Trying 'Best-Efforts' Cases

Most courts will require that ABC at least act in good faith ' a fairly low and relatively easy standard to meet. See, e.g., Triple-A Baseball Club Assocs. v. Northeastern Baseball, Inc., 832 F.2d 214, 225 (1st Cir. 1987). If ABC were to develop a competing root beer brand and cut out virtually all advertising and sales efforts for Dr. Joe's ' admitting in an internal e-mail that it did so for the sole purpose of growing sales of ABC's directly competing brand ' ABC would trip on, and fail to clear, the low good-faith hurdle. But short of such extreme cases, see, e.g., Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir. 1979), best-efforts disputes more often involve fact-intensive, drawn-out battles of expert witnesses.

Best-efforts disputes often crop up when the economy is in a downturn. In our example, Acme is likely to be suspicious of ABC whenever sales are below expectations, yet ABC is not about to devote its entire marketing budget to a single product irrespective of results, market demand, or the realistic upside of Dr. Joe's Root Beer. So back to our question ' what does a “best-efforts” clause require beyond acting in good faith?

Many courts will also read into a best efforts obligation a duty to act “reasonably” based on industry norms ' an objective standard. See, e.g., Bloor, 601 F.2d at 613 n.7 (describing definition of best efforts as “performing as well as the average prudent comparable brewer”); Mofet Etzion Ltd. v. General Dynamics Land Systems, Inc., 2008 WL 344725, at *2 (S.D.N.Y. Feb. 4, 2008); Ashokan Water Servs., Inc. v. New Start, LLC, 807 N.Y.S.2d 550, 555 (N.Y. Civ. Ct. 2006).

Despite the objective nature of the inquiry, some courts will look beyond industry norms and allow inquiry into ABC's financial resources or how ABC has marketed its other products. See, e.g., Vestron, Inc. v. Nat'l Geographic Soc'y, 750 F. Supp. 586, 593 (S.D.N.Y. 1990) (examining marketing decisions in light of resource constraints faced by marketer); NCNB Nat'l Bank of N.C. v. Bridgewater Steam Power Co., 740 F. Supp. 1140, 1151-52 (W.D.N.C. 1990) (“In construing the term 'best efforts,' courts may consider a party's experience, expertise, financial status, opportunities, and other abilities.”); Inside Out Prods., Inc. v. Scholastic, Inc., 1995 WL 375927, at *5 (S.D.N.Y. June 23, 1995) (examining whether the defendant attempted to market the materials in a manner consistent with its attempts to market other similar items).'

Although courts have drawn on widely varying standards when faced with best-efforts disputes, see, e.g., Ashokan Water Servs., Inc., 807 N.Y.S.2d at 554-56, there is a general consensus that a “best-efforts” clause should not be read in isolation, but rather must be interpreted in the context of the contract as a whole. See Gerard v. Almouli, 746 F.2d 936, 939 (2d Cir. 1984) (improper to use U.C.C. best-efforts requirement to read into the contract a sales requirement that contradicts the explicit contractual sales requirements); Vestron, Inc., 750 F. Supp. at 593 (best-efforts requirement “must be reconciled with other clauses in the contract to the extent possible, not used as a basis for negating them”).

This interplay between defined performance criteria and broad best-efforts obligations can be a critical point of contention in breach-of-contract litigation. If, say, Acme and ABC agreed that ABC must spend at least $500,000 per year on mass media advertising, can ABC be found in breach of a best-efforts clause based on expert testimony that a $3 million budget is the industry norm? Courts have grappled with these and other issues associated with best efforts clauses, often resorting to drafting history and course of dealing to address the inherent ambiguity of a best-efforts requirement.

Tips for Drafting Best-Efforts Clauses

Define Best Efforts

A broad, undefined best efforts clause ' e.g., “ABC must use its best efforts to sell Dr. Joe's Root Beer” ' affords the fact-finder considerable discretion and increases the chance of costly, intrusive discovery and fact-intensive litigation. As a promisee in Acme's position, you may find that a broad provision may be advantageous to the extent you cannot negotiate ironclad, quantifiable, and all-encompassing performance requirements. But as the party agreeing to use best efforts, you will generally benefit from a more specific definition of your obligations. For example, to lessen the chance that ABC will have to spend unreasonable amounts marketing Dr. Joe's Root Beer simply because ABC has available funds somewhere in its company, ABC should insist on a more specific, objective standard that looks to industry norms ' e.g., “'Best Efforts' means efforts that a reasonably prudent businessperson would use, applying reasonable commercial judgment and taking into account acceptable industry practices in the U.S. root beer industry.”'

Including “reasonable commercial judgment” in the definition can allow ABC to reduce resources as warranted by market experience and performance, especially when confronted with arguments by Acme that ABC should break the bank to increase sales.

Note the use of “acceptable” industry practice vs. “best” practices. Because few businesses engage in “best practices” across the board (and because “best practices” are more difficult to identify and define than “acceptable” practices), a “best-practice” standard could open the door to an obligation to spend well beyond what a prudent businessesperson would consider reasonable. (The flip side is of course true ' Acme should try to avoid a standard as low as “acceptable” industry practice. A middle ground may be to agree to abide by “reasonable” or “standard” industry practices.)

Include Defined Performance Standards Outside of the Best-Efforts Clause

Because courts will look to other parts of a contract to help define an ambiguous term, including a series of objective performance standards may help ABC even if compliance with those standards would not standing alone satisfy a best efforts obligation. For example, if Acme and ABC vigorously negotiate a requirement that ABC spend at least $X on mass media, deploy a sales force of at least Y sales reps, and open at least Z retail locations, a fact-finder will be hard-pressed to conclude that best efforts requires double or triple the agreed amounts.

Include a Notice/Cure Provision

Too often, we have seen the Acme's of the world play “gotcha” and seek to terminate a contract they no longer like based on an alleged material breach ' without having squarely teed up specific concerns about the promisor's efforts. A notice/cure provision gives ABC a chance to correct any alleged deficiencies or create a record that can be used in the event of litigation (e.g., that Acme did not clearly explain its concerns or never responded after ABC provided the reasons for its actions and asked for good-faith feedback).

State and Repeat the Obvious: Projections Are Projections

We have seen multiple best-efforts disputes when a promisor's pre- or post- contractual projections of sales or profits are not met. Creative plaintiffs argue that the projections are a fair barometer of what “best” or “reasonable” efforts would yield. Many fact-finders will understand that a projection is just that, but we recommend a belt and two pairs of suspenders. Any projections given to the other side during negotiations or after the contract has been signed should specify that the projections are not binding and may not be relied upon. You should also try to negotiate a contractual clause along the following lines (and be very suspicious of a counter-party who refuses to agree to such an innocuous provision): Any projections or predictions of future performance are not binding. Actual results are likely to vary materially from any projections, and the parties expressly disclaim reliance on any projection.

Winning Litigation Strategies

The following strategies and tactics have been successful in best-efforts trials we have handled, including two recent cases involving the defense industry and the pharmaceutical industry. These pointers are written from a defense perspective, but it is easy to flip each recommendation to identify plaintiff-side tactics.

“This is my job.” Develop a story of genuine interest in the effort in question. Show the fact-finder who in the organization was responsible for the efforts, how often the team met, how actual human beings depended on solid performance for their compensation or continued employment, how the team brainstormed and acted on ways to improve performance in light of specific obstacles, etc. Regardless of the legal standard, genuine good faith conveyed by a committed team goes a long way to establishing credibility.

Experts: Knowledge and proven performance under fire trump paper qualifications. Best-efforts cases invariably require expert testimony to determine “reasonable” industry practices in comparison with the defendant's. We cannot emphasize enough the importance of experts who truly know the industry and can articulate solid conclusions under hostile cross-examination. Retired executives who worked their way up the ranks may be far more effective and credible than academics. If you have to draft or rewrite every aspect of your expert's report, that should be a red flag that your expert may not be ready for prime time. And by all means don't wait until the week before trial to aggressively cross-examine your expert ' you need to do so before it's too late to bring in a different person.

Fact-finders see through experts who are empty suits. And even the best experts need support; be sure to provide your experts adequate time and access to documents and personnel. Spending the needed time up front can be the difference between persuasive and superficial testimony.

Search for industry reports. When presenting testimony about industry practices and norms, contemporaneous industry reports (such as articles in the trade press, analyst reports, SEC filings) can tip the balance if the fact-finder is faced with conflicting expert testimony. An expert's opinions about industry practice can be compelling, but fact-finders may be wary of party-sponsored experts whose opinions are not backed by any hard evidence of industry practices and benchmarks. Third-party studies of comparables or averages (e.g., average expenditures given a certain market size or sales projection) that were not prepared with litigation in mind can provide significant support to the sponsoring expert.'

Establish that your adversary's concerns were considered. You may not agree with your counter-party's demands in the course of business dealings, but showing that the concerns were taken into account as part of a consideration of multiple factors and options may make it easier to establish that best efforts were taken. Even if your counterparty's demand is facially unreasonable, try to avoid any inference that your client was dismissive or took a “my way or the highway” approach.

Is a comparable comparable? In the Acme/ABC hypothetical above, Acme will inevitably seek discovery of how ABC markets ABC's other beverage products. ABC should object to such discovery as irrelevant to what practices are “reasonable” industry-wide, but a court may well allow the discovery and leave it to ABC to argue whether expenditures on other products represent a true apples-to-apples comparison. Plainly, a beverage company would not be expected to devote the same resources to a top worldwide beer brand as a niche root beer product.

But beyond clearly unfair comparisons (which may backfire for plaintiffs by revealing unreasonable demands and expectations), a company's efforts for its own products or services might be important to the fact-finder. If resources and efforts for two products are vastly different, a best efforts defendant should be prepared to explain forcefully and in simple terms why the products or markets are not similarly situated.

By pointing out to your business client at the outset of a contract that its efforts may be compared to efforts for similar products or services, your client stands a better chance of avoiding litigation altogether.

What's sauce for the goose ' If Acme insists that ABC's expenditures and tactics on other products are fair game for discovery, then so too are Acme's practices. Use discovery and public records to investigate your adversary's sales and marketing tactics and budgets. Odds are that Acme has at some point cut back on resources for a product because of market reception, general economic conditions, the product's lifecycle, or other market conditions.' A plaintiff that makes unreasonable demands in litigation can often be discredited by its own historical actions.

Conclusion

Agreeing to an open-ended best efforts obligation may get you much more than you bargained for ' years of costly and intrusive discovery and litigation. Careful drafting to include more precise and manageable obligations can significantly diminish the risk of litigation. If you are sued, we have found the trial techniques outlined above enormously helpful in achieving defense verdicts.'

'

Jerome L. Epstein is a Co-Chair of Jenner & Block's Complex Commercial Litigation Practice. He represents businesses in a wide variety of contract and fraud lawsuits, arbitration proceedings, and investigations involving corporate boards of directors. Michael Hoffman is a senior associate in the same practice. Both are resident in the Washington, DC, office.

'

Contractual best-efforts clauses are commonly used when it is not possible or desirable to spell out or quantify every detail of a party's required performance. But these notoriously ambiguous clauses are also a recipe for costly, drawn-out litigation and potentially catastrophic judgments.' In this article, we offer concrete tips ' based on our experience from several recent trials ' for defending a best-efforts case. We also offer suggestions for contract drafting and business dealings to lessen the chance of costly and intrusive litigation.

Best-Efforts Obligations

Acme Co. sells its Dr. Joe's Root Beer business to ABC Co. The purchase price includes up-front cash from ABC and a percentage of Dr. Joe's Root Beer sales for the next 10 years. Acme will be dependent on ABC for strong sales, but can't find a way to spell out or quantify every detail of ABC's sales and marketing obligations. After a long and difficult negotiation, the parties agree that ABC must use its “best efforts” to market and sell Dr. Joe's Root Beer. What exactly has ABC committed to?

Most courts will require that ABC at least act in good faith ' a fairly low and relatively easy standard to meet. See, e.g., Triple-A Baseball Club Assocs. v. Northeastern Baseball, Inc. , 832 F.2d 214, 225 (1st Cir. 1987). If ABC were to develop a competing root beer brand and cut out virtually all advertising and sales efforts for Dr. Joe's ' admitting in an internal e-mail that it did so for the sole purpose of growing sales of ABC's directly competing brand ' ABC would trip on, and fail to clear, the low good-faith hurdle. But short of such extreme cases, see, e.g., Bloor v. Falstaff Brewing Corp. , 601 F.2d 609 (2d Cir. 1979), best-efforts disputes more often involve fact-intensive, drawn-out battles of expert witnesses.

Best-efforts disputes often crop up when the economy is in a downturn. In our example, Acme is likely to be suspicious of ABC whenever sales are below expectations, yet ABC is not about to devote its entire marketing budget to a single product irrespective of results, market demand, or the realistic upside of Dr. Joe's Root Beer. So back to our question ' what does a “best-efforts” clause require beyond acting in good faith?

Many courts will also read into a best efforts obligation a duty to act “reasonably” based on industry norms ' an objective standard. See, e.g., Bloor, 601 F.2d at 613 n.7 (describing definition of best efforts as “performing as well as the average prudent comparable brewer”); Mofet Etzion Ltd. v. General Dynamics Land Systems, Inc., 2008 WL 344725, at *2 (S.D.N.Y. Feb. 4, 2008); Ashokan Water Servs., Inc. v. New Start, LLC , 807 N.Y.S.2d 550, 555 (N.Y. Civ. Ct. 2006).

Despite the objective nature of the inquiry, some courts will look beyond industry norms and allow inquiry into ABC's financial resources or how ABC has marketed its other products. See, e.g., Vestron, Inc. v. Nat'l Geographic Soc'y , 750 F. Supp. 586, 593 (S.D.N.Y. 1990) (examining marketing decisions in light of resource constraints faced by marketer); NCNB Nat'l Bank of N.C. v. Bridgewater Steam Power Co. , 740 F. Supp. 1140, 1151-52 (W.D.N.C. 1990) (“In construing the term 'best efforts,' courts may consider a party's experience, expertise, financial status, opportunities, and other abilities.”); Inside Out Prods., Inc. v. Scholastic, Inc., 1995 WL 375927, at *5 (S.D.N.Y. June 23, 1995) (examining whether the defendant attempted to market the materials in a manner consistent with its attempts to market other similar items).'

Although courts have drawn on widely varying standards when faced with best-efforts disputes, see, e.g., Ashokan Water Servs., Inc., 807 N.Y.S.2d at 554-56, there is a general consensus that a “best-efforts” clause should not be read in isolation, but rather must be interpreted in the context of the contract as a whole. See Gerard v. Almouli , 746 F.2d 936, 939 (2d Cir. 1984) (improper to use U.C.C. best-efforts requirement to read into the contract a sales requirement that contradicts the explicit contractual sales requirements); Vestron, Inc., 750 F. Supp. at 593 (best-efforts requirement “must be reconciled with other clauses in the contract to the extent possible, not used as a basis for negating them”).

This interplay between defined performance criteria and broad best-efforts obligations can be a critical point of contention in breach-of-contract litigation. If, say, Acme and ABC agreed that ABC must spend at least $500,000 per year on mass media advertising, can ABC be found in breach of a best-efforts clause based on expert testimony that a $3 million budget is the industry norm? Courts have grappled with these and other issues associated with best efforts clauses, often resorting to drafting history and course of dealing to address the inherent ambiguity of a best-efforts requirement.

Tips for Drafting Best-Efforts Clauses

Define Best Efforts

A broad, undefined best efforts clause ' e.g., “ABC must use its best efforts to sell Dr. Joe's Root Beer” ' affords the fact-finder considerable discretion and increases the chance of costly, intrusive discovery and fact-intensive litigation. As a promisee in Acme's position, you may find that a broad provision may be advantageous to the extent you cannot negotiate ironclad, quantifiable, and all-encompassing performance requirements. But as the party agreeing to use best efforts, you will generally benefit from a more specific definition of your obligations. For example, to lessen the chance that ABC will have to spend unreasonable amounts marketing Dr. Joe's Root Beer simply because ABC has available funds somewhere in its company, ABC should insist on a more specific, objective standard that looks to industry norms ' e.g., “'Best Efforts' means efforts that a reasonably prudent businessperson would use, applying reasonable commercial judgment and taking into account acceptable industry practices in the U.S. root beer industry.”'

Including “reasonable commercial judgment” in the definition can allow ABC to reduce resources as warranted by market experience and performance, especially when confronted with arguments by Acme that ABC should break the bank to increase sales.

Note the use of “acceptable” industry practice vs. “best” practices. Because few businesses engage in “best practices” across the board (and because “best practices” are more difficult to identify and define than “acceptable” practices), a “best-practice” standard could open the door to an obligation to spend well beyond what a prudent businessesperson would consider reasonable. (The flip side is of course true ' Acme should try to avoid a standard as low as “acceptable” industry practice. A middle ground may be to agree to abide by “reasonable” or “standard” industry practices.)

Include Defined Performance Standards Outside of the Best-Efforts Clause

Because courts will look to other parts of a contract to help define an ambiguous term, including a series of objective performance standards may help ABC even if compliance with those standards would not standing alone satisfy a best efforts obligation. For example, if Acme and ABC vigorously negotiate a requirement that ABC spend at least $X on mass media, deploy a sales force of at least Y sales reps, and open at least Z retail locations, a fact-finder will be hard-pressed to conclude that best efforts requires double or triple the agreed amounts.

Include a Notice/Cure Provision

Too often, we have seen the Acme's of the world play “gotcha” and seek to terminate a contract they no longer like based on an alleged material breach ' without having squarely teed up specific concerns about the promisor's efforts. A notice/cure provision gives ABC a chance to correct any alleged deficiencies or create a record that can be used in the event of litigation (e.g., that Acme did not clearly explain its concerns or never responded after ABC provided the reasons for its actions and asked for good-faith feedback).

State and Repeat the Obvious: Projections Are Projections

We have seen multiple best-efforts disputes when a promisor's pre- or post- contractual projections of sales or profits are not met. Creative plaintiffs argue that the projections are a fair barometer of what “best” or “reasonable” efforts would yield. Many fact-finders will understand that a projection is just that, but we recommend a belt and two pairs of suspenders. Any projections given to the other side during negotiations or after the contract has been signed should specify that the projections are not binding and may not be relied upon. You should also try to negotiate a contractual clause along the following lines (and be very suspicious of a counter-party who refuses to agree to such an innocuous provision): Any projections or predictions of future performance are not binding. Actual results are likely to vary materially from any projections, and the parties expressly disclaim reliance on any projection.

Winning Litigation Strategies

The following strategies and tactics have been successful in best-efforts trials we have handled, including two recent cases involving the defense industry and the pharmaceutical industry. These pointers are written from a defense perspective, but it is easy to flip each recommendation to identify plaintiff-side tactics.

“This is my job.” Develop a story of genuine interest in the effort in question. Show the fact-finder who in the organization was responsible for the efforts, how often the team met, how actual human beings depended on solid performance for their compensation or continued employment, how the team brainstormed and acted on ways to improve performance in light of specific obstacles, etc. Regardless of the legal standard, genuine good faith conveyed by a committed team goes a long way to establishing credibility.

Experts: Knowledge and proven performance under fire trump paper qualifications. Best-efforts cases invariably require expert testimony to determine “reasonable” industry practices in comparison with the defendant's. We cannot emphasize enough the importance of experts who truly know the industry and can articulate solid conclusions under hostile cross-examination. Retired executives who worked their way up the ranks may be far more effective and credible than academics. If you have to draft or rewrite every aspect of your expert's report, that should be a red flag that your expert may not be ready for prime time. And by all means don't wait until the week before trial to aggressively cross-examine your expert ' you need to do so before it's too late to bring in a different person.

Fact-finders see through experts who are empty suits. And even the best experts need support; be sure to provide your experts adequate time and access to documents and personnel. Spending the needed time up front can be the difference between persuasive and superficial testimony.

Search for industry reports. When presenting testimony about industry practices and norms, contemporaneous industry reports (such as articles in the trade press, analyst reports, SEC filings) can tip the balance if the fact-finder is faced with conflicting expert testimony. An expert's opinions about industry practice can be compelling, but fact-finders may be wary of party-sponsored experts whose opinions are not backed by any hard evidence of industry practices and benchmarks. Third-party studies of comparables or averages (e.g., average expenditures given a certain market size or sales projection) that were not prepared with litigation in mind can provide significant support to the sponsoring expert.'

Establish that your adversary's concerns were considered. You may not agree with your counter-party's demands in the course of business dealings, but showing that the concerns were taken into account as part of a consideration of multiple factors and options may make it easier to establish that best efforts were taken. Even if your counterparty's demand is facially unreasonable, try to avoid any inference that your client was dismissive or took a “my way or the highway” approach.

Is a comparable comparable? In the Acme/ABC hypothetical above, Acme will inevitably seek discovery of how ABC markets ABC's other beverage products. ABC should object to such discovery as irrelevant to what practices are “reasonable” industry-wide, but a court may well allow the discovery and leave it to ABC to argue whether expenditures on other products represent a true apples-to-apples comparison. Plainly, a beverage company would not be expected to devote the same resources to a top worldwide beer brand as a niche root beer product.

But beyond clearly unfair comparisons (which may backfire for plaintiffs by revealing unreasonable demands and expectations), a company's efforts for its own products or services might be important to the fact-finder. If resources and efforts for two products are vastly different, a best efforts defendant should be prepared to explain forcefully and in simple terms why the products or markets are not similarly situated.

By pointing out to your business client at the outset of a contract that its efforts may be compared to efforts for similar products or services, your client stands a better chance of avoiding litigation altogether.

What's sauce for the goose ' If Acme insists that ABC's expenditures and tactics on other products are fair game for discovery, then so too are Acme's practices. Use discovery and public records to investigate your adversary's sales and marketing tactics and budgets. Odds are that Acme has at some point cut back on resources for a product because of market reception, general economic conditions, the product's lifecycle, or other market conditions.' A plaintiff that makes unreasonable demands in litigation can often be discredited by its own historical actions.

Conclusion

Agreeing to an open-ended best efforts obligation may get you much more than you bargained for ' years of costly and intrusive discovery and litigation. Careful drafting to include more precise and manageable obligations can significantly diminish the risk of litigation. If you are sued, we have found the trial techniques outlined above enormously helpful in achieving defense verdicts.'

'

Jerome L. Epstein is a Co-Chair of Jenner & Block's Complex Commercial Litigation Practice. He represents businesses in a wide variety of contract and fraud lawsuits, arbitration proceedings, and investigations involving corporate boards of directors. Michael Hoffman is a senior associate in the same practice. Both are resident in the Washington, DC, office.

'