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Emerson Radio Corp. v. Orion Sales, Inc.

80 F. Supp.2d 307 (D. N.J. 2000)

CONTRACTS; GOOD FAITH; BEST EFFORTS—A court distinguishes between the covenant of good faith and fair dealing and the obligation to exert best efforts.

A holder of an electronics trademark licensed the manufacturer to sell specified video and television products to a large, national retailer. The license agreement contained no minimum sales requirement, but required that the manufacturer use “best efforts” or “due diligence” in marketing or selling goods under the license. The agreement had a substantial minimum annual royalty with additional royalties based on net sales. It also permitted sale of the seller’s own brand to the national retailer. Further, goods returned from the retailer were the responsibility of the licensee. There was also a parallel agreement pursuant to which the manufacturer agreed to produce the licensor’s branded video products for the licensor so that the licensor could sell those products to customers other than the specified national retailer. The relationship was a stormy one, and eventually litigation resulted. In a prior proceeding, the Court ruled that there was no implied term of best efforts with respect to exploitation of the license agreement. That ruling was based on the ground that there could be no implication of a duty to use best efforts to market the branded video products where the licensee was required to pay a substantial minimum royalty regardless of the level of sales. The current proceeding, therefore, was not based on an implied obligation to use best efforts, but was instead based on an allegation by the licensor that the manufacturer had breached the implied duty of good faith and fair dealing. The Court held that the existence of the minimum royalty requirement was also an important factor in assessing the scope of the manufacturer’s obligation under the duty of good faith and fair dealing. As a threshold matter, the Court examined the difference between an implied obligation of best efforts and the implied duty of good faith and fair dealing in New Jersey. Best efforts is a more rigorous obligation than good faith and fair dealing. The two obligations, however, differ in kind and not merely in quality. Good faith and fair dealing is a matter of “decency, fairness or reasonableness.” The Court’s analysis was that the covenant in New Jersey mandates that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Consequently, the implied covenant may be breached even where there is no breach of the contract’s express terms. It found certain common features of New Jersey cases to be instructive. “First, each of the landmark cases involve reliance by the disappointed party that was substantial in light of that parties [sic] economic strength. ... Second, in each of the above-cited cases, there was a disparity in size and in bargaining power between the parties. Taken together, these two points illustrate a third proposition: that vulnerability of the disappointed party is a key factor in assessing the other party’s compliance with the duty of good faith and fair dealing. Dishonesty in a statement or omission is also a critical factor. ...a party’s motive is irrelevant when it exercises an express contractual right. ... At least where reliance has been impaired, as opposed to loss of a benefit conferred as part of the bargain, it appears that deception is an important indicator of breach of the duty of good faith.”

The Court did not find any New Jersey cases applying the implied duty of good faith and fair dealing in the context of an intellectual property license/supply relationship similar to the one at issue in this case. Therefore, it looked outside New Jersey and summarized its findings by stating “[l]icensing cases that consider the duty of good faith owed to a licensor independent of the issue of royalties have focused on a duty not to destroy the value of the intellectual property. ... Harmonizing these cases with New Jersey’s law on good faith and fair dealing leads to the conclusion that an act by a licensee in derogation of the interests of the licensor might constitute a violation of the implied duty, notwithstanding the existence of a minimum royalty. Where the minimum royalty has been paid, a theory of breach of good faith and fair dealing based on frustration of expectation or contractual purpose is problematic. Where some other, reliance-based interest of the licensor is impaired, the implied duty may intervene. ... The New Jersey precedents teach, however, that some heightened showing of egregiousness and economic oppression would be required in such a case, e.g., dishonesty, exploitation of a vulnerability or disparity of economic power, or destruction of some truly substantial investment or property interest. This is particularly so where the party allegedly in breach is exercising a right reserved to it by the express terms of the contract. The Court take as its starting point that the contract controls and that the duty of good faith and fair dealing ‘does not imply a general duty of ‘kindness’ in performance, or of judicial oversight into whether a party had ‘good cause’ to act as it did.’” In the present case, the Court did not feel that the record rose to a level that would justify a finding of a breach of good faith and fair dealing. The manufacturer did not defeat the fundamental purpose of the relationship. The licensor’s expectations were not subverted. In the Court’s view, no reasonable finder of fact could find destruction of any reliant interest of the licensor of like kind or quality as the New Jersey Supreme Court had previously found would justify imposing liability for the implied duty. The central expectation that the licensor received was substantial cash. It also received significant commercial certainty with respect to sales through the national retailer. The licensor had received the “fruits of the contract,” i.e., the guaranteed royalties and other benefits. Further, the licensor did not have an ancillary expectation that its trademark would be damaged if the manufacturer failed to exploit to a point where it might be considered legally abandoned. In this case, the licensor’s trademark was well-established and of unlimited duration. In sum, “[i]n light of the express terms of the parties’ agreements, the history of the parties’ relationship, the character and the sophistication of the parties, the lack of any fundamental frustration of the purpose of the contract or the destruction of substantial reliance interest,” the Court held that no reasonable fact finder could hold that the manufacturer breached the duty of good faith and fair dealing implied in contracts under New Jersey law.

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