Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.Y. SUP.: Supplier did not fraudulently induce distributor to enter agreement, breach contract or implied covenant of good faith, (Jun 26, 2013)

By John W. Arden, J.D., LL.M.

An aircraft oxygen system product supplier that entered a distributorship agreement with a distributor and then terminated it shortly thereafter in order to contract with another distributor did not commit fraud in the inducement, breach a distributorship agreement, or violate the implied covenant of good faith and fair dealing, according to the New York Supreme Court (Leki Aviation A/S v. B/E Aerospace, Inc., June 14, 2013, Sherwood, O.). The competing distributor and its parent company were not liable for tortious interference with a contract, the court ruled.

Background. Leki Aviation was a distributor of oxygen system products supplied by Draeger Aerospace GMbH, a supplier of components and integrated systems to supply oxygen systems for civil and military aircraft. B/E Aerospace acquired Draeger in 2006. In July 2006, Leki sought to continue its relationship as distributor of Draeger products, but B/E chose Satair A/S, Leki’s direct competitor, signing a distribution agreement that ran through December 31, 2012.

In September 2011, Airbus acquired Satair. Subsequently, B/E executives told Leki that they would not continue distributing oxygen system products with Satair because of other aircraft manufacturers’ reaction to the acquisition. In early November 2011, B/E sent Leki a request for proposal (RFP) for a five-year contract with an additional five-year renewal period. It represented that the expected “turnover” of the oxygen systems products ranged from $50.5 million to $66 million in the fifth year. Leki estimated that the value of the agreement over five years would exceed $250 million in direct sales of B/E products. Leki responded to the RFP and was awarded an exclusive distribution contract in January 2012. The distributor agreement was signed in March 2012.

Under the terms of the distributor agreement, B/E appointed Leki as its exclusive distributor of B/E oxygen systems products for a five year term, commencing on January 1, 2013, and ending December 31, 2017. The agreement contained a restrictive covenant prohibiting Leki from marketing or selling any competitive products without B/E’s prior written consent.

A provision of the agreement allowed termination by either party during the term of the agreement for “any or no reason” by written notice of at least 365 days. As of the date of such notice, Leki would become a non-exclusive distributor.

On May 17, 2012, Leki received a letter by fax, entitled “BE Aerospace, Inc. Notice of Termination and Withdrawal of Consent Re: Distributor Agreement.” In the letter, B/E withdrew its consent to the agreement as of January 1, 2013. “In addition, BE hereby gives notice that it terminates any document and understanding, to the extent any exit, concerning any kind of distributor relationship with or obligation to Leki.”

Leki asserted that Airbus summoned B/E executives to the Airbus headquarters in France. As a result of that meeting, B/E sent the termination letter and entered into an agreement whereby Satair would deliver the B/E products under more favorable terms that in Leki’s distributor agreement.

In its lawsuit, Leki alleged that it incurred significant costs and expenses relating to the signing of the distributor agreement, including changing its position with respect to relationships with other suppliers. It asserted the following causes of action: (1) fraud in the inducement against B/E; (2) anticipatory breach of contract against B/E; (3) breach of contract against B/E; (4) breach of the implied covenant of good faith and faire dealing against B/E; and (5) tortious interference with contract against Satair and Airbus.

B/E moved to dismiss the claims against it. Airbus and Satair moved to dismiss the tortious interference claim. The court granted the motions and dismissed the complaint.

Fraud in the inducement. B/E argued that the fraud in the inducement claim had to be dismissed because Leki failed to allege an intentional misrepresentation of a fact that existed at the time the parties entered into the distributor agreement.

Leki argued that B/E executives made material false and misleading statements with the intent to induce Leki to enter an agreement that could be used as a negotiating device with Satair and Airbus. Although these arguments were inconsistent with the claims in the complaint, Leki maintained that it could plead such a theory in the alternative.

While the complaint did not state that the fraudulent inducement claim was pled in the alternative, the intention to plead in the alternative was expressed explicitly in Leki’s opposition papers, the court found. The court declined to dismiss the claim at this early stage on the basis of failure to plead in the alternative. Nevertheless, the claim was dismissed because general allegations that the defendants entered into the contract without an intent to perform were insufficient to support a fraud claim, according to the court.

Anticipatory breach of contract. B/E contended that Leki’s anticipatory breach of contract claims had to be dismissed because Leki could not recover damages. The court agreed. While the complaint alleged that Leki “changed its position with respect to its critical business interest by impairing its relationships with its suppliers,” a provision of the agreement excusing B/E of liability for damages on account of expiration or termination of the agreement under the contract operated to bar the claim. Upon issuance of the notice of termination, B/E was not obligated to continue Leki as an exclusive distributor and had no obligation to fill Leki’s orders except for orders of existing customers with whom Leki had fixed term supply contracts.

Breach of contract. Leki’s breach of contract claim was dismissed for failure to allege compensatory damages.

Implied covenant of good faith and fair dealing. A breach of the implied covenant of good faith and fair dealing cannot be maintained where the alleged breach is intrinsically tied to the damages allegedly resulting from a breach of contract, the court observed. As pleaded, the allegations of this claim essentially mimicked those of the breach of contract claims, the court found.

Tortious interference with contract. Leki’s tortious interference with a contract claim against Satair and Airbus was dismissed because Leki’s exclusive distributor agreement was terminable at will and the agreement in its entirety was terminable at will upon 365 days’ notice. Case law clearly holds that terminable-at-will agreements are classified as only prospective contractual relations and could not therefore support a claim for tortious interference with existing contracts, the court held. This is because there can be no breach of contract, a necessary element for tortious interference with contract, when the contract may be terminated at will.

The case is Index No. 653625/2012.

Attorneys: Ted Margolis (Norris McLaughlin & Marcus) for Leki Aviation A/S. Daniel Dunn (Hogan Lovells LLP) for B/E Aerospace, Inc.

Companies: Leki Aviation A/S; B/E Aerospace, Inc.

Cases: FranchisingDistribution NewYorkNews