Polymer Dynamics, Inc. v. Bayer Corporation, CIVIL ACTION NO. 99-4040 (E.D. Pa. 8/14/2000)

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POLYMER DYNAMICS, INC. v. BAYER CORPORATION.

CIVIL ACTION NO. 99-4040.

United States District Court, E.D. Pennsylvania.

August 14, 2000.

MEMORANDUM

WALDMAN, Judge.

I. Introduction

Plaintiff Polymer Dynamics, Inc. ("PDI") asserts a civil RICO claim under 18 U.S.C. § 1962(c) and supplemental state law claims of fraud, negligent misrepresentation, breach of contract, breach of fiduciary duty, misappropriation of trade secrets and unfair competition. Presently before the court is defendant's Motion to Dismiss the RICO claim and four of the state law claims, as well as the prayer for lost profits and other consequential damages.

II. Legal Standard

The purpose of a Rule 12(b)(6) motion is to test the legal sufficiency of a complaint. See Sturm v. Clark, 835 F.2d 1009, 1011 (3d Cir. 1987). In deciding such a motion, the court accepts as true the factual allegations in the complaint and reasonable inferences therefrom, and views them in a light most favorable to the nonmovant. See Rocks v. Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989). The court may also consider exhibits appended to the complaint, documents integral to the complaint or upon which it is based and matters of public record. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997); Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n. 2 (3d Cir. 1994); Pension Benefit Guaranty Corp. v. White Consolidated Industries, Inc., 998 F.2d 1192, 1196 (3d Cir. 1993).¹ Dismissal of a claim is appropriate only when it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him to relief on that claim. See Hishon v. King & Spaulding, 467 U.S. 69, 73 (1984); Robb v. Philadelphia, 733 F.2d 286, 290 (3d Cir. 1984).

III. Facts

As alleged by plaintiff the pertinent facts are as follow.

PDI is a Pennsylvania corporation headquartered in Allentown. PDI manufactures polyurethane-based insoles and outsoles which it sells to shoe manufacturers. PDI has developed molding technology for the small polyurethane parts market.

Bayer Corporation ("Bayer") is an Indiana corporation with its principal place of business in Pennsylvania. It operates through various divisions. Those involved in this case are Hennecke Machinery and Bayer Financial Services.² Bayer AG is Bayer's German parent corporation. It is the leading manufacturer of polyurethane raw materials, formulations and machinery in the world.

PDI was in search of machines that could inject and mix polyol and isocyanate chemicals quickly. After several months of negotiations and discussions of written proposals, Bayer and PDI contracted in 1996 for the sale of two Polyurethane Machines. The contract contained a limitation of liability provision excluding recovery of lost profits and other consequential damages in contract or tort.

Hennecke Machinery manufactured the metering and mixing systems and machinery which Bayer sold to PDI. The systems and machinery were manufactured and sold under United States and foreign patents held by Bayer AG and its affiliate Maschinenfabrik Hennecke Gmbh ("Hennecke Gmbh"). These systems and machinery, and the accompanying services, were represented by Bayer to plaintiff to meet its specific requirements. Bayer delivered these machines in May 1996.

In August 1996, the parties entered into negotiations for the acquisition of three additional machines. In May 1997, PDI entered into a lease-purchase agreement with Bayer Financial Services to finance the acquisition of the three new Polyurethane Machines and Motoman Robots. The agreement called for a $300,000 down payment to be followed by 48 monthly payments of $19,625 and a $1 buyout. These machines were delivered to PDI in June 1997. After plaintiff refused to make its lease payments in full because of the inadequate and defective nature of the equipment, Bayer Financial declared PDI's lease in default on October 30, 1998. Plaintiff claims that this declaration was false in that Bayer and Bayer Financial knew the systems and machinery were inadequate and defective. Ultimately, Bayer filed a replevin action in May 1999 to seize the machines. Plaintiff then paid Bayer an agreed upon amount for the machines which plaintiff had by then substantially modified at great expense. In total, PDI paid Bayer and Bayer Financial Services in excess of $4,000,000 for the five systems and machinery, parts, chemicals and finance charges on the equipment lease.

The five machines supplied by Bayer were defective and continually failed to perform their intended function. Plaintiff began complaining about various aspects of the equipment soon after the first two machines were delivered. Throughout the next few years, plaintiff continued to experience severe problems with the machines. Defendant and other members of the alleged enterprise made false assurances of quality and misrepresentations regarding the success of repairs. In response to plaintiff's complaints, Bayer scheduled visits for PDI to Hennecke Machinery in September 1997 ostensibly to obtain technical assistance but then denied plaintiff access to any machine shop. Bayer AG then arranged in 1998 for evaluations of PDI's equipment by its German technical staff, however, the problems with the equipment continued after these evaluations.

Defendant misrepresented to plaintiff that the machines would meet PDI's requirements, that problems with the machines were being resolved, that the machines were built according to specifications and that any problems experienced by plaintiff were the result of its chemical formulations. Defendant failed to disclose that the machines would not perform properly, that the nozzles had a useful life of only a few days, that the system provided was incapable of meeting plaintiff's requirements, and that the pertinent patents were not followed in the manufacture of the machines. Defendant also "held out to plaintiff promises of a partnership and future business from Bayer."

In reliance, plaintiff invested millions of dollars in purchase and finance costs for defective machinery, and exchanged confidential commercial information with defendant which was used by it and its affiliates for their commercial advantage.³ Bayer incorporated PDI technology into new machinery for sale to Bayer customers and used confidential information obtained from plaintiff to modify systems and machinery made by defendant for other customers. Defendant thus enhanced its position to compete with plaintiff and has solicited its customers.

Between 1995 and 1998, plaintiff received 49 mailings and 16 interstate telephone calls from Bayer, Hennecke Machinery and Bayer Financial related to the acquisition, financing or servicing of the machinery in question or seeking payment of amounts overdue under the lease.

IV. Discussion

A. Plaintiff's RICO Claim

To sustain a civil RICO claim under 1962(c), a plaintiff must show the existence of an enterprise affecting interstate commerce; that the defendant was employed by or associated with the enterprise; that the defendant participated in the conduct of the affairs of the enterprise; and, that the defendant did so through a pattern of racketeering activity which included at least two predicate acts. See Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985); Annulli v. Panikkar, 200 F.3d 189, 198 (3d Cir. 1999). To satisfy the participation requirement, a defendant must participate in the operation or management of the RICO enterprise. See Reves v. Ernst & Young, 507 U.S. 170, 185 (1993). A plaintiff has standing and can recover only to the extent that he has been injured in his business or property by the conduct constituting the violation. Sedima, 473 U.S. at 496.

Defendant challenges virtually every aspect of plaintiff's RICO claim. Defendant argues that plaintiff has failed to set forth a scheme to defraud to support the alleged predicate acts of mail and wire fraud, has failed to show a "pattern" of racketeering activity and has failed to plead a distinct RICO enterprise the affairs of which defendant conducted through such a pattern.

Plaintiff essentially claims that defendant knowingly provided non-conforming and defective machinery to plaintiff and lulled it with false representations regarding repair to secure more business and ultimately to obtain millions of dollars, and induced plaintiff with false promises of a business relationship to share valuable confidential commercial information which defendant misappropriated. Plaintiff sets forth numerous mailings and interstate wire communications made by defendant in furtherance of this activity. Plaintiff has pled predicate acts of mail and wire fraud sufficient to survive a motion to dismiss. See Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1415 (3d Cir. 1991); Schuylkill Skyport Inn, Inc. v. Rich, 1996 WL 502280, *14 (E.D.Pa. Aug. 21, 1996).

To establish a pattern of racketeering activity, a plaintiff must show that the racketeering acts are related and amount to or pose a threat of continued unlawful activity. H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239 (1989); Kehr Packages, 926 F.2d at 1412.

Racketeering acts are related if they have the same or similar purposes, results, participants, victims, or methods of commission, or are otherwise "interrelated by distinguishing characteristics and are not isolated events." H.J. Inc., 492 U.S. at 240; Tyler v. O'Neill, 994 F. Supp. 603, 615 (E.D.Pa. 1998), aff'd, 189 F.3d 465 (3d Cir. 1999), cert. denied, 120 S.Ct. 981 (2000).

Continuity refers to a closed period of repeated conduct or past conduct that by its nature projects into the future the threat of repetition. H.J. Inc., 492 U.S. at 241-42; Tyler, 994 F. Supp. at 615. Continuity over a closed period may be demonstrated by a series of related predicate acts extending over a substantial amount of time. H.J. Inc., 492 U.S. at 241-42; Tyler, 994 F. Supp. at 615.

The acts...