Trecom Business Systems, Inc. v. Prasad

96-1919, 1997 WL 659835 (U.S. Dist. Ct. D. N.J. 1997)
  • Opinion Date: October 6, 1997

ASSIGNMENTS; ROYALTIES; DRAFTING— A provision in a “whereas” clause does not create a contractual obligation, in and of itself. An assignee that is obligated to pay a royalty to its assignor has an implied duty of good faith to make a diligent effort to fulfill the intent of the assignment.

A company filed suit against a former employee for breach of an agreement under which the company purchased the right, title, and interest to computer software designed by the former employee. The employee counterclaimed that the company breached the agreement by failing to adequately modify, enhance and market the software, thereby rendering it obsolete. The company moved for summary judgment.

The District Court found that the only language in the agreement which imposed a duty on the company to modify or enhance the software was a statement of intention found in a “whereas” clause. While a “whereas clause” may be a useful aid in construing the rights and obligations created by an agreement, under federal case law it does not create any right or obligation beyond those contained in the operative terms of the document. The “whereas” clause only evidences a general intent, it does not create a contractual obligation. The Court concluded that the express terms of the agreement did not require the company to modify or enhance the software. Since royalty income for an assignor is wholly dependent on the assignee’s efforts, federal courts have implied a duty of good faith and diligent effort in the context of exclusive licensing agreements or assignments of patent rights. The District Court held that not only did the company have these implied duties, but it also had an implied obligation to make reasonable efforts to perfect or enhance the software. Thus, the outcome of this case centered on whether the company fulfilled its implied obligations. The District Court concluded that the company complied with those obligations by devoting extensive time, resources and personnel to the development and marketing of the software. After those efforts proved futile, and since the company had no further contractual duties, the company properly made a good faith business decision to abandon the software. The Court granted the company’s motion for summary judgment, concluding that it acted in good faith and with due diligence.