LITTLE ROCK, Ark. (Legal Newsline) - The Arkansas Supreme Court last week reversed a $3 million jury verdict against a medical testing company.
William Jennings B. Osborne and Marie E. Osborne were the owners of Arkansas Research Medical Testing Center Inc., which specialized in procuring and performing clinical drug trials for pharmaceutical companies. In June 2004, the Osbornes sold the company to Arch Sub LLC, a wholly owned subsidiary of Stephens Capital Partners. The company was reorganized as ARMT.
As part of their purchase agreement, William Osborne was to remain with ARMT in a consulting role, for which he would be paid $500,000 over five years. The contract also contained an earn-out provision, which provided the Osbornes would be paid up to an additional $3 million a year for three calendar years from 2004 through 2006 if the company reached certain minimum profit thresholds. The couple also consented to a noncompete agreement, for which they were paid an additional $100,000 a year for a period of five years.
Pursuant to the earn-out provision, the Osbornes were paid a total of $3 million for the calendar year 2004. However, for calendar years 2005 and 2006, annual gross revenues were less than $7.5 million and no payments were made.
On Oct. 10, 2008, the couple filed suit against ARMT, Arch Sub LLC, Stephens Capital Partners LLC and Stephens Holding Company. The complaint alleged breach of the covenant of good faith and fair dealing, breach of fiduciary duty, breach of contract, breach of third-party-beneficiary agreement, interference with contract, constructive fraud and promissory estoppel.
Following an unsuccessful motion for partial summary judgment on the implied covenant and contract counts, the case proceeded to a jury trial.
ARMT twice moved for a directed verdict. The company's motion was denied on the following counts: breach of the covenant of good faith and fair dealing, breach of contract, breach of a third-party-beneficiary agreement and constructive fraud.
The jury returned with a verdict against ARMT of $2 million for breach of the implied covenant of good faith and fair dealing in 2005, and $1 million for the same in 2006. However, the jury found that no breach of contract, breach of a third-party-beneficiary agreement or constructive fraud had occurred.
ARMT moved for judgment notwithstanding the verdict, arguing that Arkansas has not recognized a separate cause of action for breach of an implied covenant and that there was no evidence of bad faith to prevent the earn-out payments. The motion was denied, and the company filed an appeal with the state's high court.
The Court, in its ruling filed Thursday, reversed the judgment and remanded the case to the Pulaski County Circuit Court. Justice Paul E. Danielson wrote the Court's six-page opinion.
In it, the justices sided with the company, declining to recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing. The Court, it said, has never recognized such a cause of action.
Also, the Court said, the Osbornes did not provide "a compelling argument" as to why it should recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing separate from a breach-of-contract claim.
"Traditionally, this court has narrowly construed the concept of bad faith. As we noted in Findley v. Time Insurance Co., the tort of bad faith arose from the duty of good faith and fair dealing implied in a contract between the parties.
"While we chose to recognize a tort arising from that duty, the tort of bad faith, we specifically limited its applicability to an insurer who actively engaged in dishonest, malicious, or oppressive conduct in order to avoid its liability.
"We simply see no reason to now recognize a separate contract claim for breach of the duty of good faith and fair dealing. Therefore, a breach of the implied covenant of good faith and fair dealing remains nothing more than evidence of a possible breach of a contract between parties."
From Legal Newsline: Reach Jessica Karmasek by e-mail at firstname.lastname@example.org.