American Locomotive Co. v. Chemical Research Corp.

• Decision Date: 07 February 1949
• Docket Number: 10717.,No. 10716,10716
• Citation: 171 F.2d 115
• Parties: AMERICAN LOCOMOTIVE CO. v. CHEMICAL RESEARCH CORPORATION. AMERICAN LOCOMOTIVE CO. et al. v. GYRO PROCESS CO.
• Court: U.S. Court of Appeals — Sixth Circuit

171 F.2d 115 (1948)

AMERICAN LOCOMOTIVE CO. v. CHEMICAL RESEARCH CORPORATION.

AMERICAN LOCOMOTIVE CO. et al. v. GYRO PROCESS CO.

Nos. 10716, 10717.

United States Court of Appeals Sixth Circuit.

December 8, 1948.

Writ of Certiorari Denied February 7, 1949.

COPYRIGHT MATERIAL OMITTED

Charles H. Tuttle, of New York City (Angell, Turner, Dyer & Meek, of Detroit, Mich., Charles H. Tuttle, C. Dickerman Williams and Tyler M. Bartow, all of New York City, on the brief), for appellants.

Howell Van Auken, of Detroit, Mich. (Howell Van Auken and Lawrence Rothenberg, both of Detroit, Mich., on the brief), for appellees.

Before MARTIN, McALLISTER and MILLER, Circuit Judges.

Writ of Certiorari Denied February 7, 1949. See 69 S.Ct. 515.

MILLER, Circuit Judge.

These are appeals from orders of the District Court denying petitions of the defendant-appellant, American Locomotive Company, for a stay of proceedings pending arbitration under the United States Arbitration Act, 9 U.S.C.A. § 3. The cases were consolidated for hearing by the District Court. There has been no trial on the merits.

Gyro Process Company (hereinafter called Gyro), the plaintiff-appellee in one of the cases, was the owner of a method for converting crude oil and other petroleum substances into motor fuel, chemicals and other products, involving patents, technical data and specialized knowledge. Chemical Research Corporation, plaintiff and appellee in the other action, is the majority stockholder in Gyro. Alco Products, Inc., (hereinafter called Alco), was a subsidiary of the defendant-appellant, American Locomotive Company. On June 16, 1932, Gyro and Alco entered into five contracts, the principal one of which constituted Alco exclusive agent for sale of licenses for use of the Gyro process, and also constituted Alco the exclusive engineering organization for the future development of the process for the purpose of keeping it abreast of the times. Subsequently Alco was dissolved and American Locomotive Company (hereinafter called Locomotive), assumed its obligations under the contract. The two suits involve the same question. As most of the proceedings took place in the Gyro suit, we will discuss that case in disposing of these appeals.

Disagreement between the contracting parties came to a head in 1938. On September 27, 1938, Locomotive wrote Gyro that on account of the repeated breaches by Gyro of the contract — "We take the position that the provisions of said contract are no longer binding upon this company and all obligations of this company thereunder are at an end," and that Locomotive proposed to hold Gyro responsible for all damages sustained by reason of the breach.

On August 30, 1940, Gyro commenced its present action in the Michigan State Court against Locomotive and several of its officers and representatives in which it sought damages in the amount of $5,250,000 for breach of the principal contract and its fiduciary obligations thereunder. On October 11, 1940, the defendants removed the case to the U. S. District Court on the ground of diversity of citizenship. On October 16, 1940, the defendants moved for a bill of particulars which was granted on December 2, 1940. Gyro then filed a motion for discovery to secure information needed to prepare for trial and to enable it to furnish a more definite statement to the defendants. This motion was granted on January 22, 1941 with proceedings to begin on January 28, 1941. This date was later extended. On February 8, 1941, the defendants filed an answer and counterclaim which denied the material allegations of the complaint and set up six special defenses. The fourth of these special defenses stated that the contract of June 16, 1932 provided that if dissatisfaction should be expressed by Gyro with performance by Alco "the question as to whether the contract had been fairly and substantially performed by said Alco Products, Inc., should be heard and determined only by arbitration, as in said contract more specifically set forth; that no such arbitration has been had or demanded by said Gyro Process Company, plaintiff herein, and that plaintiff accordingly is not entitled to bring this action." The defendants did not at that time move for a stay of proceedings pending arbitration.

On February 28, 1941, Gyro filed a petition for stay of proceedings in order to complete its discovery and to enable it to reply to the defendants' answer and counterclaim. On March 17, 1941, the Court entered an order granting the petition of Gyro "for an order staying all proceedings in the above case except the taking of certain depositions and testimony on discovery, * * *" However, the District Judge stated at the time that he was not going to prevent either party from filing any motions or any pleadings that they wanted to file as he did not know what turn the case may take in their minds. On April 28, 1941, an order was entered directing the discovery and deposition to begin on May 6, 1941 in New York City.

Gyro filed an amended declaration on June 15, 1942 to which the defendants filed a motion to dismiss on June 26, 1942. Gyro filed a second amended declaration on September 30, 1943. On October 20, 1943, an order was entered, by stipulation of the parties, extending the time to answer to November 30, 1943. Thereafter 39 additional consent orders were entered extending the time to answer to May 26, 1947.

On February 25, 1946, Gyro moved for an order consolidating the hearings in the two cases. Although Locomotive insisted on separate trials, it did not base an objection on account of its claimed right to arbitrate. On March 1, 1946, the Court ordered the hearings consolidated and set for trial at Fall 1946 term of Court. At that time Locomotive objected to a trial date at the June term, but indicated its readiness to try at the Fall term. Delays in the discovery proceedings prevented a trial at that term.

In the meantime, the discovery proceedings were started in May 1941, but met objections from defendants, which required Court rulings and clarifying orders. They were adjourned after a few days and were not resumed until September 1946. Proceedings were held in September, October and December of 1946 and in March and November of 1947. On December 19, 1947, Gyro filed an amended and supplemental complaint in which it increased its claim for damages to $36,285,000. Defendants were given 60 days within which to file their response to this pleading, which time was later extended first to February 28th and again to March 22, 1948 on successive motions by defendants. On March 22, 1948, the defendant, Locomotive, moved for an order staying further proceedings until the disputes between the plaintiff and the defendants were submitted to arbitration as provided for in the contract and in accordance with the provisions of the United States Arbitration Act. At the same time, the defendants also filed a motion to dismiss the action for failure to state a claim and because of misjoinder of causes and parties, a motion to dismiss the action because the arbitration clauses constituted a bar, a motion to strike certain allegations in the amended and supplemental complaint, and a motion to make more definite certain allegations in the amended and supplemental complaint. On April 22, 1948, the District Judge denied Locomotive's petition for a stay, from which order the present appeal is taken.

In support of its motion for a stay pending arbitration, appellant relies upon Paragraphs 4 and 9 of the contract of June 16, 1932 and § 3 of the United States Arbitration Act, 9 U.S.C.A. § 3.

Paragraph 4 of the contract provides that all inventions constituting improvements or additions to the Gyro Process shall be the property of Gyro, and all patent applications made thereon assigned to Gyro, and — "In case of a dispute between Gyro and Alco as to whether any invention made by Alco or its representatives or employees constitutes such an improvement or addition such dispute shall be settled by a board of arbitration selected as provided in paragraph 9 hereof."

Paragraph 9 of the contract provided as follows: "At any time after the expiration of three years from the date of this contract, if dissatisfaction shall be expressed by Gyro, Chemical Research Corporation, majority stockholder in Gyro, or Pure Oil Company, minority stockholder in Gyro, with the manner in which performance of this contract has been made by Alco, the question as to whether the contract has been fairly and substantially performed by Alco shall be heard and determined only in the following manner: The matter shall be submitted to a board of arbitrators consisting of three (3) members appointed as follows; * * * Said board shall make its report in writing to the parties within thirty (30) days after the conclusions of said hearings. If the arbitrators so appointed and/or a majority of them should determine that grounds for dissatisfaction with Alco exist, said arbitration board shall make a written report containing specific findings of facts upon which such conclusion is based, and containing, further, specific recommendations for the cure and remedying of such difficulties as may have been found to exist, and unless such recommendations are complied with by Alco within ninety (90) days after the report of the arbitration board, Gyro, Chemical Research Corporation, or Pure Oil Company, as the case may be, shall as an exclusive remedy have the right to terminate this agreement upon three (3) months written notice; provided, however, that as to any question as to the ownership of rights or patents or of malicious or wilful misconduct the parties hereto may exercise their usual legal remedies. Any cancellation of this contract against Alco shall not deprive it of the percentage of royalties on all licenses made during the period of this contract."

Section 3 of the Arbitration Act provides as follows: "If any suit or proceeding be brought in any of the...