North Drive-In Theatre Corp. v. Park-In Theatres, 5507-5514.

• Decision Date: 22 August 1957
• Docket Number: No. 5507-5514.,5507-5514.
• Citation: 248 F.2d 232
• Parties: NORTH DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants. DENVER DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants. SOUTH DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants. WEST DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

248 F.2d 232 (1957)

NORTH DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants.

DENVER DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants.

SOUTH DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants.

WEST DRIVE-IN THEATRE CORPORATION, Appellant and Cross-Appellee, v. PARK-IN THEATRES, Inc.; Park-In Theatres Company; Willis Warren Smith, Vigor Cranston Smith, Richard M. Hollingshead, Jr., Annie C. Boyle, Appellees and Cross-Appellants.

Nos. 5507-5514.

United States Court of Appeals Tenth Circuit.

August 22, 1957.

William E. Doyle, Denver, Colo. (Stinson, Mag, Thomson, McEvers & Fizzell, John M. Phillips, Dick H. Woods, Kansas City, Mo., and H. B. Van Valkenburgh, III, Denver, Colo., appeared with him on the brief) for appellants and cross-appellees.

Leonard L. Kalish, Philadelphia, Pa., (Kenneth W. Robinson and Robert D. Charlton, Denver, Colo., appeared with him on the brief) for appellee and cross-appellant.

Before BRATTON, Chief Judge, and HUXMAN and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

In these consolidated suits to recover royalties on license agreements under a patent for a drive-in theatre, the licensees appealed from judgments for the licensor. Federal jurisdiction is based upon requisite diversity of citizenship and amount in controversy.

As the owner of the Hollingshead Patent for a drive-in theatre, the appellee, Park-In Theatres, Inc., entered into four separate license contracts, effective July 1, 1948, with the respective affiliated corporate appellants. Each of the agreements in identical language granted to each of the appellants a license to construct and operate one patented drive-in theatre within a certain quarter segment of the territory bounded by a circle within a thirty-mile radius, centered in the City of Denver, Colorado. The contracts provided for: (a) a down payment of $1,000.00 upon the execution and delivery of the contract; (b) either 3½ percent of the net box office receipts or a lump sum royalty based on the car capacity of the theatre; and (c) costs and expenses, including counsel fees incurred in the prosecution of suits if the moneys required to be paid by the contracts are recovered by such suit.

Prior to the execution of the contracts in suit, Park-In entered into two license agreements on July 25, 1946, with Leonard J. Albertini and William A. Walthen for the building and operation of two drive-in theatres within the same territory. The rights under these contracts were later assigned to appellant, Denver Drive-In Theatres Corporation, and the "East Drive-In Theatre" was built under one of these agreements, and was operated thereunder until the execution and delivery of the contracts herein sued upon.

While the North Drive-In Theatre was being constructed by Carvue Corporation without a license, Park-In notified Carvue that the construction was an infringement of the Hollingshead Patent. Apparently as a consequence of this notice of infringement, Carvue sold the completed and operating theatre to the appellant, North Drive-In Theatres Corporation, effective September 1, 1948. The South Drive-In and the West Drive-In Theatres were subsequently constructed under the terms of the license agreements and in accordance with the Hollingshead Patent. Each of the four licensees elected to pay 3½ percent of the net box office receipts in lieu of a lump sum royalty. None of the appellants paid the $1,000.00 down payment provided in the agreements, but part payments were made on the "patent royalty" and "license fee royalty" for the 1948 season, and apparently credited to the East Drive-In Theatre operations.

While Park-In was threatening to cancel the licenses for nonpayment of the "back royalties", and on April 8, 1949, the Hollingshead Patent was adjudged invalid for lack of invention by the First Circuit Court of Appeals. Loew's Drive-In Theatres, Inc., v. Park-In Theatres, Inc., 1 Cir., 174 F.2d 547. Soon thereafter, appellees notified appellants of the decision, explaining that a petition for certiorari was being filed with the Supreme Court. Certiorari was denied on October 10, 1949. 338 U.S. 822, 70 S. Ct. 68, 94 L.Ed. 499. Apparently nothing further was said or done by any of the parties concerning the patent or the payment of royalties. Each of the appellants, however, continued to operate its theatre until after May 1950, when the Hollingshead Patent expired and these suits were commenced to recover the unpaid down payments and accrued royalties under the respective license agreements.

The appellants interposed numerous defenses, the first of which was that the adjudication of invalidity in the First Circuit operated to evict the licensees from their exclusive right under the license agreements, with consequent failure of consideration. The trial court held that the agreements granted an exclusive license to construct and use the patented theatre, but that the adjudication of invalidity did not evict the appellants from such right so as to relieve them of their obligations to pay royalties for three reasons: "(a) the geographic area within which the defendants were licensed is not within the First Circuit; (b) the license under the Hollingshead Patent was not the only consideration for the payment of royalty; and (c) the contracts expressly dealt with the rights of the parties in the event of an adjudication of the invalidity of the patent, giving to defendants the option to terminate the agreement upon such eventuality and defendants failed to exercise such right."

On the question of the significance of the geographic area, the trial court apparently had in mind the rule in Triplett v. Lowell, 297 U.S. 638, 56 S.Ct. 645, 80 L.Ed. 949, to the effect that the adjudication of invalidity of a patent in one jurisdiction is no bar to the maintenance of a suit for infringement of the same patent between different parties in another jurisdiction. The rule is but another application of the familiar principle of res judicata. But, without derogating from Triplett, some courts hold that adjudication of invalidity in one jurisdiction works an eviction of an exclusive license in another jurisdiction, with the resultant failure of consideration and unenforceability. The reason for the rule is that while the judgment of invalidity is binding only upon the parties to that suit, the monopoly granted by the license is nevertheless destroyed or impaired by the judgment, and since it is the sole consideration for the payment of the royalties, the consideration fails with the monopoly. The same authority concedes the inapplicability of the rule to a nonexclusive license on the grounds that it grants no monopoly but is merely a covenant not to sue. See Automatic Radio Mfg. Co. v. Hazeltine Research, 1 Cir., 176 F.2d 799; 1 Williston, Rev.Ed., § 137, p. 482. There is respectable authority, however, for saying that an adjudication of invalidity by a court of competent jurisdiction works an eviction, whether exclusive or not. Drackett Chemical Co. v. Chamberlain Co., 6 Cir., 63 F.2d 853; National Foam System v. Urquhart, D.C., 103 F.Supp. 433; Wynne v. Aluminum Awning Products Co., D. C., 148 F.Supp. 212. The question of course is one of local contract law on which the courts are not in complete agreement. See Automatic Radio Mfg. Co. v. Hazeltine Research, supra; Jungerson v. Kaysen, 173 Pa.Super. 114, 95 A.2d 347; Autographic Register Co. v. Philip Hano Co., 1 Cir., 198 F.2d 208; Appleton Toy & Furn. Co. v. Lehman, Co., 7 Cir., 165 F.2d 801.

On the theory that eviction turns on whether the license is exclusive or nonexclusive, the parties lay emphasis on that factual issue. But, in the view we take of the case, we have no occasion to resolve the question of exclusiveness or whether the license agreements can be supported by valid considerations independent of the monopoly under the Hollingshead Patent. For we are convinced that the trial court was clearly right in the conclusion that the parties had anticipated the legal problems arising from an adjudication of invalidity and had contracted with respect to that very eventuality; and that the terms of their contract govern the lawsuit. Evidently anticipating the detrimental effect of an adjudication of invalidity, the parties specifically agreed that in the event the patent was held invalid by a final judgment of any court of competent jurisdiction, which was not further reviewable, the licensees might cancel and terminate the license as of any date upon one month's written notice to licensor.

Upon the finality of the judgment of invalidity in the First Circuit, the licensee undoubtedly had the option to rescind the contract and to take his chances in the field of open competition in the Denver area; or they could choose, as they did, to take advantage of whatever protection the patent afforded in an unlitigated jurisdiction. The appellants were undoubtedly aware that no one except the successful party to the litigation in the First Circuit could practice the patent covered by the license agreements with immunity from the heavy burdens of infringement litigation, the prosecution of which was the sole responsibility of the licensor under the license; and that the continued hazard of unauthorized use in the absence of, or during the pendency of litigation would afford the licensees some measure of beneficial protection under their licenses. Having availed themselves of the benefits of...