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August 14, 1933


The opinion of the court was delivered by: KNIGHT

KNIGHT, District Judge.

This is a motion to strike out certain portions of the answer.

Plaintiff is the owner of certain patents covering methods, processes, machines, and attachments for manufacturing baskets commonly used for fruit packing. In or about April, 1930, the plaintiff entered into a license agreement with the defendant, whereby it licensed and leased to the defendant such patented machines and attachments and the right to manufacture baskets by the use thereof. The defendant agreed to conform to the terms of the lease, to pay certain royalties on baskets sold and rental on the machines and attachments. Defendant, licensee, admitted the validity of the patents, and plaintiff, licensor, agreed to use due diligence in prosecuting infringers thereof.The defendant, licensee, also agreed not to sell any of the baskets manufactured under the licenses for less than the market price thereof "and on such terms and conditions as licensor may from time to time decide are just and equitable."

 This action is brought to recover royalties alleged to be due and unpaid for the years 1930 and 1931, and also to recover on another alleged cause of action not involved in this motion.

 The answer, as an affirmative defense, sets up the failure of the plaintiffs to use due diligence in prosecuting infringers as covenanted in the license agreement. As an affirmative defense and counterclaim, the answer sets up the failure of the plaintiff to prosecute infringers, and also that the defendant has suffered special damages in the sum of $10,000 on account thereof. As another and separate affirmative defense, the defendant answers that the alleged cause of action herein for royalties is in restraint of trade, illegal, and void. The plaintiff has replied, denying any liability on account of the counterclaim.

 Plaintiff moves to strike out all of the so-termed affirmative defenses and defense and counterclaim aforesaid on the ground that the matters therein set forth do not state a defense. This motion being made on the pleadings, the matters pleaded stand admitted as pleaded, and the pleadings are to be construed most favorably to the pleader. Calvin A. Lamb v. S. Cheney & Son, 227 N.Y. 418, 125 N.E. 817. It does not follow, however, that conclusions of law as set forth in the pleading are admitted. Equitable Life Assurance Society of U.S. v. Brown, 213 U.S. 25, 29 S. Ct. 404, 53 L. Ed. 682. A question of law is the matter to be determined on this motion.

 The gravamen of the first defense herein mentioned (paragraphs 5-12) is the loss of the right of the plaintiff to prosecute infringers by reasons of its laches. The motion as to this defense must be granted. It does not state a defense in law. It contains no allegation that the defendant has suffered any loss on account of the plaintiff's laches. It is not alleged that any baskets manufactured by any one other than defendant were marketed. It is not made to appear that laches resulted prior to the production on account of which royalties are claimed. Assuming the covenant against infringers and the covenant to pay royalties were mutual covenants and interdependent, mere proof of failure to prosecute infringers would not suffice. Damage is not to be presumed, and must be alleged and proved. In the case of a nonexclusive license, where defendant has enjoyed, without interference so far as the pleading shows, benefits under the license agreement, he cannot refuse to pay the agreed price therefor on the ground that the right to protect him in future benefits has been lost. He may never suffer any loss. He may elect to continue to act under the license to the end. It would certainly be inequitable to say that he could do this and yet pay nothing for these benefits, even though his rights had in no way been lessened by infringement by others. Farnsworth v. Boro Oil & Gas Co., 216 N.Y. 40, 109 N.E. 860; Heller & Son, Inc., v. Lassner Co., 214 App. Div. 315, 212 N.Y. S. 175; Stott v. Rutherford, 92 U.S. 107, 23 L. Ed. 486; Barber Asphalt Paving Co. v. Headley Good Roads Co. (D.C.) 284 F. 177; Hein v. Westinghouse Air Brake Co. (C.C.) 172 F. 524, 525; Gibbs v. McNeeley (C.C.) 102 F. 594; Jack v. Armour & Co. (C.C.A.) 291 F. 741. The case of Rosenthal Paper Co. v. National Folding B. & P. Co., 226 N.Y. 313, 123 N.E. 766, quoted at length by defendant, concerned an exclusive license. While it was said that the agreement to pay royalties and the agreement to protect against infringement were interdependent, the verdict for the plaintiff, assignee of assignee of inventor, for royalties was sustained on the ground that the defendant, "Having kept alive the contract and secured the results, it can not maintain that it is not subject to its obligations and liabilities, for the reason that Seligstein (assignor) had renounced it. Its remedy is the recovery, in counterclaim or action, of the damages, if any," caused. For these reasons the motion as to this pleading is granted.

 The motion to strike out the affirmative defense and counterclaim set forth in the answer (paragraphs 13-22) must be denied. In addition to the allegations set forth in the affirmative defense hereinbefore considered, this defense contains the allegations that the defendant has sustained damages in a definite amount, and that this has resulted through loss of business caused by infringers. The substance of the allegations in this defense is that the plaintiff represented that it had the right to license the machines and attachments in question, that the defendant relied on this representation, that this particular type of basket has been manufactured without license from the plaintiff and that these patents have been infringed, that the plaintiff had knowledge of such infringement and has failed to prosecute the infringers with due diligence, and that, as a result thereof, the defendant has suffered certain damages. It is true that this license agreement is nonexclusive. Proof of damages may be difficult, but the measure of such difficulty has no bearing on the sufficiency of the pleading.

 The allegations of infringement and laches create questions of fact. "The length of time during which the party neglects the assertion of his rights which must pass in order to show laches varies with the peculiar circumstances of each case." Halstead v. Grinnan, 152 U.S. 412, 14 S. Ct. 641, 643, 38 L. Ed. 495. Knowledge of the infringement is a question of fact to be determined on the trial. Foster v. Mansfield, Coldwater, etc., R. Co., 146 U.S. 88, 13 S. Ct. 28, 36 L. Ed. 899; Smith Hardware Co. v. S.H. Pomeroy Co. (C.C.A.) 299 F. 544. Delay in prosecuting infringers while an action for infringement is pending may make a question of fact. Stearns-Roger Manufacturing Co. v. Brown (C.C.A.) 114 F. 939. As stated by plaintiff in its brief, "The contract requires plaintiff to use due diligence, and this, we conceive, implies reasonable diligence which is a relative term and depends upon the facts and circumstances." Wilfley v. New Standard Concentrator Co. (C.C.A.) 164 F. 421, Victory Bottle Capping Mach. Co. v. O. & J. Mach. Co. (C.C.A.) 280 F. 753, and Menendez v. Holt, 128 U.S. 514, 9 S. Ct. 143, 32 L. Ed. 526, disclose comparable facts determined on the trial.

 In approaching consideration of the defense (paragraphs 23-32) that the license agreement is in restraint of trade and void, we may well first set forth certain propositions that either are agreed on by the parties or about which there can be little serious doubt under the authorities.

 1. Both the law of the United States and the law of the state in which it is shown the violation occurred apply in determining the validity of the agreement. Locker v. American Tobacco Co., 121 App. Div. 449, 106 N.Y.S. 115, affirmed 195 N.Y. 565, 88 N.E. 289; Burrows v. Interborough Metropolitan Co. (C.C.) 156 F. 389. This court has power to enforce state laws prohibiting combination in restraint of trade. Waters-Pierce Oil Co. v. Texas, 212 U.S. 86, 29 S. Ct. 220, 53 L. Ed. 417; Binderup v. Pathe Exchange, Inc., 263 U.S. 291, 44 S. Ct. 96, 68 L. Ed. 308.

 2. The terms of the agreement and not whether there has been any actual operation under it determine whether it is one in restraint of trade and stamp its legality or illegality. Cummings v. Union Blue Stone Co., 164 N.Y. 401, 58 N.E. 525, 52 L.R.A. 262, 79 Am. St. Rep. 655; Cohen v. Berlin & Jones Envelope Co., 166 N.Y. 292, 59 N.E. 906; United States v. Trenton Potteries Co., 273 U.S. 392, 47 S. Ct. 377, 71 L. Ed. 700, 50 A.L.R. 989.

 3. The patentee, plaintiff, had the right to fix the price at which the licensee may sell the baskets in question made by the patented machinery. The law is the same as though the patentee were vendor and the licensee a vendee. Bement & Sons v. National Harrow Co., 186 U.S. 70, 22 S. Ct. 747, 46 L. Ed. 1058; United States v. General Electric Co., 272 U.S. 476, 47 S. Ct. 192, 71 L. Ed. 362.

 4. Even though the defendant was a party to an illegal agreement, illegality may be set up as a defense. Bement & Sons v. National Harrow Co., 186 U.S. 70, 22 S. Ct. 747, 46 L. Ed. 1058; Continental Wall Paper Co. v. Louis Voight & Sons Co., 212 U.S. 227, 29 S. ...

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