Opinion ID: 3163904
Heading Depth: 1
Heading Rank: 2

Heading: The Shareholders’ Fourth Claim

Text: Second, the Shareholders argue that Sikorsky breached the implied covenant of good faith and fair dealing based on its management of the RU-38B program. Under New York law, “[i]mplicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance.” Dalton v. Educ. Testing Serv., 663 N.E.2d 289, 291 (N.Y. 1995). The New York Court of Appeals has described this covenant broadly as “embrac[ing] a pledge that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other 4 party to receive the fruits of the contract.’” Id. (quoting Kirke La Shelle v. Paul Armstrong Co., 188 N.E. 163, 167 (N.Y. 1933)). But the Court of Appeals has also stated that “[w]here the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion.” Id. at 291. The Court of Appeals further clarified that it “will not interfere with [a] discretionary determination unless it is performed arbitrarily or irrationally.” Id. at 293. In a recent case applying New York law and involving an “earnout” provision like the contingent payments here, we similarly explained that “[t]he implied covenant does not ‘undermine a party’s general right to act on its own interests in a way that may incidentally lessen’ the other party’s expected benefit.” Sec. Plans, Inc., 769 F.3d at 817 (quoting M/A-COM Sec. Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir. 1990)). Stated differently, “[w]hile New York courts generally will not disturb actions taken pursuant to a party’s business judgment, the New York Court of Appeals has explained . . . that arbitrary decision-making is incompatible with the exercise of legitimate business judgment.” Id. at 819 (citations omitted). If the defendant “had a genuine and colorable business justification for its decision, then its actions will not have been arbitrary, and thus will not have violated the implied covenant.” Id. at 820. Far from being arbitrary and capricious, the undisputed facts demonstrate that Sikorsky’s staffing decisions were driven by a genuine and colorable business justification. Schweizer’s post-closing General Manager, Randy Simpson, described Les Schweizer, who remained an executive of Schweizer after closing, as the “engineering brains behind the company.” J.A. 2683–84. Simpson also stated that “[i]mmediately post closing [Les Schweizer] was very focused on the current product that was in development,” namely the “two in development, the RU-38 surveillance aircraft, and the Fire Scout, which was [an] unmanned vehicle that 5 [Schweizer was] producing as a subcontractor for Northrop Grumman.” J.A. 2684. Over time, Simpson directed Les Schweizer to spend more of his time on the X2 program. Simpson further testified that, “[a]s X2 came on line” in early 2005, “more and more of [Les Schweizer’s] time was spent on X2.” J.A. 2685. When Les Schweizer was asked why Simpson tasked him with the X2 program, Les Schweizer testified that “Randy [Simpson] felt that the X2 was the most important thing that the company was focused on and [Simpson] wanted that thing to be a success.” J.A. 1229. He also stated that “Sikorsky management felt that the X2 was an important program for their future in the helicopter business.” J.A. 1233. With Les Schweizer occupied by the X2 program, another Schweizer employee, Jim Daum, began taking over day-to-day responsibility for the RU-38B program. Les Schweizer acknowledged that, “at the time Jim [Daum] was selected . . . [,] he was basically the best choice” Schweizer had, other than himself, to manage the program. J.A. 1230. He also testified that “[w]e had so much stuff going on that, yeah, physically I just couldn’t spend enough time on the [RU-38B] program.” J.A. 1232. But Les Schweizer also acknowledged that he never refused to assist Daum because he was too busy and that Simpson never instructed him not to assist Daum. Accordingly, because Sikorsky “had a genuine and colorable business justification for its decision, . . . its actions [were not] arbitrary, and thus [it did not] violate[] the implied covenant.” Sec. Plans, Inc., 769 F.3d at 820.