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January 18, 1949


The opinion of the court was delivered by: KNOX

In April, 1934, the litigants herein made a contract whereby the De DeBothezat Company, defendant, assigned to plaintiff, Metals Corporation, certain letters patent and conveyed to it certain plant and equipment facilities. In addition, it leased other equipment to plaintiff. The purpose was that the latter should carry on a fan business in which defendant had previously engaged. In return, plaintiff promised to pay specified royalties to defendant. The tenth paragraph of the contract, in part, is as follows:

'One year after the date hereof or at any time thereafter, Metals Corporation may give the DeBothezat Company notice, in the manner hereinafter provided, of its intention to terminate this agreement and six (6) months after notice shall have been so given, this agreement and the lease of the Leased Equipment * * * shall thereupon terminate * * * .'

Plaintiff now wishes to terminate the contract, but desires, also, to remain in the fan business. It seeks a declaratory judgment which will permit such termination, and allow it, in addition, to continue to manufacture and sell fans. The Court of Appeals for this Circuit has unanimously ruled that this court may properly deal with this subject matter. 166 F.2d 535.

 Defendant's answer to plaintiff's petition sets up six defenses and counterclaims. Four of these are involved in the motion mow before the court. Each of the four acts of wrongful conduct alleged against plaintiff is said to constitute both a defense and a counterclaim. As a defense, it is asserted in each instance that 'said wrongful action of plaintiff makes inequitable plaintiff's exercise of said option to terminate.' As counterclaims, defendant asks for specified damages on account of each wrong. The defenses and counterclaims are as follows: Second, that plaintiff wrongfully converted equipment leased to it by defendant (damages of $ 100,000); Third, that plaintiff wrongfully and wilfully did not use the name of De Bothezat in its promotion (damages of $ 50,000); Fourth, that plaintiff has wrongfully refused to furnish defendant with a proper audit (damages of $ 10,000); and Sixth, that plaintiff has failed to use its best efforts to promote the sale of the licensed product (damages of $ 500,000).

 The present controversy between the parties was raised at a pre-trial conference. Plaintiff insists that it should be granted a separate trial of the issues set forth in its complaint and the two defenses contained in the answer, which have not been described. These defenses, it is admitted, are good in law. Wo far as the other defenses and counterclaims are concerned, plaintiff desires that they be reserved for determination at a later time. Defendant, on the other hand, urges that all matters in controversy be resolved at a single trial.

 Assuming that the question as to whether plaintiff may terminate its contract, and remain in the fan business, without violating a legal duty, can conclusively be resolved in a separate trial, it would appear that the procedure suggested by plaintiff should be followed. Federal Rules Civil Procedure, rule 42(b), 28 U.S.C.A. Collins v. Metro-Goldwyn Pictures, 2 Cir., 106 F.2d 83; Society of European Stage Authors & Composers, Inc., v. WCAU Broadcasting Co., D.C., 35 Fed.Supp. 460. See my opinion of November 5, 1948, 8 F.R.D. 459, granting a pre-trial conference in the present case.

 This suit has been pending for two years. Notwithstanding, defendant has informed the court that it will require considerable further time in order to enable it to prepare for trial on the above mentioned four defenses and counterclaims. Meanwhile plaintiff, who would prefer to terminate the contract and continue in the fan business as an independent manufacturer, is obligated to pay substantial royalties to defendant. Under existing conditions, plaintiff is apprehensive lest that, if it fails to pay royalties to defendant, it may be under liability to defendant, not only for royalties, but for its business profits as well.

 The question as to whether, in a separate trial, plaintiff's contention that it may terminate the contract and continue thereafter to manufacture fans, can conclusively be determined, depends upon the legal sufficiency of the four defenses heretofore described. If they be sufficient, the trial of the complaint must provide defendant with an opportunity to support them with adequate proof.

 In this fashion, therefore, I am confronted with the necessity of saying whether, as a result of the manner in which the problem first came before me, viz., on a pretrial hearing, I can pass upon the legal trial hearing, I can pass upon the legal adequacy of the defenses. If this question be decided in the affirmative, I must then conclude if, with propriety, they can be stricken from the answer. There is nothing here that can impede this course of action.

 Numerous cases have held that a pre-trial order may pass judgment upon the legal sufficiency of a defense. Yale Transport Corporation v. Yellow Truck & Coach Mfg. Co., D.C.S.D.N.Y. 1944, 3 F.R.D. 440; Schram v. Kolowich, D.C. Mich. 1942, 2 F.R.D. 343; Berry v. Spokane, Portland & Seattle R. Co., D.C. Or. 1942, 2 F.R.D. 483. Defendant argues, however, that plaintiff has waived its right to relief of this character. This, it would seem, is not the fact. Rule 12(h) of the Federal Rules Civil Procedure, entitled 'Waiver of Defenses' expressly excepts defenses and objections made in a reply, and also 'the objection of failure to state a legal defense to a claim.'

 Defendant's position, in essence, is this: So long as plaintiff continues to manufacture under the terms of the contract, the wrongs alleged against it will not inflict irreparable harm on defendant. However, if the contract be terminated, such wrongs would subject defendant to injuries of that nature. For these reasons, defendant urges that plaintiff has no legal right to terminate the agreement, and is obliged to continue to observe its provisions. Furthermore, even if plaintiff may terminate, on condition that it ceases to manufacture fans, it can not terminate and continue in such business. A duty to discontinue the manufacture of fans arises, so it is said, from plaintiff's prior wrongful conduct, should plaintiff choose to terminate the contract.

 The contract in suit is to be interpreted, I think, according to the law of the State of New York. Plaintiff's executive affairs are, and always have been conducted in New York, although it maintains a statutory office in Delaware, where the company was incorporated. From 1934 to 1936, its manufacturing activities took place within the state. Thereafter, and at the present time, they were carried on in Illinois. Defendant's only office is, and has been, in New York, and it was there that all royalty payments were made. Furthermore, the 20th paragraph of the contract provides that 'This agreement shall be construed in accordance with the laws of New York.'

 This Court must follow the local rule on conflicts. Klaxon Co. v. Stentor Electric Mfg. Co., 1941, 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477. The local rule, it would seem, is in accordance with Section 358 of the Restatement of Conflicts which is to the effect that the manner of performance, ordinarily, is to be decided under the prevailing law of the place of performance. Union National Bank of Chicago v. Chapman, 1902, 169 N.Y. 538, 62 N.E. 672, 57 L.R.A. 513, 88 Am.St.Rep. 614. Under the circumstances here present, the issue as to whether plaintiff's termination of the contract would constitute a breach of its provisions is a matter that has to do with performance rather than with interpretation of the agreement.

 So far as my research has gone, I have found no decision precisely in point with respect to the place of performance on the facts here involved. Nevertheless, I am disposed to think that New York should be regarded as the place of performance. Furthermore, under local law, it would appear that the actual place of performance is not necessarily a controlling consideration, but that the inquiry is to be more closely related to the intention that the parties had in mind. Kerr v. Tagliavia, 101 Misc. 614, 168 N.Y.S. 697, appeal dismissed 1920, 229 N.Y. 542, 129 N.E. 907. In the absence of a showing to the contrary, the intended place of performance of a contract will be presumed to be the same as the ...

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