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When a contract includes a term that the trial judge agrees is ambiguous, a jury must decide if the plaintiff’s interpretation is the correct one, and if it is, then the contract was breached, a federal appeals court has ruled. “It is hornbook law that if the relevant terms in a contract are ambiguous, the issue must go to a jury,” 3rd U.S. Circuit Court of Appeals Judge Dolores K. Sloviter wrote in Emerson Radio Corp. v. Orion Sales Inc. The ruling reverses a decision by federal Judge Alfred M. Wolin of the U.S. District Court for the District of New Jersey, who dismissed the suit on summary judgment despite finding that a critical term in the licensing contract — the word “exploit” — was ambiguous. Emerson was a manufacturer of consumer electronics — including televisions, VCRs and stereos — but stopped producing goods in 1994 and instead now licenses other manufacturers to produce and distribute goods bearing Emerson’s trademark, which it claims as its greatest business asset. In 1995, Emerson entered into a licensing agreement that gave Orion exclusive rights to “utilize and exploit” the Emerson trademark in manufacturing and selling goods to Wal-Mart. Emerson contended that the “utilize and exploit” provision 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. But instead of exploiting the Emerson trademark on Emerson products, the suit alleged that Orion had a plan to displace the Emerson-brand products in Wal-Mart stores with its own Orion-brand products. Sales records, Emerson said, showed that sales of Emerson-brand goods in Wal-Mart stores markedly decreased between 1995 and 1998, while sales of the Orion brand increased. As proof of Orion’s alleged “bait and switch,” Emerson pointed to internal Orion memos, including one that said “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.” In dismissing the suit, Judge Wolin didn’t even consider whether the memos raised an issue of fact as to whether Orion breached the contract. Instead, Wolin construed the word “exploit” to be subject to two possible meanings, saying it “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.” Since the meaning of the term “exploit,” said Wolin, was “inconclusive,” he declined to interpret the use of the word “as the imposition of an express duty on the part of Orion to exert some minimum level of effort or performance under the license.” But Sloviter found that Wolin was wrong to dismiss the case. “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. … To state the converse, an agreement is ambiguous if it is susceptible of more than one meaning,” Sloviter wrote. As a result, Sloviter said, if Wolin was correct in determining that the term “exploit,” as used in the license agreement, was ambiguous, he was wrong in granting summary judgment. The question of whether a contract term is ambiguous, she said, is a question of law that requires a court to weigh the proffered interpretations from both sides. Orion’s lawyers said the court should reject Emerson’s argument that a jury must decide the issue simply because “exploit” has more than one dictionary meaning. Virtually every word in the English language has more than one dictionary definition, they argued, and such reasoning would render every contract essentially ambiguous. Sloviter disagreed, saying the appellate court didn’t need to take such an “expansive view” of the issue. Instead, focusing only on the word “exploit” in the context of the agreement, Sloviter found that Wolin “was not mistaken in recognizing that the verb ‘exploit’ can be given a meaning consistent with each party’s interpretation.” As a result, she said, “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, [among other things], extrinsic evidence.” Orion’s lawyers, however, had a fallback position. They argued that no reasonable jury could construe “exploit” to impose a duty on Orion. But Sloviter found there were two decisions that supported Emerson’s position on the contractual use of the term “exploit” — Fenning v. American Type Founders Inc., a 1954 decision of the New Jersey Superior Court’s appellate division and Bellows v. E. R. Squibb & Sons Inc., a 1974 decision from the U.S. District Court for the Northern District of Illinois. Although neither case involved a license agreement in which the licensee is granted explicitly the right to “exploit” the licensor’s product, Sloviter found that both supported Emerson’s argument that the term creates an express obligation. In Fenning, Sloviter said, 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 reasonable exploitation is essential.” Sloviter therefore interpreted the Fenning holding as one that “associates the purpose of exploitation with an obligation to use what appear to be ‘reasonable efforts.’ “ In Bellows, she said, although the court did not find an implied obligation, it nonetheless used the term “exploit” interchangeably with the phrases “use due diligence to exploit” and “exercise reasonable efforts or due diligence in the exploitation of.” Several other courts, she said, “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.” Even Wolin’s decision, she said, 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.” As a result, Sloviter said, the appellate court was forced to reject Wolin’s holding 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. Sloviter was joined by 3rd U.S. Circuit Judges Thomas L. Ambro and Leonard I. Garth. In a partial dissent, Ambro said he would also have reversed Wolin’s ruling that the license agreement did not contain an “implied obligation” to use reasonable efforts to sell and market Emerson-brand products. Emerson was represented by attorneys David L. Harris of Lowenstein Sandler in Roseland, N.J., and Paul F. Carvelli and Andrew E. Anselmi of McCusker Anselmi Rosen Carvelli & Walsh in Chatham, N.J. Orion was represented by attorneys Barry J. Bendes, Jeffrey W. Herrmann and Jeffrey H. Daichman of Vedder Price Kaufman & Kammholz in New York.

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