Bergstrom v. Sears, Roebuck and Co.

• Decision Date: 25 February 1982
• Docket Number: Civ. No. 3-75-248.
• Citation: 532 F. Supp. 923
• Parties: Theodore R. BERGSTROM, Plaintiff, v. SEARS, ROEBUCK AND COMPANY and Cardinal American Corporation, Defendants.
• Court: U.S. District Court — District of Minnesota

532 F. Supp. 923

Theodore R. BERGSTROM, Plaintiff, v. SEARS, ROEBUCK AND COMPANY and Cardinal American Corporation, Defendants.

Civ. No. 3-75-248.

United States District Court, D. Minnesota, Third Division.

February 25, 1982.

COPYRIGHT MATERIAL OMITTED

Lawrence C. Brown and Steven C. Schroer, Faegre & Benson and Douglas J. Williams and John D. Gould, Merchant, Gould, Smith, Edell, Welter & Schmidt, P. A., Minneapolis, Minn., for plaintiff.

Thomas V. Koykka, Arter & Hadden, Cleveland, Ohio, and Charles E. Steffey, Schroeder, Siegfried, Ryan, Vidas, Steffey & Arrett, Minneapolis, Minn., for defendant Cardinal American Corp.

MEMORANDUM INCORPORATING FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT

MacLAUGHLIN, District Judge.

This action for patent infringement is before the Court for the third time. The matter first came before the Court for a determination of the issue of whether the patent involved, United States Design Patent No. 228,728, was invalid pursuant to 35 U.S.C. § 102(b). The Court held that the patent was not invalid and dismissed the defendants' counterclaim for declaratory judgment of invalidity. Bergstrom v. Sears, Roebuck & Co., 457 F.Supp. 213 (D.Minn.1978), aff'd, 599 F.2d 62 (8th Cir. 1979). In July, 1980, after a full trial on the merits, the Court held that the plaintiff's patent was valid and infringed by the defendants. The Court granted an injunction and awarded the plaintiff $1,455,194.50 in damages against defendants Sears, Roebuck & Co. and Cardinal American Corp. (Cardinal). Bergstrom v. Sears, Roebuck & Co., 496 F.Supp. 476, 207 U.S.P.Q. 481 (D.Minn.1980).

The defendants initiated an appeal of the latter decision to the United States Court of Appeals for the Eighth Circuit. Sears and Cardinal retained new counsel to conduct the appeal. Cardinal also retained yet another lawyer to conduct negotiations regarding a settlement of the litigation. The plaintiff contends that a settlement was reached and that Cardinal subsequently repudiated the settlement. The plaintiff applied to the Court of Appeals for a stay of the appeal and for a remand to the District Court. The motion was granted by the Court of Appeals on January 14, 1981.

The matter is now before the Court on a limited remand from the Court of Appeals. The Order of Remand directs this Court "to receive additional testimony or other evidence on the issue of whether a settlement was reached and to pass on that issue." In the judgment of the Court there is strong evidence which clearly and convincingly establishes that an agreement of settlement was reached between the parties. The following memorandum constitutes the Court's findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52(a).

I. CHRONOLOGY OF EVENTS

The plaintiff in this case is Theodore Bergstrom. During the trial on the merits and while the appeal was pending, he was represented by John D. Gould and Douglas J. Williams of the Minneapolis law firm of Merchant, Gould, Smith, Edell, Welter & Schmidt.

The defense and appeal of this lawsuit was handled primarily by Cardinal. Cardinal's operations are based in Cleveland, Ohio. S. Darwin Noll is the president, chairman of the board, and owner of approximately 96 percent of the capital stock of Cardinal. The Chicago law firm of Allegretti, Newitt, Witcoff and McAndrews acted as trial counsel for Cardinal. The Allegretti law firm began the work of writing the brief on appeal, but before completion Cardinal decided to change attorneys and retained the Cleveland law firm of Arter & Hadden. Principal responsibility for the appeal was assumed by Thomas Koykka. While the briefs on appeal were being prepared, Cardinal also retained William J. Kraus of the Cleveland law firm of Garofoli, Kraus, Hill, Roth & Bartunek to explore the possibilities of negotiating a settlement of the lawsuit.

Kraus had represented Cardinal in connection with other matters on two occasions prior to becoming involved in this lawsuit. Kraus was first consulted by Noll with regard to a possible settlement of this lawsuit in June, 1979, a year prior to the trial. Kraus met again with Noll after the judgment was entered. In September, 1980, Kraus traveled with Alan D. Gross, Cardinal's corporate counsel, to the Allegretti law firm in Chicago. At this time, the Allegretti firm was writing the brief for the appeal. Dennis Allegretti and Jon O. Nelson of that firm informed Kraus of their opinion that a settlement in the range of $750,000 would be good for Cardinal. In a letter confirming the discussion, Nelson wrote:

Additional factors which may assist in settlement negotiations include the following:

1. Bergstrom desires to transfer title to the patent. If such a transfer is effected, the consideration should be capital gain, a significant tax benefit to Bergstrom.

2. Any consideration for a capital gain transfer could be spread over a number of years, secured perhaps by a note or other collateral. As such, Bergstrom, being a cash basis taxpayer, could spread the tax benefits over a number of years. This would be beneficial to Cardinal's cash flow condition also.

Kraus soon thereafter met again with Darwin Noll and was authorized by Noll to explore the possibilities of settlement with Bergstrom's attorneys.¹ The concept to be explored was a sale of the patent by Bergstrom to Cardinal. It was believed that this would permit Bergstrom to obtain favorable capital gains treatment for tax purposes and thus make it possible for Cardinal to make a much smaller payment than the amount of the judgment while still giving Bergstrom the same net in after tax dollars.

Kraus called John Gould on September 21, 1980, to arrange a meeting in Minneapolis to discuss the possibility of settlement. Since Kraus was previously unknown to Bergstrom and his attorneys, Gould's associate, Douglas Williams, made inquiry of Cardinal about Kraus. Williams called Robert G. Markey, who was a member of Cardinal's board of directors and a partner in Arter & Hadden, which had recently been retained to conduct the appeal. Markey confirmed that Kraus had been retained to explore settlement. Williams also spoke with Thomas Koykka about Kraus' role.

On October 7, 1980, Kraus met with Williams and Gould in Minneapolis. Kraus told Williams and Gould that the meeting was to be exploratory and that he had no authority at that time to settle the case. Kraus broached $500,000 as an amount for the settlement, but no firm understandings were reached. That night Kraus reported to Darwin Noll and Alan Gross the results of the meeting. On October 9, 1980, Kraus had an extended telephone conversation with Gould and Williams. Gould became upset during the call and did not participate in the negotiations after that point. During the conversation, Kraus and Williams reached an agreement on a proposal to recommend to their respective clients. The general terms of the proposal involved a payment of $750,000 by Cardinal to Bergstrom, with $200,000 down and four additional installments of $137,500. In return, Bergstrom would transfer the patent to Cardinal and dismiss the lawsuit. If Bergstrom did not receive favorable capital gains treatment on the transfer, then Cardinal would pay an additional $200,000 at a later date.

Between October 9 and October 20, Kraus held discussions with Noll, Koykka, Markey, and other Cardinal representatives regarding the proposal of settlement. On October 19, 1980, Kraus went to the home of George Grabner, a director of Cardinal, to discuss the proposal. As a result of this meeting, Grabner arranged for Noll and the directors and other advisers of Cardinal to meet the next day, October 20, at the Cleveland Athletic Club to discuss and evaluate the proposal. Present at the meeting were Noll, Grabner, Markey, and Paul A. Miller, four of the five directors of Cardinal. Also present were Kraus, corporate counsel Alan Gross, and William McCoy, a Cleveland patent attorney who had been consulted by Noll in connection with the litigation. Kraus discussed the $750,000 proposal to settle at some length. Some opposition was expressed to the proposed term whereby Cardinal would effectively "guarantee" favorable capital gains treatment for Bergstrom. The meeting ended without approval of the proposal.

After the meeting, Noll, Miller and Grabner, three of the five directors of Cardinal, decided to meet over breakfast the next morning, October 21, to discuss possibilities for settling the case. After this meeting, Noll called Kraus and said that he, Noll, along with Miller and Grabner had decided that a new and different proposal to settle should be given by Kraus to Bergstrom. Noll told Kraus that the offer had approval of the board of directors. The fundamental terms of the offer Noll dictated to Kraus were that Cardinal would make an initial payment of $500,000 to Bergstrom to purchase the patent plus one dollar per unit sold over the life of the patent, in installments, with guaranteed minimum sales of 300,000 units. However, Cardinal would not give any guarantee of favorable tax treatment to Bergstrom.

That afternoon, Kraus called Williams and communicated the terms of the offer as he had been instructed to do. The offer was conditioned on Cardinal being assured of the feasibility of certain technical aspects of the offer by its accounting firm, Arthur Andersen & Co. Between October 21 and 23, 1980, Kraus met with James Thailing of Arthur Andersen and tax attorney Dick Katcher regarding the technical aspects of the offer. Kraus received sufficient assurances from these people to go forward with the deal. Meanwhile, Williams consulted with Bergstrom regarding the offer. Bergstrom indicated that he would accept the offer if the minimum guarantee would be raised from $300,000 to $320,000. This was communicated to Kraus and from Kraus to Noll. Noll approved the increase. On October 23, 1980, before leaving on a trip to the Middle...