Judge Johnston Concludes Vague Allegations of “Illegal Activity” Are Insufficient under Delaware’s Pleading Standards and Implied Covenant of Good Faith and Fair Dealing Claim Is Duplicative of Contract Claim

August 7, 2019

Publication

In West v. Access Control Related Enterprises, LLC, et al, C.A. No. N17C-11-137 MMJ [CCLD], Judge Johnston granted in part and denied in part a motion to dismiss. The case arose from the termination of William West, CFO and COO of Access Control Related Enterprises, LLC (“ACRE”). Prior to West’s termination, LLR Equity Partners (“LLR”) purchased a controlling interest in ACRE. West entered into an equity award agreement and a severance agreement with LLR. The severance agreement provided for West to receive payments if he was terminated without cause, and the equity award agreement defined cause. West was later terminated for cause, and he brought suit alleging that ACRE manufactured the cause for his termination. West asserted claims for wrongful termination, breach of the covenant of good faith and fair dealing, breach of contract, tortious interference with contract and prospective business relations, conversion, and declaratory relief. All defendants moved to dismiss.

First, Judge Johnston dismissed West’s claims for wrongful termination against all defendants except for ACRE. In so holding, Judge Johnston found that, under California law, ACRE was West’s employer and only an employer may be liable for wrongful termination. Moreover, a claim for wrongful termination against third parties cannot be bootstrapped through allegations of a conspiracy. Judge Johnston stated that it was the plaintiff’s burden to identify a specific statute, regulation, or constitutional provision entitling him to relief, which he failed to do. Vague allegations of illegal activity are insufficient.

Second, Judge Johnston also considered the claims for tortious interference and declined to dismiss these claims as to any defendant. Unlike wrongful termination, a claim for tortious interference may be brought against a third party to the agreement. Moreover, Judge Johnston concluded, after considering Delaware case law on tortious interference with employment agreements, that whether the defendants acted within the scope of their authority is a factual issue that should be developed through discovery.

Finally, Judge Johnston dismissed West’s claim for breach of the implied covenant of good faith and fair dealing against all defendants. West alleged that the implied covenant was breached because ACRE applied an incorrect standard of “cause” in terminating West. Judge Johnston stated that the claim was duplicative of the breach of contract claims because there was no gap in the contract. There was, therefore no need to apply the implied covenant. Accordingly, the claim was dismissed.

Analysis: Consistent with several of the other cases this quarter, the court closely scrutinized the implied covenant claim and ultimately dismissed it as duplicative of the contract claim. The decision also highlights that while Delaware’s pleading standards are minimal, vague allegations of “illegal activity” are not enough to survive a motion to dismiss.