Electrical Research Products, Inc. v. The Vitaphone Corp.

• Decision Date: 06 February 1934
• Citation: 171 A. 738,20 Del.Ch. 417
• Court: Court of Chancery of Delaware
• Parties: ELECTRICAL RESEARCH PRODUCTS, INC., Defendant Below, Appellant, v. THE VITAPHONE CORPORATION, Complainant Below, Appellee

171 A. 738

20 Del.Ch. 417

ELECTRICAL RESEARCH PRODUCTS, INC., Defendant Below, Appellant, v. THE VITAPHONE CORPORATION, Complainant Below, Appellee

Court of Chancery of Delaware

February 6, 1934

APPEAL from an order or decree of Pennewill, the then Chief Justice sitting as Chancellor, overruling a plea filed by Electrical Research Products, Inc., the Respondent Below, Appellant, to the bill of complaint filed by The Vitaphone Corporation and directing that an answer be filed to that bill. For report of the case below, see 19 Del.Ch. 247, 166 A. 255, and 19 Del.Ch. 354, 167 A. 845, denying motion for reargument.

The bill, among other things, alleged that The Vitaphone Corporation was a New York corporation and a wholly owned subsidiary of Warner Bros. Pictures, Inc., a Delaware corporation; that Electrical Research Products, Inc., was a Delaware corporation, a wholly owned subsidiary of Western Electric Company, Inc., a New York corporation, and that Western Electric Company was a subsidiary of American Telephone and Telegraph Company, a New York corporation; that Western Electric Company was primarily engaged in the business of manufacturing telephone apparatus for its parent and affiliated companies; that as an incident to this business and prior to May, 1925, it had, however, attempted to develop apparatus for the electrical recording and reproduction of sound either in synchronism with or independent of motion pictures and in connection with these experiments had secured numerous patents and patent rights that these patent rights were subsequently assigned to the respondent; that in and after May, 1925, an attempt was made to exploit commercially the sound apparatus above referred to and to that end certain specified contracts were entered into between the complainant, or its predecessors in interest, and the respondent or its predecessors in interest; that in May of 1927, these agreements were terminated and three separate though related contracts were entered into by the parties hereto, which provided:

1. That the parties to such contract should enter into a new license agreement under which Electrical Research Products, Inc. should grant to The Vitaphone Corporation non-exclusive and non-assignable licenses to use the machinery patented and manufactured by it for the electrical recording of sound both independent of and in connection with synchronized and co-related motion pictures for the United States and its territories.

2. That Electrical Research Products, Inc., also assumed the obligation to negotiate with motion picture producers other than The Vitaphone Corporation for licenses to use such sound recording equipment and agreed to pay to that corporation 37 1/2% of all royalties received by it from such licenses. This provision was subject to the limitation, however, that no amounts should be payable to The Vitaphone Corporation from royalties from a licensee who controlled or was controlled by The Vitaphone Corporation or by an associate of that corporation.

3. Regarding royalties to be imposed by Electrical Research Products, Inc., for licenses to be granted by that corporation to producers other than The Vitaphone Corporation, it was agreed, however, "that without the consent in writing of Vitaphone the rate of royalty shall (should) not be less than eight per cent. (8%) of the gross revenues of such other producers derived from the exercise of such license * * * unless provision is (should be) made whereby Vitaphone shall (should) receive on account of the royalties paid by such other producers the same amount it would receive pursuant to Section 1 of Article 6 of the contract if the rate of royalty were eight per cent (8%)."

That on the same date the new license agreement referred to in that contract was entered into; that it was therein agreed by Electrical Research Products, Inc., that if it should at any time grant licenses to others in the United States similar to those granted to The Vitaphone Corporation "upon lower rates of royalty or at lower minimum royalty" than those specified in the agreement, then the rates of royalties and the minimum of royalties to be paid by The Vitaphone Corporation should conform to such lower rates of royalties and lower minimum of royalties; and that by the so-called contractual letter of the same date Electrical Research Products, Inc., also agreed to diligently exploit the leasing to theatres of reproducing equipment at fair and reasonable charges.

The bill after alleging these and other facts regarding the acts of the complainant in making the commercial use of the respondent's apparatus for the production of sound possible, then in substance alleged that the parties hereto were joint adventurers in originating and developing the art of producing and reproducing talking motion pictures, in introducing motion pictures to the public and making available the apparatus required therefor; that the respondent with complainant's consent was entrusted with the management and control of the joint enterprise and of its assets; that by reason of the fiduciary relationship between them, the respondent was therefore not only bound to exercise the highest degree of good faith in the management of the joint enterprise, but was also bound to refrain from profiting at the expense of the complainant and from doing any acts inconsistent with or detrimental to the interest of the said complainant; that it was the duty of the respondent to account to the complainant for all it might do in pursuance of the fiduciary relationship existing between them and to pay to the complainant all the money to which it might be entitled; that instead of complying with these fiduciary obligations, the respondent had acted in complete disregard thereof and had been guilty of a series of breaches of trust to the great detriment of the complainant; that the contracts of May, 1927, between the parties and upon which the fiduciary relationship between them was based, contained provisions for the settlement by arbitration of disputes between them as to the true intent and meaning of any provisions of any such contracts or of the acts and things to be done by the parties thereunder; that two efforts had been made to settle by arbitration some of the disputes which arose between them; that the first arbitration proceeding became nugatory by reason of the resignation of an arbitrator; that certain controversies between them, some of which had been before the first Board of Arbitrators, were subsequently submitted to a new Board of Arbitrators and that by reason of the continuing breaches of trust on the part of the respondent and of the inability of the complainant to obtain any relief with respect to those matters submitted to the arbitrators, and notwithstanding the continuing great expense incurred by the complainant the second arbitration proceeding had also become nugatory and abortive.

The bill also set out in detail the particular breaches of the contracts in question by the respondent which were relied on by the complainant. It ended with a prayer for an injunction restraining the defendant from committing further breaches of trust; that it disclose the facts connected with its administration of the trust and that it account to the complainant for all moneys to which the complainant might be entitled by reason of the respondent's administration of the joint or common enterprise.

Electrical Research Products, Inc., the respondent below, the appellant filed a plea in bar to the complainant's bill. This plea among other things, in substance, alleged that The Vitaphone Corporation, the complainant below, was a corporation of the State of New York, and that the respondent below was a corporation of this State; that in May, of 1927, the parties to this action entered into three several, though related contracts, in the State of New York, whereby they, among other things, agreed that all disputes that might thereafter arise under those contracts should be settled by arbitration; that such contracts were to be performed in the State of New York, and by the express provisions thereof were to be construed according to the laws of that State; that by an express statutory provision of the State of New York, arbitration contracts were irrevocable and enforceable in that State; that certain disputes, as to the interpretation of such contracts, and, therefore, whether they were being properly performed, arose in and after the month of January, 1928; that on January 30, 1928, March 20, 1928, and July 14, 1928, the complainant notified the respondent of certain alleged defaults by it under the contracts of May, 1927, and of its desire to arbitrate those claims, according to the provisions of those contracts; that on each of those dates, the complainant also notified the respondent that under the contracts of May, 1927, it had exercised its right to select an arbitrator, and had selected Samuel Untermyer, Esquire, an attorney-at-law, of New York City; that shortly after those dates, the respondent wrote to the complainant denying the alleged defaults claimed by it, and, also, notified the complainant that it had exercised its right to select an arbitrator under the contract in question, and had selected the Honorable Nathan S. Miller, of New York City, a former Judge and an Ex-Governor of the State of New York; that, also, pursuant to the terms of the contract of May, 1927, the two arbitrators, so selected by the parties hereto, agreed upon, and selected the Honorable Frank H. Hiscock, a former Chief Justice of the court of last resort of the State of New York, as the third arbitrator, and that all of said arbitrators duly qualified; that on June 26, 1928, a like notice was served by the complainant on the...