The opinion of the court was delivered by: Wolin, District Judge.
This matter has been opened before the Court upon the motion of
defendants Orion Sales, Inc. ("Orion"), Otake Trading Co., Ltd.
("Otake"), Technos Development Limited (collectively the "Otake
Companies"), Shigemasa Otake and John Richard Bond for partial
summary judgment pursuant to Federal Rule of Civil Procedure 56.
Defendants, some of which are parties to certain agreements with
plaintiff Emerson Radio Corporation ("Emerson"), move for
dismissal of Count Two of the Complaint, which alleges a breach
of the duty of good faith and fair dealing implied in contracts
under New Jersey law. The motion has been decided upon the
written submissions of the parties, pursuant to Federal Rule of
Civil Procedure 78. For the reasons set forth below, the motion
will be granted and Count Two of the complaint will be dismissed
Plaintiff Emerson Radio Corp. ("Emerson") has dealt in electric
and electronic goods under its Emerson brand since the early
1900's. Emerson has not, however, manufactured the products it
sells since 1994, and claims that its "Emerson" trademark is its
primary business asset. Defendants Orion, Otake and Technos
Development Limited (collectively the "Otake Companies") are in
the business of manufacturing and importing electronic consumer
goods under various brand names, including their own "Orion"
brand. Defendant Shigemasa Otake is the principal of the Otake
Companies and defendant John Richard Bond is a former Emerson
executive now employed by Otake.
The License Agreement contains several notable features
pertinent to this dispute. First, there was no minimum sales
requirement to be met by Orion, nor any express provision that
Orion use "best efforts" or "due diligence" in marketing or
selling goods under the license. There was, however, a minimum
annual royalty of $4 million to Emerson, with additional
royalties based on net sales to the extent the sales-based
royalty calculation exceeded $4 million. License Agreement ¶ 5.1.
The Otake Companies were permitted to sell their own "Orion"
brand video product to Wal Mart as well. License Agreement ¶ 8.1.
Finally, goods returned from Wal Mart and repair of goods sold to
Wal Mart were the responsibility of the licensee. License Agmt. ¶
On the same day, Emerson entered into a separate agreement with
the Otake Companies, pursuant to which Otake agreed to supply
Emerson-branded Video Products to Emerson for sale to parties
other than Wal Mart. Decl. of Saburo Yamato ("Yamato Decl.") Exh.
B (hereinafter the "Supply Agmt."). Terms were to be consistent
with the parties' "customary order and acceptance procedures."
Supply Agmt ¶ 2.1. Prices were to be equal to the lowest price
Otake charged to any third party or to any affiliate of Otake.
Supply Agmt. ¶ 2.2. Emerson orders were to get priority once Wal
Mart orders were filled. Supply Agmt. ¶ 2.5.
The relationship of the parties long predates the License and
Supply Agreements. The Otake Companies have supplied video
products to Emerson for sale under the Emerson mark since the
mid-1980's. Affidavit of Eugene I. Davis ("Davis Aff.") ¶ 6.*fn1
In 1992, Shigemasa Otake was involved in a struggle for control
of Emerson, in which he was defeated by Emerson's current
management, then known as the Fidenas group. Id. ¶ 9. At that
time, Emerson learned that the Otake Companies had developed its
own "Orion" brand for video products and Bond left Emerson to
work for Otake. Id.
Subsequently, Emerson went through a bankruptcy proceeding,
from which it emerged in 1994. In 1994, a dispute erupted between
the parties concerning payment for goods received and volume
rebates. It is clear that the February 1995 agreements that are
the subject of this lawsuit were negotiated in the context of
this dispute. See id. ¶ 10-11. In fact, the Supply Agreement
itself required payments by Otake to Emerson of $10.2 million "in
full and final settlement" of prior claims, and by Emerson to
Orion of approximately $5.2 million for sums alleged to be due.
Supply Agmt. ¶ 3.
By December 1995, the dispute had ripened into litigation. The
Otake Companies filed suit in the Southern District of Indiana.
Emerson filed the instant suit. In this action, Emerson alleges —
in count one — breach of both the License and Supply Agreements
regarding acceptance of returns, pricing of Video Products,
failure to permit inspection of records, and failure to exploit
the licensed trademark. Count two, the subject of this motion,
alleges breach of the implied covenant of good faith and fair
dealing. Counts three through five allege various torts and
The scope of this action has already been narrowed by motion.
This Court granted defendants' motion for partial summary
judgment that there was no implied term of best efforts with
respect to exploitation of the License Agreement. Emerson Radio
Corp. v. Orion Sales, Inc., 41 F. Supp.2d 547 (D.N.J. 1999) (the
"Best Efforts Opinion"). As the parties will be aware, that
ruling was based on the ground that there could be no implication
of a duty to use best efforts to market Emerson-branded Video
Products where the licensee was required to pay a minimum royalty
regardless of the level of sales. On January 11, 2000, the Court
granted defendants motion for partial summary judgment dismissing
all claims for breach of the Supply Agreement and Counts Three
through Five in their entirety.
What remains are plaintiff's allegations of breach of the
License Agreement (to the extent those allegations are not based
upon an implied obligation to use best efforts to exploit the
license), and Count Two: breach of the implied duty of good faith
and fair dealing. It is to the latter of these that this Opinion
The Summary Judgment Standard
This is the third summary judgment opinion the Court has issued
in this case, and the second in the last month. The Court will
not restate the law of summary judgment motions again here, but
incorporates here the relevant discussions in the Court's prior
opinions. The issue is whether plaintiff has shown that there is
a genuine issue of material fact on each necessary element of its
claim that defendants breached the duty of good faith and fair
dealing implied in contracts under New Jersey law. Fed.R.Civ.P.
56. Sensitive to the necessarily inchoate nature of the issues
presented by the good faith and fair dealing claim, the Court
assures the parties that it has drawn all reasonable inferences
in favor of the non-movant as required by the controlling
The Duty of Good Faith and Fair Dealing
a. "Best Efforts" and Good Faith.
As will be seen below, the existence of the minimum royalty
requirement in the License Agreement is an important factor in
assessing the scope of defendants' obligation under the duty of
good faith and fair dealing. Of course, the minimum royalty was
also the dispositive fact in the Court's Best Efforts Opinion. As
a threshold matter, therefore, the difference between an implied
obligation to use best efforts and the implied duty of good faith
and fair dealing must be discussed.
It is settled law that "[a]n implied best efforts obligation is
distinct from an implied covenant of good faith performance and
fair dealing." Permanence Corp. v. Kennametal, Inc.,
908 F.2d 98, 100 (6th Cir. 1990). In fact, their nomenclature explains how
they differ; as a matter of the diligence required, best efforts
is a more rigorous obligation than good faith and fair dealing. 2
E. Allan Farnsworth, Farnsworth on Contracts § 7.17b at 336 &
n. 17 (1990) (citing inter alia Grossman v.
Lowell, 703 F. Supp. 282 (S.D.N.Y. 1989)). Yet, the two
obligations differ in kind and not merely in quality. Good faith
and fair dealing are a matter of "decency, fairness or
reasonableness," Restatement (Second) of Contracts § 205, cmt.
a, although good faith and fair dealing may impose a positive
obligation to act.
In this case, the duty of good faith and fair dealing is
broader than an implied duty to use best efforts in marketing
Emerson Products to Wal Mart. The Supply Agreement, which has
nothing to do with the amount of sales to Wal Mart, has its own
implied duty of good faith. Even within the License Agreement,
defendants assumed obligations separate from the amount of sales,
as well as obligations that are incidental to but not logically a
part of the amount of effort expended to promote Emerson-brand
Video Products. However, narrowly with respect to the amount of
effort required to promote sales to Wal Mart, the good faith and
fair dealing is less exacting than best efforts. Here the
question is: were defendants efforts "decent, fair and
reasonable" rather that "best."
Of course, all of these elements — the Supply Agreement, other
obligations not related to Wal Mart sales, and whatever remains
of defendants' requirement to promote Emerson products at Wal
Mart — must be considered together. The Court will not neglect to
consider whether the record would support a finding that
defendants breached ...