Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Cottman transmission repair franchisor may have violated license agreements, (Jul 14, 2016)

By Greg Hammond, J.D.

Transmission and automotive repair franchisees have sufficiently alleged breach of contract and tortious interference claims against their franchisor and the franchisor’s parent company, the federal district court in Philadelphia has determined. The franchisor’s motion to dismiss was denied because the facts, when viewed in the light most favorable to the plaintiff franchisees, could demonstrate a breach of the defendants’ obligation to continue to develop, promote and protect the goodwill and reputation of the franchise brand (Jade Group, Inc. v. Cottman Transmission Centers, LLC, July 13, 2016, Pappert, G.).

Several Cottman Transmission Center franchisees sued franchisor Cottman Transmission Centers, LLC and parent company American Driveline Systems, Inc., alleging breach of contract and tortious interference with contract and with the franchisees’ business relationships. The claims purportedly arose from an American Driveline CEO’s disavowal of the company’s intentions to grow the Cottman brand and articulated intention to instead invest its resources in sibling brand AAMCO. Cottman moved to dismiss.

Breach of contract. The court first determined that the facts—when viewed in the light most favorable to the franchisee plaintiffs—demonstrated that the Cottman brand deteriorated after American Driveline acquired AAMCO, and that American Driveline’s CEO disavowed American Driveline’s intentions to grow the Cottman brand, stating instead his intention to invest resources in AAMCO. These facts, according to the court, could constitute a breach of Cottman’s obligation to continue to develop, promote, and protect the goodwill and reputation of the Cottman brand, pursuant to the parties’ license agreements.

The franchisees also claimed that Cottman breached other provisions of the license agreements, including provisions that required Cottman to: (1) assist franchisees in obtaining and negotiating leases; (2) assist franchisees with the layout of their stores and the installation of equipment; (3) assist franchisees in finding and evaluating personnel; (4) give franchisees an Operator’s manual to help them operate a center; (5) provide training to the franchisees; and (6) provide advertising services in exchange for a weekly advertising fee. The court rejected the defendants’ argument that the franchisees failed to state a claim for merely alleging that the amount of assistance that Cottman now provides is less than it previously provided—not that Cottman has failed to provide any assistance. Rather, it was reasonable to interpret the license agreement as requiring Cottman to provide a certain level of services—not merely requiring it to provide some services.

The motion to dismiss the breach of contract claims as time-barred was also denied. The court was unable to determine from the face of the complaint if any breach occurred in or before May 2014.

Implied covenants. The motion, however, was granted with regard to allegations that Cottman breached the implied covenant of good faith and fair dealing, because the franchisees relied on the same facts alleged in the breach of contract claims. The court determined that because the franchisees have an adequate remedy under a breach of contract claim, they cannot state a claim for breach of the implied covenant of good faith and fair dealing.

Tortious interference. The defendants’ motion to dismiss the tortious interference claims was rejected, the court next decided. With regard to the claim for intentional interference with contractual or prospective contractual relations, the facts alleged in the complaint suggested that American Driveline’s conduct was not motivated by a desire to protect Cottman’s assets, but that American Driveline was driven by an interest in aggrandizing itself through the growth of Cottman’s corporate sibling, AAMCO. The defendants also failed to argue that the allegations regarding the tortious interference with existing and prospective business relationships claim were insufficient.

Lastly, because the franchisees stated a claim for breach of contract, their claim for declaratory relief to terminate the contract could proceed, the court concluded.

The case is No. 16-01237.

Attorneys: Barbara A. Bagdon (Dady & Garner P.A.) and Steven Kapustin (Reger Rizzo & Darnall LLP) for The Jade Group, Inc., Jade WR Inc. and B & C Transmissions, LLC. Aaron-Michael Sapp (Cheng Cohen LLC) and Seth L. Laver (Goldberg Segalla LLP) for Cottman Transmission Centers, LLC., American Driveline Systems, Inc., and Global Powertrain Systems, LLC.

Companies: Cottman Transmission Centers, LLC; American Driveline Systems, Inc.

Cases: FranchisingDistribution PennsylvaniaNews