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Long Fish v. Nanotronics Corp.6/9/2003
he implied covenant cases, any implied covenant must be consistent with the language of the contract and its overall purposes. (See Lippman v. Sears, Roebuck & Co., supra, 44 Cal.2d at p. 142; Cousins Inv. Co. v. Hastings Clothing Co., supra, 45 Cal.App.2d at p. 149; Ellis v. Chevron, U.S.A., Inc., supra, 201 Cal.App.3d at p. 140.) Here, there is no basis upon which we can imply an obligation to pay royalties under sections 3.1 and 3.2 whenever a third party makes use of the Sh-Boom technology. Such a covenant would not only contravene the literal language of the agreement, but also discourage any effort by Nanotronics to fully exploit the value of the technology. As we have seen, the literal language of the contract limits application of the strict royalty schedule to products sold by Nanotronics. As between the Fish trust and Nanotronics, this royalty provision protects the Fish trust from the manufacturing and marketing risks which Nanotronics would bear with respect to products it sells. However, under the agreement the royalty obligation only arises once Nanotronics makes the decision to bear those risks and commence production. In the event Nanotronics decided, in light of its royalty obligations, the risks were not worth the potential profit, no royalties would be due. However, the terms of the agreement make it clear the purpose of the agreement was not limited to production by Nanotronics of ShBoom products. Rather, the agreement makes it clear that its overall purpose was to realize value from the technology and share that value between the Fish trust and Nanotroncs. To the larger end of realizing value, we have seen, in the event Nanotronics was unable or unwilling to commence production, Nanotronics could still attempt to create profits for both itself and the Fish trust by licensing the technology to third parties on selling its assets to another corporation. As we have seen under the agreement, Nanotronics was required to share between 25 percent and 50 percent of any third party licensing fees with the trust and to provide the Fish trust with an opportunity to purchase Nanotronics shares in the event of a sale or merger. If we were to imply a covenant the trust could also recover the fixed royalties set forth in sections 3.2 and 3.3, we would substantially diminish any incentive Nanotronics had to license the technology to third parties or sell the corporation.
In sum then, there is no basis upon which to recognize any implied covenant to pay royalties on products sold by a third party such as Patriot.
III.
As an alternative to its contention the Technology Transfer Agreement requires royalty payments for third party use of the Sh-Boom technology, the Fish trust contends that in acquiring Nanotronics's assets, Patriot stepped into Nanotronics's shoes and is directly liable for royalties under the Technology Transfer Agreement.
"As a general rule, 'where one corporation sells or transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former unless (1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts.' [Citation.]" (Chaknova v. Wilbur-Ellis Co. (1999) 69 Cal.App.4th 962, 967.)
None of these exceptions to the general rule apply here. In acquiring Nanotronics, Patriot expressly disavowed any liability for Nanotronics's obligations to the Fish trust. Both Nanotronics and Patriot existed as separate entities before the sale and c
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