Clarke v. TRIGO U.S.

Background

Steven M. Clarke and SSD Clarke Holdings, Inc. sued TRIGO U.S., Inc. and TRIGO Holdings S.A.S. The lawsuit asserted two claims for breach of contract, one claim for breach of the implied duty of good faith and fair dealing, and one claim for declaratory relief. The claims arose from a 2018 Purchase and Sale Agreement under which TRIGO U.S. agreed to purchase SMS for $58.5 million in cash at closing, plus earn-out payments based on SMS’s performance. Clarke also agreed to remain as SMS’s CEO and president through December 31, 2019.

The plaintiffs alleged that TRIGO had represented that it could provide quality-management services to SMS customers, but that TRIGO failed to provide those services after the acquisition. They alleged that SMS therefore had to develop those capabilities itself, affecting its business and potential earn-out payments. They also alleged that TRIGO U.S. later directed SMS to slow business development and stop pursuing a large contract with L3Harris, which allegedly further reduced SMS’s earnings and earn-out payments.

The defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally plausible claim. TRIGO Holdings also argued that the court lacked personal jurisdiction over it, meaning that New York lacked a sufficient legal basis to exercise authority over that defendant.

TRIGO Holdings

The court granted the motion as to all claims against TRIGO Holdings. The Purchase and Sale Agreement identified TRIGO U.S. as the purchaser and included TRIGO U.S.’s signature, but did not identify or include a signature for TRIGO Holdings. The court held that the complaint did not plausibly allege that TRIGO Holdings objectively manifested an intent to be bound by the agreement. The participation of individuals who held positions with both companies in negotiations did not, on the allegations presented, show that TRIGO Holdings intended to become a party to the agreement. The court also noted that the plaintiffs had disclaimed an alter-ego theory against TRIGO Holdings.

The court separately concluded that the complaint did not plausibly allege personal jurisdiction over TRIGO Holdings. The court assumed, for purposes of its analysis, that the relationship between TRIGO Holdings and TRIGO U.S. might satisfy a “closely related” test concerning the agreement’s forum-selection clause. Even so, the court held that due process required sufficient minimum contacts with New York and a reasonable exercise of jurisdiction. It found that TRIGO Holdings’s contacts with New York were “thin to none,” and that the dispute had little connection to New York.

Contract claims against TRIGO U.S.

The court denied the motion to dismiss the two breach-of-contract claims against TRIGO U.S. The relevant provision required TRIGO U.S., during the earn-out period, to operate SMS in good faith and avoid actions primarily intended to reduce or eliminate earn-out payments. It also required TRIGO U.S. to operate SMS consistently with past practice and not make strategic, commercial, or financial changes that could negatively affect SMS’s EBITDA, meaning earnings before interest, taxes, depreciation, and amortization.

For the quality-management allegations, the court held that the plaintiffs plausibly alleged a breach of the provision requiring operation consistent with past practice and prohibiting changes that could negatively affect EBITDA. The court did not find a sufficient allegation that TRIGO U.S. failed to provide quality-management services with the primary purpose of reducing the earn-out. But it concluded that the alleged failure to provide promised services could qualify as a strategic or commercial change that negatively affected SMS and forced it to develop in-house capabilities.

For the slow-down allegations, the court held that the plaintiffs plausibly alleged breaches of both relevant parts of the agreement. The allegations that TRIGO U.S. directed SMS to slow business development and stop pursuing the L3Harris contract supported a claim that TRIGO U.S. made a strategic change that could negatively affect EBITDA. The court also held that the allegations were sufficient at the pleading stage to support the claim that the decision was made primarily to reduce the earn-out. The court declined to resolve factual disputes about whether the L3Harris contract existed, who made the decision, and who was ultimately responsible.

The court rejected the defendants’ arguments that later amendments to the earn-out provisions resolved or waived the alleged breaches. The amendments adjusted the timing of earn-out payments but did not change the relevant contractual provisions, and the defendants had not shown an intent to discharge the alleged obligations. The amendments also stated that the original agreement remained in effect except as expressly changed, while the agreement contained a written no-waiver clause.

Implied covenant claim

The court granted the motion to dismiss the third claim against TRIGO U.S. New York law recognizes an implied duty of good faith and fair dealing in contracts, but does not recognize a separate claim when that claim is based on the same facts and seeks the same damages as a breach-of-contract claim. The court held that the plaintiffs’ implied-covenant claim repeated the allegations that TRIGO U.S. failed to provide quality-management services, slowed business development, and directed SMS not to pursue the L3Harris contract. It therefore dismissed that claim as duplicative.

Declaratory-judgment claim and disposition

The court granted the plaintiffs’ request to voluntarily dismiss the fourth claim for declaratory relief. Overall, the motion to dismiss was granted as to all claims against TRIGO Holdings and as to the third claim against TRIGO U.S. The motion was denied as to the first and second claims, which alleged breach of contract against TRIGO U.S. The Clerk was directed to terminate the motion. Judge P. Castel noted that the surviving claims might be evaluated differently at the summary-judgment stage after discovery and development of a complete factual record.