Unarco Industries, Inc. v. Kelley Company

• Decision Date: 07 September 1972
• Docket Number: No. 71-1522.,71-1522.
• Citation: 465 F.2d 1303
• Parties: UNARCO INDUSTRIES, INC., an Illinois corporation and Overhead Door Corporation, an Indiana corporation, Plaintiffs-Appellees, v. KELLEY COMPANY, Inc., a Wisconsin corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

465 F.2d 1303 (1972)

UNARCO INDUSTRIES, INC., an Illinois corporation and Overhead Door Corporation, an Indiana corporation, Plaintiffs-Appellees, v. KELLEY COMPANY, Inc., a Wisconsin corporation, Defendant-Appellant.

No. 71-1522.

United States Court of Appeals, Seventh Circuit.

Argued June 7, 1972.

Decided September 7, 1972.

Norman C. Skogstad, Grafton, Wis., David L. Petersen, Elwin J. Zarwell, and John S. Sammond, Milwaukee, Wis., for defendant-appellant.

Stanley J. Adelman and Frederic S. Lane, Chicago, Ill., for plaintiffs-appellees.

Before DUFFY, Senior Circuit Judge, DURFEE^*, Senior Associate Judge and ESCHBACH^**, District Judge.

DUFFY, Senior Circuit Judge.

This is a suit for declaratory relief seeking the proper construction of a written agreement. The critical question is whether or not the patent license herein considered was assignable without the consent of the licensor. The District Court held the agreement to be assignable. A motion to restrain production and sale of the patented product pending a decision by the District Court was held in abeyance and finally denied.

The principal product manufactured by Kelley Company, Inc., the defendant herein, is based upon a patent granted to Garrett P. Kelley. The Company produced material-handling equipment known as "dockboard." This product permits the movement of merchandise from the bed of a truck to a loading dock.

In 1964, Kelley became aware that Unarco, a large corporation, was marketing and selling a dockboard which Kelley believed infringed its patented invention.

Kelley Company sued Unarco in the Federal District Court in Tennessee for patent infringement. This litigation became protracted and thus very expensive. Settlement discussions were held, and it became apparent to all that it would be for the best interest of both parties to enter into a nonexclusive license agreement terminating the litigation.¹

It became apparent that Unarco was not a serious competitor in the dockboard industry. Unarco's principal interest was to use dockboard as a selling tool for its principal product which was shelving. The settlement permitted Unarco to manufacture annually a few hundred dockboards without paying a royalty. While operating under this agreement, Unarco never exceeded the minimum number of royalty-free dockboards anticipated by the parties to the agreement.

Thereafter, the President of a Texas conglomerate named Overhead Door attempted to buy or merge with Kelley Company because of its desire to operate in the dockboard field. No agreement was reached.²

Overhead Door then contacted Unarco with respect to the possible purchase of Unarco's dockboard division Sturdibilt. On August 4, 1969, Overhead Door and Unarco entered into a contract whereby Overhead Door agreed to purchase and Unarco agreed to sell Unarco's dockboard business and all the assets used in connection therewith. In this contract, Unarco agreed not to compete for at least five years in the dockboard business with Overhead Door, and furthermore warranted that "Every contract, license agreement or other intangible included among Dock Board Assets is assignable by UNARCO without prior consent of any other person. . . ."

Subsequently, in a letter dated August 13, 1969, the attorney for Kelley was notified by a newspaper article of the contemplated acquisition of the Sturdi-bilt (dockboard) division of Unarco by Overhead Door. Overhead Door was advised by Kelley's attorney that their license agreement for the patents "was and is limited to Unarco."

On October 20, 1969, Unarco and Overhead Door commenced this action in District Court for a declaratory judgment with respect to the assignability of the nonexclusive patent license.³

The District Court held that the compromise agreement was a simple contract to be construed under the common law of the State of Illinois. Further, that as Illinois common law views a liberal construction of the assignability of all contracts, the license of the patent was assignable.

Defendant Kelley points out that the nonexclusive license agreement or contract between Kelley and Unarco was not only the result of a compromise settlement but it was, in fact, a forbearance.

Kelley points out that if the judgment of the District Court is sustained, Kelley's refusal to sell out to Overhead Door will be circumvented, and Overhead Door would, indirectly, obtain Kelley's patent rights which Kelley had consistently refused to sell to Overhead Door.

The threshold question before our Court is whether the law of the State of Illinois, where the contested agreement was consummated, applies, or whether determination of this issue in federal court falls within one of the exceptions to the doctrine of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) requiring the application of federal common law.⁴

The Supreme Court considered this exception to Erie in Sola Electric Co. v. Jefferson Co., 317 U.S. 173, 176, 63 S.Ct. 172, 87 L.Ed. 165 (1942). In that opinion regarding patent license litigation, the Supreme Court also considered the application of estoppel and whether estoppel in litigation concerning patent licenses and the Sherman Act was a state or federal question. The Court held that estoppel as applied was a federal question where, if invoked, it would thwart the purposes of statutes of the United States. The Erie doctrine was circumvented by the Court in Sola Electric Co., supra, by the following passage:

"It is familiar doctrine that the prohibition of a federal statute may not be set at naught, or its benefits denied, by state statutes or state common law rules. In such a case our decision is not controlled by Erie R. Co. v. Tompkins, 304 U.S. 64 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487. There we followed state law because it was the law to be applied in the federal courts. But the doctrine of that case is inapplicable to those areas of judicial decision within which the policy of the law is so dominated by the sweep of federal statutes that legal relations which they affect must be deemed governed by federal law having its source in those statutes, rather than by local law. Royal Indemnity Co. v. United States, 313 U.S. 289, 296 61 S.Ct. 995, 997, 85 L.Ed. 1361; Prudence Realization Corp. v. Geist, 316 U.S. 89, 95 62 S.Ct. 978, 982, 86 L.Ed. 1293; Board of Comm\'rs. of Jackson County v. United States, 308 U.S. 343, 349 350, 60 S.Ct. 285, 287, 288, 84 L.Ed. 313; cf. O\'Brien v. Western Union Telegraph Co. 1 Cir., 113 F.2d 539, 541. * * * To the federal statute and policy, conflicting state law and policy must yield."

Article I, Section 8, Clause 8 of the United States Constitution provides that Congress has been granted the power ". . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." This exclusive and personal concept of patents was considered by Congress upon implementation of the Patent Act of 1952⁵ and other legislation aimed at federal control of patent regulation. When an inventor or person holding patent rights desires to license or relinquish any part of the patent monopoly, such person is utilizing the monopoly of rights intended by the...