Contour Chair Lounge Co. v. True-Fit Chair, Inc.
| Decision Date | 14 October 1986 |
| Docket Number | No. 85-145C(6).,85-145C(6). |
| Citation | 648 F. Supp. 704 |
| Parties | CONTOUR CHAIR LOUNGE CO., INC., Plaintiff, v. TRUE-FIT CHAIR, INC. and Arthur C. Ferro, Defendants. |
| Court | U.S. District Court — Eastern District of Missouri |
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Joel S. Goldhammer, Philadelphia, Pa., Stuart N. Senniger/Michael E. Godar, St. Louis, Mo., for plaintiff.
Daniel K. Barklage, St. Charles, Mo., F. Douglas O'Leary, St. Louis, Mo., for defendants.
This matter is before the Court for a decision on the merits. Plaintiff brought this action under the Patent Act, 35 U.S.C. § 281, alleging patent infringement; under the Lanham Trade-Mark Act, 15 U.S.C. §§ 1114 and 1125(a), alleging trademark infringement and unfair competition, including trade dress infringement and passing off; and under state common law for unfair competition, breach of a covenant not to compete, and misappropriation of trade secrets. Defendants by counterclaim allege unfair competition and violations of federal and state antitrust laws.
Jurisdiction of this Court is predicated on 28 U.S.C. § 1338(a) and principles of pendent jurisdiction.
The case was tried before the Court sitting without a jury. After consideration of the pleadings, the testimony and exhibits produced at trial, the stipulations of the parties, and the parties' briefs and post-trial material, the Court makes the following findings of fact and conclusions of law in accordance with Rule 52, Fed.R.Civ.P.
Plaintiff Contour Chair Lounge Co., Inc. (Contour) is a corporation organized and existing under the laws of the State of Missouri, having a principal place of business in that state.
Defendant True-Fit Chair, Inc. (True-Fit) is a corporation organized and existing under the laws of the State of Missouri, having a principal place of business in that state. Defendant Arthur C. Ferro (Ferro) is an individual residing in St. Louis, Missouri. Ferro owns approximately ninety percent of True-Fit's stock.
Counterclaim defendant Craftmatic/Contour Organization, Inc. (Craftmatic) is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, having a principal place of business in that state. Contour is a wholly owned subsidiary of Craftmatic.
Contour was incorporated in 1947 by Joseph F. Laskowitz, who with Joseph Hoskiss created the first Contour Lounge Chair about that time. Ferro, an upholsterer and furniture designer and manufacturer, joined Contour in 1961 as factory manager. Contour's principal product at the time became the Contour Lounge Chair after other lines were discontinued. In 1962 Ferro became the general manager of Contour in charge of sales and manufacturing, and in 1963 he became executive vice president.
By written agreement effective April 1, 1965, Ferro and Contour entered into an employment contract. Paragraph One provided that Ferro was to be employed by Contour as its Executive Vice President and General Manager for a period of five years. Renewal was automatic on an annual basis thereafter, unless written notice was given within ninety days of the termination date.
Paragraph Two defined Ferro's job duties which included, but were not limited to, the general operation and management of the production of Contour products, and developing, improving, and creating new features of the Contour Lounge Chair.
In Paragraph Five Ferro assigned to Contour all design and utility patents which issued to Ferro while employed with Contour. Ferro was to be paid a royalty of one dollar ($1.00) per unit for the use of all patents used by Contour, with a maximum of $5,000 per year or the aggregate of $50,000. The royalty was payable in the event Contour discharged Ferro.
Paragraph Seven contained a covenant not to compete. Ferro agreed that in the event of the termination of his relationship with Contour, he would not participate in any business involving the sale or manufacture of any product similar to or competitive with Contour's products. Certain enumerated furniture products were excepted: conventional living room furniture; chairs convertible from a sitting to a reclining position; bedroom suites; and kitchen, dinette or dining room furniture. The covenant not to compete extended to the continental United States and was effective for five years from the date of Ferro's termination.
Ferro manufactured a Contour Lounge Chair in 1963, for which he was awarded U.S. Patent No. 3,232,575 (Ferro-1) on February 1, 1966. In 1976, Ferro manufactured a second Contour Lounge Chair for which the patent-in-suit, U.S. Patent No. 4,101,168 (Ferro-2) issued on July 18, 1978. Both of these utility patents, which will be described in detail below, were assigned to Contour in accordance with the parties' agreement. Additionally, design patents, now expired, issued to Ferro, as well as to other Contour employees, over the years with Contour as the assignee. Some of these designs replicate the chair depicted in figures included in the utility patents' specifications as embodiments of the patented devices. These design patents were issued by the Patent Office both prior to and after the issuance of the Ferro-1 utility patent. Most expired prior to the issuance of the Ferro-2 utility patent.
Ferro became president of Contour in 1967. He then owned approximately 25% of the shares of Contour stock. Prior to and during Ferro's presidency of Contour, the Contour Lounge Chair was sold through independent dealers and distributors. Stanley Kraftsow, now president of Craftmatic/Contour, became related with Contour in the 1960s. Kraftsow ran a retail store in Philadelphia, Pennsylvania, starting around 1966. With the knowledge of direct sales methods he had acquired from Contour's California dealers, Kraftsow expanded his territory.
Kraftsow accomplished this increase in his business by using advertising inserts in newspapers which included a business reply card. A customer would fill in and return the card to the dealer who would send more literature to the prospective customer and follow up with a telephone call to secure an appointment. A salesman would then meet the prospective client at the prospect's home. An in-home demonstration followed, using a pitch book, swatch book, brochure, audio-visual or perhaps a demonstrator model of a Contour Lounge Chair. Through this method, Kraftsow's business expanded to neighboring states. By 1974, Kraftsow's sales had increased 300% from 1971 sales.
Upon making a sale, an independent dealer, like Kraftsow, placed his order with the Contour factory and included a down payment. Contour would then manufacture a custom-fitted chair whose seating section conformed to the customer's body measurements and would ship the product to the customer. The customer paid the dealer for the chair; the dealer retained his share and remitted the remainder of the wholesale price to Contour.
As his business grew, Kraftsow began to have trouble obtaining timely deliveries from the factory. His telephone calls to Ferro went unanswered. Starting in 1972, Kraftsow began to express an interest in purchasing a part of Contour. Follow-up purchase negotiations occurred in 1975 and 1976. Kraftsow wanted any type of arrangement with Contour as he bore the brunt of Contour's advertising expenses. Moreover, he desired to secure timely deliveries.
In 1976 Contour cancelled Kraftsow as a dealer in all territories except Philadelphia, and in 1977 Kraftsow quit Contour as a dealer. Sales of the Contour Lounge Chair fell drastically with Kraftsow's departure.
In August 1978 Contour was purchased by another corporation, SBI, Inc. (SBI), through a stock acquisition. At the time of the purchase, John Wilmsen, the president of SBI, considered that Contour was not a going concern. During purchase negotiations between Contour shareholders and SBI in 1977 to 1978, Ferro signed a statement that he owed Contour $18,457.06 for salary advances. This amount appeared as an asset on Contour's books.
Prior to the purchase of Contour, Wilmsen read Contour's financial statements. Besides the asset of $18,457.06, a footnote to the statements listed a contingent liability of royalty payments. Thus, Wilmsen knew about this contingent liability, but he was not aware of Ferro's 1965 employment contract which was the source of the liability. The employment contract was never mentioned by Wilmsen or Ferro. After the acquisition of Contour, Wilmsen and Ferro often spoke about the need for an employment contract. Wilmsen told Ferro it was not his policy to have employment contracts with his employees, and an employment contract was never entered into between Ferro and SBI. Ferro testified that he believed his 1965 employment contract was abandoned by Wilmsen.
Under SBI, Ferro answered to Wilmsen. Although Ferro may have continued to carry the title of president of Contour, his duties were restricted to running the factory. He was not permitted to make any expenditures over the amount of $5,000 without first consulting SBI's controller or executive committee. Ferro's shares of Contour stock were converted to SBI shares.
Contour's financial condition went from bad to worse as sales continued to decline. On January 6, 1982, Wilmsen fired Ferro. From that date until June 1983 no royalties were paid to Ferro, nor did SBI or Wilmsen request that Ferro pay SBI the $18,457.06.
In May 1983 Ferro, interested in selling his shares of SBI back to Wilmsen or SBI, asked to meet to negotiate a sale. Wilmsen mailed Ferro a letter offering $29,547.87 for his 481 shares of stock. Included with the letter was a receipt and a release which made reference to patents and royalties. Puzzled over what the release referred to, Ferro consulted his attorney. The attorney wrote an exception to the release which stated: "Except amount due to undersigned for royalties due under employment contract with Contour Chair Lounge Company."
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