Sometimes, a breach of contract claim is not enough, especially when presented with a bad faith scheme to undermine the deal which founded the contract. In the recent decision in Healthy Lifestyle Brands, LLC v. Env’t Working Grp., No. 20 CIV. 1098 (ER), 2021 WL 4459458, at *1 (S.D.N.Y. Sept. 29, 2021) the Court allowed the plaintiff to amend its complaint to add a claim for breach of the implied covenant of good faith and fair dealing, which now goes forward alongside the pre-existing breach of contract claim.
In determining whether to allow the amendment, the Court treated the motion like a motion to dismiss, and also factored in whether there was undue delay. Under these standards, the Court examined whether the somewhat ephemeral charge of breach of the implied covenant of good faith and fair dealing could survive as pled.
By way of background, plaintiff connects health and wellness authorities with companies looking for seals of approval or other accolades to assist in their marketing. Defendant is one such health and wellness authority, and the parties entered into an agreement wherein client companies would submit products to defendant for evaluation, and if the products met defendant’s product-safety and ingredient standards, the company could pay a sublicensing fee to plaintiff to display defendant’s mark of approval on their product. Plaintiff and defendant would then split the fee.
The agreement had a term which could be renewed if plaintiff met certain conditions or (assuming the conditions were not met) the parties entered into good faith discussions. Prior to the term ending, defendant announced that it was not interested in renewal. Even though plaintiff met the requisite conditions, the defendant would not renew, and subsequent discussions and mediation pursuant to the agreement proved fruitless.
While the plaintiff originally brought a breach of contract claim, in discovery certain emails between defendant executives were produced that suggested that the defendant was diverting the companies away from plaintiff and looking to set up its own relationship with those companies – in effect, cutting out the middle man. The plaintiff then brought a motion to amend the complaint to add a claim for breach of the implied covenant of good faith and fair dealing.
“New York law implies a covenant of good faith and fair dealing in every contract “pursuant to which neither party to a contract shall do anything which has the effect of destroying or injuring the right of the other party to receive the fruits of the contract. To state a cause of action for breach of the implied covenant of good faith and fair dealing, the plaintiff must allege facts which tend to show that the defendant sought to prevent performance of the contract or to withhold its benefits from the plaintiff.” Healthy Lifestyle, 2021 WL 4459458, at *3 (internal quotations and citations omitted). The Court found that the allegations of the scheme to divert clients to avoid sharing revenue and thus depriving plaintiff of potential profits, which were the primary benefit of the agreement, sufficient to allege a claim for breach of the implied covenant of good faith and fair dealing. Id. at *4. The key is the loss of the benefit to the plaintiff, which is alleged here.