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Careful Drafting of Commercial Contracts



The recent commercial contract lawsuit of Cohen v. Wrapsol Acquisition, LLC highlights the importance of clear and adequate language in contractual relationships. In November 2012, OtterBox, a leading manufacturer and retailer of protective coverings for portable electronic devices, created a subsidiary, Wrapsol Acquisition, LLC, to purchase Wrapsol,[1] a much smaller manufacturer and retailer of similar products. OtterBox acquired Wrapsol through an Asset Purchase Agreement (APA). As part of the APA, OtterBox assumed Wrapsol’s liabilities and paid $2 million for the company. OtterBox also agreed to quarterly “contingent payments” tied to the “realized gross profits” of OtterBox’s new Wrapsol Division for each quarter until September, 2016.[2]

The APA contained specific terms and conditions (profit thresholds, percentage payment amounts, etc.) for these contingent payments. A key provision of the APA provided: “Sellers . . . acknowledge and agree that from Closing [OtterBox] owns and control . . . the [Wrapsol] Business and, therefore, is entitled to operate the Business in whatever manner Purchaser determines to be in Purchaser’s best interest.”[3]

OtterBox formally closed its Wrapsol Division in September, 2015, necessarily eliminating any potential contingency payments between September 2015 and September 2016. Following the closure, Cohen, one of Wrapsol’s founders, sued OtterBox and its subsidiary, Wrapsol Acquisitions, LLC in federal district court alleging breach of contract and breach of an implied covenant of good faith and fair dealing. Cohen alleged that OtterBox’s operation of its Wrapsol Division failed to maximize profits, and that OtterBox miscalculated contingency payments. The defendants won the case on a motion to dismiss.

The Implied Covenant of Good Faith and Fair Dealing Might Not Save You

At first glance, this outcome might seem misguided. Didn’t OtterBox fail to deal fairly with Wrapsol?  The problem for Wrapsol, however, was that the implied covenant of good faith and fair dealing could not override the plain terms of the parties’ contract,[4] and its APA did not obligate Otterbox to maximize profits for its Wrapsol Division. It only required OtterBox to operate its Wrapsol division “in whatever manner [it] determine[d] to be in [it’s] best interest.”[5] In other words, contingent payments were not guaranteed because OtterBox had carefully contracted around them and Wrapsol had agreed to the contract.

The lesson for Utah business owners is this: a carefully drafted contract is often much more useful in a commercial contract lawsuit than an implied covenant of good faith and fair dealing. As a result, when you enter into contracts, be sure to work for the terms that you feel are necessary to protect your interests—you may not be able to rely on an implied covenant of good faith and fair dealing if you don’t.

References:

[1] Cohen v. Wrapsol Acquisition, LLC, 2016 WL 1408149. (Unpublished opinion).

[2] Id.

[3] Id.

[4] Id. (citing Global Fitness Holdings, LLC v. Federal Recovery Acceptance, Inc., 127 F. Supp. 3d 1176 (D. Utah 2015)).

[5] Id.

© 2016 Kevin R. Worthy. All rights reserved.

 

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