829 F.2d 1075 (Fed. Cir. 1987)

BALDWIN, SENIOR CIRCUIT JUDGE

In 1983, Suessen, brought an action in the district court for infringement of two patents relating to improvements in the technology of open-end spinning devices, U.S. Patent No. 4,059,946 (the ’946 patent) and U.S. Patent No. 4,175,370 (the ’370 patent).

Schubert argues that it has an implied license under the ’946 patent. Its argument involves two agreements.

The first was a license agreement entered in 1982 between Schubert and Murata Machinery, Ltd. (Murata). That agreement, entered into before the filing of this suit in 1983, in pertinent part reads:

The “Patents” were defined [to] include U.S. Patent No. 4,022,011 (’011 patent) and other patents belonging to Murata in the name of Hironorai Hirai. Schubert asserts that, notwithstanding any infringement of ’946, its accused infringement is merely a practicing of the ’011 invention, which it is licensed to do under the 1982 agreement.

The second agreement, entered in 1984 after this lawsuit began, involved Suessen’s purchase of the ’011 and [other] patents from Murata. The agreement reads, in pertinent part:

Schubert asserts that, per the 1984 agreement, Suessen “stepped in the shoes of Murata” [and] cannot – just as Murata cannot – sue under the ’946 or any other patent for infringement based on practicing the ’011 invention. To allow such a suit, Schubert argues, would unfairly take away what it paid for in 1982. Schubert labels its argument one of “legal estoppel.”

[Schubert] asserts an implied license based on its theory of legal estoppel. Though we recognize that theory in appropriate circumstances, it does not work for Schubert here. Legal estoppel is merely shorthand for saying that a grantor of a property right or interest cannot derogate from the right granted by his own subsequent acts. The rationale for that is to estop the grantor from taking back that for which he received consideration. Here, however, we have a suit by a third party, Suessen, under a patent owned by Suessen. The license by the grantor, Murata, did not purport to, and indeed could not, protect Schubert from a suit by Suessen under ’946. Hence, Suessen, by filing in 1983 and now maintaining its suit under ’946, does not derogate from the right given by Murata in the 1982 license agreement.

Figure 6.2 Ownership and license of ’011 and ’946 patents in Spindelfabrik.

Schubert nevertheless urges this three prong argument: (1) “legal estoppel” would prevent Murata from suing under the ’946 patent if it were to acquire it; (2) Suessen “stepped into” Murata’s shoes in 1984 when Suessen acquired the Hirai patents and committed to maintain Schubert’s licensed rights; and hence, (3) just as Murata could not, Suessen cannot sue under the ’946 patent. We reject that argument.

As a threshold matter, a patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee. Even if couched in terms of “[l]icensee is given the right to make, use, or sell X,” the agreement cannot convey that absolute right because not even the patentee of X is given that right. His right is merely one to exclude others from making, using or selling X. Indeed, the patentee of X and his licensee, when making, using, or selling X, can be subject to suit under other patents. In any event, patent license agreements can be written to convey different scopes of promises not to sue, e.g., a promise not to sue under a specific patent or, more broadly, a promise not to sue under any patent the licensor now has or may acquire in the future.

As stated previously, the first prong of Schubert’s three part “stepping in the shoes” argument is that legal estoppel would prevent Murata from suing Schubert under the ’946 patent if Murata were to acquire that patent. However, even assuming, arguendo, that such estoppel against Murata exists, the final two prongs of Schubert’s “stepping in the shoes” argument would fail. Given the assumption of estoppel against Murata, the 1982 license agreement would necessarily be a promise by Murata not to sue under any patent, including those acquired by Murata in the future. In the 1984 agreement, Suessen incurred what Murata promised in 1982. Thus, Suessen would be committed to forebear from suit under (1) the transferred patents and (2) any of Murata’s nontransferred patents (future and present). That commitment does not include a promise not to sue under Suessen’s own ’946 patent.

Schubert’s “standing in the shoes” argument, however, would add to Suessen’s commitment a promise not to sue under Suessen’s separate patents that Murata never owned. On the facts of this case, we cannot interpret the 1984 agreement so broadly, at least not with respect to the ’946 patent.

The district court correctly determined that there is nothing in the 1984 agreement about the ’946 or other Suessen patent rights. Schubert points to no extraneous evidence tending to show any understanding on the part of either contracting party that Suessen was to forego rights under the ’946 or any other patent then owned by Suessen. To the contrary, that a lawsuit under ’946 was ongoing but not mentioned in the 1984 agreement indicates strongly that there was no intent by the parties to have Suessen forfeit its rights under ’946. Furthermore, an implied promise by Suessen to forego its ’946 suit is inconsistent not only with Suessen maintaining its lawsuit after the 1984 agreement but, also, with the course of events leading up to the 1984 contract. In sum, we agree with the district court’s conclusion that the 1984 agreement did not impose on Suessen any obligation to stop its ongoing suit under the ’946 patent.

Schubert argues that not implying a license in this case is unfair because Schubert paid valuable consideration for the right to practice the ’011 invention but is in danger of losing that right as a result of doing no more than that for which it paid. We disagree. The right Schubert paid for in the 1982 agreement was freedom from suit by Murata, not Suessen. Indeed, when Schubert signed the 1982 agreement, it was aware of possible suit by Suessen, who had previously denied Schubert a license under the ’946 patent. Moreover, Schubert has not shown us that it has lost any obligation Murata may still owe it under the 1982 license agreement, e.g., not to sue under any patents Murata still has or may acquire. To rule that the Suessen acquisition of the ’011 patent somehow bestows on Schubert an absolute defense to a suit already filed by Suessen under ’946, would result in an unintended windfall to Schubert that makes no sense under the facts of this case.

AFFIRMED

343 F.2d 655 (7th Cir. 1965)

MAJOR, CIRCUIT JUDGE

This action was brought by plaintiff [Duncan] against defendants [Royal] for alleged trademark infringement of its registered trademarks, “Yo-Yo,” “Genuine Duncan Yo-Yo” and “Butterfly,” unfair competition, false representation of goods and unauthorized use of plaintiff’s trademarks. Defendants by answer denied all allegations of the complaint relevant to plaintiff’s claim for relief.

Following a lengthy trial, the District Court entered its findings of fact, conclusions of law and a judgment order in favor of plaintiff, from which defendants appeal.

On July 23, 1948, [Duncan] entered into an agreement with Louis Marx & Company, Inc. and Charmore Company, whereby [Duncan] granted them a license to use the trademark “Yo-Yo.” The agreement provided that “should Marx abandon the manufacture or/and sale of the bandalore types of toy spinning tops, manufactured and sold by it, then Duncan shall have the right to cancel the license granted herein upon thirty (30) days’ notice in writing given to Marx.”

In 1951, Royal’s predecessor brought an action for declaratory judgment in the District Court for the Northern District of Illinois, by which it sought a cancellation of plaintiff’s registration, “Yo-Yo,” on the ground that it was the generic or a descriptive name of the article upon which it was used.

On September 14, 1955, plaintiff entered into a license agreement with Royal by which it granted to Royal “an exclusive and non-transferable right to use Licensor’s trade-mark, ‘Yo-Yo,’ on or upon or in association with bandalore tops.” This agreement provided, “The parties hereto agree that they will enter into appropriate papers in the United States District Court in the aforesaid litigation (referring to the action for declaratory judgment) wherein said trade-marks shall be held to be valid and existing.”

On November 21, 1955, a consent judgment was entered which found plaintiff to be the owner of the trademark registrations for “Yo-Yo” and for “Genuine Duncan Yo-Yo.” The judgment recited, “Each of the above trademarks is applied and used in connection with a disc-shaped top manipulated up and down on a string, more commonly known as a bandalore top or quiz.” The judgment determined that the trademarks “are valid.”

On September 6, 1961, plaintiff’s attorney directed a letter of cancellation to the Marx and Charmore Companies, the licensees named in the 1948 license agreement stating, “Please consider this letter as the thirty-days’ written notice.” This notice was given as required by a provision contained in that agreement.

Royal contends that … plaintiff, as an inducement for the 1955 license agreement, fraudulently represented that there was no outstanding license agreement when as a matter of fact it knew or should have known the 1948 agreement with Louis Marx & Company, Inc. and Charmore Company was in force and effect. In any event, Royal argues that the [1955] license agreement was invalid because of a mutual mistake as to a material fact and that the consent decree was entered as a result of and as provided for in the license agreement and was, therefore, tainted with the same fraud or mutual mistake.

Plaintiff’s response to these contentions is based upon a finding by the District Court. “This license (referring to the 1948 license to Marx and Charmore) was cancelled by mutual agreement in 1952,” and “Correspondence between Marx and plaintiff indicates an acknowledgment of the cancellation of 1952.” In our judgment, these findings as well as the argument predicated thereon are clearly erroneous and must be rejected.

Plaintiff in support of its cancellation theory relies upon the testimony of Donald Duncan, Sr., that the license was cancelled in 1952 by mutual agreement in a conversation with Marx. Admittedly he gave no thirty-day written notice of cancellation as required by the Duncan–Marx agreement. Nor was such a notice given until 1961, when it was given by plaintiff’s attorney. Plaintiff attempts to bolster its contention on this score by inferences drawn from correspondence between Duncan and Marx following the alleged oral cancellation. An examination of this correspondence as a whole completely negates the inferences which plaintiff professes to discern. For instance, on July 14, 1961, the attorneys for Marx wrote plaintiff, stating, “Our client is licensed by you to use the name ‘Yo-Yo’ as provided in the 1948 agreement.” On July 26, 1961, Marx wrote plaintiff, “We have an agreement to that effect (our right to use the name ‘Yo-Yo’) giving us full permission to use it.” (This is the same Marx with whom Duncan claimed to have had the oral agreement of cancellation in 1952.)

Even after plaintiff’s counsel gave written notice of cancellation in his letter of September 6, 1961, Marx was still contending that its 1948 agreement with plaintiff was in effect. In response to the written notice of cancellation, the attorneys for Marx wrote that they “… consider this attempted cancellation to be without validity or effect.” It may be that when plaintiff’s counsel gave written notice of cancellation in 1961, he was without knowledge of the alleged oral cancellation in 1952, or if he had such knowledge, recognized it as futile. In this connection it is pertinent to note that Donald F. Duncan, Jr., plaintiff’s president, testified that to his knowledge the 1948 agreement with Marx and Charmore had not been cancelled and was still in full force and effect in 1955, when the license agreement was entered into between plaintiff and Royal.

Thus, the conclusion is inescapable that the 1948 license agreement between plaintiff and Marx and Charmore was in full force and effect at the time plaintiff entered into a license agreement with Royal and granted to it “an exclusive” right. Royal’s president, Joseph T. Radovan, testified that he would not have settled Royal’s suit against plaintiff for declaratory judgment if he had known there was an outstanding license agreement with some other company. The most charitable characterization which can be made of plaintiff’s misrepresentation is that it was a mutual mistake, relied upon by Royal to its prejudice. The [1955] license agreement … is, therefore, invalid.

186 F.3d 283 (2d Cir. 1999)

MOTLEY, DISTRICT JUDGE

This is an appeal of a civil judgment against Professor Victor H. Vroom for breach of contract and copyright infringement relating to an exclusive licensing agreement between Dr. Vroom and Kepner-Tregoe, Inc. (K-T). The licensing agreement provided K-T with the exclusive use of executive leadership training materials co-authored by Dr. Vroom in return for the payment of royalties to Dr. Vroom. The [issue] presented by this appeal [is] whether the district court’s finding of liability against Dr. Vroom for intentional copyright infringement and breach of contract should be upheld. For the reasons discussed below, the decision of the district court is affirmed.

Background

In 1972, Dr. Vroom, a professor at Yale University’s School of Organization and Management, entered into a licensing agreement with K-T, an international management training company. This agreement granted K-T the exclusive worldwide rights to specific copyrighted materials co-authored by Dr. Vroom. These materials, known as the Vroom–Yetton model, were used to teach managers how to make better decisions. In return, K-T agreed to pay Dr. Vroom and his co-author, Dr. Philip W. Yetton, royalties based on its exclusive use of the licensed materials. The licensing agreement also included a teaching clause that allowed Dr. Vroom to retain non-assignable rights to use the licensed materials for his “own teaching and private consultation work.”

In the mid-1980s, Dr. Vroom created a more sophisticated software program, entitled “Managing Participation in Organizations” (MPO), which partially overlapped with the materials licensed to K-T. Dr. Vroom used the MPO program to conduct management training seminars for corporate executives at Yale University and other college campuses. Upon learning of Dr. Vroom’s use of the copyrighted materials, K-T initiated this lawsuit in 1989.

K-T alleges that Dr. Vroom’s use of the MPO program in his teaching of executives in the university setting infringes on its copyrights and constitutes a breach of the licensing agreement. It further alleges that Dr. Vroom breached the licensing agreement by assigning the rights to the MPO program, which infringed K-T’s licensed materials, to Leadership Software Inc. (LSI), a Texas company founded by Dr. Vroom and his colleague, Dr. Arthur Jago. LSI was created to market the MPO program.

In 1990, K-T initiated a separate lawsuit against LSI and Dr. Jago in federal district court in Texas. Dr. Vroom was not a defendant in the suit because personal jurisdiction was unavailable. In that case, K-T alleged copyright infringement based on LSI’s sales of the MPO program, which contained substantial similarities to the Vroom–Yetton model, the copyrighted materials exclusively licensed to K-T. The Texas district court found in favor of K-T and awarded it $46,000 in actual damages as well as injunctive relief.

After a five-day bench trial in April 1997, the district court in the present action held that Dr. Vroom’s use of the licensed materials, including the infringing MPO program, in his teaching of executives in the university setting was not permitted under the teaching clause of the licensing agreement. The trial court found that the teaching clause was ambiguous as written and looked to other contemporaneous documentary evidence for clarification of the parties’ intentions. The lower court interpreted the teaching clause to mean that Dr. Vroom was only allowed to use the copyrighted materials for his teaching of bona fide enrolled graduate and undergraduate students. Moreover, the district court found that Dr. Vroom willfully infringed the copyrighted material licensed to K-T and breached his contract with K-T when he taught the exclusively licensed materials to large groups of executives in the university setting.

Discussion

The central issue in this case involves the proper interpretation of the teaching clause of the licensing agreement, which allows Dr. Vroom to use the licensed materials in the course of his “own teaching and private consultation work.” We find that the district court did not err in finding the teaching clause ambiguous. It properly looked to prior negotiations between the parties to determine the parties’ intentions regarding the interpretation of the clause. Furthermore, credible evidence was presented at trial that supported the lower court’s interpretation of the teaching clause so as to limit Dr. Vroom’s teaching to only bona fide enrolled undergraduate and graduate students.

Dr. Vroom argues that the district court effectively rewrote the clear and unambiguous language of the licensing agreement by restricting his teaching of the licensed materials to only students. Dr. Vroom contends that the parties intended to allow him to retain broad and unlimited rights to use the licensed materials in his teaching, including his teaching of executives in the university setting. Dr. Vroom also claims that the trial court’s decision will virtually deprive him of his right to earn a living because he is enjoined from using the MPO program in his courses for executives at Yale and other colleges.

We review the district court’s construction of the text of the licensing contract de novo. To begin with, we agree with the district court that the teaching clause was ambiguous. K-T contends that this clause was only intended to allow the teaching of undergraduate and graduate students; Dr. Vroom argues that this clause, which also allowed “private consulting,” also permitted him to teach classes to large groups of executives. We hold, as did the district court, that in the context of the agreement the word “teaching” was susceptible to the interpretation advanced by either Dr. Vroom or K-T. Accordingly, the district court was entitled to consider extrinsic evidence to interpret the contractual language.

We also affirm the district court’s holding limiting the clause to the teaching of enrolled graduate and undergraduate students. The communications of the parties during the negotiation of the licensing agreement support this interpretation. K-T wrote a memorandum to Dr. Vroom in January of 1972, stating that it wanted to prevent “mass” teaching of the materials. Dr. Vroom produced no evidence at trial that he ever contradicted K-T’s interpretation of the teaching clause in any communications with K-T throughout the remainder of the negotiations. The district court properly relied on this evidence to conclude that the teaching clause did not extend beyond the teaching of enrolled graduate and undergraduate students.

222 N.Y. 88 (N.Y. App. 1917)

CARDOZO, JUSTICE

The defendant styles herself “a creator of fashions.” Her favor helps a sale. Manufacturers of dresses, millinery and like articles are glad to pay for a certificate of her approval. The things which she designs, fabrics, parasols and what not, have a new value in the public mind when issued in her name. She employed the plaintiff to help her to turn this vogue into money. He was to have the exclusive right, subject always to her approval, to place her indorsements on the designs of others. He was also to have the exclusive right to place her own designs on sale, or to license others to market them. In return, she was to have one-half of “all profits and revenues” derived from any contracts he might make. The exclusive right was to last at least one year from April 1, 1915, and thereafter from year to year unless terminated by notice of ninety days. The plaintiff says that he kept the contract on his part, and that the defendant broke it. She placed her indorsement on fabrics, dresses and millinery without his knowledge, and withheld the profits. He sues her for the damages, and the case comes here on demurrer.

The agreement of employment is signed by both parties. It has a wealth of recitals. The defendant insists, however, that it lacks the elements of a contract. She says that the plaintiff does not bind himself to anything. It is true that he does not promise in so many words that he will use reasonable efforts to place the defendant’s indorsements and market her designs. We think, however, that such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view to-day. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed. If that is so, there is a contract.

The implication of a promise here finds support in many circumstances. The defendant gave an exclusive privilege. She was to have no right for at least a year to place her own indorsements or market her own designs except through the agency of the plaintiff. The acceptance of the exclusive agency was an assumption of its duties. We are not to suppose that one party was to be placed at the mercy of the other. Many other terms of the agreement point the same way. We are told at the outset by way of recital that “the said Otis F. Wood possesses a business organization adapted to the placing of such indorsements as the said Lucy, Lady Duff-Gordon has approved.” The implication is that the plaintiff’s business organization will be used for the purpose for which it is adapted. But the terms of the defendant’s compensation are even more significant. Her sole compensation for the grant of an exclusive agency is to be one-half of all the profits resulting from the plaintiff’s efforts. Unless he gave his efforts, she could never get anything. Without an implied promise, the transaction cannot have such business “efficacy as both parties must have intended that at all events it should have”. But the contract does not stop there. The plaintiff goes on to promise that he will account monthly for all moneys received by him, and that he will take out all such patents and copyrights and trademarks as may in his judgment be necessary to protect the rights and articles affected by the agreement. It is true, of course, as the Appellate Division has said, that if he was under no duty to try to market designs or to place certificates of indorsement, his promise to account for profits or take out copyrights would be valueless. But in determining the intention of the parties, the promise has a value. It helps to enforce the conclusion that the plaintiff had some duties. His promise to pay the defendant one-half of the profits and revenues resulting from the exclusive agency and to render accounts monthly, was a promise to use reasonable efforts to bring profits and revenues into existence. For this conclusion, the authorities are ample.

The judgment of the Appellate Division should be reversed, and the order of the Special Term affirmed, with costs in the Appellate Division and in this court.

Figure 7.4 Lucy Christiana Lady Duff Gordon (1863–1935).

400 F.3d 130 (2d Cir. 2005)

CALABRESI, Circuit Judge.

This breach of contract dispute raises the question of whether, under New York law, two parties entering into a licensing agreement for radio ratings and data may authorize one party to adjust the price of that data unilaterally at some point in the future. [W]e conclude that the contract before us delegated, with unmistakable clarity, price-setting authority to a single party, and that New York law does not invalidate such contracts. We therefore vacate the district court’s order of summary judgment and remand for reconsideration.

Background

Plaintiff-appellant Arbitron, Inc. (“Arbitron”), a Delaware corporation, is a popular listener-demographics data provider for North American radio stations. Arbitron licenses its copyrighted listener data to regional AM and FM stations, which then use the demographic profiles of station listeners to attract advertisers. In 1997, Arbitron entered into one such license – a “Station License Agreement to Receive and Use Arbitron Radio Listening Estimates” (the “License Agreement”) with defendant Tralyn Broadcasting, Inc. (“Tralyn”), a Mississippi corporation. The License Agreement permitted Tralyn’s only radio station (WLUN-FM in the Gulfport, Mississippi area, later known as WLNF-FM) to use Arbitron listening data reports. Over its five-year term, the License Agreement charged Tralyn a monthly rate of $1,729.57 for the use of Arbitron’s listening data reports by this single station.

Were this monthly license fee the only pricing portion of the License Agreement, this case would present an extremely simple contract dispute. But another clause of the agreement – which we shall call the “escalation clause” – provided that, were Tralyn or its successor to acquire additional radio stations in the same or adjacent regional markets, a new license fee would be charged. Upon acquiring such stations, Tralyn was required to notify Arbitron so that Arbitron could determine a new license fee, and, if necessary, approve the assignment of the licensing agreement to a new party in interest. Any new licensing fee would be set, according to the escalation clause, at Arbitron’s discretion. The clause provided:

Pursuant to this “escalation clause,” Arbitron was given the right to increase the license fee as Tralyn purchased additional stations (or as entities owning additional stations purchased Tralyn). Thus, the escalation clause assumed that, as Tralyn acquired additional regional stations, it would share listener data among each of these stations, and, by allowing Arbitron to increase Tralyn’s fees, the clause provided Arbitron with a mechanism to reflect this additional use.

On October 31, 1999, Tralyn was purchased by defendant-appellant JMD, Inc. (“JMD”) a Mississippi corporation. At the time JMD acquired Tralyn and WLNF-FM, JMD also controlled at least four other stations in the Gulfport, Mississippi market (WROA-AM, WZKX-FM, WGCM-AM, and WGCM-FM). The purchase agreement between JMD and Tralyn assigned to JMD the License Agreement; JMD thereby assumed responsibility for paying Arbitron, and implicitly, for notifying Arbitron of the additional radio stations now operated by Tralyn’s successor. But in violation of Paragraph 11 of the License Agreement, neither JMD nor Tralyn obtained Arbitron’s prior written consent to the License Agreement’s assignment. Nor did they provide Arbitron with notice of a change in ownership of WLNF-FM. Instead, from November 1999 until June 2002, JMD simply paid the original single-station monthly license fee ($1,729.57) directly to Arbitron. In return, Arbitron provided WLNF-FM with updated listening data (specifically, the Fall 1999 Ratings Book and Research Data – referred to by the parties as the “Fall Book” – which was published in February 2000).

In June 2000, Arbitron discovered, through its own diligence, that JMD had purchased Tralyn and that the terms of the License Agreement had been breached. Arbitron thereupon notified JMD by letter that it was exercising its right to increase the monthly licensing fee under the escalation clause of the License Agreement. Arbitron determined JMD’s new annual license fee by multiplying the single-station license fee ($1,779.57) by five ($8,897.85) to reflect the five JMD stations that could now share Arbitron’s listener data. It then reduced that figure by 35% to reflect the typical volume discount for licenses covering five or more stations. The result was a revised monthly charge of $5,784.93. Based on this new licensing fee, which Arbitron claimed should have been paid since the October 1999 purchase, Arbitron sent JMD an invoice for “incomplete” payments made between October 1999 and June 2000. It also sent an invoice indicating the additional payments that would be due for the next quarter’s listening reports.

JMD never paid these invoices, and subsequently refused to pay anything – even the $1,779.57 due each month under the original one-station License Agreement. Arbitron therefore stopped sending JMD its listening data reports, as it was permitted to do under the License Agreement upon the licensee’s nonpayment of the monthly licensing fee.

Arbitron filed the instant suit against Tralyn and JMD on November 1, 2001. Its complaint for breach of contract sought $172,394.22, representing all moneys due under the Licensing Agreement (plus interest) from June 1999 to the end of the contract’s five-year term.

On June 5, 2003, the district court … granted summary judgment – but not monetary damages – to JMD. The district court concluded that because “[n]either the escalation clause in ¶ 11, nor any other section of the Agreement, contains any basis for determining the new rate to be paid Arbitron in the event changes in ownership occur,” the License Agreement’s escalation clause was unenforceably vague under New York law. Arbitron now challenges the district court’s decision.

Discussion

The district court based its decision on three New York cases, each dealing with contracts for the sale or lease of real property. Upon review of these same cases, we conclude that the escalation clause is enforceable under the common law of New York. This is so because the clause before us is not an “agreement to agree,” under which future negations between the parties must occur, but is instead an acknowledgment that, if certain conditions arise in the future, no new agreement is required before Arbitron may set new license terms. Such an agreement is not unenforceably vague under New York’s common law.

The seminal New York precedent on unenforceably indefinite contracts is [Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105, 417 N.E.2d 541 (1981)]. There, the Court of Appeals was faced with an agreement between a landlord and a tenant to lease a commercial space for five years at a monthly rate beginning at $500 and escalating over five years to $650, with the option to renew the lease for another five-year term at a rent to be determined by the parties. At the close of the lease’s five-year term, the landlord sought to increase the rent from $650 to $900 monthly. Surprised, the tenant employed an assessor, who appraised the market value of the premises at no more than $550 per month. The tenant sued for specific performance, seeking a new five-year lease at the fair market rate of $550. In resolving the case, the Delicatessen majority recognized that the U.C.C., as implemented by the New York legislature, counseled in favor of supplying missing price terms to save and enforce the agreement, and that the terms supplied by a court under the U.C.C. would correspond to a good’s fair market value. Nevertheless, because the New York statute’s terms made clear that leases or contracts for the sale of real property were not covered by the U.C.C., the Court of Appeals refused to enforce the agreement. It concluded that

Upon review of Delicatessen [and other cases], we conclude that the License Agreement’s escalation clause is indeed enforceable under the common law of New York. The escalation clause, unlike the promise to set a future rent rate collectively in Delicatessen, does not require the parties to reach an “agreement” on price at some point in the future. That is, the escalation clause is not an “agreement to agree.” Instead … it is a mechanism for objectively setting material terms in the future without further negotiations between both parties. It does so, moreover, with sufficient evidence that both parties intended that [pricing] arrangement. The escalation clause clearly and unambiguously states that, in the event that Tralyn or its successors acquired new radio stations in the same (or an adjacent) geographic market, “Arbitron may redetermine its Gross Annual Rate for the Data, Reports and Services licensed hereunder … effective the first of the month following [the acquisition].” The escalation clause further provides, in unambiguous language, that Arbitron may exercise this power to “redetermine” the license fee “[n]otwithstanding Station’s failure to notify Arbitron” that an acquisition had occurred.

The intent of the parties is manifest in the language of the agreement. Both Arbitron and Tralyn explicitly agreed that Arbitron was authorized to adjust the license fee in the event that Tralyn or its successors began to operate additional stations. This fact makes the instant case very different from those disputes in which courts are faced with “no objective evidence” of a shared intent to permit one party to set prices in the future. And it in no way leads a court enforcing the contract to “impos[e] its own conception of what the parties should or might have undertaken.” Accordingly, we conclude that the district court erred in holding the License Agreement’s escalation clause “impenetrably vague” under New York law.

Because we believe that the License Agreement’s escalation clause is not inconsistent with New York law, we conclude that the district court erred in granting summary judgment to JMD. We therefore vacate the district court’s order and remand the case for further proceedings.

187 F.3d 690 (7th Cir. 1999)

BAUER, CIRCUIT JUDGE

Background

On October 30, 1995, [Edwin] Kennedy and the [National Juvenile Detention Association (“NJDA”)] entered into an agreement for Kennedy to provide consulting services, to conduct a study of the juvenile justice requirements of the Seventh Judicial Circuit of Illinois (the “circuit”), and to submit a written report of his findings. The study was funded by the [Illinois Juvenile Justice Commission (“IJJC”)]. The goals of the study were to collect data regarding current juvenile detention practices, to recommend improvements in the juvenile detention process, and to estimate future juvenile detention requirements within the circuit. The contract was to run until September 30, 1996.

On September 20, 1996, Kennedy submitted a draft of his report to the NJDA. At the behest of the NJDA and IJJC, Kennedy made minor revisions to his report for no additional compensation. A few months later, the NJDA requested that Kennedy, in exchange for an additional $10,000, make more revisions to his report because the original changes were not as extensive as they had hoped. Kennedy refused to make the revisions because he was concerned about compromising the integrity of his work, and he subsequently applied to register a copyright in his work. The copyright was effectively registered on January 13, 1997. In the meantime, the NJDA requested that Kennedy provide a disk with his copy of the final report. Thinking this was a condition for payment according to the agreement, Kennedy supplied the NJDA with the disk. When the contract had expired and Kennedy had refused to make further revisions to his report, the NJDA hired Craig Boersema to supervise the completion of the report. Kennedy was fully compensated for his completed work.

On January 17, 1997, Anne Studzinski, administrator of the IJJC, hosted a meeting in Chicago, attended by the NJDA’s Executive Director Earl Dunlap, and Boersema, for the purpose of altering Kennedy’s report; Kennedy neither knew of nor assented to the revision. Studzinski defended her revision of the report based on a clause in the contract which states:

In March of 1997, Kennedy released his version of the report, and on April 1, 1997, Dunlap issued a press release discrediting Kennedy and his work in order to promote the revised version of the work. The NJDA published the official report in August of 1997.

Kennedy filed suit against the NJDA and IJJC for copyright infringement. The NJDA and IJJC filed motions to dismiss the claim based on lack of subject matter jurisdiction, lack of personal jurisdiction, improper venue, and failure to state a claim. The district court [granted] defendants’ motions to dismiss for failure to state a claim, rejecting the other theories as well as the request for sanctions. [Kennedy appeals.] The NJDA re-asserts its contention that it had the right to produce derivative works from Kennedy’s report or, in the alternative, that it had a right, as a joint author of the study, to publish its version of the report.

Analysis

Kennedy concedes that the contractual agreement conferred upon the NJDA the right to reproduce and publish his report, however he argues that it did not grant either the NJDA or IJJC the right to create derivative works from it.

[The] district court found, and we agree, that the consulting agreement granted the NJDA a nonexclusive license to reproduce, publish, and use Kennedy’s copyrighted report. The court also found that the term “use” must give the defendants rights beyond those of reproduction and publication. Moreover, it found that, considering the broad, comprehensive grant of authority given to the NJDA and IJJC, it was irrelevant that the agreement did not specifically refer to the defendants’ right to create derivative works from Kennedy’s copyrighted materials. Therefore, the district court found that the agreement gave the defendants permission to alter Kennedy’s report and create a derivative work from it.

The NJDA suggests in its brief that the word “use” in this case is synonymous with “prepare derivative works.” While we will not go so far as to agree with this interpretation, in the context of the consulting agreement between Kennedy and the NJDA, the term “use” does encompass the act of creating derivative works. To read the agreement any other way would render the term “use” superfluous. [A]s the contract stands, it grants the defendants the right to use Kennedy’s report for any purpose whatsoever.

[AFFIRMED.]

MANION, CIRCUIT JUDGE, concurring in part and dissenting in part.

[T]he issue is whether “use,” the third verb in the clause, unambiguously grants to the defendants the right to prepare derivative works. The other two verbs in this clause are unambiguous because they are statutory terms of art. But the drafters of the contract (the defendants) chose not to use the third term of art – “prepare derivative works.” Instead they used the vague term “use.” This suggests that the parties intended “use” to mean something other than simply “prepare derivative works.” They may have intended it to mean something more than prepare derivative works or perhaps something less. It is very possible that they intended it to mean only prepare derivative works. But their intention is not clear from the contract’s text, and so this term is “ambiguous.” Thus the parties should be given the opportunity to create a record to show what meaning was intended, and doubts should be construed against the drafters to the extent doing so does not otherwise frustrate the intentions of the parties. Thus I would reverse the district court’s dismissal.

2001 U.S. Dist. LEXIS 3784 (N.D. Ill. 2001)

SCHENKIER, MAGISTRATE JUDGE

At its core, this case presents a basic contract dispute between iXL, Inc. (“iXL”) and AdOutlet.Com, Inc. (“AdOutlet”). In its amended complaint, iXL claims that it entered into a contract with AdOutlet to provide consulting and web design services for a fee; that iXL provided the services; that iXL billed AdOutlet $2,913,708 for the work and expenses associated with those services; but that AdOutlet has paid only $1,195,505 of the billed amount, leaving a substantial shortfall that iXL now seeks to collect under theories of breach of contract, accounts stated, open book account, and quantum meruit. AdOutlet denies that it owes iXL anything beyond what AdOutlet already has paid; indeed, AdOutlet complains it has paid too much, and has asserted a breach of contract counterclaim seeking recovery of an unspecified amount for “significant costs and expenses” that AdOutlet allegedly has incurred because AdOutlet had to correct short-comings in iXL’s performance.

iXL claims that AdOutlet is using computer source code property that iXL created, but for which AdOutlet has not paid, and that AdOutlet thus has committed misappropriation, conversion and unauthorized use of intellectual property in violation of common law, and copyright infringement … iXL has moved for a preliminary injunction, seeking to bar AdOutlet from using the computer code and intellectual property allegedly supplied by iXL on AdOutlet’s web site.

On March 22, 2000, iXL and AdOutlet entered into a Master Service Agreement (“the Agreement”), pursuant to which iXL agreed to provide AdOutlet with consulting and web design services on an hourly fee and expense basis. As a substantial part of those services, iXL was to create computer “source code” to assist in the operation of AdOutlet’s web site.

The Agreement contemplated that the specific tasks that iXL would perform, and the price for those tasks, would be set forth in separate Statements of Work (“S.O.W.”), which would incorporate the terms of the Agreement.

Under the Agreement, iXL possessed the authority to “determine the method, details, and means of performing the services to be performed hereunder, subject to the standards set forth in the Statement of Work and the approval of Client, which shall not be unreasonably withheld.” iXL warranted that it would perform services for AdOutlet “in material conformity to the specifications set forth in a Statement of Work contemplated hereunder in a professional and workmanlike manner.” At the same time, the Agreement contained a disclaimer by iXL, stating that it did not warrant that its services would be “error free,” or that AdOutlet would be able to obtain certain results due to the services provided by iXL, or that iXL was providing any warranty of merchantability, title, or fitness for a particular purpose.

The Agreement specified that for the services provided under the Agreement, AdOutlet “shall pay to iXL the fees in the amount and manner set forth in the Statement of Work,” as well as expenses. The Agreement also set forth the remedies that iXL could pursue in the event of nonpayment by AdOutlet. If AdOutlet failed to pay for sixty days after the date of the invoice, the Agreement authorized iXL’s “suspension of the performance of the services.” The Agreement further provided that if iXL pursued legal action to recover on unpaid invoices, AdOutlet would be liable to pay “in addition to any amount past due, plus interest accrued thereon, all reasonable expenses incurred by iXL in enforcing this Agreement, including, but not limited to, all expenses of any legal proceeding related thereto and all reasonable attorneys’ fees incurred in connection therewith.”

The Agreement provided for various circumstances under which the Agreement could be terminated. For example, the Agreement provided that upon a default of payment by AdOutlet, which had not been cured within thirty days, iXL could terminate the Agreement upon written notice. The Agreement stated that upon termination of the Agreement for any of the specified reasons, AdOutlet “shall be obligated to pay iXL for all services rendered pursuant to any outstanding Statements of Work through the effective date of such termination.”

Pursuant to the Agreement, the parties entered into six separate Statements of Work. The Statements of Work defined the “Services” that iXL would perform as those set forth in the Statement of Work, and “Works” as “all deliverables developed or prepared by iXL in the performance of Services hereunder.” The Statements of Work contemplated that in performing Services and Works for AdOutlet, iXL would use certain “Pre-Existing Works” that already had been developed by iXL; that iXL also would use certain “Client Materials” obtained from AdOutlet, such as information and ideas; and that iXL would create certain new material for AdOutlet. Paragraph 3 of the consulting terms and conditions set forth the ownership rights in these three different categories of materials. Because it is central to the present motion, we set forth below that provision in its entirety:

AdOutlet does not dispute that iXL actually worked the hours for which it billed AdOutlet.

During the summer of 2000, iXL sent portions of the source code to AdOutlet by e-mail. On or about October 1, 2000, iXL delivered to AdOutlet two compact discs containing the source code iXL created for the web site. As it was delivered to AdOutlet, the source code provided by iXL bore a legend stating that AdOutlet owns the copyright.

The payment disputes between the parties reflect the ongoing disagreements between the parties during iXL’s performance of work … AdOutlet claims that the source code prepared by iXL was fraught with defects, which over a period of several months iXL had difficulty in correcting and that, as a result, AdOutlet personnel had to fix. AdOutlet claims that the vast majority of the source code used for the AdOutlet web site thus was developed by AdOutlet, and not iXL.

While iXL does not directly dispute that it encountered some difficulties in supplying code and other information that met AdOutlet’s requirements, iXL contends that iXL ultimately provided satisfactory code and other information – which iXL contends AdOutlet is using without paying for it.

Despite its criticisms about the quality of the code iXL supplied, AdOutlet admits that it has not exercised its option under paragraph 2.3 of the terms and conditions to the Statements of Work to reject the source code, to return it to iXL, and to terminate the Agreement. Rather, AdOutlet has installed the source code and continues to use it on its web site.

The difficulty that iXL confronts is in establishing a likelihood of success on the proposition that iXL, rather than AdOutlet, is the owner of a copyright in the source code. On this point, iXL runs headlong into the language of the Agreement that iXL itself drafted. The Statements of Work specifically state that the Works and Services provided by iXL (which include the source code) are works made for hire for AdOutlet, and that AdOutlet “shall be considered the author and shall be the copyright owner of the works.” This language plainly constitutes an express agreement that the source code is work made for hire, as required by 17 U.S.C. § 101. Under 17 U.S.C. § 201(b), the “person for whom the work was prepared [here, AdOutlet] is considered the author for purposes of this title, and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright.”

iXL contends that taken together, the Agreement and the Statements of Work show that the parties have “expressly agreed otherwise,” by making full payment of the invoices a condition precedent to AdOutlet’s ownership of the source code. In order for iXL to demonstrate likelihood of succeeding on this point, iXL must show both (1) that it is likely to succeed on its claim that AdOutlet breached the contract by nonpayment, and (2) that such a breach deprives iXL of ownership of the source code.

iXL has shown some likelihood of success on this first point. There is nothing here to suggest that the Agreement and the Statements of Work, signed by both parties, are not valid and enforceable. Nor is there any dispute that iXL has billed AdOutlet for some $2.9 million of time and expense that iXL actually incurred in providing services to AdOutlet, that AdOutlet has not paid nearly that full amount, and that as a result iXL has suffered injury – iXL admittedly has received some $1.7 million less than it billed AdOutlet. While AdOutlet asserts that iXL failed to perform adequately under the Agreement and that AdOutlet’s failure to pay the full amount is thus not a breach, there is evidence that could establish AdOutlet has accepted iXL’s work. The evidence shows that AdOutlet has not returned the source code submitted by iXL, and has not exercised the procedure set forth in the contract for termination upon iXL’s failure to timely correct non-conforming works. To the contrary, the evidence shows that AdOutlet is using the source code developed by iXL on the web site, and that the source code developed by iXL is a critical component to the operation of AdOutlet’s web site. Given these circumstances, the Court finds that iXL has established some likelihood of success on its claim of breach of contract.

However, iXL has not established a likelihood of success on the proposition that a breach of contract results in AdOutlet being deprived of ownership of the source code. The Statements of Work provide that the Services provided by iXL are “works made for hire” for AdOutlet. The Copyright Act provides that the person for whom the work was prepared is considered the author and owns the rights comprised in the copyright “unless the parties have expressly agreed otherwise in a written instrument signed by them.” The Agreement and the Statements of Work contain no express agreement that AdOutlet will be considered the author of the source code and the owner of its copyright only after full payment of the invoices. Nor do these agreements state that AdOutlet is barred from using the source code in its web site if AdOutlet has failed to pay the full invoice amount. Indeed, when iXL delivered the CD ROMs containing the source code on or about October 1, 2000 – by which time AdOutlet already was nearly $900,000 in arrears in payment for more than 60 days – iXL nonetheless affixed to the code a legend identifying AdOutlet as the holder of the copyright.

In the absence of an express agreement, iXL attempts to cobble together an implied condition that AdOutlet cannot own (or use) the source code until it has made full payment of the invoice price to iXL. iXL points to two provisions in particular, neither of which bears the weight that iXL seeks to place on it.

First, iXL points to paragraph 2.2 of the terms and conditions of the Statements of Work, which state that AdOutlet “shall perform the tasks set forth in the Statement as a condition to iXL’s obligations to perform hereunder.” iXL claims that this language establishes that full payment by AdOutlet is a condition precedent to AdOutlet being deemed the author and copyright holder of the source code. iXL certainly could have made full payment by AdOutlet a condition precedent. But it is hard to read paragraph 2.2 as doing so. The word “tasks” is not defined in the Agreement or in the Statements of Work. The Court finds it plausible that paragraph 2.2 is to be read in conjunction with paragraph 2.4, which provides that iXL’s obligation to meet contractual deadlines is contingent upon AdOutlet complying “in a timely manner, with all reasonable requests of iXL.” But to construe “task” to mean “full payment” by AdOutlet, as iXL argues, would make no sense. Read that way, under paragraph 2.2 iXL would have absolutely no “obligations to perform” until AdOutlet first had paid the full contract price – which is clearly not what the parties intended, as measured both by the wording of the contract and the actual course of performance by the parties.

In this case, iXL drafted the Agreement and the Statements of Work, and negotiated it at arms length with AdOutlet. iXL had every opportunity, and presumably every incentive, to provide in the Agreement and the Statements of Work for adequate safeguards to insure payment – including a provision that conditioned AdOutlet’s right of ownership in use of the copyrighted information upon payment of the full invoice price. Now that the contract has gone sour, iXL asks the Court to step in and provide it with a remedy (and with leverage) that iXL did not bargain for. The Court does not believe that iXL has shown some likelihood of succeeding in that effort.

493 N.E.2d 423 (Ill. App., 3d Dist., 1986)

BARRY, JUSTICE

This matter before us arises out of the dissolution of the parties’ partnership, the Pav-Saver Manufacturing Company.

Plaintiff, Pav-Saver Corporation (PSC), is the owner of the Pav-Saver trademark and certain patents for the design and marketing of concrete paving machines. Harry Dale is the inventor of the Pav-Saver “slip-form” paver and the majority shareholder of PSC, located in Moline. H. Moss Meersman is an attorney who is also the owner and sole shareholder of Vasso Corporation. In 1974 Dale, individually, together with PSC and Meersman, formed Pav-Saver Manufacturing Company for the manufacture and sale of Pav-Saver machines. Dale agreed to contribute his services, PSC contributed the patents and trademark necessary to the proposed operation, and Meersman agreed to obtain financing for it. The partnership agreement was drafted by Meersman and approved by attorney Charles Peart, president of PSC. The agreement contained two paragraphs which lie at the heart of the appeal and cross-appeal before us:

1. 3. The duties, obligations and functions of the respective partners shall be:

   1. A. Meersman shall provide whatever financing is necessary for the joint venture, as required.

   2. B. (1) PAV-SAVER shall grant to the partnership without charge the exclusive right to use on all machines manufactured and sold, its trademark “PAV-SAVER” during the term of this Agreement. In order to preserve and maintain the good will and other values of the trademark PAV-SAVER, it is agreed between the parties that PAV-SAVER Corporation shall have the right to inspect from time to time the quality of machines upon which the licensed trademark PAV-SAVER is used or applied on machines for laying concrete pavement where such machines are manufactured and/or sold. Any significant changes in structure, materials or components shall be disclosed in writing or by drawings to PAV-SAVER Corporation.

   3. (2) PAV-SAVER grants to the partnership exclusive license without charge for its patent rights in and to its Patent No. 3,377,933 for the term of this agreement and exclusive license to use its specifications and drawings for the Slip-form paving machine known as Model MX 6 – 33, plus any specifications and drawings for any extensions, additions and attachments for said machine for said term. It being understood and agreed that same shall remain the property of PAV-SAVER and all copies shall be returned to PAV-SAVER at the expiration of this partnership. Further, PAV-SAVER, so long as this agreement is honored and is in force, grants a license under any patents of PAV-SAVER granted in the United States and/or other countries applicable to the Slip-Form paving machine.

      …

2. 11. It is contemplated that this joint venture partnership shall be permanent, and same shall not be terminated or dissolved by either party except upon mutual approval of both parties. If, however, either party shall terminate or dissolve said relationship, the terminating party shall pay to the other party, as liquidated damages, a sum equal to four (4) times the gross royalties received by PAV-SAVER Corporation in the fiscal year ending July 31, 1973, as shown by their corporate financial statement. Said liquidated damages to be paid over a ten (10) year period next immediately following the termination, payable in equal installments.

Figure 9.3 U.S. Patent No. 3,377,933 was assigned to Pav-Saver Corp. and licensed exclusively to the PSMC joint venture.

In 1976, upon mutual consent, the PSC/Dale/Meersman partnership was dissolved and replaced with an identical one between PSC and Vasso, so as to eliminate the individual partners.

It appears that the Pav-Saver Manufacturing Company operated and thrived according to the parties’ expectations until around 1981, when the economy slumped, sales of the heavy machines dropped off significantly, and the principals could not agree on the direction that the partnership should take to survive. On March 17, 1983, attorney Charles Peart, on behalf of PSC, wrote a letter to Meersman terminating the partnership and invoking the provisions of paragraph 11 of the parties’ agreement.

In response, Meersman moved into an office on the business premises of the Pav-Saver Manufacturing Company, physically ousted Dale, and assumed a position as the day-to-day manager of the business. PSC then sued in the circuit court of Rock Island County for a court-ordered dissolution of the partnership, return of its patents and trademark, and an accounting. Vasso counter-claimed for declaratory judgment that PSC had wrongfully terminated the partnership and that Vasso was entitled to continue the partnership business, and other relief pursuant to the Uniform Partnership Act. Other related suits were filed, but need not be described as they are not relevant to the matters before us. After protracted litigation, the trial court ruled that PSC had wrongfully terminated the partnership; that Vasso was entitled to continue the partnership business and to possess the partnership assets, including PSC’s trademark and patents; that PSC’s interest in the partnership was $165,000, based on a $330,000 valuation for the business; and that Vasso was entitled to liquidated damages in the amount of $384,612, payable pursuant to paragraph 11 of the partnership agreement. Judgment was entered accordingly.

Both parties appealed. PSC takes issue with the trial court’s failure to order the return of its patents and trademark or, in the alternative, to assign a value to them in determining the value of the partnership assets. Further, neither party agrees with the trial court’s enforcement of their agreement for liquidated damages. In its cross-appeal, PSC argues that the amount determined by the formula in paragraph 11 is a penalty. Vasso, on the other hand, contends in its appeal that the amount is unobjectionable, but the installment method of payout should not be enforced.

In addition to the aforecited paragraphs of the parties’ partnership agreement, the resolution of this case is controlled by the dissolution provision of the Uniform Partnership Act (Ill. Rev. Stat. 1983, ch. 106 1/2, pars. 29 through 43). The Act provides:

1. (2). When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows:

   1. (a) Each partner who has not caused dissolution wrongfully shall have,

      • …

      1. II. The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement.

   2. (b) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name, either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable under clause (2a II) of this section, and in like manner indemnify him against all present or future partnership liabilities.

   3. (c) A partner who has caused the dissolution wrongfully shall have:

      • …

      1. II. If the business is continued under paragraph (2b) of this section the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damages caused to his co-partners by the dissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the court and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner’s interest the value of the good will of the business shall not be considered.

Initially we must reject PSC’s argument that the trial court erred in refusing to return Pav-Saver’s patents and trademark pursuant to paragraph 3 of the partnership agreement, or in the alternative that the court erred in refusing to assign a value to PSC’s property in valuing the partnership assets. The partnership agreement on its face contemplated a “permanent” partnership, terminable only upon mutual approval of the parties (paragraph 11). It is undisputed that PSC’s unilateral termination was in contravention of the agreement. The wrongful termination necessarily invokes the provisions of the Uniform Partnership Act so far as they concern the rights of the partners. Upon PSC’s notice terminating the partnership, Vasso elected to continue the business pursuant to section 38(2)(b) of the Uniform Partnership Act. As correctly noted by Vasso, the statute was enacted “to cover comprehensively the problem of dissolution … [and] to stabilize business.” Ergo, despite the parties contractual direction that PSC’s patents would be returned to it upon the mutually approved expiration of the partnership (paragraph 3), the right to possess the partnership property and continue in business upon a wrongful termination must be derived from and is controlled by the statute. Evidence at trial clearly established that the Pav-Saver machines being manufactured by the partnership could not be produced or marketed without PSC’s patents and trademark. Thus, to continue in business pursuant to the statutorily granted right of the party not causing the wrongful dissolution, it is essential that paragraph 3 of the parties’ agreement – the return to PSC of its patents – not be honored.

Similarly, we find no merit in PSC’s argument that the trial court erred in not assigning a value to the patents and trademark. The only evidence adduced at trial to show value of this property was testimony relating to good will. It was unrefuted that the name Pav-Saver enjoys a good reputation for a good product and reliable service. However, inasmuch as the Uniform Partnership Act specifically states that “the value of the good will of the business shall not be considered”, we find that the trial court properly rejected PSC’s good-will evidence of the value of its patents and trademark in valuing its interest in the partnership business.

Next, we find no support for PSC’s argument that the amount of liquidated damages awarded to Vasso pursuant to the formula contained in paragraph 11 of the parties’ agreement is a “penalty.” [T]he test for determining whether a liquidated damages clause is valid as such or void as a penalty is stated in section 356 of the Restatement (Second) of Contracts:

The burden of proving that a liquidated damages clause is void as a penalty rests with the party resisting its enforcement.

PSC has not and does not argue that the amount of liquidated damages was unreasonable. (Significantly, neither party purported to establish that actual damages suffered by Vasso were either more or less than $384,612.) PSC now urges, however, that “[t]he ascertainment of the value of the Pav Saver partnership for purposes of an accounting are [sic] easily ascertained. The accountants maintain detailed records of accounts payable and receivable and all equipment.” In advancing this argument, PSC misconstrues the two-part test of a penalty: (1) whether the amount fixed is reasonable in light of the anticipated or actual loss caused by the breach; and (2) the difficulty of proving a loss has occurred, or establishing its amount with reasonable certainty. The difficulty or ease of proof of loss is a matter to be determined at the time of contracting – not, as PSC suggests, at the time of the breach.

It appears clear from the record that Meersman, with some insecurity about his partner’s long-term loyalty to the newly formed partnership, insisted on a liquidated damages provision to protect his financial interests. Nonetheless the record discloses that the agreement was reviewed by Peart and not signed until it was acceptable to both parties. As of December 31, 1982, the date of its last financial statement prior to trial, Pav-Saver Manufacturing Company carried liability on notes owed to various banks amounting to $269,060. As of December 31, 1981, the loans outstanding amounted to $347,487. These loans, the record shows, were obtained primarily on the basis of Meersman’s financial ability to repay and over his signature individually. The amount of liquidated damages computed according to the formula in the parties agreement – $384,612 – does not appear to be greatly disproportionate to the amount of Meersman’s personal financial liability. As earlier stated, the slip-form Pav-Saver machines could not be manufactured and marketed as such without the patents and trademark contributed by Pav-Saver Corporation. Likewise, the services of Dale were of considerable value to the business.

In sum, we find there is no evidence tending to prove that the amount of liquidated damages as determined by the formula was unreasonable. Nor can we say based on the evidence of record that actual damages (as distinguished from a mere accounting) were readily susceptible to proof at the time the parties entered into their agreement. Suffice it to say, the liquidated damages clause in the parties’ agreement appears to have been a legitimate matter bargained for between parties on equal footing and enforceable upon a unilateral termination of the partnership. We will not disturb the trial court’s award of damages to Vasso pursuant to the liquidated damages formula.

We turn next to Vasso’s arguments urging reversal of the trial court’s decision to enforce paragraph 11 of the parties’ agreement with respect to the manner of paying out the amount of damages determined by the formula. The paragraph provides for the liquidated sum to be paid out in equal installments over a 10-year period. The trial court held that the $384,612 owed by PSC should be paid in 120 monthly installments of $3205.10 each commencing with March 17, 1983. In support of its argument that it was entitled to a setoff of the full amount of liquidated damages, including the unaccrued balance, Vasso argues that the doctrine of equitable setoff should apply on these facts and further urges that such setoff is required by statute.

In considering whether the liquidated damages formula contained in paragraph 11 of the partnership agreement was enforceable, we necessarily scrutinized the totality of the agreement – not merely the dollar figure so determined. Certainly at first blush the formula appears to yield a suspiciously high amount that is not directly related to any anticipated damages that either party might incur upon a wrongful termination of the agreement by the other. The manner of payout however – equal installments over a 10-year period – appears to temper the effect that the amount of liquidated damages so determined would have on the party who breached the agreement. In our opinion, the validity of the clause is greatly influenced by the payout provision. What might have been a penalty appears to be a fairly bargained-for, judicially enforceable, liquidated damages provision. While, in hindsight, Vasso may sense the same insecurity in enforcement of the paragraph in toto that Meersman had hoped to avoid by insisting on the provision in 1974 and 1976, Vasso’s concerns of PSC’s potential insolvency are neither concrete nor sufficiently persuasive to entitle it to a right of setoff.

The primary authority cited in support of Vasso’s equitable setoff argument is inapposite. There, the debtor was insolvent. In this case, PSC has been shown to have relatively little in operating finances, but has not been proved incapable of paying its creditors. Were PSC obliged to pay out the full amount of liquidated damages at this point, PSC’s insolvency would be a certainty. However, PSC’s assets and financial condition were known to Vasso at the time the parties agreed to become partners. Vasso cannot contend that its partner’s potential insolvency in the event of a wrongful termination by it was unforeseeable at the time of contracting. We do not find that the equities so clearly favor Vasso as to require application of the doctrine of equitable setoff in disregard of the parties’ agreement for installment payments.

Further, our reading of section 38(2) of the Uniform Partnership Act fails to persuade us that the statute requires a setoff of the liquidated damages. That section permits the partner causing the dissolution (PSC) to have the value of its interest in the partnership, less “any damages recoverable [by Vasso]” (subparagraph (b)) or “any damages caused [by PSC]” (subparagraph (c)), paid in cash. It does not require a cash setoff, however, in the unusual event (this case) wherein damages exceed the value of the terminating partner’s interest.

Where, as here, a valid liquidated damages clause is enforceable, that clause may be implied into the statute to the extent that it does not violate the legislative intent of the Act. We do not believe that the legislative purpose of stabilizing business is frustrated by limiting Vasso’s statutory setoff to past accrued damages and enforcing the payout terms of the parties’ agreement. Under the circumstances, we perceive of no compelling grounds, legal or equitable, for ignoring or rewriting paragraph 11 of the parties’ agreement. Therefore, all statutory references to “damages” recoverable by Vasso are supplanted by the parties’ agreement for liquidated damages. As the trial court properly ruled, enforcement of the agreement results in a judgment for PSC in the amount of its share of the value of the partnership assets ($165,000) set off by past due installments of liquidated damages accrued from the date of the partnership’s termination (March 17, 1983), and an ongoing obligation to pay out the balance monthly during the 10-year period which would end in March of 1993.

For the foregoing reasons, we affirm the judgment of the circuit court of Rock Island County.

Affirmed.

JUSTICE STOUDER, concurring in part and dissenting in part:

I generally agree with the result of the majority. I cannot, however, accept the majority’s conclusion the defendant is entitled to retention of the patents.

The Uniform Partnership Act (UPA) is the result of an attempt to codify and make uniform the common law. Partners must act pursuant to the provisions of the Act which apply when partners have not agreed how they will organize and govern their ventures. These UPA provisions are best viewed as “default” standards because they apply in the absence of contrary agreements. The scope of the Act is to be determined by its provisions and is not to be construed to extend beyond its own proper boundaries. When the partnership contract contains provisions, imposing on one or more of the partners obligations differing from those which the law ordinarily infers from the partnership relation, the courts should strive to construe these provisions so as to give effect to the honest intentions of the partners as shown by the language of the contract and their conduct under it.

The plaintiff (PSC) brought this action at law seeking dissolution of the partnership before expiration of the agreed term of its existence. Under the Uniform Partnership Act where dissolution is caused by an act in violation of the partnership agreement, the other partners are accorded certain rights. The partnership agreement is a contract, and even though a partner may have the power to dissolve, he does not necessarily have the right to do so. Therefore, if the dissolution he causes is a violation of the agreement, he is liable for any damages sustained by the innocent partners as a result thereof. The innocent partners also have the option to continue the business in the firm name provided they pay the partner causing the dissolution the value of his interest in the partnership.

The duties and obligations of partners arising from a partnership relation are regulated by the express contract as far as they are covered thereby. A written agreement is not necessary but where it does exist it constitutes the measure of the partners’ rights and obligations. While the rights and duties of the partners in relation to the partnership are governed by the Uniform Partnership Act, the Uniform Act also provides that such rules are subject to any agreement between the parties. It is where the express contract does not cover the situation or question which arises that they are determined under the applicable law, the Uniform Partnership Act.

The partnership agreement entered into by PSC and Vasso, in pertinent part, provides: 3.B.(2) [PSC] grants to the partnership exclusive license without charge for its patent rights … for the term of this agreement … [I]t being understood and agreed that same shall remain the property of [PSC] … and shall be returned to [PSC] at the expiration of this partnership … The majority holds this provision in the contract is unenforceable. The only apparent reason for such holding is that its enforcement would affect defendant’s option to continue the business. No authority is cited to support such a rule.

The partnership agreement further provides:

This provision becomes operative at the same time as the provision relating to the return of the patents.

Partnership agreements are governed by the same general rules of construction as are other written agreements. If their provisions are explicit and unambiguous and do not violate the duty of good faith which each partner owed his copartners, the courts should carry out the intention of the parties. The Uniform Partnership Act should not be construed to invalidate an otherwise enforceable partnership agreement entered into for a legitimate purpose.

Here, express terms of the partnership agreement deal with the status of the patents and measure of damages, the question is settled thereby. I think it clear the parties agreed the partnership only be allowed the use of the patents during the term of the agreement. The agreement having been terminated, the right to use the patents is terminated. The provisions in the contract do not conflict with the statutory option to continue the business and even if there were a conflict the provisions of the contract should prevail. The option to continue the business does not carry with it any guarantee or assurance of success and it may often well be that liquidation rather than continuation would be the better option for a partner not at fault.

As additional support for my conclusion, it appears the liquidated damages clause was insisted upon by the defendant because of earlier conduct of the plaintiff withdrawing from a former partnership. Thus, the existence of the liquidated damages clause recognizes the right of plaintiff to withdraw the use of his patents in accordance with the specific terms of the partnership agreement. Since liquidated damages depends on return of the patents, I would vacate that part of the judgment providing defendant is entitled to continue use of the patents and provide that use shall remain with plaintiff.

101 F. Supp. 981 (S.D. Cal. 1951)

CARTER, DISTRICT JUDGE

This case raises novel questions concerning literary property and warranties, express and implied, in the sale thereof. On March 21, 1949, defendants, Victoria Wolf and Erich Wolff, sold to the plaintiff, Loew’s Inc., a story in manuscript form entitled, “Case History.” On that date, a regular form contract used by plaintiff was executed by the defendants. The present action is based upon alleged violations of certain provisions of this contract.

Erich Wolff, a doctor, specializing in cardiology, had met his former wife, Cathy, during chemistry lectures where she was a laboratory assistant at the institute at which he studied. Following their marriage, she later became subject to spells of extreme melancholia and attempted suicide. He investigated shock treatment and radium treatment for ovarian glands. Following her second suicide attempt, she submitted to radium treatment. A third suicide attempt followed and she died on May 22, 1942. A year and a half later, Doctor Wolff read articles in medical journals describing a pre-frontal lobotomy operation for melancholia and the marked change it produced in a patient’s personality. [All of these events], as testified to by Dr. Wolff, were factual matters and in the public domain.

Victoria Wolf, a short story writer and novelist met Erich Wolff in 1943. Late that year, he first discussed with her the operation on the brain, known as a prefrontal lobotomy, as the basis of a story. She knew, and Erich Wolff told her of the tragic experiences of Wolff and his former wife. Wolff told her of the lobotomy operation; its cure of melancholia, and its transformation of the character of the patient. Due to other commitments, [however,] Victoria Wolf was unable to write the story for Erich Wolff at that time.

After his discussion with Victoria Wolf, he then contacted Elsie Foulstone, also a writer, and discussed the possibility of her aiding him in preparing a draft of the story for motion picture purposes. He told her of the facts above and she wrote a synopsis of a story entitled, “Swear Not by the Moon,” based on those facts, plus additional fictional matter. The end product did not please Erich Wolff and he relieved her of any further duties.

Nothing further was done about the story until some time in 1945, when Erich Wolff again contacted Victoria Wolf and prevailed upon her to work on the story. In that year Victoria Wolf wrote a synopsis of a story entitled, “Through Narrow Streets,” which was based upon the doctor’s former wife’s experiences, the doctor’s description of a lobotomy operation and her own research concerning it, and additional fictional matter. Dissatisfied, she next wrote a revision entitled, “Brain Storm” and late in 1948 or early 1949, wrote a second revision entitled, “Case History,” the story in suit. It was a combination of fact and fiction. As stated above, this story was sold to the plaintiff in March 1949 for $15,000.

The document executed by the parties was entitled “Assignment of All Rights.” By its language, (Sec. 1) defendants Erich Wolff and Victoria Wolf transferred and sold to plaintiff all rights of every kind in and to the story and “the complete, unconditional and unencumbered title” thereto. Section 4 of the assignment provided that defendants represented and warranted that each was the “sole author and owner of said work, together with the title thereof”; and “the sole owner of all rights of any and all kinds whatsoever in and to said work, throughout the world”; that each had “the sole and exclusive right to dispose of each and every right herein granted”; that “neither said work nor any part thereof is in the public domain”; that “said work is original with me in all respects”; that “no incident therein contained and no part thereof is taken from or based upon any other literary or dramatic work or any photoplay, or in any way infringes upon the copyright or any other right of any individual, firm, person or corporation.” …

By Section 6, the defendants guarantee and warrant that they will “indemnify, make good, and hold harmless the purchaser of, from and against any and all loss, damage, costs, charges, legal fees, recoveries, judgments, penalties, and expenses which may be obtained against, imposed upon or suffered by the purchaser by reason of any infringement or violation or alleged violation of any copyright or any other right of any person, firm or corporation, or by reason of or from any use which may be made of said work by the purchaser, or by reason of any term, covenant, representation, or warranty herein contained, or by reason of anything whatsoever which might prejudice the securing to the purchaser of the full benefit of the rights herein granted and/or purported to be granted.”

Section 7 provides that the sellers “agree duly to execute, acknowledge and deliver, and/or to procure the due execution, acknowledgment and delivery to the purchaser of any and all further assignments and/or other instruments which in the sole judgment and discretion of the purchaser may be deemed necessary or expedient to carry out or effectuate the purposes or intent of these present instruments.”

About three months after the execution of this instrument and the sale, Elsie Foulstone discovered that Erich Wolff had sold his story, and on July 1, 1949, plaintiff was notified that she claimed a portion of the proceeds of the sale because of the work she had done in 1944. On July 30, 1949, plaintiff made a demand on defendants that they obtain a quitclaim and release from Foulstone within a reasonable time or they would be compelled to rescind their agreement of March 21st. On September 21, 1949, Elsie Foulstone filed action in the Superior Court of the State of California, County of Los Angeles, naming Erich Wolff, Victoria Wolf and Metro-Goldwyn-Mayer Pictures as defendants.

[On] February 28, 1950, the Superior Court rendered a judgment in favor of defendants finding that Elsie Foulstone had no valid claim or interest in or to the story, “Case History” which was sold to the plaintiff. The present action was filed on November 2, 1949, prior to the above mentioned judgment.

At the conclusion of the trial, the court found:

1. 1. That “Case History” was a different story from “Swear Not By the Moon,” and that the only points of similarity were factual matters from the public domain.

2. 2. That Erich Wolff collaborated with Elsie Foulstone on the story, “Swear Not By the Moon.”

3. 3. That there had been proved no fraud or fraudulent representations on the part of the defendants, Erich Wolff and Victoria Wolf.

The second cause of action, in addition to setting forth express warranties which we have found were not breached rests on plaintiff’s claim to a “marketable and perfect” title, free from reasonable doubt. This raises the question of the existence and validity of what will hereafter be referred to as “implied warranties.”

The plaintiff argues that an express warranty of “marketable and perfect” title, free from reasonable doubt, arose by the use of the words, “complete, unconditional and unencumbered title”; “sole author and owner of said work”; “sole owner of all rights of any and all kinds whatsoever in and to said work, throughout the world”; and “I have the sole and exclusive right to dispose of each and every right herein granted.” Nowhere in this most comprehensive instrument can be found the words “marketable, perfect or free from reasonable doubt.” Thus, in order to find such an express warranty it must be found that the words actually used in the “Assignment of Rights” were or are synonymous with “marketable and perfect” title.

No case has been cited by counsel nor can any be found by this court which holds that the phrase “complete, unconditional and unencumbered title” is synonymous with “marketable and perfect” title. The common meaning of the word “complete” is “Filled up, with no part, item, or element lacking.” It means that the “whole” title has been given and that no part or portion of it has been kept by the seller or sold to any other person. In two cases involving the sale of real estate, the words “complete title” were found to mean the instruments which constitute the evidence of title, and not to mean the estate or interest conveyed.

The warranty of “marketability of title” is a warranty found almost exclusively in connection with the sale of real property. Such words as “merchantable title,” “clear title,” “good title” and “perfect title” have been held in cases involving the sale of land to mean the same as “marketable title.” None of these words can be found in the present instrument. As used in this assignment the word “complete” was not meant to be synonymous with the word “marketable or perfect.” It was used to mean just what the word indicated, i.e. “whole title,” that is, that no other person owned any interest in the property nor was any kept by the sellers. In this respect, the plaintiffs got what they bargained for. It seems evident that the remaining words used in the assignment are not synonymous with “marketable or perfect” title.

Plaintiff argues that the law implies the warranty of marketable title in the sale of literary property. There are more than mere historical reasons for concluding that the doctrine of “marketable title” should be limited to cases involving the sale of real property. This doctrine has a basis in the traditional concepts of judicial fair play. Briefly, the doctrine developed because the courts at common law believed, and rightly so, that since the law required there be a recorded title in the sale of real estate, then that record title should be clear and free from reasonable doubt. A buyer, desiring to purchase the seller’s land, would request that the seller deliver to him a “marketable” record of title to the property. If by searching the record, the title was free from reasonable doubt, it was proclaimed that the buyer had a “marketable” title and could not avoid the enforcement of the contract. If on the other hand, a defect appeared in the record title, then the common law courts felt that justice demanded that the seller either clear the record title or they would allow the buyer to avoid the contract. But the doctrine was not applied to the sale of personal property. At common law and with few exceptions the law as it exists today, there was no requirement that the sale of personal property be recorded. The doctrine of caveat emptor therefore prevailed. Without the application of this latter doctrine, it is highly doubtful that any sale of personal property would ever become final. There are no records to search. There is no way to ascertain that a cloud exists on the title. It is not a requirement that a record title be produced before a purchaser will buy the article in question. Thus, because of these differences between the sale of real and personal property, the courts neither then nor now could imply by law into a contract of sale of personal property the doctrine of “marketable” title. If they did so, then there would be no case in which the seller could rest in ease, for if any third person asserted a claim to the property the courts would be compelled to avoid the contract between the parties. To do this would be to place upon the seller an unsurmountable burden, and would leave the door open to allow a discontented purchaser to avoid any contract involving the sale of personal property.

For these reasons, in adopting the Uniform Sales Act the warranty of “marketable” title was conspicuously excluded. [It] is obvious that sales involving literary property are different in some respects from the sale of ordinary goods. The sale of literary property is more analogous to the sale of patents and patent rights. Both literary properties and patents are products of the mind, plus skill. Both utilize matters in the public domain. A review of patent cases confirms the position taken by this court.

The rule has been well put in the case of Computing Scales Co. v. Long, 66 S.C. 379. There the court said: “If, however, the vendor at the time of the sale knew of a valid outstanding title or encumbrance, and failed to give notice to the vendee, the element of fraud is introduced, and the vendee may rescind without waiting for actual loss to come to him. But mere dispute about the title, or the contingency of future loss, does not warrant a rescission, and, where the buyer returns the goods, and refuses to pay the purchase money, it is incumbent on him to show that there is a valid adverse claim, from which loss to him would inevitably occur. The application of the rule may sometimes result in hardship, but to adopt any other would make it possible for a purchaser to escape from his contract upon any claim coming to his notice, however, baseless or absurd it might be.”

The above rules should be even more strictly applied in the sale of literary property. [In] Golding v. R.K.O. Pictures, Inc., 1950, 221 P.2d 95, Justice Schauer of the Supreme Court of California refers to the fact that there are approximately thirty-six basic plots in all writing. Consequently, assertions of similarity and of plagiarism are practically a concomitant of all story writing. To establish then, a rule permitting the purchaser of literary property to return the property and demand back the purchase price upon a mere assertion of similarity or plagiarism is to create a right without the support of reason or principle, the exercise of which would result in untold hardship. There can be no other conclusion but that the law will not imply a warranty of “marketable” title in the sale of literary property.

Case No. 08-CV-941-BEN (MDD) (S.D. Cal. 2014)

BENITEZ, DISTRICT JUDGE

This case arises out of […] SoCal Gas’s purchase of an automated interactive system for handling incoming telephone calls made by Syntellect, Inc. (Syntellect). The Syntellect System is one component in SoCal Gas’s system for handling customer phone calls. Among other functions, the System allowed SoCal Gas to tie an incoming call to customer information from SoCal Gas’s computers. For instance, the System could obtain account records from a computer database based on the incoming phone number. Syntellect’s custom application programs provided decision trees for handling calls based on the caller’s inputs, enabling call flows that would allow the customer to either complete their task in the automated system, or speak to a live operator.

The purchase agreement for the Syntellect System contained a broad indemnity provision:

The “System” includes the Vista Interactive Voice Response System, custom application programs developed by Syntellect specifically to SoCal Gas’s application specifications, and all specifications and requirements included in the Request for Proposal.

SoCal Gas was sued by a third party, Ronald A. Katz Technology Licensing, L.P. (Katz), which alleged that SoCal Gas’s system violated patents held by Katz. SoCal Gas asked Syntellect to defend the suit, but Syntellect refused to defend or indemnify SoCal Gas. SoCal Gas reached a settlement with Katz by entering a licensing agreement granting SoCal Gas a license to use the patents, and releasing them from liability for past use. SoCal Gas agreed to pay a licensing fee to Katz based upon past calls that had used the automated system. There were two categories of calls for which Katz demanded payment and which had actually occurred in the SoCal Gas system: 1) calls which were resolved entirely in the automated system, and 2) calls that were in the automated system, then transferred to a live customer service representative. For each minute of the entire duration of both categories of calls, SoCal Gas agreed to pay $0.011.

Figure 10.4 The parties and dispute in SoCal Gas v. Syntellect.

On March 28, 2011, this Court granted SoCal Gas’s motion for partial summary adjudication on the question of whether Syntellect breached the indemnity provision by failing to defend and indemnify SoCal Gas in the Katz infringement case. Syntellect appealed to the Ninth Circuit. In a memorandum disposition, the Ninth Circuit affirmed this Court’s grant of summary adjudication on the question of liability. The Ninth Circuit noted the broad language of the indemnity provision, and that California law interpreted language such as “arising from” to mean that liability will attach if the indemnitor’s performance under the contract is “causally related in some manner to the injury for which indemnity is claimed.” The Court found that each of the “accused services” in the Katz complaint was “enabled by Syntellect’s performance of its contractual duties.” It concluded that the allegations of patent infringement were causally related to Syntellect’s provision of the System, and that Syntellect was therefore liable for “damages stemming from utilization of the System.”

The Ninth Circuit also found that SoCal Gas’s own liability was reflected in the “presumptively reasonable amount of the settlement.” However, the Ninth Circuit found that SoCal Gas must still demonstrate that the entire liability should be allocated to Syntellect. When there is a dispute over allocation, the plaintiff is required to prove the reasonableness of the proposed allocation by ordinary means, and a district court may not exclude all evidence relevant to the allocation of damages. As this Court excluded such evidence, the case was remanded for this Court to undertake this inquiry “in the first instance.”

The Ninth Circuit clearly stated that it was not holding that apportionment was required, or that Syntellect could not be held responsible for the entire amount. Rather, this Court must consider evidence to determine if apportionment is necessary. To determine if apportionment is required, this Court is directed to consider the “nature of the Katz claims as they apply to the indemnity provision and to other potentially liable parties.” The Ninth Circuit stated that when an indemnity obligation is “limited under the contract, an allocation of liability between culpable parties is appropriate.” Apportionment is appropriate where “some portion of the liability for the alleged infringement is not embraced by Syntellect’s indemnity obligation.”

Discussion

As directed by the Ninth Circuit, apportionment is appropriate when the indemnity obligation is limited and “some portion of the liability for the alleged infringement is not embraced by Syntellect’s indemnity obligation.” The critical question is thus whether the scope of the liability provision, as determined by this Court and the Ninth Circuit, covers the entire amount of the settlement, or whether some portion of the settlement amount is not covered by the indemnity obligation and allocation is required. The parties agree that Syntellect is liable for “damages stemming from utilization of the system.” SoCal Gas contends that the undisputed facts and legal conclusions demonstrate that no apportionment of liability is required. It argues that the entire amount stems from the utilization of the System, and is covered by the indemnity obligation as interpreted by the Court. Syntellect contends that part of the settlement amount exceeds the scope of the indemnity obligation. Specifically, it claims that 1) the indemnity obligation does not cover damages paid for portions of calls not conducted within the System, and 2) the indemnity obligation does not cover damages to the extent that other components of the automated call system are necessary to provide the allegedly infringing services. It argues that these categories of damages do not “[stem] from the utilization of the System.”

The arguments between the parties are essentially based on the interpretation of the Ninth Circuit’s language stating Syntellect is liable for damages “stemming from the utilization of the Syntellect system.” It is therefore necessary for this Court to examine the indemnity provision to determine what kind of relationship the damages must have to the utilization of the System, and how the obligation is affected by the presence of other parties.

Conclusion

Based on the scope of the indemnity provision and the nature of the Katz claims, this Court determines that the entire Katz settlement licensing fee is within the scope of the indemnity provision, and that allocation is not appropriate.

SoCal Gas’s Motion for Partial Summary Judgement is GRANTED.

284 F. Supp. 3d 1160 (D. Or. 2018)

MICHAEL H. SIMON, DISTRICT JUDGE

Plaintiff Fathers & Daughters Nevada, LLC (“F&D”) brings this action against Defendant Lingfu Zhang. F&D alleges that Defendant copied and distributed F&D’s motion picture Fathers & Daughters through a public BitTorrent network in violation of F&D’s exclusive rights under the Copyright Act. Before the Court is Defendant’s motion for summary judgment. Defendant argues that F&D is not the legal or beneficial owner of the relevant exclusive rights under the Copyright Act and thus does not have standing to bring this lawsuit. For the following reasons, the Court grants Defendant’s motion.

Background

Sales Agency Agreement

F&D is the author and registered the copyright for the screenplay and motion picture Fathers & Daughters. On December 20, 2013, with an effective date of April 1, 2013, F&D entered into a sales agency agreement with Goldenrod Holdings (“Goldenrod”) and its sub-sales agent Voltage Pictures, LLC (“Voltage”). Under this agreement, F&D authorized Goldenrod and Voltage as “Sales Agent” to license most of the exclusive rights of Fathers & Daughters, including rights to license, rent, and display the motion picture in theaters, on television, in airplanes, on ships, in hotels and motels, through all forms of home video and on demand services, through cable and satellite services, and via wireless, the internet, or streaming. F&D reserved all other rights, including merchandising, novelization, print publishing, music publishing, soundtrack album, live performance, and video game rights.

Figure 11.1 The 2016 film Fathers and Daughters starring Russell Crowe and Amanda Seyfried was the subject of the copyright dispute in Fathers & Daughters Nevada, LLC v. Zhang.

F&D further authorized Goldenrod and Voltage to execute agreements in their own name with third parties for the “exploitation” of the exclusive rights of Fathers & Daughters and agreed that Goldenrod and Voltage had “the sole and exclusive right of all benefits and privileges of [F&D] in the Territory, including the exclusive right to collect (in Sales Agent’s own name or in the name of [F&D] …), receive, and retain as Gross Receipts any and all royalties, benefits, and other proceeds derived from the ownership and/or the use, reuse, and exploitation of the Picture …” The “Territory” is defined as the “universe.”

Discussion

F&D asserts that it is both the legal owner and the beneficial owner of the copyright to Fathers & Daughters, which would give F&D standing to bring this infringement suit against Defendant. F&D misstates the law of legal ownership of copyright exclusive rights and thus its argument that it is the legal owner of the exclusive rights at issue in this lawsuit is rejected. F&D also fails to present evidence that create a genuine dispute of material fact that F&D is the beneficial owner of the relevant exclusive right. Thus, that argument is similarly rejected. F&D also argues that based on a reservation of rights in the distribution agreement with Vertical and in a separate addendum to the agreements, F&D has standing. This argument also is without merit.

925 F.3d 1225 (Fed. Cir. 2019)

O’MALLEY, CIRCUIT JUDGE

Lone Star Silicon Innovations LLC (“Lone Star”) sued Appellees for infringing various patents. The district court concluded that Lone Star does not own these patents and therefore lacks the ability to assert them. We agree with the district court that Lone Star cannot assert these patents on its own.

Background

The asserted patents were originally assigned to AMD, which later executed an agreement purporting to transfer “all right, title and interest” in the patents to Lone Star. The transfer agreement, however, imposes several limits on Lone Star. For example, Lone Star agreed to only assert the covered patents against “Unlicensed Third Party Entit[ies]” specifically listed in the agreement. New entities can only be added if Lone Star and AMD both agree to add them. If Lone Star sues an unlisted entity, AMD has the right—without Lone Star’s approval—to sublicense the covered patents to the unlisted target. AMD can also prevent Lone Star from assigning the patents or allowing them to enter the public domain. AMD and its customers can also continue to practice the patents, and AMD shares in any revenue Lone Star generates from the patents through “monetization efforts.”

Lone Star sued Appellees, who are all listed as Unlicensed Third Party Entities in the transfer agreement, in successive infringement actions filed between October 2016 and December 2016. In each case, Lone Star alleged, among other things, that AMD transferred “all right, title, and interest” in the asserted patents to Lone Star.

The district court granted Appellees’ motions. As the district court correctly explained, we have recognized three categories of plaintiffs in patent infringement cases. First, a patentee, i.e., one with “all rights or all substantial rights” in a patent, can sue in its own name. Second, a licensee with “exclusionary rights” can sue along with the patentee. And, finally, a licensee who lacks exclusionary rights has no authority to assert a patent (even along with the patentee). The district court concluded that it only needed to address this first category “since Lone Star claims to be an ‘assignee’ and ‘sole owner’ of the patents-in-suit.”

In determining whether the agreement between AMD and Lone Star transferred “all substantial rights” to the asserted patents, the district court examined the rights transferred to Lone Star and those retained by AMD. The district court focused on three aspects of the transfer agreement in particular: (1) AMD’s ability to control how Lone Star asserts or transfers the patents, (2) Lone Star’s inability to practice the patents, and (3) AMD’s right to share in “monetization efforts.” The district court then compared the balance of rights here to previous cases where we have said agreements did or did not transfer all substantial rights. Ultimately, the district court concluded that AMD did not transfer all substantial rights in the patents to Lone Star.

After it concluded that Lone Star could not sue in its own name, the district court dismissed the case. Lone Star timely appealed.

Discussion

Lone Star argues that it possesses all substantial rights in the asserted patents and therefore can assert them in its own name. Appellees argue that Lone Star does not possess all substantial rights and therefore lacks standing to bring suit … We address these arguments below.

955 F. Supp. 979 (N.D. Ill. 1997)

HART, DISTRICT JUDGE

Gruen Marketing Corporation (“Gruen”) brings this action against defendants Benrus Watch Company, Inc. (“Benrus”), Hampden Watch Co., Inc. (“Hampden”), Irving Wein, Joseph Wein and Jim Herbert. [Defendants] move to dismiss Gruen’s complaint.

Alleged Factual Background

Gruen, a Delaware corporation, is in the business of merchandising various products, such as watches, to major retailers and others. Benrus, a Delaware corporation, also sells watches and is the registrant for the trademark BENRUS. Hampden, a U.S. Virgin Islands corporation, assembles and sells watches for Benrus. Irving Wein controls Hampden and his son, Joseph Wein is a shareholder and officer of Benrus. Jim Herbert is a former Benrus employee.

Until June 1995, Benrus had sold its watches both with and without the BENRUS trademark. The watches not bearing the BENRUS trademark were sold as either personalized watches or private label watches. Personalized watches are sold by retailers with custom changes to the watch dial. Private label watches bear trademarks or logos of third parties, such as retailers.

In June 1995, Gruen and Benrus entered into three agreements, a License Agreement, Purchase Agreement and a Letter Agreement, each relating to Benrus’ BENRUS line of watches. Pursuant to these agreements, Gruen acquired Benrus’ business in BENRUS watches, including a master customer list, inventory, components and raw materials, intellectual property and a sales force to carry on the business. The License Agreement granted an exclusive license to Gruen for all uses of the BENRUS mark worldwide, except in Japan. Under the License Agreement, Benrus was not permitted to use the BENRUS mark without the prior written consent of Gruen. In addition, defendants Joseph Wein and Jim Herbert became Gruen sales agents. Gruen has paid $722,727.30 to Benrus under the License Agreement. Pursuant to the Purchase Agreement, Gruen paid $4,360,000 for all of Benrus’ inventory, components and raw materials.

Despite its contractual obligations, Benrus did not discontinue using the BENRUS mark. Benrus and Irving Wein continued to use the BENRUS mark on Benrus letterhead and in other written materials. Benrus has sold watches bearing the BENRUS mark after the effective date of the License Agreement.

At a watch industry trade show in Hong Kong in September 1996, Joseph Wein stated to vendors and actual and potential customers of Gruen that Gruen was insolvent and unable to fulfill orders for BENRUS watches. Irving Wein has also made these representations, as well as stated that, in the future, Benrus will continue to sell BENRUS watches. In fact, Gruen is not insolvent and has substantial financial backing. Gruen’s representatives have spent considerable time and effort to correct Irving and Joseph Wein’s representations. In October 1996, Benrus diverted a shipment of watch cases from Gruen to itself. Benrus was able accomplish the diversion by using information learned as a result of its position as licensor of the BENRUS mark.

Irving Wein and Jim Herbert are former Benrus employees who became Gruen sales agents after the execution of the agreements between Benrus and Gruen. Benrus owed one of its customers a credit for returned BENRUS watches sold prior to the execution of the agreements. Joseph Wein directed the customer to apply the credit against invoices for watches purchased from Gruen. Jim Herbert persuaded certain Gruen customers to purchase Benrus’ private label watches, although Herbert was working for Gruen at the time.

On November 12, 1996, Gruen filed its seven-count complaint …

Discussion

Count I: Trademark Infringement

In Count I, Gruen alleges that defendants are liable for trademark infringement because they used the BENRUS mark after the effective date of the License Agreement. Defendants argue that Gruen, as a licensee of Benrus, lacks standing to assert a claim under the Lanham Act. Gruen responds that it has standing because the License Agreement assigned, rather than merely licensed, the BENRUS trademark to Gruen.

Section 32 of the Lanham Act, 15 U.S.C. § 1114(1), grants standing to assert a claim for trademark infringement only to the “registrant” of the trademark. The term “registrant” includes the registrant and its “legal representatives, predecessors, successors and assigns.” Several courts have held that a licensee has no right to sue a licensor under the Lanham Act, even where the licensee has been granted an exclusive right to use the trademark. Gruen, therefore, has standing to assert a trademark infringement claim only if the rights granted to Gruen by the License Agreement amount to an assignment, as contemplated by the statute. An “assignment” of a mark is “an outright sale of all rights in that mark,” whereas a license is “a limited permit to another to use the mark.”

Figure 11.2 A 1995 stainless steel Benrus “Men’s Modern” watch issued to commemorate the fiftieth anniversary of D-Day.

Benrus argues that the terms of the License Agreement demonstrate that Gruen is a licensee and not an assignee of the BENRUS mark. Benrus asserts that the License Agreement unequivocally reserved numerous rights in the BENRUS mark indicating that the BENRUS mark was not assigned to Gruen. For example, the License Agreement excludes Gruen from using the BENRUS mark in Japan and requires Gruen to obtain Benrus’ approval for certain uses of the mark, such as advertising. In addition, Benrus reserved the right to sell BENRUS-marked goods to Jan Bell Marketing, Inc. and to use the mark on certain products sold through catalogs and direct mailings. Gruen was required to obtain Benrus’ approval before assigning Gruen’s rights under the License Agreement. Finally, the License Agreement contained the following provision:

[Gruen] acknowledges that, as between [Gruen] and [Benrus], [Benrus] is the owner of all right, title and interest in and to the Licensed Mark in any form or embodiment thereof.

For its part, Gruen argues that it was assigned the BENRUS mark because “[n]otwithstanding the use of the term ‘license’ in an agreement, if a contract gives a party an exclusive license to use a trademark and otherwise discloses a purpose to transfer the rights in the trademark, the transfer is an assignment for purposes of the federal trademark laws.” Gruen asserts that this is the case since it received the exclusive right to exploit the BENRUS mark, the right to sue for infringement, and the executory right to secure permanent transfer of the mark to Gruen. Gruen argues that its agreements with Benrus were akin to a mortgage or installment sale where Gruen’s rights did not become final until future payment of funds.

Gruen’s argument, however, does not overcome the express language of the License Agreement that Benrus retained ownership of the BENRUS mark. A licensee lacks standing where the agreement indicates that the licensor retains exclusive ownership of the mark. Other provisions of the agreement also support the conclusion that Gruen received only a license to use the BENRUS mark. For example, the License Agreement provides that Benrus “grants an exclusive license” to Gruen. Gruen was obligated to make royalty payments to Benrus and failure to do so terminated the license. Benrus retained the power to assure that Gruen maintained the quality of the BENRUS mark, a requirement consistent with a trademark license but not an assignment. That the License Agreement contemplated that Gruen one day would have the right to acquire title in the BENRUS mark does not mean Gruen was assigned the mark from the outset of the parties’ relationship. Thus, title in the BENRUS mark did not pass to Gruen and Gruen does not have standing under 15 U.S.C. § 1114.

178 F. Supp. 655 (S.D.N.Y. 1959)

BRYAN, DISTRICT JUDGE

Plaintiff sues under the Federal Declaratory Judgment Act, 28 U.S.C. §§ 2201 and 2202, for a judgment declaring that it is no longer obligated to make periodic payments to defendants based on its manufacture or sale of the well known product “Listerine”, under agreements made between Dr. J. J. Lawrence and J. W. Lambert in 1881, and between Dr. Lawrence and Lambert Pharmacal Company in 1885.

Plaintiff is a Delaware corporation which manufactures and sells Listerine, among other pharmaceutical products. It is the successor in interest to Lambert and Lambert Pharmacal Company which acquired the formula for Listerine from Dr. Lawrence under the agreements in question. Defendants are the successors in interest to Dr. Lawrence.

For some seventy-five years plaintiff and its predecessors have been making the periodic payments based on the quantity of Listerine manufactured or sold which are called for by the agreements in suit. The payments have totaled more than twenty-two million dollars and are presently in excess of one million five hundred thousand dollars yearly.

In the early 1880’s Dr. Lawrence, a physician and editor of a medical journal in St. Louis, Missouri, devised a formula for an antiseptic liquid compound which was given the name “Listerine”. The agreement between Lawrence and J. W. Lambert made in 1881, and that between Lawrence and Lambert Pharmacal Company made in 1885, providing for the sale of the Lawrence formula, were entered into in that city. Lambert, and thereafter his corporation, originally engaged in the manufacture and sale of Listerine and other pharmaceutical preparations on a modest scale there. Through the years the business prospered and grew fantastically and Listerine became a widely sold and nationally known product. The Lambert Pharmacal Company, with various changes in corporate structure and name which are not material here, continued the manufacture and sale of Listerine and other preparations until March 31, 1955, when it was merged into Warner-Hudnut, Inc., a Delaware corporation, and the name of the merged corporation was changed to Warner-Lambert Pharmaceutical Company, Inc. The plaintiff in this action is the merged corporation which continues the manufacture and sale of Listerine.

Plaintiff’s second amended complaint in substance alleges the following:

Prior to April 20, 1881 Dr. Lawrence furnished Lambert with an unnamed secret formula for the antiseptic compound which came to be known as “Listerine”, and on or about that date Lambert executed the first of the documents with which we are concerned here. This document, in its entirety, reads as follows:

On or about May 2, 1881 Lambert began the manufacture of the formula and adopted the trademark “Listerine.” The agreed payments under the 1881 agreement were reduced on October 21, 1881 by the following letter addressed to Lambert by Lawrence:

They were again reduced on March 23, 1883 by a similar letter reading as follows:

Thereafter Lambert assigned his rights to Listerine and other Lawrence compounds to the Lambert Pharmacal Company and this company on January 2, 1885 executed an instrument assuming Lambert’s obligations under these agreements with Lawrence and other obligations on account of other formulas which Lawrence had furnished, in the following language:

The agreements between the parties contemplated, it is alleged, “the periodic payment of royalties to Lawrence for the use of a trade secret, to wit, the secret formula for” Listerine. After some modifications made with Lawrence’s knowledge and approval, the formula was introduced on the market. The composition of the compound has remained the same since then and it is still being manufactured and sold by the plaintiff.

It is then alleged that the “trade secret” (the formula for Listerine) has gradually become a matter of public knowledge through the years following 1881 and prior to 1949, and has been published in the United States Pharmacopoia, the National Formulary and the Journal of the American Medical Association, and also as a result of proceedings brought against plaintiff’s predecessor by the Federal Trade Commission. Such publications were not the fault of plaintiff or its predecessors. The complaint recites the chains of interest running respectively from Lambert to the present plaintiff and from Lawrence to the defendants, and concludes with a prayer for a declaration that plaintiff is “no longer liable to the defendants” for any further “royalties”.

Despite the mass of material before me the basic issue between the parties is narrow. The plaintiff claims that its obligation to make payments to the defendants under the Lawrence–Lambert agreements was terminated by the public disclosure of the Listerine formula in various medical publications. The defendants assert that the obligation continued and has not been terminated.

The plaintiff seems to feel that the 1881 and 1885 agreements are indefinite and unclear, at least as to the length of time during which they would continue in effect. I do not find them to be so. These agreements seem to me to be plain and unambiguous.

The payments to Lawrence and his successors are conditioned upon the sale (in the 1881 agreement) and the manufacture or sale (in the 1885 agreement) of the medical preparation known as Listerine which Lawrence conveyed to Lambert. The obligation to pay on each and every gross of Listerine continues as long as this preparation is manufactured or sold by Lambert and his successors. It comes to an end when they cease to manufacture or sell the preparation. There is nothing which compels the plaintiff to continue such manufacture and sale. No doubt Lambert and his successors have been and still are free at any time, in good faith and in the exercise of sound business discretion, to stop manufacturing and selling Listerine. The plain meaning of the language used in these agreements is simply that Lambert’s obligation to pay is co-extensive with manufacture or sale of Listerine by him and his successors.

The plaintiff, however, claims that despite the plain language of the agreement it may continue to manufacture and sell without making the payments required by the agreements because the formula which its predecessors acquired is no longer secret. To sustain this position plaintiff invokes the shade, if not the substance, of the traditional common law distaste for contractual rights and duties unbounded by definite limitations of time and argues that absent a construction that the obligation to pay is co-extensive only with the secrecy of the formula, it must be a forbidden “perpetuity” which the law will not enforce. I find no support for the plaintiff’s theory either in the cases which it cites or elsewhere.

The word “perpetuity” is often applied very loosely to contractual obligations. Indiscriminate application of the term serves only to confuse. The mere fact that an obligation under a contract may continue for a very long time is no reason in itself for declaring the contract to exist in perpetuity or for giving it a construction which would do violence to the expressed intent of the parties.

There are contracts in which the promisor’s obligation has been expressly fixed to last forever. Such cases mainly arise in the field of real property and are governed by various considerations of public policy which have no pertinence here.

Contracts which omit any point of time or any condition which would terminate the promisor’s liability are somewhat different. Where it appears that the parties did in fact intend that the obligation terminate at an ascertainable time, the courts, in effect, will supply the missing clause and construe the contract accordingly.

On the other hand, if it appears that no termination date was within the contemplation of the parties, or that their intention with respect thereto cannot be ascertained, the contract will be held to be terminable within a reasonable time or revocable at will, dependent upon the circumstances.

In such cases the courts are loathe to find that the absence of a terminal point indicates an intention to contract for the indefinite future, and a perpetual obligation will not usually be inferred from the absence of a terminating date or condition. While there is no hard and fast rule, the terminal date or condition of termination will be that to be ascertained from the actual though unexpressed intention of the parties or as a remedy for their neglect. If the parties intend that the obligation be perpetual they must expressly say so.

Contracts which provide no fixed date for the termination of the promisor’s obligation but condition the obligation upon an event which would necessarily terminate the contract are in quite a different category and it is in this category that the 1881 and 1885 Lambert Lawrence agreements fall. On the face of the agreements the obligation of Lambert and its successors to pay is conditioned upon the continued manufacture or sale of Listerine. When they cease manufacturing or selling Listerine the condition for continued payment comes to an end and the obligation to pay terminates. This is the plain meaning of the language which the parties used.

Moreover, this is not a case in which the promisor’s obligation will cease only on the occurrence of some fortuitous event unrelated to the subject matter of the contract. The obligation here is conditioned upon an event arising out of the very arrangement between the parties which is the subject matter of the contract.

In Cammack v. J. B. Slattery & Bros., 241 N.Y. 39, plaintiff had furnished defendant with a secret process. Defendant’s liability to make payments therefor depended upon use. There was held to be no uncertainty as to the term of the contract nor any perpetuity of obligation, but that the obligation to pay continued as long as the defendant used the secret process which it had acquired. The court expressly rejected the defendant’s contention that the contract was terminable at will because it provided no fixed termination date.

Nor is there any need to resort to extrinsic evidence in order to ascertain what the intention of the parties was, or what the termination date of the obligation to pay would be, for the agreements themselves indicate the condition upon which the obligation terminates.

There is nothing unreasonable or irrational about imposing such an obligation. It is entirely rational and sensible that the obligation to make payments should be based upon the business which flows from the formula conveyed. Whether or not the obligation continues is in the control of the plaintiff itself. For the plaintiff has the right to terminate its obligation to pay whenever in good faith it desires to cease the manufacture or sale of Listerine. This would seem to end the matter.

However, plaintiff urges with vigor that the agreement must be differently construed because it involved the conveyance of a secret formula. The main thrust of its argument is that despite the language which the parties used, the court must imply a limitation upon Lambert’s obligation to pay measured by the length of time that the Listerine formula remained secret.

To sustain this theory plaintiff relies upon a number of cases involving the obligations of licensees of copyrights or patents to make continuing payments to the owner or licensor, and argues that these cases are controlling here. [But all that these cases hold] is that when parties agree upon a license under a patent or copyright the court will assume, in the absence of express language to the contrary, that their actual intention as to the term is measured by the definite term of the underlying grant fixed by statute. It is quite plain that were it not for the patent and copyright features of such license agreements the term would be measured by use.

Paralleling the concept that the licensing of a patent or copyright contracts only for the statutory monopoly granted in such cases is the concept not so frequently expressed that public policy may require a termination of the obligation to pay when the patent or copyright term is ended.

I see nothing in any of the cases which the plaintiff cites dealing with patents and copyrights which supports the theory which plaintiff advances here. Plaintiff has not cited a single case in which the rules of these cases have been applied to a contract involving the conveyance of a secret formula or a trade secret.

In the patent and copyright cases the parties are dealing with a fixed statutory term and the monopoly granted by that term. This monopoly, created by Congress, is designed to preserve exclusivity in the grantee during the statutory term and to release the patented or copyrighted material to the general public for general use thereafter. This is the public policy of the statutes in reference to which such contracts are made and it is against this background that the parties to patent and copyright license agreements contract.

Here, however, there is no such public policy. The parties are free to contract with respect to a secret formula or trade secret in any manner which they determine for their own best interests. A secret formula or trade secret may remain secret indefinitely. It may be discovered by someone else almost immediately after the agreement is entered into. Whoever discovers it for himself by legitimate means is entitled to its use.

But that does not mean that one who acquires a secret formula or a trade secret through a valid and binding contract is then enabled to escape from an obligation to which he bound himself simply because the secret is discovered by a third party or by the general public. I see no reason why the court should imply such a term or condition in a contract providing on its face that payment shall be co-extensive with use. To do so here would be to rewrite the contract for the parties without any indication that they intended such a result.

It may be noted that here the parties themselves made no reference to secrecy in either the 1881 or the 1885 agreements. The word “secret” is not used anywhere in either of them. It is true that I have assumed during this discussion that the plaintiff is correct in its contention that what Lambert bargained for was a “secret” formula. But that in no way justifies the further assumption that he also bargained for continuing secrecy or that there would be failure of consideration if secrecy did not continue.

One who acquires a trade secret or secret formula takes it subject to the risk that there be a disclosure. The inventor makes no representation that the secret is non-discoverable. All the inventor does is to convey the knowledge of the formula or process which is unknown to the purchaser and which in so far as both parties then know is unknown to any one else. The terms upon which they contract with reference to this subject matter are purely up to them and are governed by what the contract they enter into provides.

If they desire the payments or royalties should continue only until the secret is disclosed to the public it is easy enough for them to say so. But there is no justification for implying such a provision if the parties do not include it in their contract, particularly where the language which they use by fair intendment provides otherwise.

The case at bar illustrates what may occur in such cases. As the undisputed facts show, the acquisition of the Lawrence formula was the base on which plaintiff’s predecessors built up a very large and successful business in the antiseptic or germicide field. Even now, twenty-five or more years after it is claimed that the trade secret was disclosed to the public, plaintiff retains more than 50% of the national market in these products.

At the very least plaintiff’s predecessors, through the acquisition of the Lawrence formula under this contract, obtained a head start in the field of liquid antiseptics which has proved of incalculable value through the years. There is nothing novel about business being transacted only in a small way at the outset of a contract relationship and thereafter growing far beyond what was anticipated when the contract was made. Because the business has prospered far beyond anticipations affords no basis for changing the terms of the contract the parties agreed upon when the volume was small.

There is nothing in this contract to indicate that plaintiff’s predecessors bargained for more than the disclosure of the Lawrence formula which was then unknown to it. Plaintiff has pointed to no principle of law or equity which would require or permit the court gratuitously to rewrite the contract which its predecessors made for these considerations.

Figure 12.1 A 1915 advertisement for Listerine.

If plaintiff wishes to avoid its obligations under the contract it is free to do so, and, indeed, the contract itself indicates how this may be done. The fact that neither the plaintiff nor its predecessors have done so, and that the plaintiff continues to manufacture and sell Listerine under the Lawrence formula with great success, indicates how valuable the rights under the contract are and how unjust it would be to permit it to have its cake and eat it too.

Thus, I hold that under the agreements in suit plaintiff is obligated to make the periodic payments called for by them as long as it continues to manufacture and sell the preparation described in them as Listerine.