A recent Fifth Circuit Court of Appeals decision reversed a jury award and granted a defendant’s motion for a judgment as a matter of law because the defendant’s “best efforts” promise, in the absence of some goal or guideline by which the defendant’s efforts could be assessed, was not an enforceable promise and thus could not be the basis of a fraudulent inducement claim.
McData and Ehringer entered into an agreement for Ehringer to buy two McData product lines and for McData to provide Ehringer with promotional and sales support. Among other things, McData promised to use its best efforts to:
“further the promotion, marketing, licensing, and sale of Products;” and
“participate and exploit Product capabilities at industry trade events.”
Ehringer sued McData in federal district court claiming that McData never intended to be bound by its “best efforts” promises, and that McData’s deception fraudulently induced Ehringer to enter into the contract. The trial court denied McData’s motion for judgment as a matter of law and submitted the case to a jury, which awarded Ehringer $12.53 million on its fraudulent inducement claims. McData appealed.
The contract was governed by Minnesota law, but the parties agreed that the fraudulent inducement claim was governed by Texas law. The Fifth Circuit Court of Appeals reviewed the enforceability of “best efforts” clauses under Texas law as part of its fraud analysis.
The Court’s Decision
The Fifth Circuit reviewed Texas law and determined that a “best efforts” promise must be accompanied by some type of goal or guideline against which best efforts may be measured. If the agreement provides no such goal or guideline, the best efforts promise is too indefinite and vague to provide a basis for enforcement. Without an enforceable promise upon which to base its fraudulent inducement claim, the claim failed as a matter of law and the judgment of the trial court was reversed.
In Texas, a “best efforts” commitment, without any goal or guideline against which to measure the commitment, is not enforceable. The goal or guideline does not need to be a black-line metric, but some level of guidance must be provided. For example, a previous case upheld the enforceability of a promise to use “reasonable best efforts to prepare, file and cause to become effective, as promptly as practicable” a registration statement. The phrase “as promptly as practicable” was deemed an objective goal that made the promise enforceable.
Ehringer may have achieved a different result if, rather than its best efforts, McData had promised to use reasonable efforts or commercially reasonable efforts. Texas courts do not appear to apply the “goal or guideline” requirement to reasonable efforts obligations, instead analyzing whether the promising party exercised the effort that would have been used by an ordinary, prudent comparable party under the circumstances. This disparate treatment suggests an “all or nothing” regime governing best efforts promises in contracts: when the parties fail to set a bar for what constitutes “best efforts,” courts applying Texas law will not reform the promise so that a “reasonable efforts” standard applies.
Texas courts are not alone in their unwillingness to enforce vague promises to use best efforts. Illinois law takes a similar approach. Case law in other states is mixed (e.g., New York) or under-developed (e.g., Delaware). But what is required in Texas for an enforceable “best efforts” promise may be good drafting practice even in agreements that will be governed by another state’s laws. Having parties agree in advance on goals and guidelines may expose important differences in the parties’ understanding of the meaning of a promise to use best efforts, and could lead to more predictable results if an arbitrator or judge is called upon to interpret the agreement.
Kevin M. Ehringer Enterprises, Inc., doing business as Data Center Systems v. McData Services Corp., formerly known as Computer Network Technology Corporation, 2011 WL 2675927 (5th Cir. (Tex.)).
Herrmann Holdings Ltd. v. Lucent Techs. Inc., 302 F.3d 552, 559 (5th Cir. 2002).
Rob Park, Putting the “Best” in Best Efforts, 73 U. Chi. L. Rev. 705 (2006).
Publishers Editorial Staff, Best Efforts Clauses, 24 No. 2 Corp Couns Quarterly ART 1 (2006).
Christopher W. Hamlin, Be Clear When Using Best Efforts, St. Louis Bar Journal, Spring 2011, at 10 (2011).
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