Stokes & Smith Co. v. Transparent-Wrap Mach. Corp.

• Decision Date: 01 May 1946
• Docket Number: No. 262.,262.
• Citation: 156 F.2d 198
• Parties: STOKES & SMITH CO. v. TRANSPARENT-WRAP MACH. CORPORATION.
• Court: U.S. Court of Appeals — Second Circuit

156 F.2d 198 (1946)

STOKES & SMITH CO. v. TRANSPARENT-WRAP MACH. CORPORATION.

No. 262.

Circuit Court of Appeals, Second Circuit.

May 1, 1946.

Samuel E. Darby, Jr., of New York City (Virgil E. Woodcock, of Philadelphia, Pa., of counsel), for appellant.

R. Morton Adams and Pennie, Edmonds, Morton & Barrow, all of New York City (W. B. Morton, Jr., of New York City, of counsel), for appellee.

Before L. HAND, SWAN, and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

This is an appeal from a judgment, dismissing the plaintiff's complaint for a declaratory judgment, and directing it to assign eleven patents to the defendant. The parties are corporations organized under the laws of different states, and in the spring of 1944 they had come to a critical difference as to the effect of a contract, entered into between them on June 23, 1937. The defendant, on April 29, 1944, elected to terminate this contract as of the following May 10th, and thereby raised the question which the plaintiff wishes to have determined in this action. The facts are as follows. The defendant was the owner of three patents taken out in 1935 and 1936, upon the invention of one, Walter R. Zwoyer: the first, upon an original application, filed on November 28, 1933; the other two, upon divisional applications of the original. They were all for a machine to make a connected series of small transparent envelopes and to fill them with small pellets, such as pieces of hard candy and the like. The machine proved a success, and the defendant began making and selling it under the name, "Transwrap Packing Machine." The plaintiff had been engaged in the business of making machinery to make and fill similar packages with powders — for the most part toilet powders — and in 1935 it learned of the Zwoyer patents, and sought a license under them early in 1936. After preliminary negotiations not necessary to set forth, the parties executed the contract of June, 1937, out of which the present controversy arises, and the substance of which was as follows.

The defendant granted to the plaintiff an exclusive license under the Zwoyer patents in the United States, Canada and Mexico, as well as upon any patents for improvements which it might secure during the life of the contract. The plaintiff promised to keep books and render accounts, and to pay royalties, fixed by elaborate provisions not relevant here. The defendant promised to communicate to the plaintiff what it knew about manufacturing the machines and about prospective customers and the like, and to use its best efforts to push the sales under the patents. The contract was to last for ten years unless terminated as provided; but the plaintiff had an option to renew it for successive periods of five years, "until the expiration of the Patents above referred to and the expiration of any further Patents that may be granted to or acquired by the Licensor or Licensee, covering improvements in Transwrap Packaging Machines or inventions used, or capable of use by the Licensee in the manufacture thereof." This option was contingent (1) upon notice to the defendant, (2) upon prior performance by the plaintiff of all the conditions of the contract, and (3) upon the fact that "the volume of sales of Transwrap Packaging Machines during the then current term of the license has been such as should reasonably be satisfactory to the Licensor." In the event of disagreement as to whether sales had been reasonably satisfactory, that question was to be settled by arbitration. The defendant promised to sell the plaintiff such of its manufacturing apparatus used in making the machines as the plaintiff wished, for which the plaintiff was to pay prices as should be agreed; also to sell such of the machines and parts of machines already manufactured, as the plaintiff wished. In case the contract was terminated before the ten years expired, the defendant promised to buy back this apparatus and these machines, and any apparatus and machines meanwhile made by the plaintiff, at a depreciation of twenty per cent. The parties agreed not to challenge the validity of the Zwoyer patents, and there were stipulations regarding the suits for infringement, and the like.

So far, the contract was concededly unobjectionable. The contest is as to the eleventh, twelfth, and fourteenth Articles, which are quoted in the margin,^* and the important parts of which were as follows. Article XI is obscure, but we read the second sentence as meaning that the plaintiff promised to give the defendant an exclusive license in all territories not covered by the contract, under any patents upon improvements to the Zwoyer machine, so far as these should relate to making and closing the package. In Article XII the plaintiff promised, if it should invent any improvements to the Zwoyer machine which were suitable for use in making and closing Zwoyer packages, that it would submit them to the defendant which was given an option to apply for patents upon them. If the defendant did not exercise the option, the plaintiff might itself apply for such patents; and if the defendant took out the patents, the contract would cover them, and the plaintiff would have a license under them without further royalties. Article XIV specified those events upon which the defendant could terminate the contract. For the most part these were breaches by the plaintiff, but included were the filing of a petition by the plaintiff for reorganization under what is now Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., and any court injunction of the payment of royalties.

The parties continued under the contract until January 22, 1944, when the defendant learned that the plaintiff had applied for four patents, to which in a letter written on that day it claimed the right, and of which it demanded an assignment under Article XII. The plaintiff answered on January 26th, "that there are quite a number of patents which should have been assigned to your Company. We are getting a complete list and copies of the patents for your full information." Apparently the parties had unsatisfactory negotiations before April 17, for on that day the defendant wrote the plaintiff that its failure to offer the defendant the opportunity to take out various patents was a breach of the contract which should be submitted to arbitration. This letter it followed on April 29th by another in which it said: "Because of your failure to cure the default specified in our letter of January 22, 1944, within thirty days after written notice of such default, we have elected to terminate the license agreement on May 10, 1944." The plaintiff answered both these letters on May second, admitting that it was "certainly at fault in not submitting the inventions to you"; that it had "no excuses about this and can only apologize for the breach in not submitting these matters to you"; and that "nothing has happened which in any way affects the prosecution of the business, and there is nothing that is irremediable." This letter concluded that: "perhaps the settlement of this point, by making these assignments in recognition of the spirit of our agreement rather than its exact words, will meet the situation."

The plaintiff obviously changed its mind shortly thereafter, because the complaint at bar was filed on the 19th of May, 1944, and the summons was served on the 23rd. The defendant filed a counterclaim on June 15th, demanding an assignment of fourteen patents which it asserted to be within the contract, but three of which it withdrew upon the trial. The judge found that the contract was lawful throughout, not being within the doctrine of such decisions as Ethyl Gasoline Corporation v. United States, 309 U.S. 436, 60 S.Ct. 618, 84 L.Ed. 852; Morton Salt Company v. G. S. Suppiger Co., 314 U.S. 488, 788, 62 S.Ct. 402, 86 L.Ed. 363; and Mercoid Corporation v. Mid-Continent Investment Co., 320 U.S. 661, 64 S.Ct. 268, 88 L.Ed. 376. He dismissed the complaint, held that the plaintiff had broken the contract without excuse, that the defendant had rightfully terminated it on May 10, 1944, and he directed the plaintiff to assign to the defendant the eleven patents in question, and to disclose to the defendant all improvements upon the "Transwrap Packing Machine," in which it had any interest.

The power of a patentee to make a license conditional upon the licensee's buying other goods only of him, first came up, so far as we can find, in Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., 6 Cir., 1896, 77 F. 288, 35 L.R.A. 728, where the court decided that, since the patentee had power unconditionally to forbid infringement, he might attach such conditions as he chose to a license. In 1902 the Supreme Court in Bement & Sons v. National Harrow Co., 186 U.S. 70, 22 S.Ct. 747, 46 L.Ed. 1058, carried this so far as to except from the Sherman Act, 15 U. S.C.A. §§ 1-7, 15 note, patent licenses which fixed prices; and in Henry v. A. B. Dick Co., 1912, 224 U.S. 1, 32 S.Ct. 364, 56 L.Ed. 645, Ann.Cas.1913D, 880, it adopted the doctrine of Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., supra, 6 Cir., 77 F.Rep. 288, 35 L.R.A. 728, in full. There was a strong dissent in that case, and the dissenters had their way the next year in Bauer & Cie v. O'Donnell, 229 U.S. 1, 33 S.Ct. 616, 57 L.Ed. 1041, 50 L.R.A.,N.S., 1185, Ann.Cas.1915A, 150. The attempt which they then made to distinguish Henry v. A. B. Dick Co, supra, 224 U.S. 1, 32 S.Ct. 364, 56 L.Ed. 645, Ann. Cas.1913D, 880, was acknowledged to be futile in Motion Picture Patents Co. v. Universal Film Co., 243 U.S. 502, 518, 37 S.Ct. 416, 61 L.Ed. 871, L.R.A.1917E, 1187, Ann.Cas.1918A, 959, and the earlier decision was expressly overruled. Since then numerous decisions have held unlawful similar conditions upon a license; and in Mercoid Corporation v. Mid-Continent Co., 320 U.S. 661, 64 S.Ct. 268, 88 L.Ed. 376, and Mercoid Corporation v. Minneapolis-Honeywell Co.,...