Opinion ID: 204050
Heading Depth: 2
Heading Rank: 3

Heading: Breach of the Implied Reasonable Efforts Term of the Agreement

Text: Sonoran next asserts that, under the Purchase Agreement, PerkinElmer had an implied obligation to exert reasonable efforts to develop and promote Sonoran's technology, and that it breached its obligation. PerkinElmer in turn argues Massachusetts does not recognize such an implied obligation, at least not under the circumstances involved here. We conclude that PerkinElmer did have an implied obligation under the Purchase Agreement to use reasonable efforts, and we reverse and remand for a determination of whether PerkinElmer breached this obligation with respect to the Purchase Agreement only. Justice Cardozo's opinion in Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917), has influenced courts nationwide, including Massachusetts courts, to follow the principle that: We are not to suppose that one party was to be placed at the mercy of the other. . . . [The] promise to pay the defendant one-half of the profits and revenues resulting from the exclusive agency and to render accounts monthly was a promise to use reasonable efforts to bring profits and revenues into existence. Lady Duff, 118 N.E. at 215-16, 222 N.Y. 88. Citing to Lady Duff, the Massachusetts Supreme Judicial Court has held that it is implied that one who obtains the exclusive right to manufacture a product under a patent has an implied obligation. . . to exert reasonable efforts to promote sales of the process and to establish, if reasonably possible, an extensive use of the invention. Eno Sys., Inc. v. Eno, 311 Mass. 334, 41 N.E.2d 17, 19-20 (1942). PerkinElmer contends that implying a reasonable efforts obligation is only necessary and appropriate where there is no other consideration supporting the existence of a contract. Thus, PerkinElmer seeks to limit the implied reasonable efforts obligation to contracts in which there is no consideration other than reasonable efforts. It points out that it paid $3.5 million in consideration at closing, and concludes that the reasonable efforts obligation does not apply here. While some jurisdictions may have adopted this rule, see Emerson Radio Corp. v. Orion Sales, Inc., 253 F.3d 159, 169 (3d Cir.2001); WrestleReunion, LLC v. Live Nation Television Holdings, Inc., No. 8:07-cv-2093-JDW-MAP, 2009 WL 2473686, at , 2009 U.S. Dist. LEXIS 70285, at -27 (M.D.Fla. Aug. 11, 2009), Massachusetts has not. In Eno, for example, Mrs. Eno entered into an arrangement with a company to market a particular type of tape useful in the manufacture of shoes. Eno, 41 N.E.2d at 18. Under the license, Eno Systems was to pay Mrs. Eno $100 per month where the sales of tape were below 250,000 yards, and $200 per month where yardage exceeded that amount. Thus, even if Eno Systems had done nothing to exploit the patent, Mrs. Eno would have been entitled to $100 per month for the life of the patent. Despite this consideration, the court implied a reasonable efforts clause to maximize revenue based on the intent of the parties. Id. at 19. PerkinElmer also attempts to distinguish Eno as limited to exclusive licensing arrangements. PerkinElmer asserts that the implied reasonable efforts duty is inapplicable here because it did not obtain an exclusive license but rather purchased Sonoran's assets. The district court found this argument compelling. We do not because Massachusetts law is to the contrary. The fact that Eno involved exclusive licensing arrangements does not lessen the obligation to use reasonable efforts in other situations. See, e.g., Brightwater Paper Co. v. Monadnock Paper Mills, 161 F.2d 869, 871 (1st Cir.1947) (holding that the plaintiff had an implied duty to use reasonable efforts to elicit particular business and to hand it over to the defendant); Russo v. Enter. Realty Co., 347 Mass. 655, 199 N.E.2d 689, 692-93 (1964) (imposing a duty on a seller of land to use reasonable efforts to build a road of the width shown on its subdivision plan as part of its closing obligations); Graustein v. HP Hood & Sons, Inc., 293 Mass. 207, 200 N.E. 14, 20 (1936) (implying a duty on a purchaser of a retail milk delivery company to make reasonably diligent and persistent effort to collect [on seller's behalf] all the accounts recorded in the books which it took over). [5] Rather, the key under Massachusetts law is that the instrument as a whole must make certain that the reasonable efforts term was implicit. Eno, 41 N.E.2d at 19; see also Spaulding v. Morse, 322 Mass. 149, 76 N.E.2d 137, 139 (1947) ([I]f the instrument as a whole produces a conviction that a particular result was fixedly desired although not expressed by formal words, that defect may be supplied by implication and the underlying intention . . . may be effectuated, provided it is sufficiently declared by the entire instrument. (citing Dittemore v. Dickey, 249 Mass. 95, 144 N.E. 57 (1924))). Here various aspects of the Purchase Agreement in addition to the contingent nature of Sonoran's compensation support its argument that the reasonable efforts term was implicit. The earnout compensation was substantial (potentially $3.5 million) in relation to the up-front payments made by PerkinElmer ($3.5 million). A significant portion of the $3.5 million was paid to Sonoran's creditors and did not benefit the shareholders directly. [6] The Purchase Agreement contemplated a campaign to market the Sonoran technology over the next five years (although this does not suggest that it would not be reasonable to abandon those efforts before the end of the five-year period). There was no language in the agreement negating an obligation by PerkinElmer to use reasonable efforts or conferring absolute discretion on PerkinElmer as to the operation of the business. Under these circumstances, we find that PerkinElmer had an implied obligation to use reasonable efforts to develop and promote Sonoran's technology. Given that PerkinElmer had an implied obligation to exert reasonable efforts towards promoting sales of the CTP machines, the factual question remains whether PerkinElmer breached this obligation. On this question, as might be expected, the parties have quite different views. Sonoran has alleged a number of ways in which PerkinElmer potentially breached this obligation. In addition to PerkinElmer's failure to retain Bogen, Sonoran criticizes PerkinElmer's decision to assign Guy Antley, an in-house salesperson with no publishing experience, to lead the CTP sales efforts on a part-time basis. Sonoran contends that Antley was incompetent and made little effort to learn or promote the CTP Business. Sonoran further contends that PerkinElmer backed out of its commitment to allow Donahue to run the business . . . and started to operate it on the cheap. Pls.-Appellants' Br. 12. Sonoran offers the expert testimony of Paul Baier, who stated that despite a viable market for the CTP product, there was very little or no commitment to this product from PerkinElmer executives. Finally, Sonoran points to PerkinElmer's alleged mishandling of a potential opportunity to sell a large number of CTP units to MacDermid, Inc., a dominant supplier of equipment to newspaper publishers, as typical of the operation of the business. PerkinElmer, on the other hand, asserts that in 2003 and 2004 alone it invested (and lost) $2.5 million per year of its own money in the venture and vigorously attempted to promote and sell the Sonoran product. In PerkinElmer's view, the lack of success was attributable not to any lack of effort by PerkinElmer, but to a lack of enthusiasm by prospective purchasers in investing in an unproven technology and the well-known financial problems of the newspaper industry. PerkinElmer did not argue in its motion for summary judgment that, if the reasonable efforts obligation applied, it was entitled to summary judgment on the question of whether PerkinElmer had in fact satisfied its reasonable efforts obligation. We reverse and remand for the district court to determine whether PerkinElmer breached this obligation with respect to the Purchase Agreementan issue to which we express no views. [7] We recognize, as did the district judge, that PerkinElmer made a substantial investment in Sonoran and therefore had a substantial interest in making the CTP Business succeed, and so it may not be easy for Sonoran to show a lack of reasonable efforts. Whether on remand a trial is required to determine whether PerkinElmer utilized reasonable efforts is a matter for the district court to consider. Finally, we note that PerkinElmer may argue that the grant of summary judgment can be upheld on the ground that the district court found a lack of causation and insufficient proof of damages. To the extent that PerkinElmer makes such an argument, PerkinElmer is incorrect. The district court on summary judgment only addressed causation and damages with respect to the claims relating to the covenants of good faith and fair dealing and PerkinElmer's alleged bad faith, as PerkinElmer appears to recognize at various places in its brief. [8] Causation and damages remain to be determined with respect to the reasonable efforts claim if Sonoran is successful in establishing a breach of that obligation. Again, whether on remand a trial is required to determine causation and damages is a matter for the district court.