Locke v. Warner Bros., Inc.
57 Cal. App. 4th 354, 66 Cal. Rptr. 2d 921 (1997)
Rule of Law:
Where a contract confers on one party a discretionary power affecting the rights of the other, such as a subjective satisfaction clause, a duty is imposed to exercise that discretion in good faith. A categorical refusal to consider the other party's proposals on their merits, irrespective of the contract's payment terms being met, constitutes a breach of this implied covenant of good faith and fair dealing.
Facts:
- After a long personal and professional relationship with Clint Eastwood ended, Sondra Locke sued him.
- To settle that lawsuit in 1990, Eastwood arranged for Locke to enter into a multi-year development deal with Warner Bros., Inc. (Warner).
- The agreement was a 'first look' deal requiring Locke to submit her projects to Warner before any other studio, and it included a 'pay or play' provision for directing.
- Unbeknownst to Locke, Eastwood secretly agreed to reimburse Warner for the cost of her contract if her projects were not developed.
- Over the contract's term, Warner paid Locke the guaranteed $1.5 million in compensation.
- Despite Locke submitting numerous projects, Warner rejected all of them and did not hire her to direct any films.
- Warner executives allegedly told third parties that the studio was 'not going to work with her' and that the agreement was merely 'Clint's deal.'
Procedural Posture:
- Sondra Locke and Caritas Films filed suit against Warner Bros., Inc. in a California trial court.
- The complaint included causes of action for breach of contract, fraud, and sex discrimination.
- Warner moved for summary judgment on all claims.
- The trial court granted summary judgment in favor of Warner, finding no triable issues of material fact.
- Locke and Caritas Films, as appellants, appealed the judgment to the California Court of Appeal. Warner is the respondent.
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Issue:
Does a film studio with subjective discretionary power under a development contract breach the implied covenant of good faith and fair dealing by categorically refusing to consider a director's proposals for reasons unrelated to their merit, even if it fulfills all express payment obligations?
Opinions:
Majority - Klein, P. J.
Yes. A film studio with subjective discretionary power under a development contract breaches the implied covenant of good faith and fair dealing if it categorically refuses to consider a director's proposals in good faith. While the contract grants Warner subjective discretion, which is not reviewable for reasonableness, that discretion must be exercised honestly. The implied covenant of good faith and fair dealing requires that the dissatisfaction must be bona fide. Evidence that Warner executives stated they would never work with Locke and that the deal was merely an accommodation for Eastwood raises a triable issue of fact as to whether Warner went through the motions of 'considering' her projects without any good faith evaluation. This conduct, if proven, would deprive Locke of the primary benefit of the bargain: the opportunity to enhance her career, not just receive guaranteed payments. The same evidence creates a triable issue for fraud, as a jury could reasonably infer that Warner had no intention of honoring the agreement at its inception.
Analysis:
This decision significantly clarifies the scope of the implied covenant of good faith and fair dealing within contracts that grant one party broad subjective discretion, particularly in the entertainment industry. The court established that 'creative decisions' are not immune from judicial review for bad faith. The ruling prevents powerful entities, like film studios, from creating sham deals where they fulfill payment obligations but have no intention of providing the other party with a genuine opportunity to receive the contract's full benefits, such as career advancement. It reinforces the principle that discretionary power must be exercised honestly, ensuring that development and 'first look' deals are not illusory promises.
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