The opinion of the court was delivered by: Orlofsky, District Judge.
The scope of the case broadened considerably, however, when
Knight and Absolute (collectively "Defendants") filed an answer
with counterclaims. Four of these counterclaims allege wrongdoing
not only on the part of Waterloov, but also by Waterloov's
attorneys. The first counterclaim alleges that Waterloov and its
attorneys engaged in acts of unfair competition by sending
letters to Absolute's customers notifying them that they were
infringing Waterloov's patents by purchasing Absolute gutters.
The other three counterclaims relate to a failed business venture
involving Knight, Waterloov's president and owner, Richard L.
Kuhns ("Kuhns"), and one of Waterloov's attorneys, Raymond R.
Moser, Jr. ("Moser"). Knight alleges that Kuhns and Moser induced
him to invest $16,000 in the start-up of Waterloov International
Corporation ("WIC"), a company established to market Waterloov
gutters in foreign countries, even though Kuhns and Moser knew
that Waterloov gutters were ineligible for foreign patent
protection. Based upon that scenario, the Defendants filed
counterclaims for common law fraud, violations of the New Jersey
Consumer Fraud Act, and attorney malpractice. Moser and
Waterloov's other attorneys, Charles Lee Thomason ("Thomason"),
Emon J. Wall ("Wall"), and the law firm of Thomason & Moser
(collectively "Attorney Defendants"), have filed a motion for
summary judgment on all four counterclaims. Two of the four
counterclaims raise novel issues of law involving the application
of a state-law litigation privilege in a federal question case
and whether New Jersey's Consumer Fraud Act governs the conduct
of the Attorney Defendants in this case.
Knight and Absolute's unfair competition claim requires this
Court to decide whether New Jersey's litigation privilege, a
state-law privilege, is preempted by federal law in a federal
question case. Specifically, I must determine whether New
Jersey's "absolute litigation privilege" protects attorneys who
send notices of patent infringement to third parties when federal
law permits liability to be imposed for the transmittal of such
demand letters on a showing of bad faith. Because the application
of New Jersey's "absolute litigation privilege" in this case does
not conflict with a federal interest or undermine a federal right
and given New Jersey's strong policy interest in the privilege, I
hold that the litigation privilege is not preempted under the
circumstances of this case. As a result, Knight and Absolute
cannot assert an unfair competition claim against the Attorney
Defendants, based solely on the Attorney Defendants' demand
letters. Accordingly, I will grant the Attorney Defendants'
motion for summary judgment on the unfair competition claim.
The Defendants' New Jersey Consumer Fraud Act ("CFA") claim
requires the Court to address the applicability of the CFA to
attorneys as well as investments in start-up companies. I find
that under New Jersey law attorneys are not per se excluded
from liability under the CFA. Rather, a determination of whether
the CFA applies to any professional requires a weighing of
various factors, including an evaluation of the applicable
standards governing the conduct of the professional. I need not
address whether the CFA applies to the attorneys in this case,
however, because I conclude that the CFA is not applicable to
investments in start-up companies. Consequently, I will grant the
Attorney Defendants' motion for summary judgment on the CFA
Finally, I will grant the Attorney Defendants' motion for
summary judgment on the attorney malpractice claim. Under New
Jersey law, a party alleging attorney malpractice must provide
expert witness testimony to establish the duty of care against
which the attorney's actions are to be measured. Because the
Defendants have not provided sufficient expert testimony and
because the standard of care applicable to this case is not so
basic or obvious that expert testimony is unnecessary, the
Attorney Defendants are entitled to summary judgment.
I. Factual and Procedural History
Some of the procedural and factual history of this case has
already been recounted in this Court's opinion in a related
action. See Thomason v. Lehrer, 182 F.R.D. 121, 123-24 (D.N.J.
1998). What follows below describes the facts and procedural
history relevant only to the summary judgment motion currently
before the Court.
On May 16, 1997, Waterloov filed a Complaint alleging patent
infringement by Absolute and Knight, Absolute's owner. In
particular, Waterloov alleged infringement of United States
Patent No. 4,411,110 (the "'110 patent"), of which Waterloov is
the exclusive licensee. See Compl. ¶¶ 7, 9-11 (dated May 15,
According to a Declaration submitted by Kuhns, Knight once sold
Waterloov products as an authorized dealer and manufacturer
representative. See Kuhns Decl. ¶ 7 (dated May 14, 1997).
Knight terminated this relationship in a letter to Kuhns in 1996.
See id. at ¶¶ 7-8. Kuhns alleges that Knight then went into
business for himself, manufacturing, marketing and selling
"Gutter ProTech," a gutter Kuhns claims infringes the '110
patent. Id. at ¶¶ 5-6. Kuhns further accuses Knight of
co-opting Nelson Sensenig ("Sensenig"), a onetime supplier of
gutter components to Waterloov and a successful former Waterloov
dealer, into an exclusive supplier-dealer relationship with
Absolute. See id. at ¶¶ 9, 13, 15. Finally, Kuhns asserts that
Knight lured Ray Vandergrift ("Vandergrift"), another former
Waterloov dealer, into the Absolute stable. See id. at ¶¶ 18.
Waterloov amended its Complaint on July 16, 1997, joining
Sensenig and Vandergrift as Defendants, et alia. See Am. Compl.
¶¶ 4, 6 (dated July 15, 1997). Waterloov noted in the Amended
Complaint that it had sent letters, dated March 20, 1997, to
Sensenig and Vandergrift, giving them notice of their
infringement. See id. at ¶ 27.
Absolute and Knight filed an Answer, Affirmative Defenses and
Counterclaims in response, denying Waterloov's allegations and
asserting claims for declaratory relief. In Count I of their
Answer, Affirmative Defenses and Counterclaims, they demanded
that the '110 patent be declared invalid and uninfringed. See
Answer, Affirmative Defenses and Counterclaims Ct. I (dated July
29, 1997) (hereinafter "Answer I"). They also sought declaratory
judgments that Patent Nos. 5,216,851 and 5,339,575 ("the '851
patent" and "the '575 patent") were invalid, unenforceable, and
uninfringed. See id. Cts. II-III. These patents relate to the
same general technical area as the '110 patent, rain gutter
covers and roof line protectors. See id. at ¶ 60; Att'y Defs.'
Br. Supp. Summ. J. at 2 (filed Feb. 26, 1999).
Waterloov filed a motion to sever and dismiss the claims
asserted against the Additional Counterclaim Defendants, and in
an Unpublished Opinion and Order, this Court granted the
Plaintiff's Motion with respect to three of the Defendants' nine
Counterclaims, finding that because they were directed
exclusively at the Additional Counterclaim Defendants and not at
all at the Plaintiff, the Additional Counterclaim Defendants
could not be properly joined pursuant to Rules 13(h), 19, and 20
of the Federal Rules of Civil Procedure. See Op. and Order
(dated Mar. 31, 1997). These dismissed Counts alleged common law
fraud, violations of the New Jersey Consumer Fraud Act, and legal
malpractice. See Answer I Cts. VII-IX. They were predicated on
the same factual allegations: Knight accused the Additional
Counterclaim Defendants of inducing him to invest $16,000 in the
start-up of WIC even though they knew or should have known that
because Waterloov products had been sold to and used by the
public prior to October 23, 1991, they would never be eligible
for foreign patent protection. See id. at ¶¶ 89-101. The three
Counterclaims were dismissed without prejudice. See Op. and
On April 3, 1998, Absolute and Knight amended their Answer,
Affirmative Defenses and Counterclaims without leave of Court,
asserting all of the same Counterclaims they had previously
alleged but taking care to name Waterloov in all counts. See
First Amended Answer, Affirmative Defenses and Counterclaims Cts.
VII-IX (filed Apr. 3, 1998) (hereinafter "Answer II"). Absolute
and Knight were plainly trying to overcome the Rule 13(h), 19,
and 20 difficulties that triggered the dismissal of these three
Counterclaims just four days earlier.
The Attorney Defendants filed an Answer to Absolute and
Knight's First Amended Answer on April 24, 1998. They demanded
that Counts VII-IX be dismissed with prejudice for having been
improperly interposed, but answered all other allegations and
claims. See Answer to Counterclaim and Affirmative Defenses of
Counterclaim Defendants Charles Lee Thomason, Raymond R. Moser,
Jr., Emon J. Wall, and Thomason & Moser ¶ 5 (filed Apr. 24, 1998)
(hereinafter "Answer to Counterclaim"). Despite having sent a
letter to this Court giving notice of their intent to submit a
dispositive motion, ostensibly to dismiss Counts VII-IX, see
Letter of Charles Lee Thomason (dated Apr. 24, 1998), such a
motion was never filed.
On January 26, 1999, Waterloov filed a Second Amended
Complaint, adding allegations that the Defendants, Sensenig, and
Vandergrift, et alia, infringed the '575 and '851 patents in
addition to the '110 patent. See Second Am. Compl. ¶¶ 2-10,
16-19 (dated Jan. 25, 1999). Allegations concerning the '851
patent were voluntarily dismissed by Waterloov two weeks later.
See Notice of Dismissal of Count III of Second Am. Compl.
(dated Feb. 9, 1999).
On February 22, 1999, after the Attorney Defendants had filed
their papers in support of their motion for summary judgment, the
Defendants filed an answer to Waterloov's Second Amended
Complaint. See Answer, Affirmative Defenses and Counterclaims
(filed Feb. 22, 1999) (hereinafter "Answer III"). Answer III
differed significantly from the Defendants' predecessor answers.
Specifically, Wall was omitted from all counts, Thomason was
alleged to be vicariously and not personally liable on all
Counts, and the law firm of Thomason & Moser was stricken from
Counts VII-IX (although they remained named in Count IV on a
theory of vicarious liability) and the law firm of Thomason
& Spalding was substituted in its stead. Compare Answers I and
II ¶¶ 75-78, 88-101 with Answer III ¶¶ 174-180, 190-207.
Counts IV and VII-IX of Defendants' Counterclaims are the
subject of the Attorney Defendants' pending motion for summary
(1) Count IV: Unfair Competition
This Court has original jurisdiction over Counterclaim IV.*fn2
"The district courts shall have original jurisdiction of any
civil action asserting a claim of unfair competition when joined
with a substantial and related claim under the . . . patent . . .
laws." 28 U.S.C. § 1338(b) (1994). A patent claim is
"substantial" if, on the basis of the pleadings, it is not
frivolous or lacking in substance. See Paine, Webber, Jackson &
Curtis, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
564 F. Supp. 1358, 1373 (D.Del. 1983); General Foods Corp. v.
Struthers Scientific & International Corp., 297 F. Supp. 271, 274
(D.Del. 1969); Jenn-Air Products, Co. v. Penn Ventilator,
283 F. Supp. 591, 595 (E.D.Pa. 1968). A patent claim is "related" if
it is derived from a common nucleus of operative fact. See
General Foods Corp., 297 F. Supp. at 275. The term "related" is
to be interpreted broadly. See Paine, Webber, Jackson & Curtis,
Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 587 F. Supp. 1112,
1114 (D.Del. 1984).
There is no question that Defendants Absolute and Knight have
alleged a substantial patent claim. Counts II and III of their
Answer allege that the '851 and '575 patents are invalid,
unenforceable and not infringed and have been filed in response
to Waterloov's infringement suit concerning the same patents.
Count IV is, moreover, related to Counts II and III. Count IV
alleges unfair competition on the ground that letters sent by the
Attorney Defendants to Sensenig's and Vandergrift's customers
threatening enforcement of the '851 and '575 patents had no
purpose but to "disrupt and interfere with Absolute's business
and to gain an unfair economic advantage for Waterloov." Answer
II ¶ 76. Count IV is related to Counts II and III because the
validity and enforceablity of the '851 and '575 patents will be
critical in determining whether the Attorney Defendants' letters
were sent solely to secure an unfair competitive advantage over
Absolute. Count IV, in other words, arises out of a common
nucleus of operative fact: the validity and enforceability of the
'851 and '575 patents. Thus, jurisdiction over Count IV may be
properly exercised under 28 U.S.C. § 1338(b).
(2) Counterclaims VII-IX: Common Law Fraud, New Jersey Consumer
Fraud Act Violations, Attorney Malpractice
This Court may also exercise jurisdiction over Counts VII-IX,
although on a different ground.*fn3 Jurisdiction cannot be
predicated upon 28 U.S.C. § 1338(b) as Defendants argue, see
Answer III ¶ 151, because
Counts VII-IX do not constitute claims of unfair competition.
Counts VII-IX accuse the Attorney Defendants of common law fraud,
violations of the New Jersey Consumer Fraud Act, and negligence.
The essence of each of these claims is that Waterloov and the
Additional Counterclaim Defendants induced the Defendants to
invest in and become part owners of an international start-up
company, Waterloov International Corporation ("WIC"), established
to market Waterloov products abroad even though they knew or
should have known that it would be impossible to secure foreign
patent protection. It is difficult to see how these claims fit
within the rubric of unfair competition. Courts have
characterized many different types of claims as claims of unfair
competition. See, e.g., O'Brien v. Westinghouse Elec. Corp.,
293 F.2d 1 (3rd Cir. 1961) (accusation charging the
misappropriation of trade secrets treated as a claim for unfair
competition); Hook v. Hook & Ackerman, Inc., 233 F.2d 180 (3rd.
Cir. 1956) (copying the appearance of another's patented product
construed to be a claim for unfair competition); General Foods
Corp. v. Struthers Scientific & International Corp., 297 F. Supp. 271
(D.Del. 1969) (allegations that defendant wrongfully
appropriated information from the plaintiff and used that
information to secure two patents characterized as claims for
unfair competition); Trio Process Corp. v. L. Goldstein's Sons,
Inc., 250 F. Supp. 926 (E.D.Pa. 1966) (false statements by
defendant that plaintiff's invention was his own formed basis for
unfair competition claim). Nonetheless, there is scant evidence
that courts are willing to characterize claims essentially
alleging fraud as claims for unfair competition.
Jurisdiction must be found elsewhere, and given that
diversity*fn4 jurisdiction does not exist between the parties
and that Counts VII-IX do not raise federal questions,
28 U.S.C. § 1367 is the only potential basis for jurisdiction.*fn5 Before
this Court can determine whether supplemental jurisdiction
applies to Counts VII-IX, however, it must first address the
pivotal question of whether Counts VII-IX should be characterized
as compulsory or permissive counterclaims. As the Third Circuit
It is stated frequently that the determination of
ancillary jurisdiction of a counterclaim in federal
court must turn on whether the counterclaim is
compulsory within the meaning of Rule 13(a). . . .
What is meant is that the issue of the existence of
ancillary jurisdiction and the issue as to whether a
counterclaim is compulsory are to be answered by the
same test. It is not a coincidence that the same
considerations that determine whether a counterclaim
is compulsory decide also whether the court has
ancillary jurisdiction to adjudicate it. The tests
are the same because Rule 13(a) and the doctrine of
ancillary jurisdiction are designed to abolish the
same evil, viz., piecemeal litigation in the federal
Great Lakes Rubber Corp. v. Herbert Cooper Co., 286 F.2d 631,
633-34 (3rd Cir. 1961); see also Phillips Petroleum Co. v.
United States Steel Corp., 566 F. Supp. 1093, 1096-97 (D.Del.
A counterclaim is compulsory if "it arises out of the
transaction or occurrence that is the subject matter of the
opposing party's claim." Fed.R.Civ.P. 13(a). Courts have held
that the Rule 13 standard is satisfied when a "logical
relationship" can be established between a counterclaim and one
of the claims brought by the opposing party. Great Lakes Rubber
Corp., 286 F.2d at 634. Several factors should be considered in
evaluating whether a logical relationship exists, including
whether separate trials of the different claims would involve a
substantial duplication of effort and time and whether the claims
and counterclaims involve many of the same factual and legal
issues or factual and legal issues that are offshoots of the same
basic controversy. See id.; see also Xerox Corp. v. SCM Corp.,
576 F.2d 1057, 1059-60 (3rd Cir. 1978). "`Transaction or
occurrence' should be interpreted broadly; it is unnecessary that
the facts be from the same time or that exactly the same facts
will resolve the issues in the complaint and the counterclaim."
Centennial School District v. Independence Blue Cross,
885 F. Supp. 683, 685 (E.D.Pa. 1994); see also Metallgesellschaft AG
v. Foster Wheeler Energy Corp., 143 F.R.D. 553, 558 (D.Del.
1992). Finally, the "logical relation" inquiry is a
fact-intensive, case-specific one, resisting the categorization
of different couplings of claims and counterclaims as necessarily
compulsory or permissive, see Xerox Corp., 576 F.2d at 1060,
although "[a]ny counterclaim involving the same patent as
involved in the original action usually is considered to arise
from the same transaction as the main claim." 6 Charles Alan
Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and
Procedure § 1410, at 73 (2nd ed. 1990).
This Court is satisfied that Counts VII-IX are compulsory
counterclaims. In Count II of its Second Amended Complaint,
Waterloov asserts that the '575 patent is valid and has been
infringed by the Defendants. The Defendants counter that they
have not infringed the '575 patent because the '575 patent is
invalid. They claim that gutters embodying the '575 patent were
advertised and sold to the public more than a year before
Waterloov filed an application for United States patent
protection — a fact that, if true, would render the patent
invalid for failing to meet the novelty requirements of United
States patent law. See 35 U.S.C. § 102 (1994).*fn6 Central to
a determination of the validity of the '575 patent is an
assessment of when, if at all, gutters embodying the '575 patent
were put to an invalidating public use.
A decision to label a counterclaim as compulsory is a decision
to exercise supplemental jurisdiction over that counterclaim
pursuant to 28 U.S.C. § 1367. The only question that remains,
then, is whether, the Defendants, given their amendment to their
counterclaims, have properly joined the Attorney Defendants. I
conclude they have.
Rule 13 permits persons not made parties in an original action
to be joined for the purposes of a counterclaim if they meet the
requirements set forth in Rules 19 and 20. See Fed.R.Civ.P.
13(h). Rule 20 states that parties may be joined as defendants
"if there is asserted against them . . . any right to relief in
respect of or arising out of the same transaction, occurrence, or
series of transactions or occurrences and if any question of law
or fact in common to all defendants will arise in the action."
Fed.R.Civ.P. 20(a). Courts have interpreted Rule 20(a) to
establish a two-part test and require both parts to be met for
joinder to be permitted: First, claims brought against defendants
to be joined must stem from the same transaction or occurrence,
and, second, they must share a common question of law or fact.
See Morris v. Paul Revere Insurance Group, 986 F. Supp. 872,
885-86 (D.N.J. 1997); Dougherty v. Mieczkowski, 661 F. Supp. 267,
277-78 (D.Del. 1987); Mesa Computer Utilities, Inc. v.
Western Union Computer Utilities, Inc., 67 F.R.D. 634, 636
(D.Del. 1975). Courts have held that the first prong of this test
requires an inquiry identical to the "logical relation" inquiry
under Rule 13(a). See Dougherty, 661 F. Supp. at 278; King v.
Pepsi Cola Metropolitan Bottling Co., 86 F.R.D. 4, 5-6 (E.D.Pa.
1979). Counts VII-IX easily satisfy these joinder requirements.
The Defendants are seeking relief against the Attorney Defendants
on the same basis they are seeking relief against Waterloov. They
claim that the Attorney Defendants, like Waterloov, either knew
or should have known that the inventions produced from the '575
patent had been publicly disclosed in a way that would prevent
WIC from ever obtaining foreign patents for the Waterloov gutter
protection system. Because identical transactions, questions of
law, and questions of fact are at issue for all of the Additional
Counterclaim Defendants, joinder of the Attorney Defendants is
B. The Defendants' Amendment of Their Answer, Affirmative
Defenses, and Counterclaims
Counsel for the Attorney Defendants contends that the
Defendants amended their answer and counterclaims improperly
because they did not first seek leave of court. See Answer to
Countercl. ¶ 5; Att'y Defs.' Br. Supp. Summ. J. at 1. The
Defendants respond by characterizing their initial omission of
Waterloov from their counterclaims as a mere "clerical error."
Defs.' Mem. Opp'n Summ. J. at 2 (filed Feb. 26, 1998).
The Defendants' amendment was permissible. "A party may amend
the party's pleading once as a matter of course at any time
before a responsive pleading is served. . . . Otherwise a party
may amend the party's pleading only by leave of court or by
written consent of the adverse party." Fed.R.Civ.P. 15(a). A
motion to dismiss is not a responsive pleading within the meaning
of Rule 15. See Hewlett-Packard Co. v. Arch Assoc. Corp., 172
F.R.D. 151, 153 (E.D.Pa. 1997) (citing Fed. R.Civ.P. 7(a));
Schnabel v. Bldg. & Construction Trades Council of Phila., 563
408 F. Supp. 1030, 1035 (E.D.Pa. 1983). Courts have held generally
that a party may amend its pleading without seeking leave of
court after the pleading has been dismissed, as long as the
amendment is made within a reasonable time and no responsive
pleading has been served. See id. (citing 6 Charles A. Wright,
Arthur R. Miller & Mary Kay Kane, supra, § 1483 & n. 19 (1990)
In Hewlett-Packard, three defendants, described collectively
in the opinion as the "Jewell Defendants," filed an answer with
counterclaims in response to a complaint by Plaintiff
Hewlett-Packard ("HP"). See id. at 152. The court dismissed the
Jewell Defendants' counterclaims without prejudice. See id.
Fifteen months after their counterclaims had been dismissed and
after a long and contentious discovery process, the Jewell
Defendants filed an amended answer with counterclaims without
seeking leave of court. See id. The counterclaims were
"essentially the same" as those filed initially, except that they
added an additional counterclaim under the Robinson-Patman Act
and omitted two others. Id. HP immediately filed a motion to
dismiss or strike the amended answer and counterclaims. See id.
at 153. The court held that the Jewell Defendants should have
sought leave of court because 15 months had passed between the
dismissal of their original counterclaims and the filing of their
amended counterclaims. See id. Finding that Rule 15 "requires
parties to litigate their cases diligently and serves the
interest of finality," the court ruled that it would have
undermined these interests to have permitted an amendment as a
matter of course under those circumstances. See id.
The circumstances in Hewlett-Packard are strikingly similar
to the circumstances in this case, with a notable exception,
which compels me to reach a different conclusion. Here, as in
Hewlett-Packard, the Defendants filed a counterclaim that was
dismissed without prejudice and later sought to amend their
answer by re-alleging "essentially the same" counterclaims
without seeking leave of court. Moreover, the amendments in both
cases were made before a responsive pleading had been made.
In the instant case, however, the Defendants filed their
amended counterclaims within days of the Court's dismissal.*fn9
Consequently, there is no risk that the interests in diligent
litigation and finality outlined in Hewlett-Packard would be
sacrificed if, in this case, Defendants' amended answer and
counterclaims were found to be permissible pursuant to Rule
15(a). Nor have the Additional Counterclaim Defendants in this
case faced the degree of prejudice HP would have faced had the
amended counterclaims been permitted in that case. Had the Jewell
Defendants' amendment been allowed, HP would have had to complete
months more of discovery. See id. at 154-55. In this case, the
Additional Counterclaim Defendants were served with the amended
counterclaims shortly after having briefed the question of
whether the original counterclaims should have been dismissed.
They had the opportunity to avoid the additional discovery they
had to perform. They could have filed a motion to dismiss,
however, they never ...