Clark Distribution Systems, Inc. v. ALG Direct, Inc. et al

Filing 56

MEMORANDUM AND ORDER denying deft ALG Direct's motion to dismiss 41 . (See memo & order for complete details.) Signed by Honorable Christopher C. Conner on 08/27/12. (ki)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

CLARK DISTRIBUTION SYSTEMS,
INC.,
Plaintiff
v.
ALG DIRECT, INC.,
Defendant

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CIVIL ACTION NO. 1:10-CR-2575
(Judge Conner)

MEMORANDUM
This is an action for breach of contract filed by Clark Distribution Systems,
Inc. (“CDS”) against American Logistics Group, Inc., operating as ALG Direct, Inc.
(“ALG”). CDS, a freight forwarder, alleges that ALG, a logistics provider and
distributer of printed materials, breached a contract entered into on June 28, 2010,
for “transportation and related services” to be provided by CDS to ALG. Presently
before the court is the motion (Doc. 41) to dismiss filed by ALG. For the reasons
that follow, the court will deny the motion.
I.

Background
Plaintiff CDS is a Delaware corporation with its principal place of business in

New Jersey and a “major hub of operations” in Mechanicsburg, Pennsylvania.
(Doc. 33 ¶ 1). CDS is a “provider of distribution logistics services to the publishing
and printing industries–also known as a ‘freight forwarder’”. (Id. ¶ 6). CDS’s
business consists of picking up materials such as newspapers and magazines from a
distributor and forwarding these materials to delivery services such as the United

States Postal Service (“USPS”). (Id. ¶¶ 7, 8). When delivering materials to the
USPS, CDS must comply with the USPS’s standards and regulations. (Id. ¶ 9). In
particular, materials must be sorted and accompanied by easily accessible bar
codes. (Id. ¶¶ 19, 22).
Defendant ALG is an Illinois corporation with its principal place of business
in Illinois. (Id. ¶ 2). ALG is a “logistics provider in the business of coordinating the
distribution of printed materials.” (Id. ¶ 10). CDS had performed work for ALG for
many years before 2010 without issue, and the two companies maintained a good
working relationship. (Id. ¶ 13). On June 28, 2010, ALG and CDS entered into a
contract, referred to as the Transportation Services Agreement (“TSA”), wherein
CDS agreed to “furnish transportation and related services as directed by ALG for
the transportation of printed matter and materials, equipment and supplies for
distribution to USPS Locations and other locations for ALG as may be tendered to
[CDS] from time to time.” (Id. ¶ 12; Doc. 33, Ex. A, Art. 1). Under the TSA, CDS
was to invoice ALG within 10 days of service, and ALG would then have 40 days to
remit payment for the service. (Doc. 33, Ex. A, Art. 6).
Patrick Del Monico III (“Del Monico”), then-president of ALG, represented to
CDS that the volume of shipments ALG would provide to CDS under the TSA
would be approximately 11% greater than the volume ALG provided CDS prior to
the contract’s formation. (Id. ¶¶ 11, 14). Del Monico also represented that all
materials would be delivered to CDS in acceptable condition consistent with the

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condition of materials tendered to CDS before the TSA. (Id. ¶ 15). CDS relied on
Del Monico’s statements as it prepared to perform under the TSA. (Id. ¶ 16).
According to the amended complaint, much of the material tendered by ALG
to CDS was in unacceptable condition, despite ALG’s “awareness of their
obligations.” (Id. ¶¶ 20, 21). Many of the pallets tendered by ALG were
disorganized, and bar codes required by the USPS were obscured or missing. (Id. ¶
22). Additionally, the amount of product provided by ALG to CDS was over 100%
greater than before the TSA became active, rather than the 11% previously
suggested by Del Monico. (Id. ¶ 24).
Ultimately, CDS claims that ALG owes $681,474.13 in unpaid shipment
invoices and an additional $337,997.00 for CDS’s processing the higher-thananticipated volume of materials and converting it to a condition acceptable to the
USPS. (Id. ¶¶ 25, 27, 31, 32).
On August 19, 2011, ALG filed the instant motion (Doc. 41) to dismiss. ALG
contends that the $337,997 CDS claims in damages for processing higher than
anticipated volumes and converting materials to an acceptable condition is
incidental or consequential to ALG’s purported breach of contract, and is
unrecoverable under Article Fourteen of the TSA. (Doc. 42 at 4; Doc. 33, Ex. A, Art.
14(d)). ALG does not dispute CDS’s claim that the $681,474.13 in unpaid invoices
falls under the category of direct damages. (Doc. 42). However, ALG has expressed
its inability to pay that sum to CDS, citing “cash-flow issues.” (Doc. 33 ¶ 28). The
only issue presently before the court is whether the $337,997 qualifies as direct
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damages, which can be recovered, or as incidental/consequential damages, recovery
of which is barred under Article Fourteen of the TSA.
II.

Standard of Review
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for the

dismissal of complaints that fail to state a claim upon which relief can be granted.
FED . R. CIV . P. 12(b)(6). When ruling on a motion to dismiss under Rule 12(b)(6), the
court must “accept all factual allegations as true, construe the complaint in the light
most favorable to the plaintiff, and determine whether, under any reasonable
reading of the complaint, the plaintiff may be entitled to relief.” Gelman v. State
Farm Mut. Auto. Ins. Co., 583 F.3d 187, 190 (3d Cir. 2009) (quoting Phillips v. County
of Allegheny, 515 F.3d 224, 233 (3d Cir. 2009)); see also Kanter v. Barella, 489 F.3d
170, 177 3d Cir. 2007) (quoting Evancho v. Fisher, 423 F.3d 347, 350 (3d Cir. 2005)).
Although the court is generally limited in its review to the facts contained in the
complaint, it “may also consider matters of public record, orders, exhibits attached
to the complaint and items appearing in the record of the case.” Oshiver v. Levin,
Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994); see also In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997).
Federal notice and pleading rules require the complaint to provide “the
defendant notice of what the . . . claim is and the grounds upon which it rests.”
Philips, 515 F.3d at 232 (quoting Bell Atl. Corp v. Twombley, 550 U.S. 544, 555
(2007)). To test the sufficiency of the complaint in the face of a Rule 12(b)(6) motion,
the court must conduct a three-step inquiry. See Santiago v. Warminster Twp., 629
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F.3d 121, 130-31 (3d Cir. 2010). In the first step, “the court must ‘tak[e] note of the
elements a plaintiff must plead to state a claim.’” Id. (quoting Ashcroft v. Iqbal, 556
U.S. 662 (2009)). Next the factual and legal elements of a claim should be separated;
well-pleaded facts must be accepted as true, while mere legal conclusions may be
disregarded. Id., see also Fowler v. UPMC Shadyside, 578 F.3d 203, 210-211 (3d Cir.
2009). Once the well-pleaded factual allegations have been isolated, the court must
determine whether they are sufficient to show a “plausible claim for relief.”
Ashcroft v. Iqbal, 556 U.S. at 662 (citing Twombly, 550 U.S. at 556); Twombly, 550
U.S. at 555 (requiring plaintiffs to allege facts sufficient to “raise a right to relief
above the speculative level”). A claim “has facial probability when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. When
the complaint fails to present a prima facie case of liability, however, courts should
generally grant leave to amend before dismissing a complaint. See Grayson v.
Mayview State Hosp., 293 F.3d 103, 108 (3d Cir. 2002); Shane v. Fauver, 213 F.3d
113, 116-17 (3d Cir. 2000).
III.

Discussion
Defendant ALG contends that CDS fails to state a claim upon which relief

can be granted for the $337,997 CDS claims it is owed by ALG. This contention is
based on ALG’s assertions that the $337,997 for processing higher volumes of
material and converting the material to acceptable condition constitutes

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“incidental, indirect, special or consequential” (hereafter “indirect”) damages, and
that both parties are barred from claiming indirect damages under the TSA.
Article Fourteen, section (d) of the TSA reads, in relevant part, “NEITHER
PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INCIDENTAL,
INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND.” (Doc.
33, Ex. A, Art. 14(d)). Under Pennsylvania law, such provisions are generally
enforceable unless they are unconscionable. Factory Market, Inc. v. Schuller
Intern., Inc., 987 F. Supp. 387, 399-400 (E.D. Pa. 1997). In the present case, neither
party suggests that the provision is unconscionable, and therefore this court will
assume that this provision is enforceable.
The question of whether a particular component of damages is direct or
indirect is generally a question of fact to be decided at trial. Combustion Sys.
Servs., Inc. v. Schuylkill Energy Res., Inc., No. Civ. A. 92-4228, 1993 WL 496946 at *2
(E.D. Pa. Nov. 19, 1993). Both CDS and ALG agree that there are exceptions to this
rule, particularly when the parties define or agree upon what constitutes indirect
damages or the court has sufficient information in the record to determine as a
matter of law whether damages are direct or indirect. See id. ALG avers that “the
demarcation between the direct damages under the [TSA] . . . and the indirect . . .
damages is clear cut,” with the $337,997 clearly falling on the indirect side of the
demarcation. (Doc. 45, at 3). CDS maintains that the classification of the $337,997
is an issue of fact properly reserved for trial. (Doc. 44, at 2).

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To succeed at this stage of proceedings, ALG must demonstrate that CDS has
admitted that the damages are indirect, that the damages at issue are clearly
defined as indirect by the TSA or some other authority, or that there is enough
information available for the court to determine that the damages are indirect as a
matter of law. Combustion Sys. Servs. Inc., 1993 WL 496946, at *2.
A.

Admission or Definition by CDS

ALG contends that CDS took a position inconsistent with its current claim in
a prior case between the two parties (ALG Direct, Inc. v. The Clark Group, Inc., No.
1:11-CV-1356 (M.D. Pa. 2011)), and is thus barred from asserting its current
argument by the doctrine of judicial estoppel. ALG also avers that CDS admitted in
their Amended Complaint (Doc. 33) that the $337,997 constitutes indirect damages.
The court will address these arguments in turn.
1.

Judicial Estoppel

ALG suggests that CDS is “perilously close to running afoul of the doctrine of
judicial estoppel” in its assertion that the damages at issue are direct. The doctrine
of judicial estoppel “seeks to prevent a litigant from asserting a position
inconsistent with one that she has previously asserted in the same or in a previous
proceeding.” Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355,
358 (3d Cir. 1996). Under the three-pronged test given by the Third Circuit in
Montrose Medical Group Participating Savings Plan v. Bulger, a district court may
invoke judicial estoppel “only if: (1) the party to be estopped is asserting a position
that is irreconcilably inconsistent with one he or she asserted in a prior proceeding;
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(2) the party changed his or her position in bad faith, i.e., in a culpable manner
threatening to the court’s authority or integrity; and (3) the use of judicial estoppel
is tailored to address the affront to the court’s authority or integrity.” 243 F.3d 773,
777-78 (3d Cir. 2001).
CDS’s claim is not judicially estopped. First, as CDS notes, the prior position
referred to by ALG was that of The Clark Group, Inc., the parent company of CDS.
(ALG Direct, Inc., No. 1:11-CV-1356). Assuming, arguendo, that judicial estoppel
may bar a subsidiary from contradicting a statement its parent company made in a
prior proceeding, there is no indication that the court ever accepted The Clark
Group’s legal argument. In the absence of evidence of “a threat to judicial integrity
other than [a party’s] inconsistent positions. . . judicial estoppel is generally not
appropriate where the defending party did not convince the District Court to
accepts its earlier position.” G-I Holdings, Inc. v. Reliance Ins. Co., 586 F.3d 247,
262 (3d Cir. 2009). ALG voluntarily dismissed the complaint before a ruling was
made on The Clark Group’s motion to dismiss. (See No. 1:11-CV-1356, Docs. 32, 41).
Moreover, The Clark Group’s arguments in ALG Direct, Inc. related to ALG’s
claims that The Clark Group breached a “strategic alliance” that arose from
multiple documents, including the TSA. (Id. Doc. 25). The Clark Group claimed
that the breach alleged by ALG was not governed by the TSA or any other named
document, and at no point discussed the distinction between direct and indirect
damages under the TSA. The Clark Group did state that its failure to “expend the
necessary time and resources needed to process Type 3 commodities” did not
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constitute a breach under any documents between the Group and ALG, but this
statement was based on multiple theories different from the one presently at issue.
(Id. Doc. 32). Hence, CDS’s claim in the present case is not “irreconcilably
inconsistent” with the arguments of The Clark Group in ALG Direct, Inc.
2.

CDS’s Amended Complaint

ALG next claims that CDS, by separating its claim for $681,474.13 in unpaid
invoices from its claim of $337,997 related to the volume and condition of goods
tendered, is conceding that the latter of these two claims does not stem directly
from the alleged breach of contract. (Doc. 42, at 5).
CDS distinguishes these two claims, but CDS does not identify the $337,997
as indirect damages. It is possible that multiple claims of damage could be found to
be direct, especially given that CDS suggests that ALG may have breached the TSA
in multiple ways. (Doc. 33 ¶ 31); see Seidel, Gonda, and Goldhammer, P.C. v.
Master Data Center, Inc., 438 F. Supp. 80, 82 (E.D. Pa. 1977). There is no evidence
that CDS, by listing the claimed amounts separately, intended to distinguish the
damages for purposes of Article Fourteen of the TSA.
B.

Definition of Indirect Damages Under the TSA and in General

Article Fourteen states “NEITHER PARTY SHALL BE LIABLE TO THE
OTHER FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO ANY LOSS OF
USE, LOSS OF BUSINESS OR LOSS OF PROFITS.” (Doc. 33, Ex. A, Art. 14(d)).
The $337,997 does not fall under any of the categories listed, as CDS does not claim
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that the $337,997 represents money it might have received but for ALG’s conduct.
The TSA does not explicitly define “amounts incurred in expending the time and
labor required to convert the commodity tendered to [CDS] into a usable condition”
or “amounts incurred in processing the unanticipated and wrongfully inflated
volume of commodity tendered to [CDS]” as indirect damages, therefore external
sources will help characterize the present claim for damages. (See Doc. 33 ¶¶ 31,
32).
The Restatement (Second) of Contracts § 347 distinguishes “the loss in value
to [the injured party] of the other party’s performance caused by its failure or
deficiency”—direct damages—from “any other loss, including incidental or
consequential loss, caused by the breach,”—indirect damages. RESTATEMENT
(SECOND ) OF CONTRACTS § 347 (1981). The Pennsylvania Uniform Commercial Code
(“PA UCC”), while not directly controlling in the context of a contract for services
rather than goods, is also instructive.1 Under the PA UCC, incidental damages are
defined as “any commercially reasonable charges, expenses or commissions
incurred in stopping delivery, in the transportation, care and custody of goods after
the breach by the buyer, in connection with return or resale of the goods or
otherwise resulting from the breach.” 13 PA . CONS. STAT . § 2710. ALG analogizes
this to the present case, suggesting that CDS “seeks reimbursement for additional
‘time and labor’ and ‘processing’ – i.e., expenses it incurred relating to the care,

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Indeed, both parties cited the PA UCC in their respective briefs on ALG’s
motion to dismiss.
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custody and control of the commodities sent by ALG’s customers.” (Doc. 42, at 7).
In Atlantic Paper Box Co. v. Whitman’s Chocolates, the Eastern District of
Pennsylvania defined incidental damages as those “normally incurred when a
buyer (or seller) repudiates the contracts or wrongly rejects the goods, causing the
other to incur such expenses as transporting, storing, or reselling the goods,” and
consequential damages as those that “do not arise within the scope of the buyerseller transaction, but rather stem from losses incurred by the non-breaching party
in its dealings, often with third parties, which were a proximate result of the
breach.” Atlantic Paper Box Co. v. Whitman’s Chocolates, 844 F. Supp. 1038, 1046
(E.D. Pa. 1994).
The present dispute is over whether the $337,997 is properly classified as
“loss in value to CDS of ALG’s performance under the TSA caused by ALG’s failure
or deficiency” or “any other loss. . . caused by ALG’s breach of the TSA.” At this
stage, there are issues of fact which must be resolved before CDS’s claim for
damages is classified as direct or indirect.
ALG maintains that “[t]he only ‘payment’ provision of the TSA relates to
payments for shipments made pursuant to. . . the TSA. Accordingly, [CDS’s] direct
damages under the TSA . . . consist of any failure on the part of ALG to pay for
shipments made by [CDS] pursuant to the TSA.” (Doc. 42, at 5). In its amended
complaint, however, CDS avers that ALG’s conduct – specifically, tendering a much
higher volume of materials than originally understood and in a condition much
worse than anticipated – constituted a breach of the TSA, in addition to any failure
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by ALG to pay invoices. (Doc. 33 ¶¶ 31, 32). The TSA contains an “integration
clause” (Doc. 33, Ex. A, Art. 22) which states that the entire agreement between
CDS and ALG is contained within the TSA, thus barring CDS from using Del
Monico’s representations to contest terms of the TSA. CDS avers, however, that
ALG understood the TSA to contain an obligation to tender goods in acceptable
volume and condition. (Doc. 33 ¶ 20). Ultimately, whether ALG’s conduct
constituted a breach of the TSA is a mixed question of law and fact. If ALG’s
conduct was, in fact, a breach of the TSA, then the question of how CDS’s damages
flowed from that breach (i.e. directly or indirectly) is a matter of fact that is not
properly addressed at this stage.
ALG, in its reply brief (Doc. 45), states that “[i]f the commodities [tendered to
CDS] were not in ‘good order and condition,’ [CDS’s] remedy was to reject the
shipment; not to falsely represent (through the receipt [referenced in Article 5(a) of
the TSA]) that the commodities were in ‘good order and condition,’ [and] expend
additional money putting the commodities in good order and condition. . .” (Doc. 45,
at 6) (emphasis in original). At the present stage, however, there is no information
concerning whether and under what circumstances CDS signed these receipts or
“falsely represented” the condition of the commodities. Discovery may produce the
answers to these questions, but at the motion to dismiss stage, the court may look
only to the complaint and documents attached to the complaint as well as matters
of public record. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380,
1384 n.2 (3d Cir. 1994). Based on the information available at the current stage of
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proceedings, and viewing the amended complaint in the light most favorable to
plaintiff CDS, the court concludes that its claim for $337,997 in damages is not
clearly barred under the TSA. Therefore, ALG’s motion to dismiss is denied.
IV.

Conclusion
For the foregoing reasons, the motion to dismiss is DENIED. An appropriate

order follows.

S/ Christopher C. Conner
CHRISTOPHER C. CONNER
United States District Judge

Dated:

August 27, 2012

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

CLARK DISTRIBUTION SYSTEMS,
INC.,
Plaintiff
v.
ALG DIRECT, INC.,
Defendant

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CIVIL ACTION NO. 1:10-CR-2575
(Judge Conner)

ORDER
AND NOW, this 27th day of August, 2012, upon consideration of the motion
(Doc. 41) to dismiss filed by defendant ALG Direct, and for the reasons set forth in
the accompanying memorandum, it is hereby ORDERED that the motion to dismiss
(Doc. 41) is DENIED.

S/ Christopher C. Conner
CHRISTOPHER C. CONNER
United States District Judge