Opinion ID: 2469348
Heading Depth: 2
Heading Rank: 3

Heading: Count III: Breach of Contract for Failure to Negotiate in Good Faith

Text: Under New York law parties who enter into binding preliminary agreements, such as Section 5 of the SOW, accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement.... Teachers Ins. & Annuity Ass'n of Am. v. Tribune Co., 670 F.Supp. 491, 498 (S.D.N.Y.1987). These agreements do not commit the parties to reach their ultimate contractual objective; instead, such agreements create an obligation to negotiate the open issues in good faith in an attempt to reach the ... objective within the agreed framework. Adjustrite Sys., Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543, 548 (2d Cir.1998) (quotation marks omitted). This obligation bars a party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement. Tribune, 670 F.Supp. at 498. In effect, an agreement to agree buys a party an assurance that the transaction will falter only over a genuine disagreement, thus allowing a party strapped for time or money to go ahead with arrangements with a sufficient degree of confidence in the outcome. P.A. Bergner & Co. v. Martinez, 823 F.Supp. 151, 156 (S.D.N.Y.1993); see also Penguin Grp. (USA) Inc. v. Steinbeck, No. 06 CV 2438, 2009 WL 857466, at  (S.D.N.Y. Mar. 31, 2009) (The linchpin of negotiation is not that one side capitulates to the other, but that there is a good faith, honest, articulation of interests, positions, or understandings.); Venture Assocs. Corp., 96 F.3d at 278 (The parties may want assurance that their investments in time and money and effort will not be wiped out by the other party's foot-dragging or change of heart or taking advantage of a vulnerable position created in the negotiation.). [T]he parties may abandon the transaction as long as they have made a good faith effort to close the deal and have not insisted on conditions that do not conform to the preliminary writing. Adjustrite, 145 F.3d at 548. To state a claim for breach of contract for failure to negotiate in good faith, a plaintiff must allege the specific instances or acts that amounted to the breach; generalized allegations and grievances will not suffice to survive a motion for judgment on the pleadings. U.S. ex rel. Smith v. New York Presbyterian Hosp., No. 06 Civ. 4056, 2007 WL 2142312, at  (S.D.N.Y. July 18, 2007); accord Prospect St. Ventures I, LLC v. Eclipsys Solutions Corp., 23 A.D.3d 213, 804 N.Y.S.2d 301, 302 (1st Dep't 2005). Although lost profits are not available where no agreement is reached, see Goodstein Constr. Corp. v. City of New York, 80 N.Y.2d 366, 374, 590 N.Y.S.2d 425, 604 N.E.2d 1356 (1992), out-of-pocket costs incurred in the course of good faith partial performance are appropriate, see Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 74 n. 2 (2d Cir.1989).
L-7 stated a plausible claim that Old Navy breached its obligation to negotiate the license agreement in good faith. The three bases alleged for this claim were that Old Navy (1) failed to participate in negotiations from April 2008 to December 15, 2008 and never provided a single substantive comment with respect to the draft license at any time in 2008, L-7 12(c) Opp. at 5; [11] (2) made repeated material representations that it would negotiate the terms of the license agreement in good faith, which L-7 subsequently learned were false, Compl. ¶ 47; and (3) proposed terms it knew to be in bad faith and economically unfair to [L-7], believing they would be rejected, and then reneged when [L-7] did accept, L-7 12(c) Opp. at 23. These are legally cognizable theories for breach of the duty to negotiate in good faith. Moreover, drawing all reasonable inferences in L-7's favor, the non-conclusory allegations in L-7's Complaint, combined with the exhibits attached thereto, render each one plausible. [12] First, L-7 plausibly alleged that Old Navywho in June of 2008 proposed postponing negotiationswas engaged in dilatory tactics from April 2008 until December 15, 2008, during which time it failed to provide any substantive comments on L-7's draft license agreement. The emails exchanged between Vayness (L-7) and Fahlbusch (Old Navy) from April 2008 until September 10, 2008when Fahlbusch finally recommend[ed] that Vayness and Oldham work directly with [Howe] in terms of the branded line, Ex. 21support the plausible inference that Fahlbusch was repeatedly putting L-7 off for undisclosed or pretextual reasons (discussed further below). The mere exchange of telephone calls and emailsmost of which were initiated by L-7 (according to L-7's exhibits) and some of which Old Navy did not respond to (according to L-7's uncontradicted allegations)does not make the inference that Old Navy negotiated for some ten months, 2010 WL 157494, at , so obvious that L-7's opposing inference of dilatory tactics is rendered implausible. [13] Similarly, whether or not L-7 agreed to Old Navy's alleged request to postpone discussions in June of 2008a question of fact left open by the pleadings [14] that would not defeat L-7's allegations that Old Navy was engaged in dilatory tactics. [A]ssuming the pleaded facts to be true and read[ing those facts] in [L-7's] favor, Sepúlveda-Villarini v. Dep't of Educ. of Puerto Rico, 628 F.3d 25, 30 (1st Cir.2010) (Souter, J.), it suggests the conversethat L-7, eager to execute the licensing agreement on terms as favorable to it as possible, and trusting that its negotiating partner in good faith believed a postponement of discussions would be mutually advantageous, was negotiating in good faith. It is reasonable to infer that, once L-7 became suspicious of what it believed to be dilatory tactics on Old Navy's part, it took a firmer stance, clarifying that while Old Navy may have thought that [Oldham] agreed to postpone the finalizing of an agreement, the idea of postponing immediate discussions was merely discussed, and that the parties should work to ensure that the Agreement did not become breached, Ex. 22. Second, L-7 plausibly alleged that, commencing in May 2008, Old Navy made repeated material representations that L-7 subsequently learned were false, such as Fahlbusch's (Old Navy's) assurances to Oldham that she was already working with Old Navy's legal team on the licensing agreement template, or her multiple promises to get back to L-7, which either never happened or only occurred after substantial delay. [15] L-7's Complaint also suggests that, instead of revealing its true purpose, which was to avoid entering into the license agreement as required under the [Agreement], Compl. ¶ 121 (emphasis added), Old Navy advanced pretextual reasons for its decision to delay negotiations (economic conditions) and, ultimately, to cut off negotiations (L-7's insistence on minimum guaranteed royalties). See Teachers Ins. & Annuity Assoc. of Am. v. Butler, 626 F.Supp. 1229, 1233-34 (S.D.N.Y.1986) (upholding a finding of bad faith, after a six-day non-jury trial, where evidence suggested that defendant deliberately intended not to close on an agreement that was no longer economically favorable to it due to a decline in interest rates, seiz[ing] on other terms of the agreement as a pretext for not going forward with it at the eleventh hour). That Old Navy's true purpose was to avoid negotiating at all can be inferred from the fact that Old Navy informed L-7 (1) that it wished to postpone the signing of a license indefinitely, (2) that it could not make a commitment to any discussions, and, ultimately, (3) that it could not follow through with the promised license, Compl. ¶ 55. Moreover, L-7's Complaint and the exhibits attached thereto support the inference that Old Navy's purported reasons for withdrawing from negotiationsi.e., that minimum guaranteed royalties were inconsistent with [Old Navy's] business plans and practices, Ex. 28were pretextual. As of December 3, 2008, minimum guaranteed royalties were not one of the four essential issues on which differences [had] emerged in the parties' positions according to Old Navy, Ex. 26 (describing the timing of [the] launch as the most important[] issue); and assuming the truth of L-7's uncontradicted documentary evidence, none of the points that had yet to be resolved after the January 29th conference callincluding minimum guaranteed royaltieswas left off as a deal breaker to L-7, Ex. 28. Third, L-7 plausibly alleged that Old Navy's January Proposal was designed to be economically unfair to L-7 so that L-7 would reject it, pointing to Old Navy's reneging on its offer when L-7 ultimately signaledafter several counteroffers that it would accept the bulk of the January Proposal. See L-7 12(c) Opp. at 23. While the District Court concluded as a matter of law that L-7 did not accept Old Navy's January Proposal, we are inclined to see a fact question as to whether L-7 plausibly alleged that Old Navy's January Proposal was designed to elicit L-7's rejection. See Venture Assocs., 96 F.3d at 280 (business owner would be acting in bad faith if its purpose in demanding more than prospective buyer would pay was to induce [prospective buyer] to back out of the deal). Whether or not L-7 rejected key terms of Old Navy's January Proposal or made a series of counter-demands before attempting to resurrect it, 2010 WL 157494, at  9, [16] the well-pled fact remains that, when L-7 finally acquiesced to Old Navy's insistence on no minimum guaranteed royalties and appeared willing to accept an offer substantially on Old Navy's terms, Old Navy balked. In light of the (1) documentary evidence that Old Navy's first proposal for the Branded Line did not come until January of 2009, after the intervention of outside counsel; (2) allegations that Old Navy's sluggish negotiations from December 15, 2008 to February 6, 2009 were a sham, Compl. ¶ 124; (3) documentary evidence that L-7 was slowly retreating from and ultimately abandoned its insistence on minimum guaranteed royalties, a supposed sticking point for Old Navy; and (4) allegations that, under new management and in a deteriorating retail environment, Old Navy had decided it did not want to close any deal with Oldham, the Complaint raised the plausible inference that Old Navy's January Proposal was designed to elicit L-7's rejection. For all of these reasons, L-7 stated a claim for breach of contract for failure to negotiate in good faith. [17]