Eastern Electric, Inc. v. SEEBURG CORPORATION, 724

• Decision Date: 02 June 1970
• Docket Number: No. 724,Docket 33958.,724
• Parties: EASTERN ELECTRIC, INC., Plaintiff-Appellant, v. The SEEBURG CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

427 F.2d 23 (1970)

EASTERN ELECTRIC, INC., Plaintiff-Appellant, v. The SEEBURG CORPORATION, Defendant-Appellee.

No. 724, Docket 33958.

United States Court of Appeals, Second Circuit.

Argued April 27, 1970.

Decided June 2, 1970.

William T. Sullivan, Arthur A. March, New York City (Charles Trynin, Willkie, Farr & Gallagher, Sumner S. Kittelle, Charles E. Lewis, New York City, on the brief), for plaintiff-appellant.

William P. Hindman, New York City, Ronald L. Engel, Chicago, Ill. (Townley, Updike, Carter & Rodgers, New York City, Kirkland, Ellis, Hodson, Chaffetz & Masters, Chicago, Ill., on the brief), for defendant-appellee.

Before HAYS, ANDERSON and FEINBERG, Circuit Judges.

FEINBERG, Circuit Judge:

Plaintiff Eastern Electric, Inc. formerly manufactured electrical cigarette vending mchines, holding several patents in the field. By a written Purchase Agreement dated April 8, 1958, Eastern sold its entire cigarette vending machine business, including its patents, to defendant The Seeburg Corporation.¹ Seeburg promised, inter alia, to pay royalties on each electrical cigarette vending machine sold that utilized the Eastern patents, referred to in the agreement as the Vending Machine Patents. After paying royalties of more than $50,000 on almost 8,500 machines which utilized those patents, Seeburg commenced manufacture in 1959 of various other types of electrical cigarette vending machines which allegedly did not employ the Eastern patents. Since that time Seeburg has refused to pay further royalties under the Purchase Agreement.

In 1960, Eastern sued for breach of contract, claiming royalties and damages. The suit was filed in the state courts, from which it was removed to the United States District Court for the Southern District of New York. At trial, Eastern advanced two theories under which Seeburg would be liable: (1) the Seeburg machines utilized the Eastern patents, entitling Eastern to royalties under the Purchase Agreement; and (2) Seeburg's introduction of non-royalty machines breached its implied obligation to exploit Eastern's patents. A five-week non-jury trial was held before John F. X. McGohey, J., who ruled for defendant Seeburg. In a thorough opinion reported at 310 F.Supp. 1126 (S.D.N.Y.1969), the judge held that the Seeburg machines did not employ the Eastern patents and that the express language of the Purchase Agreement negated any implied duty to exploit them. We affirm.

I.

Appellant Eastern's first claim is that it is entitled to royalties under the Purchase Agreement. Eastern initially claimed before the trial court that appellee Seeburg had utilized at least four of the assigned patents in its products without paying royalties thereon. After trial, Eastern limited its claim to two patents, both of which the trial judge found are not embodied in the Seeburg machines. On appeal Eastern has limited its claim further; it now contends only that patent 2,593,102 (the '102 patent) covering the means for simultaneous delivery of cigarettes and matches by use of a common chute, is employed in Seeburg machines which contain match dispensing mechanisms. The trial judge heard extensive evidence concerning this claim, and concluded that appellee did not use patent '102 in the models on which it did not pay royalties. We have examined the record, and find that Judge McGohey's conclusion, far from being clearly erroneous, is amply supported by the evidence.

Eastern makes much of the court's "finding" that claims contained in patent '102 are "somewhat abstract and so it is possible to read them literally on Seeburg's machine." 310 F.Supp. at 1135. Appellant contends that this statement is inconsistent with the court's later finding that Seeburg did not use the essence of the patent. The trial judge found that "'102 pertains to a machine employing a top discharging and forward ejecting cigarette magazine," id. at 1135, and that accordingly "it was essential that the cigarettes pass through an enclosed structure in the space separating the magazines." Id. Appellee's machines, however, are bottom discharging, thus eliminating the need for the type of common chute described by patent '102. The trial judge found that this was an "essential difference" between the two types of machines. Id. Eastern offers a number of reasons why this finding cannot be sustained. We have considered them all and conclude that Judge McGohey's determinations were correct and that appellee Seeburg does not owe Eastern royalties under this patent.

II.

Appellant's second claim presents more difficult questions. Citing such cases as Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917), and Mechanical Ice Tray Corp. v. General Motors Corp., 144 F.2d 720 (2d Cir. 1944), cert. denied, Horton v. General Motors Corp., 324 U.S. 844, 65 S.Ct. 679, 89 L.Ed. 1406 (1945), Eastern contends that Seeburg breached an implied obligation to exploit the assigned patents when it ceased the manufacture of vending machines embodying them and substituted a royalty-free line of its own design. We do not quarrel with the propositions that "We are not to suppose that one party was to be placed at the mercy of the other" and that an agreement can be "instinct with an obligation" not explicitly expressed. Wood v. Lucy, Lady Duff-Gordon, supra, 222 N. Y. at 91, 118 N.E. 214. See Perma Research & Development Co. v. Singer Co., 410 F.2d 572, 574 n. 8 (2d Cir. 1969). It is also true that in Mechanical Ice, we recognized that these principles might impliedly require an exclusive licensee to exploit the patents upon which it pays royalties dependent upon use, although in that case we reversed a judgment for the licensor. Indeed, in the opinion below, Judge McGohey noted that "in interpreting exclusive license agreements or assignments, courts generally have implied an obligation to exploit," 310 F. Supp. at 1150, a statement which, as applied to patents, finds support in authority.² But, as the trial judge also noted, the parties may provide otherwise. Moreover, the basis of the rule for which Eastern contends was explained in the case upon which it relies:

Whatever may be left of the rule of implied covenant of an exclusive licensee to exploit the licensed device in in good faith rests, as the doctrine always has rested, upon the ground that not to hold the licensee to that standard of conduct would be unfair and inequitable as between the parties to the license.

Mechanical Ice Tray Corp. v. General Motors Corp., supra, 144 F.2d at 725. Therefore, in resolving the question whether an obligation to exploit should be implied, the crucial issues are what the agreement provides and where the equities lie.

In the present case, the trial judge properly focused on paragraph 16 of the Purchase Agreement as the key provision. It begins as follows (for Buyer, read Seeburg, and for Seller, Eastern):

Buyer at any time hereafter and without being subject to the restrictions of this Agreement in any respect may acquire, lease, manufacture, deal in, sell or otherwise dispose of cigarette vending machines other than those within the scope of the Vending Machine Patents, and Seller shall not have any right to receive any payment in respect of the sale by Buyer of any cigarette vending machines which are outside the scope of the Vending Machine Patents, nor shall Seller have any other rights in respect thereof under this Agreement, it being expressly agreed that this Agreement applies only to the sale of Vending Machines by Buyer in the manufacture of which one or more of the Vending Machine Patents is utilized. Emphasis added.

On its face, this language provides powerful support for Seeburg's position that it had no obligation to exploit the Vending Machine Patents, since the agreement explicitly recognizes that Seeburg could deal in machines not covered by the Vending Machine Patents and that Eastern would not be paid for such sales. Appellant, however, contends that the provision does not help Seeburg because it did not specifically grant Seeburg the right to invent a machine outside the Eastern patents, which is what Seeburg did. However, reliance on the absence of "invent" in the string of all-inclusive permissions ("acquire, lease,...