Ortman v. Stanray Corporation

• Decision Date: 08 February 1971
• Docket Number: No. 18379.,18379.
• Citation: 437 F.2d 231
• Parties: Charles E. ORTMAN, Jr., Plaintiff-Appellant, v. STANRAY CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

437 F.2d 231 (1971)

Charles E. ORTMAN, Jr., Plaintiff-Appellant, v. STANRAY CORPORATION, Defendant-Appellee.

No. 18379.

United States Court of Appeals, Seventh Circuit.

January 14, 1971.

Rehearing Denied February 8, 1971.

Martin Faier, Chicago, Ill., for plaintiff-appellant; John A. Wright, Chicago, Ill., of counsel.

Patrick H. Hume, Richard G. Lione, Sabin C. Bronson, Chicago, Ill., for defendant-appellee; Hume, Clement, Hume & Lee, Ltd., Chicago, Ill., of counsel.

Before SWYGERT, Chief Judge, HASTINGS, Senior Circuit Judge, and FAIRCHILD, Circuit Judge.

SWYGERT, Chief Judge.

This appeal raises questions concerning the interpretation of a contract for the assignment of a patent and the application of the parol evidence rule.

The plaintiff, Charles E. Ortman, Jr., is the inventor of a device for truing metal wheels of the type used on railroad cars. On May 11, 1959 plaintiff filed an application entitled, "Cutting Tool and Milling Head Insert Therefor," for a United States patent on this device. On September 17, 1963 this application matured into United States patent No. 3,102,736. On the same day as the filing of the patent application, plaintiff entered into an assignment contract with Standard Railway Equipment Manufacturing Company, a division of the Stanray Corporation. This contract, portions of which are set out in the margin,¹ provided that plaintiff would assign all his patent rights in his invention to defendant in return for quarterly installment payments based on the defendant's use of the device. The payments were to continue for ten years or for the life of any patent issued on the application. Paragraph four, however, stated that the patent rights would be revested in plaintiff on thirty days notice to or from defendant and the occurrence of certain stated conditions.

The defendant faithfully performed its contract obligations until July 5, 1964. On June 5, 1964, apparently on the advice of counsel that its use of the cutting device was not covered by the patent's claim, defendant mailed a notice stating its intention to terminate the agreement pursuant to paragraph four of the contract. Defendant made no further payments under the contract after July 5, 1964, though it continued to use the device.

On August 25, 1965 plaintiff filed a complaint in the district court alleging four causes of action for infringement of the United States patent and of various foreign patents which had been obtained on the invention and one cause of action for breach of the assignment contract.² Defendant's motion for summary judgment was denied by the trial court; and, on the defendant's interlocutory appeal, the denial was affirmed by this court.³

After the remand, defendant's motion to separate the contract issues for purposes of trial was granted, and the parties agreed that there were two issues for determination: whether the contract had been terminated and, if so, whether it was lawfully terminated. At trial, defendant contended that the parol evidence rule would render inadmissible all evidence other than the contract itself and objected to the plaintiff's offering any testimony. After opening statements, while plaintiff's first witness was on the stand, the trial judge interrupted the trial to refresh his recollection of the parol evidence rule. Briefs on the applicability of the rule were submitted and on March 10, 1969, the judge entered a memorandum holding that the assignment agreement was unambiguous and susceptible of a clear and reasonable interpretation on its face. Consequently, the court refused to "attempt to go behind it" and refused to consider plaintiff's offered evidence concerning the circumstances existing when the contract was signed. The court ruled that the fourth paragraph of the agreement gave defendant the option of terminating its payment obligation simply by giving notice and refusing thereafter to make the prescribed installment payments.

Subsequently another district judge, to whom the case had been transferred, filed a memorandum holding that the contract had been properly terminated on July 5, 1964, and that defendant's payment obligations ceased on that date. Judgment was entered to that effect, and plaintiff appeals.

In entering judgment for defendant on the contract cause of action, the trial court accepted the defendant's argument that a condition precedent to the admission of any evidence relating to the meaning of the contract was an initial determination by the court that the contract was ambiguous. Though language in some of the Illinois cases supports this view, we believe that it is incorrect as a general statement of the parol evidence rule. If relevant testimony concerning the circumstances surrounding the signing of a contract is offered, it should generally be heard. The meaning of words cannot be ascertained in a vacuum.⁴ The function of interpretation of a contract is to ascertain the intention of the parties as manifested by the words they used to evidence their agreement. This cannot normally be done by an isolated inquiry limited to the four corners of a document; it requires that a court attempt to place itself in the same situation as that of the parties at the time of the execution of the contract.

The standard to be used in interpreting an integrated contract is:

The meaning that would be attached to the integration by a reasonably intelligent person acquainted with all operative usages and knowing all the circumstances prior to and contemporaneous with the making of the integration. * * * Restatement of Contracts § 230 (1932).

Thus, relevant parol evidence is always admissible to assist in the determination of what the words used in an integrated writing mean;⁵ and the parol evidence rule is placed in its proper role of focusing interpretation on the meaning of the terms embodied in the writing and of rendering all evidence inoperative to vary those terms once their meaning has been discovered.⁶ Admitting evidence of prior negotiations and agreements for the purpose of discovering the meaning of the terms used in the integration does not violate the parol evidence rule. "Such testimony does not vary or contradict the written words; it determines that which cannot be varied or contradicted."⁷

Though the language and holdings of the various Illinois cases involving the parol evidence rule cannot be harmonized, we believe that our interpretation of the rule is generally consistent with the decisional law of Illinois. The most instructive Illinois case is Martindell v. Lake Shore National Bank, 15 Ill.2d 272, 283, 154 N.E.2d 683, 689 (1958), where the supreme court held:

The primary object of the construction of a contract is to give effect to the intention of the parties, greater regard being given to such intent, when clearly revealed, than to any particular words used in expression thereof. * * * In general, the intention of the parties is to be determined from the final agreement executed by them, rather than from preliminary negotiations and agreements * * * but previous agreements, negotiations and circumstances may be considered in determining the meaning of specific words and clauses. * * * Similarly, under well recognized exceptions to the parol evidence rule, extrinsic evidence is admissible to show the meaning of words used in a contract where there is an ambiguity, or when the language is susceptible of more than one meaning.

Since the court found that "the agreement is not without ambiguity and inconsistency," 15 Ill.2d at 280, 154 N.E.2d at 688, it had no occasion to hold whether the presence of "ambiguity" is a necessary prerequisite to the admission of extrinsic evidence. The whole thrust of the quoted language from the court's opinion, however, is toward the admission of evidence in aid of interpretation and a finding of ambiguity is not stated to be necessary before "previous agreements, negotiations and circumstances may be considered in determining the meaning of specific words and clauses."

Another recent Illinois case which recognizes the necessity of admitting extrinsic evidence in aid of interpretation of seemingly clear contract language is Michigan Mutual Liability Co. v. Hoover Bros., Inc., 96 Ill.App.2d 238, 237 N.E.2d 754, 756 (1968). There, an insurance policy excluded "carrying property for a charge" from its coverage. The insured contended that injuries caused by one of its trucks while engaged in a cartage operation were within the provision covering "incidental operations." In spite of the apparently clear exclusion, the court allowed proof of a letter from the insurance company which stated that such cartage operations were within the "incidental operations" clause. The court said:

Notwithstanding the contention that the exclusion is clear and requires no interpretation, it appears to us that we must consider other portions of the policy and the prior negotiations between the parties in order to determine the limits of the coverage.

* * * * * *

While an insurance policy may not be amended by parol evidence, prior negotiations may be admitted when interpretation is involved.⁸

We think that an application to the contract between Ortman and Stanray of the principles set out above shows that the trial court erred in determining that it could discover the intention and meaning of the document solely within its four corners. The terms of this contract are not so plain and clear that there can be no question as to their meaning. Plaintiff suggests that the termination provisions of paragraph four of the contract were primarily a security device for plaintiff's benefit. The language is susceptible of this interpretation. As plaintiff correctly points out, paragraph four provides only for "revestment" and does not specify whether the obligation to pay royalties is to continue after revestment. The intended effect and meaning of "revestment" can only be discovered through the process of interpretation, and...