Cold Metal Process Co. v. McLouth Steel Corporation, 10522

Decision Date29 November 1948
Docket NumberNo. 10522,10523.,10522
Citation170 F.2d 369
PartiesCOLD METAL PROCESS CO. et al. v. McLOUTH STEEL CORPORATION.
CourtU.S. Court of Appeals — Sixth Circuit

A. Hilliard Williams, of Detroit, Mich., and Wm. H. Webb, of Pittsburgh, Pa. (Wm. H. Webb, of Pittsburgh, Pa., Franklin B. Powers, of Youngstown, Ohio, and Thomas G. Long, Charles A. Wagner and A. Hilliard Williams, all of Detroit, Mich., on the brief), for appellants and cross-appellees.

Charles H. Walker, of New York City, and William B. Cudlip, of Detroit, Mich. (William B. Cudlip, R. William Rogers and T. Donald Wade, all of Detroit, Mich., on the brief), for appellee and cross-appellant.

Before HICKS, Chief Judge and SIMONS and ALLEN, Circuit Judges.

HICKS, Chief Judge.

The Cold Metal Process Company, herein called Cold Metal, brought an action by complaint and supplemental complaint upon a patent licensing agreement dated April 30, 1934, and herein called the Agreement, against McLouth Steel Corporation, to recover royalties for the use of two machines for rolling strip metal, one known as a "hot mill" and the other as a "cold mill." The other appellants are aligned with Cold Metal and no further mention need be made of them.

McLouth's main defenses were: That the Agreement was illegal and unenforceable because of control assumed by Cold Metal over the unpatented product and over equipment bought by McLouth under the Sales Agreement of April 30, 1934; that the hot mill did not produce satisfactory steel, thus raising the issue of failure of consideration; that McLouth was entitled to the benefits of the more favorable terms granted Youngstown Steel Metal and Tube Company (herein called Youngstown) whose 1929 agreement with Cold Metal had been specifically excepted from the operation of the most favored licensee clause of the agreement; and that the cold mill did not come within the scope of Patent No. 1,744,016, herein called No. '016.

There was a counterclaim by McLouth for hot mill royalties already paid, and for $10,000 paid Cold Metal at the time McLouth purchased its cold mill from a third party. This counterclaim was rejected by the court and has not been pursued here.

Subordinate defenses and issues will be referred to hereinafter.

A hearing was had before the District Court on October 1, 1941, 41 F.Supp. 487, and it ruled that the contractual requirements for the payment of royalties upon the product of the mills were not inconsistent with the outright sale of the mills to McLouth and that the Agreement of April 30, 1934 and the Accord of January 12, 1937, were lawful; that if McLouth did not know in 1934 that the reversing hot mill acquired by it was still in a state of experimentation it should have so known, and that in any event at the end of three years the hot mill was working satisfactorily so that a new agreement, the Accord of 1937, was made, and that the mill was operated at a substantial profit until June 1, 1939, the date upon which McLouth ceased to pay royalties. The court ruled touching an agreement made by Cold Metal with Youngstown in 1934 that there was no evidence that McLouth knew of its existence when entering its own 1934 Agreement; that the Youngstown agreement of 1934 had the effect of putting the reversing hot mill in an equal or competitive position with continuous hot mills, a position not accorded it by the terms of the 1929 Youngstown agreement; that McLouth was thereby entitled to any reduction in royalty rates which the operation of its mills and the quality and surface of its steel might warrant since it was undisputed that the results obtained on McLouth's reversing hot mill did not compare favorably with those obtained from continuous hot mills. The court directed that if the parties were not able to agree on royalty rates for the hot mill from 1937, it would appoint a Master to determine what they should be. As to the cold mill, the court rejected McLouth's contention that it did not come within the scope of Patent No. '016 and concluded that McLouth was bound to pay royalties on the hot and cold mills, with the exception of whatever advantage might accrue to it from the 1934 Youngstown contract.

The Master so appointed held hearings and submitted a report on December 7, 1943, upon which the court ruled on July 18, 1946, D.C., 68 F.Supp. 112. Proceedings were suspended in the interim by court order by reason of the operation of the patent Royalty Adjustment Act of 1942, 35 U.S.C.A. § § 89 to 96. We think it unnecessary to consider the Master's report, except incidentally, since the District Court on December 10, 1946 filed its own Findings of Fact and Conclusions of Law to which we shall refer.

The court reiterated that although McLouth spent large sums in perfecting the hot mill, it should have known that the mill was in an experimental state and that differences over liabilities due to the imperfect condition of the mill were composed by the Accord of January 12, 1937. The court repeated that the cold mill was under patent No. '016 under which McLouth was licensed and that by the supplemental agreement of June 25, 1937 both parties expected royalties to be paid on its products. It repeated that both the Agreement and the Accord were valid and binding contracts. However, the court rejected the Master's conclusion that McLouth's royalties should be reduced 50% on the hot mill because of its unfavorable competitive position with the continuous hot mills. It found that McLouth had actually been able to sell a much greater production of hot strip than Cold Metal had promised at prices equal to the alleged superior product of its competitors using continuous mills; that it suffered no damage, was entitled to no reduction by application of the reduction clause in Paragraph II(g) of the 1934 Youngstown contract.

McLouth then contended that it was entitled to elimination of royalties on its hot mill by operation of Paragraph II(i) of the 1934 Youngstown contract which gave Youngstown the benefit of any "more favorable rate" granted another licensee "for the hot rolling of low carbon steel, or any other steel covered by this agreement." The court found that Cold Metal in terminating litigation on August 30, 1940 with another licensee, Carnegie-Illinois Steel Corporation, (herein called Carnegie), — not licensed upon any patent reading upon McLouth's reversing hot mill, — had stipulated that Carnegie should thereafter pay no royalties "on any steel on account of hot rolling" and that cold rolling rates should be materially reduced. It further found that because of the wording in the Youngstown agreement of 1934, Youngstown became entitled to hot roll steel on its reversing mill at zero rates even though it abandoned the use of that mill in 1937; and that because Youngstown so benefited, McLouth might after August 30, 1940, also hot roll steel at zero rates and obtain the benefit, but not retroactively, of lower cold rolling rates granted Carnegie.

The court observed that Cold Metal had placed the same interpretation on its 1933 agreement with Dominion, a Canadian firm, operating a reversing hot mill.

The court further found that McLouth was entitled to benefit from the definition of low carbon simple steel, namely, steel containing a .60% carbon or less, granted Youngstown in 1934, rather than that containing .25% found in its agreement of April 1934; and that all hot mill royalties for which McLouth was liable prior to August 30, 1940, should be calculated upon the more favorable .60% definition.

The court allowed interest only from date of suit, or due date of the royalties, whichever was later, for the reason that after discontinuance of the hot mill royalties negotiations for a reduction of settlement of royalties were in progress until that date. The court deducted interest on royalties during the period of the Royalties Adjustment Act.

Based upon these findings it was decreed that McLouth, who paid royalties of $111,566.78 on the hot mill to August 30, 1940, the date of the settlement with Carnegie with interest at 5% from February 14, 1940, the date of suit, or the due date, whichever was later, and to pay royalties of $113,168 upon the cold mill to March 31, 1942, the date fixed by the Master, royalties being figured at the rate fixed in the agreement to August 30, 1940, and thereafter at the rate fixed in the Carnegie license and interest to be computed as for the hot mill from February 14, 1940, or due date, whichever was later.

The decree did not allow interest from August 13, 1943 to January 15, 1945, the effective period of the Royalty Adjustment Act. Interest was also deducted upon $90,000 which McLouth was required to deposit as security for the stay of proceedings due to the operation of the Royalty Adjustment Act.

Anticipating deductions in its 1946 income tax, McLouth on December 13th of that year paid into court the amount of the judgment against it with the reservation that it would not be prejudiced by such payment upon its appeal.

Both parties appealed.

The major issues on the appeal are, — (1) the effect of the reduction of the royalties in the Carnegie settlement upon the Youngstown agreements and indirectly upon the McLouth Agreement; (2) the dates from which interest should be calculated and the amounts upon which it was due; and (3) whether McLouth was entitled to the benefit of .60% definition of low carbon steel by reason of the inclusion of that definition in the Youngstown agreement of January 1934.

On the cross-appeal the major issues are, — (1) whether the Agreement was unlawful and unenforceable; and (2) whether the McLouth cold mill was covered by Patent No. '016, owned by Cold Metal.

Something should be said touching the use of the mills here involved in the reduction of steel slabs and strip. They involve the use of a set of rollers between which the material is passed and the rollers are so mounted that they...

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