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With v. Knitting Fever

October 20, 2009


The opinion of the court was delivered by: Buckwalter, S.J.


Currently pending before the Court is a Motion for Judgment on the Pleadings Pursuant to Federal Rule of Civil Procedure 12(c), filed by Defendants Knitting Fever, Inc. ("KFI"), Sion Elalouf, Diane Elalouf, Jeffrey J. Denecke, Jr., and Jay Opperman (collectively, the "KFI Defendants"). For the reasons which follow, the Motion is granted in part and denied in part.


The factual background of this case is one familiar to both the parties and the Court and has been reiterated in several of this Court's prior opinions.*fn1 This matter arises between Plaintiff, The Knit With ("The Knit"), a small, family-owned and operated business retailing specialty yarns and accessories to consumers, and Defendant Knitting Fever, Inc. ("KFI"), a New York corporation that manufactures and distributes specialty yarns. At the core of the dispute is Plaintiff's claim that KFI sold designer knitting yarns to The Knit, representing that the yarns contained a percentage of cashmere, which they allegedly did not.

Plaintiff initiated litigation against KFI, on September 2, 2008, its officers/directors, and several related entities, alleging that, as a consequence of the false labeling of three of the six Cashmerino yarns at issue, its business and commercial interests were harmed. (Compl., The Knit With v. Knitting Fever, Inc., No. CIV.A.08-4221 (E.D. Pa. Sep. 2, 2008) ("The Knit With I").) The Complaint set forth several causes of action, including: (1) breach of the express warranty of merchantability; (2) breach of the implied warranty of merchantability; (3) false advertising under the Lanham Act, 15 U.S.C. § 1125(a)(1)(B); (4) injury to business and property pursuant to the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1962; (5) conspiracy to cause injury to business and property pursuant to RICO; (6) perfidious trade practices (deceit) under the common law of unfair competition; and (7) piercing the corporate veil. (Id. ¶¶ 82-150.) Defendants moved, on September 24, 2008, to dismiss the third, fourth, and fifth counts.

On October 6, 2008, prior to the resolution of this motion to dismiss, Plaintiff initiated a second litigation against KFI, also including as Defendants the Japanese manufacturers of the remaining three Cashmerino yarns at issue. (Compl., The Knit With v. Eisaku Noro & Co., Ltd., No. CIV.A.08-4775 (E.D. Pa. Oct. 6, 2008) ("The Knit With II").) The Complaint in that case set forth the following causes of action: (1) breach of express warranty of merchantability of goods for resale to consumers; (2) breach of implied warranty of merchantability of goods for resale to consumers; (3) explicitly false advertising pursuant to the Lanham Act, 15 U.S.C. § 1125(a)(1)(B); (4) perfidious trade practices and common law unfair competition; (5) civil conspiracy; and (6) piercing the corporate veil. Defendants filed another motion to dismiss. (Id. ¶¶ 35-82.)

On December 18, 2008, this Court, in The Knit With I, granted the motion to dismiss the Lanham Act claim on standing grounds, but declined to dismiss the RICO claims. The Knit With v. Knitting Fever, Inc., No. CIV.A.08-4221, 2008 WL 5381349, at *1-6 (E.D. Pa. Dec. 18, 2008). The following day, the Court also dismissed the Lanham Act claim in The Knit With II. The Knit With v. Eisaku Noro and Co., Ltd., No. CIV.A.08-4775, 2008 WL 5273582 (E.D. Pa. Dec. 19, 2008). By way of Order dated December 23, 2008, the Court consolidated both actions under the first civil action number.

Following the KFI Defendants' submission of their Answer, Plaintiff moved, on January 22, 2009, to dismiss all counterclaims and strike all affirmative defenses. The Court struck Defendants' fifth affirmative defense, but denied the motion in all other respects.

Via its current Motion for Judgment on the Pleadings, filed on July 15, 2009, the KFI Defendants seek dismissal of the entire Complaint. Plaintiff responded to the Motion on July 29, 2009, and both parties have submitted supplemental briefing. By letter brief, the KFI Defendants subsequently requested that the portion of their Motion dealing with Plaintiff's breach of warranty claims be converted into a summary judgment motion so as to allow them to supplement the record. Plaintiff objected and, alternatively, contended that if such a conversion was permitted, it wanted the opportunity to engage in its own supplementation. Faced with these conflicting arguments reflecting a potentially unresolved factual discrepancy, the Court denied this portion of the KFI Defendants' Motion for Judgment on the Pleadings without prejudice.

What remains is the KFI Defendants' Motion for Judgment on the Pleadings as to Plaintiff's RICO, deceit, and conspiracy claims. Having considered the briefing of the parties, the Court turns to a discussion of these issues.


Under Rule 12(c) of the Federal Rules of Civil Procedure, "[a]fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings." FED. R. CIV. P. 12(c). While motions to dismiss for failure to state a claim pursuant to Rule 12(b)(6) must be brought before and in lieu of filing an answer, a Rule 12(c) motion is appropriate after the defendants have answered the complaint. Id. The difference between Rules 12(b)(6) and 12(c), however, is purely procedural and there is "no material difference in the applicable legal standards." Spruill v. Gillis, 372 F.3d 218, 223 n.2 (3d Cir. 2004). Accordingly, the Court turns to Rule 12(b)(6) jurisprudence for further guidance on the appropriate standard of review.

Under Rule 12(b)(6), a defendant bears the burden of demonstrating that the plaintiff has not stated a claim upon which relief can be granted. FED. R. CIV. P. 12(b)(6); see also Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005). In Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), the United States Supreme Court recognized that "a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. at 555. Following the basic dictates of Twombly, the Supreme Court, in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), subsequently defined a two-pronged approach to a court's review of a motion to dismiss. "First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. at 1949. Thus, although "Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era . . . it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions." Id. at 1950. Second, the Supreme Court emphasized that "only a complaint that states a plausible claim for relief survives a motion to dismiss." Id. "Determining whether a complaint states a plausible claim for relief will, as the Court of Appeals observed, be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. Where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged, but not shown an entitlement to relief. Id.; see also Phillips v. County of Allegheny, 515 F.3d 224, 231-33 (3d Cir. 2008) (holding that: (1) factual allegations of complaint must provide notice to defendant; (2) complaint must allege facts suggestive of the proscribed conduct; and (3) the complaint's "'factual allegations must be enough to raise a right to relief above the speculative level.'") Id. at 234 (quoting Twombly, 550 U.S. at 555).

Notwithstanding these new dictates, the basic tenets of the Rule 12(b)(6) standard of review have remained static. Spence v. Brownsville Area Sch. Dist., No. CIV.A.08-626, 2008 WL 2779079, at *2 (W.D. Pa. Jul. 15, 2008). The general rules of pleading still require only a short and plain statement of the claim showing that the pleader is entitled to relief and need not contain detailed factual allegations. Phillips, 515 F.3d at 233. Further, the court must "accept all factual allegations in the complaint as true and view them in the light most favorable to the plaintiff." Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006). Finally, the court must "determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Pinkerton v. Roche Holdings Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002).


As indicated above, the sole argument before the Court is whether Plaintiff's tort-based and federal statutory claims -- specifically, the RICO, deceit, and conspiracy claims (Counts 4-6 of The Knit With I and Counts 4-5 of The Knit With II) -- are barred by the gist of the action and/or economic loss doctrines. The KFI Defendants contend that the "sum and substance" of the conduct which Plaintiff alleges in support of these claims relates only to purported misrepresentations concerning the quality and cashmere content of the yarns sold by KFI to Plaintiff. (Defs.' Mem. Supp. Mot. Judg. Pleadings 5, 9.) Because Plaintiff and KFI were commercial parties that entered into a series of contracts for the sale of knitting yarn, the KFI Defendants argue that their legal obligations are defined by those agreements as opposed to the larger social policies of tort. (Id. at 9.) In turn, they claim that the consolidated actions sound only in contract and seek only economic losses under the warranties accompanying each purchase of the purportedly mislabeled yarn. (Id. at 5.)

Plaintiff denies that either of these doctrines has any preclusive effect on its claims. Its reasoning is four-fold. First, Plaintiff contends that neither the gist of the action doctrine nor the economic loss doctrine apply to bar federal statutory claims, such as the RICO causes of action. Second, it asserts that absent discovery, dismissal pursuant to either of these doctrines is procedurally premature. Third, Plaintiff avers that even assuming Rule 12 dismissal is appropriate under these doctrines, neither applies because the tort claims at issue have a legal foundation independent of the underlying contract for sale of goods. Finally, it asserts that, in any event, the individual defendants cannot invoke either doctrine without having contractual privity with Plaintiff. The Court first defines the basic principles underlying each doctrine and then addresses each of Plaintiff's individual arguments.

A. Definitions of the Gist of the Action and Economic Loss Doctrines

1. Gist of the Action Doctrine

As a general rule, Pennsylvania courts are cautious about permitting tort recovery on contractual breaches. Glazer v. Chandler, 200 A.2d 416, 418 (Pa. 1964). In eToll, Inc. v. Elias/Savion Adver., Inc., 811 A.2d 10 (Pa. Super. Ct. 2002), the Pennsylvania Superior Court emphasized that the "gist of the action" doctrine "is designed to maintain the conceptual distinction between breach of contract claims and tort claims [by] preclud[ing] plaintiffs from recasting ordinary breach of contract claims into tort claims." Id. at 14.*fn2 The simple existence of a contractual relationship between two parties does not preclude one party from bringing a tort claim against the other. Id.; see also Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79, 104 (3d Cir. 2001). The doctrine, however, forecloses a party's pursuit of a tort action for the mere breach of contractual duties, without any separate or independent event giving rise to the tort. Smith v. Lincoln Benefit Life Co., No. CIV.A.08-1324, 2009 WL 789900, at *20 (W.D. Pa. Mar. 23, 2009) (citing Air Prods. and Chems., Inc. v. Eaton Metal Prods. Co., 256 F. Supp. 2d 329, 340 (E.D. Pa. 2003)).

"When a plaintiff alleges that the defendant committed a tort in the course of carrying out a contractual agreement, Pennsylvania courts examine the claim and determine whether the 'gist' or gravamen of it sounds in contract or tort." Sunquest Info. Sys., Inc. v. Dean Witter Reynolds, Inc., 40 F. Supp. 2d 644, 651 (W.D. Pa. 1999). To make this determination, the court must ascertain the source of the duties allegedly breached. Sunburst Paper, LLC v. Keating Fibre Int'l., No. CIV.A.06-3957, 2006 WL 3097771, at *2 (E.D. Pa. Oct. 30, 2006). The doctrine bars tort claims: "(1) arising solely from a contract between the parties . . . ; (2) where the duties allegedly breached were created and grounded in the contract itself . . . ; (3) where the liability stems from a contract . . . ; or (4) where the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of a contract. eToll, 811 A.2d at 19 (internal quotation marks and citations omitted). "In other words, if the duties in question are intertwined with contractual obligations, the claim sounds in contract, but if the duties are collateral to the contract, the claim sounds in tort." Sunburst Paper, 2006 WL 3097771, at *2.

Whether the gist of the action doctrine applies in any particular setting is a question of law.

Alexander Mill Servs., LLC v. Bearing Distribs., Ins., No. CIV.A.06-1116, 2007 WL 2907174, at *8 (W.D. Pa. Sep. 28, 2007).

2. Economic Loss Doctrine

As a close relative of the gist of the action doctrine, the economic loss doctrine "prohibits plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract." Werwinski v. Ford Motor Co., 286 F.3d 661, 671 (3d Cir. 2002) (quotations omitted). In Pennsylvania, the purpose of the economic loss doctrine is to maintain the separation between the law of contract and the law of tort. Air Prods and Chems., 256 F. Supp. 2d at 335 (citing N.Y. State Elec. & Gas Corp. v. Westinghouse Elec. Corp., 564 A.2d 919, 925 (Pa. Super. Ct. 1989)). In other words, "claims for only economic loss are appropriately brought as breach of contract or warranty claims rather than as tort claims." Fid. & Deposit Co. of Md. v. Int'l Bus, Mach. Corp., No. CIV.A.05-461,2005 WL 2665326, at *2 (M.D. Pa. Oct. 19, 2005). "[I]f a claim is in essence one arising from 'failed economic expectations,' i.e. expectations that the product would perform in the manner warranted, then tort recovery is inappropriate." Id. (quoting Wellsboro Hotel Co. v. Prins, 894 F. Supp. 170, 175 (M.D. Pa.1995)). Although its precise contours are unclear, McElwee Group, LLC v. Mun. Auth. of Borough of Elverson, 476 F. Supp. 2d 472, 476 (E.D. Pa. 2007), the economic loss doctrine is concerned primarily with two main factors: foreseeability and limitation of liability.*fn3 Sovereign Bank v. BJ's Wholesale Club, Inc., 533 F.3d 162, 175 (3d Cir. 2008) (citing Adams v. Copper Beach Townhome Communities, L.P., 816 A.2d 301, 305 (Pa. Super. 2003).

B. Whether the RICO Claims Are Subject to the Gist of the Action or Economic Loss Doctrines

Having defined these doctrines, the Court must now determine their application in the case at bar. The KFI Defendants first seek dismissal of Plaintiff's two causes of action raised pursuant to the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1962. Plaintiff objects, arguing that a Pennsylvania state doctrine cannot bar federal statutory causes of action.

Resolution of this dispute mandates consideration of the nature of a RICO action. "The legislative history clearly demonstrates that the RICO statute was intended to provide new weapons of unprecedented scope for an assault upon organized crime and its economic roots." Russello v. United States, 464 U.S. 16, 26 (1983). The broad goal was removal of the profit from organized crime "by separating the racketeer from his dishonest gains." Id. at 28. To sustain a civil RICO claim under § 1962(c), "a plaintiff must show the existence of an enterprise affecting interstate commerce; that the defendant was employed by or associated with the enterprise; that the defendant participated in the conduct of the affairs of the enterprise; and, that the defendant did so through a pattern of racketeering activity which included at least two predicate acts." Polymer Dynamics, Inc. v. Bayer Corp., No. CIV.A.99-4040, 2000 WL 1146622, at *3 (E.D. Pa. Aug. 14, 2000) (citing Sedima, S.P.R.I. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985); Annulli v. Panikkar, 200 F.3d 189, 198 (3d Cir. 1999)).*fn4 The source of the duties in a RICO action flow from neither a contract between the parties nor social policy/mutual consensus, but rather from federally imposed legislation designed to "quell the potence and persistence of organized crime." In re Cantanella and E.F. Hutton and Co., Inc. Secs. Litig., 583 F. Supp. 1388, 1422 (E.D. Pa. 1984) (noting that RICO "makes collective, ongoing activity, of the sort commonly engaged in by 'organized crime,' an offense separate from the underlying violation."). Although the underlying pattern of racketeering activity -- or predicate acts -- may sound in tort, "civil RICO is truly sui generis and . . . particular claims cannot be readily analogized to causes of action known at common law." Malley-Duff & Assoc., Inc. v. Crown Life Ins. Co., 792 F.2d 341, 353 (3d Cir. 1986), aff'd, 483 U.S. 143 (1987). The United States Supreme Court, considering the nature of a RICO claim in the context of defining the appropriate statute of limitations, has held "there is no comparable single state law analogue to RICO. . . . [and] the predicate acts that may establish racketeering activity under RICO are far ranging, and . . . cannot be reduced to a single generic characterization." Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143, 152 (1987).

Given this underlying characterization of the RICO statute, neither the gist of the action nor the economic loss doctrines can apply. First, as set forth above, the gist of the action doctrine precludes a plaintiff from recovering in tort for claims that actually sound in contract. Sunburst Paper, 2006 WL 3097771, at *2 (citing Bash v. Bell Tel. Co. of Pa., 601 A.2d 825, 829 (Pa. Super. Ct. 1992). "To determine whether the gist of the claim sounds in contract or in tort, the court must determine the source of the duties allegedly breached." Id. (citing Werner Kammann Maschinenfabrik, GmbH v. Max Levy Autograph, Inc., No. CIV.A.01-1083, 2002 WL 126634, *6 (E.D. Pa. Jan. 31, 2002)). "If the duties flow from an agreement between the parties, the claim is deemed to be contractual." Id. "Conversely, if the duties breached were of a type imposed on society as a matter of social policy, the claim is deemed to sound in tort." Id. Where a statutory cause of action does not clearly sound in contact or tort, such as a RICO claim, it does not implicate the ...

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