After the highly publicized end of her relationship with Clint Eastwood, actress-director Sondra Locke resolved related litigation through a settlement that included a multi-year director development/first-look deal with Warner Bros. Under that agreement, Warner would pay Locke a fixed development fee and provide office and overhead while she developed film projects for possible production and direction; Warner retained broad discretion to accept or reject any project and, if Warner declined, Locke could shop the project elsewhere. Over the term, Locke submitted many proposals (by her account, more than 30). Warner rejected all of them, and Locke alleged Warner refused to genuinely review the submissions, avoided meetings, and declined to consider her for Warner-originated projects. Evidence indicated that, as part of Eastwood's settlement, he reimbursed Warner for the costs of Locke's deal, creating an inference Warner bore no financial risk and had no incentive to work with her. Locke also presented evidence of statements by Warner personnel suggesting a blanket unwillingness to hire or work with her regardless of project merit. Locke sued Warner for breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory fraud. The trial court granted summary judgment for Warner, reasoning that the contract gave Warner absolute discretion to accept or reject projects and imposed no duty to produce any film. Locke appealed.
When a contract grants one party broad discretion to approve or reject performance (here, a studio's discretion to accept or decline film projects under a development/first-look deal), does the implied covenant of good faith and fair dealing require the party to exercise that discretion in good faith—and can evidence of a blanket, pretextual refusal create triable issues precluding summary judgment?
Every contract in California contains an implied covenant of good faith and fair dealing, which prevents a party from doing anything to unfairly interfere with the right of the other to receive the benefits of the agreement. Where a contract confers one party with discretionary power affecting the other's rights, that discretion must be exercised in good faith and in accordance with fair dealing, even under subjective "satisfaction" or approval clauses. The implied covenant cannot contradict or vary express terms or impose obligations beyond the contract, but it does prohibit arbitrary, capricious, or pretextual exercises of discretion that frustrate the contract's purposes.
The appellate court reversed summary judgment in part, holding that triable issues of material fact existed as to whether Warner breached the implied covenant of good faith and fair dealing and committed promissory fraud by allegedly never intending to genuinely consider Locke's projects. The court affirmed that Warner did not breach any express contractual term, because the agreement gave Warner discretion to accept or reject projects and imposed no duty to produce a film.
The court began by acknowledging California's core principles: the implied covenant cannot be used to add terms at odds with the contract's language, but it does require honest exercise of contractual discretion (citing authorities recognizing that even subjective satisfaction clauses demand honest judgment). Warner's contract gave it discretion to accept or reject projects, and thus an implied duty arose to exercise that discretion in good faith—i.e., to give Locke's submissions honest consideration rather than reject them for reasons extraneous to the contract's purposes. On summary judgment, the court credited evidence that could support a jury finding of bad faith. First, Locke presented evidence that Warner categorically refused to work with her and would not consider her for Warner-originated projects, regardless of the merits of her submissions. Second, the purported reimbursement arrangement whereby Eastwood covered Warner's costs for the deal could reasonably suggest Warner lacked any financial incentive to evaluate or produce Locke's projects, raising an inference that Warner treated the arrangement as a sham consideration rather than a genuine development opportunity. Third, statements attributed to Warner executives (e.g., that Locke would not be hired or that her projects would not be made at Warner) tended to show pretextual decision-making unrelated to the actual quality or marketability of her submissions. The court distinguished cases like Third Story Music, which enforced language conferring truly unfettered discretion and refused to impose promotional duties contrary to the contract's text. Here, enforcing the implied covenant did not compel Warner to produce any particular project or to surrender its approval rights; it merely required Warner to exercise the approval right honestly and not in bad faith. Conversely, the court aligned its analysis with decisions like Mattei v. Hopper and Carma Developers, recognizing that discretion-laden clauses remain subject to an obligation of honest judgment and fair dealing. Because a reasonable trier of fact could conclude Warner never intended to, and did not, consider Locke's projects in good faith, summary judgment on the implied covenant and promissory fraud claims was improper. However, the express breach claim failed because the contract unambiguously permitted Warner to reject any or all projects and contained no promise to produce or employ Locke on any film.
Locke is widely taught for its clear articulation that discretionary contractual rights—common in entertainment, publishing, licensing, and financing—must be exercised in good faith. The case draws a careful boundary: courts will not use the implied covenant to rewrite deals or negate express approval rights, but they will police sham or pretextual exercises of discretion that deprive a counterparty of the contract's core benefits. It also underscores how circumstantial evidence (internal statements, structural incentives like third-party reimbursement, and patterns of refusal) can create triable issues on bad faith and promissory fraud, defeating summary judgment.
Locke v. Warner Bros., Inc. is a leading case on the implied covenant's role in contracts that allocate broad discretion to one party. It preserves the integrity of express approval clauses while insisting that discretion be exercised honestly and for the purposes contemplated by the agreement. The case therefore strikes a balance between freedom of contract and the law's aversion to opportunism and pretext.