Reynolds Metals Co. v. Skinner

• Decision Date: 12 February 1948
• Docket Number: No. 10475.,10475.
• Parties: REYNOLDS METALS CO. v. SKINNER et al.
• Court: U.S. Court of Appeals — Sixth Circuit

166 F.2d 66 (1948)

REYNOLDS METALS CO. v. SKINNER et al.

No. 10475.

Circuit Court of Appeals, Sixth Circuit.

February 12, 1948.

COPYRIGHT MATERIAL OMITTED

John H. More, of Cincinnati, Ohio, and W. Lee Helms, of New York City (John H. Clippinger and John H. More, both of Cincinnati, Ohio, and W. Lee Helms, of New York City, on the brief; Taft, Stettinius & Hollister, of Cincinnati, Ohio, and Walter L. Rice, of Richmond, Va., of counsel), for appellant.

Leo Wolford, of Louisville, Ky., and Francis R. Harbison, of Pittsburgh, Pa. (Francis R. Harbison, of Pittsburgh, Pa., and Leo T. Wolford, of Louisville, Ky., on the brief; Bullitt & Middleton, of Louisville, Ky., of counsel), for appellees.

Before SIMONS, ALLEN and McALLISTER, Circuit Judges.

ALLEN, Circuit Judge.

This is an action to recover additional royalties on sales of extruded aluminum products claimed to be due under a patent assignment agreement.

Three main issues are presented:

(1) Whether the appellant underpaid royalties commencing in June, 1942.

(2) Whether the appellant improperly excluded from sales on which it paid royalties the sales of certain products manufactured by Extruded Metals, Inc., and certain products manufactured by appellant on a horizontal Loewy press.

(3) Whether appellant is required to continue the payment of royalties on the sale of extruded products after September 23, 1943 because it continued to manufacture under appellees' patents or their mechanical equivalents and to use in such manufacture certain unpatented devices installed by appellees in appellant's plant.

The District Court gave judgment for the appellees on all three issues.

The case arises out of the following facts, which are for the most part not in controversy:

The appellee Skinner was employed from 1912 to 1935 at the Aluminum Company of America (hereinafter called Alcoa), where for a number of years he was general foreman of the extrusion department. Appellee Bradley was also an employee of Alcoa, having been for a number of years a diemaker in the extrusion department. On March 2, 1932, patent 1,847,365 was issued to Skinner on an extrusion die called the port hole die.

On October 22, 1935, Skinner and Bradley started an extrusion business at Springdale, Pennsylvania. In 1936 John A. Robertshaw, president of the Robertshaw Thermostat Company (hereinafter called Robertshaw), a wholly-owned subsidiary of the appellant, negotiated with Skinner and Bradley for purchase of their entire operation and for their employment by his company. At that time neither appellant nor Robertshaw had had experience in extrusion methods. $7,500 was paid for the purchase of the plant, and an employment contract and assignment agreement were executed between the parties. The agreement provided that Skinner and Bradley should be employed by Robertshaw until November 1, 1939, at salaries of $350 per month each, and should perform services primarily in the extrusion of metals: that Skinner should assign Robertshaw his patent 1,847,365, and that Skinner and Bradley should thereafter assign to Robertshaw certain additional inventions for which patent applications were pending or about to be made, including any inventions which they might make during the term of the agreement. Robertshaw agreed to pay royalties on sales for each twelve-month period commencing May 1, 1937, at the rate of one per cent of sales not exceeding $1,000,000, embodying the inventions disclosed and claimed in any patent covered by the agreement, and at reduced percentages on annual sales in excess of $1,000,000. A minimum annual royalty of $5,000 was to be paid. The agreement further provided that Robertshaw could terminate its obligations under the contract by giving thirty days' notice, but that in such case it should discontinue the extrusion of metal under and by means of the "processes, patents and devices" of Skinner and Bradley, and should reassign the patents and patent applications.

In November, 1938, Robertshaw assigned the agreements to the appellant, with the consent of Skinner and Bradley. In October, 1939, the Springdale plant was shut down, Skinner was moved to appellant's plant No. 1 in Louisville, Kentucky, where Bradley had already been working on extrusion products, and in 1940 appellant shifted Skinner and Bradley to a new and larger plant in Louisville, known as plant No. 8, in which they generally supervised the layout of the plant for installation and equipment. This plant was taken over by the Defense Plant Corporation in 1940, and appellant operated the plant as agent for the United States Government.

Disagreements arose between appellant and the appellees. Bradley was discharged in May, 1941, and Skinner resigned in July, 1941. On September 23, 1943 the appellant served written notice on Skinner and Bradley terminating the license agreement, and reassigned to them Skinner's original patent and the additional patents which had been issued to Skinner and Bradley during their employment. At the same time the appellant made certain changes in its equipment for the alleged purpose of discontinuing the use of any claims which had been allowed and granted under the Skinner and Bradley patents and continued to produce extruded products. The appellant also continued to use some of the unpatented devices which had been recommended and installed by Skinner and Bradley during their employment.

The parties have stipulated as to the amount of the sales involved in this dispute up to November 20, 1943, and if appellant is obligated to pay one per cent royalty on sales not exceeding $1,000,000 in each month, the judgment on this point is correct.

The Royalty Contract.

There was delay in starting work at the Springdale plant, and for a considerable period the operations were not financially profitable. As a result, on December 24, 1937, Robertshaw requested that the appellees execute a temporary waiver to May 1, 1939, of the minimum royalties. Skinner and Bradley on the same date wrote a letter to Robertshaw waiving the minimum royalties as requested, stating:

"We further understand that, in accordance with our verbal understanding made with you, in consideration of the waiver of minimum royalties until the date mentioned, we will be paid the actual royalties due under the agreement upon a percentage basis in monthly instalments rather than in annual instalments. We understand that the monthly payments of actual royalties due under the agreement will be, of course, computed on a monthly basis rather than sixty days following the lapse of the annual period, as provided in the agreement.

"Except for the change in modification with regard to the waiver in minimum royalties and the payment of the actual royalties upon a percentage basis in monthly installments, as we have stated herein, our agreement of October 26th, 1936, is not otherwise changed in any respect."

Robertshaw answered:

"We wish to acknowledge receipt of your letter of December 24, 1937.

"The change and modification, as therein set out, is an accurate statement of our verbal understanding with relation to the modification of the agreement of October 26th, 1936, and, in consideration of your waiver until May 1st, 1939 of the payment of minimum royalties as provided in said agreement, we, in turn, agree that the actual royalties, to become due thereunder, shall become due and be computed and paid to you monthly thereafter."

An additional waiver of minimum royalties up to May 1, 1940 was made by Skinner and Bradley at appellant's request in February, 1939, and again the letters exchanged agreed that the royalties should be "computed on a monthly basis."

The original contract provided that the royalties to be paid for each twelve-month period should be one per cent on sales not exceeding $1,000,000; three-fourths of one per cent on sales exceeding $1,000,000 and not exceeding $2,000,000, and one-half of one per cent on sales exceeding $2,000,000. Appellant claims that since the sales in the period in controversy exceeded $1,000,000 in each year the reduced percentage should apply. The District Court gave judgment for $95,000 additional royalties, upon the ground that under the modified contract the one per cent royalty was payable so long as the aggregate sales in any given month did not exceed $1,000,000.

We think the decision of the District Court must be affirmed. Appellant asked for a waiver of the minimum royalties provision of the contract for two full years, thus securing the waiver of an agreement to pay the appellees at least $10,000 royalty during that time. Its request for additional waiver increased the amount relinquished by Skinner and Bradley to $15,000. As a consideration for this waiver appellant agreed that the basis of computation should be changed to a monthly rather than an annual basis. Since the letters expressly provided that the computation should be monthly, the reduced percentage did not become effective unless the sales exceeded $1,000,000 in any given month.

Appellant contends that no change in the percentage rate was contemplated, and that the consideration for the waiver of minimum royalties was merely a change in the time of payment. Appellant's vice-president testified in effect that this was the understanding. But since the appellees were giving up a guaranty of very substantial royalties, it is reasonable to infer, as they contend, that they demanded an actual financial consideration for the waiver, in addition to the shift in the method of payment. Appellant knew nothing about extrusion, and had to begin from the very bottom to develop this business. Skinner and Bradley, with their extensive experience in extrusion and die-making, made it possible for appellant to start operations with second-hand presses which Skinner redesigned and rebuilt at a saving of many thousands of dollars over the cost of new equipment. While appellant attempts to discredit the output of these machines,...