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January 29, 1941


The opinion of the court was delivered by: CAMPBELL

CAMPBELL, District Judge.

This suit is brought by the plaintiff to obtain an injunction to permanently enjoin the defendant from making, selling or distributing a product known as Kea in claimed competition with a product known as Nyafat, on the theory that under an implied negative covenant of a written contract between the plaintiff and the defendant, the defendant could not sell or distribute the product known as Kea because that product could be used for similar purposes as the product known as Nyafat.

The defendant is a responsible concern and was established some fifty years ago.It sells cleaners, such as scouring powder, silver polish, soaps, food products used for cooking, frying, baking and shortening, soups, oils, honey and tea.

 The contract refers to a product therein called "Parev Schmaltz", which under the right given to the defendant by the contract in question was changed to "Nyafat" by which name it will be called in this opinion.

 Defendant sells and distributes, but does not manufacture, Kea, as that product is manufactured by Best Foods, Inc., which corporation sells the product to any one who desires to purchase, in wholesale quantities. For defendant the manufacturer packs the article Kea in cans with labels both of which are furnished by the defendant.

 Defendant manufactures and sells Nyafat.

 The basic ingredient of Nyafat is cocoanut oil 95 per cent, the balance hardened cottonseed oil, coloring and onion material, all cooked, stirred and strained before packing and packed in glass jars and labeled. In the product described, as Neutral Nyafat, of which but a very small quantity was sold or distributed by the defendant, there is no onion material. The basic ingredient of Kea is straight cottonseed oil hydrogenated and deodorized. No other oil is added, nor is there added any onion material or coloring and there is no cooking.

 The customer gets 40 per cent more in quantity of Kea in buying the one pound can, than he or she does in buying Nyafat in the ten ounce jar, which is the way in which small quantities of those articles are packed, and which are sold for substantially the same price.

 There are, and have been for a long time, vegetable oils on the market which are used for cooking frying, baking and shortening in addition to Nyafat and Kea, including Crisco and Spry, and Mr. Proser was not the originator of the idea of using vegetable oils for such purposes, as Crisco had been on the market and used for that purpose for some years prior to the making of Parev Schmaltz.

 Plaintiff contends that the defendant has no right to manufacture and sell Kea because, as Mr. Proser, its president, says Kea and Nyafat are used for the same purposes, and for every can of Kea that is being sold by the defendant, one jar of Nyafat is not being sold, therefore, he complains that for every jar of Nyafat that is not being sold, he is deprived of the benefits of the contract of February 29th, 1924, pursuant to which he is entitled to a royalty upon the sale of a jar of Nyafat.

 This contention, together with plaintiff's contention that the contract of February 29th, 1924, must be held to contain an implied covenant that the defendant will not sell a food product so similar in use to Nyafat as to displace that article from the consumers' market, and thus deprive the plaintiff of the benefits of the contract, that is, its royalties, and the further contention that the product Kea tends to displace Nyafat in the consumers' market, and come within the scope of such an implied negative covenant, form the basis of the controversy which this court has presented to it for its decision and will be discussed in this opinion.

 The hereinbefore mentioned contract between the parties dated February 29th, 1924 (Plaintiff's Exhibit 1), in which it is recited and represented by plaintiff that Letters Patent of the United States were then pending in its favor upon its application covering a formula and process for the manufacture of a food product known as Parev Schmaltz, which was registered in the United States Patent Office; the exclusive right to use said patent, when issued, together with the said trademark registration, process and formula, were as provided by said contract to be turned over to the defendant. The said good will, process and formula of the food product were turned over to the defendant for its sole and exclusive use subject to the restrictions in said contract thereinafter expressed in manufacturing of Parev Schmaltz for a period of twenty-five years from the date of the contract in consideration of royalties to be paid to the plaintiff.

 It was further provided in said contract that the food product was to be manufactured in accordance with the formula and process covered by the patent pending, and any improvement thereon that may be invented "when and as the said party of the second part shall think fit", the party of the second part being the defendant.

 In the first paragraph there is a provision for the payment of royalties, which was subsequently modified, but that is of no moment except to show that royalties were to be paid.

 By the second paragraph the defendant was given the option to cancel the contract within two years in the manner indicated in the contract.

 The third paragraph provided for the turning over of the patent, etc., by the plaintiff to the defendant as hereinbefore cited.

 The fourth paragraph provided that plaintiff should deliver the recipe in writing showing all materials, methods and processes and machinery required in the manufacture of the food product.

 The fifth paragraph provided for the employment of Mr. Proser the president of the plaintiff.

 The sixth paragraph provided for the keeping of accurate accounts by the defendant, the rendering of statements by it to the plaintiff in January and July of each year, and to pay the amount shown by said statements within five days after the statement was rendered.

 The seventh paragraph provides that plaintiff is "not to engage, either directly or indirectly, in the manufacture or sale or distribution of the formula or process, or in any way use the formula or process for the making of the food product known as Parev Schmaltz covered by a patent pending", and that plaintiff would not engage or aid in the manufacture, sale or distribution of any products similar to Parev Schmaltz or in any business incidental thereto.

 The eighth paragraph provided that plaintiff warranted the process and formula covered by the patent pending was a secret one known only to three persons mentioned, and if it should turn out at any time that the process is known to anybody other than the persons mentioned and that the article is manufactured or sold by any other, then the defendant had the option to terminate the contract in the manner provided therein.

 The ninth paragraph provided that the plaintiff should give the defendant whatever assistance was needed and when required so that the defendant might be enabled to make full and complete use of the process, formula and invention as covered by the patent pending and the trademark and formula.

 The tenth paragraph provided that if Mr. Proser should make any improvement or modification of the process or formula or of the method in using it, that these improvements were to be given to the defendant, and subject to all the terms and conditions of the contract, without the payment of any further royalty. It was also provided that plaintiff should give the defendant "full information respecting the mode of using the same", without any additional payments.

 The eleventh and twelfth paragraphs provided for the protection of the defendant in the event of any lawsuits for the infringement of the ...

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