BERG v. Pershing Square Capital Management ( 2022 )

21-1980-cv
BERG v. Pershing Square Capital Management
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed
on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate
Procedure 32.1 and this Court’s Local Rule 32.1.1. When citing a summary order in a
document filed with this Court, a party must cite either the Federal Appendix or an
electronic database (with the notation “summary order”). A party citing a summary order
must serve a copy of it on any party not represented by counsel.
At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
on the 30th day of March, two thousand twenty-two.
PRESENT: DENNIS JACOBS,
JOSÉ A. CABRANES,
SUSAN L. CARNEY,
Circuit Judges.
BUSINESS EXPOSURE REDUCTION GROUP (BERG)
ASSOCIATES, LLC,
Plaintiff-Appellant, 21-1980-cv
v.
PERSHING SQUARE CAPITAL MANAGEMENT, L.P.,
Defendant-Appellee.
FOR PLAINTIFF-APPELLANT: Brian R. Della Rocca, Compass Law
Partners, Rockville, MD, and Alexander
Powhida, Powhida & Cano, PLLC,
Albany, New York.
FOR DEFENDANT-APPELLEE: John P. Coffey, Jeffrey S. Trachtman,
Jason M. Moff, Kramer Levin Naftalis &
Frankel LLP, New York, NY.
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Appeal from an order and judgment of the United States District Court for the Southern
District of New York (Paul A. Engelmayer, Judge).
UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the order and judgment of the District Court be and hereby
are AFFIRMED.
In 2013, Defendant Pershing Square Capital Management, L.P. (“Pershing”), an investment
fund, hired Plaintiff Business Exposure Reduction Group Associates, LLC (“BERG”), an
investigative firm, to conduct research related to Pershing’s “short” position in the company
Herbalife, Ltd. (“Herbalife”). Pershing and BERG entered into a contract containing a fee
agreement (the “Fee Agreement”), which provided that BERG would be paid $200 per hour. The
fee agreement further provided for a “success fee,” under which BERG’s rate would increase to
$750 per hour “[i]n the event the case developed by BERG . . . [wa]s settled or resolved in a manner
that [Pershing] determine[d] [wa]s beneficial to the financial standing of [Pershing] . . . .” Joint App’x
38. BERG’s research into Herbalife revealed various damaging facts about the company. In July
2014, Pershing used this information in a presentation designed to drive down the price of Herbalife
and thereby benefit Pershing’s “short” position.
In March 2015, Pershing told BERG to cease its work under the contract. That same month,
BERG advised Pershing to close out its short position in Herbalife, which BERG alleges would
have resulted in a benefit to Pershing of over $107 million, had it done so. Pershing declined to
close its short position. Around the same time, BERG sent Pershing a demand for payment which
included the success fee and totaled about $3 million. Pershing refused to pay the success fee at that
time and indicated it would consider BERG’s entitlement to the success fee after it closed out its
position in Herbalife. Around July 2018, Pershing closed out its position in Herbalife and realized a
“significant loss.” Joint App’x 61. Pershing refused to pay BERG the success fee.
BERG initially sued Pershing in the United States District Court for the District of
Massachusetts. That court found that it lacked jurisdiction over Pershing and transferred the case to
the United States District Court for the Southern District of New York. In December 2020, BERG
filed its operative Amended Complaint (the “Complaint”) alleging breach of contract and breach of
the implied covenant of good faith and fair dealing. Pershing filed a motion to dismiss under Federal
Rule of Civil Procedure 12(b)(6). The District Court granted the motion, and BERG appeals. We
assume the parties’ familiarity with the underlying facts, the procedural history of the case, and the
issues on appeal.
DISCUSSION
We review de novo a district court’s dismissal of a complaint for failure to state a claim under
Rule 12(b)(6). Johnson v. Nextel Communications, Inc., 660 F.3d 131, 138 (2d Cir. 2011). To survive a
motion to dismiss, a complaint must plead “enough facts to state a claim to relief that is plausible on
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its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) A complaint is properly dismissed where
“the allegations in a complaint, however true, could not raise a claim of entitlement to relief.” Id. at
558. The parties agree that the Fee Agreement is governed by New York law. Joint App’x 76 n.5,
166 n.4.
I. Breach of Contract
The District Court dismissed BERG’s breach of contract claim on the ground that the Fee
Agreement unambiguously gave Pershing the discretion to determine whether or not BERG’s work
was financially beneficial to Pershing. We agree.
The Fee Agreement clearly states that BERG was only entitled to the success fee “in the
event the case developed by BERG . . . is settled or resolved in a manner that [Pershing] determines
is beneficial to [its] financial standing.” Joint App’x 38. The Fee Agreement makes clear that “[t]he
decision regarding the ‘beneficial status’ will be made by [Pershing] based on its evaluation of the work
product delivered by BERG.” Id. (emphasis added). The Complaint simply does not allege that
Pershing ever made such a determination. On the contrary, the Complaint itself establishes that
Pershing elected not to make such a determination until it had closed out its short position in
Herbalife. See Joint App’x 62 (alleging that Pershing’s principal “asked that BERG wait until he
closed his position and then he would re-visit BERG’s entitlement” to the success fee). BERG’s
primary counterargument on appeal misses the mark. BERG essentially argues that it has alleged
Pershing did make a determination, namely that BERG had not earned the success fee. Even
assuming that to be true, such a negative determination would merely confirm the result in this case:
Pershing never made the determination that it was financially benefitted, which is what was required
to trigger the success fee.
Under New York law, where, as here, a contract vests one party with the right to make a
discretionary determination, courts “will not interfere with that discretionary determination unless it
is performed arbitrarily or irrationally.” Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 392 (1995).
BERG therefore attempts to argue that it was arbitrary and irrational for Pershing to assess its
financial benefit after it had closed out its short position in Herbalife, rather than to assess it based
on the unrealized gains of $107 million that it allegedly would have realized if it had followed
BERG’s advice and closed out its position in March 2015. But there is nothing irrational about a
hedge fund choosing to determine benefit to its financial standing only after it has closed out a short
position. Indeed, this case demonstrates the contrary, given that Pershing ultimately sustained a loss
on its Herbalife position. We therefore agree with the District Court that BERG “has not come
close” to sufficiently pleading that Pershing acted arbitrarily or irrationally. Joint App’x 245.
In sum, the breach of contract claim was properly dismissed by the District Court.
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II. Breach of the Covenant of Good Faith
New York contract law implies a covenant of good faith and fair dealing. See Thyroff v.
Nationwide Mut. Ins. Co., 460 F.3d 400, 407 (2d Cir. 2007), certified question answered, 8 N.Y.3d 283(2007). The covenant “embraces a pledge that neither party shall do anything which will have the
effect of destroying or injuring the right of the other party to receive the fruits of the contract.
Where the contract contemplates the exercise of discretion, this pledge includes a promise not to act
arbitrarily or irrationally in exercising that discretion.” Dalton, 87 N.Y.2d at 389 (internal quotation
marks omitted).
The margin between BERG’s breach of contract and breach of covenant claims is thin.
“[W]hen a complaint alleges both a breach of contract and a breach of the implied covenant of good
faith and fair dealing based on the same facts, the latter claim should be dismissed as redundant.”
Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 125 (2d Cir. 2013) (citation omitted). In its Complaint,
BERG alleges that Pershing’s “conduct in refusing to follow the recommendation to close its
position was arbitrary or unreasonable” and “prevent[ed] BERG from enjoying the benefit of” the
success fee. Joint App’x 18. On appeal, BERG suggests that by not closing its Herbalife position as
recommended, Pershing “frustrate[d] the ability of BERG to collect its success fee, . . . took the
BERG-developed information about Herbalife to the United States Drug Enforcement
Administration[,] . . . and . . . took that same information to the [Federal Trade Commission] which
resulted in a settlement.” Appellant’s Br. 27.
Assuming, dubitante, that these claims are not duplicative of the “arbitrary or irrational”
arguments BERG advanced in conjunction with its breach of contract claims, we would reject them
for substantially the reasons articulated by the District Court. Pershing was under no obligation to
heed BERG’s investment advice in March 2015. Its failure to do so—while perhaps unwise from a
business perspective and in hindsight—is not evidence of bad faith. See Peter R. Friedman, Ltd. v.
Tishman Speyer Hudson Ltd. P’ship, 107 A.D.3d 569, 570 (1st Dep’t 2013) (“[T]he covenant of good
faith and fair dealing cannot be construed so broadly as effectively to nullify other express terms of a
contract, or to create independent contractual rights.”) (internal quotation marks and alteration
omitted).
CONCLUSION
We have reviewed all of the arguments raised by BERG on appeal and find them to be
without merit. For the foregoing reasons, we AFFIRM the July 16, 2021 order and July 19, 2021
judgment of the District Court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
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