Appeal from a judgment of the United States District Court for the Southern District of New York (David N. Edelstein, Judge), dismissing plaintiff's action for lack of subject matter jurisdiction, denying plaintiff leave to file an amended complaint, and imposing sanctions against plaintiff, its counsel, and the law firm of which plaintiff's counsel was formerly a member, pursuant to Fed.R.Civ.P. 11. Affirmed in part, reversed in part, and remanded.
Pratt and Altimari, Circuit Judges, and Raggi, District Judge.*fn*
Plaintiff-appellant Official Publications, Inc. ("Official") appeals from a judgment of the United States District Court for the Southern District of New York (Edelstein, J.), which dismissed its action against defendant-appellee Kable News Co. ("Kable"), denied its motion to replead a RICO claim, and imposed sanctions. Official brought the underlying action charging Kable with violations of RICO, the Robinson-Patman Act, and pendent state law claims. The district court granted Kable's motion for summary judgment having found, inter alia, there was no diversity jurisdiction, plaintiff lacked standing to sue under the Robinson-Patman Act, and plaintiff's allegation of a RICO violation had not been pleaded with the specificity required by Fed.R.Civ.P. 9(b). Official Publications, Inc. v. Kable News Co., 692 F. Supp. 239 (S.D.N.Y. 1988). On this appeal, Official concedes it made certain pleading errors, but contends it stated colorable Robinson-Patman and RICO claims. Official further contends it should have been given an opportunity to cure the purported Rule 9(b) defect. Along with attorney Barry I. Fredericks, plaintiff argues that the complaint was sufficiently grounded in law and fact to preclude the imposition of sanctions. The law firm of Certilman, Balin, Adler & Hyman ("Certilman") asserts that exceptional circumstances exist that militate against holding it responsible for sanctions imposed on Official and Fredericks.
The judgment of the district court is affirmed with respect to dismissal of plaintiff's RICO and Robinson-Patman Act claims. However, because we find plaintiff should have been permitted to replead its RICO claim, and because sanctions were not warranted on the facts of this case, we reverse the judgment of the district court with respect to these issues and remand for further proceedings.
We will summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal. We assume the reader's familiarity with the district court's opinion, referred to above.
A. Distribution Agreements
At issue in this dispute are two distribution agreements, dated 1974 and 1980, between Official and Kable. Beginning in 1961, Kable contracted to act as sole nationwide distributor of Official's magazines. As distributor, Kable purchased magazines from Official for resale to its own customers, who are wholesalers located throughout the United States and abroad. Under the agreement, Kable was entitled to grant some of its wholesale customers various credits and discounts, collectively known as "special allowances." Special allowances were granted to certain wholesalers who purchased Official's magazines from Kable where warranted by the wholesalers' high transportation and/or labor costs. Official was contractually obligated to reimburse Kable for its special allowance expenditures.
Early versions of the agreement contained clauses that expressly stated the amounts of special allowances that Kable was entitled to grant to its wholesalers. In addition, the agreements specified the geographical locations where special allowance programs could be undertaken. The 1974 and 1980 agreements, as amended, provided that Official was to "reimburse [Kable] for any and all allowances made by [Kable] to any of its sales outlets in locations where special labor conditions and/or other situations and conditions causing such allowances exist." 1974, 1980 Kable News Co. Distribution Contract paras. 1(h), 1(h). There was no clause in the amended agreements detailing the amount of special allowances that Kable was permitted to offer to wholesalers. The contracts did not specify which labor or other special situations would trigger the grant of special allowances. In addition, the agreements omitted the geographical markets where discounts were permitted. Thus, the contracts appeared to permit Kable to grant special allowances in its sole discretion, without limitation, and to charge any and all of the allowances back to Official.
In 1983 or early 1984, Official requested that Kable render a settlement statement particularizing its special allowances. In response, Kable sent Official computer printouts detailing by name the wholesalers to whom it granted discounts, the type of discounts given, and the amount of each wholesaler's discount. After receiving the detailed printouts, Official began to suspect that Kable had granted allowances which were not justified by wholesaler transportation or labor costs. Accordingly, Official commenced the underlying action in the Southern District of New York.
Official retained Barry I. Fredericks, Esq., a member of the law firm of Goldschmidt, Fredericks & Oshatz, for the purpose of pursuing the litigation. Several months later Fredericks joined the Certilman firm as head of the firm's litigation department. While at Certilman, Fredericks personally supervised the litigation against Kable. With one exception, Fredericks signed all of the papers relevant to the instant appeal.
Official's original complaint, filed February 22, 1985, named Kable News Co. as the sole defendant. The complaint pleaded diversity jurisdiction on the basis that Kable was a Delaware corporation having its principal place of business in Mount Morris, Illinois. The complaint also pleaded federal question jurisdiction. As relevant to this appeal, plaintiff alleged that Kable violated §§ 2 (a) and (d) of the Robinson-Patman Antidiscrimination Act, 15 U.S.C. §§ 13(a) and (d) ...