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General Nutrition Corp. v. Gardere Wynne Sewell

August 20, 2008

GENERAL NUTRITION CORPORATION, PLAINTIFF,
v.
GARDERE WYNNE SEWELL, LLP., DEFENDANT.



The opinion of the court was delivered by: Terrence F. McVerry United States District Court Judge

MEMORANDUM ORDER

Pending now before the Court is the MOTION TO DISMISS (Document No. 9), with brief in support, filed by Defendant Gardere Wynne Sewell, LLP ("Gardere"). Plaintiff filed a memorandum of law in opposition to the motion (Document No. 13). The motion is ripe for disposition.

Standard of Review

The proper standard for evaluating motions to dismiss has been the subject of two recent binding decisions. In Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), all nine justices of the United States Supreme Court agreed that the oft-quoted standard that a complaint may not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief" has been retired and "is best forgotten." Id. at 1968. The Court explained that a complaint must allege enough "facts" to show that a claim is "plausible" and not merely conceivable. Id. at 1965. The term "plausible" is not suspectible of mathematical quantification, but lies somewhere on the rhetorical spectrum between `"conceivable" or "speculative" and "probable." Indeed, the Twombly Court made a distinction between facts that were merely "consistent" with wrongful conduct and facts that would be "suggestive" enough to render the alleged conduct plausible. Id. at 1966. In particular, the Court upheld dismissal of a complaint alleging an antitrust conspiracy, despite "stray averments" that defendants had entered into an unlawful agreement, explaining that the plaintiff had alleged "merely legal conclusions." Id. at 1970. The Supreme Court also emphasized the need for district courts to prevent unjustified litigation expenses resulting from claims that are "just shy of a plausible entitlement." Id. at 1967, 1975.

In Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008), the United States Court of Appeals for the Third Circuit further refined the Twombly standard. As the Court of Appeals explained, "notice pleading" pursuant to Rule 8(a)(2) remains intact, but requires the pleader to make a "showing" of entitlement to relief, and to give the defendant fair notice of what the claim is and the grounds upon which it rests. A pleader may not simply make a "bare averment that he wants relief and is entitled to it." Id. at 233. Labels, conclusions, and a formulaic recitation of the elements of a cause of action will not suffice. Id. at 231. Rather, the now-applicable pleading standard is as follows: stating a claim requires a complaint with enough factual matter (taken as true) to raise a reasonable expectation that discovery will reveal evidence of all the necessary elements of Plaintiff's claims. Id. at 234.

Legal Analysis

The gravamen of this case is a claim that Gardere provided improper legal advice to Plaintiff General Nutrition Corporation ("GNC")*fn1 as to the consequences of terminating contracts with Franklin Publications, Inc. for the production, purchase and sale of two magazines. Acting on Gardere's allegedly faulty advice, GNC terminated the contracts in the expectation that Franklin's damages, if any, would be limited under the Uniform Commercial Code (UCC) to $1-3 million and that Franklin would be precluded from recovering its lost profits estimated at approximately $34.5 million. Franklin filed suit in the United States District Court for the Southern District of Ohio (the "Ohio court") and Gardere defended the litigation by contending that the contract involved a sale of goods which was governed by the UCC, which did not permit recovery of consequential damages. On July 13, 2007, the Ohio court ruled on summary judgment that the contract predominantly involved the sale of services, such that the UCC did not apply to limit Franklin's damages. After this adverse development, GNC fired Gardere, hired replacement counsel, and paid a substantial sum to Franklin to settle the case.

Plaintiff asserts claims against Gardere for negligence, breach of contract, and breach of fiduciary duty. The Court notes that GNC filed its complaint in the Court of Common Pleas of Allegheny County, Pennsylvania, which was removed by Defendant to this Court. Therefore, the complaint was not drafted with the federal pleading standards in mind. The motion to dismiss filed by Gardere asserts a number of arguments, which will be addressed seriatim.

Initially, Gardere contends that GNC's claims are barred by what it calls the "judgment rule." In essence, the "judgment rule" provides that lawyers are not required to be infallible in their predictions of how a court will decide a matter. However, as explained in Collas v. Garnick, 624 A.2d 117, 120 (Pa. Super. 1993) (citations omitted):

Although a lawyer is not expected to be infallible, he or she is expected to conduct that measure of research sufficient to allow the client to make an informed decision. In order for a lawyer to advise a client adequately, he or she is obligated to scrutinize any contract which the client is to execute, and thereafter must disclose to the client the full import of the instrument and any possible consequences which might arise therefrom. The lawyer, moreover, must be familiar with well settled principles of law and the rules of practice which are of frequent application in the ordinary business of the profession.

Thus, in order to assert the "judgment rule," Defendant must establish that it enabled GNC to make an informed judgment because Gardere conducted sufficient research, properly scrutinized the contract, and was familiar with the applicable legal principles (including, in this case, whether the contract involved a sale of goods and/or services). The complaint properly pleads that Gardere breached this standard in numerous respects. Complaint ¶ 45. These issues are fact-intensive and the discovery process must be engaged to fully develop the record evidence before the application of the "judgment rule" may be determined, possibly at the summary judgment stage.

Gardere also contends that the complaint fails to plead causation. The Court does not agree. The complaint alleges that the advice rendered by Gardere caused GNC to terminate its contracts with Franklin and that Gardere's litigation strategy precluded GNC from mitigating its potential exposure prior to the Ohio court's summary judgment ruling. GNC alleges that after the adverse ruling, it was forced to settle the case from a weak position. Thus, the causation element is sufficiently pled. Gardere will have an opportunity to reassert this defense at summary judgment, if appropriate, or with the jury at trial.

Gardere argues that the negligence claim is barred by the applicable two-year statute of limitations. Gardere cites several cases for the proposition that the limitations period commences upon the occurrence of the alleged breach of duty. See, e.g., Wachovia Bank, N.A. v. Ferretti, 935 A.2d 565, 572 (Pa. Super. 2007). However, Wachovia Bank also holds that the limitations period is tolled "when the client, despite the exercise of due diligence, cannot discover the injury or its cause." Id. at 573. GNC contends that it did not reasonably discover that Gardere's alleged improper advice was the cause of its injury until it received the adverse summary judgment ruling from the Ohio court during the litigation. For example, the amended complaint alleges that even after Franklin provided an expert report from a law professor, Gardere continued to assure GNC that its analysis of GNC's potential liability was correct. See Complaint ¶¶ 18-22. Thus, the complaint alleges a valid basis for tolling the limitations period and at this stange the Court cannot determine as a matter of law that Plaintiff's claim is untimely.

Gardere argues that GNC's claims are barred because it settled the lawsuit with Franklin. The Court cannot agree. Gardere's reliance on Muhammad v. Strassburger, McKenna, Messer, Shilobod & Gutnick, 587 A.2d 1346 (Pa. 1991) (involving a plaintiff who settled an underlying case), is misplaced. See White v. Kreithen, 644 A.2d 1262 (Pa. Super. 1996) (distinguishing Muhammad). In this case, the settlement of the underlying case by GNC -- the defendant --resulted in its alleged damages being made actual and ...


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