Zest Anchors, LLC v. Biomet 3i, LLC

United States District Court for the Southern District of New York

June 5, 2025, Decided; June 5, 2025, Filed

Case No. 1:23-cv-07232 (JLR)

Reporter

2025 U.S. Dist. LEXIS 106986 *; 2025 LX 140064; 2025 WL 1591707

In Zest Anchors, LLC v. Biomet 3i, LLC, the Court addressed a dispute arising from a terminated distribution agreement between dental implant companies Zest and Biomet. After the termination, Section 13.4 of the agreement provided Zest with “the option, but not the obligation, to repurchase” Biomet’s remaining inventory of Zest products “in its sole discretion.” Biomet claimed that Zest initially exercised this option through its invoking of its contractual rights and proposal of an altered distribution agreement on September 3, 2021, thereby triggering reasonable reliance and operational decisions by Biomet based on the belief that repurchase would occur. However, Zest allegedly reversed its decision without explanation, refused to accept the products or pay for them, and leveraged the situation to pressure Biomet into renegotiating distribution terms—actions that, Biomet argued, went beyond mere discretion and constituted bad faith.

“Biomet claims that Zest reneged on its decision to repurchase its product from Biomet in order to gain the upper hand in ongoing contract negotiations and to cause harm to Biomet in the marketplace. Id. ¶¶ 19, 38. Biomet also alleges that Zest’s subsequent refusal to repurchase any of the product caused Biomet to suffer financial harm and loss of reputation, and interfered with Biomet’s contracted-for benefit under the Distribution Agreement, namely that either Zest would repurchase Biomet’s remaining inventory or Biomet could resell the product. Id. ¶¶ 33-37. Biomet has therefore pleaded that Zest breached its implied promise to not to act arbitrarily or irrationally in exercising its discretion to repurchase its product.”

Zest Anchors at 16-17. Zest moved to dismiss Biomet’s counterclaim for breach of the implied covenant of good faith and fair dealing, arguing that the express contract language gave it unfettered discretion over the inventory repurchase and that no breach of implied duties could arise where the agreement allowed for unilateral decision-making. The court disagreed.

The court emphasized that even where a contract grants one party “sole discretion,” that discretion is not limitless. Instead, it must be exercised in good faith and not arbitrarily or irrationally. The implied covenant of good faith and fair dealing serves to protect the reasonable expectations of the contracting parties and prevent one party from using its discretionary authority to destroy the other party’s benefit under the contract.

“Under New York law, “[w]here the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion.” Spinelli v. Nat’l Football League, 903 F.3d 185, 205 (2d Cir. 2018) (quoting Fishoff, 634 F.3d at 653); see also S. Telecom Inc. v. ThreeSixty Brands Grp., LLC, 520 F. Supp. 3d 497, 505 (S.D.N.Y. 2021) (“[E]ven where a contract permits discretion to a contracting party, that party may not exercise that discretion arbitrarily or irrationally.”); Valley Stream Foreign Cars, Inc. v. Am. Honda Motor Co., 209 F. Supp. 3d 547, 555 (E.D.N.Y. 2016) (similar). A party acts arbitrarily or irrationally when, among other things, “a party’s action . . . directly violate[s] an obligation that may be presumed to have been intended by the parties.” Pilkington N. Am., Inc. v. Mitsui Sumitomo Ins. Co. of Am., 420 F. Supp. 3d 123, 150 (S.D.N.Y. 2019) (quoting Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407-08 (2d Cir. 2006)).”

Zest Anchors at 15-16. The court found that Biomet’s allegations plausibly stated a claim that Zest acted in bad faith—not simply choosing not to repurchase inventory, but first inducing reliance and then reversing course to gain leverage. That strategic use of discretion, the court noted, could not be shielded by contract language permitting “sole discretion.” The court bases its ruling primarily on Southern Telecom Inc. v. ThreeSixty Brands Group, LLC, 520 F. Supp. 3d 497 (S.D.N.Y. 2021) which explains that the term “sole discretion” does not alleviate a party’s obligation to act in good faith, and that courts should “read the contract as a whole to determine whether a limitation on the exercise of discretion would negate a term of the contract and then, depending on [the court’s] reading of the contract, ask the question whether such a limitation is necessary to avoid rendering a contractual obligation illusory.” Southern Telecom at 507. In this case, Zest invoked its right to repurchase the product from Biomet and then chose not to purchase the product, allowing the product to expire and forcing Biomet to suffer a loss that would tip the scales of bargaining power over the new agreement in their favor. “Implying a gloss of good faith and fair dealing on Zest’s exercise of “sole discretion” is necessary to avoid rendering a contractual right — Biomet’s right to resell remaining inventory either to Zest or third-party purchasers upon the termination of the Distribution Agreement — illusory. Thus, Biomet has stated a claim for breach of the implied covenant of good faith and fair dealing.” Zest Anchors at 21.

Zest then argued that there were good faith reasons for its refusal to repurchase its products from Biomet, including Biomet’s failure to provide a timely inventory report according to their new distribution agreement. However, the court found this to be irrelevant, as it was based on a set of facts that were almost entirely unrelated to the counterclaims brought by Biomet, meaning that Biomet could still make a plausible claim that Zest had breached its covenant of good faith and fair dealing.

Therefore, the court denied Zest’s motion to dismiss the implied covenant counterclaim, holding that Biomet sufficiently alleged facts that, if proven, could establish that Zest exercised its contractual discretion in a manner contrary to the duty of good faith and fair dealing.