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Atd-American Co v. Krueger International

April 19, 2012

ATD-AMERICAN CO., PLAINTIFF,
v.
KRUEGER INTERNATIONAL, INC.,
DEFENDANT.



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

MEMORANDUM

Presently pending before the Court are Defendant Krueger International, Inc.'s Motions to Dismiss Pursuant to Federal Rule of Procedure 12(b)(6), to Strike Pursuant to Rule 12(f), and for a More Definite Statement Under Rule 12(e). For the following reasons, the Motions are granted in part and denied in part as set forth in the accompanying Order.

I. FACTUAL AND PROCEDURAL HISTORY*fn1

Plaintiff ATD-American Co. ("Plaintiff"), a Pennsylvania corporation, sells furniture and other supplies to a variety of institutions via direct marketing, catalog sales, and internet sales. (Compl. #1 ¶¶ 1, 7.) Defendant KI International, Inc. ("Defendant"), a Wisconsin corporation, manufactures furniture and other institutional supplies exclusively for sale to dealers. (Id. ¶¶ 2, 8.) For over fifty years, Plaintiff and Defendant have had a vendor-dealer relationship through which Plaintiff sells Defendant's products to end-users. (Id. ¶ 9.)

Prior to January 31, 2008, Defendant owned all of the outstanding capital stock of a company called Olympic Industries, Inc. ("Olympic"), which in turn owned all of the outstanding capital stock of a subsidiary corporation, Adirondack Chair Co., Inc. ("Adirondack"). (Id. ¶¶ 10-11.) Adirondack, like Plaintiff, is in the business of selling furniture and other supplies directly to a variety of institutions. (Id. ¶¶ 12-13.) Plaintiff alleges that Defendant sold its products to Adirondack at a lower price than other dealers, which provided Adirondack with a competitive advantage. (Id. ¶ 15.) In turn, Adirondack purchased more products from Defendant than any other dealer. (Id. ¶ 16.)

On January 31, 2008, Plaintiff entered into a contract ("the Asset Purchase Agreement") with Defendant, Olympic, and Adirondack to purchase certain assets belonging to Adirondack, including its capital stock. (Id. ¶ 17.) Plaintiff paid $1,522,307.92 as consideration for the Asset Purchase Agreement, and further agreed to a Supply Agreement in which it would buy over $27 million worth of Defendant's products over the course of five years. (Id. ¶¶ 18, 28.) The Asset Purchase Agreement also included Covenant Not to Compete and Confidentiality clauses, which applied to Defendant and Olympic. (Id. ¶ 19.)

According to Plaintiff, the Covenant Not to Compete precludes Defendant from making "any and all sales to end-user customers, whether by way of direct marketing, telephone sales, fax sales, catalog sales, Internet sales, or any other forms of sales . . . ." (Id. ¶ 33.) Plaintiff alleges that since January 31, 2008, when the Asset Purchase Agreement was signed, Defendant has breached the Covenant Not to Compete "by selling to end-user customers and thereby competing with [Plaintiff] and Adirondack, and by becoming interested with entities that compete with [Plaintiff]." (Id. ¶ 34.) Specifically, Plaintiff asserts that Defendant used call centers, field sales representatives, and a website to sell directly to end-user customers. (Id.) In further support of its allegation that Defendant has engaged in improper competition, Plaintiff asserts that several of Defendant's employees have actually admitted to selling directly to end-user customers, and that, between July 12 and August 24, 2011, Defendant actively sought to hire employees for the express purpose of executing such sales. (Id.) Finally, Plaintiff alleges that Defendant marketed directly to end-user customers and then closed sales through dealers other than Plaintiff. (Id. ¶ 36.) According to Plaintiff, Defendant's breach of the Covenant Not to Compete has resulted in a 75% decrease in Adirondack's sales and has prevented Plaintiff from performing its minimum purchase obligations pursuant to the Supply Agreement. (Id. ¶¶ 42-43.)

Next, the Asset Purchase Agreement contains a Confidentiality clause which prohibits each party from using the confidential information of the other. (Id. ¶¶ 58-62; id., Ex. A, Asset Purchase Agreement between and among Adirondack, Plaintiff, Olympic, and Defendant ("Asset Purchase Agreement") § H.6.) The Complaint alleges that Adirondack's customer lists became the sole and exclusive confidential information of Plaintiff at the time the Asset Purchase Agreement commenced, and that Defendant violated the Confidentiality clause by using those lists to contact Plaintiff and Adirondack's customers. (Compl. #1 ¶¶ 61, 63.)

Finally, the Supply Agreement-which obligated Plaintiff to buy a certain amount of products from Defendant over the course of five years-also contained a Confidentiality clause which, like the clause in the Asset Purchase Agreement, stated that customer lists and other information disclosed by one party to the other was to be kept confidential. (Id. ¶¶ 77-79; id., Ex. B, Supply Agreement between Plaintiff and Defendant ("Supply Agreement") ¶ 5(a).) Plaintiff alleges that Defendant violated the clause by using Adirondack's customer lists. (Compl. ¶ 84.)

On January 4, 2012, Plaintiff filed two Complaints in this Court, setting forth the following claims: (I) breach of the Covenant Not to Compete (Count I of Compl. #1 & #2); (II) breach of the Confidentiality Provision of the Asset Purchase Agreement (Count II of Compl. #1 & #2); (III) breach of the Confidentiality Provision of the Supply Agreement (Count III of Compl. #1); (IV) fraudulent inducement, fraudulent misrepresentation, and material non-disclosure and omission (Count III of Compl. #2); and (V) misappropriation of trade secrets; disgorgement of profits (Count IV of Compl. #2). (Compl. #1 ¶¶ 29-93; Compl. #2 ¶¶ 28-83.)*fn2

According to the Complaint, Defendant's conduct has caused Plaintiff to lose customers; past, current, and future sales; the ability to compete on price; goodwill; market share; and the future value of lost customer relationships. (Compl. #1 ¶¶ 48, 69, 91.) The Complaints seek damages, declaratory relief, and an injunction to enforce the terms of the Asset Purchase and Supply Agreements. (Id. ¶¶ 115-17; Compl. #2 ¶¶ 50, 63, 69, 83, 85.)

On January 30, 2012, Defendant filed separate Motions to Dismiss for each Complaint. Plaintiff responded in opposition to both on February 21, 2012. Defendant filed Reply Briefs on February 28, 2012, and Plaintiff filed Sur-Reply Briefs on March 6, 2012. On April 3, 2012, upon stipulation by both parties, this Court consolidated the two Complaints under Civil Action Number 12-00032. Accordingly, the Court considers Defendant's separate Motions to Dismiss together in a single Memorandum.

II. STANDARD OF REVIEW

Pursuant to Federal Rule of Civil Procedure 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. It emphasized that it would not require a "heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face." Id. at 570.

In the subsequent case of Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Supreme Court enunciated two fundamental principles applicable to a court's review of a motion to dismiss for failure to state a claim. First, it noted that "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 678. Thus, although "[Federal] Rule [of Civil Procedure] 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 678-79. Second, the Supreme Court emphasized that "only a complaint that states a plausible claim for relief survives a motion to dismiss." Id. at 679. "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.

Notwithstanding the foregoing, nothing in Twombly or Iqbal has altered some of the fundamental underpinnings of the Rule 12(b)(6) standard of review. Arner v. PGT Trucking, Inc., No. Civ.A.09-0565, 2010 WL 1052953, at *2 (W.D. Pa. Mar. 22, 2010); Spence v. Brownsville Area Sch. Dist., No. Civ.A.08-0626, 2008 WL 2779079, at *2 (W.D. Pa. July 15, 2008). Federal Rule of Civil Procedure 8 requires only a short and plain statement of the claim showing that the pleader is entitled to relief and need not contain detailed factual allegations. Fed. R. Civ. P. 8; Phillips v. Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008). 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

In its Motions to Dismiss, Defendant asserts the following: (1) Plaintiff's interpretation of the Asset Purchase Agreement's Covenant Not to Compete is an illegal contract under the Sherman Act; (2) Plaintiff has failed to state a claim for attorney's fees and costs; (3) Plaintiff's tort claims for fraudulent inducement, fraudulent misrepresentation, material non-disclosure and omission, and misappropriation of trade secrets are barred by the gist of the action doctrine; (4) Plaintiff's request for declaratory relief should be dismissed as duplicative; (5) Plaintiff should be required to re-plead to clarify the pleadings, delineate paragraphs, and identify alternative pleadings; and (6) the Court should strike Plaintiff's allegations pertaining to the breach of the Supply Agreement's pricing provisions. The Court considers each argument in turn.

A. Whether Plaintiff's Interpretation of the Covenant Not to Compete Violates the Sherman Act

Section 1 of the Sherman Antitrust Act states in relevant part: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1. Pursuant to the Sherman Act, "'a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.'" Palmer v. BRG of Ga., Inc., 498 U.S. 46, 48 (1990) (quoting United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940)). Covenants not to compete, however, are not violations of section 1 of the Sherman Act. Eichorn v. AT & T Corp., 248 F.3d 131, 145 (3d Cir. 2001). According to the Third Circuit Court of Appeals, such agreements are "executed upon the legitimate transfer of ownership of a business" and are therefore merely "ancillary restraints on trade." Id.

In this case, the Asset Purchase Agreement between the two parties includes a Covenant Not to Compete, which states as follows:

As a material inducement to Buyer's consummation of the transactions contemplated in this Agreement, none of the Seller Parties shall, during the five (5) years following the Closing (the "Restricted Period"), do any of the following, directly or indirectly, ...


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