Sterling Drug, Inc. v. City Bank Farmers Trust Co.

• Decision Date: 15 July 1959
• Docket Number: 1959,No. 2,2
• Citation: 154 A.2d 156,38 Del.Ch. 444
• Parties: STERLING DRUG, INC., a corporation of the State of Delaware, and Winthrop Laboratories, Inc., a corporation of the State of Delaware, Defendants-Below, Appellants, v. CITY BANK FARMERS TRUST CO., a New York corporation, Executor of the Estate of B. Thurber Guild, Deceased, Plaintiff-Below, Appellee.
• Court: Supreme Court of Delaware

Page 156

154 A.2d 156

38 Del.Ch. 444

STERLING DRUG, INC., a corporation of the State of Delaware and Winthrop Laboratories, Inc., a corporation of the State of Delaware, Defendants-Below Appellants, v. CITY BANK FARMERS TRUST CO., a New York corporation Executor of the Estate of B. Thurber Guild Deceased, Plaintiff-Below, Appellee.

No. 2, 1959.

Supreme Court of Delaware.

July 15, 1959.

Appeal from the Court of Chancery in and for New Castle county.

Henry M. Canby, of Richards, Layton & Finger, Wilmington, and Mathias F. Correa, of Cahill, Gordon, Reindel & Ohl, New York City, of counsel, for Sterling Drug Inc. and Winthrop Laboratories.

Herbert L. Cobin, Wilmington, and William D. Denson, of Morgan, Finnegan, Durham & Pine, New York City, of counsel, for City Bank Farmers Trust Co.

SOUTHERLAND, C. J., and WOLCOTT and BRAMHALL, JJ., sitting.

WOLCOTT, Justice.

This is an appeal from an order of the Vice-Chancellor denying the defendants' motion for summary judgment.

The action is for an accounting of royalties due the plaintiff. The plaintiff ¹, the owner of a patent for a cleansing substance for sensitive skin, granted the defendants an exclusive license of the patent. The license agreement provided for the payment to the plaintiff annually of 5% of the net receipts of all sales made by defendants of the licensed product, provided, however, that no royalties, with the exception of a minimum annual royalty of $3,000, would be due the plaintiff, unless the defendants had derived a net profit from the sales of the licensed product. The agreement provided that 'net profit' should be determined in accordance with the defendants' usual accounting methods and procedures. In no event was the royalty to exceed one-third of the net profit.

The agreement gave the defendants the right to terminate upon sixty days notice, with the proviso that if at the time of termination the defendants were obligated to third parties with respect to the licensed subject matter, the defendants had the right to retain such rights under the agreement as in their sole judgment were necessary to enable them to fulfill their obligations to such third parties.

The defendants paid royalties to the plaintiff for the years 1950 through 1956. For 1950-51 the $3,000 minimum royalty was paid. In 1952 royalties in the amount of $7,192.83 were paid purportedly as 5% of the net profit of the sale of the licensed product. The royalty amounts thus paid increased annually until in 1956 the sum of $40,370.41 was paid the plaintiff.

In his complaint the plaintiff alleged two causes of action. The first was for an accounting from the defendants of the amounts of royalties due, and for a judgment in the amount found due. The second sought a cancellation of the executory portion of the agreement on the ground of lack of mutuality in the termination provision.

The defendants did not answer the complaint, but upon affidavits filed moved for summary judgment upon the grounds that the plaintiff's claim for royalties was barred by the defenses of accord and satisfaction, account stated, and as to royalties due prior to July 1, 1953, by the statute of limitations and laches.

The defenses raised of accord and satisfaction, and account stated, under the circumstances of this case, are the same and were so treated by the Vice-Chancellor. They are based upon the facts, as shown by defendants' affidavits, that the checks paying each yearly royalty were accompanied by letters of transmittal enclosing a 'royalty statement' which purported to show the royalties due under the license agreement, and by a statement of the defendants' accountants to the effect that the amounts paid 'fairly present the royalties payable.'

Based upon these circumstances, the defendants argue that the acceptance and cashing of the checks by the plaintiff amounted to an accord and satisfaction between the parties of any disputed amount of royalty. The defendants argue that the circumstances under which the checks were transmitted to the plaintiff clearly indicate that the payments were made upon the condition that acceptances of the amounts would be a complete discharge of the defendants from further liability.

The plaintiff filed counter-affidavits asserting that the acceptance of the royalty checks by him did not amount to an accord and satisfaction for the reason that no clear condition was attached to the acceptance of the checks, and that, as a matter of fact, he continuously voiced objection to officials of the defendants as to the amounts of royalty paid him. He also asserted that he had continuously sought access to the defendants' books in order to compute the royalty due, but that defendants had just as continuously refused to permit him to inspect their books.

The plaintiff argues that the defendants' operation--that is, the manufacture and sale of various drugs--was of great complexity and of such nature as to require an accounting between the parties in order to determine the amounts of royalties due. As an example, he points to the fact that the total sales of the defendants were in excess of $200,000,000 of which something in excess of $11,000,000 represented sales of the licensed product, and that the cost of selling of the licensed product necessitates an apportionment of various items of costs between the licensed product and the defendants' total sales. Thus, it is argued, an accounting is required for the license agreement requires the determination of the 'net profit' of the sales of the licensed product as the basis upon which the royalties...