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Kraus v. General Motors Corp.

May 26, 1941


Appeal from the United States District Court for the Southern District of New York.

Author: Hand

Before AUGUSTUS N. HAND and CHASE, Circuit Judges, and CLANCY, District Judge.

AUGUSTUS N. HAND, Circuit Judge.

The amended complaint contained four separate counts, of which the third was withdrawn by the plaintiff. Issues raised by the first, second and fourth counts, and the defendants' answers, were submitted to the jury which returned a verdict for the defendants. The plaintiff has appealed from the judgment entered on the verdict which, in our opinion, ought to be affirmed.

On July 1, 1919, the plaintiff Kraus and the defendant AC Spark Plug Company (hereafter called Champion) made an agreement under seal, whereby the latter was to use plaintiff's alleged secret process for increasing the plasticity and improving other qualities in porcelain body mixtures used for insulation in spark plugs to be manufactured and sold by Champion. The agreement provided for a disclosure by Kraus of his process and for an exclusive license to Champion of any patent issued therefor. The agreement also provided that manufacture by Champion should begin under the process on September 1, 1919, and likewise provided for payment by the latter to Kraus of a royalty of $.001 per each spark plug insulator body manufactured that embodied his process, and for the immediate payment to him by Champion of $10,000 which might be credited in pro rata monthly amounts against any royalties accruing under the agreement which were to be calculated at a minimum rate of 100,000 per day.

The agreement of July 1, 1919, was superseded by a contract dated February 7, 1920, which provided for a written disclosure by Kraus to Champion of his process so as to enable the latter "to commercially use the same in the manufacture of spark plug porcelains", and for an exclusive license under any patents therefor and for the payment of the same royalty as under the earlier agreement. The contract of February 7, 1920, provided that after the close of six months from its date Champion should pay Kraus a minimum royalty based on the production of 50,000 spark plugs per working day to continue during the life of the contract. The licensor was to furnish bentonite for the manufacture of spark plugs and Champion was to pay Kraus two cents per pound therefor.

Article Fifth of the contract of February 7, 1920, contained a cancellation clause reading as follows: "It is understood and agreed that Licensee may cancel this contract at any time within one year from the date hereof, and that at any time after one year from the date hereof Licensee may cancel this contract upon giving to the Licensor six months notice in writing, in either case if said cancellation is occasioned through failure of Licensor to secure and preserve patent protection, or in case said application for a patent covering said improvements shall be finally rejected or if thereafter said improvements shall become known and used by any other manufacturer of spark plug porcelains, or in case of failure of Licensor to supply Licensee with material in the manner set forth in the annexed agreement of purchase, then in any of such events Licensee shallhave the right to cancel this agreement forthwith."

Kraus disclosed his process to Champion but, though it had some laboratory success, there was substantial evidence that it did not meet the requirements of commercial production. Accordingly, on October 28, 1920, the president of Champion notified Kraus in writing that he cancelled the contract and asked the latter for reimbursement stating in substance that bentonite, which under his process was to be introduced to impart plasticity to clay bodies, had been known and used in many arts for years and saying that the difficulty of shrinkage and air cracking had not only been found by Champion but had been experienced by others who had applied it to clay bodies. In 1938, eighteen years after the contract was cancelled, Kraus brought the present action against Champion and also against General Motors Corporation, which had become the owner of the stock of Champion and assumed its rights to manufacture spark plugs.

The first count of the amended complaint seeks to recover royalties under the contract of February 7, 1920, on the ground that the defendants had manufactured and sold spark plugs embodying the secret process of Kraus.

The second count seeks to recover damages for non-use of the Kraus secret process.

The fourth count seeks damages for fraud in that the defendants manufactured, sold and used spark plugs embodying the Kraus process and "deliberately concealed such use, manufacture and sale from him."

On a motion to dismiss made by the defendants at the close of the case the trial judge ruled, and thereafter in his charge instructed the jury, that "the contract as a matter of law was duly cancelled in October 1920". As the notice of cancellation was given during the first year after its date, but not during the first six months (in which the contract did not call for the payment of royalties), there was a period between Agust 7, 1920, the end of the six months, and October 28, 1920, the date of the letter of cancellation, during which royalties might have been earned. Whether they were earned during that period depended on whether the contract to furnish a commercially usable process was performed. The judge charged the jury that they would have to determine: "Whether or not plaintiff * * * proved, * * * that during this period plaintiff's exclusive license covered a commercially usable process, and that said process was followed, used and made, or could have been so used and made into spark plug bodies by the defendants. If you are satisfied that the Kraus process was of no value to the defendants, and that it was not so used by the defendants during this period, then your verdict should be for the defendants on this cause of action. Otherwise you are at liberty to award the minimum royalty." Upon this charge the jury returned a verdict "for the defendants on all three counts."

The first and most vital question is whether the contract of February 7, 1920, was cancelled by the letter of Champion's president on October 28, 1920. We have no doubt that such was the effect of the letter and that Kraus hardly questioned that it was such at the time in spite of his expressions of surprise and disappointment and a desire to talk the matter over. In a letter of December 4, he said: "To cancel the contract without explaining as to why you have failed to use it commercially, or without requesting us to cooperate with you, seems to me to be inconsistent."

The right to cancel "at any time within one year from the date" of the contract was absolute so that at most nothing was recoverable but a relatively small sum for minimum royalties accruing during about two and ...

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