Bus. Exposure R Eduction Grp. (Berg) Assocs., LLC v. Pershing Square Capital Mgmt., L.P.

549 F.Supp.3d 318

BUSINESS EXPOSURE R EDUCTION GROUP (BERG) ASSOCIATES, LLC, Plaintiff,

v.PERSHING SQUARE CAPITAL MANAGEMENT, L.P., Defendant.

20 Civ. 10053 (PAE)

United States District Court, S.D. New York.

Signed July 16, 2021

Alexander Powhida, Powhida & Cano, PLLC, Albany, NY, Brian R. Della Rocca, Compass Law Partners, Rockville, MD, Thomas Joseph Scannell, Fusaro, Altomare & Ermilio, Worcester, MA, for Plaintiff.

Christopher Thomas Brown, Ropes & Gray LLP, Jason Michael Moff, John Patrick Coffey, Kramer Levin Naftalis & Frankel, LLP, New York, NY, Peter L. Welsh, Ropes & Gray LLP, Boston, MA, for Defendant.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

In late 2013, plaintiff Business Exposure Reduction Group Associates, LLC ("BERG"), an investigative firm, contracted with defendant Pershing Square Capital Management ("Pershing"), a hedge fund, to conduct research for Pershing regarding Pershing's well-publicized "short" position in Herbalife, Ltd. ("Herbalife"). The parties’ agreement provided that Pershing would pay BERG on an hourly basis, and that in certain circumstances, BERG's hourly rate would jump from $200 per hour to $750 per hour. Ultimately, however, exercising the discretion it claims to have been granted by the parties’ agreement, Pershing decided that such a "success fee" was not warranted. That decision, BERG alleges here, breached the parties’ contract and the implied covenant of good faith and fair dealing.

Before the Court is Pershing's motion to dismiss BERG's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. For the reasons that follow, the Court grants that motion.

I. Background

A. Factual Background¹

1. Parties

BERG is a Florida limited liability company ("LLC") whose sole member resides in Florida. Am. Compl. ¶ 1; Dkt. 49. It provides "consulting, forensic accounting, and related investigative work" for third parties. Am. Compl. ¶ 7. Pershing is a Delaware limited partnership and investment firm with a principal place of business in New York, New York. Id. ¶¶ 2, 6. Its partners reside in New York, New Jersey, Connecticut, Texas, Pennsylvania, Massachusetts, and Illinois; none is a citizen of Florida. Dkt. 50 ¶ 3.

2. Pershing's "Short" Position and Agreement with BERG

In May 2012, Pershing took a short position on Herbalife. See Am. Compl. ¶ 19. At some point before December 2013, Pershing reached out to BERG about engaging BERG to investigate "the conduct and business activities of Herbalife" and Herbalife's distribution network. Id. ¶¶ 10–11. Pershing sought to use BERG's research for managing its investments and, specifically, for evaluating and making investment decisions regarding its position in Herbalife. Id. ¶¶ 10–11, 19.

On December 2, 2013, BERG presented Pershing with a fee agreement. Id. ¶ 12. Pershing requested modifications to that agreement. Id. ¶ 13. On or about December 17, 2013, BERG produced a revised agreement. Id. ¶ 14. On December 23, 2013, after further modifications, BERG and Pershing executed the Fee Agreement. Id. ¶ 15.

The Fee Agreement states that Pershing would pay BERG an hourly rate of $200 per man hour worked. Fee Agr. at 4. It also provides, in the provision at the heart of the instant dispute, for an increase to that rate "[i]n the event the case developed by BERG Associates is settled or resolved in a manner that [Pershing] determines is beneficial to the financial standing of [Pershing] ...." Id. In such case, BERG's hourly rate would jump to $750 per hour. Id. However, it states, "[t]he decision regarding the ‘beneficial status’ will be made by [Pershing] based on its evaluation of the work product delivered by BERG Associates." Id.² Pershing paid the $200-per-hour base fee "in full throughout the engagement." Id. ¶ 40.

3. BERG'S Investigation and Demand for Success Fee

After the execution of the Fee Agreement, BERG began investigating Herbalife. Id. ¶ 26. BERG's research revealed, among other things: (1) tax and fraud issues with respect to Herbalife's operation; (2) evidence that Herbalife's distribution network was entangled with drug traffickers, drug trafficking channels, and organized crime; and (3) that Herbalife might have been targeting vulnerable groups to serve as distributors. Id. ¶¶ 27–29, 32.

On July 22, 2014, Pershing's principal, William Ackman, gave a public presentation titled "The Big Lie," with the goal of eroding public confidence in Herbalife and thereby benefitting Pershing's short position. Id. ¶¶ 30–33. BERG alleges that this presentation drew upon materials obtained from its investigation, including evidence that Herbalife had targeted vulnerable groups and was linked to Mexican, Russian, and Brazilian organized crime and money-laundering operations. Id. ¶¶ 30, 32. BERG alleges that, "[a]s a result of BERG's investigation as presented in the ‘The Big Lie’, Herbalife was the subject of a Federal Trade Commission (FTC) investigation ...." Id. ¶ 40. BERG also alleges that, as a result of Pershing's presentations—and, indirectly, BERG's work—Herbalife's stock price "plummeted" from $80.81 per share (when the Fee Agreement was finalized on December 23, 2013) to $33.25 per share on March 12, 2015 (when BERG alleges that its investigatory case "settled or resolved"). Id. ¶¶ 25, 34, 45–47.³

On March 12, 2015, Pershing told BERG to "stand down." Id. ¶ 34. As a result, BERG ceased its investigation into Herbalife. Id. However, Pershing also asked BERG to continue to be "available to consult if needed" and to "continue to respond to regulators with information," and used BERG's earlier research in presentations to the Drug Enforcement Agency ("DEA") and the Federal Trade Commission ("FTC"), the latter of which ultimately reached a settlement with Herbalife in 2016. Id. ¶ 40.

Around the same time, two BERG associates advised Pershing to close its short position on Herbalife. Id. ¶ 35. Pershing chose not to do so, in what BERG characterizes as "an imprudent investment decision." Id. ¶ 37.

On March 24, 2015, BERG sent Pershing a letter demanding the success fee, which it claimed totaled $3,086,875. Id. ¶¶ 50–51. On May 6, 2015, representatives for both Pershing and BERG, including Ackman, met in New York City. Id. ¶¶ 52–53. There, Ackman expressed surprise that BERG had been asked to "stand down." Id. ¶ 53. He stated that he would revisit BERG's entitlement to the success fee after he closed his position in Herbalife. Id. ¶ 54.

In or around July 2018, Pershing closed its position in Herbalife at a "significant loss." Id. ¶¶ 48, 55. On July 24, 2019, BERG renewed its demand for payment. Id. ¶ 56.

Pershing has not paid, and has refused to pay, BERG any part of the success fee. Id. ¶ 61.

4. BERG's Claims

BERG brings two claims against Pershing: for breach of contract and for breach of the implied covenant of good faith and fair dealing (the "implied covenant"). Id. ¶¶ 57–67.

As to the contract-breach claim, BERG alleges that if Pershing had closed its short position in Herbalife on March 12, 2015 (when BERG's representatives advised it to do so and when BERG was told to "stand down"), Pershing would have realized a $107,010,000 gain—which BERG alleges would unquestionably have been a "financial benefit." Id. ¶¶ 35–36. BERG also alleges that the use of information its investigation had uncovered contributed to the drop in Herbalife's stock price between December 23, 2013 and March 12, 2015, and therefore would have been responsible for that benefit. Id. ¶¶ 45–47. BERG claims that Pershing's failure to pay BERG the success fee, after "having received services from BERG that were beneficial to the financial standing of Pershing," breached the parties’ agreement. Id. ¶ 61; see id. ¶¶ 62–63.

Second, BERG alleges that, by refusing BERG's advice to close its short position in March 2015, when it stood to realize a significant gain, Pershing acted arbitrarily and unreasonably "to prevent BERG from enjoying the benefit of the [success fee]," in violation of the implied covenant. Id. ¶ 65.

B. Procedural History

On December 10, 2019, BERG filed a complaint against Pershing in federal district court in the District of Massachusetts. Dkt. 3. Pershing moved to dismiss, based on lack of personal jurisdiction and failure to state a claim. Dkts. 16–18.

On December 1, 2020, the presiding court held that it lacked personal jurisdiction over Pershing, Dkt. 29, and, rather than dismiss, transferred the case to this District. Dkt. 30. On December 18, 2020, the Court held an initial conference, at which BERG stated that it intended to file an amended complaint. See Dkt. 31. As reflected in the order issued after the conference, the Court granted BERG leave to file such a complaint, while providing that no further amendments would be permitted. Dkt. 48 ("No further opportunities to amend will ordinarily be granted.").

On December 31, 2020, BERG filed the Amended Complaint. On January 15, 2021, Pershing filed a motion to dismiss, Dkt. 53, as well as a memorandum of law in support, Pershing Mem., and the declaration of John P. Coffey, Esq., with supporting exhibits. On February 12, 2021, BERG opposed that motion. Dkt. 56 ("BERG Mem."). On February 25, 2021, Pershing replied. Dkt. 58 ("Pershing Reply").

On June 23, 2021, the Court held argument. Dkt. 61.

II. Legal Standards

A. Rule 12(b)(6) Motion to Dismiss

To survive a motion to dismiss under Rule 12(b)(6), a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim will only have "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). A complaint is properly dismissed where, as a matter of law, "the allegations in a complaint, however true, could not raise a...