Crew v. Flanagan, 36181

• Citation: 242 Minn. 549,65 N.W.2d 878
• Decision Date: 30 July 1954
• Docket Number: No. 36181,36181
• Parties: , 102 U.S.P.Q. 324 CREW et al. v. FLANAGAN et al.
• Court: Minnesota Supreme Court

Page 878

65 N.W.2d 878

242 Minn. 549, 102 U.S.P.Q. 324

CREW et al. v. FLANAGAN et al.

No. 36181.

Supreme Court of Minnesota.

July 30, 1954.

Rehearing Denied Aug. 24, 1954.

Syllabus by the Court.

1. It is no objection to the prosecution of a suit for royalties in a state court that the validity or the construction of the patent may become involved, providing the suit is one in contract and the questions under the patent laws arise collaterally.

2. When the parties conduct an action on the theory that the agreement in question was a license rather than an assignment, they may not shift their position on appeal where this court does not consider the issue to be decisive of the appeal.

3. In the absence of contractual provisions to the contrary, a licensee may raise the defense of invalidity of the patent in an action for royalties accrued after the licensee has, by giving notice thereof, Repudiated the license, even though the patent has not been held invalid in third-party proceedings. Under such circumstances, the doctrine of estoppel does not apply in this state.

4. If the licensee gives the licensor clear and unequivocal notice of his decision to repudiate the license on the ground of invalidity of patent, as well as failure of consideration, then the licensee may avoid payment of royalties from the date of such notice of repudiation, even though the patent has not been judicially held invalid.

5. Where a licensee repudiates a license agreement prior to a court decision of invalidity, royalties are payable to the licensor up to the date such notice of repudiation is given to the licensor by the licensee.

Best, Flanagan, Rogers, Lewis & Simonet, Minneapolis, for appellants.

R. J. Quinlivan, Atwood & Quinlivan, St. Cloud, David W. Louisell, Minneapolis, for respondents.

NELSON, Justice.

Plaintiffs bring this action for an accounting of royalties which they claim are due and owing from defendants, as licensees under a patent license agreement, over a period extending from April 1, 1949, to the time of trial. Defendants counterclaim for all royalties paid by them to the plaintiffs, as licensors, over a period extending from July 1, 1947, to March 31, 1949, in the sum of $5,370.17.

The matter was tried without a jury, and findings were entered denying relief to plaintiffs and granting relief to defendants on their counterclaim in the amount of $5,370.17. Plaintiffs moved in the alternative for amended findings and conclusions of law or for a new trial, which motion was denied, and plaintiffs appeal from the judgment thereafter entered.

The facts of importance here are as follows:

Plaintiffs, residents of Minneapolis, Minnesota, who had always been actively interested in hunting and shooting activities, made application for patent February 24, 1947, on a certain gun case which they had devised and which they then felt served a definite need in its field.

Defendants were manufacturers in St. Cloud, Minnesota, operating as copartners under the firm name of Stearns Manufacturing Company in 1947, later incorporating under the same name and thereafter carrying on their business activities through the corporate organization. Defendants were at the time manufacturing frost shields and were looking for additional articles to manufacture, including sporting goods items.

Plaintiff Charles P. Wilbert and defendant M. H. O'Link were friends of some years' standing, and Wilbert discussed with defendants the possibility of their manufacturing the gun-case device. These discussions led to an agreement in writing entered into between the parties May 31, 1947.

The plaintiffs were identified as licensors and defendants as licensees in this agreement, which recites that licensors are the owners of the entire right, title, and interest to the 'gun case' invention disclosed and claimed in application for U.S. Patent S.N. 731312; that the licensees desire to acquire and licensors desire to grant a license to manufacture, sell, and use the 'gun case' in the United States of America and the Dominion of Canada.

It appears from the evidence that plaintiffs, in their discussions with the defendants that led to the license agreement, represented that they expected to obtain letters patent within a period of 18 months. That this representation was made was denied by the plaintiffs. The trial court found that such statements had been made by the plaintiffs but that they were made innocently and therefore in effect without fraud or deceit.

The license agreement of May 31, 1947, provided for royalties of ten percent on all money received from the manufacture and sale of the gun cases. This agreement was amended November 3, 1947, to provide for royalties of ten percent on the first 2,500 gun cases manufactured and sold and five percent on all gun cases manufactured and sold in excess of 2,500.

The distinctive features of the gun case, as described in the original patent Application, were a complete zipper down one side and over each end, allowing the case to be laid in a 'substantially flat condition' for rolling into a compact roll, plus a flexible lining, a flexible waterproof exterior, and a flap pocket at the small end of one side of the case to receive the small end of the gun barrel.

After the license agreement was executed, plaintiff Crew aided defendants in commencing the manufacture of the case. The characteristics of the case were substantially changed by the time production began. The original plan of having a full-length zipper extending around both ends was abandoned and, although a long zipper was utilized, it extended only to near the end of the case where it was riveted. Plaintiffs' application claim 2 (patent claim 1) provided for a pocket to secure the end of the barrel of the gun, to be constructed of a flap sewed to one of the sides of the case. When the full-length wrap-around zipper was abandoned, however, this pocket became unnecessary since the riveted end provided a natural pocket to receive the barrel end. To conform with this change, application claim 12 (patent claim 2) was amended, After conclusion of the trial below, to describe the pocket as one 'formed at the small end of said case for receiving the end of a gun barrel.'

Plaintiffs' original patent application included nine claims, each of which featured a full-length zipper and each of which was rejected. The claims were subsequently amended and enlarged but again rejected at various times. In his fifth action on the application, the patent examiner only allowed claim 2, which provided for the flap pocket secured to one side of the case sheet at the small end. The board of appeals sustained the finding of the examiner and held the other claims unpatentable for lack of novelty over the prior art. After a request for reconsideration was denied, plaintiffs on April 10, 1951, cancelled all claims except claim 2 for the flap pocket. On April 17, 1951, this claim was allowed by the examiner. Therefore, at the time of trial below, June 14 and 15, 1951, only the one claim had been patented, and this four years after the license agreement between plaintiffs and defendants had been entered into. However, a Canadian patent was issued to the plaintiffs on November 14, 1950.

The Stearns Manufacturing Company in fact commenced the manufacture and sale of the gun cases July 1, 1947. From that time to March 31, 1949, 20,108 full-zippered gun cases were sold for a dollar volume of $95,561.90. There was paid to the plaintiffs, as royalties on this amount of sales, the sum of $5,370.17. The defendants refused to make further royalty payments after March 31, 1949, on the ground that plaintiffs had failed to obtain the patent according to plans and representations; that their claims had been repeatedly rejected by the patent examiner; and that the alleged or claimed invention in fact was not patentable, constituting only a combination through rearrangement of various items made more useful through the skill of the plaintiffs with the prior art before them but not through the use of a patentable invention. The defendants further claimed as grounds for their repudiation of the license agreement that the gun case as devised was thought to be patentable through mutual mistake and that there was a total failure of consideration in that the defendants acquired no exclusive rights such as the license agreement purported to grant to them. No further royalty payments of any kind were thereafter made by defendants.

Although the gun cases apparently proved to be a commercial success, there are strong indications in the record that they have been copied quite generally by other manufacturers.

At the time of trial plaintiffs, claimed that the unpaid royalties under the license agreement amounted to $10,415.14, that amount having accrued during the period from April 1, 1949, to February 28, 1951, upon sales of 58,853 units sold at a dollar volume of $208,302.97.

Plaintiffs claim that, because of their interest in hunting and shooting activities over a period of years, they were familiar with the type of gun cases manufactured prior to their undertaking in the field and that the present case differs from cases previously manufactured and on the market in that it opens up fully so that it can be dried out; it has handles plus a fly to protect the gun from the metal parts of the zipper; it has a repellant cover over the sheepskin lining; and it has a safety feature in that the danger of discharging the gun during withdrawal from the case or while closing the case is avoided because of the full-length zipper.

The defendants denied the right of plaintiffs to recover any of the royalties accrued since April 1, 1949, contending that the gun case devised by plaintiffs was neither a new nor useful idea as such in the manufacture of gun cases and that the United States patent finally issued on November 13, 1951, had no relation to the gun case being manufactured and...