FRESHPAIR.COM, INC. v. BUTLEIN
2:17-cv-00905
D.N.J.Dec 4, 2017Background
- Freshpair.com, Inc. (Plaintiff) purchased all common stock from the Butlein defendants under a Stock Purchase Agreement (SPA) that included an earn‑out condition: $1.2 million in sales in the six months after closing would trigger additional payments.
- Plaintiff later sued the Butleins in state court alleging breaches under the SPA; defendants removed to federal court.
- The Court previously dismissed most of Plaintiff’s claims but allowed a breach of contract claim to proceed.
- The Butlein defendants answered and asserted two counterclaims: (1) breach of the SPA and (2) breach of the implied covenant of good faith and fair dealing; Plaintiff moved to dismiss the second counterclaim under Rule 12(b)(6).
- The Butleins allege Plaintiff engaged in a course of conduct (delaying hires, hiring unqualified relatives, refusing to purchase inventory or spend on marketing, prioritizing website functionality over inventory, etc.) that made it impossible to achieve the $1.2 million sales threshold and thereby deprived them of the SPA’s expected benefits.
- The Court denied Plaintiff’s motion, finding the second counterclaim sufficiently pled under the Twombly/Iqbal pleading standard and New Jersey law on the implied covenant.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Butleins' counterclaim for breach of the implied covenant of good faith and fair dealing states a plausible claim | The counterclaim is conclusory and fails to plead facts sufficient to show bad faith or inequitable conduct under Rule 8/Twombly/Iqbal | The complaint alleges specific acts by Plaintiff that intentionally frustrated the earn‑out condition and the Butleins’ contractual expectations | Denied: the Court held the counterclaim plausibly alleges bad faith/inequitable conduct and survives a 12(b)(6) challenge |
Key Cases Cited
- Fields v. Thompson Printing Co., 363 F.3d 259 (3d Cir. 2004) (New Jersey contracts include an implied covenant of good faith and fair dealing)
- Jurista v. Amerinox Processing, Inc., 492 B.R. 707 (D.N.J. 2013) (implied covenant may fill gaps to give efficacy to contract)
- Wilson v. Amerada Hess Corp., 773 A.2d 1121 (N.J. 2001) (performance may breach implied covenant absent violation of an express term)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (complaints must plead facts raising claim above speculative level)
- Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008) (Rule 8 requires factual showing, construed in plaintiff’s favor at pleading stage)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (courts need not accept legal conclusions; threadbare recitals insufficient)
- Emerson Radio Corp. v. Orion Sales, Inc., 80 F. Supp. 2d 307 (D.N.J. 2000) (discusses the implied covenant and the expectation interest protected thereby)