Emerson Radio Corp. v. Orion Sales, Inc.

• Decision Date: 26 March 1999
• Docket Number: Civil Action No. 95-6455.
• Citation: 41 F.Supp.2d 547
• Parties: EMERSON RADIO CORP., Plaintiff, v. ORION SALES, INC., et al., Defendants.
• Court: U.S. District Court — District of New Jersey

Page 547

41 F.Supp.2d 547

EMERSON RADIO CORP., Plaintiff, v. ORION SALES, INC., et al., Defendants.

Civil Action No. 95-6455.

United States District Court, D. New Jersey.

March 26, 1999.

Paul F. Carvelli, McCusker, Anselmi, Rosen, Carvelli & Walsh, Chatham, NJ, for plaintiff.

Joseph J. Fleischman, Norris, McLaughlin & Marcus, Somerville, NJ, for defendants.

OPINION

WOLIN, District Judge.

This matter comes before the Court on a motion for partial summary judgment filed by defendant Orion Sales, Inc. ("Orion"). The Court has decided the matter pursuant to Rule 78 of the Federal Rules of Civil Procedure. For the reasons stated herein. the Court will grant defendant's motion for partial summary judgment.

BACKGROUND

On or about February 22, 1995, plaintiff Emerson Radio Corp. ("Emerson") entered into a licensing agreement (the "license") with Orion, regarding sales of Emerson trademark goods to Wal-Mart Stores, Inc. See Declaration of Jeffrey H. Daichman (the "Daichman Decl."), Exh. C. Pursuant to the license, Emerson granted Orion a three-year "exclusive ... non-transferable license to utilize and exploit" the Emerson trademark "in connection with the manufacturing, sale, marketing, and distribution" of certain specified video and television products. See id., Exh. C, §§ 2.1, 3.1. The license does not specify a minimum sales requirement to be met by Orion, and does not include any express provision that Orion use "best efforts" or "due diligence" in marketing or selling goods under the license. The license does, however, require that Orion pay a minimum annual royalty of $4 million to Emerson. See id., Exh. C, § 5.1.

On December 20, 1995, Emerson filed the complaint in this action against defendants Orion, Otake Trading Co. Ltd., Technos Development Limited, Shigemasa Otake and John Richard Bond. Mr. Otake is alleged to own and/or control the three corporate defendants. See Complaint, ¶ 11. Mr. Bond is alleged to be a former executive of Emerson, later hired by Mr. Otake. See id., ¶ 17.

In its complaint, Emerson asserts the following causes of action against the defendants: in the first count, breach of contract for failing to accept product returns, failing to exploit privileges granted under the license, failing to provide price decreases, and failing to permit plaintiff to inspect books and records; in the second count, breach of the implied covenant of good faith and fair dealing; in the third count, unfair competition; in the fourth count, tortious interference with contractual relations and prospective economic gain; and in the fifth count, conspiracy to interfere with and harm plaintiff's business relations. See id., ¶¶ 48-52, 55-57, 59-61, 63-66, 68-70.

Orion has moved for partial summary judgment "on Emerson's claim that Orion failed to exploit the privileges granted to it as licensee." See Orion moving brief at 1. Orion seeks a finding by this Court that Orion had no express or implied duty under the license to sell a minimum quantity of Emerson products to Wal-Mart.¹ See id. at 6. Emerson argues in opposition that the license's grant to Orion of the opportunity to "exploit" Emerson trademark goods constituted an express requirement that Orion "employ [the license] to the greatest possible advantage." See Emerson brief at 31. Emerson also asserts that "in furtherance of the affirmative obligations imposed on Orion by the express terms of the License Agreement, a `best efforts' requirement should be implied [sic] in the License Agreement." See id. at 36.

DISCUSSION

Summary Judgment

Summary judgment shall be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The party moving for summary judgment has the burden of demonstrating that there is no genuine issue as to any material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

Where a summary judgment motion is properly made and supported, "an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). If the adverse party fails to respond with a showing that there is a genuine issue for trial, "summary judgment, if appropriate, shall be entered against the adverse party." Id. In making this determination, the Court must draw all reasonable inferences in favor of the non-moving party. See National State Bank v. Federal Reserve Bank, 979 F.2d 1579, 1581 (3d Cir.1992).

The Court's function at the summary judgment stage of litigation is to determine whether there is a genuine issue for trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). An issue of material fact is genuine if the evidence would permit a reasonable jury to return a verdict for the non-moving party. See id., Coolspring Stone Supply, Inc. v. American States Life Ins. Co., 10 F.3d 144, 148 (3d Cir.1993). Absent evidence sufficient to permit a jury to return a verdict for the non-moving party, there is no issue for trial, and summary judgment must be granted. See Anderson, 477 U.S. at 249, 106 S.Ct. 2505.

Applicable State Law

In its briefs, Orion does not address the issue of which state's substantive law should govern this contractual dispute. Emerson relies upon a finding by a district judge, made in a related case pending in Indiana, that New Jersey law should apply. See Declaration of Paul F. Carvelli, Esq., Exh. A ("Findings of Undisputed Facts and Conclusions of Law on the Parties' Cross-Motions for Partial Summary Judgment," entered December 11, 1998, by District Judge Richard L. Young of the United States District Court for the Southern District of Indiana). This Court concurs with Judge Young's reasoning and agrees that New Jersey substantive law should be applied in this case.

Express Sales Obligations Under the License

Emerson concedes that the license did not include a minimum sales requirement. See Emerson brief at 31. Rather, Emerson argues that the use of the word "exploit" in the license, required Orion to "`employ [the license] to the greatest possible advantage.'" See id. (quoting dictionary definition of "exploit"). Emerson asserts that the use of the word "exploit," together with certain other "express" terms of the license, "confers upon Orion an obligation to market, manufacture, sell, and distribute Emerson product." See id. at 32-33 (emphasis added).

Emerson cites no law in support of this argument. In fact, the dictionary definition of "exploit" that constitutes the sole basis for Emerson's argument could as easily be used to support an opposite interpretation of the contract. The license authorized Orion to "exploit" the Emerson trademark, but did not specify whether the exploitation should result in "the greatest possible advantage" to Emerson, or to Orion. Furthermore, the second definition of "exploit" is "to make use of ... selfishly." See Webster's II New Riverside Dictionary (1984) at 455. Thus, the use of the word "exploit" in the license could as easily be interpreted as granting Orion authority to act in its own self-interest as imposing a duty to act in Emerson's best interests.

Orion did have certain express duties under the license.² Because the use of the 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.1954), 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.1971).

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...