McLeod v. Crawford

• Decision Date: 06 March 1964
• Docket Number: No. 35515,35515
• Citation: 126 N.W.2d 663,176 Neb. 513
• Parties: , 141 U.S.P.Q. 45 Richard L. McLEOD and Lottie M. McLeod, Appellees, v. H. R. CRAWFORD and Violet M. Crawford, Appellants.
• Court: Nebraska Supreme Court

Page 663

126 N.W.2d 663

176 Neb. 513, 141 U.S.P.Q. 45

Richard L. McLEOD and Lottie M. McLeod, Appellees, v. H. R. CRAWFORD and Violet M. Crawford, Appellants.

No. 35515.

Supreme Court of Nebraska.

March 6, 1964.

Syllabus by the Court

1. The right to the exclusive use of a trademark or a trade name continues in a trademark owner despite expiration of the patent required to be used in connection with the trademark or trade name.

2. It is assumed that parties to a contract know best what was meant by its terms and that whatever is done by the parties during the period of performance is done as they intended it should be.

3. The interpretation given contracts by the parties themselves, while engaged in their performance of it, is one of the best indications of their true intent and should be given great, if not controlling, influence and the courts ordinarily should enforce such construction.

4. Generally, the assertion of the invalidity of a contract is nullified by the subsequent acceptance of benefits growing out of the contract claimed to have been breached.

5. Generally, parties to a patent licensing agreement may contract for the payment of royalties beyond the expiration of the patent, unless such contract, under the circumstances, constitutes a device to evade the patent laws or a violation of the principle of combinations in restraint of trade.

6. A trademark licensor has not only the right, but the duty to control the circumstances under which the name is used.

7. Preservation of the unique value of a trademark and the retention of the enjoyments of it require a trademark owner to include controls over the nature, quality, type of machines, and the method of production of the finished product associated with the trade name.

8. A provision in a contract giving a party the right to terminate for failure of the other party to make required payments under the contract is not an exclusive remedy.

9. Generally, contract disclosure of a patent expiration date, which is of public record, is not required.

Ray L. Svehla, York, Miles N. Lee, C. L. Robinson, Broken Bow, for appellants.

Robert L. Jeffrey, Richard L. Goos, Lincoln, for appellees.

Heard before WHITE, C. J., and CARTER, MESSMORE, SPENCER, BOSLAUGH, and BROWER, JJ., and LYNCH, District Judge.

WHITE, Chief Justice.

This is an action for breach of contract growing out of three territorial agreements in the State of Nebraska between the plaintiffs, McLeods, and the defendants, Crawfords, as to the use of the 'Dairy Queen' soft ice cream trademark and the soft ice cream machine used in connection therewith, being described herein as Patent No. 2080971. The questions presented in this case arise out of the defendants' claim that the territorial contracts entered into were illegal, being a 'patent misuse' because they were agreements against public policy in extending the patent monopoly beyond the expiration date of the patent. These contracts gave the use of the Nebraska trademark 'Dairy Queen' and the use of the machine to the defendants. The defendants agreed to operate 'Dairy Queen' stores and to make payments to the plaintiffs according to the number of gallons of soft ice cream mix used and sold in the 'Dairy Queen' stores. The amounts actually used were stipulated and agreed to so no question arises in this respect. The district court rejected the defense of illegality, held the contracts enforceable to the extent of the actual use by the defendants of the trademark and the machines in the territories contracted for, and entered judgment for the plaintiffs in the sum of $18,357.30, interest, and costs. Defendants' counterclaim for payments that had been made on the contracts was also dismissed. The defendants appeal.

The material facts as to the issues presented are not essentially in dispute. On June 24, 1950, June 4, 1951, and March 3, 1953, the parties executed agreements covering the respective territories of Harlan and Hamilton, Saline, and York Counties. From these almost identical contracts, we extract the pertinent recitals and provisions with respect to the issues presented. They are:

1. The plaintiffs have purchased from McCulloughs Dairy Queen of Geneseo, Illinois, the right to use the registered Nebraska trademark 'Dairy Queen' and the right to use the freezing and dispensing machine connected therewith, being Patent No. 2080971. The right to the use of the machine was acquired by McCulloughs Dairy Queen from the patent owner, Ar-Tik Systems, Inc., Miami, Florida.

2. For the right to use the trade name 'Dairy Queen' and the dispensing machines, the defendants agree to pay a cash sum (about which there is no controversy), and 'the sum of sixteen (16cents) cents a gallon on each and every gallon of mix used, or sold within said territory, hereinafter.' (Emphasis supplied.) The second and third contracts for Saline and York Counties provided for 26cents and 23cents per gallon of mix, respectively.

3. The defendants, Crawfords, agree to keep records of the amount of mix used, and the Crawfords have the right to subcontract their rights, which they did, with the consent of the plaintiffs, McLeods.

4. The defendants, Crawfords, agree not to sell any other frozen or semifrozen dairy product, nor to use any other type of dispensing machine without obtaining the consent of the McLeods.

5. The Crawfords agree to maintain standards as to quality of mix, dress, and uniform by the 'Dairy Queen' store operators, and agree as to when the first store will be in operation and when the first freezer will be purchased.

6. On failure to make the required payments for mix used, plaintiffs may terminate the contract 30 days' notice.

7. The plaintiffs, McLeods, agree to pay the patent owner, Ar-Tik Systems, Inc., 4cents per gallon of mix used. The defendants assume no obligation in this respect.

The record reveals the following facts as to the contracts and their performance:

1. Patent No. 2080971 (the dispensing machine), in full force and effect at the time of the execution of the contracts, expired May 18, 1954.

2. The defendants, Crawfords, opened 'Dairy Queen' stores, bought and used the dispensing machines, and operated 'Dairy Queen' stores in the territories contracted for through the year 1961. The petition in this case was filed January 2, 1959.

3. Crawfords paid the mix 'royalty' or gallonage fee until about November 1957, and have not paid since, although operating 'Dairy Queen' stores using the trademark and the dispensing machine in connection therewith through the year 1961.

4. No fixed time is specified in the contracts. The obligation of the Crawfords is measured by how long and how much of the mix is used and sold 'hereinafter.' There is no obligation to use in point of time or amount, only to pay on the contingency of voluntary use of the trademark and machine.

5. The plaintiffs, McLeods, neither guarantee the validity of the patent, nor do they have a right to terminate the contract at any time, except for nonpayment of the mix fee on mix actually used.

6. No dispute exists as to how long the stores were operated, the use of the trademark 'Dairy Queen,' the use of the machine, or the amount of mix used. The amounts were stipulated to, showing amounts used under the terms of the contract including and through the year 1961.

As mentioned before, the court found the contracts enforceable, and entered judgment for the mix fee due under their terms in the sum of $18,357.30.

The defendants cite numerous propositions of law and list many assignments of error. They all flow from, or boil down to, one fundamental contention that the contracts were illegal and unenforceable because they licensed or contracted for the use of Patent No. 2080971 beyond the 17-year period of the patent monopoly granted by the United States. The patent expired May 18, 1954, several years after the first contract was executed and a little over a year after the last one of March 3, 1953. They argue that the contracts required payments beyond the patent expiration date and were therefore illegal and against public policy; and then they proceed to consecutively argue failure of substantial performance, their innocence as to the claimed illegality, their right touse the trademark and machines free of the mix charge, and their affirmative right to recover all back payments made under the contract. This contention is based primarily on the doctrine of patent misuse and illegality set out in Ar-Tik Systems, Inc. v. Dairy Queen, Inc. (3 Cir.), 302 F.2d 496, and the cases cited therein supporting it. Scott Paper Co. v. Marcalus Mfg. Co., Inc., 326 U.S. 249, 66 S.Ct. 101, 90 L.Ed. 47; American Securit Co. v. Shatterproof Glass Corp. (3 Cir.), 268 F.2d 769; and on the effect of illegality, United States Gypsum Co. v. National Gypsum Co., 352 U.S. 457, 77 S.Ct. 490, 1 L.Ed.2d 465.

Substantially similar, if not identical, 'Dairy Queen' franchise contracts have been construed as to aspects of these same issues in Ar-Tik Systems, Inc. v. McCullough (D.C.), 133 F.Supp. 807; Medd v. Boyd Wagner, Inc. (D.C.), 132 F.Supp. 399; Temperato v. LaBrot (Mo.App.), 358 S.W.2d 106; Capital Dairy Queen v. McCullough's Dairy Queen, 125 U.S.P.Q. 540, and the federal district court decision in Ar-Tik Systems, Inc. v. Dairy Queen, Inc., supra.

All of the 'Dairy Queen' cases cited above have found it necessary, as we do, to review the history of the development of the 'Dairy Queen' trademark and the tie-in with the use of the soft ice cream machine. A case very aptly reviewing this development and history, and meeting the same issues we have before us here, is Medd v. Boyd Wagner, Inc., supra. There, the McCulloughs had granted franchise rights to the plaintiffs, the same as they had to the plaintiffs here who, in turn, under contracts similar to the ones here, had subcontracted to parties in the same status as the defendants, Crawfords, here who were in turn...