Schoefield Gear & Pulley Co. v. Schoefield

• Decision Date: 26 July 1898
• Citation: 71 Conn. 1,40 A. 1046
• Court: Connecticut Supreme Court
• Parties: SCHOEFIELD GEAR & PULLEY CO. v. SCHOEFIELD.

40 A. 1046

71 Conn. 1

SCHOEFIELD GEAR & PULLEY CO.

v. SCHOEFIELD.

Supreme Court of Errors of Connecticut.

July 26, 1898.

Appeal from superior court, New London county; George W. Wheeler, Judge.

Action by the Schoefield Gear & Pulley Company against Joseph J. Schoefield to recover damages for false and fraudulent representations concerning the operation and efficiency of certain patented inventions, whereby plaintiff was induced to make a contract. From a judgment in favor of plaintiff, defendant appealed. Affirmed on condition.

The complaint stated this case: On October 17, 1895, the defendant owned certain patents for improvements in split pulleys and wheels, cotton speeder gears, and in driving bobbins in speeder and roving frames, and had a plant for the manufacture of screw hub gears, at Providence, and was engaged in that business. Said screw hub gear was made in adjustable parts, and designed for fitting upon the small shafts of a machine easily and quickly, without taking apart the machine or the fixtures on the shaft, whenever it was desired to replace a worn-out gear of one piece of the old style. All cloth mills use many such solid gears in one piece, and they wear out frequently. Such an adjustable "screw hub gear' would be, if it worked successfully, in great demand. The defendant had previously, in 1894 and 1895, negotiated with five persons, Smith, Lee, Collins, Shannon, and Lucas, for the purpose of interesting them in his patents, and getting them to organize a corporation to buy of him his plant and the right to make and sell such gears under his patents. For the purpose of inducing them to form such corporation and make such contract with, and payments to, the defendant, he stated and represented to them that he had already made a large number of said screw hub gears, and sold and delivered the same to a large number of mills, and that such gears had been successfully applied and used, and were in successful operation, and were a practical success, and that there had never been any trouble with them or complaint about them, and that there was a large demand and a ready market for them as fast as they could be made, and that the making of such gears was a good and profitable business. Said Smith, Lee, Collins, Shannon, and Lucas believed said statements and relied upon them, and were thereby induced to unite and form, and did form, the plaintiff corporation, under the general incorporation laws of Connecticut, on October 17, 1895, and they all became stockholders, and the only stockholders, of the same, and were all five duly elected and became the five directors of said corporation, and said corporation was formed for the sole purpose of making such contract with the defendant, and securing from him the right to make and sell such screw hub gears under his said letters patent, and making and selling the same. Afterwards the defendant, to induce the plaintiff and its directors to make a contract with him, made to said directors the same statements, above mentioned, which he had made to them individually before. By reason of said statements, which the plaintiff believed and relied on, he induced it to make such a contract with him, on October 23, 1895, and to pay him $5,000, and enter on the manufacture of said gears under said contract, at large expense. Said statements so made by the defendant were false, and he well knew at the time he so made them that they were false, and he made such statements with intent to induce said Smith and others aforesaid to unite and form said corporation, and to make such contract, and to induce such corporation, through its said directors and officers, to make such contract with, and payments to, the defendant, and engage in said business, and thus to cheat and defraud the plaintiff, and did thereby cheat and defraud it as aforesaid, to its great damage, out of its said $5,000 paid by it to him under said contract, and the further sum of $10,000 for the trouble and expense incurred by it in preparing for the manufacture and in manufacturing such screw hub gears. Said screw hub gear at that time was not a practical success, and would not work, and had been condemned by mills which had tried the same, and was useless, because it could not be made fast and secure on the shaft, and because it did not mesh and run true and in line with its fellow gear, and there was no demand and market for such gears, and the plaintiff could not sell the same, and was put to great trouble and lost all its money expended in the manufacture of said gears and carrying on said business.

The contract was made part of the complaint it was dated October 23, 1895, and its main provisions were as follows: The defendant granted to the plaintiff the exclusive right to manufacture and sell, from said date until January 1, 1897, split pulleys, gears, wheels, and all other machines or parts of machines covered by said letters patent, and let to it his movable manufacturing plant, material, and manufactured goods then at Providence. The plaintiff agreed to pay him therefor $5,000 on or before October 23, 1895, and thereafter a royalty of 10 per cent. on its gross sales of gears and pulleys manufactured by it. It was contemplated that on or before January 1, 1897, the plaintiff should become the absolute owner of the patents, and increase its capital stock, to provide for their purchase, by such amount as would permit it to pay the defendant $20,000, and such further sum as should be represented by one-third of its entire capital stock as so increased, and should further provide itself with a working capital of at least $10,000, and, upon all this being done, the defendant was to assign the patents, and convey absolutely the plant and stock leased, and was to be entitled to subscribe for and receive enough of the new stock to amount to a third of the whole stock, the same to be full paid and nonassessable, and also to be paid $20,000. But if the capital were not thus increased, and said stock and cash delivered to the defend' ant, then the plaintiff should pay him the cost price of the stock leased, being $1,205, the same to be in full of all damages for such failure to purchase said patent rights, and all rights thereunder were then to reinvest in him, and the plaintiff was also to redeliver to him at Providence all the plant leased, in good condition, with any new patterns it might have made.

An answer was filed containing two defenses. The first was, in the main, a denial of the complaint, but admitted certain of its allegations, in part, in the same manner as the second defense, by reference thereto. The second was as follows: "Prior to October 17, 1895, said George S. Smith applied to the defendant for an option to purchase the defendant's said patents and business, and the defendant gave to said Smith such option for a limited time, and subsequently said Smith introduced to the defendant the said Lee and Collins, who, with said Smith, personally examined defendant's said business and products. The defendant made to the said Smith, Lee, and Collins the statements alleged in the complaint, and said statements were true, and were fully and thoroughly investigated and verified by said Smith, Lee, and Collins prior to the formation of said corporation. Said statements were not made by the defendant for the purpose of influencing or inducing the said Smith, Lee, and Collins to form a corporation for said purchase, or to make said contract with, and payments to, the defendant, but were made in response to inquiries of said parties in regard to the business of the defendant, and in connection with a personal investigation of said business and products by the parties aforesaid. Subsequently said Smith, Lee, and Collins procured the said Shannon and Lucas to join with them in the formation of said corporation, and to make the contract with the defendant annexed to said complaint, and said parties united in forming said corporation, relying entirely upon the representations and investigations of the said Smith, Lee, and Collins. On said October 17, 1895, the plaintiff corporation was organized, and concurrently therewith the plaintiff made said contract with the defendant, and paid the defendant the sum of five thousand dollars, as therein provided. The defendant has performed all the matters and things in said contract by him agreed to be performed."

This defense was denied. A counterclaim was also filed, stating that the plaintiff had made and sold a large amount of gears and pulleys under the contract, and never accounted for these sales or any royalties therefor, and claiming an account. To this the plaintiff answered, admitting gross sales to the amount of $1,530, and that a royalty of $153 thereon might be deducted from any amount found due to the plaintiff, or, if nothing was found due to the plaintiff, then that he might take judgment for that sum.

Each party introduced evidence in support of his pleadings. The plaintiff introduced the written option given to Smith (who had been a traveling salesman for the defendant), which read as follows: "May 15th, 1895. Mr. George S. Smith, of Norwich, Conn-Dear Sir: In reply to your verbal request made to me this day, I will sell, to a company which may be equitably formed and properly organized to purchase, manufacture, sell, or to operate my inventions and improvements relating to pulleys and gears, all of the several United States patents which I now hold, and the several applications for improvements thereon which are now pending in the U. S. patent office, together with all the patterns which I now have for the said pulleys and gears, and the special machines and tools which I use in their manufacture, and also all the finished and unfinished stock of pulleys and gears of the various kinds which I have on hand at the time of any consummation of said sale, for the sum and consideration of one-third (1/3) of the capital...