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EMERSON RADIO CORP. v. ORION SALES

January 21, 2000

EMERSON RADIO CORP., PLAINTIFF,
V.
ORION SALES, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Wolin, District Judge.

OPINION

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 with prejudice.

BACKGROUND

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. ¶ 13.

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.

The parties operated amicably under their contracts for only a matter of months. By June 1995, Emerson wrote to Mr. Otake complaining, inter alia, that prices under the Supply Agreement were too high. Davis Aff.Exh. T. A mediation in July 1995 failed. Daichman Decl.Exh. G (Jurick Dep. at 199-200). Emerson placed no orders for Video Products under the Supply Agreement after 1995. Id. Exh. H, ¶¶ 7-10. Defendants claim that Emerson never paid for a substantial amount of product it received and that Emerson wrongfully rejected returns.

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 conspiracy.

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 is directed.

LEGAL DISCUSSION

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 precedent.

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 ...


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