Commercially reasonable efforts (CRE) provisions are a common feature in technology and life sciences agreements, particularly in development collaborations, licensing deals, and milestone-based contracts. While these provisions offer valuable flexibility during negotiations, they can create significant complexity and ambiguity when disputes arise.
Partner Robert Counihan and associate Nick Klenow’s recent CLE session, “Commercially Reasonable Efforts in IP Agreements: A Litigator’s Perspective,” breaks down how courts interpret and enforce CRE obligations, providing crucial insight for companies operating in these sectors.
When evaluating whether a party has met its CRE obligations, courts look to specific benchmarks outlined in the agreement. There are four primary types of benchmarks that companies should understand:
External benchmarks compare a company's efforts against what other similarly situated companies in the industry normally do to achieve comparable objectives. For example, in biotech deals, this might mean comparing a company's development timeline against those of other companies working on similar therapeutics at comparable development stages.
A challenge with external benchmarks is defining and proving what constitutes a "similarly situated" company or product. A startup biotech firm may not be comparable to a global pharmaceutical company, just as a product entering development may not be comparable to an established market leader. When litigating external benchmarks, companies often need to identify specific comparator companies and gather evidence about their efforts—which may be difficult given the confidential nature of many development programs.
Internal benchmarks look at how a company typically handles similar projects or products within its own portfolio. This approach examines whether the company is applying consistent effort and resources across comparable initiatives.
While internal benchmarks may seem to favor the company making the efforts, they present their own challenges in litigation. Companies may need to disclose sensitive information about other development programs during discovery. Additionally, if a company lacks truly comparable internal projects, it becomes difficult to establish an appropriate standard for measuring compliance.
Blended benchmarks incorporate both external and internal comparisons, allowing courts to consider how the company typically operates as well as industry standards. This approach provides more flexibility in arguing for or against breach but also increases the scope of potentially relevant discovery and can lead to disputes about which comparators are most relevant.
Some agreements simply require "commercially reasonable efforts" without specifying how those efforts should be measured. With these provisions, courts often require the party seeking to enforce the provision to establish an objective standard based on industry context. While this flexibility can be advantageous when drafting agreements, it may increase the likelihood of disputes and create additional complexity in litigation.
Agreements sometimes pair CRE obligations with specific deadlines or quantifiable objectives. For example, a contract might require both "commercially reasonable efforts to develop Product X" and "initiation of a Phase 2 clinical trial for Product X by January 1, 2027."
This combination raises interesting questions in litigation. Meeting a concrete deadline may not prove that commercially reasonable efforts were used—a company might have delayed unnecessarily before rushing to meet the deadline. Conversely, missing a deadline may not constitute a breach of the CRE provision if the company can demonstrate that its efforts were commercially reasonable given market conditions, scientific challenges, or other factors.
Whether defending against allegations of breach or preparing to assert them, companies should focus on several key areas. Collecting evidence is a critical first step. Courts consider multiple factors when evaluating CRE claims, and it can be helpful for companies to have maintained detailed records in these areas, particularly through regular information reports that document progress, challenges, and decision-making rationale.
It’s also important to understand that information is often asymmetrical—the "promisor” performing the obligations typically has more information about its efforts than the "promisee” who is receiving the benefit of those efforts. This dynamic can influence litigation strategy and sometimes leads promisees to initiate litigation when the information they have suggests breach, even though a more fulsome record may show otherwise.
Courts often recognize that companies can consider their legitimate business interests when determining what constitutes commercially reasonable efforts. However, this isn't a blank check—companies must demonstrate that their decisions were reasonable given the circumstances and not merely convenient.
Several practical considerations can help companies better position themselves for potential CRE disputes:
While CRE provisions offer valuable flexibility in commercial agreements, they require careful attention to documentation and performance standards. Understanding how courts evaluate these provisions can help companies better structure their agreements and maintain appropriate evidence of their efforts. When disputes arise, success often depends on the ability to demonstrate objective evidence of reasonable efforts while accounting for legitimate business considerations and market realities.
For companies in the tech and life sciences sectors, where development timelines and market conditions can be highly unpredictable, managing CRE obligations requires a balanced approach that maintains flexibility while creating clear evidence of commercially reasonable efforts.
Watch the webinar—and learn more about Fenwick’s litigation and life sciences capabilities.