Opinion ID: 205969
Heading Depth: 2
Heading Rank: 3

Heading: Coty's Discretion Under the LTIP

Text: Under New York law, a covenant of good faith and fair dealing is implied in all contracts. See Cross & Cross Props., Ltd. v. Everett Allied Co., 886 F.2d 497, 502 (2d Cir.1989). This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153, 746 N.Y.S.2d 131, 773 N.E.2d 496 (2002) (citations and internal quotation marks omitted). Where the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion. Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389, 639 N.Y.S.2d 977, 663 N.E.2d 289 (1995); accord In re Kaplan, 143 F.3d 807, 819 (3d Cir. 1998) (Courts have equated the covenant of good faith and fair dealing with an obligation to exercise that discretion reasonably and with proper motive,... not ... arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties. (internal quotation marks omitted)). A breach of the duty of good faith and fair dealing is considered a breach of contract. Nat'l Mkt. Share, Inc. v. Sterling Nat'l Bank, 392 F.3d 520, 525 (2d Cir.2004). In this case, Coty does not argue that its decision to cut its share price by almost 50% in order to devalue Fishoff's options is consistent with the implied duty of good faith and fair dealing. Indeed, it is difficult to conceive of a set of facts under which Coty's seemingly arbitrary post hoc valuation, which was applied only to Fishoff and only after he exercised his options, would not be a clear violation of the duty of good faith and fair dealing; Coty's actions plainly denied Fishoff the fruits of the contract. Rather, Coty urges that the implied duty is of no consequence because the LTIP expressly provides an unrestricted discretionary right as codified in Section 3(b) of the LTIP. We disagree with the interpretation of the contract advanced by Coty. Discretion to modify or cancel an incentive ... will not be implied if there exists no explicit contractual provisions assigning the employer absolute discretion to pay such compensation. Lam v. Am. Express Co., 265 F.Supp.2d 225, 237 (S.D.N.Y.2003); Namad v. Salomon, Inc., 74 N.Y.2d 751, 753, 545 N.Y.S.2d 79, 543 N.E.2d 722 (1989). While Section 3(b) gives Coty a considerable amount of discretion in making determinations about the Plan and Awards issued thereunder, it is silent as to Coty's discretion to alter share value after an optionee has validly exercised his options. If nothing else, the fact that Coty initially issued a written confirmation of Fishoff's exercise that included a $58 Fair Market Value for the shares, indicates that Coty at one time also recognized this limitation on its discretion. Moreover, the terms of the LTIP, Section 6(d)(ii), provide that once an optionee has made a valid exercise, Coty must make payment to the optionee based upon the Fair Market Value of the company's shares that was in place on the date the options exercise was made. See LTIP § 6(d)(ii) (Upon any valid exercise ... the respective Participant shall be entitled to receive ... a payment in cash ... (emphasis added)). In this case, that payment was to be in an amount equal to the difference between the Fair Market Value of the company's shares as of the Exercise Date and the purchase price of the optionsthat is, the difference between the valuation in place on the date Fishoff exercised his options and their respective purchase prices. Once the exercise was processed and that difference was computed, Coty was required to make payment to Fishoff as promptly as practicable. See LTIP § 6(d)(ii) (The payment of cash shall be made as promptly as practicable after an exercise.). To the extent that any other part of the LTIP could be read to conflict with these strictures, Section 6(d)(ii) makes clear that it applies with full force and effect notwithstanding [a]ny provision of the Plan or any Award Agreement to the contrary. Thus, once Fishoff's exercise was, by operation of law, a valid November exercise, he was entitled to be compensated at the $58 per share rate that all other November exercisers received.