Western Union Telegraph Co. v. American Bell Telephone Co.

• Decision Date: 06 October 1903
• Docket Number: 398.
• Citation: 125 F. 342
• Parties: WESTERN UNION TEL. CO. et al. v. AMERICAN BELL TEL. CO.
• Court: U.S. Court of Appeals — First Circuit

125 F. 342

WESTERN UNION TEL. CO. et al. v. AMERICAN BELL TEL. CO.

No. 398.

United States Court of Appeals, First Circuit.

October 6, 1903

Josiah H. Benton, Jr., and Rush Taggart (John F. Dillon, on the brief), for appellants.

John C Gray and Richard Olney (Charles H. Swan, on the brief), for appellee.

Before PUTNAM, Circuit Judge, and ALDRICH and BROWN, District Judges.

PUTNAM Circuit Judge.

There are several parties to the record, and several other parties have been predecessors in title; but, as the sole beneficial issue is now between the Western Union Telegraph Company and the American Bell Telephone Company, we will find it necessary to name only them. The bill was brought for an accounting under a contract dated November 10, 1879, between the Western Union Telegraph Company and corporations in the same interest and the National Bell Telephone Company, the predecessor in interest of the respondent. It was filed on November 16, 1883. Without waiting for a hearing, on May 24 1886, the case was sent to a so-called master under the following agreement:

'It is agreed that the above-named cause may be referred to the Honorable John Lowell, as master, to hear the parties, report the facts, with such part of the testimony as either party shall request, and his rulings on any question of law arising in the case.'

The reference fell within the rule of Kimberly v. Arms, 129 U.S. 512, 524, 9 Sup.Ct. 355, 32 L.Ed. 761, and of subsequent cases of that class. Frequently such references involve troublesome complications through the fact that they necessitate departures, more or less definite, from the ordinary practice. In the present case, however, no difficulty arises. The complainants excepted to the master's report solely as to questions of law. The respondent took no exceptions. We should explain that there are some findings of the master which take the form of findings of fact, but which are really findings of law, as they arose on the face of the various papers in the case. Therefore, we are not embarrassed on account of the agreement for reference by Kimberly v. Arms or by other cases of that class.

The master found for the respondent, and the Circuit Court sustained his findings, and entered a decree dismissing the bill. We think that we should first make clear what the true issue is. The contract obligated the telephone company, among other things, to account to the Western Union for a certain percentage of rentals or royalties for the use of telephones protected by certain letters patent. At the time of the execution of the contract there were three ordinary methods of using telephones: First, on private lines; second, on lines from one part of a building, or premises, to another part thereof, ordinarily known as 'speaking-tube' purposes; and, third, in exchange systems or the like thereof. Then the telephone company not only owned and licensed telephones, but also had certain interests in exchange systems. The master, among other things, reported:

'I am of opinion that by the contract the defendant clearly had the exclusive right to carry on the exchange business, alone or jointly with others, and to receive its profits, paying to the plaintiffs twenty per cent. of the stated rentals.'

It is clear that the Western Union had, under the contract, no interest in the exchange business which the telephone company owned, in whole or in part, or in the profits received therefrom, so far as either can be distinguished from considerations for the mere licensing of telephones, or so far as the advantages which came from them to the telephone company came as the result of a contribution by it aside from that of such mere licensing. It is also clear that when, even after the contract of November 10, 1879, the telephone company had properly acquired any part of an exchange, the complainants had no interest in the subsequent profits which might come therefrom. The position of the complainants before us renders it unnecessary to elaborate these propositions. They put the case on a single issue in the following language, which refers to certain shares of corporate stock which the complainants maintain the telephone company received as part consideration for licenses to rent and use telephones:

'It is in respect to these shares thus received by the Bell solely for exclusive licenses to use telephone instruments under the patents which were by the contract combined in its hands, and by virtue of which contract alone the Bell was able to give such licenses, that this suit seeks an accounting.'

This claim is illustrated by the following finding by the master:

'The shares, of which the plaintiffs require one-fifth to be accounted for, were, in nearly all cases, obtained in the way to be presently mentioned, but reference may be had for their terms to the contracts reported herewith. The defendant issued to a corporation a license to use telephones for five years in an exchange to be established by and at the expense of the licensee in a certain place, paying the usual rentals, and reserved the right to take the plant at actual cost, less depreciation at the end of the term, allowing nothing for franchise or good will. These short-term contracts either expired or were surrendered by the licensees, and thereupon the defendant gave them perpetual exclusive licenses for the agreed locality, and received these shares, usually thirty-five per cent. of the entire capital stock, for which it paid nothing except the exclusive perpetual license.'

This renders immaterial a considerable portion of the master's findings of the proofs in the record and of the propositions urged on us by the respondent. It especially renders it unnecessary that we should consider the proposition urged by the respondent that there is a substantial distinction between a 'rental of telephone instruments' and the 'profits of an exchange business,' or that we should follow out any elaboration of the definitions and expressions in the contract, showing that the word 'telephone' is used therein with the utmost precision. In the same manner, we are relieved from considering the respondent's illustration of its proposition that the contract had no intention that the Western Union 'should share in the whole profits due to the telephonic patents,' if that expression has any peculiar significance, or the further proposition that it was contemplated that some exchanges would make larger charges, and, consequently, have larger profits, than others. It also renders unnecessary any consideration, at least at this stage of the case, of the peculiar relations of the contracting parties to exchanges at the date of the contract or prior thereto. It is plain that the only question before us is whether the Western Union may share in valuable assets received in lump by the telephone company in exchange in the whole or in part for telephone licenses.

The parties have not urged on us any question of jurisdiction in equity, but it naturally arises in connection with that of the substantial merits of the case. The record shows that the accounting, if the complainants are entitled to it, would be so voluminous and complicated that it would be impossible to take it at common law, unless by the technical action of account, if it would lie. That this fact affords sufficient ground for jurisdiction in equity, whether that action would lie or not, is well settled. Some of the authorities bearing thereon are cited and explained in Fenno v. Primrose (C.C.) 116 F. 49. In addition, the nature of the rights vested in the Western Union by the contract in issue here supports this jurisdiction. It will appear that the contracting parties combined substantially all their interests in telephonic patents, to be worked by the telephone company for their joint benefit, certain net results to be shared on an agreed percentage. While this did not create the technical relation of trustee and cestui que trust, it established a quasi trust, such as between copartners, and between the officers of a corporation and the corporation, over which chancery takes jurisdiction.

It is not necessary to set out with great fullness the contract in issue. It has been abstracted in the opinion of the learned judge who heard the case in the Circuit Court, and a general statement of its purview with reference to the topics which bear on the question at bar will be sufficient. The respondent has very well stated its general features in substantially the following language: The Western Union, a well-established corporation with a large capital controlling continental telegraphing, was also, previous to and at the time the contract was made, carrying on a more or less extensive telephone business. The telephone company, then a comparatively new and small corporation, was wholly engaged in telephones, and, by virtue of its patents, claimed an exclusive right. Numerous suits were pending for a determination of the respective rights under the several telephonic patents owned or controlled by the parties. The Western Union desired to protect its telegraphic business against possible inroads by telephones, and, under those circumstances a compromise was reached, and this contract was executed. Its principal features are carefully framed provisions for the protection of the Western Union telegraphic system, and a lease and transfer by it to the telephone company of its interests in the telephonic patents, its telephones and telephonic exchanges, with an agreement that the Western Union should receive a certain proportion of the rentals or royalties which should come to the telephone company. It should be added that, as incidental thereto, the telephone company agreed to keep accounts of the number of telephones...