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Sokoloff v. General Nutrition Companies

May 21, 2001

ERIC SOKOLOFF, ET AL., PLAINTIFFS,
v.
GENERAL NUTRITION COMPANIES, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Simandle, District Judge

OPINION

This claim for attorney's fees and costs is before the Court on the motion of defendants, GNC Franchising, Inc., and General Nutrition Companies, Inc., who seek such fees and costs pursuant to Rule 54(d), Fed. R. Civ. P. The plaintiffs' claims in the underlying case, which would have required this Court to interpret the terms of a Franchising Agreement between the parties, were dismissed on August 18, 2000, when this Court granted plaintiffs' motion to voluntarily dismiss the action. By consent of the parties, the claims were dismissed with prejudice, subject to an agreement that defendants were not barred from seeking counsel fees arising from the Franchise Agreement in this or another action, and plaintiffs were not barred from raising any appropriate defenses to such an action. Defendants GNC Franchising, Inc. ("GNC Franchising"), and General Nutrition Companies, Inc. ("GNCI") (collectively, the "GNC Defendants"), now move for an award of attorney's fees and litigation-related costs pursuant to Rule 54(d)(2)(A).

The principal issue to be addressed is whether a defendant, which has asserted no counterclaim for attorney's fees and costs, may nonetheless invoke Rule 54(d)(2)(A) to recover same as contractual damages under the parties' contractual fee-shifting provision, or whether, alternatively, the defendants' remedy must lie in a separate action for contractual damages under relevant state law, in this case the law of New Jersey. For the reasons stated herein, the Court finds that, under the applicable state law, defendants' claim for contractual fee-shifting must be pleaded and tried as an item of contractual damages and not by way of motion under Rule 54(d)(2)(A), and the motion of the GNC Defendants will be dismissed without prejudice.

I. BACKGROUND

Plaintiffs Eric and Heidi Sokoloff own and operate a General Nutrition Center store in Delran, New Jersey, selling vitamins, mineral supplements, and other health related products manufactured by defendant GNCI, pursuant to a franchising agreement with GNC Franchising. On February 9, 2000, plaintiffs filed a complaint in this Court against the GNC Defendants and Rite Aid Corporation ("Rite Aid") and moved for a preliminary injunction, alleging that the GNC Defendants breached their franchise agreement with plaintiffs by allowing defendant Rite Aid to sell PharmAssure vitamins manufactured by GNC within plaintiffs' "protected territory," as set forth in the franchise agreement. On March 15, 2000, the GNC Defendants filed their opposition and a cross-motion to transfer venue to the Eastern District of Pennsylvania. The primary dispute between plaintiffs and the GNC Defendants was the meaning of contractual language in the Franchise Agreement and whether the sale of PharmAssure brand products by Rite Aid within the protected area violated that agreement.

On March 31, 2000, this Court issued an opinion in Kazmierski v. General Nutrition Co., Inc., No. 99-5281, slip op. (D.N.J. Mar. 31, 2000)(Simandle, J.), which interpreted a franchise agreement identical to the one at issue in the instant case, and permitted the sale of PharmAssure brand products within the Kazmierski franchisee's protected territory. Id. at 8-9. On April 6, 2000, the GNC Defendants transmitted a copy of the Kazmierski opinion to plaintiffs and requested that they withdraw their motion for a preliminary injunction. (Defs.' Br. at 2.) Depositions were taken on April 11, 2000, and the GNC Defendants again requested that the motion be withdrawn. (Defs.' Br. at 2-3.) Plaintiffs declined both requests. On April 20, 2000, the GNC Defendants withdrew their motion to transfer venue. On May 4, 2000, pursuant to a Court approved agreement, the GNC Defendants filed a supplemental brief, emphasizing plaintiffs' inability to meet their burden of proof, in lieu of an evidentiary hearing. No opposition was filed by plaintiffs. On May 22, 2000, this Court heard oral arguments and denied plaintiffs' motion for a preliminary injunction against the GNC Defendants. An opinion and order were issued on June 12, 2000, granting defendant Rite Aid's motion to dismiss and finding that plaintiffs failed to prove a likelihood of success on the merits or irreparable harm to them if the preliminary injunction were not granted, and that the GNC Defendants would be harmed by the granting the preliminary injunction motion.

On July 20, 2000, plaintiffs submitted a motion to voluntarily dismiss their claims against the GNC Defendants without prejudice, pursuant to Rule 41(a)(2), Fed. R. Civ. P. The GNC Defendants objected to the plaintiffs' motion to voluntarily dismiss their claims without prejudice unless attorney's fees were included as a condition of the dismissal order. After extensive negotiations between the parties, plaintiff agreed to voluntarily dismiss their claims with prejudice. On August 18, 2000, prior to granting plaintiffs' Rule 41(a)(2) motion, this Court had a telephone conference with all counsel, during which the issue of attorney's fees was discussed:

MR. SCHUMACHER: Your Honor, Mr. Soffian has agreed to dismiss the plaintiffs' case with prejudice. The GNC defendants have agreed that the case can be dismissed with prejudice provided it's clearly understood that the GNC defendants are not waiving or otherwise compromising their right to seek counsel fees or any other remedies that may be available to them in this action or any other action.

THE COURT: Okay. Mr. Soffian, do you agree?

MR. SOFFIAN: I agree. And it's also conditioned upon the fact that plaintiffs are not prevented from raising any factual, legal or procedural defenses available to them in this ir another litigation.

THE COURT: All right. In other words, plaintiffs are not conceding that any attorney fees are available, is that correct?

MR. SOFFIAN: That's correct.

MR. SCHUMACHER: As I understand what Mr. Soffian is saying, the plaintiffs are not waiving any of these rights with respect to defenses to the counsel fees or any other future remedies which GNC defendants may pursue.

MR. SOFFIAN: Or whatever other remedies plaintiffs might pursue.

MR. SCHUMACHER: Judge, I have a question on any remedies the plaintiff might pursue. The plaintiff is dismissing their case with prejudice.

MR. SOFFIAN: I'm talking about your case for counsel fees.

MR. SCHUMACHER: That's all I'm trying to clarify.

THE COURT: I'm going to enter an order then that dismisses the case with prejudice subject to the agreement which counsel have placed in the record this morning. (Tr., Aug. 18, 2000, at T 2:25 to T 4:9).

On August 18, 2000, this Court entered an Order granting plaintiffs' motion for voluntary dismissal of their claims and dismissing the action with prejudice, subject to the above-quoted agreement regarding defendants' ability to seek, and plaintiffs' ability to defend against, claims for attorney's fees in this or another action, pursuant to the contractual fee-shifting terms of the Franchise Agreement.

On August 21, 2000, this action was closed. On September 20, 2000, the GNC Defendants filed the instant motion for attorney's fees and costs pursuant to Rule 54(d), Fed. R. Civ. P. as a prevailing party. For the reasons stated herein, the GNC Defendants' Rule ...


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