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LATHROP v. RICE & ADAMS CORP.

December 24, 1936

LATHROP et al.
v.
RICE & ADAMS CORPORATION



The opinion of the court was delivered by: RIPPEY

RIPPEY, District Judge.

Harry D. Lathrop, one of the plaintiffs, is a citizen and resident of Chicago, Ill.; Lathrop-Paulson Company is an Illinois corporation having its principal place of business in Chicago; and the defendant Rice & Adams Corporation is a New York corporation with its principal place of business in Tonawanda, N.Y.

This is an action at law to recover royalties which plaintiffs claim are due to them under a written license agreement duly executed by the parties on September 13, 1929. Jury trial was duly waived and the case was tried before the court without a jury.

 For at least ten years past, both parties have been engaged in the manufacture and sale of can-washing machines and dairy equipment. Since January 21, 1925, the plaintiff Harry D. Lathrop and the defendant had been engaged in patent litigation within the Western District of New York, wherein plaintiff asserted that defendant was infringing his patents on can-washing machines. On September 13, 1929, two infringement suits were pending. The first was for infringement of Blair patent, No. 880,713, dated March 3, 1908, Equity Docket No. 793-D. Defendant was unsuccessful and infringement was decreed [Lathrop v. Rice & Adams Corporation (D.C.) 21 F.2d 124, affirmed (C.C.A.) 24 F.2d 1021, affirmed 278 U.S. 509, 49 S. Ct. 220, 73 L. Ed. 480], and an accounting was pending. The second, Equity Docket No. 1140-F, based on patents 1,172,808, February 22, 1916; 1,247,692, November 22, 1917; 1,249,129, December 4, 1917; 1,249,130, December 4, 1917; 1,336,567, April 13, 1920; 1,336,570, April 13, 1920; 1,396, 516, November 8, 1921; and 1,578,451, March 30, 1926, owned by Lathrop, had not then been tried. The contract here involved recites that "it is the desire of all the parties hereto to settle all litigations now pending between them * * * and to further provide means for preventing future litigation between the parties," and to that end, the defendant agreed to pay, and plaintiffs to accept, $10,000 in settlement for accounting for all past profits and damages and costs and to further pay all costs that had accrued before the master to whom the suit first above mentioned had been referred to take the account, and plaintiffs agreed to license defendant to use their patents in the future. Paragraph 15 of the contract provides that in Equity Suit No. 1140-F, a decree should be entered finding the claims involved in the patents referred to in said suit valid and infringed by the defendant and that "it is hereby conceded that said patents are valid and infringed." A decree to that effect was entered on September 14, 1929, in which it was held (1) that claims 4 and 9 of patent 1,172,808, (2) claims 1, 2, 7, 8, and 9 of patent 1,247,692, (3) claims 1, 3, 4, 6, 7, and 8 of patent 1,249,129, (4) claims 4, 5, and 6 of patent 1,249,130, (5) claim 1 of patent 1,336,567, (6) claim 1 of patent 1,336,570, (7) claims 1 and 2 of patent 1,396,516, and (8) claims 1, 2, 3, 4, 5, 7, and 10 of patent 1,578,451, were valid and infringed, and judgment was docketed for plaintiffs for $245 costs. If any of those claims are involved in the present action, the defendant will not be permitted either to show invalidity or that it is not infringing as to any features of its present machines or dairy equipment that were in its machines at the time the contract was entered into. Kessler v. Eldred, 206 U.S. 285, 27 S. Ct. 611, 51 L. Ed. 1065.

 When the contract was executed, plaintiffs were the owners of thirty-eight United States patents and seven applications for patents within the United States covering inventions relating to can-washing machines, dairy equipment, and the like, therein described. They are listed in the agreement. Plaintiffs granted to defendant the right to use inventions covered by such patents and applications, in consideration of the payment to plaintiffs by defendant (1) of a royalty of 7 1/2 per cent. of the selling price of all Straightaway can-washing machines and of 10 per cent. of the selling price of all Rotary can-washing machines manufactured and sold by defendant from and after June 6, 1929, as long as defendant continued to use any feature covered by any patent then owned or controlled by plaintiffs, or either of them, which royalties were to be based upon the selling price of the entire machine in which any such invention was incorporated, (2) of a royalty of 10 per cent. of the total selling price of any dairy machinery or equipment, other than canwashing machines provided for in (1) above, covered or protected by any patent or patents owned or controlled by plaintiffs, or either of them, except that, where such equipment was sold or became a part of and was attached to a machine previously sold, on which a royalty had been paid, such royalty should be paid on such equipment only at the same rate as paid on the original machine.

 The agreement further provided that each party licensed the other to use any future inventions on which patents issued to the several parties in improvements on can-washing machines of all types and/or other dairy equipment, by paying a royalty of 10 per cent. of the selling price thereof to the owner of any such inventions. In addition to the patents enumerated in the contract, eight patents were issued to Lathrop between January 14, 1930, and June 7, 1932, both inclusive, as set out in paragraph 17 of the complaint, to be considered as within the terms of the agreement.

 Defendant agreed to keep a complete, true, and correct record and books of all such machines and equipment manufactured and sold, with the name and address of the purchaser, the date of sale, and the selling price, to render a statement thereof under oath to plaintiffs not later than the 20th day of each January, April, July, and October of each year for the preceding three calendar months, with the royalty due, and to accompany it with a remittance for the amount due. Between September 13, 1929, and April 1, 1934, defendant manufactured and sold approximately 350 Straightaway can-washing machines for which it accounted to plaintiffs at quarterly intervals and on which it paid $16,240.93 in royalties in accordance with the terms of the contract. Royalties amounting to $1,457.80 for the quarter ending March 31, 1934, and accounted for were not paid, however, until July 12, 1934. Defendant rendered an accounting for royalties due for the quarter ending June 30, 1934, amounting to $1,863.46, and for the quarter ending September 30, 1934, amounting to $1,585.95, which became due and payable not later than the 20th day of July and October, 1934, respectively, but has failed to make payment. It has rendered no other statements to plaintiffs and has paid no royalties since March 31, 1934. It at no time asserted that such machines did not contain features covered by the claims in plaintiffs' patents, or that it was not infringing such claims, or that it was not operating under the terms of the license agreement.

 Defendant further agreed to attach a name plate to each machine manufactured and sold by it, showing that it was licensed under plaintiffs' patents, naming them. It attached such name plate in accordance with the terms of the contract, not only on each of the 350 machines it sold prior to April 1, 1934, but to each of the machines it made and sold thereafter. Dr. Alling, defendant's president, testified that he decided on February 25, 1934, to no longer attach the name plate to the machines defendant was manufacturing and that he later promulgated a shop order to that effect. The alleged typewritten shop order shows, however, on its face, that it was not approved by Alling until February, 1935, and defendant's sales manager said that all machines that went out before some time in November, 1935, had these name plates attached. It must be found that all Straightaway can-washing machines manufactured and sold by defendant during the period for which it may be required to pay royalties in this suit had such name plates attached.

 Defendant seeks, by way of counterclaim, to recover back royalties paid by it prior to December 31, 1934, on the ground, as it asserts, that the can-washing machines and equipment made and sold by it contained no invention covered by plaintiffs' patents and that the royalties paid prior to that date were paid under a misapprehension of the scope of such patents. It is too much to ask us to believe that defendant paid the royalties to plaintiffs under any misapprehension as to the nature and scope of plaintiffs' patents or under any honest mistake as to infringement thereof. It would hardly have paid the price it did for peace if it had no legal liability. To decide on the question of legal liability for infringement, it had the advantage of the advice of eminent counsel, and its president had such training and mechanical knowledge and intimate knowledge of the patent situation in the industry that he might well rely upon his own judgment without eminent counsel's advice. The record clearly indicates that it knew it was appropriating plaintiffs' inventions in its machines and equipment. The chain it manufactured, it admits, "was a literal reproduction of the construction shown in the patent No. 1,861,642." It admits, in its answer, that it used other of plaintiffs' inventions covered by the contract. For more than five years the defendant used name plates on all machines manufactured and sold by it on which were listed plaintiffs' patents; during this period it accounted for and paid royalties under the contract; it advertised and sold the machines as made under and protected by such patents; it had full knowledge of the patent situation and used what plaintiffs had. It is therefore estopped to deny that the machines and equipment contained the patented improvements of plaintiffs during the life of the patents. Universal Rim Co. v. Scott (D.C.) 21 F.2d 346; Andrews v. Landers (C.C.) 72 F. 666; Sproull v. Pratt & Whitney Co. (C.C.) 97 F. 807, affirmed (C.C.A.) 108 F. 963; Baker Oil Tools v. Burch (C.C.A.) 71 F.2d 31; Piaget Novelty Co. v. Headley (C.C.A.) 108 F. 870; Collis Co. v. Consolidated Machine Tool Corporation (C.C.A.) 41 F.2d 641, 645; Felix v. Scharnweber, 119 Ill. 445, 10 N.E. 16. Even though the patents were entirely invalid, there was adequate continuing consideration to sustain the agreement and to compel defendant to pay royalties until an unequivocal notice of repudiation was given to the licensor. Universal Rim Co. v. Scott, supra; Humphrey v. Sea Gull Specialty Co. (C.C.A.) 242 F. 271; Skinner v. Walter A. Wood M. & R.M. Co., 140 N.Y. 217, 35 N.E. 491, 493, 37 Am.St.Rep. 540; Martin v. New Trinidad Lake Asphalt Co. (D.C.) 255 F. 93. Such being the case, there was no burden on plaintiffs to show that the machines and equipment of defendant contained inventions of plaintiffs. It is conclusively presumed that they did. Had defendant given such a notice of repudiation, it could not thereafter defend itself against the payment of royalties on the ground that the patents were invalid because, there being no stipulation to the contrary in the agreement, it is conclusively presumed that the patents referred to in it are valid according to their respective claims. Ball & Socket Fastener Co. v. Ball Glove Fastening Co. (C.C.A.) 58 F. 818.

 No unequivocal notice has been given by defendant to the plaintiffs that it was not using the inventions of plaintiffs as covered by the patents set up in the agreement. As is stated in Skinner v. Walter A. Wood M. & R.M. Co., supra: "A licensor is entitled to assume that his licensee remains such until the latter, by a clear, definite, and unequivocal notice, emanating from lawful and competent authority, throws off the protection of the license, and stands admittedly an infringer, if the patent is valid. The licensor is not to be left in a doubtful or uncertain position. He must not be exposed to the double danger of being defeated in a suit for infringement by a plea of license never effectually or authoritatively renounced; or, if he sues for royalties, of being beaten because there was merely an infringement, if anything."

 The only lawful and competent authority from which a notice could be given was the corporation itself by action of its board of directors, and there is no evidence that the corporation ever acted upon the matter either formally or informally.

 Defendant claims that it so changed the construction of its machine in 1934 as to exclude every feature covered by every claim of plaintiffs' patents. There is no evidence in the case of any notice whatever of any such change, except the testimony of Alling to the effect that he met Lathrop in the Cleveland Hotel in Cleveland, Ohio, early in February, 1935, and then stated to Lathrop that he was not using any of the Lathrop patents and was not operating under the agreement. Even if that did occur, such oral statement did not amount to such a notice as was required. See, also, Martin v. New Trinidad Lake Asphalt Co. (D.C.) 255 F. 93. Furthermore, the parties themselves agreed in paragraph 21 of the agreement that, to avoid infringement litigation or suits for royalties, if defendant should at any time change the construction of its Straightaway can-washing machine to the extent that its counsel might advise it that such machine, so modified, did not infringe any patent or patents of plaintiffs, and if such counsel should give an opinion to that effect, it would submit a copy of that opinion to the counsel for the plaintiffs and furnish a complete and accurate set of drawings of the modified machine and place one of such modified machines at the disposal of counsel for the plaintiffs for inspection, and if the parties did not agree they would proceed to arbitration. Thus, the parties deliberately fixed by contract the method by which defendant might relieve itself from payment of royalties if, during the life of plaintiffs' patents, it so changed its machine that it embodied none of the inventions covered by those patents. There is no evidence in this case that any such notice was given or opinion of noninfringement furnished. That plaintiffs thoroughly understood this to be the kind of notice required is clearly indicated from their complaint, because they set this clause up in the complaint and they bring a suit solely for royalties under the contract and not for infringement. The defendant does not plead any such notice or any notice at all. Thus, defendant is not in a position to assert in this case that any machine or other dairy equipment that they are manufacturing and selling was not covered by the plaintiffs' patents.

 The agreement provided that, should either party grant a license to a third party on any patent or patents owned or controlled by him on such machinery or equipment on more favorable terms than those above named, such more favorable terms should inure to the benefit of the other party to the agreement, and the royalty be reduced accordingly from the date of the granting of such more favorable license. No claim is made in this case that plaintiffs affirmatively granted any license to others than defendant to use their inventions. Rather, complaint is made that, by inaction against various alleged infringers, plaintiffs in effect granted free licenses. In the first place, to establish this defense, the defendant was required to show that the alleged infringers were in reality infringing plaintiffs' patents; otherwise defendant cannot complaint that the plaintiffs failed to serve notices on the alleged infringers or to prosecute actions against them. Such evidence as there is fails to establish the existence of any such infringers.

 The fact is, however, that plaintiffs brought two actions in this district against Oakes & Burger Company, Inc., Equity Suits 201 and 331, for infringement, and suits against the Kendall-Lamar Company and against the Houck Manufacturing Company for infringement and served notices on others. The Houck suit was not pressed. This company quit building can washers shortly after the suit was brought. In the Kendall-Lamar litigation, plaintiffs stipulated that trial should not proceed until final decision was rendered on appeal in the Oakes & Burger suits. But the Kendall-Lamar suits were neither discontinued nor settled, and plaintiffs may proceed with them whenever they wish. In the Oakes & Burger suits, after trial, Judge Adler in this district, On November 15, 1933, held noninfringement, (Lathrop v. Oakes & Burger Co. [D.C.] 5 F.Supp. 70), and a decree was entered on August 13, 1934, dismissing both suits without costs to either party. No appeal was taken by plaintiffs. After the decision, changes were made in the Oakes & Burger machine that removed any question of infringement of plaintiffs' patents, and the possible recovery involved was so small that the expense of appeal was not warranted. In the Oakes & Burger suit, Judge Adler pointed out that the distinctive features in plaintiffs' patent 1,249,130 were not present in the Oakes & Burger machine. Claim 6 of patent 1,249,130 and claim 12 of patent 1,336,570 are here in suit, as they were in the Oakes & Burger Cases. Patent 1,249,130 expired December 4, 1934, and patent 1,336,570 expired April 13, 1935. ...


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