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Aamco Transmissions, Inc v. Frank Wirth and Auto Center

December 7, 2011

AAMCO TRANSMISSIONS, INC., PLAINTIFF,
v.
FRANK WIRTH AND AUTO CENTER, LLC, DEFENDANTS.



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

MEMORANDUM

Currently pending before the Court is a Motion to Dismiss Defendants' Counterclaims by Plaintiff AAMCO Transmissions, Inc. ("ATI") against Defendants Frank Wirth and Auto Center, LLC. For the following reasons, the Motion is granted.

I. FACTUAL BACKGROUND

According to the facts set forth in the Complaint, ATI has continually, since at least 1963, used the name "AAMCO" as its trade name, trademark, and service mark in connection with the operation of transmission repair centers. (Compl. ¶ 6.) It owns three marks registered on the principal register of the United States Patent and Trademark office for "automobile repair services": (1) the name "AAMCO"; (2) a pictorial representation containing the name "AAMCO"; and (3) a pictorial representation containing the name "AAMCO Transmissions." (Id.) ATI uses the name "AAMCO" in the operation of its approximately 700 licensed or franchised transmission repair centers. (Id. ¶ 7.) To preserve the good will and secondary meanings associated with its names, ATI has established standards and policies governing the quality of service to be provided to the public, and has established procedures calling for the inspection of franchisees' centers to determine that the standards and policies are being followed. (Id. ¶ 10.)

On February 6, 2008, ATI and Defendant Frank Wirth entered into a franchise agreement ("Franchise Agreement"), pursuant to which Wirth was authorized to use the name and mark "AAMCO" in connection with the operation of an AAMCO Transmission Center located at 2310 Walnut Street, Harrisburg, Pennsylvania (the "Center"). (Id. ¶ 11.) On that same day, Wirth executed a promissory note in favor of ATI in the amount of $21,000, which required him to make twenty-one monthly payments of $1,000 each to ATI. (Id. ¶ 12.) The parties then executed an amendment to the Franchise Agreement on August 5, 2008, adding Defendant Auto Center as a franchisee. (Id. ¶ 13.)

Two years later, in August 2010, Defendants were audited by ATI for compliance under the Franchise Agreement. (Id. ¶ 14.) Following that audit, Defendants executed a settlement agreement and promissory note in favor of ATI in the amount of $35,000, payable in thirty-five monthly installments of $1,000 each. (Id.) Via letter dated June 9, 2011, however, ATI notified Defendants that they were in breach of the Franchise Agreement and in default under the 2008 and 2010 Notes for failure to pay the sums owed. (Id. ¶ 15.) When Defendants failed to cure any of these deficiencies, ATI, by letter dated June 21, 2011, terminated the Franchise Agreement and demanded that Defendants comply with their post-termination obligations under the Franchise Agreement. (Id. ¶¶ 16-17.) Specifically, Section 19.2(a) of the Franchise Agreement required that, upon termination of the Franchise Agreement for any reason, Defendant shall:

(2) immediately and permanently discontinue the use of all AAMCO names and marks, signs, structures, all forms of advertising, telephone listings and service, manuals, software and all materials and products of any kind which are identified or associated with the System or AAMCO and return all such materials and products, including without limitation, the Operator's Manual, to AAMCO;

(3) thereafter make no representations or statements for commercial benefit that Franchisee is or ever was in any way approved, endorsed, associated or identified with AAMCO or the System in any manner whatsoever or that Franchisee is a former AAMCO franchisee; provided, however, Franchisee shall reimburse AAMCO for all customer warranty repairs made within an applicable warranty period arising from work performed at the Center;

(4) immediately take all steps necessary to amend or terminate any registration or filling of any fictitious name or any other registration or filing containing the AAMCO names and marks in order to effectuate the removal of the AAMCO names and marks from such registration or filing.

(Id. ¶ 18 & Ex. A § 19.2.) Moreover, Section 20 provided as follows:

Franchisee represents and warrants . . . [f]or a period of two (2) years after the termination of this Agreement for any reason, which two-year period shall not begin to run until Franchisee commences to comply with all obligations stated in this section 20, Franchisee shall not . . . within a radius of ten (10) miles of Franchisee's former Center and ten (10) miles of any other Center in operation at the time of termination or any Center that has commenced operation during the two-year period, begin or engage in any business the same as, similar to or in competition with such Center, except for a business previously approved by AAMCO pursuant to section 8(e). (Id. ¶ 19 & Ex. A § 20.)

Notwithstanding these provisions, Defendants have, according to Plaintiff, failed to remove the AAMCO name and trademark from the Center and cease all use of ATI's systems and AAMCO merchandising materials. (Id.) Moreover, Defendants have continued to operate a competing transmission repair business at the former Center location under the name and style "AAMCO Transmissions," thereby holding themselves out as an authorized ATI franchisee. (Id.) In addition, Defendants maintain the telephone number that links to the former and current Yellow Page ads for "AAMCO Transmission." (Id. ¶ 21.) Finally, Defendants have neglected to cure any of their monetary defaults. (Id. ¶¶ 22-23.)

Plaintiff filed a Complaint in this Court on June 3, 2011, setting forth six causes of action against Defendants. Count I alleges trademark infringement. (Id. ¶¶ 24-33.) Count II asserts a claim for breach of franchise agreement/specific performance. (Id. ¶¶ 34-40.) Count III alleges a claim of common law unfair competition. (Id. ¶¶ 41-45.) Count IV asserts breach of contract. (Id. ¶¶ 46-54.) Count V seeks costs and attorneys' fees. (Id. ¶¶ 55-59.) Finally, Count VI sets forth a request for a declaratory judgment. (Id. ¶¶ 60-66.)

Defendants responded with an Answer and Counterclaim on August 29, 2011. In their Counterclaim Complaint, Defendants aver that prior to entering the Franchise Agreement, representatives of ATI had indicated that ATI had a "proven formula and system" for maintaining a successful franchise, that its Business Model included cost containment provisions for labor and parts, and that this model would allow Defendants to make a profit. (Answer & Countercl. ¶¶ 86-91.) Relying on these representations, Defendants entered into the Franchise Agreement and continued to use ATI's Business Model for three and a half years. (Id. ¶¶ 92-93.) Ultimately, however, Defendants found that ATI's Business Model was only effective with respect to rebuilding transmissions, but was not profitable with respect to general automotive repairs, installing remanufactured transmissions, and/or installing used transmissions - a fact that ATI knew or should have known. (Id. ¶¶ 94-99.) The Counterclaim Complaint goes on to allege that pursuant to the Franchise Agreement, Defendants were required to participate in a local "ad pool" to share local advertising expenses - including television and print marketing - with franchisees in the designated market area. (Id. ¶¶ 100-02.) The costs for the "ad pool" are divided equally among the franchisees in the designated market area, but, in April 2011, Defendants were unable to pay the local "ad pool" due to a lack of profitability resulting from the alleged deficiencies and ineffectiveness of the ATI Business Model. (Id. ¶¶ 103-05.) Due to the failure of Defendants to pay the "ad pool" costs, Plaintiff, without notice or warning, removed Defendants from its internet website and from its Center Locator, which allows customers to locate franchises on the ATI national website. (Id. ¶¶ 106-07.) These actions by Plaintiffs further reduced any income potential from Defendants, making it impossible to cure any financial deficiencies. (Id.)

Based on these events, Defendants put forth several counterclaims against Plaintiff ATI. First, they allege a cause of action for breach of the Franchise Agreement (Count I). (Id. ¶¶ 109-17.) Second, they assert that Plaintiff breached the implied covenant of good faith and fair dealing (Count II). (Id. ¶¶ 118-26.) Finally, they claim fraudulent misrepresentation. (Count

III). (Id. ¶¶ 127-33.)

Prior to the Answer being filed, Plaintiff brought a Motion for Preliminary Injunction on July 21, 2011. Defendants responded on August 12, 2011, and, on October 5, 2011, the Court approved a stipulation between the parties resolving the injunction motion. Subsequently, on September 13, 2011, Plaintiff moved to dismiss Defendants' Counterclaims and, following an extension of time, Defendants responded on October 26, 2011. Plaintiff submitted a Reply Brief on November 2, 2011, making this Motion ripe for the Court's consideration.

II. 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 these basic dictates, the Supreme Court, in Ashcroft v. Iqbal, 556 U.S. 662, 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., 129 S. Ct. 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. A complaint alleges, but does not show, an entitlement to relief when the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct. Id.; see also Phillips v. Cnty. of Allegheny, 515 F.3d 224, 232-34 (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.'" (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. July 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).

III. DISCUSSION

A. The Fraud Counterclaim ...


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