Key Points

  • The Second Department dismissed Jian He's counterclaim against Grubmarket for breach of the implied covenant of good faith and fair dealing, applying California law under the employment agreement's choice-of-law provision.
  • Under California law, allegations that Grubmarket made false statements about Jian He after his termination seek tort remedies and cannot support an implied-covenant claim, which is limited to contract remedies.
  • The remaining implied-covenant allegations duplicated the breach-of-contract counterclaim or contradicted the agreement's at-will termination term.
  • The panel affirmed the denial of Grubmarket's motion to dismiss the breach-of-contract counterclaim, finding it adequately pleaded and not utterly refuted by documentary evidence.
  • The panel declined to consider Grubmarket's argument about post-termination compensation because it was raised for the first time on appeal, and awarded costs to Grubmarket.

A New York appeals court on Oct. 14 dismissed a former Grubmarket, Inc. employee's claim that the company violated its duty of good faith toward him, holding that California law, which governed his employment agreement, does not allow that kind of claim to recover for false statements the company allegedly made about him after firing him.

The Appellate Division, Second Department, issued the decision and order, in which Justices Betsy Barros, Cheryl E. Chambers, Janice A. Taylor and Elena Goldberg Velazquez all concurred. The panel left standing a separate counterclaim by the former employee, Jian He, that Grubmarket breached the employment agreement itself.

The ruling narrows Jian He's case against the company to its contract theory. Applying California precedent, the panel held that a claim for breach of the implied covenant of good faith and fair dealing, a promise California law reads into every contract, cannot seek tort damages, cannot duplicate a breach-of-contract claim and cannot override an agreement that permits firing at will.

According to the decision, Grubmarket employed Jian He until it terminated him in July 2023. The company then sued him and others, including a defendant named Minh Thai, in Supreme Court, Queens County, in an action that seeks, among other things, damages for breach of contract. Jian He asserted counterclaims alleging that Grubmarket breached both the employment agreement and the implied covenant.

Grubmarket moved to dismiss both counterclaims under CPLR 3211(a). Justice Frederick D.R. Sampson denied both requests in an order entered March 11, 2025, and Grubmarket appealed.

The employment agreement contained a choice-of-law provision, a clause in which the parties select the law that will govern their contract, and it selected California. The panel therefore decided the appeal under California law. It quoted Rattagan v. Uber Tech., Inc., which in turn quoted Guz v. Bechtel National Inc., for the principle that the covenant "exists merely to prevent one contracting party from unfairly frustrating the other party's right to receive the benefits of the agreement actually made."

The panel then set out three limits on the covenant under California law. First, compensation for its breach is limited to "contract rather than tort remedies," the panel wrote, quoting a California appellate decision that in turn quoted the state high court's ruling in Foley v. Interactive Data Corp. "Damages awarded for breach of the implied covenant of good faith and fair dealing should only reflect the loss of express contractual benefits, not additional injuries actionable under tort law," the panel wrote, citing a ruling in Welch v. MGM.

Second, a covenant claim that relies on the same acts and seeks the same relief as a companion contract claim "may be disregarded as superfluous as no additional claim is actually stated," the panel wrote, quoting a California appellate decision, Levy v. Only Cremations for Pets, Inc. Third, the covenant "cannot contradict the express terms of a contract," the panel wrote, quoting another California appellate decision, Coyote Aviation Corp. v. City of Redlands, and, citing Guz, it added that the covenant places no independent limit on an employer's power to dismiss employees.

Each limit disposed of part of the counterclaim. Jian He's allegations that Grubmarket made false statements about him after his termination "cannot support recovery on the second counterclaim, as such allegations seek tort remedies rather than contractual remedies," the panel held. His other covenant allegations, the panel held, "are either duplicative of the first counterclaim, alleging breach of contract, or contradicted by the terms of the employment agreement, which permitted termination at will."

Grubmarket lost its challenge to the contract counterclaim. The panel held that Jian He adequately stated a breach-of-contract claim under California law, whose elements, it wrote, "include the existence of a contract, the plaintiff's performance or excuse for non-performance, the defendant's breach, and resulting damages to the plaintiff." The company's documentary-evidence argument also failed. Under New York law, such evidence must be "unambiguous, authentic, and undeniable," and the panel held that Grubmarket's "submissions failed to utterly refute the defendant's material allegations or conclusively establish a defense to that cause of action as a matter of law."

The company had also argued on appeal that the contract counterclaim should be dismissed "to the extent" it seeks "post-termination compensation." The panel declined to reach that argument. It "is raised for the first time on appeal, and we decline to consider it," the panel wrote. "The defendant's remaining contentions are without merit," the decision concluded.

Grubmarket was represented by Sean Haran of Walden Macht Haran & Williams LLP. Yimin Chen of the Law Offices of Chen & Associates, P.C. represented Jian He.

The panel modified the March 2025 order to grant Grubmarket's motion as to the implied-covenant counterclaim, affirmed the order in all other appealed respects and awarded costs to Grubmarket. The decision, 2026 NY Slip Op 05940, is uncorrected and subject to revision before publication in the Official Reports.