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Emerson Radio Corp. v. Orion Sales, Inc.

41 F. Supp.2d 547 (D. N.J. 1999)

LICENSES; ROYALTIES—Where a license agreement provides for a substantial minimum royalty payment from the licensee but no minimum sales requirement, the licensee is not obligated to employ its best efforts to maximize revenue.

A company holding a trademark granted a manufacturer a three-year “exclusive ... non-transferable license to utilize and exploit” the trademark “in connection with the manufacturing, sale, marketing, and distribution” of certain specified video and television products to a particular retailer. The license did not specify a minimum sales requirement and did not include any express provision that the manufacturer “use best efforts” or “due diligence” in marketing or selling goods under the license. The license did, however, require payment of a minimum annual royalty. A time came when the trademark holder filed suit against the manufacturer alleging breach of contract for the manufacturer’s failure to accept product returns, failure to exploit privileges granted under the license, failure to provide price decreases to the customer, and failure to permit the trademark owner to inspect books and records. It also alleged breach of the implied covenant of good faith and fair dealing, unfair competition, tortious interference with contractual relations and prospective economic gain as well as conspiracy to interfere with and harm the trademark holder’s business relations. The manufacturer responded by seeking a finding from the Court that it had no express or implied duty under the license to sell a minimum quantity of the trademarked products to the retailer in question. In opposition, the trademark holder argued that the grant to the manufacturer of the opportunity to “exploit” the trademark constituted an express requirement that the manufacturer “employ [the license] to the greatest possible advantage.” It asserted that “in furtherance of the affirmative obligation imposed on [the manufacturer] by the express terms of the License Agreement, a ‘best efforts’ requirement should be implied [sic] in the License Agreement.”

The trademark holder conceded that the license did not include a minimum sales requirement. Rather, it argued that the use of the word “exploit” in the license, required the manufacturer to employ the license to the greatest possible advantage. It cited no law in support of this argument. In fact, the dictionary definition of “exploit,” which was the sole basis for the trademark holder’s argument, could have easily been used to support the exact opposite interpretation of the contract. The license authorized the manufacturer to “exploit” the trademark, but did not specify whether the exploitation should result in “the greatest possible advantage” to the trademark holder or the manufacturer. Furthermore, the second definition of “exploit” in the dictionary was “to make use of ... selfishly.” Thus, the use of the word “exploit” in the license could have easily been interpreted as granting the manufacturer authority to act in its own self-interest. On the other hand, the Courts have long read into exclusive licenses an implied duty on the part of the licensee to “use reasonable efforts to bring profits and revenues into existence.” “Certain licenses, however, may confer benefits on the licensor outside the royalties or revenues obtained as a result of the licencee. For instance, a license may provide for an up-front payment from licensee to licensor, an advance payment of future royalties, or a minimum annual royalty payment.” Courts have recognized that through such provisions, “the licensor, in lieu of obtaining an express agreement to use best efforts, has protected himself against the possibility that the licensee would do nothing.” Consequently, “the inclusion of such alternate or additional non-contingent payments provisions is a factor that ‘militate[s] against the implication of an obligation to use diligence to exploit the product in question.’” According to the Court, the particular question of law, i.e., whether a licensee is subject to an implied covenant to use best efforts to exploit a license where the license contains no explicit sales requirement but does provide for a minimum annual royalty payment to the licensor, had never been addressed under New Jersey law. After reviewing how this issue had been resolved in other jurisdictions, the Court found that the trademark holder had assured itself of a substantial annual payment, regardless of what level of diligence the manufactured applied in promoting the trademark goods. As a result, the Court held that a required annual payment of such magnitude constituted sufficient non-contingent consideration such that the equitable purposes served by inferring a best efforts clause was not implicated here. One the other hand, the Court’s finding that the license did not include an implied best efforts covenant did not preclude the trademark holder from using evidence of the manufacturer’s actions and statements (both public and “behind the scenes”) in support of its claim for breach of its implied covenant of good faith and fair dealing, which, under well settled New Jersey law, is implied in every contract.


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