Deom v. Walgreen Co.

GERARD W. DEOM; DEOM HEALTH ENTERPRISES, INC, Plaintiffs-Appellants, v. WALGREEN COMPANY, Defendant-Appellant.

No. 14-5331

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

November 12, 2014

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 14a0842n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF KENTUCKY

Before: SUTTON and KETHLEDGE, Circuit Judges; ROSENTHAL, District Judge^*

PER CURIAM. This case asks us to determine whether a complaint alleged a breach of the implied duty of good faith and fair dealing when the contract specified a condition precedent for a bonus payment to one party; the contract did not tell the other party to achieve the condition precedent or to make best or even reasonable efforts to try; the condition precedent was not met; and the bonus was not paid. The contract at issue was an agreement to sell the inventory and prescription records of three pharmacies, which then closed. The seller was to receive a bonus if the buyer filled a minimum number of prescriptions for the seller's former customers within a certain period after the sale. The buyer did not achieve the target number. The seller sued for breach of the implied covenant of good faith and fair dealing under Illinois law, which the parties'contract specified, alleging that the buyer had failed to prepare for the added business and provided poor customer service that drove the seller's former customers away and frustrated the bonus.

The district court dismissed the claim for breach of the implied duty of good faith and fair dealing under Rule 12(b)(6) of the Federal Rules of Civil Procedure. We agree that the complaint failed to state a claim for breach of the implied duty under Illinois law, and we AFFIRM the dismissal.

I.

Gerard Deom and Deom Health Enterprises, Inc. owned and operated three pharmacies in Radcliff, Kentucky. In September 2011, Deom signed an Asset Purchase Agreement with Walgreen to sell the inventory and prescription records from his pharmacies for $3,500,000 and Walgreen's agreement to pay an additional $600,000 as an earnout bonus if it filled an average of at least 308 prescriptions daily for Deom's former customers in the nine months after the sale. If Walgreen filled more than 308 prescriptions daily, Deom could earn a larger bonus, up to $800,000.

Walgreen filled far fewer than the number of prescriptions needed to trigger the earnout bonus. Deom sued, alleging that Walgreen had either lied about how many prescriptions it filled or breached the implied duty of good faith and fair dealing by failing to be "adequately prepared" to serve Deom's former customers after the sale, and instead providing "substandard customer service," including "unhelpful staff" and "long waiting times." R. 1 at 4-5.

The district court granted Walgreen's motion to dismiss Deom's claim for breach of the implied duty but denied the motion to dismiss Deom's claim that Walgreen had lied about the number of prescriptions it filled. Walgreen produced evidence showing that it had filled fewer than a daily average of 308 prescriptions for Deom's former customers, and Deom agreed to summary judgment on this claim. Deom also asked the court to reconsider the dismissal of his claim forbreach of the implied duty. The district court again ruled that Walgreen did not owe Deom a duty of good faith and fair dealing because it did not have contractual discretion over whether Deom's former customers came to Walgreen for their prescription needs or went elsewhere.

We review the district court's dismissal de novo. See Gunasekera v. Irwin, 551 F.3d 461, 465-66 (6th Cir. 2009). We accept Deom's well-pleaded factual allegations as true and construe them in the light most favorable to him. See Hill v. Blue Cross and Blue Shield of Mich., 409 F.3d 710, 716 (6th Cir. 2005). To survive a Rule 12(b)(6) motion to dismiss, a complaint must state a claim for relief that is plausible on its face. Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "A claim has 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." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).

II.

The Asset Purchase Agreement specified that Illinois law applied. Illinois law implies a duty of good faith and fair dealing in every contract, Cromeens, Holloman, Sibert, Inc. v. AB Volvo, 349 F.3d 376, 395 (7th Cir. 2003), but makes clear that this duty "has never been an independent source of duties for the parties to a contract." Beraha v. Baxter Health Care Corp., 956 F.2d 1436, 1443 (7th Cir. 1992); see also Oil Express Nat'l v. Burgstone, 958 F. Supp. 366, 369 (N.D. Ill. 1997). Rather, it "is simply a guide to the construction of the explicit terms of the agreement." MJ & Partners Rest. Ltd. P'ship v. Zadikoff, 995 F. Supp. 929, 933 (N.D. Ill. 1998) (citing Beraha, 956 F.2d at 1443).

In his complaint, Deom alleged that Walgreen violated the duty of good faith and fair dealing by:

failing to take appropriate steps to ensure that it could perform its obligation to retain the DHE pharmacies' customers; failing to provide appropriate customer service []; creating an environment wherein many of the DHE pharmacies' customers sought and secured services from other pharmacies . . . [and] fail[ing] to take appropriate remedial measures to keep these customers. R. 1 at 6.

Deom additionally alleged that "Walgreen's customer service . . . was so poor that a number of other area pharmacists opened competing pharmacies." Id.

"In order to plead a breach of the covenant of good faith and fair dealing, a plaintiff must plead existence of contractual discretion." Mid-West Energy Consultants, Inc. v. Covenant Home, Inc., 815 N.E.2d 911, 916 (Ill. Ct. App. 2004). As the district court noted, the parties' agreement "did not affirmatively obligate [Walgreen] to meet the prescription targets." R. 10 at 4.

Under Illinois law, the implied duty supplements a party's existing obligations only when that party has significant discretion in performing them. "[A] good-faith duty to exercise contractual discretion reasonably does not apply where no contractual discretion exists." Id.; see also Bank One, Springfield v. Roscetti, 723 N.E.2d 755, 764 (Ill. Ct. App. 1999). A party has contractual discretion over an obligation that is "contingent upon a condition particularly within the power of that party." Wilson v. Career Educ. Corp., 729 F.3d 665, 674 (7th Cir. 2013) (quoting Dayan v. McDonald's Corp., 466 N.E.2d 958, 972 (Ill. Ct. App. 1984)). The district court found that Walgreen did not have contractual discretion over the earnout bonus, reasoning that Walgreen could not control whether it filled enough prescriptions for Deom's former customers to trigger that bonus. Customer preferences and loyalty, population changes, and competition with other pharmacies affected whether Walgreen attracted or retained these and other customers. We disagree with this basis for dismissal, but affirm the dismissal on another ground.

Contractual discretion can be present when both external factors and factors within a party's control determine whether a condition precedent is met. See Behara, 956 F.2d at 1444 (holding that a medical device marketer had contractual discretion in developing and marketing the plaintiff's device under an exclusive license agreement even though the device's profitability would also depend on design feasibility and market demand); Osten v. Shah, 433 N.E.2d 294, 296 (Ill. App. Ct. 1982) (a party had contractual discretion in financing a home purchase even though its ability to get a mortgage "might depend on many variables, including interest rates, as well as loan demand"). A party need not have complete control over whether a condition precedent occurs to be subject to the implied duty of good faith and fair dealing. Rather, the party must have sufficient control to be able to prevent the condition from occurring. Dayan, 466 N.E.2d at 972 (contractual discretion exists when "the controlling party could have avoided incurring any contractual obligation by refusing to bring about the relevant condition").

The cases recognize that when, as here, an earnout clause makes a seller's bonus contingent on postsale business success, a buyer may have contractual discretion in how it runs the business so as to meet the target amount needed to trigger the earnout bonus. Such a provision benefits both the seller and the buyer, by allowing the seller to earn the bonus while the buyer increases its own business. See, e.g., E.B. Harper & Co. v. Nortek, Inc., 104 F.3d 913, 920 (7th Cir. 1997); Northbound Grp., Inc. v. Norvax, Inc., No. 11 C 6131, 2012 WL 394336, at *1 (N.D. Ill. Feb. 6, 2012); see also O'Tool v. Genmar Holdings, Inc., 387 F.3d 1188, 1195-97 (10th Cir. 2004); Jones v. Wright Travel Agency, Inc., No. 2:04-cv-724-DB, 2006 WL 3025991, at **1-2, 8 (D. Utah. Oct. 23, 2006); Interwave Tech., Inc. v. Rockwell Automation, Inc., No. Civ-A-05-398, 2005 WL 3605272, at **2-3 (E.D. Pa. Dec. 30, 2005); Tagare v. Nynex Network Sys. Co., 994 F. Supp. 149, 159-60 (S.D.N.Y. 1997).

At the pleadings stage, we take as true Deom's factual allegations that Walgreen provided inadequate staffing and resources to serve the added customers from Deom's stores in order to attract and retain their prescription business. Based on the allegations in the complaint, we cannot find as a matter of law that the implied duty claim fails for lack of Walgreen's contractual discretion over how it responded to the foreseeable increased staff and time needed to serve these customers. Walgreen had contractual discretion over the quality and quantity of service it provided its existing customers and Deom's former customers, even though other factors clearly influenced the number of prescriptions Walgreen filled. Walgreen's discretion over how it...