word "exploit" is inconclusive, however, the Court declines to
interpret the use of that word as the imposition of an express
duty on the part of Orion to exert some minimum level of effort
or performance under the license.
Implied Best Efforts Clause
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." Wood v. Lucy, Lady
Duff-Gordon, 222 N.Y. 88, 91, 118 N.E. 214 (1917); see also HML
Corp. v. General Foods Corp., 365 F.2d 77, 80 (3d Cir. 1966).
Under an exclusive license, the licensor is completely reliant on
the licensee's efforts in order to obtain the benefits bargained
for in the contract. In order to give the license efficacy,
therefore, an implied obligation is imposed on the licensee. See
Wood, 222 N.Y. at 91-92, 118 N.E. 214; Fenning v. American Type
Founders, Inc., 33 N.J.Super. 167, 175, 109 A.2d 689 (App. Div. 195
4), certif. denied, 21 N.J. 469, 122 A.2d 528 (1956). This
obligation has been variously characterized as an implied
"covenant to exploit," "best efforts clause," or "due diligence
requirement," among other terms. See, e.g., Vacuum Concrete Corp.
v. American Mach. & Foundry Co., 321 F. Supp. 771, 774 (S.D.N.Y.
Certain licenses, however, may confer benefits on the
licensor outside the royalties or revenues obtained as a result
of the efforts of the licensee. For instance, a license may
provide for an up-front payment from licensee to licensor, an
advance payment on 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 will do nothing." Permanence Corp. v. Kennametal,
Inc., 908 F.2d 98, 102 (6th Cir. 1990); see also Beraha v. Baxter
Health Care Corp., 956 F.2d 1436, 1442 (7th Cir. 1992) (finding
the Permanence reasoning "persuasive"). The inclusion of such
alternate or additional non-contingent payment provisions is a
factor that "militate[s] against the implication of an obligation
to use due diligence to exploit the product in question." Bellows
v. E.R. Squibb & Sons, Inc., 184 U.S.P.Q. 473, 474 (N.D.Ill.
1974) (applying New Jersey law).
The particular question of law before the Court is whether,
under New Jersey law, 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.
Unfortunately, the parties have not cited to, and the Court has
been unable to locate, any New Jersey cases that are specifically
on point. The most pertinent cases available appear to be Bellows
and Fenning, both cited above.
In Bellows, an Illinois district court applied New Jersey law
to determine whether, as a matter of law, a licensee was under an
implied obligation to "exercise reasonable efforts and due
diligence" to exploit a patent under an exclusive license. See
Bellows, 184 U.S.P.Q. at 473. The court held that such an
obligation was not implied where the license provided for an
advance royalty payment and a minimum annual royalty and also
specifically alluded to the licensor's remedies if the licensee
"elect[ed] not to exploit the license granted hereunder." See id.
at 474. The court concluded that these provisions, considered
together, precluded the existence of an implied best efforts
covenant. See id.
Fenning, on the other hand, involved an exclusive license
that contained no minimum royalty provisions. See Fenning, 33
N.J.Super. at 171, 109 A.2d 689. The licensor alleged that the
licensee had breached an implied obligation to "exercise
reasonable efforts and due diligence in the exploitation and sale
of devices" pursuant to the license. Id. at 175, 109 A.2d 689.
The court concluded that such an implied duty did exist, arising
from fairness and public policy concerns, reasoning that "if
we presume the parties intended a fair contract where the evident
purpose of the license was exploitation, an implied covenant of
reasonable exploitation is essential." Id. at 178, 109 A.2d 689.*fn3
Neither Bellows nor Fenning is directly applicable to the
instant matter. In Bellows, the court seemed most persuaded by
the fact that the license expressly contemplated the possibility
of the licensee failing to exercise its rights under the license.
See Bellows, 184 U.S.P.Q. at 473 (noting that the license
"explicitly recognizes that [the licensee] might elect not to
exploit the device."). No such provision is contained in the
license at issue here. The license in Fenning, on the other hand,
did not require a minimum royalty payment, as the Emerson-Orion
license did. See Fenning, 33 N.J.Super. at 178, 109 A.2d 689.
As noted above, several courts have recognized that the
inclusion of a minimum royalty provision in an exclusive license
defeats the rationale underlying the implication of a best
efforts clause. The licensor's entitlement to consideration that
is not contingent on the efforts of the licensee serves to
counteract the rationale behind the equitable doctrine developed
in Wood and its progeny. The Wood approach of inferring an
implied duty to use best efforts is justified only when the
licensor's consideration is entirely contingent on the licensee's
Although the two available cases applying New Jersey law are
not directly applicable, after evaluating those cases and other
relevant case law, the Court has concluded that, under New Jersey
law, an exclusive license providing for a substantial minimum
royalty payment is not subject to an implied best efforts
covenant. The Court is persuaded that the rationale for imposing
an implied duty to exercise best efforts is offset by the
existence of substantial non-contingent consideration, which
provides the licensor with some assurance of benefit arising from
the license independent of the efforts of the licensee.
The Court notes that Emerson has failed to document a single
instance in which a court recognized an implied obligation to use
best efforts in an exclusive license that required a minimum
annual royalty payment. On the other hand, in the cases available
to the Court that do address this specific situation, courts have
declined to find such an implied obligation. See, e.g.,
Permanence and Beraha, cited supra.
In this case, Emerson was assured of an annual payment of $4
million, regardless of what level of diligence Orion applied in
promoting the Emerson trademark goods. The Court finds that a
required annual payment of this magnitude constitutes sufficient
non-contingent consideration such that the equitable purposes
served by inferring a best efforts clause are not implicated in
This holding is limited to a finding that the license did not
subject Orion to an express or implied obligation to use best
efforts under the license. The sole ramification of this ruling
is that Orion cannot be held liable for breach of contract on the
grounds that it failed to comply with a duty to use best efforts
to market and sell Emerson products. The Court has made no
determination regarding the other grounds for Emerson's breach of
contract claim, and also has not considered the remaining four
counts of the complaint that assert other causes of action.
Implied Covenant of Good Faith and Fair Dealing
In particular, the Court notes that Emerson's allegations of
fact regarding Orion's
efforts (or lack thereof) to market and sell Emerson trademark
products may be relevant to Emerson's claim that Orion breached
the implied covenant of good faith and fair dealing.
New Jersey law is well settled that every contract contains
an implied covenant of good faith and fair dealing. See Sons of
Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420, 690 A.2d 575
(1997). Included in every contract is "an implied covenant 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. . . .'" Palisades Properties, Inc. v.
Brunetti, 44 N.J. 117, 130, 207 A.2d 522, (1965) (quoting 5
Samuel Williston & Walter H.E. Jaeger, A Treatise on the Law of
Contracts § 670, pp. 159-60 (3d ed. 1961)).
The Court's finding that the license does not include an
implied best efforts covenant does not preclude Emerson from
using evidence of Orion's actions and statements (both public and
"behind the scenes") in support of its claim for breach of the
implied covenant of good faith and fair dealing.
For the foregoing reasons, the Court has determined to grant
Orion's motion for summary judgment to the extent that Orion has
requested a finding that the license did not subject Orion to an
express or implied obligation to use best efforts in performing
under the license.