Emerson Radio Corp. v. Orion Sales, Inc.

Filed June 5, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-1571
EMERSON RADIO CORP.,
Appellant
v.
ORION SALES, INC. ;
OTAKE TRADING CO. LTD. ;
TECHNOS DEVELOPMENT LIMITED;
SHIGEMASA OTAKE;
JOHN RICHARD BOND
On Appeal from the United States District Court
for the District of New Jersey
(D. C. Civ. No. 95-cv-06455)
District Judge: Hon. Alfred M. Wolin
Argued November 16, 2000
Before: SLOVITER, AMBRO, and GARTH, Circuit Judges
(Filed: June 5, 2001)
David L. Harris (Argued)
Lowenstein Sandler
Roseland, N.J. 07068
Paul F. Carvelli
Andrew E. Anselmi
McCusker, Anselmi, Rosen,
Carvelli & Walsh
Chatham, N.J. 07928
Attorneys for Appellant

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Barry J. Bendes (Argued)
Jeffrey W. Herrmann
Jeffrey H. Daichman
Vedder, Price, Kaufman & Kammholz
New York, N.Y. 10022
Attorneys for Appellees
OPINION OF THE COURT
SLOVITER, Circuit Judge.
I.
STATEMENT OF THE CASE
Plaintiff Emerson Radio Corp., a Delawar e corporation
with its principal place of business in New Jersey, began
manufacturing consumer electronic products in the early
1900s. Emerson had stopped manufacturing its own
products by 1994, and, instead, now licenses other
manufacturers to produce and distribute goods bearing
Emerson' s trademark, which it claims as its gr eatest
business asset.
Defendants, the Otake companies, consist of a gr oup of
affiliated companies, Orion Sales, Inc., an Illinois
corporation, Otake Trading Co. Ltd., a Japanese
corporation, and Technos Development Limited, a Hong
Kong corporation, which Emerson alleges are owned and/or
controlled by Shigemasa Otake, a citizen of Japan. The
Otake companies are in the business of manufacturing and
supplying to distributors worldwide consumer electr onic
products under various brand names, including their own
"Orion" brand.
On February 22, 1995, Emerson entered into a License
Agreement with Orion pursuant to which 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
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products under Emerson' s trademark to W al-Mart Stores,
Inc., historically Emerson' s largest customer . App. at 87.
Emerson entered into a Supply Agreement with the Otake
companies at the same time pursuant to which the Otake
companies agreed to supply video products to Emerson for
sale under the Emerson trademark to parties other than
Wal-Mart. Both the License Agreement and Supply
Agreement were set to run from April 1, 1995 to March 31,
1998. The relationship between the parties has been
contentious from its inception, even befor e the negotiation
and signing of the License Agreement, but we will confine
ourselves in the text of this opinion to the issues directly
relating to this appeal.
On December 20, 1995, Emerson filed suit in the United
States District Court for the District of New Jersey on the
basis of diversity jurisdiction against the thr ee Otake
companies, Mr. Otake, and John Richar d Bond, a citizen of
Kansas. Bond is a former Emerson executive who was
Emerson' s primary contact with Wal-Mart and was
thereafter hired by Mr. Otake. The complaint alleged breach
of contract, breach of the implied covenant of good faith
and fair dealing, unfair competition, tortious inter ference
with contractual relations, and conspiracy to interfere with
and harm plaintiff ' s business r elations.
Following discovery, the District Court, in a series of
three opinions, granted summary judgment to the
defendants on all but one of the issues. See Emerson Radio
Corp. v. Orion Sales, Inc., 41 F. Supp. 2d 547 (D.N.J. 1999)
(hereafter "Emerson I"); Emerson Radio Corp. v. Orion Sales,
Inc., 2000 WL 49361 (D.N.J. 2000) (hereafter "Emerson II");
Emerson Radio Corp. v. Orion Sales, Inc., 80 F . Supp. 2d
307 (D.N.J. 2000) (hereafter "Emerson III"). The court
permitted the jury to determine the r emaining issue, which
was the respective responsibility of Emerson and Orion for
a three-month span of Emerson-brand product returns
from Wal-Mart from June to August 1995. The jury found
for Emerson in part and for Orion in part, and the District
Court offset Emerson' s damage award by the amount the
jury awarded to Orion.
Emerson timely appeals the District Court' s grant of
summary judgment in favor of the defendants on Emerson' s
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claims for breach of contract, breach of the implied
covenant of good faith and fair dealing, and tortious
interference. Emerson also appeals fr om the amount of
damages in the District Court' s final judgment. This court
has jurisdiction pursuant to 28 U. S.C. § 1291.
II.
GRANT OF SUMMARY JUDGMENT
Summary judgment is appropriate where"there is no
genuine issue as to any material fact and . . . the moving
party is entitled to a judgment as a matter of law." Fed. R.
Civ. P. 56(c). In considering a motion for summary
judgment, a court must draw all reasonable inferences from
the underlying facts in the light most favorable to the non-
moving party. See Battaglia v. McKendry, 233 F. 3d 720,
722 (3d Cir. 2000). We have plenary r eview over a district
court' s grant of summary judgment. See Pittston Co.
Ultramar Am. Ltd. v. Allianz Ins. Co., 124 F . 3d 508, 515 (3d
Cir. 1997). Similarly, we have plenary r eview over the
District Court' s interpretation of state law, see id., and in
this case, it is undisputed that we must apply the
substantive law of New Jersey.
A.
BREACH OF CONTRACT
Emerson' s principal claim on appeal is that Orion
breached its contractual obligation in the License
Agreement to sell Emerson-brand video pr oducts to Wal-
Mart. Emerson proffers two legal theories in support of its
breach of contract claim: one is based on the express
language of the License Agreement; the other is based on
an obligation implied in that contract. The theories as set
forth on appeal are alternate routes to the same goal -- an
opportunity to present the breach of contract claim to a
jury. The District Court rejected both as a matter of law
and we consider each in turn.
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1.
Express Obligation to "Utilize and Exploit"
Emerson' s claim that Orion breached the expr ess
contract is based on ¶2.1 of the License Agr eement, which
provides, "[Emerson] grants to [Orion] an exclusive . . . non-
transferable license to utilize and exploit the Licensed Marks
solely upon and in connection with the manufacturing,
sale, marketing, distribution and after sales service of the
Goods [defined to include video cassette r ecorders, video
cassette players, televisions, etc.]" to W al-Mart. App. at 87
(emphasis added). Emerson contends that this pr ovision in
effect imposed on Orion an express contractual obligation
to use "reasonable efforts" or" due diligence" in selling and
marketing Emerson-brand products to Wal-Mart. 1
Emerson alleges that rather than exploiting the Emerson
trademark on the Emerson products, Orion had a plan to
displace the Emerson-brand products in W al-Mart stores
with Orion-brand products. Emerson argues that sales
records show that the sales of Emerson-brand goods in
Wal-Mart stores markedly decreased during the period of
the license, from 1995 to 1998, while sales of the Orion
brand increased. Further, as evidence of a secret Orion
"bait and switch" intent to displace the Emerson brand,
Emerson produced numerous Orion inter office memoranda,
including the following memorandum from Bond to Mr.
Otake that read, inter alia:
Therefore, my personal opinion is to not alert Emerson
people to our intentions but to let them think we have
decided to help them - actually we are just buying 1
and 1/2 years to be free of Emerson.
App. at 1503.
In awarding summary judgment to Orion on Emerson' s
_________________________________________________________________
1. In the District Court and in its briefs on appeal, Emerson appeared to
make the argument that Orion had an expr ess obligation to exercise its
"best efforts." At oral argument, Emerson clarified that it was only
suggesting that Orion had an obligation to use " r easonable efforts" or
"due diligence."
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breach of contract claim, the District Court did not consider
whether this evidence raised a material issue of fact as to
whether Orion breached its contract. Instead, the District
Court construed the word "exploit" as used in the phrase
"utilize and exploit" to be subject to two possible meanings.
It stated that the term "exploit" "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." Emerson I, 41 F. Supp. 2d at 549. The meaning
of the term "exploit" is, according to the District Court,
"inconclusive." Id. at 550. The District Court therefore
declined to "interpret the use of that wor d as the imposition
of an express duty on the part of Orion to exert some
minimum level of effort or perfor mance under the license,"
id., and, in a brief discussion, it rejected Emerson' s claim
that Orion had express sales obligations under the license.
It is hornbook law that if the relevant terms in a contract
are ambiguous, the issue must go to a jury. See, e.g.,
Sanford Inv. Co., Inc. v. Ahlstrom Mach. Holdings, Inc., 198
F.3d 415, 421 (3d Cir. 1999). The court can grant summary
judgment on an issue of contract interpretation if the
contractual language being interpreted "is subject to only
one reasonable interpretation." Ar nold M. Diamond, Inc. v.
Gulf Coast Trailing Co. , 180 F.3d 518, 521 (3d Cir. 1999).
To state the converse, an agreement is ambiguous if it is
"susceptible of more than one meaning." Sumitomo Mach.
Corp. of Am., Inc. v. AlliedSignal, Inc. , 81 F . 3d 328, 332 (3d
Cir. 1996) (quotation omitted). Therefor e, if the District
Court was correct in determining that"exploit" as used in
the license was ambiguous, we must reverse its order
granting summary judgment on this claim.
The determination whether a contract ter m is ambiguous
is a question of law that requires a court to " ` hear the
proffer of the parties and determine if there [are] objective
indicia that, from the linguistic refer ence point of the
parties, the terms of the contract are susceptible of
different meanings.' " Sheet Metal Workers, Local 19 v. 2300
Group, Inc., 949 F.2d 1274, 1284 (3d Cir. 1991) (brackets in
original) (quoting Mellon Bank, N. A. v. Aetna Bus. Credit,
Inc., 619 F.2d 1001, 1011 (3d Cir . 1980)). We have stated
that before we decide whether a contract is ambiguous, we
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must " ` consider the contract language, the meanings
suggested by counsel, and the extrinsic evidence of fered in
support of each interpretation.' " American Cyanamid Co. v.
Fermenta Animal Health Co. , 54 F.3d 177, 180-81 (3d Cir.
1995) (quoting Teamsters Indus. Employees Welfare Fund v.
Rolls-Royce Motor Cars, Inc., 989 F. 2d 132, 135 (3d Cir.
1993)) (finding these "traditional rules of contract
interpretation" consistent with New Jersey law). In this
case, however, it is the word "exploit" as used in the grant
of the license to "utilize and exploit" that the District Court
found ambiguous and we focus on that issue.
Orion deprecates Emerson' s argument that the meaning
of the term "exploit" in the License Agr eement should go to
a jury because "exploit" has more than one dictionary
meaning. Orion states that virtually every wor d in the
English language has more than one dictionary definition,
and that such reasoning would render every contract
essentially ambiguous. We need not accept such an
expansive view. After all, it was the District Court that
found the word "exploit" inconclusive in this context. The
court was not mistaken in recognizing that the verb
"exploit" can be given a meaning consistent with each
party' s interpretation. Webster' s Third New International
Dictionary (7th ed. 1993) defines "exploit" as "to take
advantage of, " a meaning consistent with Emerson' s
interpretation, or as " to make use of meanly or unjustly for
one' s own advantage or profit[;] take undue advantage of,"
a meaning more consistent with Orion' s pr offered
definition. On this basis alone, the term"exploit" appears
ambiguous. Both Orion and Emerson argue that their
interpretation of the "utilize and exploit" language finds
support in other provisions of the License Agr eement. We
do not discuss them because we believe they ar e not
dispositive.
Under the circumstances, Emerson has substantial basis
to complain that the District Court usurped the jury' s
function by finding the phrase "utilize and exploit . . . in
connection with the . . . sale" of Emerson-brand video
products to Wal-Mart to be ambiguous but granting
summary judgment without permitting the jury to resolve
the ambiguity through, inter alia, extrinsic evidence.
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Orion, however, argues as a fallback position that no
reasonable jury could construe permission given to it to
"exploit" to impose a duty on it. We note, however, that
there is relevant case law discussing contractual obligations
that suggests that courts, including some applying New
Jersey law, support Emerson' s interpretation. For this
purpose, we find instructive the discussions in both
Fenning v. American Type Founders, Inc., 33 N.J. Super.
167, 109 A.2d 689 (App. Div. 1954), and Bellows v. E. R.
Squibb & Sons, Inc. , 184 U.S.P. Q. 473 (N.D. Ill. 1974), the
only two relevant cases of which we are aware that apply
New Jersey law, of the contractual use of the ter m "exploit"
and the implied obligations that may derive fr om it under
New Jersey law. Admittedly, neither case involves a license
agreement in which the licensee is granted explicitly the
right to "exploit" the licensor' s product. Still, in Fenning the
New Jersey court stated that "if we presume the parties
intended a fair contract where the evident purpose of the
license was exploitation, an implied covenant of r easonable
exploitation is essential. " 33 N.J. Super . at 178, 109 A.2d
at 694. Importantly then, Fenning associates the purpose of
exploitation with an obligation to use what appear to be
"reasonable efforts. "
Moreover, in Bellows, although the court did not find an
implied obligation it used the term "exploit" interchangeably
with the phrases "use due diligence to exploit" and "exercise
reasonable efforts or due diligence in the exploitation of."
184 U.S.P.Q. at 474. Several other courts also have used
the term "exploit" interchangeably with, or at least
analogized it to, "reasonable efforts," "best efforts," or "due
diligence, " albeit usually in the context of
implied obligations. See Beraha v. Baxter Health Care Corp.,
956 F.2d 1436, 1441 (7th Cir. 1992) (equating an "implied
obligation to exploit" with an "implied best efforts clause"
when interpreting Illinois law); Per manence Corp. v.
Kennametal, Inc. , 908 F. 2d 98, 101, 102 (6th Cir. 1990)
(interchanging "implied covenant to use best efforts" with
"implied covenant to exploit," and finding no "implied duty
to use best efforts" under Pennsylvania law in part because
licensee did not expressly agree to "exploit" the subject of
the license); Vacuum Concrete Corp. of Am. v. American
Mach. & Foundry Co., 321 F. Supp. 771 (S.D.N.Y. 1971)
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(using interchangeably the following ter ms under New York
law: "obligation to exploit;" "covenant . . . to exploit . . . with
reasonable diligence and in good faith;" "duty . . . to exploit
. . . with due diligence; " "covenant to exploit with due
diligence;" and "covenant . . . to exer cise the alleged
standard of diligence (whether it be ter med ` best efforts,'
` due diligence, ' or something along these lines) in the
exploitation of "); Havel v. Kelsey-Hayes Co., 445 N.Y.S.2d
333, 83 A.D.2d 380 (App. Div. 1981) (using inter changeably
"obligation to exploit" with "promise . . . to use reasonable
diligence to exploit" and "obligation to use due diligence to
exploit" when interpreting New York law) (quotation
omitted). In fact, even the District Court noted that courts
have characterized an implied obligation under an exclusive
license as "an implied ` covenant to exploit,' ` best efforts
clause,' or ` due diligence requirement,' among other terms."
Emerson I, 41 F. Supp. 2d at 550.
In light of this precedent, we cannot hold, as did the
District Court, that the contract language that granted
Orion the right "to utilize and exploit" Emerson' s
trademarks did not, as a matter of law, impose on it an
express obligation to sell a certain amount of Emerson-
brand products to Wal-Mart. Thus, we will reverse the grant
of summary judgment on Emerson' s breach of contract
claim insofar as it rejected Emerson' s claim of an express
obligation.
2.
Implied Obligation to Use "Reasonable Efforts"
As noted above, Emerson argues that it is also entitled to
a jury trial on its breach of contract claim because, as a
result of the License Agreement, Orion had an implied
obligation to exercise "reasonable ef forts" and "due
diligence" in selling and marketing Emerson-brand
products to Wal-Mart. 2 The District Court rejected as a
_________________________________________________________________
2. As with its claim for an express obligation to " utilize and exploit" the
license, Emerson here too has frequently r eferred to this implied
obligation as an obligation to use "best ef forts." Still, we interpret
Emerson' s argument as suggesting an implied obligation to use
"reasonable efforts" or "due diligence."
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matter of law Emerson' s claim of any such implied
contractual obligation. The court held that because the
License Agreement required Orion to make a minimum
annual royalty payment of $4 million for thr ee years, Orion
was not subject to any implied obligation to use"best
efforts" to market and sell Emerson-brand products under
the License. The District Court reasoned 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 situation." Id. at 551. Emerson complains
that it was error for the District Court to have determined
that the inclusion of the minimum royalty pr ovision
precluded any implied obligation that Orion sell Emerson-
brand video products to Wal-Mart during the license period.
After consideration, we find the District Court' s reasoning
in this regard to be persuasive.
The doctrine of implied contractual obligations wasfirst
enunciated by Justice Cardozo in Wood v. Lucy, Lady Duff-
Gordon, 222 N.Y. 88, 118 N.E. 214 (1917). The parties to
that case had signed an agreement by which the defendant,
who designed clothing and related accessories, gave
plaintiff the exclusive right to place her indorsements on
the designs of others, with the parties to shar e the profits
equally. Plaintiff sued defendant for br eaching the
exclusivity provision, and defendant ar gued that the
agreements lacked mutuality because plaintif f had not
bound himself to any promise.
The court rejected that contention, holding that although
plaintiff "does not promise in so many words that he will
use reasonable efforts to place the defendant' s
indorsements and market her designs . . . such a pr omise
is fairly to be implied." Id. at 90-91, 118 N.E. at 214.
Justice Cardozo was concerned that "[u]nless [licensee]
gave his [reasonable] efforts,[licensor] could never get
anything." Id. at 91, 118 N.E. at 214. As he explained, " [w]e
are not to suppose that one party was to be placed at the
mercy of the other." Id.
This doctrine, imposing on the licensee in an exclusive
license an implied obligation "to use reasonable efforts to
bring profits and revenues into existence," id. at 92, 118
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N.E. at 215, has been adopted in many jurisdictions,
including New Jersey. In Fenning, 33 N.J. Super. 167, 109
A.2d 689, the highest court of New Jersey to have
considered the issue of implied obligations adopted the
analysis as set forth in Wood. The Fenning plaintiffs, who
had given defendant an exclusive license to manufacture
and sell a patented device, sued claiming that defendant
never manufactured or sold the device. In its answer,
defendant denied it had any obligation to exer cise
reasonable efforts and due diligence to exploit the sale of
the device. The trial court dismissed the action but the New
Jersey appellate court reinstated it based on the implied
obligation set forth in Wood. See Fenning, 33 N.J. Super. at
174-78, 109 A.2d at 692-94.
The New Jersey court stated: " The theory supporting this
implied duty is that the productiveness of the licensor' s
property having been placed solely within the control of the
licensee, a covenant on its part will be implied to work the
patent in good faith to make it produce r oyalty income to
the licensor." Id. at 175, 109 A. 2d at 693. The court further
stated: "The principle is well established with r espect to a
wide variety of contracts in which the consideration for a
grant of property lies wholly in the payment of sums of
money based upon the earnings of property transferred." Id.
Accordingly, the court concluded that defendant had an
implied obligation to "exercise reasonable efforts and due
diligence in the exploitation and sale of the device under
the exclusive license" notwithstanding the absence of any
explicit language to that effect in the contract. Id. at 178,
109 A. 2d at 694. As the court stated, "wher e the evident
purpose of the license was exploitation, an implied
covenant of reasonable exploitation is essential." Id.
The District Court in this case recognized that Fenning
held that plaintiffs were entitled to trial on their claim that
defendant failed to exercise reasonable ef forts and due
diligence. Nonetheless, the District Court distinguished
Fenning because it involved an exclusive license that
contained no minimum royalty provisions whereas the
Emerson-Orion license did contain "substantial non-
contingent consideration, which provides the licensor with
some assurance of benefit arising from the license
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independent of the efforts of the licensee." Emerson I, 41 F.
Supp. 2d at 551.
The District Court noted that the Fenning court, "[i]n a
perplexing aside, " stated "without further explanation:
` [t]hough no minimum royalty is involved, this is not
inconsistent with a duty to use reasonable diligence in
exploitation.' " Id. at 551 n.3 (quoting Fenning, 33 N.J.
Super. at 178, 109 A.2d at 694). If, as the District Court
suggested, this meant that a duty to use reasonable
diligence would always be implied when minimum r oyalties
were required, we agree with the District Court that such a
comment is "counterintuitive." Id. W e have no reason to
believe, in light of the analysis of this issue in cases much
more recent than the 1954 Fenning decision, that the New
Jersey Supreme Court would so hold.
The only other relevant decision applying New Jersey law,
albeit from a federal district court, is of little help. In
Bellows, 184 U.S.P.Q. 473, where the parties chose New
Jersey law to govern their contract, the court, in an
abbreviated decision, declined to find that the licensee had
an implied obligation to exercise reasonable efforts and due
diligence to exploit the licensed patent device. The court
noted that provisions in the license agr eement explicitly
recognized "that the parties consider ed and provided for the
contingency that [the licensee] might either elect not to
exploit [the device] or fail in the attempt." Id. at 474. One
of those provisions gave the licensor the option to terminate
the agreement should the licensee fail to pay a minimum
royalty. The court read that and similar provisions as
militating against the implication of an obligation to use
due diligence to exploit the product in question. Although
Emerson argues that Bellows stands for the proposition
that the absence of an express provision contemplating
non-use of an exclusive license means that non-use should
be implicitly prohibited, we do not read Bellows as
mandating such a holding in the converse of the situation
presented there. In any event, we agr ee with the District
Court that neither Fenning nor Bellows is directly
applicable.
We find more instructive, as did the District Court, the
decisions of the Sixth and Seventh Circuits in similar
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situations. In Permanence Corp. v. Kennametal, Inc. , 908
F. 2d 98 (6th Cir. 1990), Permanence, which held a patent
for a process to form an alloy, gave Kennametal a non-
exclusive right to the patent. Kennametal, the licensee,
agreed to pay Permanence a $150,000 fee and a royalty on
the net sales price of the products it made using processes
protected by the patent. It also paid advance r oyalties of
$100,000. Kennametal thereafter exercised its option to
convert the license to an exclusive one, for which it paid
additional fees and advance royalties. Several years later,
Permanence sued, claiming Kennametal br eached the
contract by failing to fulfill its implied obligation to use best
efforts to exploit the license.
The Sixth Circuit declined to imply such an obligation
into the exclusive license. Applying Pennsylvania law, the
court determined that because of the pr ovision in the
contract for advance royalties the licensor" did not depend
for its consideration solely on [licensee's] sale of products
developed under the [license]." Id. at 102 (emphasis added).
The court distinguished the facts before it fr om those in
Wood where the court "found it necessary to imply a
covenant to employ best efforts as a matter of law because
otherwise the contract . . . would [have] lack[ed] mutuality
of obligation and [have] be[en] inequitable." Id. at 100. In
contrast to Wood, Permanence had "protected himself
against the possibility that the licensee will do nothing." Id.
at 102.
Other courts have held similarly. For example, in Beraha
v. Baxter Health Care Corp., 956 F .2d 1436 (7th Cir. 1992),
the court, when faced with a comparable situation, adopted
and applied the reasoning in Permanence. The court stated
that "[w]hile courts have widely accepted the principle [of
the Wood case], they do not lightly find implied obligations
of any kind unless those implied obligations serve to effect
the clear intentions of the parties derived fr om the express
terms of the contract." Id. at 1441-42.
A decision from this court in an analogous situation,
although applying New York law, infor ms our analysis. In
HML Corp. v. General Foods Corp. , 365 F.2d 77 (3d Cir.
1966), we declined to extend the holding in W ood to a
situation where the supplier received an advance minimum
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payment as part of the supply agreement. W e described
Wood and its progeny to mean that"[w]here an owner of a
product gives an exclusive agency, solely in return for
royalties, but no promise is expressed on the part of the
agent to use his best efforts to promote it, the courts have
implied such a promise." Id. at 80 (emphasis added).
Because the terms of the contract at issue in HML provided
for a "substantial minimum payment," and the supplier was
therefore "not at the mercy of the[buyer]," this court found
Wood inapplicable and the exercise of its equitable powers
unnecessary. Id. at 81. In rejecting the appellant' s claim for
an implied obligation, we stated that in such instances:
The choice lies between implying a promise to correct
an apparent injustice in the contract, as against
holding the parties to the bargain which they have
made. The latter alternative has especial for ce where
the bargain is the result of elaborate negotiations in
which the parties are aided by counsel, and in such
circumstances it is easier to assume that a failure to
make provision in the agreement resulted not from
ignorance of the problem, but from an agr eement not
to require it.
Id. There is no perceivable dif ference in this area of law
between the jurisprudence of New York and the
jurisprudence of New Jersey.
Accordingly, we will apply the reasoning of HML to the
case at hand. The courts in HML, Per manence, and Beraha
did not blindly apply Wood to a situation involving an
exclusive agreement and the payment of r oyalties but
rather examined the mutual obligations and intentions of
the contracting parties. They found that a substantial
advance or minimum royalty payment serves to pr otect the
licensor/supplier from the possibility of the failure of the
licensee/buyer to use reasonable or best ef forts, the
concern in Wood. See Beraha , 956 F. 2d at 1442;
Permanence, 908 F.2d at 102; HML, 365 F.2d at 81; see
also Vacuum Concrete, 321 F . Supp. at 773-74; cf. Havel,
445 N.Y.S.2d at 336, 83 A.D.2d at 383 (finding minimum
royalty payment provision that "doesn' t obligate defendant
to the payment of minimum royalties" irr elevant, even
where plaintiff ' s "recourse for defendant' s failure to
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complete the annual minimum payment was to withdraw
the license"). In such instances, there is mutuality of
obligation and an implied obligation is unwarranted.
Paragraph 5. 1 of the Emerson-Orion License Agr eement
provided Emerson with a substantial minimum r oyalty
payment totaling $4 million per year for thr ee years. The
District Court found that this minimum royalty provision
discharges the court of its duty to imply an obligation to
use reasonable efforts because it ensur es that Emerson has
"some assurance of benefit arising from the license
independent of the efforts of the licensee." Emerson I, 41 F.
Supp. 2d at 551. In his deposition, Geoffr ey P. Jurick,
Emerson's Chairman and Chief Executive Officer,
acknowledged that the minimum guaranteed royalty
provision was designed, in part, "to guar d against the total
nonuse of a license. . . . [I]t is one incentive that you expect
the client, the licensee, will actually make use of a license
because he is paying you, and therefore, to keep things fair
and even, he pays you to guard against -- you assume that
he will then do his best to keep your product on the shelf
because he has to pay you. " App. at 159.
Under the circumstances, we cannot hold that it is
necessary to imply an obligation to use reasonable efforts
in order to avoid the lack of mutuality that was Justice
Cardozo' s fundamental concern in W ood. Moreover,
Emerson will have the opportunity at trial to pr ess its
contention that Orion expressly undertook the obligation to
exploit and sell Emerson-brand video products to Wal-Mart
by the language in the License Agreement.3 We will
therefore affirm the District Court' s grant of summary
judgment in favor of Orion on the question of an implied
obligation to use reasonable efforts.
_________________________________________________________________
3. The dissent also concludes that Emerson is entitled to show at trial
that Orion failed to exercise reasonable efforts in selling and marketing
the Emerson products, albeit on the additional theory that there was an
implied obligation as well as an express undertaking.
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B.
BREACH OF IMPLIED COVENANT OF GOOD FAITH
AND FAIR DEALING
In addition to its breach of contract claim, Emerson
included in its complaint a claim for breach of the implied
covenant of good faith and fair dealing. The District Court
dismissed this claim on summary judgment as a matter of
law, relying upon "the express ter ms of the parties'
agreements, the history of the parties' r elationship, the
character and sophistication of the parties, [and] the lack of
any fundamental frustration of the purpose of the contract
or destruction of a substantial reliance inter est." Emerson
III, 80 F. Supp. 2d at 320.
An implied covenant of good faith and fair dealing is
present in all contracts governed by New Jersey law. See
Sons of Thunder, Inc. v. Borden, Inc. , 148 N.J. 396, 420,
690 A.2d 575, 587 (1997). Good faith is defined in the
Uniform Commercial Code, as adopted in New Jersey, as
"honesty in fact in the conduct or transaction concerned."
N.J. Stat. Ann. 12A:1-201(19). Although the UCC is
inapplicable to the Emerson-Orion License Agr eement,
which was not a contract for the sale of goods, it is unlikely
the concept of good faith would be defined dif ferently by the
New Jersey Supreme Court merely because the contract at
issue is a license.
This obligation to perform contracts in good faith has
been interpreted in New Jersey to mean 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." Sons of Thunder, 148 N.J. at 420, 690 A.2d
at 587 (quotations omitted). Under the contract at issue in
Sons of Thunder, defendant Borden was to purchase clam
meat from plaintiff for up to five years. The contract
permitted Borden to terminate in a year but it was
plaintiff ' s expectation that the contract would run for five
years. Borden, with new managers, terminated the
contract, plaintiff sued, and the jury found that Borden
breached its obligation of good faith and fair dealing. The
Appellate Division overturned the verdict. In reinstating the
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verdict, the New Jersey Supreme Court, while emphasizing
the plaintiff ' s "desperate financial straits" and overall
economic dependency on the defendant, determined there
was sufficient evidence for the jury to have found that the
implied covenant of good faith was breached because
defendant' s conduct "destroyed [plaintif f ' s] reasonable
expectations and right to receive the fruits of the contract."
Id. at 425, 690 A.2d at 589.
Other courts have similarly interpreted the implied
covenant of good faith and fair dealing. See Beraha, 956
F. 2d at 1444 (implied covenant requir es that "a party
vested with discretion . . . exercise that discretion
reasonably, with proper motive and in a manner consistent
with the reasonable expectations of the parties") (emphasis
omitted); Comprehensive Care Corp. v. RehabCare Corp., 98
F. 3d 1063, 1066 (8th Cir. 1996) ("The implied covenant
simply prohibits one party from depriv[ing] the other party
of its expected benefits under the contract.") (quotation
omitted) (brackets in original); Restatement (Second) of
Contracts § 205, cmt. a ("Good faith per formance or
enforcement of a contract emphasizes faithfulness to an
agreed common purpose and consistency with the justified
expectations of the other party."). Under this authority, the
inquiry looks to the reasonable expectations of the
contracting parties.
New Jersey law also holds that a party to a contract can
breach the implied duty of good faith even if that party
abides by the express and unambiguous ter ms of that
contract if that party "acts in bad faith or engages in some
other form of inequitable conduct." Black Horse Lane Assoc.
v. Dow Chem. Corp., 228 F.3d 275, 288 (3d Cir. 2000). In
Bak-A-Lum Corp. of Am. v. Alcoa Bldg. Prods. , Inc., 69 N.J.
123, 130, 351 A.2d 349, 352 (1976), the New Jersey
Supreme Court held that "defendant' s selfish withholding
from plaintiff of its intention seriously to impair its
distributorship although knowing plaintiff was embarking
on an investment substantially predicated upon its
continuation constituted a breach of the implied covenant
of dealing in good faith. "
In reviewing the District Court' s grant of summary
judgment on this issue, we must address: (1) the "fruits of
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the contract" or interests that Emerson claims have been
injured by the defendants' alleged bad faith (the expectation
interests); and (2) the manner in which the defendants
carried out the express terms of the contract.
In its analysis of the "fruits of the contract, " the District
Court rejected Emerson' s contention that the defendants'
failure to market Emerson-brand products to Wal-Mart
interfered with Emerson' s fundamental expectation or
purpose of the contract. See Emerson III, 80 F. Supp. 2d at
317. Instead, the District Court stated that "[w]ith respect
to Wal Mart sales, the ` fruits of the contract,' narrowly
defined, were the guaranteed royalties and added security
that Emerson expected to receive from the License
Agreement." Id. Emerson argues that the District Court' s
determination was not based on the evidence and, at the
very least, its expectation interests concer ning the License
Agreement were disputed issues of material fact that should
be decided by a jury at trial, and not by a judge on
summary judgment.
Because Emerson was the party against which the
summary judgment was brought, the District Court was
required to draw all reasonable infer ences in favor of
Emerson. Emerson contended below that it was entrusting
its business relationship with Wal-Mart to Orion with the
purpose of protecting its primary asset, the"Emerson"
name and goodwill, and that the minimum royalty
payments provided for in the License Agr eement constituted
Emerson' s minimum expectations. Defendant Bond
acknowledged as much in his January 15, 1999 deposition,
describing the $4 million per year as "[t]he minimum that
[Emerson] expected in order to sign the license agreement."
App. at 243. In contrast, the defendants argued in the
District Court that Emerson was in desperate financial
trouble and that it was simply looking "to transform a
losing business into a profitable one, " app. at 1250,
expecting in return for the license only the $10. 2 million
that Orion undertook in the Supply Agreement to pay in
settlement of past claims, Orion' s assumption of
responsibility for Wal-Mart retur ns, and a guaranteed
minimum royalty payment of $4 million per year .
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It appears that the District Court accepted the
defendants' argument, concluding that "ther e was no
ancillary expectation interest by Emerson, or at least not
one that was frustrated by defendants." Emerson III, 80 F.
Supp. 2d at 317. Therefore, the District Court ruled that
there could be no breach of good faith and fair dealing
flowing from the alleged failure to exploit the license unless
there was harm to some reliance interest of Emerson. See
id. The District Court also rejected Emerson' s argument
that it had entrusted its business relationship with Wal-
Mart to the defendants. The court distinguished between
entrusting a trademark and entrusting a business
relationship, and determined that "Emerson voluntarily
withdrew from its relationship with W al Mart for the
duration of the license." Id.
In ruling on summary judgment, the District Court was
limited to determining whether Emerson' s contentions
raised a genuine issue of material fact. When we draw all
reasonable inferences in favor of Emerson, we conclude
that the District Court erred in ruling that no such issues
were raised. Emerson has put forth evidence to suggest
that it expected much more than the $4 million annual
minimum royalty payment. Emerson' s Chair man and CEO,
Jurick, stated in his deposition that "[w]e thought we might
get six or $8 million a year. We actually did at one point
figure we might get six and three-quarters to seven and a
quarter million dollars a year. That was our vision at the
time for this license." App. at 435. In this r espect, this case
is like Beraha, the Seventh Circuit decision to which the
District Court looked, where the court r emanded the case
so that the jury could hear the evidence and deter mine for
itself "if [defendant] reasonably exer cised its discretion
under the circumstances and in light of the r easonable
expectations of the parties. " 956 F. 2d at 1445. Here too,
because we have conflicting evidence befor e us, we cannot
sustain the grant of summary judgment on the gr ound that
Emerson' s expectation interests were not destroyed by the
defendants' conduct.
Emerson further argues that it has shown a br each of the
implied covenant of good faith and fair dealing because the
defendants' concealment of their intentions caused it
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financial harm. This principle of New Jersey law was
established in Bak-A-Lum. The District Court rejected this
argument on several grounds. First, it disputed Emerson' s
evidence of damages, concluding that "[o]n the facts of
record, there is no damage to the pr operty actually licensed
by Emerson sufficient to support its breach of good faith
claim." Emerson III, 80 F. Supp. 2d at 317. Second, the
court found insufficient evidence of causation, noting that
"Emerson has failed to produce evidence that would
support a finding that any act of defendants would prevent
Wal Mart from buying [Emerson pr oducts]." Id. at 318.
Third, the court concluded that the evidence does not
establish "that defendants acted so unreasonably,
deceitfully, unfairly, or otherwise to amount to a breach of
the duty of good faith and fair dealing." Id. And fourth, the
District Court found significant Emerson' s lack of"special
vulnerability, " a factor "prominent in the jurisprudence of
the New Jersey Supreme Court." Id. at 319.
Again we conclude that the District Court failed to draw
all reasonable inferences in favor of Emerson. Emerson has
put forth considerable evidence suggesting that it suffered
significant financial damage and that this damage resulted
from the defendants' own intentional conduct. Sales of
Emerson-brand products to Wal-Mart declined 78% in the
first two years of the License Agreement, fr om $331 million
to $74 million. In contrast, sales of Orion-brand pr oducts
to Wal-Mart increased 160% in the first year of the
agreement alone, from $92 million to $239 million.
Additional evidence suggests that this was exactly what
the defendants intended when Orion entered into the
License Agreement. In fact, one month into the license
period, Takao Mizuta, an executive with the Otake
companies, compiled a chart projecting that Orion sales to
Wal-Mart would grow from $100 million in 1994 to $800
million in 1997 whereas Emerson sales to W al-Mart would
decrease from $340 million in 1994 to $0 in 1997.
Moreover, Emerson has submitted into evidence
transcripts of phone conversations and written
correspondence among Otake executives that further
suggest a secret intent to decimate Emerson' s r elationship
with Wal-Mart. App. at 1503 (Bond memorandum to Mr.
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Otake warning him "to not alert Emerson people to our
intentions but to let them think we have decided to help
them -- actually we are just buying 1 and 1/2 years to be
free of Emerson. . . . We have to pr etend to Emerson that
we are willing to help them."); App. at 1512 (Mizuta
memorandum to Bond stating that "[i]n 1997, we will
discontinue Emerson brand business completely."); App. at
1561 (Mr. Otake telephone statement that"[w]hen the
contract with us ends [in March 1998], Emerson won' t have
anything." ).
There is even evidence to suggest that defendants
influenced Wal-Mart' s purchasing decisions. App. at 1506
(Bond memorandum to Mr. Otake acknowledging own
ability to "greatly influence Wal-Mart' s selections." ); App. at
1560 (Memorandum from Jim Sweet, Bond' s assistant,
noting that "we have already convinced W al-Mart to drop
the Emerson 19" CTV and carry the Orion 19" in its
place."). In light of all the evidence in the r ecord, we
conclude that Emerson has sufficiently established genuine
issues of material fact as to damages, causation, and the
defendants' secret, dishonest intent.
We further conclude the District Court placed undue
emphasis on Emerson' s alleged lack of economic
vulnerability. Although the New Jersey Supreme Court in
Sons of Thunder was particularly concerned with the
plaintiff ' s vulnerability, the Court did not make that
characteristic fundamental to a claim for br each of implied
covenant of good faith and fair dealing. Instead, a
complaining party' s economic vulnerability is one factor
among many to consider. Moreover , the District Court' s
conclusion that Emerson was not specially vulnerable may
not prove correct; even the District Court pointed out that
Emerson "had been losing money" and "[p]roduct returns
. . . were a drain on [Emerson' s] r evenues." Emerson III, 80
F. Supp. 2d at 316.
For the reasons set forth, we will reverse the District
Court' s grant of summary judgment on Emerson' s claim for
breach of implied covenant of good faith and fair dealing. 4
_________________________________________________________________
4. Emerson alleges in its complaint that the Otake companies, not just
Orion, breached this implied covenant. The District Court treated the
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C.
TORTIOUS INTERFERENCE WITH CONTRACT
Emerson also argues that the District Court committed
reversible error by dismissing on summary judgment its
claim against Mr. Otake for tortious inter ference with the
License and Supply Agreements. The District Court granted
summary judgment because it found that Mr. Otake was
not a third-party interloper to the contracts at issue, as
required under the law. The court based its decision on
Emerson' s own repeated assertions that Mr . Otake was a
corporate agent of Orion who "exercise[d] systematic control
and decision-making authority over the Otake Companies'
business and operations. " App. at 624.
A cause of action for tortious interfer ence with contract
cannot be directed against a defendant who is a party to
the contract. See Printing Mart-Morristown v. Sharp Elecs.
Corp., 116 N.J. 739, 752-53, 563 A.2d 31, 37-38 (1989).
Although this rule extends to agents of a corporation, acts
committed by an agent outside the scope of employment or
agency may satisfy the " tripartite relationship" required for
a tortious interference claim. Silvestre v. Bell Atlantic Corp.,
973 F. Supp. 475, 486 (D.N.J. 1997), af f ' d, 156 F. 3d 1225
(3d Cir. 1998).
Emerson' s complaint alleged that Mr. Otake exercised
control over the Otake companies, but at oral argument
before us counsel for Emerson maintained that Mr. Otake
is a legally independent third-party. Counsel stated that the
allegations of the complaint proved inaccurate in light of
subsequent discovery, and that the depositions make clear
that Mr. Otake, although retired, continued to offer
suggestions that need not have been followed. Counsel
conceded, however, that all of Mr. Otake' s suggestions were
followed.
_________________________________________________________________
claim accordingly. In its briefs on appeal, Emerson only argues that
Orion breached the implied covenant arising out of the License
Agreement to which the other Otake companies (Otake Trading Co. Ltd.
and Technos Development Limited) were not parties. On remand, the
District Court can have the parties clarify this matter.
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Notwithstanding Emerson' s assertions at oral ar gument,
in its briefs before this court Emerson r epeated its
argument that Otake played a central r ole in Orion' s
business affairs during the relevant time period. See Br. of
Appellant at 6, 13, 17-19. In fact, much of the bad faith
conduct and intent that Emerson assigns to the Otake
companies allegedly derives from Mr. Otake himself. See id.
at 12-13, 17-19. Accordingly, we find no evidence to
suggest that Mr. Otake' s alleged conduct occurred outside
the scope of his alleged control and ownership relationship
with the Otake companies. Therefore, we will affirm the
District Court' s grant of summary judgment as to
Emerson' s claim for tortious interference.
III.
ENTRY OF FINAL JUDGMENT
Emerson also appeals from the judgment enter ed by the
District Court on the lone issue that went to the jury, that
pertaining to the parties' dispute relating to Emerson-brand
products that Wal-Mart retur ned to the parties in July and
August 1995. Emerson argues that the court improperly
awarded duplicative damages and pre-judgment interest in
Orion' s favor.
A.
DUPLICATIVE DAMAGES
Under the License Agreement, Orion agreed to accept
responsibility for certain returns from Wal-Mart of goods
sold by Emerson before the License Agreement. There were
three categories of returns: r eturns delivered and received
in July 1995, which were Emerson' s responsibility; returns
delivered and received in August 1995, which were Orion' s
responsibility; and returns deliver ed in July and received in
August, which were the subject of the dispute. The special
interrogatories and the jury's responses in the verdict form
were as follows:
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1. With respect to the Wal-Mart returns sent by
Wal-Mart to Emerson in July, 1995, and r eceived by
Emerson in August, 1995, check the appropriate box:
[ ] these were Emerson' s r esponsibility, or
[ x ] these were Orion' s r esponsibility.
2. What damages do you find, if any, in favor of:
Emerson Radio Corp. $ 873721.-
Orion Sales $ ----
3. In what year do you find that the obligation to
Wal-Mart was satisfied:
[ x ] in 1995, or
[ ] in 1998.
4. Do you find that Wal-Mart char ged Orion for
returns sent to Orion in July, 1995?
x Yes No
4(a) If your answer is "Yes," what amount is Orion
due from Emerson?
$ 215283
Verdict Form, February 24, 2000. Accordingly, the District
Court entered judgment with respect to these two matters
as follows: in Emerson' s favor in the amount of $873,721
(plus pre-judgment interest) and in Orion' s favor in the
amount of $215,283 (plus pre-judgment inter est).5
Emerson challenges the $215,283 figure. It ar gues that
in fixing that amount the District Court gave Orion a
duplicative credit. Emerson contends that the court failed
to recognize that the jury' s answer to Interr ogatory #2
constituted a "net" amount and that the jury' s answer to
Interrogatory #4 was duplicative, not additional. There is no
evidence in the record to support Emerson' s assertions. The
jury interrogatory sheet did not ask for a"net" figure in
Interrogatory #2. In fact, nothing in the ver dict sheet
_________________________________________________________________
5. The final money judgment also included other amounts that are not at
issue here.
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supports Emerson' s argument. Moreover , the pages in the
appendix to which Emerson cites for support of fer no
assistance. 6 In light of the lack of any evidence in the
record to support Emerson' s argument, we will affirm the
District Court' s entry of final judgment, as based upon the
jury' s answers to the court' s special interr ogatories.
B.
PRE-JUDGMENT INTEREST
Emerson also argues that the District Court committed
reversible error by arbitrarily awar ding pre-judgment
interest to Orion from July 15, 1995 on the $215,283
liability of Emerson. We review for abuse of discretion. See
Coastal Group, Inc. v. Dryvit Sys., Inc., 274 N.J. Super. 171,
181, 643 A.2d 649, 654 (App. Div. 1994).
Emerson contends that Orion introduced no evidence
demonstrating that pre-judgment interest was warranted
and states that the July 15, 1995 date chosen by the
District Court was "literally selected at random. " Br. of
Appellant at 57. In response, Orion argues that the award
of pre-judgment interest properly derives from the jury' s
finding that Wal-Mart incorrectly shipped to and charged
Orion for returns in July 1995 and that July 15, 1995 was
appropriately chosen by the District Court because it was
the midpoint of the period during which those incorr ect
charges were made against Orion for r eturns for which
Emerson bore responsibility.
Pre-judgment interest may be awarded to parties
prevailing on contract claims at the discr etion of the trial
court "in accordance with equitable principles" and we
should only reverse the award of pr e-judgment interest
_________________________________________________________________
6. In addition, Emerson' s arithmetic is not corr ect. Emerson contends
that the gross amount of damages in Interr ogatory #2 was $1,099,439
and that the jury had already deducted its answer to Interrogatory #4
($215,283) from this total to get its answer to Interrogatory #2
($873,721). However, adding together the jury' s answers to
Interrogatories #2 ($873,721) and #4 ($215,283) only totals $1, 089,004,
thus leaving a $10, 435 discrepancy.
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where "it represents a manifest denial of justice." Coastal
Group, 274 N.J. Super. at 181, 643 A.2d at 654. We see no
manifest denial of justice here as Orion' s explanation is
fairly supported by the record. Ther efore we will affirm the
District Court on this matter.
IV.
CONCLUSION
For the foregoing reasons, we will r everse the District
Court' s order granting summary judgment to the
defendants on Emerson' s claims for breach of contract
based upon an express obligation to use r easonable efforts
and for breach of the implied covenant of good faith and
fair dealing, and we will remand for further pr oceedings
consistent with this opinion. In all other r espects, we will
affirm the District Court' s grant of summary judgment. We
also will affirm the District Court' s entry of judgment on the
jury' s verdict.
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AMBRO, Circuit Judge, dissenting in part.
I write separately to join in the majority' s well r easoned
opinion in all aspects but one. I do not agr ee with the
majority' s conclusion in section II(A)(2) that the District
Court correctly held that the License Agr eement between
Emerson and Orion did not contain an implied obligation to
use reasonable efforts to sell and market Emerson-brand
products. Therefore, I respectfully dissent from that portion
of the majority' s opinion.
Instead, I would hold that the District Court err ed in
finding as a matter of law that Orion had no obligation to
use reasonable efforts and due diligence in selling and
marketing Emerson-brand products to Wal-Mart because of
the $4 million yearly minimum royalty payment. See
Fenning v. Am. Type Founders, Inc., 109 A.2d 689, 694
(N.J. App. Div. 1954) (stating that a minimum r oyalty
payment is not inconsistent with a finding of an implied
obligation to use best efforts). Thus, I would conclude that
Emerson is entitled to trial on its claim that Orion failed to
exercise reasonable efforts in selling and marketing the
Emerson products and that the District Court erred in
granting summary judgment on that claim.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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