There is an implied covenant that neither party shall do anything to injure or destroy the rights of the other party to receive the benefits of the agreement. The principle has been applied in copyright license agreements, and there is a corollary application in a restricted license of patent rights to the effect that the licensee will not invade the ungranted part of the patent to the detriment of the estate reserved by the licensor. The implication that a party is not to exceed the limits of his license is not external to the license agreement. It is an inference which follows from the language of the parties and becomes as much a part of the contract as if it were spelled out in explicit terms.
A pharmaceutical company and a smaller research company agreed to collaborate in research on new chemical carrier compounds that would enable oral delivery of parathyroid hormone (PTH), which was used in treating osteoporosis. Through a contract and licensing agreement, the parties set up a close, collaborative research relationship that required trust and good faith on both sides. However, after several years of joint research, the pharmaceutical company decided it did not need the research company any further, so it decided to pursue a secret research strategy, utilizing the collaborative research, in breach of its contractual obligations.
Did the pharmaceutical company breach its license agreement and research agreement with the research company?
The court concluded that the pharmaceutical company's actions breached the parties' contract in several ways and that the pharmaceutical company did not act in good faith. The breach of trust went to the root of the parties' agreement, and it was serious enough to support the research company's termination of the contracts. While the pharmaceutical company asserted theories to justify its actions, the court found that those theories were not supported by the evidence or the law.