Havel v. Kelsey-Hayes Co.

• Decision Date: 11 December 1981
• Docket Number: KELSEY-HAYES
• Parties: , 217 U.S.P.Q. 79 Charles HAVEL, Respondent-Appellant, v.COMPANY, Appellant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 333

445 N.Y.S.2d 333

83 A.D.2d 380, 217 U.S.P.Q. 79

Charles HAVEL, Respondent-Appellant, v. KELSEY-HAYES COMPANY, Appellant-Respondent.

Supreme Court, Appellate Division Fourth Department.

Dec. 11, 1981.

Kernan & Kernan, P. C., Utica, for appellant-respondent; Earle C. Bastow, Utica, of counsel.

Groben, Liddy, Cardamone & Gilroy, Utica, for respondent-appellant; Michael H. Stephens, Utica, of counsel.

Before DILLON, P. J., and CALLAHAN, DOERR, DENMAN and SCHNEPP, JJ.

DILLON, Presiding Justice:

On defendant's appeal, the issue presented is whether a written contract between the parties should be construed to include a promise by defendant to exercise reasonable diligence to exploit plaintiff's patented process. We hold that the contract imposed that burden but because other issues of fact remain, we affirm Special Term's denial of defendant's motion for summary judgment.

In 1967 plaintiff obtained patents on a "hot isostatic pressing" process to be used in the production of turbine discs for jet engines. Defendant is a manufacturer of turbine discs.

By agreement dated January 30, 1973, plaintiff granted to defendant an exclusive license for the use and dissemination of the patented process. Defendant agreed to pay plaintiff a percentage of the cost of super alloy powders used in the process and further agreed that plaintiff would receive 25% of all lump sum payments and 40% of all royalties paid to defendant by sublicensees. The agreement also provided for payment by defendant of minimum royalties of $20,000 per year. The minimum payment was not guaranteed, however, because plaintiff's sole right was to terminate the license on defendant's failure to make up the deficiency if plaintiff's share of the lump sum payments and royalties did not amount to $20,000 in any calendar year.

On November 18, 1974 defendant entered into a written sublicensing agreement with United Aircraft Corporation (United), a manufacturer of jet aircraft engines, under which United agreed to pay $5,300,000 to defendant over an eight-year period. ¹ Through December 1975, United paid defendant the sum of $700,000, 25% of which was paid over to plaintiff, but in June 1977 United exercised its right of termination of the sublicensing agreement.

We are here concerned only with the first cause of action in plaintiff's complaint. ² It alleges that United terminated the sublicense because defendant failed to perform its obligations under the sublicensing agreement, thus breaching its implied promise to plaintiff to use reasonable diligence to exploit the process. Although Special Term properly denied defendant's motion for summary judgment dismissing the first cause of action, it erred in finding that there are issues of fact to be resolved on the question of whether the agreement imposes the obligation to exploit.

Initially, we note our agreement with defendant's argument that there are no inferences to be drawn from extrinsic evidence. Examinations before trial have been completed and it is acknowledged by the parties that pre-writing discussions did not include the specific subject of a promise by defendant to exploit plaintiff's invention (compare Gluck v. Amsterdam Print. & Litho Corp., 77 A.D.2d 722, 430 N.Y.S.2d 423, affd. 53 N.Y.2d 737, 439 N.Y.S.2d 338, 421 N.E.2d 830). If the promise was made, it must be found from the writing. ³

It is a primary rule of contract construction that where the terms of a written agreement are clear and unambiguous, the intent of the parties must be drawn from the contract language (Zion v. Kurtz, 50 N.Y.2d 92, 105, 428 N.Y.S.2d 199, 405 N.E.2d 681; Laba v. Carey, 29 N.Y.2d 302, 308, 327 N.Y.S.2d 613, 277 N.E.2d 641; Benderson Dev. Co. v. Schwab Bros. Trucking, 64 A.D.2d 447, 456, 409 N.Y.S.2d 890). This is so because "it is not the function of the courts to remake the contract agreed to by the parties, but rather to enforce it as it exists" (Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62, 69, 412 N.Y.S.2d 827, 385 N.E.2d 566). In achieving that end, due regard must be given the overriding principle that every contract contains an implied covenant of good faith performance and fair dealing (Van Valkenburgh, Nooger & Neville v. Hayden Pub. Co., 30 N.Y.2d 34, 45, 330 N.Y.S.2d 329, 281 N.E.2d 142; Kirke La Shelle Co. v. Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163). Moreover, that a specific promise has not been expressly stated does not always mean that it was not intended. "undertaking of each promisor in a contract must include any promises which a reasonable person in the position of the promisee would be justified in understanding were included" (11 Williston, Contracts § 1295, p. 37).

The principles thus stated are of particular consequence where the essence of the contract is the grant of a license under which the fate of the subject matter is placed exclusively with the licensee for the purpose of exploitation and profit. Implicit in such an arrangement is the licensee's obligation to exploit the license (Wood v. Duff-Gordon, 222 N.Y. 88, 118 N.E. 214; Wilson v. Mechanical Orguinette Co., 170 N.Y. 542, 63 N.E. 550; Guardino Tank Processing Corp. v. Olsson, 89 N.Y.S.2d 691, Sup.). Significantly, given the policy consideration that the use of patents, not their suppression, serves the public good, the promise will more likely be found where the subject of the exclusive license is patented (see Eastern Elec., Inc. v. Seeburg Corp., 427 F.2d 23, 25, 2nd Cir.; Mechanical Ice Tray Corp. v. General Motors Corp., 144 F.2d 720, 727, 2nd Cir. Comment 49 Mich.L.Rev. 738, 754; cf. Rowe v. Great Atlantic & Pacific Tea Co., supra).

Turning to the comprehensive contract under review, the grant of the exclusive license is made in...