Opinion
01 Civ. 6156 (GEL).
October 26, 2001
David B. Eizenman, Ronald L. Israel, Lobe Loeb LLP New York, NY, for Plaintiff PA Holdings Limited.
David M. Hashmall, Christopher J. Garvey, Goodwin Procter LLP, New York N Y for Defendant Arthur D. Little, Inc.
OPINION AND ORDER
Plaintiff PA Holdings Limited ("PA") and Defendant Arthur D. Little, Inc., ("ADL") engaged in negotiations concerning a possible merger or other business combination. On October 19, 2001, PA and ADL entered an Agreement that, among other things, obligated them to negotiate exclusively with each other until (effectively) December 31, 2000, and to notify each other of any of a defined category of transactions that might interfere with the proposed combination. The Agreement also provided that "All costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses." The discussions ultimately failed, however; negotiations were suspended after December 13, 2000, and after further talks in March 2001 the parties agreed that they could not make a deal and terminated negotiations.
PA's Complaint, the allegations of which must for present purposes be accepted as true, alleges that ADL breached the exclusivity clause of the Agreement by entering into discussions with two other possible merger partners during the exclusivity period. It seeks damages of $2,000,000 for expenses occurred in the failed negotiations, and specific performance of the notice obligations, in particular to learn the identity of one of the counterparties in ADL's allegedly unauthorized discussions, which has not yet been disclosed.
ADL moves to dismiss the complaint, arguing that PA has not adequately pleaded that any damages were caused by ADL's alleged breach, and that specific performance is not available in connection with an expired contract. The motion will be denied.
I. Damages
Noting that the Agreement specifically provides that it shall be governed by Delaware law, ADL relies primarily on Great Lakes Chemical Corp v. Pharmacia Corp., No. Cic. A. 18276, 2001 WL 765187 (Del.Ch. June 29, 2001). That case holds that "[a]n essential element of any claim for breach of contract is cognizable injury," and dismisses a contract claim (arising from a supply agreement, not an exclusivity clause of an agreement to negotiate a possible merger) where the asserted injury did not "logically flow from the breach" and "[n]othing in the complaint links the alleged breach and the claimed injury". Id. at *5 In this case. ADL maintains, the parties agreed that each would bear its own costs, PA acknowledges in the pleadings that the failure of the negotiations did not result from the exclusivity breach, and PA does not allege that any of its expenses were increased or occasioned by that breach.
Case law from other jurisdictions, which equally recognize the basic principle reflected in Pharmacia, has dealt more directly with the kind of agreement at issue here. This Court, for example, in a case governed by either New York or Illinois law, ruled that neither state would permit a plaintiff charging breach of an exclusive negotiations provision to recover expectation or "benefit of the bargain" damages in such a case, at least absent proof that the defendant would have entered an agreement with plaintiff absent the breach. In re 131 Liquidating Corp., 44 F. Supp.2d 552 (S.D.N.Y. 1999) (Cedarbaum, J.). The Court did not dismiss the complaint, however, merely granting partial summary judgment precluding expectation damages and holding that damages for breach "should be limited to the amount that it expended in reliance on the Debtor's promise of exclusive negotiations." Id. at 554. One of the cases cited by the Court, Venture Associates Corp. v. Zenith Data Systems Corp., 96 F.3d 275 (7th Cir. 1996) (Posner, J.), elaborated on the reasoning, in the related context of an agreement to negotiate in good faith:
If, quite apart from any bad faith, the negotiations would have broken down, the party led on by the other's bad faith to persist in futile negotiations can recover only his reliance damages — the expenses he incurred by being misled, in violation of the parties' agreement to negotiate in good faith, into continuing to negotiate futilely. But if the plaintiff can prove that had it not been for the defendant's bad faith the parties would have made a final contract, then the loss of the benefit of the contract is a consequence of the defendant's bad faith, and, provided that it is a foreseeable consequence, the defendant is liable for that loss — liable, that is, for the plaintiff's consequential damages.Id. at 278.
These cases fully respect the principle of causation reflected inPharmacia. Whatever damage plaintiff claims must be shown to be a result of the alleged breach. Since plaintiff's pleading appears to concede that the discussions between ADL and PA failed to culminate in a deal for reasons unrelated to the alleged breach of the exclusivity agreement, it is clear that PA cannot recover damages occasioned by the parties' failure to conclude a final agreement. At the same time, plaintiff can recover any expenses that it incurred in reliance on ADL's adherence to the exclusivity provision.
Any reliance damages, however, must also be shown to have been caused by the alleged breach. Here, the parties fully anticipated that each side might incur substantial expenses in pursuing good faith negotiations, and expressly provided that each party would bear those expenses itself. To recover any of those expenditures as damages. PA must establish that they resulted from ADL's breach of its obligation to negotiate in good faith exclusively with PA — "the expenses [it] incurred by being misled, in violation of the parties agreement to negotiate in good faith, into continuing to negotiate futilely" Venture Associates, 96 F.3d at 278. Whether such causation can be established is yet to be determined. PA has adequately alleged, however, that it insisted upon the exclusivity agreement as a condition to entering negotiations, and that ADL was on notice that PA therefore would have abandoned the discussions (and ceased to incur expenses) had it learned of the alleged breach. Given those allegations, it is not apparent on the face of the pleadings that PA will be unable to prove causation.
Accordingly, PA's claim for damages cannot be dismissed for failure to state a claim.
II. Specific Performance
ADL argues that the Court cannot grant PA specific performance of an agreement that is no longer in force. PA replies that the time limitation of the Agreement is limited to the exclusivity provision, and is not to be found in the section regarding notice. PA's argument is extremely dubious, since the notice provisions plainly are intended as a support to the agreement to negotiate, and to do so exclusively, and would serve no purpose if extended indefinitely into the future. There is no need, however, to resolve this difference of interpretation at this time. Since the case will go forward on the claim for damages, the information PA seeks will inevitably be provided in the course of discovery, as the parties apparently recognize. The issue of notice will therefore become moot long before the Court will ever have to determine whether to award the requested relief. In the interest of judicial economy, therefore, the motion is denied for the present, without prejudice to renewal at a later point in the litigation on mootness or other grounds.
Conclusion
For the reasons stated above, the motion to dismiss for failure to state a claim upon which relief can be granted is denied.
SO ORDERED: