged negotiations, agree that they are not entering
into a franchise, the Act simply has no application. There is
also room for argument that an agreement not to enter into
franchise arrangement cannot plausibly be regarded as "a release, assignment, novation, waiver or estoppel which would relieve any
person from liability imposed by [the act]."
For present purposes, I will assume that plaintiffs may be able
to demonstrate at trial that they were "required" to accept that
provision in the contract, and that they were pressured into
surrendering their rights under the franchise statute.
Since the Provider Agreement can be regarded as fitting the
definition of a franchise, I shall assume that the Act does
apply, notwithstanding the reservations discussed above.
B. Did defendants violate the statute?
It is undisputed that plaintiffs wished to sell their interests
in Titan to Modis, and that the defendants objected to the
proposed transaction. Viewing the evidence in a light most
favorable to the plaintiffs, defendants informed Modis that, if
Modis acquired Titan, defendants would not renew the license to
Titan, which was scheduled to expire on December 31, 2000 (the
initial term of the Provider Agreement was for three years,
ending December 31, 2000, but subject to automatic renewals
thereafter unless either side gave the other 90 days' notice of
termination). (¶ 16.2).
Plaintiffs assert that defendants violated § 10-7(d) of the
franchise statute, which makes it a violation of the statute for
any franchisor: "(d) To restrict the sale of any equity or debenture
issue or the transfer of any securities of a
franchise or in any way prevent or attempt to prevent
the transfer, sale or issuance of equity securities
or debentures to employees, personnel of the
franchisee, or spouse, child or heir of an owner, as
long as basic financial requirements of the franchisor are complied with, and
provided any such sale, transfer or issuance does not
have the effect of accomplishing a sale or transfer
of control, including, but not limited to, change in
the persons holding the majority voting power of the franchise.
Nothing contained in this subsection shall excuse a
franchisee's obligation to provide prior written
notice of any change of ownership to the franchisor
if that notice is required by the franchisor."
The statute further provides, § 10-6:
"It shall be a violation of this act for any
franchisee to transfer, assign or sell a franchise or
interest therein to another person unless the
franchisee shall first notify the franchisor of such
intention by written notice setting forth in the
notice of intent the prospective transferee's name,
address, statement of financial qualifications and
business experience during the previous five years.
The franchisor shall within 60 days after receipt of
such notice either approve in writing to the
franchisee such sale to proposed transferee or by
written notice advise the franchisee of the
unacceptability of the proposed transferee setting
forth material reasons relating to the character,
financial ability or business experience of the
proposed transferee. If the franchisor does not reply
within the specified 60 days, his approval is deemed
granted. No such transfer, assignment or sale
hereunder shall be valid unless the transferee agrees
in writing to comply with all the requirements of the
franchise then in effect."
It is undisputed that plaintiffs did not comply with § 10-6.
Their failure to do so, however, would not necessarily relieve
defendants of responsibility for violating § 10-7(d), if in fact
they did so.
The question is whether § 10-7 precludes a franchisor from
objecting to a sale of the entire interest in the franchise, or merely precludes such interference if the proposed sale is to
"employees, personnel of the franchisee, or spouse, child or heir
of an owner." At an earlier stage of this litigation, in denying
defendants' motion to dismiss the complaint, I opined that the
statute was ambiguous, and noted that plaintiffs had adequately
alleged a violation of the statute. The case is now before me on
a motion for summary judgment, and plaintiffs cannot rely upon
the allegations of their pleadings alone. Reading the statute as
a whole, I am convinced that the defendants did not in fact
violate § 10-7 of the statute, because plaintiffs were free to
sell their interests only "provided any such sale, transfer or
issuance does not have the effect of accomplishing a sale or
transfer of control, including, but not limited to, change in the
persons holding the majority voting power of the franchise."
Plainly, the proposed sale to Modis would have amounted to the
transfer of control, change in persons holding majority voting
power, etc. The statute does severely restrict the franchisor's
freedom of action, but still permits the franchisor to have some
voice in choosing the persons or entities with whom it wishes to
deal. And the summary judgment record contains extensive evidence
justifying defendants' objections to the Modis transaction. I do
not believe a reasonable jury could possibly find that
defendants' actions in opposing the Modis transaction were
tortious, or anything other than legitimate protection of defendants' own perceived business interests.
II. Tortious interference with plaintiffs' individual
contractual rights to sell their shares
In the preceding section, I have dealt with claims under the
New Jersey Franchise Practices Act, on the assumption (a) that
the Act is applicable, and (b) that plaintiffs have standing to
pursue claims under that statute, because it purports to protect
not only an entity which holds a franchise, but also the officers
and directors of any such entity. I confess to a great deal of
uncertainty about the right of officers and directors of a
franchisee to pursue claims which are at odds with the interests
of the franchise entity itself, but find it unnecessary to pursue
that complication, since I find no violation of the statute. But,
irrespective of the franchise statute, plaintiffs are permitted
to pursue their common-law claims that the defendants tortiously
interfered with their prospective contractual advantage, when
they took actions which discouraged Modis from carrying out the
proposed transaction with plaintiffs.
For essentially the same reasons expressed in the preceding
section, I conclude that defendants' actions were not tortious,
but merely a legitimate attempt to protect their own valid
interests. Even if that were not the case, however, I am
satisfied that plaintiffs cannot prevail in this action, because they sustained no provable damages as a result of defendants'
actions. After the sale to Modis fell through, plaintiffs sold
their interests to Condor, without objection from the defendants.
Although the terms of the two transactions were not identical, it
appears that, as a practical matter, plaintiffs fared better with
Condor than they would have with Modis. The Modis transaction
would have generated cash of about $5,000,000, plus an
opportunity for additional sums if Titan's revenues reached a
certain level. Titan's revenues did not reach the specified
level, primarily because the market for Titan products suffered
an extensive downturn affecting the entire industry. The sale to
Condor, on the other hand, produced benefits equivalent to about
Plaintiffs have produced an expert report to the effect that
Modis would probably have been willing to invest additional sums
in expanding Titan's operations, and that, had it done so,
Titan's revenues would have exceeded the required level, and
plaintiffs would have received additional payments. The expert
who prepared the report made numerous assumptions having no basis
in practical reality and, admittedly, did not consider the actual
performance of Titan, or the general market conditions affecting
Titan and its competitors. I do not believe the expert's opinion
passes muster under Daubert, but in any event, it is clear that
plaintiffs have no non-speculative evidence of damages. On this record, a jury could not find that plaintiffs suffered damages
unless the jury indulged in wildly speculative guesswork.
For all of the foregoing reasons, I conclude that defendants'
motion for summary judgment should be granted.
An Order follows. ORDER
AND NOW, this ____ day of March 2004, IT IS ORDERED:
1. Defendants' Motion for Summary Judgment is GRANTED.
2. Judgment is entered in favor of the defendants and against
3. This action is DISMISSED with prejudice
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