GALAXY PRODUCTS & SERVICES, INC. v. AMI ENTERTAINMENT NETWORK, INC. et al
Filing
132
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE MARY A. MCLAUGHLIN ON 8/4/2015. 8/4/2015 ENTERED AND COPIES MAILED, E-MAILED.(kp, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
GALAXY PRODUCTS & SERVICES,
INC., et al.
v.
AMI ENTERTAINMENT NETWORK,
INC., et al.
:
:
:
:
:
:
:
CIVIL ACTION
NO. 12-6963
MEMORANDUM
McLaughlin, J.
August 4, 2015
These consolidated cases arise from the parties’
failed efforts to capitalize on the markets for regulated gaming
in Illinois and Oklahoma.
The plaintiff/counterclaim defendant
Galaxy Products & Services, Inc. (“Galaxy”) and
plaintiff/counterclaim defendant GPS Global, LLC (“Global”)
(collectively, “GPS”), allege that the defendant/counter
claimant AMI Entertainment Network, Inc. (“AMI”) failed to
deliver gaming software and hardware as specified by the
parties’ contracts, causing GPS to miss the Illinois and
Oklahoma gaming markets.
GPS seeks to recover the lost profits
it would have made had it been able to enter the Illinois and
Oklahoma gaming markets as planned.
AMI has filed two motions for summary judgment as to
GPS’s claims.
In its first motion, AMI argues that GPS cannot
recover lost profits because of the existence of limitation of
liability clauses in the parties’ contracts.
AMI also argues
that GPS’s concert of action claim fails because GPS has not
introduced evidence showing that AMI had knowledge of a breach
of duty or that AMI encouraged or assisted another in breaching
a duty owed to GPS.
In its second motion for summary judgment, AMI argues
that GPS’s contract claims fail because GPS materially breached
the contract by failing to apply for a gaming license in
Illinois.
AMI also argues that GPS could not have been licensed
because one of its principals, John Bailey, had a criminal
history that would have prevented licensure in Illinois.
AMI
has also moved for sanctions against GPS.
The Court grants AMI’s first motion for summary
judgment because the limitation of liability clauses contained
in the parties’ contracts are enforceable and prevent GPS from
recovering its claimed lost profits.
Additionally, GPS has
failed to introduce evidence supporting its concert of action
claim.
The Court’s decision on AMI’s first motion for summary
judgment renders AMI’s second motion for summary judgment moot.
The Court therefore will not consider AMI’s second motion for
summary judgment.
The Court will deny AMI’s motion for
sanctions.
2
I.
Summary Judgment Record
In 2009, Illinois passed the Illinois Video Gaming Act
(the “Act”), which legalized regulated gaming in taverns, truck
stops, and bars in Illinois.
AMI, which produced gaming
machines for use in Europe, initially expressed interest in
entering the Illinois gaming market.
AMI utilized the services
of attorney Thomas Fricke while it considered entering the
Illinois gaming market.
230 ILL. COMP. STAT. ANN. 40/1-85 (West
2009); Maas Dep. 28:1-21; Fricke Dep. 474:14-22.
AMI eventually decided not to enter the Illinois
market because it did not want to subject itself and its parent
company to regulatory scrutiny.
When he learned of AMI’s
decision in April 2010, Fricke informed AMI that he “might know
somebody that would be interested in licensing [AMI’s
products].”
Fricke Dep. 221:9-23, 230:11-231:13.
Still acting as AMI’s attorney, Fricke contacted
Brenda Kinnaman, a consultant, and told her about the licensing
opportunity.
Fricke told Kinnaman that whoever wanted to pursue
the opportunity with AMI would have to hire Fricke as his or her
attorney.
Kinnaman contacted John Bailey, an operator of South
Florida bingo halls and senior arcades, with the opportunity.
Fricke had represented Bailey in the past on other matters.
Fricke Dep. 223:1-24, 385:20-24, 474:14-22; Bailey Dep. 17:319:25, 26:12-20; Bailey Aff. ¶ 3, Sept. 9, 2014.
3
In May 2010, Fricke began representing Bailey in his
negotiations with AMI.
Fricke continued to represent AMI on
other unrelated matters.
Both Bailey and AMI signed a conflict
of interest waiver form regarding Fricke’s representation of
Bailey in the licensing transaction.
AMI was to be represented
in the negotiations by the law firm Dickstein Shapiro.
Pls.’
App. Ex. 3; Fricke Dep. 35:12-40:14, 519:6-21.
Bailey subsequently created Galaxy and Global to
pursue, among other opportunities, the licensing opportunity
with AMI.
GPS began negotiating, with Fricke’s assistance, with
AMI in October 2010.
Dickstein Shapiro did not participate in
the negotiations until January 2011.
Bailey Aff. ¶ 9, Sept. 9,
2014; Bailey Dep. 71:8-11; Fricke Dep. 301:19-302:24.
After negotiating for over a year, the parties signed
contracts in December 2011 for AMI to license its products to
Galaxy for the Illinois market and to provide hardware to Global
for the Oklahoma gaming market.
Dep. 180:14-181:2, 191:14-21.
Def.’s App. Exs. M-O; Bailey
Both contracts contained
limitation of liability clauses which limited the damages
available under the contracts to cost of cover with a cap of
$1,000,000.00. 1
Def.’s First App. Ex. M § 15.3, Def.’s First
App. Ex. O § 8.2.
1
The full text of the limitation of liability clause in the
Illinois agreement reads:
4
15.3 Limitations Upon the Parties’ Liability
Under This Agreement. No provision this
Section 15 shall be deemed to limit: (1) the
liability of the Licensee under provisions
of this Agreement that provide for the
Licensee’s payment of the License Fee, or
(2) the liability of the Licensee for
payment of the Development Fee or the
Additional Development Fee. Otherwise:
(a)
Except as expressly provided in
this Agreement, no Party or
Affiliate thereof or any director,
trustee, officer or employee of
such Party of Affiliate shall be
liable for any special,
incidental, consequential,
punitive or indirect damages,
economic damage due to injury to
property, lost profits, loss of
business opportunity or loss of
data, whether or not the
possibility of such loss was known
or foreseeable, it being
understood however that any breach
of the Licensor’s duty to
reimburse the Licensee for the
Licensee’s cost of covering
performance as set out in Section
3 of this Agreement shall not be
an excluded type of damages that
is precluded pursuant to this
paragraph (a) of Section 15 of
this Agreement; and
(b)
Regardless of whether any remedy
set forth in this Agreement shall
fail of its essential purpose, the
liability of either Party under
this Agreement arising from any
breach hereof under all theories
of recovery including contract,
tort, (including negligence)
strict liability and
misrepresentation shall not exceed
5
in the aggregate, the sum of one
million dollars ($1,000,000).
Def.’s First App. Ex. M § 15.3 (emphasis in original).
Similarly, the text of the limitation of liability clause
in the Oklahoma agreement reads:
8.2 Damages for Cost of Covering
Performance in Event of Breach; Exclusion of
All Other Kinds of Damages; Aggregate
Limitation of Liability for All Damages. In
the event that the Vendor shall materially
breach this Agreement and further, upon
Notice, shall fail to duly and timely cure
the breach, by Continuing Cure if
applicable, then upon further Notice to the
Vendor the Purchaser shall have the
prerogative to procure covering performance
by a person not a party to this Agreement
and, subject to the aggregate limitation on
the amount of damages that a Party can
collect for breach of this Agreement, as
hereinbelow set out, the Purchaser shall be
entitled to collect from the Vendor, as
contract and incidental damages, the
Purchaser’s demonstrable costs, including
incidental costs, of procuring such covering
performance. Except as expressly
hereinabove set out, no Party or Affiliate
thereof, or any trustee, director, officer
or employee of such Party or Affiliate shall
be liable for any of the following types of
damages: special damages, incidental
damages, consequential damages, punitive
damages, indirect damages, economic loss due
to any of (1) injury to property, (2) lost
profits, (3) loss of business opportunity,
or loss of data. Neither Party nor any
Affiliate of either shall be entitled to any
recovery in respect of such excluded types
of damages, regardless of any failure of
essential purpose or whether the possibility
of loss was foreseeable. In any event, the
liability of either Party for damages for
breach of this agreement together with any
6
The limitation of liability provisions were the
subject of extensive negotiations between the parties.
Bailey
and Mike Maas, the president of AMI, were personally involved in
the negotiation over these provisions.
Bailey personally
emailed Maas the limitation of liability proposal that was
eventually adopted in the agreements.
Bailey Dep. 83:6-16,
126:6-17; Def.’s First App. Ex. I.
AMI never delivered any hardware or software to GPS.
Despite efforts to do so, GPS never obtained software or
hardware from other providers to cover for AMI’s failure to
deliver under the contract.
Bailey Dep. 261:20-262:2; Pls.’
App. Ex. 18.
II.
Procedural History
Galaxy initiated this lawsuit against AMI and Fricke
in the Southern District of Illinois on May 8, 2012.
On
December 11, 2012, this case was transferred from the Southern
other agreement between the Parties or
between the Vendor and the Affiliate, shall
not collectively exceed the aggregate sum of
one million dollars ($1,000,000.00) (the
“Aggregate Damages Limitation”) for all
breaches and entitlements to damages not
categorically excluded hereunder. For the
avoidance of doubt, the Aggregate Damages
Limitation shall apply to both this
Agreement and the Illinois Agreement as if
they were one and the same agreement.
Def.’s First App. Ex. O § 8.2 (emphasis in original).
7
District of Illinois to this Court on the order of the Honorable
Judge Michael J. Reagan.
On April 17, 2013, AMI filed a separate lawsuit
against Global in this Court over the Oklahoma contract.
AMI
Entertainment Network, Inc. v. GPS Global, LLC, 13-2049.
The
parties stipulated to the consolidation of the two actions on
May 8, 2013, and the Court approved of the consolidation on May
13, 2013.
On September 19, 2013, the Court directed the Clerk
of Court to mark the 13-2049 case as closed, and ordered that
all documents in the consolidated action be filed in the 12-6963
case.
The Court also ordered that Global be added as a
plaintiff and counterclaim defendant in the 12-6963 action.
On September 19, 2013, Galaxy dismissed its claims
against Fricke after the parties agreed to a settlement.
On
September 18, 2013, Galaxy filed its third amended complaint,
and Global filed a counterclaim against AMI based on the
Oklahoma agreement.
Galaxy and Global collectively brought five
claims against AMI: Count I – Concert of Action; Count II –
Breach of Illinois Agreement; Count III – Declaratory Judgment
Concerning Damages – Illinois Agreement; Count IV – Breach of
Oklahoma Contract; and Count V – Declaratory Judgment Concerning
Damages – Oklahoma Agreement.
In its answer to the Third
Amended Complaint, AMI filed a counterclaim against Galaxy,
alleging that Galaxy breached the Illinois agreement.
8
AMI
currently has breach of contract claims pending against both
Galaxy and Global.
On August 1, 2014, in the midst of discovery, AMI
filed its first motion for summary judgment as to GPS’s claims.
On March 27, 2015, AMI filed a supplemental motion for summary
judgment, as well as several Daubert motions.
GPS did not file
any motions for summary judgment on AMI’s claims.
III. Summary Judgment Standard
Under Fed. R. Civ. P. 56, a party moving for summary
judgment must show that there is no genuine issue as to any
material fact and that judgment is appropriate as a matter of
law.
Fed. R. Civ. P. 56(a).
The moving party bears the initial
burden of demonstrating the absence of any genuine issue of
material fact.
(1986).
Celotex Corp. v. Catrett, 477 U.S. 317, 323
Once a properly supported motion for summary judgment
is made, the burden shifts to the nonmoving party, who must set
forth specific facts showing that there is a genuine issue for
trial.
(1986).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250
The mere existence of some alleged factual dispute
between the parties will not defeat an otherwise properly
supported motion for summary judgment.
9
Id. at 247-48.
IV.
Discussion
AMI’s motion for summary judgment will be granted as
to the breach of contract and declaratory judgment claims
because the limitation of liability clauses in the Oklahoma and
Illinois agreements are enforceable and GPS does not seek cost
of cover damages.
AMI’s motion for summary judgment will be
granted as to the concert of action claim because GPS has not
produced any evidence showing that AMI substantially assisted or
encouraged Fricke to violate any duty to the plaintiffs.
AMI’s
motion for sanctions will be denied.
A.
Breach of Contract and Declaratory Judgment Claims
GPS’s breach of contract claims fail because GPS does
not seek damages for the cost of covering AMI’s alleged failure
to perform under the contracts.
The Illinois and Oklahoma
agreements both contain clauses limiting liability under the
contracts to the cost of covering with a cap of $1,000,000.00.
Def.’s First App. Ex. M § 15.3, Def.’s First App. Ex. O § 8.2.
Under Pennsylvania law, limitation of liability clauses are not
disfavored and are generally enforceable.
Valhal Corp. v.
Sullivan Assoc., Inc., 44 F.3d 195, 201-04 (3d Cir. 1995);
Greenspan v. ADT Sec. Serv. Inc., 44 F.App’x 566, 568-70 (3d
Cir. 2011).
Such clauses “are not subjected to the same
stringent standards applied to exculpatory and indemnity
10
clauses.”
Valhal, 44 F.3d at 204.
If the limitation is
“reasonable and not so drastic as to remove the incentive to
perform with due care, Pennsylvania courts uphold the
limitation.”
Id.
These clauses are reasonable limitations on liability.
They provide for a substantial recovery - $1,000,000.00 – to
compensate GPS for covering any breach of the contracts by AMI.
Further, the limitation of liability applies to both parties.
If GPS breached the contract, AMI’s recovery would also be
limited to cost of cover with a $1,000,000.00 cap.
The clauses
are therefore enforceable, and GPS can only recover cost of
cover damages with a $1,000,000.00 cap.
GPS makes three arguments in support of its contention
that the limitation of liability clauses are unenforceable:
(1)
that covering for any breach of contract by AMI was impossible,
which removed AMI’s incentive to perform the contract in good
faith; (2) that the clauses are unconscionable; and (3) that the
clauses are the result of undue influence.
Not one of these
arguments is persuasive.
1.
The Possibility of Cover
GPS argues that because the Illinois agreement was
signed so close to the critical date to make an effective entry
to the Illinois gaming market, covering for any breach by AMI
11
was impossible.
It argues that this removed AMI’s incentive to
perform with due care, and that the limitation of damages
provision should therefore not be enforceable.
GPS has not introduced evidence showing that covering
for AMI’s alleged breach was in fact impossible, or that the
perceived impossibility removed AMI’s incentive to perform the
contract with due care.
GPS’s evidence on this point consists
of its experts stating that success in the Illinois gaming
market depended on early entry into the market.
Def.’s Supp. Mot. Exs. 5-6.
Pls.’ Opp. to
Additionally, GPS points to an
unsuccessful attempt to cover for AMI’s alleged breach as
evidence that procuring cover was impossible.
Bailey Aff. ¶ 14,
Sept. 9, 2014; Kinnaman Aff. ¶ 11, Sept. 9, 2014.
One unsuccessful attempt at procuring substitute
performance does not show that obtaining cover for AMI’s alleged
breach would have been impossible.
If anything, the attempt at
cover shows that the parties to the contract thought cover was a
possibility.
GPS would not have attempted to procure cover if
it did not think it would be possible to procure substitute
performance in time to meet the market.
Furthermore, this
evidence does not show that at the time the deal was signed, AMI
had no incentive to perform the contract in good faith.
GPS has
not produced evidence showing that AMI regarded cover as an
impossibility at the time the parties signed the agreement.
12
GPS
has not created an issue of fact over whether the limitation of
liability clause was “so drastic as to remove the incentive to
perform with due care.”
2.
Valhal, 44 F.3d at 204.
Unconscionability
The limitation of liability clauses are not
unconscionable because Bailey was involved in extensive
negotiations over those clauses.
The doctrine of
unconscionability bars the enforcement of clauses when there is
“an absence of meaningful choice on the part of one of the
parties together with contract terms which are unreasonably
favorable to the other party.”
Witmer v. Exxon Corp., 434 A.2d
1222, 1228 (Pa. 1981) (quoting Williams v. Walker-Thomas
Furniture Co., 350 F.2d 445, 449 (D.C. Cir. 1965)).
GPS had a meaningful choice when it came to the
limitation of liability clauses.
It is undisputed that these
clauses were the subject of extensive negotiations between GPS
and AMI.
Bailey Dep. 83:6-16.
Indeed, it was Bailey himself
who proposed the final terms of the limitation of liability
clauses that were eventually included in the Illinois and
Oklahoma agreements.
Ex. I.
Bailey Dep. 126:6-17; Def.’s First App.
These undisputed facts defeat GPS’s unconscionability
argument.
13
GPS argues that Fricke had a conflict of interest due
to his representation of AMI that prevented GPS from having a
meaningful choice in the Illinois and Oklahoma agreements.
Throughout its briefs GPS states that Fricke was secretly
working for AMI and looking out for AMI’s interests during these
contract negotiations.
In May 2010, both AMI and Bailey signed a conflict of
interest waiver regarding Fricke’s representation of GPS during
the contract negotiations.
40:14, 519:6-21.
Pls.’ App. Ex. 3; Fricke Dep. 35:12-
GPS has not introduced any evidence showing
that Fricke continued to act in AMI’s interests – rather than
GPS’s - in the contract negotiations after the signing of this
waiver.
GPS points to an entry in Fricke’s billing records for
the GPS account for a conference call with B. Bezant and M. Maas
(both employees of AMI or its parent company) on June 9, 2010 as
evidence that Fricke was actually working for AMI rather than
GPS.
Pls.’s App. Ex. 23.
This is not evidence that Fricke was
secretly working for AMI rather than GPS in the contract
negotiations between the parties.
It is unlikely that Fricke
would include evidence of such double-dealing on a document
intended to be read by Bailey and others at GPS.
GPS has not
introduced any evidence regarding the substance of this
conversation between Fricke, Maas, and Bezant, and Fricke
testified that Bailey and Kinnaman were on the call as well.
14
Fricke Dep. 272:6-15.
GPS has failed to create an issue of
disputed fact over whether Fricke’s alleged conflict of interest
negated any meaningful choice GPS had in negotiating the
contracts with AMI.
3.
Undue Influence
GPS also argues that the contracts are voidable
because they are the result of Fricke’s undue influence.
As
stated above, GPS has failed to introduce evidence showing that
Fricke exercised undue influence during his negotiation of the
contracts on behalf of GPS.
Even if GPS had introduced such
evidence, this argument would fail because GPS is trying to
enforce the very contracts it claims should be voided.
A contract “may be set aside or rescinded if it can be
proven that, at the time of formation of the agreement, the
parties did not bargain at arm’s length.”
Biddle v.
Johnsonbaugh, 664 A.2d 159, 161 (Pa. Super. Ct. 1995) (citing
Frowen v. Blank, 425 A.2d 412, 416 (Pa. 1981)).
GPS appears to
want to void only the parts of the contracts it disagrees with,
while enforcing the provisions of the contracts that would
enable it to recover in this case.
The Court is unaware of any
cases holding that the doctrine of undue influence may be used
to void only part of a contract while enforcing other parts.
Rather, a contract that is the product of a confidential
15
relationship is presumptively voidable “unless the party seeking
to sustain the validity of the transaction affirmatively
demonstrates that it was fair under all of the circumstances and
beyond the reach of suspicion.”
Frowen, 425 A.2d at 416.
If
the contract is rescinded due to undue influence as GPS claims
it should be, GPS would not be able to recover the lost profits
damages it seeks.
The limitation of liability clauses in the Oklahoma
and Illinois agreements are enforceable because GPS had a
meaningful choice via extensive negotiations over those
provisions.
Summary judgment is granted in AMI’s favor on GPS’s
contract claims because GPS does not seek cost of cover damages
- the only type of damages recoverable under the Illinois and
Oklahoma contracts.
B.
Concert of Action Claim
GPS’s concert of action claim fails because GPS has
not introduced any evidence showing that AMI gave substantial
assistance or encouragement to Fricke to breach Fricke’s duty to
GPS.
Section 876 of the Restatement (Second) of Torts governs
concert of action claims in Pennsylvania.
Skipworth ex rel.
Williams v. Lead Indus. Ass’n, Inc., 690 A.2d 169, 174 (Pa.
1997).
Section 876 allows a third party to be held liable for
the tortious conduct of another where the third party:
16
(1) does
a tortious act in concert with the other or pursuant to a common
design with him; (2) knows that the other’s conduct constitutes
a breach of duty and gives substantial assistance or
encouragement to the other so to conduct himself; or (3) gives
substantial assistance to the other in accomplishing a tortious
result and his own conduct, separately considered, constitutes a
breach of duty to the third person.
RESTATEMENT (SECOND)
OF
TORTS §
876 (1979).
GPS has not introduced any evidence showing that AMI
either assisted or encouraged Fricke to breach any duty to GPS.
The only evidence GPS cites in support of its concert of action
theory is:
(1) that Fricke was serving as AMI’s attorney when
he initially contacted Bailey with the Illinois opportunity; (2)
that AMI negotiated an early draft of the Illinois agreement
without the assistance of the Dickstein Shapiro law firm, which
did not enter the contract negotiations under January 2011; and
(3) the time record entry showing a conference call between
Fricke, Maas, and Bezant in June 2010.
These facts fall short
of showing that Fricke violated any duty owed to GPS; much less
that AMI substantially assisted or encouraged such a breach.
Summary judgment is granted in AMI’s favor on GPS’s concert of
action claim because GPS has failed to produce evidence
supporting its claim.
17
C.
Motion for Sanctions
AMI seeks sanctions under 28 U.S.C. § 1927, claiming
that GPS’s filings were frivolous and made in bad faith.
Section 1927 provides:
Any attorney or other person admitted to
conduct cases in any court of the United
States or any Territory thereof who so
multiplies the proceedings in any case
unreasonably and vexatiously may be required
by the court to satisfy personally the
excess costs, expenses, and attorneys’ fees
reasonably incurred because of such conduct.
28 U.S.C. § 1927.
To order sanctions under this section, a
court must find that an attorney has “(1) multiplied
proceedings; (2) in an unreasonable and vexatious manner; (3)
thereby increasing the cost of the proceedings; and (4) doing so
in bad faith or by intentional misconduct.”
In re Prudential
Ins. Co. American Sales Practice Litig. Agent Actions, 278 F.3d
175, 188 (3d Cir. 2002) (citing Williams v. Giant Eagle Markets,
Inc., 883 F.2d 1184, 1191 (3d Cir. 1989)).
Indications that an
attorney has acted in bad faith include the fact that “the
claims advanced were meritless, that counsel knew or should have
known this, and that the motive for filing the suit was for an
improper purpose such as harassment.”
In re Prudential, 278
F.3d at 188 (quoting Smith v. Detroit Fed’n of Teachers Local
231, Am. Fed. Of Teachers, AFL-CIO, 829 F.2d 1370, 1375 (6th
Cir. 1987)).
18
Although the Court grants summary judgment for AMI on
GPS’s claims, the Court does not view these claims to have been
made in bad faith.
GPS argued that the limitation of liability
clauses were unenforceable because they were unreasonable,
unconscionable, and the result of undue influence.
These
arguments, although weak, do not rise to the level of
frivolousness.
AMI’s motion for sanctions is denied.
An appropriate order shall issue.
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