BAE Systems Information and Electronic Systems Integration Inc. v. Lockheed Martin, (Del. Ch., Feb. 3, 2009), read opinion here.
We are fortunate to have the following review and analysis of this case prepared by Kevin Brady, a partner in the Business Law Group at the Wilmington, Delaware, office of Connolly Bove.
In this Delaware Chancery Court decision involving a post-closing dispute about the intent of transaction agreements, Vice Chancellor Noble denied a motion to dismiss an amended complaint in a contract dispute between the world’s largest and third largest defense contractors. The dispute arose out of the sale of a business unit by Lockheed Martin to the purchaser, plaintiff BAE Systems Information and Electronic Systems Integration Inc. (“BAE”). BAE argued that it expected that the business unit sold to BAE would continue to do business with Lockheed Martin after the sale and that BAE had adequately articulated its expectation in the sale contract. The Court was then faced with the issue of whether the sale contract was specific enough to allow for what it called “unknown work in the future while recognizing that price and scope will necessarily depend upon the specific work.”
Lockheed Martin, as an enterprise, operates through numerous unincorporated business units, such as Lockheed Martin STS-Orlando (“LMSTS”), Lockheed Martin Aerospace (“LM Aero”), and Sanders. Lockheed Martin’s Sanders business unit was part of Lockheed Martin’s Aerospace and Electronics Systems (“AES”) business segment before 2000. In June 1996, Sanders and LMSTS executed an internal memorandum of agreement (the “Internal MOA”) which outlined the manner by which the two Lockheed Martin business units would approach future opportunities for Automated Test Systems (“ATS”) business.
Four years later, in July 2000, Lockheed Martin entered into an agreement for the sale of its AES business, including the Sanders business unit (the “Transaction Agreement”), to BAE for $1.67 billion. The Transaction Agreement provided that while LMSTS and Sanders would continue to operate under the terms of the Internal MOA, BAE would become the new owner of the Sanders business unit. In addition, Lockheed Martin and BAE agreed to execute a new memorandum of agreement memorializing the arrangements reflecting, among other things, the parties post-closing rights and obligations regarding AES business opportunities and the Sanders business unit. That new Memorandum of Agreement (the “MOA”), which was executed by Lockheed Martin and BAE on the same day the AES transaction closed, is virtually identical to the Internal MOA executed in 1996 between Sanders and LMSTS.
According to the Complaint, the parties expected that the MOA would allow LMSTS and BAE/Sanders to “cooperatively align their respective business strategies to maximize the focus and effectiveness of resources, increase corporate business, and jointly broaden the market aperture for ATS.” The parties agreed that they would, “seek to utilize each other’s technology, market, and production strengths to achieve and exploit the advantages of joint cooperation.” Four years after the MOA was executed, however, BAE began to suspect that LMSTS was not acting in a manner consistent with how BAE expected LMSTS to act under the MOA. In particular, BAE suspected that new ATS work was being generated by LM Aero’s F-35 fighter-jet project and that work should have been allocated to BAE under the MOA. BAE approached Lockheed Martin in an attempt to address these concerns and to ensure proper allocation of ATS work arising from the LM-Areo F-35 project. BAE was unsuccessful in getting Lockheed Martin to change how that work was being allocated. As a result, BAE filed this action claiming that Lockheed Martin has breached the MOA. In response, Lockheed Martin claimed that the MOA was wholly-unenforceable and merely outlined a general approach for the parties to follow only when it made “good business sense” to do so.
BAE sought specific performance, or in the alternative, damages for breach of contract and breach of the implied covenant of good faith and fair dealing. Lockheed Martin moved to dismiss the complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted, or in the alternative, for a more definite statement. BAE amended its Complaint and added claims for unjust enrichment and declaratory judgment. Lockheed Martin then renewed its motion to dismiss.
The Court addressed two issues: (1) was there was any reasonable possibility that BAE could prevail in proving intent to be bound on the part of Lockheed Martin and (2) whether it was reasonable to believe that the terms of the MOA might be proven sufficiently definite for enforcement. In addressing the sufficiency of the contract, Vice Chancellor Noble followed the “objective” theory of contracts, which meant that the contract’s construction would be viewed as “that which would be understood by an objective, reasonable third party,” focusing on the parties’ overt manifestations of assent, rather than the parties subjective desires. BAE argued that Lockheed Martin performed under the terms of the MOA for at least four years following its execution and that during this period, at least fifteen contracts were performed pursuant to the MOA.
Based upon that four-year pattern of behavior plus the execution of the MOA at the same time the Transaction Agreement was completed and the references to the MOA found within the Transaction Agreement, the Chancery Court found that there was a sufficient pleading of objective facts to demonstrate Lockheed Martin’s intent to be bound to the MOA. As a result, the complaint stated facts sufficient to survive Lockheed Martin’s motion to dismiss.
Lockheed Martin also argued that the absence of pricing terms, or a pricing structure and the insufficiently definite terms governing how future ATS work and responsibility would be allocated rendered the MOA unenforceable. The Chancery Court disagreed, however, finding that the Amended Complaint contained distinct allegations that precluded dismissal. For example, there was an allegation that the MOA required Lockheed Martin to offer BAE an opportunity to participate in the pursuit of ATS business opportunities as they arose. The Court found that this allegation sufficiently implicated a situation where the indefiniteness Lockheed Martin complained of, might be excused and as a result rendered the Amended Complaint sufficient to survive Lockheed’s motion to dismiss. In addition, the Court found that “a rough skeleton of definite obligations exists in the MOA upon which prior course of dealings and industry custom could, by reasonable inference, add sufficient flesh to justify enforcement of the resulting form.”
While the MOA had no specific requirement that Lockheed Martin “shares news of various work opportunities with it,” BAE attempted to save that claim by invoking the covenant of good faith and fair dealing to impose a duty on Lockheed Martin to provide news of various work opportunities to BAE. Although Lockheed Martin argued that the MOA imposed no notification requirement, the Court noted that the covenant “might imply a notice provision were BAE successful in proving its interpretation of the contract.” Because the Chancery Court found that the covenant could be found to require the addition of a notification requirement and BAE had pled facts sufficient to sustain a cause of action for its breach, the motion to dismiss as to the covenant of good faith and fair dealing was denied.
BAE also raised two equitable claims — specific performance and unjust enrichment. The Court found that under the facts as alleged, it was reasonably conceivable that BAE could demonstrate the existence of an enforceable agreement of some scope. However, with respect to BAE’s claims of unjust enrichment, because unjust enrichment recovery is unavailable when a contract governs the parties’ relationship (and the Court found that the relationship of the parties was governed by “a complex contract negotiated by sophisticated parties”), the Court dismissed BAE’s claim for unjust enrichment recovery. Interestingly, the Court did not agree with BAE’s claim that its unjust enrichment claim should survive because it was pled as an alternative to its contract claim, and such a pleading should be allowed. The Court noted that in some instances, both a breach of contract and an unjust enrichment claim may survive a motion to dismiss when pled as alternative theories for recovery. The Court went on to state that: “[a] right to plead alternative theories does not obviate the obligation to provide factual support for each theory. Here, there is no independent basis for an unjust enrichment claim because the Amended Complaint contains no facts challenging Lockheed Martin conduct on a basis not comprehensively governed by the MOA. Because BAE pleads no right to recovery not controlled by contract there can be no claim for unjust enrichment.”
Finally, the Court refused to dismiss the declaratory judgment aspect of the relief sought. Moreover, it found no factual basis to support Lockheed Martin’s claim of laches.