O'Tool v. Genmar Holdings, Inc.

Geoffrey Pepper (plaintiff) founded Horizon Marine LC (Horizon) (plaintiff), a boat-manufacturing company that produced and sold utility boats. Pepper’s daughter and son-in-law Cassandra and John O’Tool (the O’Tools) (plaintiffs) had managerial positions at Horizon. Genmar Holdings Inc. and Genmar Industries Inc. (collectively Genmar) (defendants), a large recreational-boat manufacturer, purchased Horizon. To facilitate the purchase, Genmar created a subsidiary, Genmar Manufacturing of Kansas Inc. (GMK) (defendant), which assumed Horizon’s assets and liabilities. Pepper became president of GMK, and the O’Tools became managers. The purchase agreement included an earnout provision: for five years, Genmar would pay Horizon a percentage of annual gross revenues, subject to achieving certain gross profit percentages, from the sale of Horizon-brand boats (or any direct successor) and the manufacture of Genmar’s boats in the GMK facility. Soon after closing, Genmar required that the Horizon brand name be changed because of a trademark conflict and made two Genmar brands the priority of the GMK facility. The Genmar-brand boats were harder and more expensive for GMK to build, causing GMK’s gross revenues to fall below budget and hindering Pepper’s ability to achieve the earnout. After Pepper and the O’Tools were terminated, Horizon, Pepper, and the O’Tools (collectively Horizon) sued Genmar for breach of the implied covenant of good faith and fair dealing inherent in the purchase agreement. Horizon claimed that Genmar frustrated its ability to realize the earnout by (1) changing the name of Horizon’s boats, (2) giving production priority to Genmar-brand boats, (3) requiring GMK to pay for designing and producing a new Genmar-brand boat, (4) failing to give Pepper authority to determine GMK’s production priorities, (5) flipping Horizon dealers to other Genmar brands, and (6) closing the GMK facility. The jury returned a verdict in favor of Horizon. The district court denied Genmar’s motion for judgment as a matter of law, remittitur, or a new trial. Genmar appealed, arguing that its actions were contemplated under the terms of the purchase agreement and could not be the basis for violating the implied covenant of good faith and fair dealing.