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Sterling Asset Management, LLC. v. Vtl Associates

August 17, 2011


The opinion of the court was delivered by: Joyner, C.J.


This action is presently before this Court for adjudication of the Plaintiff/Counterclaim Defendant's Motion to Dismiss the Defendant/Counterclaim Plaintiffs' First Amended Counterclaim for Failure to State a Claim Upon Which Relief Can Be Granted (Docket No. 15). For the reasons which follow, the motion shall be denied.

Statement of Pertinent Facts

In 2005-2006, Vincent T. Lowry ("Lowry"), the Chief Executive Officer of Defendant/Counterclaim Plaintiff VTL Associates, LLC ("VTL"), developed a unique Revenue-Weighted investment methodology. By a letter dated March 21, 2007("Letter Agreement") (Exhibit C), VTL entered into an agreement with Valley Forge Advisors, LLC, Sterling Asset Management's ("Sterling") predecessor-in-interest, Brian McElwee ("McElwee"), and Richard Ireland ("Ireland") "to promote, market, and develop" its Revenue-Weighted Program. In exchange, VTL agreed to "assign its inventions, patent applications, and patents developed by Lowry to Advanced Indexing Methodologies, LLC ("AIM"). At that time, the members of AIM were Lowry, Brian McElwee, and Richard Ireland. McElwee and Ireland were also the original principals of Sterling's predecessor-in-interest.

In July of 2008, Sterling and VTL entered into the First Amended Subadvisory and Fund Administration Agreement ("VFA Agreement") (Exhibit A), which, according to Sterling, required it to provide back office support, as well as numerous investment advisory services to VTL and its clients." However, according to VTL, Sterling's duties under the VFA Agreement were "essentially administrative", and did not include advising clients because Sterling was a "subadvisor", not an investment advisor. Sterling could utilize the Revenue-Weighted indexes solely as a subadvisor for clients to whom VTL served as an investment advisor. Pursuant to the VFA Agreement as well as prior versions of it, VTL referred several clients to Sterling and its predecessors, including City Trusts.

Also, in July of 2008 the parties and others entered into a series of agreements relating to the licensing and use of the Revenue-Weighted methodology. Significant to this Motion to Dismiss is the License Agreement to Use Indexes ("License Agreement") (Exhibit C), which granted Sterling the right to use the Revenue-Weighted Methodology. The License Agreement contained a non-competition clause, which prohibited the parties from transferring, moving, or attempting to transfer or move any assets from any program created by or using the AIM Methodology or otherwise promoted using any AIM trademarks to any other investment program not using the AIM Methodology and not using the AIM trademark.

Also at issue in this Motion to Dismiss is the Intentions and Assurances Agreement (Exhibit F) concluded between AIM, VTL, and Index Licensing, LLC. ("IL") in July 2008. The members of IL at that time were McElwee and Ireland. The stated purpose of the Intentions and Assurance Agreement was to "jointly promote, market, and develop the Revenue-Weighted investment methodology. Last, but not least, the Letter, which, according to VTL, has the same purpose as the Intentions and Assurances Agreement, is at issue in this Motion to Dismiss.

In Count I of their Counterclaim, Lowry and VTL allege that in April 2010, Sterling breached the non-competition clause of the License Agreement by removing City Trusts' assets from the Revenue-Weighted Program to a non-AIM Methodology investment program, and that Sterling breached the clause by recommending to City Trusts that it transfer its assets from the Revenue-Weighted Program.

Counterclaim Defendants, Sterling, IL, McElwee, and Ireland, moved to dismiss Count I for failure to state a claim because, they assert, Counterclaim Plaintiffs failed to factually support the allegation that Sterling did remove City Trusts' assets from the Revenue-Weighted Program. Also, Counterclaim Defendants assert that "recommending" to a client that it transfer its assets to a different investment program is not within the scope of the non-competition clause, and thus is not a breach of it. Furthermore, they assert that this Court cannot interpret the non-competition clause in this manner because it "would come dangerously close to impinging upon [Sterling's] fiduciary obligations" to advise its clients.

However, according to Counterclaim Plaintiffs, in this context, such a recommendation did constitute an attempt to transfer, and thus it was a breach of the non-competition clause. Also, Counterclaim Plaintiffs assert that Sterling owed no such duty to give investment advice to City Trusts because Sterling was the subadvisor, while VTL was the one charged with such a duty because it was City Trusts' investment advisor.


When considering a motion to dismiss pursuant to Rule 12(b)(6), first a District Court must separate the factual and legal elements of the claim, and accept all of the well-pleaded facts as true and view them in the light most favorable to the plaintiff, but may reject any of the legal conclusions. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009), and Fowler v. UPMC Shadyside, 578 F.3d 203, 211-212 (3d Cir.2009). Second, the court must determine whether the facts alleged demonstrate that the plaintiff has a "plausible claim for relief." Fowler, 578 F.3d at 212. At the pleading stage, a plaintiff is not required to go into particulars, but "need only put forth allegations that raise a reasonable expectation that discovery will reveal evidence of the necessary element." Id. at 213 (citations omitted). Also, the Third Circuit has stated that the heightened pleading standards of Twombly and Iqbal apply to cross-claims. Travelers Indem. Co. v. Dammann & Co., 594 F.3d 238, 256 n.13 (3d Cir. 2010). See also, Southeastern Transp. Auth. v. AECOM USA, Inc., 2010 WL 4703533 (E.D.Pa. Nov. 19, 2010) ("the pleading standards set forth in Twombly and Iqbal apply with equal force to cross-claims, counterclaims, and third-party complaints").

Here, Counterclaim Plaintiffs have stated sufficient facts to demonstrate that they have a "plausible claim for relief" for breach of contract against Sterling, and thus Counterclaim Defendants' Motion to Dismiss is denied. While Counterclaim Defendants assert that Counterclaim Plaintiffs have not alleged factual support for their allegation that Sterling actually transferred funds from the Revenue-Weighted Program, this allegation is a fact as pleaded by VTL and Lowry, not a legal conclusion. Counterclaim Plaintiffs provided this fact in support of their legal conclusion that Sterling breached the non-competition clause. Their Counterclaim alleges that "in April of 2010 Sterling did remove City Trust[s'] assets from a program using AIM Methodology to an investment program not using the AIM Methodology and not using the AIM trademarks." It is not a "thread-bare, conclusory assertion" as Counterclaim Defendants assert. Iqbal 129 S. Ct. at 1951. It provides Sterling fair notice of the conduct that it must defend. Count I provides a date range in which the conduct occurred, a description of what conduct violated the agreement, and a description of the assets that were removed.

Counterclaim Plaintiffs' second allegation in Count I - that Sterling breached the non-competition clause by recommending that City Trusts transfer its assets out of the Revenue-Weighted Program - also plausibly states a claim for relief. While the parties dispute whether "recommending" constitutes an "attempt to transfer", ...

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