Clement v. Solta Medical CA1/5 ( 2014 )

Filed 9/16/14 Clement v. Solta Medical CA1/5
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FIVE
RICHARD CLEMENT, as Representative,
etc.,
Plaintiff and Appellant, A139965
v. (Alameda County
SOLTA MEDICAL, INC., Super. Ct. No. RG12659048)
Defendant and Respondent.
CLRS Technology Corporation (CLRS) developed CLARO, a dermatological
product for acne treatment. It agreed to merge with a subsidiary of Solta Medical, Inc.
(Solta), which had greater resources for marketing and sales. Under terms of an
“Agreement and Plan of Merger” (Merger Agreement), former CLRS managers and
shareholders would receive contingent payments, dependent upon on sales of CLARO.
The Merger Agreement provided that Solta would have “complete discretion” over
CLARO marketing and sales. Richard Clement, as the former CLRS shareholders’
representative, alleges Solta breached the contract and implied covenant of good faith and
fair dealing by failing to market or sell CLARO, thus denying former shareholders
additional compensation. The trial court sustained Solta’s demurrer, ruling that Solta did
not breach the contract and the implied covenant could not alter the “complete discretion”
granted to Solta in the contract. We affirm.
1
I. BACKGROUND
In reviewing the trial court’s order sustaining the demurrer, we accept as true
properly pleaded factual allegations of the complaint. (Kotlar v. Hartford Fire Ins. Co.
(2000) 83 Cal.App.4th 1116, 1120.) Where a complaint incorporates terms of a contract,
we consider those terms as part of the pleading. (Ibid.) Clement’s original and first
amended complaints, each with the Merger Agreement attached, set forth the following
facts.
A. The Merger Agreement
CLRS developed and produced dermatologic treatments based on intense pulsed
light and heat including CLARO, which used intense pulsed light to treat acne. In
October 2010, CLRS1 and Solta signed the Merger Agreement whereby a Solta
subsidiary (Solta Temp, Inc.) merged into CLRS. CLRS became the surviving company
but with the articles, bylaws, officers and board of directors of Solta Temp, Inc.2
Under the Merger Agreement, existing CLRS shareholders exchanged their CLRS
stock for the right to receive certain “earnout” payments triggered by specified revenue or
operating income milestones during “earnout periods” that spanned from January 1 to
December 31, 2011. Two former CLRS managers, Richard Oberreiter and James
Pereyra, also had the right to receive earnout payments if certain CLARO sales
milestones were met. Payments to the shareholders and managers were to go through
Clement as their designated representative. Solta had to certify the earnout payment
amounts. Clement, as the former shareholders’ and managers’ representative, could
dispute those amounts and if necessary submit the matter to binding arbitration before an
arbitrating accountant.
1
The Merger Agreement was signed by a CLRS officer on behalf of CLRS and
also by Clement as representative of CLRS shareholders.
2
Clement describes the merger as follows: “CLRS would merge with and into
Solta and that Solta would be the surviving company of the merger.” Solta similarly
describes the merger as “structured so that CLRS would be merged into a wholly-owned
subsidiary of Solta.”
2
Solta further agreed to assume or satisfy all the outstanding liabilities of CLRS.
The contingent earnout payments for CLRS shareholders would be reduced by the
amounts paid to satisfy the CLRS indebtedness. Payouts at closing totaled $529,915.46
and included payments to Clement, Oberreiter, and Pereyra. A schedule of other
company debt outstanding as of the closing date, and assumed by Solta, totaled
$232,199.09, including additional amounts owed to Oberreiter and Pereyra.
Principally at issue here are two provisions set forth in article V of the Merger
Agreement, “ADDITIONAL AGREEMENTS.” Section 5.02,3 “Further Action;
Reasonable Best Efforts,” provided in relevant part: “(b) Upon the terms and subject to
the conditions of this [Merger] Agreement, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable Laws to
consummate and make effective the Merger. In case, at any time after the Effective Time,
any further action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this [Merger] Agreement shall use their
reasonable best efforts to take all such action.” (Italics added.)
Section 5.06, “Company Products and Services from and after the Effective
Time,” provided: “[Solta], [CLRS] and the Representative [(Clement)] acknowledge and
agree that [Solta] shall have complete discretion in the ordinary course of its business
over all matters relating to any [CLRS] Products and Services from and after the
Effective Time, including, but not limited to, any matter relating to the development,
testing, regulatory submission or regulatory approval, if applicable, manufacturing,
marketing, sales, distribution, pricing, service or maintenance thereof.” (Italics added.)
B. The Lawsuit
In December 2012, Clement sued Solta in his capacity as representative of
CLRS’s former shareholders. The original complaint alleged that in November and
December 2010, Solta had prepared and approved formal budgets for the sale and
3
All undesignated section references are to the Merger Agreement.
3
marketing of CLARO, but “decided shortly after the start of the earnout periods that it
would not support CLARO sales with marketing efforts during the earnout period.” Solta
misrepresented its CLARO marketing plans to shareholders, stating in May 2011 that it
was “ramping up production for CLARO” and that it had spent money on sales and
marketing of CLARO in the first quarter of 2011. In fact, Solta “had not authorized the
kind of investment in marketing [CLARO] that had been anticipated at the time of the
acquisition of CLRS.” In August 2011, Solta falsely stated it expected CLARO and
another project to “ ‘drive significant top line growth in the second half of the year.’ ” In
fact, “Solta had already made a decision to substantially cease marketing efforts for
CLARO during the earnout period.” In November 2011, Solta reported that it had
determined as of September 30, 2011, that it would not make earnout payments because
the revenue milestones would not be achieved, and that prediction became true. Clement
alleged that Solta breached the Merger Agreement and implied covenant of good faith
and fair dealing by “failing to use its reasonable best efforts to sell or market CLARO in
breach of Section 5.02(b) . . . . Solta essentially ceased providing marketing and support
for CLARO in early 2011.”4
Solta demurred to the complaint, arguing the theory of the complaint was
“explicitly foreclosed by the unambiguous terms of the parties’ contract. . . . [The parties]
agreed that Solta would have ‘complete discretion’ regarding ‘any matter relating to the
development, testing, . . . manufacturing, marketing, sales [or] distribution’ of the product
in question.” The trial court agreed the complaint failed to state a valid claim as pled.
“[Clement’s] claims for breach of contract and breach of covenant are governed by the
rules of contract interpretation discussed in Third Story Music Inc. v. Waits (1995)
41 Cal.App.4th 798, in which defendant record company had the contractual right to, at
its election, refrain from doing anything to market the music that was the subject of that
contract. The court in Third [Story] Music observed that, where (as here) a discretionary
4
Clement also alleged that this conduct violated Business and Professions Code
section 17200 et seq. In his first amended complaint, however, Clement abandoned this
claim.
4
power is expressly given by contractual language, there was an apparent inconsistency
between the principle that the covenant of good faith should be applied to restrict exercise
of that discretionary power, and the principle that an implied covenant must never vary
the express terms of the parties’ agreement. (Id. at [pp.] 803–804.) The court reconciled
that inconsistency by finding that, read literally, the discretionary contract provision was
‘a textbook example of an illusory promise,’ and if that were the only consideration given
by defendant a duty to exercise that discretion in good faith would necessarily be implied.
(Id. at [p.] 808.) However, because the illusory promise embodied in the contract’s
discretionary provision was not the only consideration given by defendant, the court held
that the implied covenant of good faith and fair dealing could not be used to vary the
express terms of the contract’s discretionary provision. (Id. at [pp.] 808–809.)
Therefore, whether or not [Clement] here can allege a viable claim for Breach of Contract
and Breach of Covenant of Good Faith and Fair Dealing, in which [Solta] had an implied
obligation to use [its] ‘reasonable best efforts’ to sell or market CLARO, depends largely
on what consideration [Clement] and the other CLRS shareholders actually received for
entering the [Merger] Agreement.” The court sustained the demurrer with leave to
amend “to clearly allege (1) what consideration, if any, [Clement] and the other CLRS
. . . shareholders were given for entry into the [Merger] Agreement . . . , and (2) what
provision of that [Merger] Agreement set forth the compensation (if any) that [Clement]
and the other shareholders were actually paid.”
In a first amended complaint, Clement alleged that “Solta contracted to pay all of
the consideration owing to the common shareholders of CLRS in the form of delayed
earnout payments . . . .” (Italics & boldface omitted.) Because this was the only
consideration for the common shareholders, “the parties discussed and understood that
one of the fundamental purposes of the Merger Agreement was to enable sales of the
CLARO product line through Solta’s superior resources and access to the retail sales
channel. [¶] . . . Indeed, CLRS executives . . . provided Solta with detailed sales
projections that had accompanying budgets for the marketing of CLARO. These budget
and sales projections formed the basis of the earnout formulas . . . [and t]he CLRS
5
common shareholders agreed to the Merger Agreement in reliance on Solta’s
representations during negotiation of the Merger Agreement that it would support
CLARO through marketing efforts, particularly through the retail sales channel. [¶] . . .
Solta’s executives discussed with CLRS executives various channels through which the
new merged business would market CLARO in the ordinary course in order to generate
sales to trigger the earnout formulas . . . .” However, “[r]ather than market CLARO
during the earnout periods in the ordinary course of business as it was required to [do],
Solta essentially halted its marketing of CLARO. [¶] . . . [D]uring the earnout periods,
between January 1 and December 31, 2011, Solta executives made a decision to
significantly curtail marketing of CLARO and ignore the marketing plans they had
agreed to . . . . [¶] . . . Despite being advised on multiple occasions by Richard Oberreiter
and others that Solta was not adequately supporting the marketing of CLARO during the
earnout periods, Solta executives refused to do so. For example, Solta refused to partner
with Sephora to market and sell CLARO through its stores during the earnout periods,
despite the fact that Sephora was a key potential retail channel for the product. [¶] . . . By
refusing to take such minimal marketing efforts, Solta deliberately eliminated any
possibility of an earnout payment to the [CLRS former] shareholders and breached
Sections 2.05[5] and 5.02(b) of the Merger Agreement.” Clement alleged that the
“complete discretion” provided to Solta in section 5.06 was only “boilerplate language”
which “simply acknowledged Solta’s right to run its business in the ordinary course
while upholding the purposes of the Merger Agreement . . . . Importantly, the parties did
not intend or agree to provide Solta unfettered discretion with respect to whether it could
5
Section 2.05 provides: “Further Assurances. [¶] If at any time before or after the
Effective Time Parent reasonably believes or is advised that any further instruments,
deeds, assignments or assurances are reasonably necessary or desirable to consummate
the Merger or to carry out the purposes and intent of this Agreement at or after the
Effective Time, then [CLRS], [Solta], the Surviving Corporation and their respective
officers, directors, managers or managing member, as the case may be, shall execute and
deliver all such proper deeds, assignments, instruments and assurances and do all other
things reasonably necessary or desirable to consummate the Merger and to carry out the
purposes and intent of this Agreement.”
6
unilaterally refrain from marketing CLARO or otherwise game the earnout structure set
forth in the Merger Agreement.”
Solta demurred to the first amended complaint, again arguing Clement’s claims
were explicitly foreclosed by section 5.06’s “complete discretion” language. It argued,
consistent with the prior trial court order, that the implied covenant of good faith and fair
dealing could override the express “complete discretion” contract language only if the
contract would otherwise be illusory because it provided no other consideration to CLRS.
However, the Merger Agreement provided CLRS with other consideration: Solta
“(i) assumed specified CLRS indebtedness; and (ii) paid CLRS shareholders hundreds of
thousands of dollars independent of the earnout.” (Italics & boldface omitted.)
Solta argued that the earnout payments were made conditional by the parties
“[g]iven the uncertainties associated with CLARO and its prospects . . . . [T]he parties
expressly and unequivocally agreed that Solta would have ‘complete discretion’ over all
decisions relating in any way to the manufacturing, marketing, sales and distribution of
CLARO[.] [¶] . . . [¶] As the [first amended complaint] acknowledges, Solta publicly
expressed its high hopes for sales of CLARO and noted that it had committed substantial
resources to production, sales and marketing of it. [Citation.] However, CLARO proved
to be far less successful than the parties anticipated and—as [Clement] concedes—sales
never reached levels high enough to trigger the earnout provisions.”
The court sustained the demurrer without leave to amend. “[Clement] fails to
allege facts supporting [his] claim that [Solta] breached the Merger Agreement, or any
Covenant of Good Faith and Fair Dealing pertaining to that Agreement, by failing to use
‘its reasonable best efforts’ to sell or market CLARO. Section 5.06 of the Agreement
expressly gave [Solta] ‘complete discretion’ over all matters pertaining to the marketing
and sales of any company products including CLARO, and it did not provide that [Solta]
must use its ‘reasonable best efforts’ to sell or market any products. An implied covenant
cannot be used to prohibit a party from doing that which is expressly permitted by the
contract, and implied terms should never be read to vary express terms. (See Carma
Developers (Cal.) Inc. v. Marathon Development California Inc. (1992) 2 Cal.4th 342,
7
374 [(Carma)].) Assuming arguendo that there was a conflict or ambiguity between the
general provisions of Section 5.02(b) (requiring parties to use ‘reasonable best efforts’ to
carry out the purposes of the [Merger] Agreement) and Section 5.06 (granting [Solta]
‘complete discretion’ over all matters relating to marketing or sales of products), the
more specific provision—5.06—would control. (See Code [Civ. Proc., §] 1859.)
“Although the Court could read an implied covenant into the [Merger] Agreement
that [Solta] made a good faith effort to sell or market the product if obviously necessary
to prevent the [Merger] Agreement from becoming illusory (see, e.g., Third Story Music
Inc. v. Waits[, supra,] 41 Cal.App.4th [at pp.] 808–809), [Clement] does not allege facts
demonstrating such necessity. An implied covenant will not be read into an agreement to
vary its terms if the agreement is supported by legally adequate consideration. ([Ibid.];
see also Thrifty Payless Inc. v. Mariners Mile Gateway, LLC (2010) 185 Cal.App.4th
1050, 1061–1063.) Although First Amended Complaint paragraphs 14 and 39 allege that
the holders of CLRS common stock did not receive any consideration from the merger
apart from earnout payments contingent on future sales of CLARO, the [Merger]
Agreement itself clearly indicates that legally adequate consideration was paid by [Solta].
(See Section 1.01(a) . . . , providing for ‘Aggregate Merger Consideration[’] of $2 million
less the amount of indebtedness as of the closing date,[6] as well as Schedule I to the
[Merger] Agreement, providing for payments to [Clement] and others of over $500,000
within three days of the closing date.) [Solta’s] assumption of CLRS’[s] debt constitutes
consideration sufficient to support the agreement. (See, e.g., Beatrice Co. v. State Bd. of
Equalization (1993) 6 Cal.4th 767, 782–783.)
“Finally, [Clement’s] reliance on Locke v. Warner Bros. Inc. (1997)
57 Cal.App.4th 354 is unavailing. When, as in Locke, a promisor’s obligations deal with
6
The “Aggregate Merger Consideration” was a figure used to determine the
amount of earnout payments to former shareholders in the event such payments were
triggered by the company’s reaching designated milestones. (§ 2.01(e)(iii)–(iv), (g)(i)–
(ii).) Solta does not cite to any term of the Merger Agreement that required the
Aggregate Merger Consideration amount to be paid as a term of the merger separate from
the earnout payments.
8
purely subjective matters such as artistic judgment, a covenant of good faith is implied to
supply adequate consideration to support the contract. (See Storek & Storek Inc. v.
Citicorp Real Estate Inc. (2002) 100 Cal.App.4th 44, 61.) But where, as here, a
promisor’s performance calls for satisfaction as to financial considerations, commercial
value, or other objective considerations, the contract is not illusory and no covenant of
good faith is implied, because the promisor’s ability to claim dissatisfaction is limited by
the standard of reasonableness. (Id. at [pp.] 57–61.) [Clement] alleges no facts
suggesting that [Solta’s] purported failure to adequately market CLARO was
commercially unreasonable.” The court dismissed the action.
II. DISCUSSION
“On appeal from an order of dismissal after an order sustaining a demurrer, the
standard of review is de novo: we exercise our independent judgment about whether the
complaint states a cause of action as a matter of law. [Citation.] First, we give the
complaint a reasonable interpretation, reading it as a whole and its parts in their context.
Next, we treat the demurrer as admitting all material facts properly pleaded. Then we
determine whether the complaint states facts sufficient to constitute a cause of action.
[Citations.] [¶] We do not, however, assume the truth of contentions, deductions, or
conclusions of law. [Citation.]” (Stearn v. County of San Bernardino (2009)
170 Cal.App.4th 434, 439–440.) “[T]he allegations of the complaint must be liberally
construed with a view to attaining substantial justice among the parties. [Citations.]”
(Kotlar v. Hartford Fire Ins. Co., supra, 83 Cal.App.4th at p. 1120.)
“ ‘Where a written contract is pleaded by attachment to and incorporation in a
complaint, and where the complaint fails to allege that the terms of the contract have any
special meaning, a court will construe the language of the contract on its face to
determine whether, as a matter of law, the contract is reasonably subject to a construction
sufficient to sustain a cause of action for breach.’ [Citation.]” (Davies v. Sallie Mae, Inc.
(2008) 168 Cal.App.4th 1086, 1091.) “Whether the contract is reasonably susceptible to
a party’s interpretation can be determined from the language of the contract itself or from
extrinsic evidence of the parties’ intent. [Citation.] Extrinsic evidence can include the
9
surrounding circumstances under which the parties negotiated or entered into the
contract; the object, nature and subject matter of the contract; and the subsequent conduct
of the parties. [Citations.]” (Cedars-Sinai Medical Center v. Shewry (2006)
137 Cal.App.4th 964, 980.) If the proposed interpretation is “clearly erroneous,” the
demurrer may be sustained. (See Aragon-Haas v. Family Security Ins. Services, Inc.
(1991) 231 Cal.App.3d 232, 239.)
We first address Solta’s arguments regarding the implied covenant of good faith
and fair dealing.
A. Breach of the Implied Covenant of Good Faith and Fair Dealing
“ ‘ “Every contract imposes upon each party a duty of good faith and fair dealing
in its performance and its enforcement.” (Rest.2d Contracts, § 205.) This duty has been
recognized in the majority of American jurisdictions, the Restatement, and the Uniform
Commercial Code. [Citation.]’ [Citation.]” (Carma, supra, 2 Cal.4th at pp. 371–373.)
“The covenant of good faith finds particular application in situations where one
party is invested with a discretionary power affecting the rights of another. Such power
must be exercised in good faith. [Citations.] . . . [¶] . . . [¶] [T]he scope of conduct
prohibited by the covenant of good faith is circumscribed by the purposes and express
terms of the contract. [Citations.] . . . [U]nder traditional contract principles, the implied
covenant of good faith is read into contracts ‘in order to protect the express covenants or
promises of the contract, not to protect some general public policy interest not directly
tied to the contract’s purpose.’ [Citation.]” (Carma, supra, 2 Cal.4th at pp. 372–373.)
For the implied covenant to be imposed, “ ‘ “the implication must arise from the language
used or it must be indispensable to effectuate the intention of the parties; . . . [and] it must
appear from the language used that it was so clearly within the contemplation of the
parties that they deemed it unnecessary to express it . . . .” ’ [Citations.]” (Third Story
Music, Inc. v. Waits, supra, 41 Cal.App.4th at p. 804.)
Courts have repeatedly held that the implied covenant applies to contract clauses
that give one party discretion over a class of activity. Several of these cases hold that the
covenant is violated by a categorical refusal to engage in the activity. In Locke v. Warner
10
Bros., Inc., supra, 57 Cal.App.4th 354, for example, Warner Brothers paid for a three-
year “ ‘nonexclusive first look’ ” at Locke’s movie proposals and a “ ‘pay or play’ ”
directing deal. Under both elements of the contract, Warner Brothers had to pay Locke a
fixed sum of money but had no obligation to accept a proposal or hire Locke to direct a
film. Nevertheless, the court held the implied covenant applied to Warner Brothers’
exercise of discretion under the contract and further held that evidence Warner Brothers
never intended to accept a deal or have Locke direct a film would establish a violation of
the implied covenant. (Id. at pp. 358, 364–367.) In Pasadena Live v. City of Pasadena
(2004) 114 Cal.App.4th 1089, event promoter Pasadena Live paid for renovations to a
City-owned amphitheater in exchange for the City’s consideration of Pasadena Live’s
event applications. The contract acknowledged that Pasadena Live proposed to produce
11 events in 2000 and 2001. After approving five such events, the City allegedly
categorically refused to approve any more Pasadena Live events unless it met conditions
not set forth in the contract. The court held that the implied covenant applied to the
City’s consideration of the proposals and that the City’s refusal to even consider
additional proposals by Pasadena Live, if proven, was a violation. (Id. at pp. 1091–
1093.)
The implied covenant does not apply to all discretionary contract provisions,
however. The implied covenant ordinarily cannot override the express terms of a
contract. (Carma, supra, 2 Cal.4th at p. 374.) “ ‘The general rule [regarding the
covenant of good faith] is plainly subject to the exception that the parties may, by express
provisions of the contract, grant the right to engage in the very acts and conduct which
would otherwise have been forbidden by an implied covenant of good faith and fair
dealing. . . . [¶] This is in accord with the general principle that, in interpreting a contract
“an implication . . . should not be made when the contrary is indicated in clear and
express words.” [Citation.] . . . .’ [Citation.]” (Ibid.)
Thus, if the contract gives a party the discretion to do the specific act that is
alleged as a breach of the implied covenant, the implied covenant does not apply. In
Carma, for example, a commercial lease prohibited the lessee from subletting the
11
premises without prior written consent of the landlord, “ ‘which consent shall not be
unreasonably withheld.’ ” (Carma, supra, 2 Cal.4th at p. 351.) However, the lease also
expressly allowed the landlord, when faced with a proposed sublease, to terminate the
lease rather than approve the sublease and to enter into its own new lease with the
intended sublessee and capture any increase in the rent. (Id. at pp. 351–352 [“ ‘Tenant
shall not be entitled to any portion of the profit, if any, which Landlord may realize on
account of such termination and reletting’ ”].) The landlord exercised the latter right in
order to capture higher rent in a rising market. The court rejected the argument that the
implied covenant of good faith and fair dealing barred the landlord from exercising that
right unless it had a reasonable objection to the proposed sublessee. “[S]uch
interpretation would be contrary to the express language and natural import of [the latter
provision]. . . . [I]t was certainly within the reasonable expectations of the parties that
[the landlord] might terminate the lease upon a proposed transfer in order to claim for
itself appreciated rental value of the premises.” (Id. at pp. 373–374.)
Similarly, where a contract provided, “ ‘If, for any reason . . . the Lease Term has
not commenced by June 30, 2008, Tenant and Landlord shall each have the right to
terminate this Lease by giving written notice to the other,’ ” the implied covenant did not
apply to a decision to terminate under this clause. (Thrifty Payless, Inc. v. Mariners Mile
Gateway, LLC, supra, 185 Cal.App.4th at pp. 1060–1062; see also New Hampshire Ins.
Co. v. Ridout Roofing Co. (1998) 68 Cal.App.4th 495, 501, 504–505 [contract expressly
allowed insurer to settle any claim “ ‘at [its] discretion’ ” and to require the insured to
reimburse deductible amounts paid to effect the settlement]; PMC, Inc. v. Porthole
Yachts, Ltd. (1998) 65 Cal.App.4th 882, 889–892 [contract expressly allowed purchaser
of yacht to terminate contract by rejecting trial run or maritime survey and parties
understood this could be done for any reason].)
The implied covenant also does not apply if a contract gives one party discretion
over a class of activity (as in Locke v. Warner Bros., Inc., supra, 57 Cal.App.4th 354) but
also expressly allows the party to refrain from the activity. Thus, where a contract gave a
music studio the discretionary right to sell certain recordings, but further provided the
12
studio “ ‘at [its] election’ ” could refrain from doing so, the implied covenant did not
apply to the studio’s decision not to sell a recording. (Third Story Music, Inc. v. Waits,
supra, 41 Cal.App.4th at pp. 808–809.) Similarly, where a contract gave the Disney
corporation the right to license use of film characters for promotion or advertising “as
[Disney] may see fit,” and also provided that Disney “shall not be under any obligation to
exercise any of the rights granted” under the contract, the implied covenant did not apply
to Disney’s licensing decisions. (Wolf v. Walt Disney Pictures & Television (2008)
162 Cal.App.4th 1107, 1112–1113, 1121–1123 & fn. 7.)
The only exception to the rule that the implied covenant cannot vary the express
terms of a contract is the circumstance where the contract would otherwise be
contradictory, ambiguous or illusory. (Third Story Music, Inc. v. Waits, supra,
41 Cal.App.4th at pp. 805–806.) In April Enterprises, Inc. v. KTTV (1983)
147 Cal.App.3d 805, 813–814 for example, the contract granted both parties the right to
seek syndication of a television program and allowed one party to erase videotapes of
such program. In order to resolve the inherent contradiction, the court construed the
erasure clause to be limited by the implied covenant, allowing erasure only if future
syndication of the program was not feasible. (Id. at pp. 816–817.)
The contract here, in section 5.06, granted Solta discretion over the marketing and
sale of CLARO. It did not expressly provide authority for Solta to refrain entirely from
marketing and selling CLARO or to do any of the specific acts Clement alleges as breach
of the covenant. The Merger Agreement does, however, grant Solta “complete
discretion” over the marketing and sale of CLARO. In our view, this is significant
distinction. “Complete discretion” must mean something more than mere “discretion.”
Ordinarily, contracts should not be construed in a manner that renders terms superfluous.
(See Travelers Casualty & Surety Co. v. Superior Court (1998) 63 Cal.App.4th 1440,
1455 [“the interpretation of ‘sudden’ [in an insurance contract] must include a temporal
component; otherwise, the word is rendered mere surplusage”].) The Supreme Court has
described a contract clause that granted “ ‘absolute and sole discretion’ ” to one party as
“broad and express language” that made the implied covenant inapplicable. (Steiner v.
13
Thexton (2010) 48 Cal.4th 411, 419–420.) A court may not imply a covenant of good
faith and fair dealing which contradicts the express terms of a contract. (Storek & Storek,
Inc. v. Citicorp Real Estate, Inc., supra, 100 Cal.App.4th at p. 55.) Whether or not a
grant of “complete discretion” over an activity might be broad enough to allow a party to
refrain from an activity within the contemplation of a contract entirely, we view it as at
least sufficiently broad to necessarily bar a court from second-guessing how the activity
was carried out.
Here, Clement has essentially conceded that Solta did not completely refrain from
marketing and selling CLARO in the earnout period. In the original complaint, he
alleged that during the earnout period Solta “had not authorized the kind of investment in
marketing [CLARO] that had been anticipated at the time of the acquisition of CLRS”
and Solta “made a decision to substantially cease marketing efforts for CLARO during
the earnout period.” (Italics added.) Specifically, “Solta essentially ceased providing
marketing and support for CLARO in early 2011.” (Italics added.) In his first amended
complaint, Clement similarly alleged “[r]ather than market CLARO during the earnout
periods in the ordinary course of business as it was required to [do], Solta essentially
halted its marketing of CLARO. [¶] . . . [D]uring the earnout periods, between January 1
and December 31, 2011, Solta executives made a decision to significantly curtail
marketing of CLARO and ignore the marketing plans they had agreed to . . . . [¶] . . .
Despite being advised on multiple occasions by Richard Oberreiter and others that Solta
was not adequately supporting the marketing of CLARO during the earnout periods,
Solta executives refused to do so. For example, Solta refused to partner with Sephora to
market and sell CLARO through its stores during the earnout periods, despite the fact that
Sephora was a key potential retail channel for the product.” (Italics added.) The
allegations of Clement’s pleadings, taken as true, establish that Solta did not completely
refrain from marketing and selling CLARO, but rather marketed CLARO during the
earnout period in a manner, and for a duration, that Clement believed to be inadequate.
The agreement negotiated by the parties gave Solta the “complete discretion” to do so.
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Nor did the lack of earnout payments render the contract illusory for lack of
consideration. The former common shareholders of CLRS received consideration for the
merger not only in the form of Solta’s marketing efforts, but in Solta’s assumption of
substantial debt of CLRS, and payment of more than $500,000 to CLRS creditors,
including CLRS former shareholders and managers. The Merger Agreement was
therefore supported by ample consideration, and enforceable. Clement cites no relevant
authority to support his argument that the contract would be illusory unless the former
shareholders received direct consideration in their role as shareholders (i.e., not as
creditors of CLRS).
Clement argues that section 5.02(b), requiring that the parties use “reasonable best
efforts” to take “any further action [that] is necessary or desirable to carry out the
purposes of this [Merger] Agreement” was intended to ensure that Solta would take steps
to effectuate the parties’ mutual intent and that Solta was thereby obligated to “carry out
some type of marketing and selling of CLARO.”7 As Solta notes, section 5.02(b) makes
no mention of sales, marketing or CLARO. The interpretation Clement offers for the
general provisions of section 5.02(b) is directly at odds with the more specific provisions
of section 5.06, providing Solta with “complete discretion . . . over all matters relating to
any [CLRS] Products and Services . . . including, but not limited to, any matter relating to
the development, . . . manufacturing, marketing, sales, distribution, pricing, service or
maintenance thereof.” We consider the contract as a whole and interpret the language in
context, rather than interpret a provision in isolation. (Employers Reinsurance Co. v.
Superior Court (2008) 161 Cal.App.4th 906, 919.) Moreover, a specific provision
prevails over a general one. (Code of Civ. Proc., § 1859.)
The court properly sustained the demurrer to the implied covenant claim without
leave to amend.
7
Clement contends that the question of how much marketing and selling of
CLARO adequately constitutes “reasonable best efforts” is a question for a jury.
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B. Breach of Contract
Clement has not alleged a breach of the express terms of the Merger Agreement by
Solta. The only breach alleged was inadequate marketing and sales of CLARO, but we
have concluded that Solta did not breach a contract provision granting it complete
discretion over such marketing and sales even taking the implied covenant into
consideration. It follows that the bare breach of contract claims fails as well and the trial
court properly sustained Solta’s demurrer without leave to amend.
III. DISPOSITION
The judgment is affirmed. Clement shall pay Solta’s costs on appeal.
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Bruiniers, J.
We concur:
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Jones, P. J.
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Needham, J.
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