Minerva Studio—Fotolia. The views and opinions set forth herein are the personal views or opinions of the author; they do not necessarily reflect views or opinions of the law firm with which he is associated. Today, the cost of developing and commercializing new products is rising, and companies are increasingly forming alliances with the inventors or holders of intellectual property to supplement their product pipelines, reduce the costs associated with internal research and development, and obtain new products for sale. Setting up a new alliance can be a challenging task, requiring the negotiation of complex agreements that outline, among other things, how the risks of development and commercialization will be divided. Unforeseen or uncontrollable events make the full extent of risk associated with development and commercialization unknowable. Companies are therefore pressed to find ways to limit risk where future events may impact the parties' ability to perform. One of the tools drafters use to balance risk is incorporating “efforts clauses” into agreements, such as “ company X shall use its commercially reasonable efforts to develop product Y. ” Efforts clauses are used to avoid absolute promises to accomplish tasks, such as when accomplishing the task is controlled by a third party, like obtaining regulatory approval, or when the task may be subject to changing circumstances, like economic forces. Commentators have penned several articles discussing how courts have interpreted efforts clauses and extolling the virtues of defining these clauses in agreements, but omit discussion of the downstream effects of choosing the way in which these clauses are defined. Efforts clauses are, however, often central to disputes where development stalls or fails and when commercialization results do not meet expectations. How the parties define (or when they choose not to define) efforts clauses during contract drafting can impact and shape those disputes, including the scope of the dispute, the types of information that may have to turn over to the other party in discovery, and the burden of proof each party may bear.

• The Decision Not to Define

Where parties choose not to define an efforts clause, there can be uncertainty as to enforceability and meaning of the efforts clause in a dispute. Some courts have found that the failure to define an efforts clause renders that provision unenforceable. Other courts have tried to give undefined efforts clauses meaning by digging through the confusing and sometimes contradictory case law. And still other courts have engaged in a fact intensive inquiry that can weigh multiple factors including industry usage, the promising party's actions in similar situations, or what a third party in a similar situation would have done. Critically, the absence of a definition makes it difficult to gauge before a dispute what evidence will be most relevant to proving (or disproving) a party's adequate performance. Instead, the lack of definition can raise multiple questions: Is the provision enforceable? What information will be relevant in assessing my efforts? What information should I request from the other side to support my claim? What information will I have to turn over?

• The 3 Buckets of Definitions and Their Practical Implications

To avoid some of this uncertainty, the parties can agree to a framework to give meaning to an efforts clause. While there are countless ways parties can define efforts clauses, the definitions drafters use commonly fall into three buckets: (1) directives, measurements, or limiters; (2) industry standards; or (3) individualized standards. Each bucket, in turn, can carry different proof and discovery burdens that a company should weigh before agreeing to that type of definition.

• Directives, Measurements or Limiters

Directives, measurements, or limiters provide measurable or observable standards that can be expressed as positive requirements or as limits to a party's obligations and are often touted for their objectivity. These standards could include (1) caps on money that must be spent to accomplish a task; (2) specifications on the number of people to be dedicated to a task; and (3) requirements for particular working conditions, such as overtime requirements. A drawback to relying on directives, measurements, or limiters is that reaching agreement on them during negotiations can be elusive. In addition, directives, measurements, and limiters may not short-circuit disputes, even where the performing party appears to have complied with the agreed-to standard. For example, some courts have found that even where the parties have agreed to specific directives, measurements and limiters, the complaining party is still entitled to attack how the promising party met the standard, such as disputing how the promising party spent money before reaching an agreed-upon spending cap. At a minimum, however, setting specific standards can serve to limit the scope of disputes, and both parties will better understand what actions the promising party should take or does not have to take when performing its duties.

• Industry Standards

Absent agreement on specific directives, measurements or limiters, parties sometimes turn to conceptual benchmarks to define their efforts clauses. A common benchmark utilized is an “industry standard” that requires the promising party's efforts be consistent with that of other companies in the industry. Industry standards definitions provide theoretical benefits to both parties. Promising parties believe these definitions protect them from having to take steps beyond what a company in the same space would take. Non-promising parties believe these definitions provide assurances that the promising company will at least take actions consistent with the other companies in the industry with whom it could have, but ultimately did not, partner. In a dispute, industry-standards definitions may still leave uncertainty as to the parties' intent. Companies could (and likely will) dispute what the industry standard actually is. Disputes often devolve into a battle of experts, with each side's expert providing vastly different interpretations of what the industry standard is and conflicting opinions on whether the promising party met that standard. Industry standards do provide a theoretical baseline of performance and provide some framework for understanding what actions the promising party should take. However, companies must be aware that, in the event of a dispute, their efforts (or the efforts of their partners) will likely be assessed through the lenses of conflicting experts.

• Individualized Standards

Some drafters also use “individualized standards” that look at how the promising party has acted with respect to other similar products in its portfolio in the past to measure the performance due on the licensed product. By relying on individualized standards, the promising party hopes to protect itself from being required to use greater effort than it would in similar circumstances, even if other actors in the market would take different or even greater action. The non-promising party also obtains assurances that the promising party will not employ lesser efforts on the licensed product than other similar products in the promising party's portfolio. In a dispute, individualized standards can present certain unique challenges. Because the promising party's efforts will be judged against its efforts vis-à-vis its other products, the parties may dispute what products should be considered “similar” for purposes of comparison. In addition, promising party may have to turn over information on its other products in discovery, a potentially burdensome task particularly in companies with large or varied product portfolios. Discovery can quickly become time-consuming, expensive and intrusive and, if the promising party has a robust in-licensing program, such discovery can implicate confidentiality obligations owed to third parties. Individualized standards appear to take some of the guesswork out of where the parties will have to look to identify the standard against which the promising party's efforts will be judged. Both parties should consider, however, that in a dispute, there are unique proof and discovery risks associated with peering into a company's product portfolio.

• Balance the Risks of Choosing a Definition

Companies should be mindful of the consequences that an efforts clause definition may have on any future disputes. The time invested at the beginning of the relationship to define what efforts are expected from the promising party can help both parties better understand their agreement and, in the unfortunate event of a dispute, provide some clarity regarding the scope of the dispute and the legal and factual burdens that may arise depending on the “effort” promised. Jeremy J. Gray is a partner in the business & tort litigation practice of Jones Day.