PALERMO GELATO, LLC v. PINO GELATO, INC

Filing 12

OPINION. Signed by Judge Mark R. Hornak on 1/24/13. (bdb)

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

PALERMO GELATO, LLC,

)
)

Plaintiff,

)
)

v.

)
)

PINO GELATO, INC.,
Defendant.

Civil Action No. 2:12-cv-00931
Judge Mark R. Hornak

)
)

OPINION

Mark R. Hornak, United States District Judge

Pending before the Court is Defendant Pino Gelato, LLC's ("Pino") Partial Motion to
Dismiss, in which Pino requests that Count I of Plaintiff Palermo Gelato, LLC's ("Palermo")
three-count Complaint be dismissed under Fed. R. Civ. P. 12(b)(6). Having carefully considered
Plaintiffs Complaint, ECF No.1; Defendant's Motion to Dismiss, ECF No.7, and Reply Brief,
ECF No. 11; and Plaintiffs Response, ECF No.9, and Brief in Opposition, ECF No, 10, the
Court concludes sua sponte that the case must be dismissed for lack of subject matter
jurisdiction.
I.

BACKGROUND

Sometime in 2008, Palermo, a Pennsylvania corporation, was seeking to open gelato
stores in the Pittsburgh area.

In search of a gelato product to sell, Palermo contacted the

representatives of Pino, a South Carolina corporation, who allegedly made various
representations that suggested that Pino was the "exclusive" owner of a "unique recipe" of gelato
developed in Sicily. Compl. at ~~ 7-13. On September 19,2008, the parties entered into a Store

License Development and Supply Agreement ("Agreement") for the licensing and supply of
Defendant's gelato product at Plaintiffs places of business located in Allegheny County,
Pennsylvania and Butler County, Pennsylvania. Compl. Ex. D.
The Agreement gave Palermo the exclusive rights to sell Pino products as a Pino licensee
in Allegheny and (a portion of) Butler Counties. Id.

~~

lea), 13(a). Palermo agreed to supply an

"Area Development Fee" of $25,000 and to purchase pans of Pino's gelato at $30.00 per pan. Id.
~

13(c), Schedule 2. Palermo also agreed to "operate each location exclusively under [Pino

Gelato'S] Mark ... and such name shall be prominently displayed on the signage for each
location." Id. ~ l(a).! Sometime after the Agreement was signed, Pino allegedly sent its gelato
chef to Pittsburgh during the opening of Palermo's first store, where the chef informed Plaintiff
that the gelato product came from Hilton Head, South Carolina. Compl. ~ 21.
Around September 2011, Palermo allegedly discovered that the gelato it was purchasing
from Pino was not small-batch crafted gelato, but in fact being manufactured in bulk by G.S.
Gelato ("G.S."), a Florida company, and that G.S. also sold its gelato wholesale on its website.

Id.

~~

24-25. Palermo believed that its $30.00 per pan purchase price was approximately 30%

higher than G.S.'s wholesale price for the identical product. Id.

~

32. In January 5, 2012, Palermo

notified Pino of its beliefs about the provenance of the gelato and its intention "to rescind the
Agreement and seek recovery of payments already made under the same." Id.

~

37. Plaintiff

alleges that it was fraudulently led into the Agreement under the belief that it was purchasing
high-end gelato from Pino's own exclusive recipe. It also alleges that the Agreement in fact

In a "Limitation on Liability Clause," the parties also agreed that:
Except for [breach of confidentiality and third party claims], in no event shall either party be liable
to the other for lost profits or savings or for any indirect, incidental, consequential, special,
punitive or exemplary damages in connection with this Agreement or the transactions
contemplated by this Agreement, however caused, under any theory of liability.
Id ~ 12 (all capitalized in original).
I

2

established a franchise relationship with Pino, rather than a license relationship, and that the 30%
"mark-up fees were essentially disguised royalties." Id.

~~

35-36.

On July 6, 2012, Plaintiff filed suit in this Court (I) seeking a declaratory judgment that
the Agreement is invalid and void because Pi no and Palermo had entered into a franchise
relationship, and Pino violated Federal Trade Commission (FTC)'s Franchise Rule, 16 C.F.R. §
436 ("Rule 436"), when it failed to provide to Palermo with a pre-sale disclosure document
containing information about its franchise;2 (II) asserting a claim of unjust enrichment; and (III)
asserting in the alternative a claim of fraud in the inducement. Pino moves to dismiss only Count
I of the Complaint under Fed. Civ. P. 12(b)(6), arguing that (1) the parties did not enter into a
franchise relationship, and thus Rule 436 does not apply, and (2) even if the parties did enter into
a franchise relationship, claimed violations of Rule 436 are only enforceable by the FTC, and
does not provide any legal basis for the voiding of a contract between two private parties.
Palermo asserts 28 U.S.c. § 1337 as the basis for federal jurisdiction as to Count I, and invokes
supplemental jurisdiction under § 1367 as to Counts II and III. Compi.

II.

~

3.

DISCUSSION
Because the federal courts are of limited jurisdiction, even before turning to the merits of

Pino's Motion to Dismiss, this Court is obligated to inquire as to whether it has subject matter
jurisdiction over this case. See Nesbit v. Gears Unlimited, Inc., 347 F.3d 72, 77 (3d Cir. 2003).

2 Under 16 C.F.R. § 436.I(h), a franchise is established when three criteria are met: (1) the franchisee has the right
to use the franchisor's mark in selling its goods or services; (2) the franchisor "has the authority to exert a significant
degree of control over the franchisee's method of operation," or provide significant assistance with the method of
operation; and (3) the franchisee makes a required payment to the franchisor. The FTC has issued an advisory
opinion which stated that a business relationship is deemed to be a franchise based not on what the parties call the
relationship, but rather on if the three elements are met. FTC Informal Staff Advisory Op. 98-4 (1998); see Englert,
Inc. v. LeafGuard USA, Inc., CIV. A. No. 409-00253,2009 WL 5031309, at *3 (D.S.C. Dec. 14,2009). Under the
Franchise Rule, a franchisor must provide to prospective franchisees a complete and accurate basic disclosure
document containing information relating to the franchisor and its existing franchisees. 16 C.F.R §§ 436.2-436.5. A
franchisor's failure to disclose that information is an unfair or deceptive trade practice that violates § 5 of the
Federal Trade Commission Act (FTCA). 16 C.F.R § 436.2; 15 U.S.C. § 45.

3

Palermo's complaint asserts federal jurisdiction under 28 U.S.C. § 1337, which confers on the
district courts original jurisdiction over "any civil action or proceeding arising under any Act of
Congress regulating commerce or protecting trade and commerce against restraints and
monopolies." One such Act of Congress is the Federal Trade Commission Act (FTCA), 15
U.S.C. § 45. See A.a. Smith Corp. v. FTC, 530 F.2d 515, 519 (3d Cir. 1976). The scope of
§ 1337's "arising under" jurisdiction is the same as that of the more familiar § 1331. MCI

Telecomm'ns. Corp. v. Teleconcepts, Inc., 71 F.3d 1086, 1094 nA (3d Cir. 1995). Section 1337
is the only basis for federal jurisdiction that Palermo asserts in its Complaint.
Whether there might also be diversity jurisdiction is unclear. 28 U.S.C. § 1332. Although
it appears from the face of the Complaint that the only two parties to this case, Pale!IIlo and Pino,
are citizens of different states, Compl.

~~

1-2, Palermo has not asserted any specific amount in

controversy, nor can it be adequately gleaned or inferred whether that number might be greater
or less than $75,000 (exclusive of costs and interest) given the rather vague counts, claims, and
assertions of damages in its Complaint. 3
"A case 'arises under' federal law within the meaning of § 1331, [the Supreme] Court
has said, if 'a well-pleaded complaint establishes either [1] that federal law creates the cause of
action or [2] that the plaintiffs right to relief necessarily depends on resolution of a substantial
question of federal law.'" Empire Healthchoice Assur., Inc. v. McVeigh, 547 U.S. 677, 689-90

Onyiuke v. Cheap Tickets, Inc., 435 F. App'x 137, 139 (3d Cir. 2011):
In determining whether the amount in controversy exceeds $75,000, the Court generally accepts
the plaintiff's good faith allegations. Columbia Gas Transmission Corp. v. Tarbuck, 62 F.3d 538,
541 (3d Cir.1995). However, the case may be dismissed for failure to meet the amount in
controversy requirement if it appears to a "legal certainty" that the claim is for less than the
jurisdictional amount. St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 289, (1938);
Dardovitch v. Haltzman, 190 F.3d 125,135 (3d Cir.1999) ....
Given the vagueness of the Complaint, the Court can neither determine what the amount in controversy in this case
might be based on Plaintiff's "good faith allegations," nor can it say ''to a legal certainty" that Plaintiff's claims fall
below the jurisdictional amount.
3 See

4

(2006) (quoting Franchise Tax Bd o/Cal. v. Constr. Laborers Vacation Trust/or So. Ca/., 463
U.S. 1, 27-28 (1983). It is well settled that § 5 of the FTCA (and thus Rule 436) may only be
enforced by the FTC, and does not create a private cause of action. See, e.g., Sandoz Farm v.

Corp. v. Richardson-Vicks, Inc., 902 F.2d 222, 231 (3d Cir. 1990); Holloway v. Bristol-Myers
Corp., 485 F.2d 986, 987,1001 (D.C. Cir. 1973); Freedman v. Meddy's, Inc., 587 F. Supp. 658,
659-62 (E.D. Pa. 1984). Therefore, the questions before this Court are whether Palermo's (a)
well-pleaded Complaint establishes (b) that its right to relief necessarily depends on the
resolution of a substantial question of federal law.
With regards to (a) the well-pleaded complaint rule, the Court has held that the
application of federal law must arise in "the plaintiff s original cause of action," rather than by
way of a defense to that cause of action. Franchise Tax Board, 463 U.S. at 12 (citing Louisville
& Nashville R. Co. v. Mottley, 211 U.S. 149 (1908)). The Court has gone on to hold that the

federal Declaratory Judgment Act (and it state law iterations) does not alter this rule to in any
way expand the scope of federal jurisdiction. Id. at 16. Therefore, when the face of a plaintiff s
complaint relies on federal law in seeking a declaratory judgment, "if, but for the availability of
the declaratory judgment procedure, the federal claim would arise only as a defense to a state
created action, jurisdiction is lacking." Id. at 16 (citing Skelly Oil Co. v. Phillips Petroleum Co.,
339 U.S. 667 (1950)).
As to (b) when a plaintiff s state law claim for relief depends on the resolution of a
substantial question of federal law, the Supreme Court has articulated the appropriate test as
being whether "a state law claim necessarily raise[ s] a stated federal issue, actually disputed and
substantial, which a federal forum may entertain without disturbing any congressionally
approved balance of federal and state judicial responsibilities." Grable & Sons Metal Prods., Inc.

5

v. Darue Eng'g & Mfg., 545 U.S. 308,314 (2005); see Merrell Dow Pharms. Inc. v. Thompson,
478 U.S. 804, 810 (1986) ("in exploring the outer reaches of § 1331, determinations about
federal jurisdiction require sensitive judgments about congressional intent, judicial power, and
the federal system").
These Franchise Tax Board/Skelly Oil and the Grable/Merrell Dow lines of cases are
clearly interrelated, but involve quite different standards to be applied by the courts.

The

difficulty in determining which standard is more appropriate under the facts of a particular case
likely arises from the fact that sometimes, the line between an affirmative state law cause of
action for which federal law provides an element, and a declaration that federal law forms the
basis of a state law right or liability, can be an extremely fine one. This tension is especially
palpable in cases in which the validity of a contract is under attack by a plaintiff, where what is a
"sword" and what is a "shield" is often murky. Compare Koresko v. Murphy, 464 F. Supp. 2d
463, 469 (E.D. Pa. 2006) (analyzing under Grable standard a claim where plaintiff asserted
invalidity of contract for failure to comply with federal law) with Dave v. Crowell & Moring
LLP, Civ. A. No. 10-0172,2010 WL 1848147, at *9 (C.D. Cal. May 4,2010) (distinguishing
Koresko; holding that under mostly similar facts, Skelly Oil was the proper standard), North
Cent. FS., Inc. v. Brown, 951 F. Supp. 1383, 1397-98 (N.D. Iowa 1996) (same), and Northwest
Century Pipeline Corp. v. Mesa Petroleum Co., 576 F. Supp. 1495, 1500 (D. Del. 1983) (same);
see also Marel v. LKS Acquisitions, Inc., 585 FJd 279 (6th Cir. 2009).4
Therefore, it is no wonder that at first blush it is difficult to determine which category
Palermo's lawsuit more directly implicates: the Franchise Tax Board/Skelly Oil "well-pleaded
complaint" line of cases addressing complaints that seek declaratory judgments, or the

In Skelly Oil, on the other hand, the plaintiff sought a declaration of the validity of a contract given its conformity
with federal law, and thus the 'shield' nature of the action was readily apparent. See 339 U.S. at 671.

4

6

Grable/Merrell Dow line addressing what federal ingredients embedded in state causes of action

pass muster. To this end, it is necessary to drill down further on the precise nature of Palermo's
claims.
The thrust of Palermo's Complaint is that Palermo was duped into entering an agreement
based on Pino' s misrepresentations that the Pino gelato product was a handcrafted Sicilian
specialty developed by a noted gelato chef rather than being manufactured in bulk at a factory in
Florida and sold on the internet. Palermo asserts in Count II a claim for unjust enrichment. ECF
No.1" 52-57. Under Pennsylvania law, "[t]he doctrine of unjust enrichment applies only to
situations where there is no legal contract." Wilson Area Sch. Dist. v. Skepton, 895 A.2d 1250,
1254 (Pa. 2006). Therefore, assumedly as a predicate to this quasi-contractual claim, Count I
seeks a "Declaratory Judgment" that the Agreement is "void for failure to comply with the
requirements of the [federal] Franchise Rule." Id

,~

40, 52.

Count III pleads, "in the

alternative" to Counts I and II, a claim for fraud in the inducement. Id. ~ 60. 5 The remedies
Palermo seeks are a declaration that the Agreement is void, , 52, and damages "including but not
limited to" "licensing fees, lost profits due to product mark-up costs, attorney's fees and costs
associated with this matter and other consequential damages."~' 57, 65.
Therefore, it seems that Palermo's Complaint can be interpreted in two ways. On the one
hand, Count I read alone merely seeks a declaratory judgment that the Agreement is invalid due
to its federal illegality. This would seem to merit the application of the Skelly Oil/Franchise Tax
Board "well-pleaded complaint" standard, because it seeks a federal declaration that would only
Unlike an unjust enrichment claim, a fraud in the inducement claim under Pennsylvania law is not extinguished by
the presence of a written agreement. See, e.g., Youndt v. First Nat. Bank ofPort Allegany, 868 A.2d 539, 545 CPa.
Super. Ct. 2005). However, Pennsylvania'S parole evidence rule bars extra-contractual representations "where the
written agreement (1) contains terms which directly deal with the subject matter of the alleged oral representation;
and (2) represents the entire contract between the parties." Atl. Pier Assocs., LLC v. Boardakan Rest. Partners, 647
F. Supp. 2d 474, 489 (E.D. Pa. 2009) (citing J 726 Cherry St. P'ship v. Bell Atlantic Props.• 653 A.2d 663, 666 (Pa.
Super. Ct.l995». Therefore it appears that while the validity of the Agreement is not a strict bar to Palermo's claim
of fraud in the inducement, Palermo may have a well-founded belief that it is at least a hindrance.
5

7

otherwise arise as a defense to a state law contract action. On the other hand, Count I could be
interpreted to plead what may be a necessary element of Palermo's claim in Count II for unjust
enrichment, the absence of a valid written contract. 6 The federal element of an affirmative state
law claim would place this case in the realm of Grable and Merrell Dow. Because these
interpretations might be equally valid, see supra n.6, it is prudent to analyze Palermo's claims in
each light. Still, by either road traveled, the end point is the same: Palermo's claims do not give
rise to federal subject matter jurisdiction.
A. Well-pleaded Complaint RulelDeclaratory Judgment
Palermo seeks a declaratory judgment that the Agreement is invalid because it violates
the FTC's Franchise Rule. Under the "well-pleaded complaint rule .... a federal court does not

6 From this Court's survey of Pennsylvania law, it remains unclear whether the absence of a valid written contract is
a necessary element of a cause of action for unjust enrichment where such a contract is undisputedly in existence, or
instead merely anticipates an affirmative defense to the unjust enrichment action. Pennsylvania courts do not list it
as a formal element. See, e.g., Styer v. Hugo, 619 A.2d 347, 350 (Pa. Super. 1993) affd, 637 A.2d 276 (Pa. 1994)
("The elements of unjust enrichment are benefits conferred on defendant by plaintiff, appreciation of such benefits
by defendant, and acceptance and retention of such benefits under such circumstances that it would be inequitable
for defendant to retain the benefit without payment of value.") (internal quotation omitted). However, a contract's
absence will certainly cause a Plaintiff to lose on summary judgment, e.g. Lackner v. Glosser, 892 A.2d 21, 34 (Pa.
Super. Ct. 2006) ("By its nature, the doctrine of quasicontract, or unjust enrichment, is inapplicable where a written
or express contract exists."), and at least one court has held that failure to adequately plead the absence of a valid
written contract is fatal to a claim at the motion to dismiss stage, Homziak v. Gen. Elec. Capital Warranty Corp.,
No. GD2000-1707, 2001 WL 35923945 (Pa. Ct. Com. PI. May 21, 2001) (dismissing unjust enrichment claim where
Plaintiff "[did] not plead facts on which this Court could conclude that the service contract is [unenforceable as]
insurance"). Therefore, this Court cannot say with confidence whether in Pennsylvania the absence of a valid
written contract is an "element" of, or rather an anticipation of an affirmative defense to, an unjust enrichment claim.

It is also conceivable that the complaint could also be read as an attempt to rescind the Agreement under
Pennsylvania law, that is, to affirmatively unwind a voidable contract rather than seek a declaration that it was void
ab initio. Compare Am. Ass 'n of Meat Processors v. Cas. ReCiprocal Exch., 588 A.2d 491, 495 (Pa. 1991) ("the
general rule [is] that an agreement which violates a provision of a statute, or which cannot be performed without
violation of such a proviSion, is illegal and void.") with Key Bank v. Crawford, 600 F. Supp. 843, 846 (E.D. Pa.
1985) ("while Chalfont's failure to disclose may render the contract voidable, the contract does not require any
wrongdoing and is therefore not void."). However, Pennsylvania courts have not viewed rescission as creating a
cause of action in itself, but rather as an equitable remedy for causes of action such as fraud in the inducement. See
Clark v. Allstate Ins. Co., CIV.A.I0-294, 2010 WL 1904013, at *2 (W.D. Pa. May 7, 2010) ("Under Pennsylvania
law, there is no cause of action for rescission; rather, rescission is an equitable remedy that a court may grant when
an insurer proves fraud by the insured in obtaining the policy.") (citing Overmiller v. Town and Vii/age Ins. Serv., 21
A.2d 411, 412-13 (Pa. Super. 1941). Therefore, because there is no affirmative state law cause of action of
"rescission," an attempt to construe the Complaint as such to satisfy the well-pleaded complaint rule would be
ineffective.

8

have original jurisdiction over a case in which the complaint presents a state-law cause of action,
but also asserts that federal law deprives the defendant of a defense he may raise, or that a
federal defense the defendant may raise is not sufficient to defeat the claim." Franchise Tax Bd.,
463 U.S. at 10 (internal citations omitted). If the plaintiff seeks a declaratory judgment of a
federal issue (rather than asserting a state law cause of action), the well-pleaded complaint rule
still applies in full force: "if, but for the availability of the declaratory judgment procedure, the
federal claim would arise only as a defense to a state created action, jurisdiction is lacking." Id.
at 16 (discussing Skelly Oil). In Skelly Oil, the Court found that there was no federal jurisdiction
where a plaintiff sought a declaration that a contract was valid, on the grounds that a federal
requirement contained in its terms was met. 339 U.S. at 670-71. It reasoned that because the
federal issue arose solely as an anticipation of a federal law defense for breach of contract, the
well-pleaded complaint rule was not satisfied. Id. at 672.
Another district court in our Circuit, confronted with facts similar to those here, found
that a claim that sought a declaratory judgment that a certain contractual provision was
unenforceable because its terms violated federal law was "purely anticipatory." Nw. Cent.
Pipeline Corp. v. Mesa Petroleum Co., 576 F. Supp. 1495, 1500 (D. Del. 1983). The court

applied Skelly Oil to hold that because "[t]he claim, absent a declaratory judgment statute, would
arise only as a defense to a breach of contract brought by [defendants] to collect payments for
deficiencies," it did not satisfy the well-pleaded complaint rule. Id. at 1500-01. Accord Dave v.
Crowell & Moring LLP, 2010 WL 1848147, at *9; North Central FS., Inc. v. Brown, 951 F.

Supp. at 1397-98.
Here, as in Northwest Central, Dave, and North Central FS., without the declaratory
judgment, the claim that Pino could have brought against Palermo would have been a purely

9

state law claim for breach of contract, which Palermo would have defended based on the
invalidity of the contract, citing federal law. 7 There would have been no federal claim that could
have been asserted by Pino. Therefore, federal jurisdiction based on the declaratory judgment
sought in Count I alone is lacking under Franchise Tax Bd. and Skelly Oil, because Palermo's
claim does not satisfY the well-pleaded complaint rule. s

B. Substantial Federal Issue
1. The Grable Standard
Assuming that Palermo could satisfY the well-pleaded complaint requirement by
construing its sought-after declaration of invalidity of the contract as an element of its state law
unjust enrichment claim (or some other cause of action recognized in Pennsylvania), it still
would have to demonstrate that it alleged "a state law claim [that] necessarily raise[s] a stated
federal issue, actually disputed and substantial, which a federal forum may entertain without
disturbing any congressionally approved balance of federal and state judicial responsibilities."
Grable, 545 U.S. at 314.

In Merrell Dow, the Supreme Court stressed the absence of a federal cause of action as
strongly weighing against finding that a state law claim actually raised a substantial federal issue.

While Palermo cites no federal or state statute as the basis for its "declaratory judgment" claim, it seems most
plausibly to assert a claim under the federal Declaratory Judgment Act. If the claim sought a declaration under
Pennsylvania'S declaratory judgment statute, the basis for federal question jurisdiction in this case would arguably
be even more questionable than it already is. See Franchise Tax Board, 463 U.S. at 17 (holding that Skelly Oil rule
applies with equal force whether plaintiff cites federal Declaratory Judgment Act and files in federal court, or
plaintiff cites state declaratory judgment statute and defendant removes, but not addressing any situation where
plaintiff files in federal court citing state declaratory judgment statute).
7

Additionally, to the extent that under Pennsylvania law the invalidity of a written contract is not properly
considered an element of a cause of action for unjust enrichment, but rather is also an anticipatory reply to a defense
of the presence of a contract, see supra n.6, it would also not satisfY the well-pleaded complaint rule. See Mottley,
211 U.S. 149.

8

10

478 U.S. at 810. 9 In Grable, the Court left the door open, if only a little, for state law causes of
action predicated on federal laws that do no themselves create private rights of action. It noted
that the absence of a federal cause of action is "relevant to, but not dispositive, of' whether a
substantial federal interest is asserted, and held that under the facts in that case, such a federal
interest was present as to confer jurisdiction. 545 U.S. at 314, 318. One year later, the Court
emphasized the narrowness of its holding in Grable, and described Grable as delineating a
"special and small category" of cases that qualifY for federal question jurisdiction. Empire
Healthcare Assur., Inc. v. McVeigh, 547 U.S. 677, 669 (2006).10

The Sixth Circuit has summarized the relevant facts in Grable:
In Grable & Sons, the Court found that the interpretation of a provision of the
Internal Revenue Code governing notice to land owners whose property is to be
sold to satisfY delinquent taxes presented a substantial federal question in a title
dispute action removed from state court. The meaning of that statute was
genuinely in dispute, and the Court found that the government's interest in fixing
the means of collecting delinquent taxes justified "the experience, solicitude, and
hope of uniformity that [resort to] a federal forum offers on federal issues."
Eastman v. Marine Mech. Corp., 438 F.3d 544, 552 (6th Cir. 2006) (quoting 545 U.S. at 312).

The Court itself in Empire noted that the dispute in Grable "centered on the action of a federal
agency (IRS) and its compatibility with a federal statute, the question qualified as 'substantial,'
and its resolution was both dispositive of the case and would be controlling in numerous other
cases." Empire, 547 U.S. at 700. Finally, Grable discussed that in considering whether a federal

In that case, the plaintiff brought a state negligence per se claim against a drug company, alleging as an element of
the tort cause of action that the drug was misbranded under the Food, Drug, and Cosmetics Act. Merrell Dow, 478
U.S. at 810. The Court held that this claim did not confer federal jurisdiction, noting that Congress did not create a
federal private cause of action for violations of the FDCA, and that the federal-state balance of litigation would be
upset if every negligence per se claim that relied on the violation of a federal statute or regulation would confer
federal jurisdiction.
9

10 To date, the Third Circuit has engaged in a discussion of Grable in two written opinions, only one of which was
precedential. In Treasurer of N.J. v. u.s. Department of Treasury, 684 F.3d 382, 402 (3d Cir. 2012), the court
reaffirmed the "limitations" of Grable as elucidated by Empire. See also Kalick v. Northwest Airlines Corp., 372 F.
App'x 317,320 (3d Cir. 2010).

11

issue is substantial, federal courts must consider the proper balance of state and federal litigation:
"A general rule of exercising federal jurisdiction over state claims resting on federal mislabeling
and other statutory violations would thus have heralded a potentially enormous shift of
traditionally state cases into federal courts." 545 U.S. at 319 (discussing Merrell Dow, 478 U.S.
at 811-12). Therefore, the lower courts are called upon to employ "sensitive judgments about
congressional intent, judicial power, and the federal system" in conducting this inquiry. Grable,
545 U.S. at 318 (quotation omitted).

2. Application to Palermo's Alleged Facts
Upon review of Plaintiffs Complaint and the underlying facts of this case, the Court is
confident that this case is not one that fits in the narrow category contemplated by Grable.
First, as noted above, it is well settled that § 5 of the FTCA (and Rule 436) may only be
enforced by the FTC, and does not create a private cause of action. See, e. g., Sandoz, 902 F.2d at
231. Therefore, this is one of the cases in which there is a "missing welcome mat" from
Congress to permit federal adjudication of private claims regarding alleged violations of the
Franchise Rule, weighing against jurisdiction. Grable, 545 U.S. at 318; see also Merrell Dow,
478 U.S. at 810-11.
Second, in distinguishing Grable, the Court in Empire noted that Grable involved the
action of a federal agency, while its own case "was triggered, not by the action of any federal
department, agency, or service, but by the settlement of a personal-injury action launched in state
court." Empire, 547 U.S. at 700. As in Empire and in Merrell Dow, there are no federal or
governmental actors in the fray here, but only two private business entities, also highlighting the
lack of an important federal interest in this case.

12

Third, an examination of the nature of this action demonstrates that any federal claim
Palermo has stands on exceedingly thin ice, and therefore that the federal question can hardly be
considered "substantial." To be sure, based on the parties' briefing, it is clear that they actually
and vigorously contest both the applicability of the Franchise Rule to their case based on their
relationship and the terms of the Agreement, as well as its ability to serve as the basis for the
unwinding of a contract, and recognize that issue as central to the lawsuit. See Def. 's Br. Supp.
Mot. Dismiss, ECF No.8, at 2 ("Count I is the lynchpin of Palermo's action. If Palermo cannot
void the License Agreement, Palermo's claim of unjust enrichment fails ...").
But even though the federal question may be "actually disputed," it is far from
"substantial." Grable, 545 U.S. at 319. It appears that every court that has confronted the issue
has determined, with persuasive reasoning, that a violation of the disclosure requirements of the
Franchise Rule does not provide the basis to render a subsequent agreement void as illegal or
contrary to public policy. See Vino 100, LLC v. Smoke on the Water, LLC, 864 F. Supp. 2d 269,
281 (E.D. Pa. 2012); Holiday Hospitality Franchising, Inc. v. 174 West St. Corp., No. 05-149,
2006 WL 2466819, at *13 (N.D. Ga. July 19, 2006); Crawford, 600 F. Supp. at 846. Another
district court confronted with this very same issue dismissed it for lack of "arising under"
jurisdiction. Mercy Health Sys. ofSoutheastern Pa. v. Metro. Partners Realty, LLC, Civ. A. No.
02-1015,2002 WL 1774060, at *2 (E.D. Pa. July 29,2002).11 Among the reasons enumerated in
those opinions include the fact that the defendants' alleged failures to provide the Franchise Rule
disclosures occurred outside of the formation of the contract and its terms, and thus any violation

II While the Mercy Health System court did not offer a detailed explanation of the reasons for its dismissal, 2002
WL 1774060, at *2, this Court notes that its holding is precisely the same as that of this Opinion. It is also worth
noting that in each of the other three opinions that addressed contractual validity on the merits, there was a separate
basis for federal jurisdiction other than the effect of the Franchise Rule on the contract, and therefore the "arising
under" question was not before those Courts. See Vino 100, 864 F. Supp. 2d at 273 (Lanham Act); Holiday
Hospitality, 2006 WL 2466819, at *1 n.1 (diversity); Crawford, 600 F. Supp. at 846 (interpleader, 28 U.S.C. §
1335).

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would not go to the validity of the contract; that because the Franchise Rule is a regulation and
not a Congressional statute, violations of it do not provide as potent a force to unwind a contract;
that there were no indications that their respective states had incorporated the FTC's regulations
as so central to their own public policy as to render them void, and that the plaintiffs were
essentially seeking to circumvent the bar on private actions to enforce the FTCA. See Vino 100,
864 F. Supp. 2d at 280-281; Holiday Hospitality, 2006 WL 2466819, at *5-6; Crawford, 600 F.
Supp. at 845-46. Therefore, this is not the case where "it is plain that a controversy respecting
the construction and effect of the federal laws is involved and is sufficiently real and
substantial." Grable, 545 U.S. at 316 (internal quotation omitted). 12
In short, it is apparent on the face of the Complaint that Plaintiff is trying to seek a back
door entrance into federal court, by citing a federal regulation with only a tenuous connection to
the contract at issue, and then proffering that regulation as the source for the invalidity of the
entire contract under Pennsylvania law. This case is really about whether Palermo got duped by
Pino as to the source of the gelato product when it entered into the Agreement, and not whether
Pino filled out its paperwork as FTC regulations allegedly required it to do. Whatever remedy
Palermo has for its state law claims of unjust enrichment and fraud in the inducement, it is clear
that the federal courts, when they rely on their "arising under" jurisdiction only, are not the
proper place to adjudicate them. Federal law is among the last on the list of ingredients of this
gelato mix.
Finally, Grable instructs this Court to ask whether allowing federal jurisdiction would
disturb the "congressionally approved balance of federal and state judicial responsibilities." 545

12 Although this Court is without subject matter jurisdiction to render a decision on the merits as to whether Count I
should be dismissed for failure to state a claim, the Court notes that especially given the highly persuasive reasoning
of the other three court opinions that have considered this precise issue, Palermo may well face an uphill battle on
the merits of Count I were it to return to this Court sitting in diversity and press that claim's vitality.

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u.s.

at 314. Franchised businesses are nearly ubiquitous in this state and around the country.

Many of the contractual disputes surrounding franchise agreements (or alleged franchise
agreements, as in this case) are ordinarily plain vanilla state law contract claims. If in cases such
as this, the mere presence of an FTC regulation that might apply to the parties' agreement could
warrant the grant of federal jurisdiction, the risk of a marked shift in the currents of litigation
would be real. As noted above, Congress's unwillingness to create a federal cause of action for a
violation of § 5 of the FTCA is indicative of its view of the proper balance of state versus federal
adjudication of franchise~related contract disputes. The potential for disrupting the

state~federal

balance of the adjudication of contract disputes, considered alongside the oblique relationship of
FTC regulations to the contractual claims here, demonstrates that this case does not implicate a
"substantial" federal law element of a state law claim, and thus does not fit within the narrow
exception carved out by the Supreme Court in Grable. Therefore, the Court concludes that it
lacks subject matter jurisdiction over this case under 28 U.S.C. §§ 1331 and 1337.

C. DIVERSITY JURISDICTION
It appears that on the face of the Complaint there is complete diversity of citizenship of

the parties, see CompI. '11'111-2, but the amount of controversy is at present unknown, leaving the
possibility, though not certainty, of federal jurisdiction under 28 U.S.C. § 1332. 13 Because the
Court has raised and disposed of the issue of subject matter jurisdiction under § 1337 sua sponte,
Plaintiff has not yet been given the opportunity to assert whether there might also be jurisdiction
under § 1332.
The Court believes that in this case, allowing leave to amend is the proper course of
action. In Scattergood v. Perelman, 945 F.2d 618, 627 (3d Cir. 1991), the Third Circuit held that
a district court abused its discretion when, after the court had dismissed the plaintiff s federal law
13

See Onyiuke v. Cheap Tickets, Inc., 435 F. App'x 137, 139 (3d Cir. 2011).

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claims (eliminating the basis for federal question jurisdiction), the court denied a plaintiffs
request for leave to amend to assert federal jurisdiction on the alternate basis of diversity. See id
(citing 28 U.S.C. § 1653 ("Defective allegations of jurisdiction may be amended, upon terms, in
the trial or appellate courts."); Fed. R. Civ. P. l5(a)(2) ("The court should freely give leave [to
amend] when justice so requires.")).

Given the Third Circuit's holding and reasoning in

Scattergood, the Court concludes that it is appropriate to give Plaintiff the opportunity to amend
the Complaint before this case is dismissed from federal court.
Plaintiff shall have thirty (30) days to amend its Complaint if it seeks to allege federal
jurisdiction under 28 U.S.C. § 1332. If, at the end of the thirty days, Plaintiff has not filed any
such amended Complaint, this Court's order dismissing the case for lack of subject matter
jurisdiction will take effect and the case will be dismissed forthwith. An appropriate order will
lssue.

Mark R. Hornak
United States District Judge

Dated: January

cc:

fl,

2013

All counsel of record

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