Deom et al v. Walgreen Company

Filing 10

MEMORANDUM OPINION AND ORDER by Judge John G. Heyburn, II on 4/18/2013. 6 Motion to Dismiss ; is SUSTAINED IN PART and DENIED IN PART. Plaintiff is permitted limited discovery to require Defendant to account in full for its determination that no sums are due pursuant to the Prescription Earnout Provision. Defendant is given thirty (30) days to respond to alimited discovery request by Plaintiffs regarding this specific issue. cc:counsel (TLB)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CIVIL ACTION NO. 3:12-CV-00719-H
GERALD W. DEOM and DEOM HEALTH
ENTERPRISES, INC.,

PLAINTIFFS

V.
WALGREEN CO.

DEFENDANT
MEMORANDUM OPINION AND ORDER

The matter before the Court is Defendant, Walgreen Co.’s motion to dismiss all
claims asserted by Plaintiffs, Gerald W. Deom and Deom Health Enterprises, Inc.
(“DHE”) pursuant to Federal Rule of Civil Procedure 12(b)(6).

For the following

reasons, the Court will sustain in part and deny in part Defendant’s motion.
I.
For some time, Deom, through DHE, owned and operated three pharmacies in the
Radcliff, Kentucky area. After a lengthy career, Deom decided to retire and sell the
assets of the DHE pharmacies. Enter Defendant, a national corporation engaged in the
retail pharmacy business.
In September 2011, the parties negotiated and signed the Asset Purchase
Agreement (“APA”) wherein Defendant agreed to purchase, inter alia, the stock,
pharmaceutical inventory, and prescription files belonging to DHE. The purchase price
consisted of $3,500,000 at closing, plus the potential for earnout payments up to
$800,000. The parties do not refute that Defendant in fact paid $3.5 million at closing in

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accordance with the APA.

This dispute centers on the possible earnout payments

detailed in the APA’s Prescription Earnout Provision (“PEP”).
The PEP provided that Defendant would pay an additional sum of money,
between $600,000 and $800,000, if, in the nine-month period following the closing date,
the average number of daily prescriptions (“Average Customer Prescriptions”) filled by
Defendant at the three pharmacies was equal to or greater than 308. If the figure was less
than 308, Defendant had no contractual obligation to pay anything beyond the $3.5
million at closing. The APA provided a formula to calculate the Average Customer
Prescriptions: Defendant was to identify through its computer system the total number of
prescriptions filled during the payout period, and then divide that number by the total
number of days in the payout period.
Following the closing date, Defendant’s sale performance apparently failed to live
up to expectations. Plaintiffs allege that a large number of customers transferred their
prescriptions to other pharmacies due to Defendant’s mismanagement. Specifically,
Plaintiffs aver that the long waiting times to fill prescriptions, unhelpful staff and lack of
preparedness, drove customers away.
On September 27, 2012, Defendant sent notice to Deom informing him that it had
reviewed the applicable data for the earnout period, and had concluded that it failed to
reach the minimum PEP target, 308. As such, Defendant stated that, pursuant to the PEP,
it did not owe anything to Plaintiffs.
Plaintiffs then filed the following claims against Defendant: breach of contract,
breach of the implied covenant of good faith and fair dealing, and equitable estoppel.

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Plaintiffs ask the Court for compensatory and punitive damages,1 and an order requiring
Defendant to account in full for its determination that no sums are due to Plaintiffs under
the PEP. Defendant has moved to dismiss all claims.
To survive a motion to dismiss, the “complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007)). “A claim has facial plausibility when the pleaded factual content allows the
court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Id. (citing Twombly, 550 U.S. at 556). The Court must view the allegations in
the complaint in the light most favorable to the Plaintiffs, treating all well-pleaded facts
as true, but need not accept bare legal conclusions as definitive. See Tackett v. M & G
Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009) (citing Gunasekera v. Irwin, 551
F.3d 461, 466 (6th Cir. 2009)).
The APA contains a choice of law provision requiring that all matters relating to
the construction, validity, performance and enforcement of the APA be governed by and
construed pursuant to Illinois law. ECF No. 1-1.
II.
As to their breach of contract claim, Plaintiffs proceed with two alternative
theories of liability: 1) Defendant did not meet the PEP targets because it failed to use
reasonable efforts to retain Plaintiffs’ former customers, or 2) Defendant in fact met the
PEP targets and therefore breached the APA by advising Plaintiffs that it did not. The
Court will address each theory individually.
1

Plaintiffs have since consented to the withdrawal of their request for punitive damages. ECF No. 7.

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A.
In its Complaint, Plaintiffs allege that Defendant breached the APA by failing to
meet the explicit prescription targets set forth in the PEP. However, the plain language
of the APA did not affirmatively obligate Defendant to meet the prescription targets.
Additionally, the APA did not provide any condition that could be implicated if
Defendant failed to meet the prescription targets. The Court finds no need to negate the
clear terms of the APA, and as such, Plaintiffs’ express breach of contract claim fails.
Plaintiffs argue that the extra-contractual implied duty of good faith and fair
dealing obligated Defendant to maintain or increase prescription sales so as to meet the
prescription targets.2 Specifically, Plaintiffs contend that Defendant had a duty to use its
reasonable best efforts to retain a sufficient customer volume so as to trigger a payment
obligation under the PEP.
Absent an express disavowal, Illinois law implies a covenant of good faith and
fair dealing in every contract. Kipris v. Mendel Metals, Inc., 741 N.E.2d 1033, 1038 (Ill.
Ct. App. 2000). The Illinois Supreme Court noted that “’[t]his principle ensures that
parties do not try to take advantage of each other in a way that could not have been
contemplated at the time the contract was drafted or to do anything that will destroy the
other party’s right to receive the benefit of the contract.” Cramer v. Ins. Exch. Agency,
675 N.E.2d 897, 903 (Ill. 1996). However, the covenant of good faith and fair dealing
does not permit courts to override the clear terms of the contract or to read an obligation
2

Plaintiffs’ devote a separate count of its complaint on the allegation that Defendant violated the implied
covenant of good faith and fair dealing. However, in Illinois, a lack of good faith and fair dealing does not
by itself create a distinct cause of action. See Beraha v. Baxter Health Care Corp., 956 F.2d 1436, 1443
(7th Cir. 1992)(“[U]nder Illinois law, the covenant of good faith and fair dealing has never been an
independent source of duties for the parties to a contract.”). Rather, the implied duty of good faith and fair
dealing collapses into a breach of contract claim and is used as a guide for the construction of explicit terms
in an agreement. Id.

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into a contract that does not exist. See Resolution Trust Corp. v. Holtzman, 618 N.E.2d
418, 424 (Ill. Ct. App. 1993); Bank One, Springfield v. Roscetti, 723 N.E.2d 755, 764 (Ill.
Ct. App. 1999).
Generally, the implied covenant of good faith and fair dealing is implicated where
one party to a contract is given broad discretion in performance of its contractual duties.
Perez v. Citicorp Mortg., Inc., 703 N.E.2d 518, 525 (lll. Ct. App. 1998). In such a
circumstance, “a plaintiff must plead [the] existence of contractual discretion.” Mid-West
Energy Consultants, Inc. v. Covenant Home, Inc., 815 N.E.2d 911, 917 (Ill. App. Ct.
2004)(citing N. Trust Co. v. VIII S. Mich. Assocs., 657 N.E.2d 1095 (1995)). Where no
contractual discretion is present, “the good-faith duty to exercise contractual discretion
reasonably does not apply.” Id. (citing Roscetti, 723 N.E.2d at 764). Where a party is
vested with contractual discretion, it must do so “reasonably and with proper motive, not
arbitrarily, capriciously, or in a manner that is inconsistent with the reasonable
expectations of the parties.” Resolution Trust, 618 N.E.2d at 424.
Plaintiffs maintain that reaching the PEP targets was a matter within the sole
discretion and control of Defendant and that Defendant’s failure to retain sufficient
customer volume to trigger the PEP breached the implied covenant of good faith and fair
dealing. The Court finds this position unpersuasive for two reasons. First, the number of
prescriptions filled during the earnout period was not a figure exclusively dictated by
Defendant’s operations. The decline in sales could be attributed to a number of factors
outside the control of Defendant, such as a customer’s preference to support local
pharmacies or customers moving out of the area. Second, Plaintiffs have failed to
identify any provision of the APA that vested Defendant with the type of contractual

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discretion needed to support a breach of contract based on a breach of the implied
covenant of good faith and fair dealing. There is nothing in the APA from which it could
be inferred that Defendant was obligated to meet the PEP targets or undertake actions
that would maximize the total number of prescriptions filled.

Both parties clearly

expected to benefit from this transaction, and the Court fails to discern any bad faith on
the part of Defendant to subvert Plaintiffs’ chance of receiving a prescription earnout
payment.
Before executing the APA, Plaintiffs could have insisted that it contain specific
contractual commitments from Defendant regarding its business operations and
prescription sales. Or, more generally, Plaintiffs could have required that Defendant use
its best efforts to retain sufficient customer volume. However, no such provisions appear
and the Court is without a justification to rewrite the APA and impose such an implied
obligation. As Judge Learned Hand posits, “in commercial transactions it does not in the
end promote justice to seek strained interpretations in aid of those who do not protect
themselves.” James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344, 346 (2d Cir. 1933).
In sum, Defendant’s alleged failure to meet the PEP targets does not amount to a
breach of the APA or a breach of the implied duty of good faith and fair dealing. The
clear, express provisions of the APA did not obligate Defendant to meet the targets or to
take any particular actions. Accordingly, the Court will grant Defendant’s motion to
dismiss the breach of contract claim based on the theory that Defendant improperly failed
to meet the prescription targets.
B.

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In the alternative, Plaintiffs argue that Defendant may have breached the APA if it
actually met the proscribed PEP targets, but falsely advised Deom that it did not.
Defendant has not provided any documentation to Plaintiffs to support its claim that the
Average Customer Prescriptions’ calculation was less than 308. Since Defendant has
exclusive control of the data with respect to the volume of prescriptions filled during the
earnout period, Plaintiffs are unable to confirm that Defendant indeed failed to meet the
minimum prescription target.
Defendant maintains that Plaintiffs waived the right to challenge its calculation of
the Average Customer Prescriptions. To support this contention, Defendant points to a
part of the PEP, which provides, “[Defendant’s] calculation of the Average Customer
Prescriptions shall be conclusive.” ECF No. 1-1. Defendant argues that to ask for an
accounting of the Average Customer Prescriptions filled during the earnout period is
really to challenge it, a right Plaintiffs expressly waived. The Court disagrees.
As stated above, the APA sets forth a formula to determine the Average Customer
Prescriptions. This number is reached by dividing the total number of prescriptions filled
at the three Walgreen pharmacies during the earnout period by the total number of days
in the earnout period.

Plaintiffs have waived the right to challenge Defendant’s

arithmetic in calculating this figure. Notwithstanding, the APA does not direct or permit
Defendant to withhold from Plaintiffs the numbers used in the calculation.
Plaintiffs can easily determine the denominator used in the computation. The
same cannot be said for the numerator, the total number of prescriptions filled by
Defendant in the earnout period, as that figure is within the exclusive possession of
Defendant. The PEP provides that on or about the nine-month anniversary of the closing,

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Defendant would “identify, though its pharmacy computer system, the total number of
prescriptions filled” during the nine-month earnout period. ECF No. 1-1 (emphasis
added). A reasonable interpretation of that clause indicates that Defendant is obligated
to, at the very least, identify that number for the Plaintiffs.3

See BLACK’S LAW

DICTIONARY (9th ed. 2009)(defining identify as “prov[ing] the identity of (a person or
thing)”).
It is plausible from the facts that Defendant may have breached the APA by
failing to pay an earnout payment due under the PEP. It may very well be that Defendant
will produce numbers used in its calculation that are accurate and true. However, the
chance that it did not use proper figures in its calculation precludes dismissal of this
cause of action. The Court will allow Defendant sixty days to respond to Plaintiffs’
limited discovery request concerning the total number of prescriptions filled during the
payout period and an accounting thereof.
III.
Plaintiffs’ complaint also advances an equitable estoppel claim, alleging that they
entered the APA in reliance on Defendant’s representations that it would incorporate
DHE’s customer base into its own for the mutual benefit of the parties, and in such a
manner as to maximize the benefits of the transaction. Illinois law holds that
[t]o establish equitable estoppel, the party claiming estoppel must
demonstrate that (1) the other person misrepresented or concealed
material facts, (2) the other person knew at the time he or she made
the representations that they were untrue, (3) the party claiming
estoppel did not know that the representations were untrue when
they were made and when they were acted upon, (4) the other
person intended or reasonably expected that the party claiming
estoppel would act upon the representations, (5) the party claiming
estoppel reasonably relied upon the representations on good faith to
3

At this early juncture, the Court declines to declare this particular provision ambiguous.

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his or her detriment, and (6) the party claiming estoppel would be
prejudiced by his or her reliance on the misrepresentations if the
other person is permitted to deny the truth thereof.
Rothers Const., Inc. v. Centurion Indus., Inc., 786 N.E.2d 644, 652-53 (Ill. Ct. App.
2003)(citing Geddes v. Mill Creek Country Club, Inc., 751 N.E.2d 1150, 1157 (Ill.
2001).4
At the pleadings stage, a plaintiff is not required to affirmatively prove the
elements of a claim to withstand dismissal. Rather, to survive a motion to dismiss, a
plaintiff must proffer factual allegations that raise a right to relief above a speculative
level, and that state a claim to relief that is plausible on its face. See Twombly, 550 U.S.
at 555, 570. Here, Plaintiffs have failed to allege sufficient facts to maintain a claim for
equitable estoppel. For one, they do not allege that Defendant knowingly misrepresented
or concealed any material fact. Plaintiffs only allege that Defendant failed to comply
with its representations concerning its ability to provide appropriate service to DHE’s
customers in the period following closing.

The APA is replete with such a

representation, and given the APA’s integration clause, the parol evidence rule would
likely bar the introduction of any extra-contractual evidence to support that argument.
Moreover, the alleged representations pertain to future events, which cannot be the basis
of an estoppel claim under Illinois or Kentucky law. See Gilliland v. Allstate Ins. Co.,
388 N.E.2d 68, 71 (Ill. Ct. App. 1979)(“To invoke the doctrine of estoppel, a false
representation must generally relate to an existing or past event, not to a promise
concerning a future happening.”); Lena Petroleum, Inc. v. Kennedy, 2009 WL 723044, *9

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The equitable estoppel claim is extra-contractual, and as such, the choice of law provision mandating the
application of Illinois law may not be implicated. Notwithstanding, Kentucky law mirrors Illinois law with
respect to the elements of an equitable estoppel claim, and Plaintiffs’ claim would meet the same fate under
either common law. See Hitachi Auto. Prods. USA, Inc. v. Craig, 279 S.W.3d 123, 126 (Ky. 2008).

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(Ky. Ct. App. Mar. 20, 2009)(“Equitable estoppel generally requires a misrepresentation
to a past or existing fact.”). As such, Plaintiffs’ equitable estoppel claim merits dismissal
as a matter of law.
Being otherwise sufficiently advised,
IT IS HEREBY ORDERED that Defendant’s motion to dismiss is SUSTAINED
IN PART and DENIED IN PART and the following claims are dismissed: 1) breach of
contract based on Defendant’s alleged failure to maintain sufficient customer volumes; 2)
breach of the implied duty of good faith and fair dealing; and 3) equitable estoppel.
What remains is Plaintiffs’ breach of contract claim based on the allegation that
Defendant met the Prescription Earnout Provision’s targets but falsely advised Deom that
it did not.
IT IS FURTHER ORDERED that Plaintiff is permitted limited discovery to
require Defendant to account in full for its determination that no sums are due pursuant to
the Prescription Earnout Provision. Defendant is given thirty (30) days to respond to a
limited discovery request by Plaintiffs regarding this specific issue.

April 18, 2013

cc:

Counsel of Record

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