Stentor Electric Mfg. Co. v. Klaxon Co.

• Decision Date: 15 November 1940
• Docket Number: No. 7398.,7398.
• Citation: 115 F.2d 268
• Parties: STENTOR ELECTRIC MFG. CO., Inc., v. KLAXON CO.
• Court: U.S. Court of Appeals — Third Circuit

115 F.2d 268 (1940)

STENTOR ELECTRIC MFG. CO., Inc., v. KLAXON CO.

No. 7398.

Circuit Court of Appeals, Third Circuit.

October 24, 1940.

Rehearing Denied November 15, 1940.

COPYRIGHT MATERIAL OMITTED

James D. Carpenter, of Jersey City, N. J. (Henry M. Hogan and Robert H. Spreen, both of New York City, and Kevin McInerney, of Rochester, N. Y., of counsel), for appellant.

Paul Leahy and Southerland, Berl, Potter & Leahy, all of Wilmington, Del. (Murray C. Bernays and Abraham Friedman, both of New York City, of counsel), for appellee.

Before MARIS, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

This is defendant's appeal from judgment in favor of the plaintiff for $160,821.92, entered in the United States District Court for the District of Delaware. The jury returned a verdict for $100,000 and the trial judge thereafter granted the plaintiff's motion to add interest of $60,821.92 to the judgment. The action was brought for breach of a contract under seal entered into on May 20, 1918 in New York. By the contract the plaintiff (Stentor) transferred to the defendant (Klaxon) all of its assets and its entire business as a going concern. Included in the transfer were certain patents then owned by the plaintiff, questions concerning which are the core of this litigation.

At the outset defendant raises the point that this plaintiff has no capacity to sue. The point was raised below by a plea in abatement to which a demurrer was sustained. Stentor Electric Mfg. Co. v. Klaxon Co., D.C.Del.1938, 23 F.Supp. 351. The defendant's contention arises out of the fact that on May 26, 1919, subsequent to the making of the contract already referred to, the plaintiff, a New York corporation, filed a certificate of voluntary dissolution. The defendant contends that such voluntary dissolution marks the death of the plaintiff as a corporate body, that rigor mortis has long since set in and that there is, therefore, no plaintiff to conduct the action. The New York statute, however, must be examined before this question can be answered. At the time the voluntary petition of dissolution was filed the New York statute provided with respect to such dissolution of a New York corporation, General Corporation Law, Consol. Laws, c. 23, Laws of 1909, Ch. 28, § 221 (3): "Said corporation shall nevertheless continue in existence for the purpose of paying, satisfying and discharging any existing debts or obligations, collecting and distributing its assets and doing all other acts required in order to adjust and wind up its business and affairs, and may sue and be sued for the purpose of enforcing such debts or obligations, until its business and affairs are fully adjusted and wound up."

The defendant contends that this provision limits the right to sue to claims which have ripened into causes of action at the time of the dissolution. None of the New York decisions cited by either side construes the statute on this point and we have been unable to find any. But in the absence of authoritative decisions limiting them, the words of the statute seem clear. Existence is continued for "suing and being sued for the purpose of enforcing such debts or obligations." That an existing contract is an obligation seems too certain a proposition to require extensive argument or marshaling of authorities to prove it. A contract is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes as a duty. Restatement, Contracts § 1. That the defendant, by its contract, came under obligation to the plaintiff is plain. If it did not perform the plaintiff could sue for the breach of the obligation under the clear words of the statute, even though it had voluntarily dissolved. Compare City of Philadelphia v. Lieberman, 3 Cir., 1940, 112 F.2d 424, 428. Under the New York statute the figure of speech analogy is not death of the corporation, but its retirement from active business.

The defendant also says that after the plaintiff corporation was dissolved, there being no plaintiff, there could be no diversity of citizenship. This is the same point as that above stated in a somewhat different way. If the corporation, under the New York law, was sufficiently alive to sue, as we hold it was, the requisite diversity of citizenship existed. The parties were proper and there was a controversy.

We pass, therefore, to the substance of the case. The contract of May 20, 1918, concerns a transfer of the plaintiff's tangible assets and good will and the assignment of existing contracts to the defendant. Included in the transaction were certain patents then owned by the plaintiff. Two of these patents, which had been issued to Jesse L. Spence, vice president of the plaintiff, on September 29, 1914, are the important ones in this controversy. The clause transferring them reads as follows:

"Article Second: The Stentor Company further agrees to grant and hereby does grant, license and transfer to the Klaxon Company for the term of this agreement, but subject to its conditions, the sole and exclusive right to make, have made, use and sell telephone and related apparatus and devices and articles made in accordance with the United States Letters Patent, and applications for patents described on Schedule `A' hereto annexed, or any subsequent improvements thereon which may be made, acquired, owned or controlled by the said Stentor Company upon the inventions or any of them, described in said Letters Patent or applications.

"The Stentor Company further agrees that it will grant a similar license to manufacture the said inventions, improvements and devices under any patent which has been or which may be issued to it by any foreign state or country."

These patents were for a telephone transmitter and receiver.¹ On its part the defendant paid approximately $130,000 to the plaintiff and agreed to pay the plaintiff 50% of the net profits realized from the sale of the articles manufactured and sold under the patents, unless the profits were less than 30% of the cost of manufacture, in which case an alternative division of the profits was to be made. The contract was to run until September 29, 1931, the date of the expiration of the Spence patents.

The defendant makes the argument that the contract was one for royalties based on profits only and that it was not within the contemplation of the parties that damages should be recovered from the defendant for failure to manufacture and sell articles made under the patents. But the express words of the contract do not permit such an interpretation of the bargain between the parties. In Article Thirteenth of the contract the defendant agreed that it "will use its best efforts to further the manufacture and sale of the articles covered by this agreement, and to that end it will maintain an efficient organization for the manufacture and sale of said articles". These are certainly broad words of unequivocal promise and we find nothing in other paragraphs of the agreement to modify them.

The case presents a number of problems in the conflict of laws which will be noted and dealt with at the appropriate places. The first relates to the law governing the obligation of a contract. The agreement was negotiated, executed and delivered by the parties in New York. The contract is, therefore, governed by the law of that State. While the question of the law determining the validity and scope of the obligation of a contract is the subject of considerable confusion in the authorities there is nothing in this case to create difficulty on that point. Reference to the place of contracting is the rule expressed in the Restatement of Conflict of Laws, § 332. This case presents none of the factors which, when present, lead courts to depart from that general rule. There is nothing here to show intention of the parties that any other rule should govern. New York is the place where plaintiff company was located and did its business. New York is the place where the agreement was both negotiated and consummated. New York law governs the obligation of the contract.

This brings us to the consideration of the defendant's next argument. He contends that the articles covered by the patents had no commercial utility, that the District Court erred in holding that the contract was a license rather than an assignment and instructing the jury that the defendant could not question the validity of the patents. These points involve, in our judgment, the same general proposition and will be treated together, for both go to the proposition whether the defendant was in default in failing to use its best efforts in the manufacture and sale of the articles covered by the agreement.

The court below instructed the jury that it was necessary that it should find that the patents possessed commercial value and utility sufficient to justify the manufacture and sale of devices thereunder in order that the plaintiff should recover By its verdict the jury resolved this question in favor of the plaintiff. There was evidence upon which the jury could base that finding. It was not disputed that all the receivers and transmitters sold by the defendant were stamped with the words "patented" and "Stentor" and that the plaintiff paid royalties to the defendant on the sale of these devices. There was introduced in evidence advertising matter distributed by the defendant showing that the articles were manufactured under the Spence patents and that the equipment was of "surpassing merit, combining utility, comfort and safety." There was a letter to Mr. Spence from one of the defendant's officers praising the equipment. There was an exchange of communications between officers of the defendant in which it was suggested that since only a small part of the construction of the devices then being manufactured came under the Spence patents, the possibility of changing the construction to avoid the patents entirely...