Free Trial Brief - District Court of Arizona - Arizona

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GREENBERG TRAURIG, LLP
ATTORNEYS AT LAW SUITE 700 2375 EAST CAMELBACK ROAD PHOENIX, ARIZONA 85016 (602) 445-8000

Steven M. Weinberg, SBN 016817, [email protected] Brian J. Schulman, SBN 015286, [email protected] Kimberly A. Warshawsky, SBN 022083, [email protected] Attorneys for Plaintiff Awareness Corporation and Third Party Defendants Allcock and Schmidt IN THE UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Awareness Corporation, Plaintiff, Group Vision International, L.L.C., et al., Defendants. And related cross claims and third party actions. Plaintiff Awareness Corporation ("Awareness") hereby submits its bench memorandum regarding the distributor defendants' ("Defendants") breach of contract and breach of implied covenant of good faith counterclaims based on (1) Awareness' failure to timely ship products, (2) Awareness' late and improperly calculated commissions and (3) Awareness' direct sales to customers. I. Defendants Cannot Use Their Implied Covenant of Good Faith and Fair Dealing Claim to Bootstrap Their Breach of Contract Claim. A covenant of good faith and fair dealing is implicit in every contract and it requires that neither party act to impair the right of the other to receive the benefits that flow from their agreement or contractual relationship. Kuehn v. Stanley, 91 P.3d 346, 354
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No. CV03-2024-PHX-DGC PLAINTIFF AWARENESS CORPORATION'S BENCH MEMORANDUM NO. 9 RE: ALLEGED BREACH OF CONTRACT CLAIMS

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(Ariz. Ct. App. 2004).

Accordingly, "the relevant inquiry always will focus on the Id. (citing Rawlings v.

contract itself, to determine what the parties did agree to."

Apodaca, 726 P.2d 565, 570 (Ariz. Ct. App. 1986)). However, implied covenants are disfavored at law. Smith v. Phlegar, 236 P.2d 749, 754 (Ariz. 1951) ("The courts will declare implied covenants to exist only when there is a satisfactory basis in the express contract of the parties which makes it necessary to imply certain duties and obligations in order to effect the purposes of the parties to the contract made."). Hence, Arizona courts are reluctant to enlarge, by implication, contractual terms. Walgreen Arizona Drug Co. v. Plaza Ctr. Corp., 647 P.2d 643, 646 (Ariz. Ct. App. 1982). Courts will only imply obligations where the language of the contract would require it. See id. Furthermore, because contracts are designed to memorialize the parties intentions, the express contract terms remain the best evidence of the parties reasonable expectations and are the basis upon which any implied duties are determined. Shanks v. Davey Tree Surgery Co., 845 P.2d 483, 486 (Ariz. Ct. App. 1992). Defendants' claim that Awareness breached the implied covenant of good faith and fair dealing lacks any viable basis in the law or the facts. Awareness' obligations pursuant to the express terms of the P&P do not set forth a specific time or day limitation for when a shipment is considered "late." The P&P only requires that the distributor "should contact Customer Service if any order has not been received within a customary amount of time after an order has been placed." See P&P, XVII(G)(ii) (emphasis added). Defendants have not established any evidence showing the few late shipments impaired their right to receive the benefits which flow from their contractual relationship or that Awareness did not perform in good faith. Moreover, it is impermissible for Defendants to use breach of the implied covenant of good faith and fair dealing to "bootstrap" claims for which they could otherwise obtain no relief. "[W]hile the covenant regulates the way in which a contract right or duty is
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exercised, it does not provide a means to add non-bargained-for terms to an agreement" ­ "[t]o permit the covenant of good faith to imply such terms would be to make an end run around the rights and duties which were negotiated and bargained for by the parties and to rewrite the agreement." Atchison Casting Corp. v. Dofasco, Inc., 889 F. Supp. 1445, 1457-58 (D. Kan. 1995) (emphasis added). Moreover, "essential terms of a contract on which the minds of the parties have not met cannot be supplied by the implication of good faith and fair dealing." Id. Thus, due to the fact that Awareness has not materially breached any express terms of the contract and its behavior comports with the standards of good faith and fair dealing, Defendants' breach of implied duty of good faith claim must fail. II. Awareness has Not Materially Breached Any Express Term in the Contract. This Court must first look to Arizona law when interpreting a contract negotiated and entered into in Arizona, such as the P&P at issue in this case. B.F. Goodrich Co. v. Vinyltech Corp., 711 F. Supp 1513, 1518 (D. Ariz. 1989). In evaluating the triviality of a breach Arizona courts follow the RESTATEMENT (SECOND) OF CONTRACTS § 241 which requires the fact-finder to consider the following: (a) (b) the extent to which the injured party will be deprived of a the benefit which he reasonably expected; the extent to which the injured party can be adequately compensated [by damages] for the part of that benefit which he will be deprived; the extent to which the party failing to perform or to offer to perform will suffer forfeiture; the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; and

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(c) (d)

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(e)

the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

RESTATEMENT (SECOND) OF CONTRACTS § 241 (1976); Found. Dev. Corp. v. Loehmann's, Inc., 788 P.2d 1189, 1197-1198 (1990). Arizona case law has consistently held that a reasonable delay in the performance of a contract will not be considered a material breach when time is not of the essence. Poggi v. Kates, 115 Ariz. 157, 161, 564 P.2d 380, 384 (1977) (emphasis added). The P&P was void of any express, or even implied, "time is of the essence" obligation, thus the reasonable delay should not be considered by the Court as a material breach. Defendants' breach of contract claim that Awareness's failure to timely ship the products must fail as a matter of law because it is not a material breach, if even a breach at all. Additionally, Defendants have not provided any evidence that their other two breach of contract claims for (1) Awareness' alleged improper direct sales and (2) Awareness' alleged late and improperly calculated commissions should justify forfeiture of the contract at issue. Under the above standard provided by the RESTATEMENT (SECOND) OF CONTRACTS § 241, Defendants have not met the burden of establishing these two breaches are "material breaches" that would justify forfeiture of the P&P. III. Damages for any Claim Under the Contract Against Awareness by a Distributor are Limited. Any claim for damages against Awareness is limited by agreements between Awareness and its distributors. Each of the Distributor Defendants is bound by these agreements and limitations. Under these agreements, and specifically the Electronic AwarenessLife Agreement expressly entered into by each of the Distributor Defendants, the "entire liability of the Company and its affiliates of any claim whatsoever related to the relationship of the Company and [a distributor]...shall be limited to the amount of products [the distributor has] purchased from the Company ... that are in resalable condition."
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The Distributor Defendants have waived their right to damages in excess of this limitation. None of the Distributor Defendants has proffered evidence of the amount of products that were in resalable condition at the time the claim arose. Further, none of the Distributor Defendants followed the specific procedures under Section XVII of the July 2005 P&Ps for returning such products for a refund, and therefore failed in their duty to mitigate damages. IV. The Distributor Defendants have Waived any Claim for Damages Relating to Their Distributorships. Finally, and significantly, Section XX.F. of the July 2005 P&Ps provides that when a distributor "voluntarily resigns with the Company he or she loses all rights to his or her downline. The lost rights include, but are not limited to, sales commissions, overrides, rebates, bonuses, awards, downline rights, or any compensation whatsoever from the Company." Thus, the Distributor Defendants by their voluntary termination ­ and each did in fact expressly voluntarily terminate -- waived their right to any commissions or bonuses they may have earned. V. Conclusion. Awareness did not materially breach the P & P. Nor did Awareness breach the covenant of good faith and fair dealing implicit in the P&P. Further, the Distributor Defendants have not proffered evidence of any damages from the alleged breaches and in any event have completely waived their right to any claim for breach of contract. As such, Defendants' breach of contract and breach of implied covenant of good faith and fair dealing claims fail.

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RESPECTFULLY SUBMITTED this 8th day of August, 2005. GREENBERG TRAURIG, LLP By: /s/ Kimberly A. Warshawsky Steven M. Weinberg Brian J. Schulman Kimberly A. Warshawsky Attorneys for Awareness Corporation and Third Party Defendants Allcock and Schmidt

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CERTIFICATE OF SERVICE I hereby certify that on August 8, 2005, I electronically transmitted the attached document to the Clerk' Office using the CM/ECF System for filing and transmittal s of a Notice of Electronic Filing to the following CM/ECF registrants: Curtis D. Drew, Esq. 2342 North Pima Road Scottsdale, Arizona 85257-2405 [email protected] Attorney for Defendant Group Vision International, L.L.C. G. Gregory Eagleburger, Esq. The Eagleburger Law Group 2999 North 44th Street, Suite 303 Phoenix, Arizona 85018 [email protected] Attorneys for Distributor Defendants I hereby certify that on August 8, 2005, I served the attached document by facsimile and United States mail on the following, who are not registered participants of the CM/ECF System:

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/s/ J. David Smith

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