Framish Holdings Pty Limited v Force Industries Pty Limited  VCC 680
In a judgement made on 6 July 2007 by Judge Murphy in the County Court of Victoria, the standard imposed on a licensee by a "best efforts" obligation in the context of getting an early stage product to market was examined.
Framish was the owner of a patented invention known as the "Allysnake Screeem". The Allysnake Screeem is essentially a horn for a skateboard.
Framish granted Force an exclusive licence to exploit the patent for skateboards and inline skates. Force warranted that "it will use its best efforts... to maximise the sale of products."
Some design work was needed to get the product to market. Force commissioned Framish and an external designer to assist with the design work. The design work was completed but the resulting component was unsatisfactory.
About this time, a major US sporting goods distributor, Franklin Sports, expressed an interest in the product including the possibility that the product could be placed with Wal-Mart.
Further design work was then undertaken seeking to resolve the previous problems. In the meantime, Force sought to renegotiate the terms of the licence with Framish given the interest of Franklin Sports, the design difficulties and the manufacturing delays. Force advised Framish that until the renegotiation of the licence was resolved, production planning would cease and it would not pay the remaining money for tooling to the Japanese component supplier.
Framish responded with a notice of default. Force did not remedy the default.
Framish asserted that Force had failed to use best efforts to market the product. Framish also argued that Force’s insistence on pursuing a design that was "doomed to failure" had resulted in the loss of the opportunity of a major purchase of the product by Franklin Sports and, indirectly, Wal-Mart.
Force responded that it was never part of the licence that it would have to undertake a prolonged design exercise. In addition, it had relied on Framish’s representation that the device could be mass produced to retail quality within a short time, which was not the case.
Despite this, Force alleged that it had exercised its best efforts to overcome the design difficulties including acquiring the assistance of both Framish and an external designer.
The Court held that:
Force had a continuing obligation under the licence to get the product to market.
Force’s "bad" decision to pursue the initial faulty design was not contrary to Force’s best efforts obligation.
Force’s delay in developing the product was not enough to constitute a failure of best efforts, when Force was prosecuting the development in a reasonable manner.
Force’s attempts to renegotiate the licence was not contrary to its best efforts obligations.
However, and most importantly, Force’s action in putting production plans "on hold" and "downing tools" as part of a demand to renegotiate the licence terms was inconsistent with its best efforts obligations and represented a block on the critical path for commercialisation of the product.
Accordingly, Force lost the case. Framish was awarded $50,000 in damages for unpaid licence fees due after termination and royalties for lost likely sales during the remaining term of the licence of about $85,000.
The Framish case gives guidance as to what constitutes fulfilment of a "best efforts" obligations for a licensee in bringing an emerging technology to market. We can learn the following lessons from the Framish case:
A proper consideration of the likely time and resources to develop and manufacture a product based on a proof of concept design should be made prior to the acceptance of the commercial terms of a licence. The failure here by both parties to conduct a proper technology review created unreasonable expectations about what was achievable.
The obligations of what constitutes "best efforts" should be fleshed out in a licence to give greater certainty. This could include development timelines and sales targets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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