## Facts

- Parev Products Co., a small manufacturer, produced “Parev Schmaltz,” a kosher semisolid cooking fat made from coconut oil using a claimed secret formula and process.
- In 1924, Parev and I. Rokeach & Sons, an established seller of food products to orthodox Jewish consumers, entered a written agreement designed to give Rokeach a kosher vegetable shortening to market and to provide Parev financial support through royalties.
- The agreement granted Rokeach exclusive use of the secret formulas and know-how for 25 years, with an option to renew for another 25 years, and required royalty payments to Parev based on sales.
- Parev was restricted from competing with Rokeach’s sale of the licensed product during the contract term; the contract also contained post-termination limits on Rokeach’s ability to sell “Nyafat” (the product marketed under Rokeach’s brand) or a similar product.
- For roughly 15 years, Nyafat was commercially successful and generated substantial royalties for Parev.
- Rokeach later began distributing “Kea,” a lower-priced cottonseed-oil shortening, asserting it was introduced in good faith to compete with new national brands.
- Parev claimed Kea was introduced to divert customers from Nyafat, reducing royalties, and sought to enforce an implied negative covenant preventing Rokeach from competing with or undermining Nyafat.

## Issues

1. Whether the 1924 exclusive, royalty-based license implied a negative covenant requiring Rokeach to refrain from conduct that would undermine or substantially impair sales of the licensed product and Parev’s royalties.
2. If such an implied covenant existed, whether injunctive relief could issue to restrain Rokeach’s conduct in distributing and marketing Kea.

## Decision

- The Second Circuit reversed the district court’s dismissal and held that a limited implied negative covenant arose from the contract’s structure.
- The court ruled that an exclusive licensee owing royalties may not act arbitrarily or deliberately to substantially destroy the value of the licensed product or render the royalty arrangement illusory by diverting established trade to a competing product.
- The court rejected Parev’s broader position that the agreement barred all competition or forbade Rokeach from introducing other products.
- The case was remanded for fact-specific proceedings to determine whether Rokeach’s marketing of Kea constituted prohibited destructive or bad-faith conduct warranting an injunction.

## Legal Principles

- An implied contractual obligation may be recognized when necessary to make an exclusive, royalty-based arrangement workable and to preserve the bargain’s expected benefit for the party dependent on royalties.
- Where one party has exclusive control over production and sales from which the other party’s compensation is derived, the controlling party has an implied duty not to act arbitrarily or deliberately to deprive the other of the contract’s contemplated benefit.
- Implied negative covenants in this setting are narrow: they bar bad-faith or destructive conduct that substantially defeats the royalty-based bargain, but they do not bar legitimate good-faith business responses to market competition.
- Injunctive relief may be available to prevent conduct inconsistent with the contract’s structure and purpose, but equitable relief must be tailored and depends on the defendant’s actual conduct and its effect on the contract’s value.

## Conclusion

The Second Circuit recognized a limited implied negative covenant in an exclusive, royalty-based secret-formula license, holding that the licensee must not deliberately or arbitrarily undermine the licensed product in a way that substantially defeats the licensor’s expected royalties, and remanded to determine whether the challenged competing product conduct justified an injunction.


Parev Prods. Co. v. I. Rokeach & Sons, Inc., 124 F.2d 147 (2d Cir. 1941)