Most Favoured-Licensee Clauses in Licence Agreements

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MOSTFAVOURED-LICENSEECLAUSESINLICENCEAGREEMENTS

PanagiotaKoutsogiannisandFrançoisPainchaud*

LEGERROBICRICHARD,L.L.P.
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ThisisacontinuationofPanagiotaKoutsogiannisandFrançoisPainchaud’s
articleconcerninglicenceagreements.Theauthorswillnowcommentonthe
issueof”bestefforts”.
Thedifficultyarisingfromthistypeofprovisionisindefiningtheterm”best
effort”andindecidingwhattypeofeffortcanbeconsideredasthe”best”
effort.Althoughthistermiswidelyusedinlicensingagreements,the
uncertaintyoverlegaltreatmentofsuchaprovisionimpedestheabilityof
partiestocontracteffectively.
Overtheyears,thecourtsintheUnitedStatesandCanadahavebeencalled
upononseveraloccasionstointerpret”bestefforts”clauses.Eachtime,the
courtshavebeeninconsistentinthetreatmentofsuchaclauseanditis
thereforedifficulttoappreciatetheextentoftheobligationplacedona
licensee(orlicensor)whoisboundtoputforwardhisbesteffortinmarketing
ordevelopingacertainproduct.
InBloorv.FalstaffBrewingCorp.,601F.2d609(2ndCir.1979)theCourtwasof
theopinionthatthebesteffortsobligationwasviolatedeventhoughthesale
oftheproductwashighlyunprofitable.However,inWesternGeophysicalCo.
v.BoltAssociates,Inc.,584F.2d1164(2ndCir.1978),thebesteffortsobligation
washeldtobesatisfiedeventhoughnodevicehadbeenmadeorsold.This
wasduetothefactthatthedevicewasnotmechanicallysoundand
Westernwastryingtoimprovethemechanicalreliabilityofthedevicebefore
puttingitonthemarket.Howevertheeffortsputintodevelopingtheproduct
wereseenbytheCourtasbeingsufficienttosatisfythecontractualobligation
ofusing
bestefforts
.

CIPS,1999.
*OfLEGERROBICRICHARD
,L.L.P.,amultidisciplinaryfirmoflawyers,andpatentand
trademarkagents.PublishedintheSummer1999issue(Vol.3,No.3)issueofourNewsletter.
Publication068.020E.

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InZilgv.Prentice-Hall,Inc.,717F.2d671,cert.denied,466U.S.938(2ndCir.
1983),thetestusedfordecidingwhether”bestefforts”hadbeenusedwas
limitedtowhethertheproducthadbeengivenareasonablechanceof
achievingmarketsuccess.
Anothertestusedbythecourtsindeterminingwhethertheobligationof”best
efforts”isbeingsatisfiedisasubjectivetestasopposedtoanobjectiveone.
Thistestwouldtakeintoconsiderationthepotentialitiesofthelicensee’s
businessandthecircumstancesthatmightarisetoaffectit.Thepartywith
suchanobligationcanonlybeaskedtodothatwhichisreasonably
expectedunderthecircumstances(RespirexofCanadaLtd.v.Flynn(1975),
22C.P.R.(2d)104(Ont.H.C.)affirmed(1978)41C.P.R.(2d)74(Ont.C.A.)).
InCanada,thereiscaselawdefiningtheterm”bestefforts”usedincontracts
otherthantechnologytransferagreements.Thecourtsinsuchcasesseemto
equatethebesteffortsprovisiontoanobligationto”leavenostone
unturned”:C.A.E.IndustriesLtd.v.R.(1983),2F.C.616(F.C.T.D.).Thiswould
imposeatremendousobligationuponthelicenseetoensurethateverysingle
possibilityforexploitingorefficientlymarketingtheproducthasbeenthought
ofandthatnoanglehasbeenneglected.Suchanobligationwouldimplya
substantiallygreaterefforttobegivenbythelicenseethanthatwhichis
usuallyrequiredtosatisfythistypeofobligationbytheAmericancourts.
ImpliedObligationofBestEfforts
Thecourtshavesometimeshadtodecidewhether,intheabsenceofan
expressobligationtothateffectinacontract,thelicenseeisboundtothe
performanceof”bestefforts”arisingfromanimpliedobligation.Thisissuewas
dealtwithindetailbytheU.S.CourtofAppealsinPermanenceCorporation
v.Kennametal,Inc.,908F.2d98(6thCir.1990).TheCourtacknowledgedthat
suchanobligationhassometimesbeeninferredincertaincircumstances
whereforexample”noadvancepaymentsweremadeandthelicensorhad
torelyentirelyonthegoodfaithofthelicenseeinordertoreceiveany
considerationinreturnforthegrantoftheexclusiveagency.”
Theargumentofthelicensorinthiscasewasthattheprovisionforroyalty
paymentsimpliesabesteffortsobligationbecauseroyaltieswillonlybe
generatedifthedefendantisunderadutytoexploitthepatentedprocess.
HowevertheCourtcametotheconclusionthatasubstantialminimumor
advanceroyaltypaymentprovidessufficientincentiveanddemonstrationof
goodfaithbythelicenseetodevotebesteffortsforthedevelopmentofthe
technology,andthattheimplicationofabesteffortsobligationneednotbe
made.Inaddition,theCourtstated:”Especially,asistrueinthepresentcase,

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whenaninventorgrantsalicencetopatentedtechnology,theapplication
ofwhichisunknown,acommitmentonthepartofthelicenseetodevote
besteffortstothedevelopmentofthetechnologyisasubstantial
commitmentwhichshouldnotbeautomaticallyinferred”.
Inlightofthis,itwouldseemthatalicensororlicenseewhowishestoobtain
anobligationofbesteffortsfromtheotherpartyshouldmakesuretoinclude
anexpressobligationtothiseffectintheagreementitself.
Alternativestothe”BestEfforts”Clause
Thefollowingarealternativestothe”bestefforts”clause:i)thepriorityof
developingthelicensedproductcanbestatedinrelationtootherproducts
andtechnologiesthatarebeingdevelopedatthetimeofformationofthe
contract;ii)thepriorityofthenewproducttobedevelopedcouldbestated
relativetotheproductlinesofthecompanyintermsofperitemprofit,sales
volume,historicalimportancetothecompanyetc;iii)thelimitationsofthe
budgetandworkforceofthecompanycouldbestatedaslimitationsona
“bestefforts”obligation;iv)minimumandmaximumcommitmentsof
manhoursandexpensescouldbedetailed;andv)worktobeperformed
couldbeoutlinedinsomedetail,etc.
Itisthereforepreferabletospecifyminimumperformancerequirementsrather
thanbroad,vaguetermssuchas”bestefforts”or”reasonableefforts”.
Inconclusion,itisimportanttonotethatusingastandardmodelmaybe
helpfulbutmaynotalwaysbesuitableforallclientswhohavedifferent
needsandobjectives.Itisessentialtoreadeachclauseandcarefullyadapt
ittotheparticularcaseinquestioninordertoprovidetheclientwitha
licensingagreementsuitableforhisorherneeds.

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