Ar-Tik Systems, Inc. v. Dairy Queen, Inc.

• Decision Date: 28 March 1962
• Docket Number: No. 13447.,13447.
• Citation: 302 F.2d 496
• Parties: AR-TIK SYSTEMS, INC., Appellee, v. DAIRY QUEEN, INC., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

302 F.2d 496 (1962)

AR-TIK SYSTEMS, INC., Appellee, v. DAIRY QUEEN, INC., Appellant.

No. 13447.

United States Court of Appeals Third Circuit.

Argued March 10, 1961.

Decided March 28, 1962.

Wallace D. Newcomb, Philadelphia, Pa. (Paul & Paul, John H. Austin, Michael H. Egnal, Philadelphia, Pa., on the brief), for appellant.

Mark D. Alspach, Philadelphia, Pa. (Virgil Bozeman, Moline, Ill., Owen J. Ooms, Malcolm S. Bradway, Ooms, Welsh & Bradway, Chicago, Ill., Krusen, Evans & Shaw, Philadelphia, Pa., on the brief), for appellee.

Before GOODRICH, McLAUGHLIN and FORMAN, Circuit Judges.

FORMAN, Circuit Judge.

In the amended complaint filed in the United States District Court for the Eastern District of Pennsylvania, Ar-Tik Systems, Inc., (Ar-Tik) a corporation of Indiana, alleged that it entered into an agreement on September 7, 1946 with H. A. McCullough, H. F. McCullough and J. F. McCullough, co-partners doing business as McCullough's Dairy Queen,¹ whereby it licensed the McCulloughs to use and to permit others to use a frozen dessert machine, constructed under its United States Patent 2080971, "within the area comprised by the eastern part of the United States, including the Commonwealth of Pennsylvania, upon payment of a certain consideration based upon the quantities of frozen dessert used and upon certain other considerations more fully enumerated therein"; that under the terms of a series of assignments from the McCulloughs and others there was executed a certain contract dated November 29, 1949, which Ar-Tik averred had been assigned to the defendant Dairy Queen, Inc., a corporation of the State of Washington, registered to do business in the Commonwealth of Pennsylvania, whereby it became entitled to use within the territorial limits of Pennsylvania the trade name "Dairy Queen" in connection with the manufacture and sale of frozen dessert "upon, inter alia, the payment of certain considerations to the plaintiff and the plaintiff's assignors" under the said agreement of September 7, 1946; that prior to November 29, 1949 the McCulloughs coined and registered the trade name "Dairy Queen" and in conjunction with the plaintiff and others developed it by extensive nation-wide advertising, supervision of manufacture, sale and method of sale of frozen dessert known as "Dairy Queen" so that the trade name was enhanced in value; that as the result of the acquisition by the defendant, Dairy Queen, Inc., of the rights and liabilities under the contract of November 29, 1949 it became obligated to account to Ar-Tik and the McCulloughs by showing the quantity of frozen dessert mix used and to make payments upon the basis thereof and that in violation of its agreement defendant, Dairy Queen, Inc. has failed to account and to make payments to Ar-Tik and has forfeited the right to use the trade name.

Ar-Tik prayed, among other things, for the production of books and records; a money judgment for such sum as might be found to be due; a temporary injunction to be made permanent enjoining the defendant, Dairy Queen, Inc., from doing anything connected with the sale of the frozen dessert product to the public under the trade name "Dairy Queen"; and that the court shall declare that the defendant has violated paragraph 3 of the agreement of November 29, 1949 and paragraph 9 of the agreement of October 18, 1949 and that the said contracts shall be declared null and void as to any rights defendant, Dairy Queen, Inc., may have acquired therein.²

In its answer the defendant, Dairy Queen, Inc., generally denied the allegations of the compaint. However, it admitted the assignment to it of the agreement of November 29, 1949.

The defendant, Dairy Queen, Inc., further averred in its answer that the agreement of October 18, 1949 "referred to in paragraph 10 of the complaint and any assignments thereof are unenforceable and ineffective" as a result of paragraphs 7 and 12 of the said agreement of October 18, 1949;³ and that defendant, Dairy Queen, Inc., is the sole owner and possessor of the trade name "Dairy Queen" within the State of Pennsylvania.

The defendant, Dairy Queen, Inc., also filed a counterclaim for a declaratory judgment that Ar-Tik has no right in the trade name "Dairy Queen" within the State of Pennsylvania. The plaintiff Ar-Tik answered the counterclaim by denying substantially its allegations.

The pleadings tend to sideglance the real issues in the case which were drawn into much sharper focus by the pretrial proceedings and the hearings before the court.

An opinion was filed by the District Court, in which findings of fact and conclusions of law were made and discussed.⁴ In effect it was held, among other things, that the law of Illinois should govern the crucial contract under which Ar-Tik claims in this case and that under that law Ar-Tik had a right to sue as a third party beneficiary.

It was further held that the agreement of October 18, 1949 was a franchise agreement or trademark license and not a patent license agreement so that the defense theory of patent misuse raised by the defendant was found to be inapposite.

The trial court also held that the McCulloughs were merely controlling the type of machines used in Dairy Queen's stores, similar to like control of the mix, the physical characteristics and other standards of the stores; that Ar-Tik's claim was not "the product of a thinly veiled technique to create a patent monopoly by indirection" and that the four cent figure can not be termed a royalty payment for Ar-Tik's patent.

Orders were accordingly entered by the court in favor of Ar-Tik and against Dairy Queen, Inc. in the sums of $86,169.08 and $32,424.99, representing principal and interest due from Dairy Queen, Inc. and dismissing the counterclaim of the latter. As a result this appeal was taken.

Jurisdiction of the court was properly found to be grounded on diversity of citizenship. 28 U.S.C.A. § 1332.

The suit is an incident in the phenomenal development of the merchandising of this frozen dessert or soft ice cream product to the public by literally thousands of individual stores all over the country under practically uniform methods within a period of less than 23 years.⁵ It had its inception when on July 31, 1939 Harry M. Oltz agreed to grant a license to H. A. McCullough to manufacture an ice cream freezer on which Oltz held United States Patent No. 2080971 in 23 states west of the Mississippi River, known as the "Western Agreement". McCullough was to furnish the mix to make the product and to pay Oltz a royalty of from four cents to one cent per gallon on all the mix furnished to the machines depending upon the number made and put into operation until the expiration of the patent on May 18, 1954, at which the manufacturing rights were to end, but he was to be permitted to keep his machines and operate them independently paying the royalty as usual.⁶

Evidently the parties considered the exploitation of the "Western Agreement" successful and satisfactory to them for on September 7, 1946, Ar-Tik, a corporation which Oltz had formed and to which he had assigned his interests entered into an agreement with H. A. McCullough granting the exclusive right to manufacture, use and sell machines under the same patent in many states east of the Mississippi River including Pennsylvania. The contract, known as the "Eastern Agreement", was to terminate on May 18, 1954, but if patents for improvements were secured it was to run for the life of the improvements. McCullough agreed to pay Ar-Tik $10,000 in cash and 60 percent of sums received by him by reason of territorial rights he, McCullough, might grant to third parties until $102,000 was paid to Ar-Tik.

Paragraphs 4 and 5 of the agreement read:

"4. All sublicenses granted by Second Party McCullough shall contain a provision obligating the sublicensee to pay to Ar-Tik Systems, Incorporated, the sum of Two Cents (.02¢) per gallon on all mix used in the machines built during said patent number, said royalty to continue during the life of the machines regardless of the expiration of said patent. * * *"

"5. Copies of all sublicenses granted by Second Party shall be promptly furnished to Ar-Tik Systems, Incorporated. All machines manufactured shall bear a serial number and Ar-Tik Systems, Incorporated, shall be kept informed at all times of the location of all machines manufactured by Second Party or his sublicensees."

A supplement to the agreement was entered into on February 20, 1953, as of September 7, 1946, by Ar-Tik and H. F. McCullough acting for McCullough's Dairy Queen, which substituted the following for paragraph 4 of the original agreement:

"4. All sub-contracts issued by Second Party McCullough\'s Dairy Queen shall contain a provision obligating the sub-contractor, successors, and assigns, to pay to AR-TIK SYSTEMS, INC., the sum of Four Cents (.04¢) per gallon on all mix used in machines built under said patent number, said payments to continue during the life of the machines regardless of the expiration of any patents. * * * The said payments in amount of Four Cents (.04¢) per gallon shall be divided equally between the parties hereto and First Party shall remit to the Second Party the amount of Two Cents (.02¢) per gallon each month as collected from the sub-contractor."

Subsequently H. A. McCullough assigned his rights under the agreement of September 7, 1946 to a partnership consisting of him, H. F. McCullough and J. F. McCullough, under the name of McCullough's Dairy Queen.

On October 18, 1949, McCullough's Dairy Queen entered into an agreement with Burton F. Myers, Robert J. Rydeen, M. E. Montgomery and Howard Dale, trading under the name of Dairy Queen of Pennsylvania. The agreement recited that McCullough's Dairy Queen had registered the trademark "Dairy Queen" with the State of Pennsylvania; that Ar-Tik was the owner of Patent No. 2080971 on the Freezing and Dispensing Machine; and that "the rights to manufacture, use,...