The opinion of the court was delivered by: CONNER
Plaintiff Levisohn, Lerner, Berger & Langsam ("LLBL") seeks to recover legal fees allegedly owed to it by defendant Medical Taping Systems, Inc. ("MTS") pursuant to a retainer agreement. In its Amended Answer and Counterclaim, Defendant MTS alleges that the agreement is an invalid nonrefundable special retainer or, in the alternative, has been terminated, and seeks recoupment of fees paid in excess of the fair and reasonable value of services actually rendered. Plaintiff moves, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss MTS's amended counterclaim for failure to state a claim upon which relief can be granted. For the reasons discussed below, Plaintiff's motion is granted in part and denied in part.
In 1994, MTS was a start-up company incorporated for the purpose of manufacturing and selling a certain medical product (the "Product"). In connection therewith, MTS retained LLBL to provide intellectual property legal services and to defend MTS against anticipated litigation with Nellcor, a competitor in the field. MTS and LLBL entered into an agreement on September 13, 1994 which outlined their relationship and provided a payment structure specifically tailored for start-up companies (the "Retainer Agreement"). MTS was to pay LLBL a fixed fee equal to 10% of gross revenues received from sales of the Product and other related products. Payments were to be made on a monthly basis over a five-year period with a total cap of $ 1.5 million. The Retainer Agreement further provided that, in the event of termination by either party prior to the expiration of the initial five-year term, LLBL would receive a pro-rated percentage of revenues for the remaining months. For example, if the relationship terminated after 30 of the 60 months, LLBL would be entitled to 10% x 30/60 (or 5%) of gross revenues for the remaining 30 months.
Pursuant to this Retainer Agreement, LLBL defended MTS in litigation with Nellcor and received approximately $ 250,000.00 in legal fees. On May 8, 1997, MTS (without representation by LLBL) entered into a confidential settlement agreement with Nellcor (the "Settlement Agreement"). In exchange for LLBL's cooperation in executing a Consent Judgment, MTS agreed in a letter dated May 21, 1997 to negotiate a fee to LLBL of between 5% and 8% of the settlement amount (the "Letter Agreement").
In the instant action, LLBL alleges that MTS breached the Retainer Agreement and Letter Agreement by refusing to pay LLBL a percentage of the settlement funds. MTS's original Answer contained a breach-of-contract counterclaim which LLBL moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. The court granted LLBL's motion to dismiss the breach-of-contract counterclaim and granted MTS leave to replead it to cure the defects therein. See Levisohn, Lerner, Berger & Langsam v. Medical Taping Systems, Inc., 10 F. Supp. 2d 334, 1998 U.S. Dist. LEXIS 10168, 1998 WL 384887 (S.D.N.Y. June 19, 1998) ("Levisohn I"). MTS filed an Amended Answer, dropping the breach-of-contract counterclaim and alleging instead that the Retainer Agreement is an improper nonrefundable special retainer or, in the alternative, has been terminated. MTS is seeking recoupment of fees paid in excess of the fair and reasonable value of the services actually rendered by LLBL.
I. The Amended Counterclaim Will Be Considered
When the Court granted MTS leave to replead, we suggested that the amended counterclaim "should more specifically state how LLBL allegedly breached the Retainer Agreement and how MTS was damaged by that conduct." Levisohn I, 10 F. Supp. 2d 334, 1998 U.S. Dist. LEXIS 10168, 1998 WL 384887, *9. Instead, MTS chose to eliminate the breach-of-contract counterclaim and include a counterclaim based on new legal theories. In its Amended Answer, MTS asserted the following by way of counterclaim:
1. On or about September 13, 1994, Plaintiff and Defendant MTS entered into an agreement whereby Plaintiff would act as attorney to MTS [i.e., the Retainer Agreement].
2. Said Agreement provides that Plaintiff shall receive as compensation a "pro-rated" share for work done prior to discharge and that Plaintiff shall receive a percentage of gross revenues for a period of time after discharge.
3. The Agreement interferes with Defendant MTS' unbridled right to discharge its attorney and as such, constitutes an improper non-refundable special retainer agreement.
4. Plaintiff has been paid approximately $ 250,000 in fees pursuant to the Agreement.
5. The Agreement is unenforceable under New York law and is violative of public policy.
6. Alternatively, the Agreement has been terminated.
7. Defendant is entitled to return of all amounts paid to Plaintiff in excess of the fair and reasonable value of the services completed by Plaintiff on behalf of MTS.
The amendments to MTS's pleadings clearly fall outside the scope of leave granted by this Court. However, Rule 15(a) of the Federal Rules of Civil Procedure states that leave to amend "shall be freely given when justice so requires." See generally, 3 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 15.14 (3d ed. 1997). Absent circumstances of abuse, delay or prejudice, courts have been urged to allow parties the opportunity to test their claims on the merits and not to dismiss on the basis of mere technicalities. See Foman v. Davis, 371 U.S. 178, 181-182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962); Rachman Bag Co. v. Liberty Mut. Ins. Co., 46 F.3d 230, 234-35 (2d Cir. 1995) (preference to allow amendment). In keeping with the spirit of the Federal Rules of Civil Procedure, the Court hereby retroactively grants MTS leave to amend its pleadings to include the above counterclaim and related affirmative defenses.
LLBL nevertheless contends that there is no legal or factual basis for MTS's amended counterclaim and requests that it be dismissed pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6).
A counterclaim should not be dismissed "unless it appears beyond doubt that the [claimant] can prove no set of facts in support of his claim which would entitle him to relief." Padavan v. United States, 82 F.3d 23, 26 (2d Cir. 1996) (quoting Hughes v. Rowe, 449 U.S. 5, 10, 66 L. Ed. 2d 163, 101 S. Ct. 173 (1980)). All well-pleaded factual allegations will be accepted as true and all reasonable inferences must be drawn in favor of the claimant. See Wright v. Ernst & Young LLP, 152 F.3d 169, 1998 U.S. App. LEXIS 18179, 1998 WL 455600, *4 (2d Cir. 1998). However, "conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." 2 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 12.34 [b] (3d ed. 1997); see also Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1088 (2d Cir. 1995).
III. The Terms of the Retainer Agreement Will Be Considered
In assessing the legal sufficiency of a claim, the Court may consider not only the facts alleged in the pleading at issue, but also any document attached as an exhibit or incorporated by reference. See Fed. R. Civ. P. 10(c); Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991). The Retainer Agreement was attached to LLBL's Complaint as Exhibit A. It was not attached to MTS's Amended Answer; however, this Court finds that it was incorporated by reference. The Amended Answer contains the following statement:
Defendant MTS admits that it entered into a contract ("Contract") with Plaintiff, a copy of which is marked as Exhibit "A" to the Complaint. Allegations as to the terms of the Contract are neither admitted nor denied, as the document speaks for itself.
(See MTS Amd. Ans. P 23). The Retainer Agreement is also referenced repeatedly in the amended counterclaim. (See MTS Amd. Countercl. PP 1-6). Even if the Retainer Agreement is not explicitly incorporated, MTS's Amended Answer "relies heavily upon its terms and effect; therefore, the Agreement is 'integral'" to the amended counterclaim and we may consider its terms in deciding whether MTS can prove any set of facts that would entitle it to relief. Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995). To the extent that MTS's allegations are ...