ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, November 28, 2011

"The Implied Covenant of Good Faith and Fair Dealing Is Not a License for a Court to Make Stuff Up"

StrineThus Delaware Chancellor Strine (pictured) in Winshall v. Viacom Int'l Inc. This case emerged as a result of a merger through which Viacom International (Viacom) became the parent corporation of Harmonix Music Systems (Harmonix), the company that brought us Guitar Hero, Rock Band, among other happy diversions.  Under the terms of the 2006 merger agreement, Mr. Winshall and other selling shareholders were paid $175 million plus an uncapped right to certain earn-outs based on the extent to which Harmonix exceeded certain earnings goals in 2007 and 2008.  

Rock Band was a huge success, causing its distributor, Electronic Arts, Inc. (EA) to want to re-negotiate its agreement with Harmonix so as to secure broader distribution rights over Rock Band and its sequels.  Harmonix elected to do so, but the way Harmonix negotiated distribution fees did not have the positive impact on Mr. Winshall believed it could have had.  Harmonix elected to front-load the distribution fees paid to EA in order, so Mr. Winshall argued, to avoid having to share the benefits of Rock Band's success with the selling shareholders.  Based on that belief, Mr. Winshall sued Viacom for breach of the covenant of good faith and fair dealing, but Chancellor Strine was having none of it.

Chancellor Strine's view of the case is that Mr. Winshall believes that Viacom and Harmonix were obligated to take advantage of their increased bargaining power with EA, derived from Rock Band's success, to lower the distribution fees paid to EA in 2008 and thus to increase the 2008 earn-out payment to the selling shareholders.  The Chancellor rejected this argument: 

I find that Winshall has failed to allege facts that support a reasonable inference that the Selling Stockholders did not get the benefit of their bargain under the Merger Agreement. On these facts, even viewed in the light most favorable to Winshall, the Selling Stockholders could not conceivably have had a reasonable expectation that Viacom and Harmonix had a duty to renegotiate the Original EA Agreement to increase the amount of earn-out payments the Selling Stockholders would receive.

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