Opinion
05-13-1897
WARWICK v. STOCKTON.
George T. McEwan, for complainant. Adrian Riker, for defendant.
Bill by George T. Warwick against Charles S. Stockton for an accounting. An account directed.
George T. McEwan, for complainant.
Adrian Riker, for defendant.
EMERY, V. C. This bill is filed to obtain an accounting under a written agreement between complainant and defendant, the complainant claiming that the relation between himself and defendant, created by the agreement, either alone or in connection with the subsequent conduct of business during the term specified in the agreement, created a partnership. The bill asks, also, a receiver for the partnership, based on complainant's exclusion from the partnership business, and a charge of mismanagement. No particulars of mismanagement are, however, alleged in the bill. The general questions in the case are, first, whether the relation of partners exists between the parties, or whether the complainant's rights are simply to a share of the profits by way of royalty or compensation; and, if no partnership exists, then, secondly, whether the complainant has any right to an accounting at all under the agreement, in view of the defenses set up. I will state briefly the conclusions I have reached, leaving a fuller statement and opinion to be filed hereafter if desired. These conclusions are:
First. The agreement between the parties, as shown by the writings executed and delivered by them, was not an agreement of partnership, but was an agreement for a share of the profits by way of royalty to complainant, and an additional agreement for compensation to complainant for personal services. In reference to the construction of the agreement in this respect, I follow the opinion of Vice Chancellor Pitney on the application for receiver in this case (Warwick v. Stockton [Jan., 1897] 36 Atl. 488), and in this opinion I concur.
Second. These contracts in writing, creating this relationship between the parties, were not ambiguous or uncertain in their language, and the subsequent conduct of the parties in carrying on their business, during the time provided for by the written agreements, is not to be resorted to simply for the purpose of construing the agreements in this respect. Nor is the evidence relating to such conduct of the parties sufficient, in my judgment, toshow any change of the relations fixed by the agreement to the relation of partnership, nor any intention on the part of the defendant to change the relationship created by the agreements into one of partnership. The relation of partners must be the result of the intention of both parties to create the relation, and the subsequent conduct of the parties, in carrying on the business, which is here relied on by complainant to create a partnership, if it is not created by the agreement, is, in my judgment, fairly referable to, other causes or reasons than the existence of a partnership, and is insufficient, either alone or in connection with the agreement, to establish a relation of partnership.
Third. The complainant's rights, therefore, are not the rights of a partner in the business, but are limited to an accounting and the employment specified under the contract. Complainant is entitled to such accounting, unless deprived of it by the defenses set up, and which are hereafter considered.
Fourth. Under the agreement and its supplement the right to an accounting will extend, not only to the profits in the manufacture and sale of the parts of bicycles covered by the patents owned or controlled by the complainant at the time of the original agreement, but to all profits derived from the bicycle business as carried on by the parties. The original agreement seems to restrict the manufacture to bicycle parts covered by the patents, but the modification, made by the writing of the same date, by which it was agreed "that we are to divide all profits derived from the bicycle business equally," etc., includes, in my judgment, the profits from any branch of the bicycle business which the parties afterwards took up. The subsequent conduct of the parties in carrying on the manufacture, and the manner of keeping and stating the accounts between them, show that this was their construction of the extent of defendant's interest in the profits; and, if the language "bicycle business" is ambiguous or indefinite, the subsequent conduct of the parties is admissible to determine its construction.
The defendant denies any right whatever to an accounting, repudiating any liability to account under the agreement. He has not, as yet, either by answer or otherwise, rescinded or claimed to rescind the agreement, or abandoned in complainant's favor any right to manufacture any of the articles supposed to have been covered by the patents, or articles covered by patents since procured by complainant. The latter manufacture constitutes a considerable part of the business transacted since January, 1896, and these articles were manufactured and sold in large quantities upon the supposition, as between both parties, that the agreement was in force. The defenses set up to resist any accounting whatever are, substantially: First, failure of consideration for the agreement of defendant to account, upon the ground that the patents claimed to be owned or controlled by complainant, for the articles manufactured, or some of them, were invalid; second, that the equitable title to these patents is in the Warwick Cycle Company, under a contract made by complainant to assign to them; third, that complainant's refusal to complete defendant's record title to the patents, on his demand made before suit, justifies defendant in refusing to account. In reference to these defenses, my conclusions are:
Fifth. As to the invalidity of the patent: So far as relates to the profits derived from the manufacture and sale of the articles, which are apparently covered by the patents, the defendant, as licensee, having acted under the license and received profits from it, is estopped, as against the licensor, to deny the validity of the patent. Bigelow, Estop. (5th Ed.) p. 553, and cases cited; 7 Am. & Eng. Enc. Law, p. 25; 13 Am. & Eng. Enc. Law, p. 570; Kinsman v. Parkhurst, 18 How. 289. The law to this extent is not disputed by defendant, as I understand, and this will cover the pedals manufactured under the Broadbent patent. The same principle, in my judgment, extends to the manufacture and sale of the hubs, which were manufactured and sold by the parties as covered by patents, and so claimed, by stamping and otherwise. The manufacture of these hubs has not been, so far as appears by the evidence, molested or interfered with on the claim by any person that it was an infringement or not covered by complainant's pedal patent. Defendant's expert, in this case, states that prima facie, and on the face of the pedal patent and specifications, the hub would seem to be covered, and so long as the defendant has not repudiated and does not repudiate any right to manufacture under the patents which he derives or may derive from the license, and does not leave complainant in a position where he can sue him as an infringer for all the profits, the right to profits under the agreement should not be dependent on the determination in this suit of the validity of the manufacture of the hub under the pedal patent. As to the hubs manufactured and sold and covered by patents issued to complainant since the date of the agreement, and also the chains and other articles, which were not covered by patents, the right to an accounting for these is based upon the construction of the modification of the original agreement, which, as above stated, extended it to the entire bicycle business. But I am not entirely clear that this patent for hubs granted since the agreement is not included within the original agreement as a patent owned or controlled by complainant "during the continuance of the agreement." So long, however, as the defendant in fact has, and is allowed by complainant to have, the exclusive license under this patent, and does in fact manufacture under it, it will not, in my opinion, be necessary to pass upon this question in order to decide the question of a liability to a present accounting for the profitshitherto made. So far as relates to manufactures which are not covered by the patents referred to in the agreement, the question of invalidity of the patents does not apply, nor can the invalidity of the patents be set up by the licensee, except it amounts to an entire failure of consideration, and the licensee repudiates the license, leaving the licensor to his full remedies against him as an infringer. This I understand to be the effect of the cases relied on by defendant's counsel. In the absence of any such entire failure of consideration or repudiation of his rights as licensee, under any of the patents, and inasmuch as defendant has derived and continues to derive profits from the license, I hold that he is liable to account for these, as well as the other articles manufactured in the bicycle business under the agreement as modified.
Sixth. As to the contract or alleged contract by complainant with the Warwick Cycle Company: inasmuch as this company has never to this date insisted upon or set up any such claim against the defendant, or shown any intention to do so, and complainant claims a release from all obligations in this respect, if any contract ever was made, it is manifest, I think, that the defendant's equities, by reason of the continued existence of any such contract, would reach only to protection or indemnity against such claim, if actually made in good faith by the Warwick Company before decree for payment of any balance due on the accounting, and cannot at all be extended to allowing him to withhold the accounting under the articles.
Seventh. As to the rights of the defendant to resist any accounting, because complainant failed to produce the formal record title, my opinion is that the completion of the formal record title before suit satisfied the defendant's rights in this respect, so far as any question of liability to account was concerned, and that the refusal or neglect in the past, if it had any effect whatever on defendant's rights, is not to be punished by the penalty of depriving complainant of all his rights to an accounting. Inasmuch as the manufacture and sale has been actually proceeding for two years and over, the right to an accounting for the profits actually made to this time cannot be denied, because they were made pending the completion of the formal record title to the papers.
Eighth. As to the principles upon which the accounting should proceed, the principal disputes are two: First, whether the accounting is to be restricted to the articles covered by patents owned or controlled by complainant at the date of making the contract, or should extend to all the articles made in carrying on the bicycle business. On this point my view is, as above stated, that the account extends to all articles manufactured in the business. The other question is as to the right of the defendant to an allowance of 6 per cent. Interest on all capital invested beyond $25,000. The original agreement fixes no limit as to the capital to be provided, neither did it make any provision for interest thereon, except that, "as part of the reasonable cost of manufacture, a reasonable rental for the factory room and power should be allowed to Stockton." The supplemental agreement of the same date provided that all commissions and running expenses should be deducted. It was represented to Dr. Stockton, and supposed by him at the time of embarking in the enterprise, that the sum of $10,000 would be sufficient to equip the necessary plant for the manufacture of hubs and pedals, and that the plant would be self-sustaining in a few months; but a much larger amount was in fact expended, and before August 10, 1895, the amount expended had exceeded $25,000 for a plant to manufacture hubs, pedals, and also chains, and the business had not yet begun to make profitable returns. The original agreement had been for two years from October 10, 1894, but on August 10, 1895, the agreement was extended to five years from October 10, 1894, and in reference to charges to be allowed to Dr. Stockton it was expressly agreed "that ten (10) per cent. shall be charged off on the cost of the machinery and tools and placed to the expense account" As the articles provided for a yearly statement of the profits, this 10 per cent would be deducted yearly, and the tools (or some of them) were also supplied at the expense of the firm. The allowance now claimed by defendant for 6 per cent. Interest on capital advanced beyond the $25,000 is in addition to the rental and the 10 per cent. on machinery and tools. These provisions for rental and 10 per cent. are the only written contracts between the parties relating to the allowance, and, unless there was a subsequent agreement the written contract covering the subject-matter of allowances for payments on account of capital must be the basis of the accounting. Defendant asserts and complainant denies that there was such subsequent agreement. No settlement has ever been actually had between the parties in which any such allowance has been made, and the burden, therefore, is on the defendant to establish satisfactorily an agreement which qualifies the written articles. This, in my judgment, he has failed to do.
During the spring of 1896, Dr. Elliott, the son-in-law of the defendant, endeavored in behalf of the latter to adjust the differences between these parties, which had become so serious that there was no personal intercourse between them. One point of difference was the payment of this interest on capital over $25,000, and, as a result of these efforts of Dr. Elliott, complainant wrote a letter to defendant on June 19, 1896, stating the concessions he was willing to make, one of them being the payment of this interest; but the concessions included other charges affecting defendant, such as making the factory rental $2,500, which had been $3,000, and striking off, from January 1, 1896, the 10 per cent. wear and tear of the tools. He proposed, also,the joint pushing of the business. Complainant requested a reply to this letter, if the concessions, taken all together, were agreeable. No reply was ever received, and complainant says he never had any conversation with defendant in which the offer was accepted. Defendant says that on the Saturday following the reception of the letter the complainant came to the factory, and they talked over the reception of the letter, and he (defendant) accepted it. But the subsequent conduct of defendant shows that the concessions on his part stipulated for in the letter, such as the omission from January 1, 1896, of the charge of 10 per cent. on tools, and the reduction of the factory rent from $3,000 to $2,500, were not carried out on the books, according to defendant's statement. An inventory to be taken July 1st was requested in the letter, and this was taken; but the defendant also says that this would have been taken anyhow, at that time, so that this cannot be of any special importance as indicating an acceptance of the terms of the letter. These facts weaken the force of defendant's evidence that the letter was accepted by him as a settlement on the basis proposed therein. The burden of showing that the written articles have been changed in this respect rests upon the defendant, and he has failed, in my judgment, to establish that there was any change. I must hold, therefore, that the agreement to allow this interest, either on the terms mentioned in the letter of June 19, 1896, or otherwise, has not been made out, and that the account must be taken upon the basis of allowance made by the written agreements. If any further directions are required for the accounting, they may be applied for on settlement of decree.