Despite The Festive Use Of Colorful Felt, Pine Cones And A Glue Gun, Martha Stewart Living Omnimedia, Inc. Is Denied Summary Judgment – Implied Covenant Of Good Faith And Fair Dealing Be DamnedPrint Article
- Posted on: Apr 12 2018
Sometimes in litigation, the facts get in the way of the desired results. Such was the case for the defendant in Age Group, Ltd. v. Martha Stewart Living Omnimedia, Inc. (April 12, 2018), in which the First Department affirmed Supreme Court’s denial of defendant’s motion for summary judgment seeking to dismiss plaintiff’s causes of action sounding in breach of contract and breach of the implied covenant of good faith and fair dealing.
The facts are set forth in Supreme Court’s Decision and Order (Kornreich, J). Briefly stated, defendant, Martha Stewart Living Omnimedia, Inc. (“MSLO”), and plaintiff, Age Group, Ltd. (“AGE”), entered into a four-year licensing agreement (the “MSLO Agreement”) to market, manufacture and sell Martha Stewart branded pet products to pre-approved distributors. In furtherance thereof, AGE entered into a four-year agreement with PetSmart (temporally coincident with the MSLO Agreement) (the “PetSmart Agreement”), pursuant to which PetSmart was to purchase MSLO Pet Products from AGE. If the MSLO agreement was not renewed at the end of its term, AGE would not be permitted to sell pet products to PetSmart or other distributors. The MSLO Agreement expired by its terms on December 31, 2013 and was not extended.
AGE alleged that, as a result of MSLO’s realization that it “grossly undervalued the profit potential of its [p]et [p]roducts”, “MSLO interfered with [AGE’s] ability to timely produce [p]et [p]roducts so that PetSmart would grow frustrated with [AGE] and ultimately wish to contract directly MSLO” after the PetSmart Agreement ended. MSLO’s plan, AGE argued, would frustrate the purpose of the MSLO Agreement, which was to “maximize revenue in the first four years and develop a long term profitable relationship.”
In addition, it was alleged that MSLO not only refused to approve AGE’s designs, it improperly injected itself into the design and pricing of the pet products – duties that were within AGE’s province. MSLO allegedly designed “overpriced” and “inferior” products and then blamed AGE. According to AGE, MSLO’s actions were intended to frustrate AGE’s performance and to make it appear that AGE “lacked the capacity to deliver quality, low price [p]et [p]roducts, using this outcome to convince PetSmart that it should cut [AGE] out of the process before the expiration of the MSLO Agreement.” (Some brackets in original.) In this regard, AGE claims that MSLO unilaterally promised PetSmart designs that could not be manufactured at a price acceptable to PetSmart and vetted those designs with PetSmart without participation from AGE. MSLO also sent PetSmart disparaging e-mails about AGE.
Finally, as a result of some pressure from PetSmart, it is alleged that MSLO frustrated AGE’s ability to sell pet products to any other contractually approved retailer by, inter alia, indicating that it would reject any designs for pet products that AGE intended to sell to retailers other than PetSmart.
Supreme Court, for the most part, denied MSLO’s summary judgment motion. Regarding the covenant of good faith and fair dealing claim, Supreme Court held that there were factual issues precluding summary judgment, including “whether MSLO’s statement that, despite the MSLO Agreement permitting AGE to design and sell [p]et [p]roducts to certain retailers other than PetSmart, MSLO breached its implied covenant of good faith and fair dealing by declaring that it would not approve Pet Products for retailers other than PetSmart.” (Citation omitted.)
The First Department unanimously affirmed Supreme Court. As to MSLO good faith, the Court stated:
The court correctly found that issues of fact exist as to whether defendant breached the agreement by saying that it would not approve any new designs. While defendant was permitted to refuse any design on subjective grounds such as personal taste and sensibilities, it was nevertheless obligated to exercise its refusal in good faith, based on dissatisfaction genuinely and honestly arrived at. The examination of such a state of mind is for a jury.
As to damages, the First Department agreed with Supreme Court that “plaintiff may recover lost profits, since plaintiff submitted evidence supporting its claim that such damages were caused by defendant’s alleged breach of the parties’ contract, are capable of proof with reasonable certainty, and were fairly within the contemplation of the parties at the time the contract was made.” (Citations omitted.)
The factual allegations in the AGE case strongly suggest that MSLO sought to frustrate AGE’s ability to realize the benefit of its bargain. Allegations of such bad faith tactics are sufficient to preclude summary judgment in favor of the allegedly breaching party.