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DESIGNER NORTH CARPET, INC. v. MOHAWK INDUSTRIES

July 17, 2001

DESIGNER NORTH CARPET, INC., PLAINTIFF,
V.
MOHAWK INDUSTRIES, INC., DEFENDANT.



The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

This case arises out of claims by Designers North Carpet, Inc. ("Designers" or the "plaintiff") that Mohawk Industries, Inc. ("Mohawk" or the "defendant") acted in bad faith and breached the covenant of good faith and fair dealing and, therefore, violated alleged agreements between the companies. The plaintiff also claims that the defendant violated section 349 of the New York General Business Law ("NYGBL"). Presently before the Court is a motion by Mohawk to dismiss the complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Fed.R.Civ.P.").

I. BACKGROUND

The following facts are taken from the complaint. Designers has been a retail carpet dealer for the past 17 years, during which time it carried and sold two lines of carpets manufactured by Mohawk. Designers sold Mohawk's "Helios" line for 15 years and the "Karastan" line for 10 years. The Helios and Karastan lines are unique in terms of their style and the manner in which they are manufactured. According to the plaintiff, no other manufacturer can duplicate the defendant's products. As a result of the unique quality of the carpets, the Helios and Karastan lines are generally sold at a greater profit than carpets manufactured by other companies. In addition, Mohawk has limited the number of retail carpet dealers to whom it will sell its Karastan and Helios carpets, which the plaintiff contends has led to a lack of competitive pricing.

Throughout their business relationship, Designers purchased a large number of carpets from Mohawk, and its sales of Helios and Karastan carpets represented a substantial portion of its total sales. Designers always paid for the Helios and Karastan carpets in a timely fashion.

As it had done in the past, in the summer of 2000, at the manufacturer's request, Designers purchased a large quantity of sample Karastan carpets from Mohawk. On August 8, 2000, Mohawk notified Designers that as of September 8, 2000, Mohawk would no longer provide Designers with Karastan or Helios carpets, because Designers had not been selling enough Karastan carpets. Designers protested that its sales volume had generally remained constant over many years. A Mohawk agent allegedly acknowledged the truth of that statement and said that the decision to stop supplying Designers with Karastan and Helios carpets was simply a "business decision." Designers asked for the basis of the defendant's "business decision" and also asked why Mohawk had not given the plaintiff prior notice of its intent to stop supplying Designers with the carpets. Allegedly, the defendant did not answer the plaintiffs inquiries.

In the complaint, the plaintiff alleges that the defendant's decision to stop selling Karastan and Helios carpets to Designers was not a "business decision" and was an attempt to placate other dealers of Karastan carpets. The plaintiff further alleges that agreements existed between Designers and Mohawk by the terms of which Designers purchased carpets, samples, and displays from Mohawk. According to the plaintiff, these agreements are subject to the provisions of the Uniform Commercial Code ("UCC"), and therefore, the defendant was obligated to exercise good faith and fair dealing in the performance of the agreements. Designers further claims that Mohawk's decision to stop selling Helios and Karastan carpets to Designers on 30 days notice, without just cause and based upon the false reason of diminished sales, constitutes an act of bad faith and a breach of the obligation to exercise good faith and fair dealing. The plaintiff claims that because the defendant committed an act of bad faith and breached its obligation to exercise good faith and fair dealing, it violated agreements it had with the plaintiff.

The plaintiff commenced this action on October 19, 2000. The complaint sets forth three causes of action. The first cause of action alleges breach of contract and breach of the obligation to exercise good faith and fair dealing and seeks actual monetary damages as well as incidental and consequential damages. The second cause of action alleges the same conduct but requests an order directing Mohawk to continue to supply Designers with Helios and Karastan carpets and preventing the defendant from refusing to supply the carpets without just cause. As a third cause of action, the plaintiff claims that the defendant's conduct violates section 349 of the NYGBL and seeks actual damages plus attorneys' fees as well as an injunction.

Presently before the Court is a motion by Mohawk to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim. The defendant advances the following arguments in support of its motion: (1) the plaintiffs first cause of action should be dismissed because it alleges only a breach of an independent duty of good faith, without alleging any breach of contract; (2) the plaintiffs second cause of action should be dismissed because it differs from the first only in the remedy sought; and (3) plaintiffs third cause of action should be dismissed because plaintiff has failed to allege the elements necessary to support a claim under section 349 of the NYGBL.

II. DISCUSSION

On a motion to dismiss for failure to state a claim, the Court should dismiss the complaint pursuant to Rule 12(b)(6) if it appears beyond doubt that the plaintiffs can prove no set of facts in support of their complaint which would entitle them to relief. See King v. Simpson, 189 F.3d 284, 286 (2d Cir. 1999); Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996). The Court must accept all factual allegations of the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Koppel v. 4987 Corp., 167 F.3d 125, 127 (2d Cir. 1999); Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997). The issue to consider is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims. See Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995). The Court must confine its consideration "to facts stated on the face of the complaint, in documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken." Leonard F. v. Israel Discount Bank of N.Y., 199 F.3d 99, 107 (2d Cir. 1999); Hayden v. County of Nassau, 180 F.3d 42, 54 (2d Cir. 1999).

A. As to the First Cause of Action

Under New York law, every contract contains an implied covenant of good faith and fair dealing. This covenant includes an implied undertaking on the part of each party to the contract that each will not intentionally or purposely do anything to prevent the other party from carrying out the agreement on his part. See Gelder Medical Group v. Webber, 41 N.Y.2d 680, 684, 394 N.Y.S.2d 867, 871, 363 N.E.2d 573 (1977). A failure to act in good faith as to a material part of the agreement could be considered a material breach of the agreement. Stated otherwise, the implied covenant of good faith means that neither party to the contract shall do anything that will have the effect of destroying or injuring the rights of the other party to receive the benefit of the contract. Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389, 639 N.Y.S.2d 977, 979, 663 N.E.2d 289 (1995). However, this implied covenant of good faith does not extend so ...


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