New Haven Sand Blast Co. v. Dreisbach , 102 Conn. 169 ( 1925 )

The defendant's first and fourth contentions are that Exhibit A is null and void because the original contract, Exhibit A, does not conform to the antecedent negotiations for the sale of the Dreisbach patent to the plaintiff as evidenced by the records of the corporation, in that there is no mention in those records of a covenant for future conveyances; and, further, because it is claimed that Exhibit A was restated and superseded by the subsequent execution of Exhibit R, which is a second written assignment of the patent to the plaintiff, not containing the covenant for future conveyances.

The first reason given is manifestly insufficient unless, as a matter of fact, the covenant for future conveyances was inserted by mistake and was not agreed to by the assignors; and on that point it appears that there was no opportunity at all for fraud and almost none for mistake, because the assignors, Dreisbach, Smith and Billings, were also the directors and officers of the plaintiff, assignee. As directors of the assignee they voted to buy the patent and instructed plaintiff's attorney to prepare "a proper bill of sale." Pursuant to this vote Exhibit A was prepared and they signed it, as assignors of the patent. Then the defendant, as president of the assignee, reported that a proper bill of sale had been executed, and the three directors, acting for the assignee, accepted the contract which they had just signed as assignors. The Superior Court has found that, before Dreisbach signed Exhibit A, the entire instrument was read aloud to him; that when Mr. Hammer purchased his stock, in September, 1911, he inquired of the respondent whether subsequent improvements would accrue to the benefit of the company, and the respondent, referring to Exhibit A, replied, "Yes, there's my agreement by which the company will get the benefit of any such." And finally the court finds that Dreisbach, Smith and Billings understood and knew the contents of Exhibit A and knew that they could not obtain capital to promote the purposes of the company unless Exhibit A contained a covenant covering future improvements. These findings are not excepted to and they seem to put an end to any claim that the covenant was inserted in Exhibit A by mistake.

The court has also found that the second assignment, Exhibit R, was not executed with intent to supersede or to rescind Exhibit A, or the covenant for future conveyances contained therein. And this finding the defendant does attack in his assignments of error, but the conversation above noted between Mr. Hammer and the defendant is enough of itself to support the finding of the court, so far as the defendant is concerned. Moreover, it does not appear that there is any mention of Exhibit R on the corporate records of the plaintiff or any record of any action taken inconsistent with the status created by the original acceptance of Exhibit A.

Exhibit R had its origin in the fact that Mr. Nash sent an attorney from Boston to see that all legal formalities necessary for the protection of his investment were complied with; and as the result of this attorney's inspection of the records, some changes were made in the certificate of organization and in the minutes of the stockholders' meetings. It was then discovered that no written evidence existed of Billings' ownership of his alleged one-third interest in the patent, and an assignment was executed from Dreisbach and Smith to Billings, for the purpose of curing that defect. Although there is no specific finding on this point, it appears from an inspection of Exhibit A that it does not, in terms, convey the legal title to the patent to the plaintiff. The entire beneficial interest is, however, conveyed in terms which would entitle the plaintiff to an explicit assignment of the legal title, and, under all the circumstances, the only reasonable inference is that Exhibit R was executed solely to perfect the transfer of the legal title to the plaintiff and to make a record in the patent office of that title in terms free from uncertainty. The finding of the court that Exhibit R was merely a formal assignment executed for recording purposes is fully supported by the subordinate facts.

Points two and three on the defendant's brief attack the validity of the decree of specific performance of the contract for future conveyances, first, on the ground that the rights of third parties were involved, who were not parties to this action, namely, Washburn and Sheldon and the Broadway Bank Trust Company. It is, however, found that Washburn and Sheldon have assigned all their rights, title and interest to the Broadway Bank. Apparently they have none left, and none is suggested on the brief, except the possibility that the defendant may have induced them to part with their interest in ignorance of their rights and without consideration. Obviously the defendant cannot shelter himself behind that possibility. Besides, the action is in personam and the plaintiff gets no title better than the defendant and his servants and agents can give.

As to the Broadway Bank, the finding is, in effect, that it is merely the apparent custodian of the legal title, for the use and benefit of the defendant, and that it neither gave any consideration for the recorded assignment to itself nor received any for its contemporaneous unrecorded assignment to the defendant. Upon these findings, we think it is shown to be merely a custodian for the defendant and may be treated as such in the decree. Of course, the Broadway Bank is not concluded by these findings made in an action to which it was not a party; and if it is not in fact a mere custodian for the defendant, of the rights assigned to it by Washburn and Sheldon, it will have the right to assert such independent rights as it does possess in any proceedings which may be brought to compel it to comply with the terms of the decree.

The other phase of the claim that the court erred in decreeing specific performance, rests on the language of the covenant for future conveyances: "We, each for himself, hereby further agree to convey to said company every and all patents or patent rights which may be issued to us, or any of us, hereafter by the United States of America covering any improvement on said machine or machines of a similar nature which may be patented by us hereafter." It is said that this language must be strictly construed; and that it requires two things, first, the absolute necessity of an issue by the United States of a patent or patent right, and second, that such issue should be to the defendant. The defendant's claim is that the United States has issued no patent or patent right to the defendant.

In the first place, there is no rule of law which requires that contracts should be strictly construed. The oft-repeated rule is that the intent of the parties is to be ascertained by a fair and reasonable construction of the written words in the light of the circumstances surrounding the execution of the writing and in the light of the object of the parties in executing the contract. Here the parties had already agreed to form, and had just completed the formation of, a corporation for the purpose of exploiting the Dreisbach patented sand blast barrel. There were four stockholders, Dreisbach, Smith and Clarence E. Billings, who owned the patent, and Nash, a banker, who furnished the only money put into the business. Dreisbach was an inventor, and all except Nash were manufacturers. "Under these circumstances," as we said of a similar contract (Birkery Mfg. Co. v. Jones, 71 Conn. 113, 121, 40 A. 917), "it was in the power of Birkery and Jones (in this case, Dreisbach, Smith and Billings), by subsequent inventions and improvements . . . to practically destroy the business of the corporation. This is what Standish [Nash] evidently feared, and it was mainly to guard against this that the [original] written agreement was executed." So much for the evident object of covenants for future conveyances which are commonly found in contracts of this kind, made to obtain capital for the exploitation of patented devices.

Turning now to its language, we must suppose that the phrase "every and all patents and patent rights which may be issued to us," etc., was intended to include something more than the patents only; and the controversy as to the proper construction of the covenant centers upon the meaning to be given to the term "patent rights" and to the word "issued." Standing alone or in the context in which they are usually found, the term "patent rights" ordinarily refers to rights arising under patents already issued, such as licenses to make, use or sell the patented invention, or grants of some interest in the monopoly less than the absolute and undivided legal title to the patent itself. But here the context shows that the reference is to patent rights "which may be issued to us, or any of us, hereafter by the United States," and this must include rights to be issued in connection with future patents.

Again, if the word "issued" is taken in its technical patent office sense of a formal grant by publication and delivery, the term "patent rights" will have no meaning at all, for no patent rights are issued in that sense by the United States. The United States does, however, grant to or confer upon an inventor the right to apply for a patent, which application is assignable, and the right — which is also assignable to others — to prosecute such applications and to receive any patent which may be granted thereon. These rights may be said to be issued by the United States in the sense that they are granted by or conferred by it or issued from it. They are also rights which may properly be described as rights "covering" the improvement for which the patent is sought.

We think that when the term "patent rights" is plainly intended to include rights arising in respect of future patents upon an improved machine and is so used in a covenant to convey every and all such patents or patent rights covering such improved machine, the covenant may well be intended as an agreement in the alternative to convey any such patent or an application for such patent.

And so we think that the proper construction of this covenant, from a technical point of view, is narrowed down to the single question whether, in the phrase "issued to us, or any of us, hereafter by the United States," the word "issued" must be given the technical sense already noted, which, as the findings and the defendant's claims demonstrate, may defeat the entire covenant for the conveyance of future patents as well as patent rights; or whether that word may be construed in its larger sense as meaning granted, conferred, or issuing from, and thus the whole phrase construed as referring rather to the source from which the patent right is derived rather than the act of granting it in any particular manner and form. This latter view is supported by the paragraph next following the covenant in question, for it provides that "no foreign rights in or under said patent or in or under any improvement upon said machine or patent or patents upon other similar machines which may be granted to any or all of us are conveyed or intended to be conveyed by this instrument to the said The New Haven Sand Blast Company." It will be noted that in this part of the instrument the word "granted" is used instead of the word "issued."

It thus appears that Exhibit A purports to define the subject-matter of the covenant for future conveyances in terms which are both inclusive and exclusive; and by thus describing what portion of the subject-matter lies on either side of the dividing line, it purports to deal with the subject-matter comprehensively. When, therefore, we find that the language excluding foreign rights from the covenant very plainly covers foreign applications for patent, we may infer from that fact also that the ambiguous language in which United States rights are included in the covenant was probably intended to cover applications for patents in this country. And finally, unless the words "patent rights" include rights arising in connection with applications for patents, the whole covenant for future conveyances may be evaded in the manner in which the defendant has attempted to do so. For the several reasons indicated, we are of the opinion that the trial court did not err in holding that the covenant in question includes the Washburn-Sheldon application in controversy.

The fifth, sixth and seventh points on the defendant's brief attack the conclusions of the court that the defendant occupied a fiduciary relation toward the plaintiff, and stood in the position of a constructive trustee with reference to the Washburn-Sheldon application.

These questions are discussed upon the defendant's brief upon the assumption that no express contract obligation existed on the part of the defendant to convey the Washburn-Sheldon application to the plaintiff. Inasmuch as we have determined that the defendant was and is under an express contract obligation to convey that application to the plaintiff, the questions now under consideration have lost a good deal of the importance which the defendant's brief attributes to them. In the light of this determination their application is limited to that portion of the decree which requires the defendant to account for profits and damages arising out of the competitive business in which the court finds that the defendant was engaged at the time when he was president and general manager of the plaintiff corporation, and, we may add, was also under contract to convey the Washburn-Sheldon application to the plaintiff; for, having once determined that obligation to exist, we cannot shut our eyes to it in any discussion of the legal or equitable relations between the plaintiff and the defendant. The existence of this contractual obligation which the defendant's brief and argument, on this branch of the case, assume to be nonexistent, necessarily destroys the force of most of the argument on behalf of the defendant under these two points, for, in our judgment, it narrows the question down to the point whether the findings of the court to the effect that the defendant made and sold Washburn-Sheldon barrels during the time he was also president and general manager and director of the plaintiff company are supported by the evidence. If they are, the conclusion that the defendant, who was also under contract obligation to convey the Washburn-Sheldon application to the plaintiff, could not fairly manufacture and sell such barrel in competition with the plaintiff without its consent or acquiescence, would seem to be irresistible.

It is undoubtedly true that the public, or any person having the necessary knowledge or information, fairly acquired, may manufacture the Washburn-Sheldon barrel up to the time when the patent issues, if it does issue. But it does not follow that the president and general manager of the corporation has the right to do so in competition with the corporation whose best interests he is bound to protect by virtue of his office. Still less may he do so, when also under a contract obligation to convey the application and all rights thereunder to his corporation. Still less may he do so when, as in the present case, it is found that he has used his office as president and general manager in an attempt to evade his contract obligation by assenting to the judgment in the Smith suit, and by again attempting to evade it by making it appear that the ownership of the Washburn-Sheldon application was in the Broadway Bank Trust Company, when it is found as a fact that the Bank was acting merely as a custodian for the defendant himself.

The findings show that the defendant held his office as president until February 10th, 1920; and that the construction of the Washburn-Sheldon barrel was commenced in the defendant's Standard Equipment Company factory in July, 1919, the first barrel being delivered to a customer on March 1st, 1920. On October 31st, 1919, the defendant quoted prices on four such barrels to another customer, which resulted in orders dated November 14th and November 18th, 1919, and thereafter accepted.

It is also found that none of the stockholders or directors of the plaintiff company, other than the defendant, knew of the existence of the Washburn-Sheldon barrel until some time in March, 1920.

These findings are enough to show that defendant's competition commenced to some extent in the fall of 1919; and that is enough to justify the decree for an accounting of defendant's profits and plaintiff's damages.

Under point nine of the brief, defendant claims that the judgment on the fifth count was erroneous because it appears that the plaintiff ratified the action of the defendant in raising the cost price of the Dreisbach barrel. The claimed ratification consists in continuing, after February 10th, 1920, to require Dreisbach to supply barrels under his contract with plaintiff and in continuing to pay the increased cost price. Dreisbach had a right under the terms of his contract to increase the cost price of the barrels. In so doing he was acting for himself, and not as agent of the plaintiff company. The gist of the fifth count is not simply that Dreisbach raised the price, but that, having done so, he failed to perform his duty, as president and general manager of the plaintiff, to protect it from loss occasioned by his own acts, or, under the special circumstances of this case, to at least notify the other officers or directors of the corporation that the price had been advanced.

The plaintiff was required by its contract to continue to pay Dreisbach the increased price, but there is no finding that it continued to sell barrels at less than cost after February 10th, 1920, when it first acquired knowledge of the facts; and hence no basis of fact for the claimed ratification of Dreisbach's breach of duty.

Under the same heading the defendant pursues his assignments of error relating to the admission in evidence, over his objection and exception, of two letters, Exhibits O-1 and P-1. The former is from William J. Smith to Nash, referring to Exhibit E, which is the agreement between Smith and Nash stating the terms upon which the latter agreed to pay $5,000 for his interest in the corporation. This letter was written the day after the first meeting of the corporation, and acknowledges receipt of Exhibit E, also receipt of $5,000 under its terms, and promises to forward the papers which, by the terms of Exhibit E, were to be submitted for Nash's approval. Exhibit P-1 is a letter to Nash from his attorneys, approving the by-laws of the plaintiff corporation, observing that there is nothing to show that the organization of the corporation was properly carried out, and advising inquiry as to whether the transfers of patents to the company have been properly executed and recorded. The only objection is that the letters are immaterial and irrelevant. That is a question which it is often difficult for a trial court to determine at the stage of the case when the objection is made; and it is not often that the admission of evidence otherwise unobjectionable will be treated as harmful error. While these letters are not of any great importance, they are not wholly irrelevant or immaterial, because they relate to what was done in pursuance of Exhibit E, which was already in evidence.

Point ten is that neither the pleadings nor the evidence justify the conclusion that the defendant acquired any adverse interest in the Washburn-Sheldon barrel. Broadly stated, our conclusion that the Washburn-Sheldon application is covered by the covenant for future conveyances in Exhibit A, refutes this claim. It is, however, presented in another light as a necessary consequence of the complaint itself. Paragraph twelve of the second count, after alleging that the Washburn-Sheldon barrel is the subject of an application for letters patent in the names of Washburn and Sheldon, alleges: "That such improvements, if not made solely by the defendant herein, were made by the said Washburn and the said Sheldon as participants with defendant, and were in any case instigated and developed and fostered and controlled and supervised by the defendant; but defendant, in violation of his duty to preserve plaintiff's rights in the premises, and in breach of his trust as an officer of plaintiff, and in breach of his contractual duty arising from the contract referred to in paragraph 8 herein and marked Exhibit A, failed to file an application for letters patent in his own name, or to join as co-inventor with the said Washburn and the said Sheldon in making the application for the benefit of plaintiff, and avoided having his name appear in connection with the patent application and papers relating thereto, either as applicant or assignee, so as to deceive and injure plaintiff; and defendant, further, in violation of plaintiff's rights, caused the said application for letters patent to be transferred secretly to The Broadway Bank Trust Company, a corporation organized under the laws of the State of Connecticut and having its office and principal place of business in the city, town and county of New Haven, said State, by a secret trust agreement, as trustee for the benefit of the defendant herein."

It is contended that this is in substance a direct averment that Dreisbach was either the sole inventor or a joint inventor with Washburn and Sheldon, and hence an averment that the application filed by and supported by the oath of Washburn and Sheldon is, in either alternative, a void application upon which no patent can lawfully be issued under the Patent Act, which requires every application to be filed and sworn to by the inventor or by all the joint inventors. Defendant relies on Kennedy v. Hazelton, 128 U.S. 667,9 Sup. Ct. 202, in which a bill for specific performance of a covenant to convey future patents for improvements made by the defendant in steam boilers, alleged that the defendant did invent such an improvement, and, with intent to evade his obligation, procured a patent therefor to be obtained upon the application of a third person. The bill was held bad on demurrer because, on the showing made by the bill and admitted by the demurrer, the patent was invalid and conferred no title which the defendant could convey.

In the case at bar, "so much of paragraph 12 as alleges that the Washburn and Sheldon invention is the subject of an application for letters patent of the United States filed in the name of said Washburn and Sheldon is admitted. The remainder of said paragraph is denied." It does not appear that any evidence was introduced tending to show that Dreisbach was the inventor or a joint inventor of the Washburn-Sheldon barrel and the testimony of Sheldon very clearly shows that he was not; the finding refers to Washburn and Sheldon as the "inventors" and to their "disclosure" of the improvement to the defendant, and the judgment repeatedly describes the improvement as the "Washburn and Sheldon invention." Thus, if it were so that the complaint had alleged, without qualification, that Dreisbach was either the sole, or a joint, inventor of the subject-matter of the application, it would appear that the defendant, by denying that allegation, had laid a foundation in the pleadings upon which a judgment consistent with the validity of the application filed in the names of Washburn and Sheldon, might stand. And we also think that the allegation that the improvements, "if not made solely by the defendant herein, were made by the said Washburn and the said Sheldon as participants with defendant, and were in any case instigated and developed and fostered and controlled and supervised by the defendant," is broad enough, in view of its last qualifying phrase, to be consistent with proof of a joint invention by Washburn and Sheldon alone; and, further, that the charge that the defendant fraudulently failed to file an application, either in his own name or as co-inventor with Washburn and Sheldon, does not apply to the situation contemplated by the phrase beginning with the words "and were in any case instigated," etc.

Under point eleven the defendant claims that the plaintiff is not entitled to a judgment because it has failed to prove the essential allegations of the complaint, and the brief maintains that proposition by reference to a number of selected allegations which, it is said, the court has not found to be true. For the reasons already stated, we are of opinion that, with one qualification hereafter made, the facts found are sufficient to support the judgment rendered, and the plaintiff is not bound to go any further than that in its proof of facts alleged. It is therefore unnecessary to follow the defendant's claims in detail under this heading. Many of them are based on claims of law and fact which have been already disallowed. We are unable to find any instance of an allegation essential to the validity of the judgment which has not been found true by the trial court.

It is also contended that in the absence of any allegation in the complaint of a demand for an accounting and refusal to account, no accounting can be decreed. This is not a common-law action of account based on contract; in which it is usual to allege a demand and refusal to account as a basis for the demand for damages. It is a bill in equity asking that an account be taken, and the right to the equitable relief demanded does not depend on a demand and refusal, but upon the facts alleged and proved. In such actions it is not usual or necessary to allege a demand and refusal. No allegation of a demand for an accounting is necessary, for example, to support a prayer for an accounting of profits and damages in a bill for infringement of patent, or copyright, or trademarks, or trade names, or unfair competition based on imitative labels or packages, as will appear from reference to any standard collection of forms for such bills. The practice in this State is illustrated by the printed record in Chamberlain v. Hemingway, 97 Conn. 156, 115 A. 632.

The defendant's claim under point twelve is that the decree is broader than the law allows. Several propositions are relied on:

A: That there is no warrant in the complaint for a mandatory injunction. This has reference to that provision of the injunction which requires the defendant, his agents and attorneys, and the Broadway Bank Trust Company to do what is necessary to fully transfer and insure to the plaintiff all rights under the Washburn-Sheldon application. This provision is incidental to the decree for specific performance of the covenant to convey, and is intended to prevent a total or partial voluntary abandonment or a forfeiture of the application under the rules of the patent office requiring an applicant to respond to any action or ruling of the examiner in charge of the application within a time limited. We have no doubt that the superior Court had power to make its decree for specific performance effectual, by requiring the defendant to keep the application alive and unimpaired by any act or omission of the defendant pending this appeal. In this connection the suggestion is repeated that the Broadway Bank is not a party to the action, and that it cannot comply with the decree requiring it to convey all rights in the application to the plaintiff, because it has already assigned most of its rights to the defendant. We have already pointed out that, on the findings, the Broadway Bank has no beneficial rights in the application. It is admitted that the original assignment was delivered to the bank upon some undisclosed parol trust, partly executed, no doubt, by the contemporaneous reassignment of practically all the beneficial rights under the patent, if and when issued, to the defendant. Apparently the Bank still retains the right to have the patent issued in its name, and in that event would still retain the right to make, use and sell the improvement in the State of Florida. These rights it can convey, and any others which it has under the undisclosed trust.

B: It is objected that the defendant is perpetually restrained from making, using or selling any radial blast barrel or parts thereof. We are of opinion that the terms of the injunction in paragraph six of the judgment are too broad. The plaintiff is entitled to a conveyance of the application, and to the use and enjoyment of the monopoly granted by any patent which may be issued thereon, free from any competition by the defendant before or after the grant of the patent. Upon complying with these conditions the defendant will have performed all his contract requires him to do. When the patent expires the public, including any assignor of the patent, may make, use and sell the patented improvement. Furthermore, it is permissible during the life of the patent for any person, including an assignor of the patent, to make repairs upon a patented machine by replacing such parts as may break or wear out in ordinary use during the expectancy of life of the machine itself, provided such replacements do not amount to a virtual reconstruction of the machine. We are of opinion that the plaintiff's rights as owners of the application and of any patent that may be granted thereon will be sufficiently protected by substituting for the sixth and seventh clauses of the decree an injunction restraining the defendant from making, using or selling any radial blast barrel or parts thereof which are described in the Washburn-Sheldon application, giving its date and serial number, pending the issue of any patent thereon, and from making, using or selling any radial blast barrel or parts thereof which are described and claimed in any patent of the United States which may be issued thereon, during the term of such patent or of any reissue or extension thereof, or from otherwise infringing or contributing to the infringement of such patent, re-issue, or extension.

C: The defendant also complains that, in paragraph eight of the judgment, he is perpetually enjoined from obtaining for himself in the future any patent or patent rights relating to improvements in the original Dreisbach barrel. It is pointed out that this would prevent the defendant from buying at any time in the future such a patent issued to any third person; and we think it must be conceded that Exhibit A does not purport to prevent the defendant from acquiring for his own benefit patents issued to third persons; but only such patents and patent rights covering improvements on the original Dreisbach invention as are issued to the defendant within the meaning of Exhibit A as we have construed it. We are of opinion that the question whether any patent or patent right which the defendant may hereafter acquire, equitably belongs to the plaintiff under the terms of Exhibit A, should be disposed of on its merits when the question arises, if it ever does arise, and that the judgment should also be amended by erasing from paragraph eight so much thereof as now follows the words, "enjoined from further breach of the covenant of Exhibit A in this action."

The thirteenth point on the defendant's brief criticizes the finding of the trial court that the defendant offered no evidence in support of count one of his counterclaim. We cannot find any evidence tending to prove the essential allegations of this count, which is based on the alleged refusal of the plaintiff to accept and pay for two barrels constructed by the Standard Equipment Company for the plaintiff, under the contract before mentioned. We are referred to none, except the testimony of the defendant's bookkeeper, who testified, in another connection, that the defendant's books showed a balance due from the plaintiff. This has no tendency to prove a refusal to accept and pay for the barrels described in the counterclaim.

The fourteenth and last point on the defendant's brief covers assignments of error based on alleged findings by the trial court of material facts without any evidence, and of refusals to find material and undisputed facts aggregating one hundred and forty-two such items. We cannot, of course, review these assignments — all of which are insisted on — in this opinion. We have, however, examined them all in the light of the briefs on both sides, and of such references to the testimony as appear, and find no error.

There is error in part, and the cause is remanded with direction to amend paragraphs six, seven and eight of the judgment in accordance with this opinion.

In this opinion the other judges concurred.