313 F. Supp. 3d 447
S.D. Ill.2018Background
- Holland Loader Company (HLC), owned largely by mining engineer Steven Svatek, sold its intellectual property (the "Acquired Assets") to FLSmidth A/S (FLS) in May 2012 under an IP Purchase Agreement that included a five‑year earnout and a requirement that buyer "use commercially reasonable efforts to actively promote the sale of Products and to further develop new products" that incorporate the assets. Svatek was employed by an FLS subsidiary.
- FLS is a Danish holding company that licenses IP to 50+ operating subsidiaries; the subsidiaries perform engineering, sales, and R&D work. FLS Spokane (later FLS USA) handled much of the Holland work.
- FLS performed limited work: hired Svatek and a product manager (Tash); began converting hand drawings to electronic format ("FLS‑izing"); produced some brochures and web updates; logged modest engineering hours and R&D budgets; but never completed conversion, produced prototypes (bidirectional loader, DT6000 dozer trap), or achieved any sales of Holland products under FLS.
- In mid‑2015, after corporate downsizing and reprioritization, FLS effectively tabled active promotion/development and terminated Svatek and Tash. FLS later explored divesting or selling back the IP. No earnout payments beyond the initial closing amount were realized.
- HLC sued for breach of the Section 6.1(b) commercially‑reasonable‑efforts covenant. After a bench trial, the Court found FLS breached the covenant (both promotion and development) but declined to award damages because HLC failed to prove lost profits with sufficient certainty.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FLS could delegate performance to subsidiaries despite an assignment clause requiring written consent | Svatek/HLC argued delegation to subsidiaries violated the assignment clause and that FLS (parent) remained directly responsible | FLS argued its corporate structure and licensing model meant subsidiaries would perform; clause unambiguous and permissible; Svatek waived any consent requirement | Court: Clause unambiguous and, read in context, permits performance via subsidiaries; Svatek’s conduct waived written‑consent objection — evidence of subsidiary performance admissible |
| Standard for "commercially reasonable efforts" in the contract | HLC: contract imposes an objective industry standard of active, affirmative efforts (shown by expert Humphrey) | FLS: obligations governed by business judgment and may be limited by legitimate business interests; efforts judged in light of corporate capabilities | Court: "Commercially reasonable efforts" requires objective demonstration of conscious, affirmative exertion judged against industry standards and the promisor’s capacities; less than requiring self‑sacrificing performance |
| Whether FLS breached Section 6.1(b) (promotion) | HLC: FLS failed to plan, train sales staff, complete FLS‑izing, create effective promotional materials, or undertake proactive business development; FLS effectively abandoned the product line | FLS: made reasonable, industry‑norm efforts given system‑sale business model, market downturn, resource constraints, and need to comply with safety/design standards | Court: Breach. Although some groundwork was done, overall efforts were passive/reactive, inadequate training and marketing, incomplete conversion, internal confusion, and a mid‑2015 decision to table the line demonstrated abandonment inconsistent with commercially reasonable efforts |
| Whether HLC proved damages/lost profits from the breach | HLC: expert opined earnout would have been reached based on FLS forecasts and projections | FLS: projections speculative, manufactured for approval/R&D funding; no reliable comparators or historical sales track record | Court: HLC failed to prove damages with required reasonable certainty for a new/novel product line; forecasts unreliable and no suitable comparator — therefore judgment for defendant on relief |
Key Cases Cited
- Greenfield v. Philles Records, 98 N.Y.2d 562 (N.Y. 2002) (written agreement controls; extrinsic evidence admissible only if contract ambiguous)
- W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157 (N.Y. 1990) (whether contract is ambiguous is a question of law)
- Lockheed Martin Corp. v. Retail Holdings, N.V., 639 F.3d 63 (2d Cir. 2011) (contract construed to effectuate parties’ intent; ambiguities assessed objectively)
- Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir. 1979) (discussion of "best efforts" obligations and their unsettled contours)
- In re Chateaugay Corp., 108 F.3d 1369 (2d Cir. 1997) (reasonable‑efforts clauses analyzed with deference to good‑faith business judgment)
- Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89 (2d Cir. 2007) (lost profits recoverable when they are direct fruits of the contract; rules on general vs. consequential damages)
- Schonfeld v. Hilliard, 218 F.3d 164 (2d Cir. 2000) (heightened scrutiny for lost‑profits awards for new businesses; need for reliable comparators)