Zest Anchors, LLC v. Biomet 3i, LLC

Background

Zest Anchors, LLC, doing business as Zest Dental Solutions, sued Biomet 3i, LLC, doing business as Zimvie, over their distribution agreement. Biomet then asserted counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing. Zest moved under Rule 12(b)(6), which allows dismissal for failure to state a legally sufficient claim, to dismiss only the implied-covenant counterclaim.

The dispute concerned Section 13.4 of the distribution agreement. That section gave Zest the option, but not the obligation, to repurchase some or all of the Zest products in Biomet’s inventory after the agreement expired or ended. It also stated that products Zest did not purchase could continue to be sold by Biomet in compliance with the agreement.

Biomet alleged that, after the agreement expired, Zest said it was invoking its right to repurchase all Zest products in Biomet’s inventory. Zest also took the position that Biomet had to stop selling and marketing the products. Biomet provided inventory information, but Zest did not repurchase any of the inventory. Biomet alleged that Zest refused to repurchase the products to gain leverage in negotiations for a new distribution agreement and to harm Biomet in the marketplace. It claimed losses involving expired and unsold inventory, customer relationships, and goodwill.

Materials Considered by the Court

The court considered Zest’s September 3, 2021 letter because Biomet’s counterclaims referred to it by date, quoted it, and described its contents. The court did not consider five other exhibits containing emails and letters because the counterclaims did not specifically refer to them or rely on them in framing the claim. The court stated that those materials might be relevant at summary judgment or trial, but they could not be used to resolve this motion to dismiss.

Court’s Analysis

Applying New York law, the court explained that every contract includes an implied covenant of good faith and fair dealing. That covenant does not add duties inconsistent with the contract, but when a contract gives one party discretion, the party may not exercise that discretion arbitrarily or irrationally.

The court rejected Zest’s argument that the words “sole discretion” and “option, but not the obligation” eliminated any possible implied-covenant claim. According to the court, Biomet plausibly alleged that Zest invoked its right to repurchase the inventory, asserted that Biomet could not sell the products, and then refused to repurchase any of them. The court reasoned that Biomet had alleged a contractual benefit: either Zest would repurchase the remaining inventory or Biomet could resell products that Zest did not purchase. Allowing Zest to block both possibilities through an arbitrary exercise of discretion could make that benefit illusory.

The court also rejected Zest’s argument that Biomet’s alleged breach of the distribution agreement defeated the counterclaim. Zest relied on materials outside the counterclaims, and the court declined to consider those materials or convert the motion into a motion for summary judgment.

Disposition

The court held that Biomet had stated a claim for breach of the implied covenant of good faith and fair dealing. Judge Jennifer L. Rochon denied Zest’s motion to dismiss and directed the Clerk of Court to terminate the motion at Docket 52. The opinion did not decide whether Biomet will ultimately prevail on the counterclaim.