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Breach of the Covenant of Good Faith and Fair Dealing

If you’re not getting what you thought you would get from your contract, can you sue the other person for breach, even if he has not violated any of the express terms of the contract? The answer may be yes. A contracting party must not only adhere to the express terms of a contract, but he must also refrain from doing anything that would frustrate your rights to receive the benefits of that contract. This is called “the covenant of good faith and fair dealing,” and it is implied into all contracts, both written and oral.

One of our current cases involves a doctor who had developed patents for a medical device. He sold his patents to his business partner, and his business partner promised to exploit those patents, and to pay our client one-third of any consideration the business partner received from those patents. While the business partner did license the patents to a company, and did pay our client one-third of the money he received from that deal, the business partner also licensed different patents to the company for a much higher fee, and entered into other transactions with the company that, at least superficially, had nothing to do with our client’s patents. By way of illustration, if the business partner entered into three deals with the company and received $100 for all three deals, the business partner allocated only $10 to our client’s patents, meaning that our client received only a little over $3.

Technically speaking, the business partner adhered to the express terms of the contract: he paid our client one-third of all of the money he received for licensing our client’s patents. But it is our contention that the business partner breached the implied covenant of good faith and fair dealing – and thus breached the contract – by licensing our client’s patents for less than fair value (because he would have to share that money), and licensing the other patents for more than fair value (because would not have to share that money). By so doing, the business partner is frustrating our client’s right to share in the exploitation of the patents, because the business partner is licensing them for less than fair value. Thus, even though the contract does not expressly state that the business partner has to license the patents for fair value, it is a breach of the implied covenant of good faith and fair dealing to fail to do so.

If you have contracted with someone to exploit your property, and are not receiving as much as you anticipated, consult with an Los Angeles attorney near you. You may have a valid claim.

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