Opinion
07-06-1903
MACON KNITTING CO. et al. v. LEICES TER MILLS CO. et al.
P. C. Lowthrop and Hector T. Penton, for complainants. Edward H. Murphy, Joshua Pusey, and Joseph Jenkin, for defendants.
Bill by the Macon Knitting Company and others against the Leicester Mills Company and others, to compel specific performance of a contract to pay royalties for the use of a patented article. Decree for complainants.
The following preliminary statement will disclose the general features of the cause to be determined: On January 2, 1890, and on November 18, 1895, patents were allowed to Joseph Bennor for certain improvements in straight knitting jackets for making fashioned hosiery. On September 14, 1894, Bennor conveyed a one-half interest in this invention to the Macon Knitting Company, the other complainant. On February 10, 1896, the complainants entered into an agreement with the defendant the Leicester Mills Company, by which they granted to the latter company an exclusive license to manufacture in the United States, for its own use therein, to the end of the term for which such letters patent were or might be granted, knitting machines containing the abovementioned patented improvements, granting it the sole right in the United States to use the said machines in the manufacture of knitted goods of wool, worsted, and merino, and of no other material and for no other purpose. By said agreement complainants contracted to build and furnish to the defendant 20 knitting machines, of the construction specified in the application for said patents, for a cash price amounting to 10 per cent. above the cost of their construction, but not to exceed $200 each, which said machines the defendant was to have the right to use in the manufacture of the specified goods, and which machines it was agreed should be practically operative and built in a workmanlike manner. Complainants agreed to assist the defendant in placing said machines in its factory, and to impart to a competent person, to be designated by said defendant, proper instructions for operating the machines. The defendant agreed that upon the delivery to it of the 20 machines, and upon the practical operation of said machines, the defendant would forthwith assign to the complainants 50 shares of the capital stock of the said Leicester Mills Company, of the par value of $100 per share, together with the bonds of the said company of the value of $5,000. The defendant also agreed that on January 1, 1898. or before that time, if it had constructed 80 machines, it would assign 100 more shares of its capital stock and the same amount of bonds. The first installment of stock and bonds was delivered; but the second installment has not been delivered, and it is to compel the delivery of the latter stock and bonds that this bill is filed. The answer, as well as the answer by way of cross-bill, sets up that the defendant was induced to execute the agreement by the false representation of the complainants that the machines would produce stockings that would be shaped in process of manufacture, and would be marketable as first-class goods; that it delivered the first installment of stock and bonds, relying upon the contract and upon the further assurance already mentioned; that it cost $400 to make each machine; that they were not particularly operative; that the manufactured product was not first-class and merchantable, but had tobe darned and sold as second-class goods. The; cross-bill sets up the same facts, and prays that the stock and bonds already delivered may be redelivered to the defendant, and that damages may be awarded for the expenditure made by defendant in reliance upon the representations made and the written covenants executed by the complainants. The supplemental answer sets up that the patents were infringements of a preceding patent owned by the Powells, and so the complainants had no title to convey, and that that question was then being litigated in a federal court. By a stipulation this last question was held in abeyance until a decision by the federal tribunal, which decision was to be regarded as decisive in this court. A decision has been rendered in favor of the defendant, the character and effect of which decree will be presently considered.
P. C. Lowthrop and Hector T. Penton, for complainants.
Edward H. Murphy, Joshua Pusey, and Joseph Jenkin, for defendants.
REED, V. C. (after stating the facts). Of the two complainants, the Macon Knitting Company and Joseph Beunor, each owning a one-half interest in the machines sold, and in the right to manufacture and use like machines, Mr. Bennor was the inventor and patentee of the machines sold to the Leicester Mills Company. Previous to the sale, the latter company was a dealer in woolen yarns, and for about two years had been selling these goods to the Macon Knitting Company. Mr. Bennor, then interested in the business of the Macon Knitting Company, in his intercourse with the officers of the Leicester Mills Company concerning the purchase of woolen yarn, spoke to them about the knitting machines. In consequence of his talk with them, Mr. Wilson H. Brown, the vice president and treasurer of the Leicester Mills Company, accompanied Mr. Bennor to Macon, and saw the machines in operation. The result of the conversation and of this visit was that the contract already mentioned was entered into between Mr. Bennor and the Macon Knitting Company on the one side and the Leicester Mills Company on the other side. Of the 20 machines sold, 6 were sent to Germantown, where the Leicester Mills factory was located, on July 25, 6 on September 11, and 8 on November 4, 1896. In the latter part of July, or the first part of August, of that year, Joseph N. Bennor, Jr., the son of the patentee, went to the Leicester Mills to superintend the setting up and putting into operation of the machines sold, and remained there until July, 1897. The Leicester Mills people constructed a shop for the purpose of building the additional machines mentioned in the contract, Mr. Bennor, who arrived at Germantown before the arrival of the first installment of machines, devoted his time to starting up the machines shipped, making the tools, putting in the shafting, and preparing for the purpose of manufacturing machines. He says he set up the first arriving machines as soon as they got the shafting in, but that it took some time to get ready to run them. He had to experiment on yarns. Some of it was twisted too hard, some had little pieces or burrs on it, and some was irregular in size, "and we had to get our samples of proper weights before we could start the machines." It is to be remarked here that the machines, while at Macon, had run on cotton, excepting in those instances where samples were made from yarn sent to them. Mr. Bennor further says that he got the first of these machines started in the latter part of September, 1896, and he had them all at work by the 1st of December. Much of Mr. Bennor's time was given to the machine shop, and therefore, to assist him, Mr. James T. Hall was sent from the Macon Knitting Company about the 1st of February, 1897. Mr. Hall was the foreman of the knitting room at the Macon Mills. Mr. Hall ran the knitting machines from the time he came until he left, which was some time in March. Before Mr. Hall came, Mr. Bennor had a boy whom he taught to help him run the machines. This boy remained until the first week that Mr. Bennor was there, and then another boy was hired, who remained two or three weeks after Mr. Hall left. He was discharged by the officers of the Leicester Mills Company. After Mr. Hall left, the Leicester Mills Company employed Mr. Thomas W. Tustin, who began to work in the second week in May, and remained about one year. Mr. Bennor and he were there together from the second week in May until about July 4th, when Mr. Bennor left, and Mr. Tustin was alone until the Leicester Mills Company ceased using the machines. The machines ran until December. On December 21, 1897, Mr. Wilson H. Brown, the treasurer of the Leicester Mills Company, wrote to Mr. Bennor, stating that the machines were not "practically operative," and notifying him that the Leicester Mills Company rescinded the agreement, and asked him to reinstate them in the same position as before the agreement was made. On December 24th Mr. Bennor replied, refusing to entertain! the proposition. On March 8, 1898, Mr. Bennor and the Macon Knitting Company filed the bill in this cause, and on April 29th the defendants filed their answer and cross-bill.
The bill, as already observed, asserts that the machines were "practically operative." The answer and cross-bill charged that they were not "practically operative," and further charged that there were false representations made, which induced the execution of the contract. In detailing these representations, the answer states that the defendants were induced to enter into the contract by the statement that the machines would, could, and should produce stockings that would be shaped in process of manufacture, and would be marketable as first-class goods. The answer then states that the stockings produced required to be darned,which made them unsalable as first-class goods. The prolonged operation of these machines by the defendants is explained by the statement that they notified Mr. Bennor in July, 1897, that the machines were not in accordance with the agreement, and that Mr. Bennor requested defendants to give them a further trial, and agreed that, if they were not found to be satisfactory by January 1, 1898, they would be taken back, and the defendants would be reinstated in their original position. The cross-bill charges that at the time of the execution of the agreement it was agreed that the words "practically operative" meant that the machines would produce fashioned stockings that would be marketable as first-class goods. It charges that all the stockings produced by the machines had holes in them, which required to be darned, and so made them unsalable as first-class goods; that frequent and constant complaints were made to complainants of this state of affairs, and as frequent promises were made by them that the defects would! be remedied, and that the complainants would demonstrate that the machines would produce first-class goods. The cross-bill restates the conversation in July, already set out in the answer. The cross-bill also sets up that large sums of money were expended in buying special tools, etc., to equip the shop and run the machines, at a large expense, and that they also lost much in the manufacture of unsalable goods. It charges a failure of consideration and a failure to perforin the conditions to be performed by the complainants. It asks that the complainants may be decreed to return the stock and bonds and interest already received, and also to pay the amount expended by the defendants, already mentioned.
It is to be observed that the cross-bill does not ask for the rescission on the ground of fraud, nor do I find any fraudulent representation of any subsisting fact by the complainants. Whether the machines were or were not "practically operative" in fact, in the sense in which the words are used in the contract, I am quite clear that Mr. Bennor thought the machines would do what he said they would do. The primary question in the case is whether the machines delivered were "practically operative." In that question is also involved the practical effectiveness of the machines to be manufactured, and consequently the value of the license to manufacture. Inasmuch as the inoperativeness of the 20 machines is attributed to defects in design, and not to defects in construction, the proof of the Inefficiency of the first 20 machines carries with it the presumption of similar inefficiency in every machine which was to be built under the license. Practical operativeness is to be tested by the purpose for which the machine is built and sold. A machine may operate practically to make bricks; but, if sold for the purpose of making tiles, it would be absurd to speak of it as "practically operative." The contract itself recites the grant to Mr. Bennor of the patents for an improvement in stockings and the art of making them, and improvements in straight knitting machines for making fashioned hosiery, and recites that the Leicester Mills Company were desirous of manufacturing knitting machines containing those improvements, and acquiring the exclusive right to manufacture thereon knitted stockings of wool, worsted, and merino, together with other knitted goods of wool, worsted, and merino. Then there follows a license to manufacture such knitting machines, with the sole right to use the said machines in the manufacture of knitted goods of wool, worsted, and merino, but of no other material. It thus appears that the machines were to be "practically operative" in making knitted woolen goods, including fashioned hosiery. It is apparent, also, that the machines were to make seamless hose. Now, a machine might make a fashioned seamless hose, and yet not be "practically operative." Its operativeness must be measured by the work of other knitting machines, in respect to the quantity and quality of the goods produced, the durability of the machine, its freedom from liability to disarrangement, and its liability to waste yarn.
In the consideration of the question whether these machines were "practically operative" to accomplish the purpose for which they were sold, the first fact that strikes the attention is that these machines were run for over a year before any written complaint of their inefficiency was made. They were put into operation by the 1st of December, 1890, some before that date, and not until December 21, 1897, was there any written expression of dissatisfaction. It is true, that the Messrs. Brown say that there were repeated verbal statements to Mr. Bennor that the machines were not working satisfactorily. One occasion is particularly pointed out, namely, when the Messrs. Brown and Mr. Bennor were returning together from the meeting of the stockholders of the Leicester Mills Co. at Point Pleasant, in July, 1897. Mr. Bennor, however, denies that then, or at any time before the 1st of December, 1897, the Messrs. Brown expressed any disapproval of the work of the machines. In respect to the conversation on the train on the return from Point Pleasant, in July, he says that it solely concerned the proposition of the Messrs. Brown to purchase the right to use the machines on cotton, as well as upon woolen, fabrics. It is entirely clear that this topic was discussed at that time, and it is not clear that any other topic was debated. The denial of Mr. Bennor, in connection with the written correspondence between the parties covering the period in which the machines wererunning, leave it unproved that any disapproval was interposed before December 21, 1897. This fact, in my judgment, leads to the conclusion that there could not have been any such radical defect in the machines as would have arrested attention. It is true that the Messrs. Brown claim that they were induced to persist in running the machines by the promise of Mr. Bennor that their defects would be remedied. Mr. Bennor denies this. It is also to be observed that Joseph N. Bennor, Jr., who had been sent to install the machines and teach some person to operate them, left on July 4, 1897. The adjusting and teaching function of Mr. Bennor was then understood to be ended. The machines were at that time turned over to the Leicester Mills Company. That company ran them for about six months thereafter before complaint was made. In view of this conduct, it is incumbent upon the defendants to show the existence of those defects in the machines which rendered them practically inoperative.
The principal witness offered for this purpose is Mr. Thomas W. Tustin. Tustin went to the Leicester Mills the second week in May, 1897, as superintendent of the hosiery department. Tustin says that the character of the product of those machines was very unsatisfactory, and that in his opinion the stockings produced were seconds. The imperfections, he says, were in the side of the foot, where the widening was done on the needles: that every pair of stockings had to be darned, and that there were seven or eight holes for about three-fourths of an inch. He says that he does not allude to the hole in the heel, for any machine will do that. Then he says there were drop stitches at the front of the toe that required mending; that, if only one was dropped, it might be mended so as to be imperceptible, but for two or more no one could make it perfect; that SO per cent. of the goods had drop stitches. He says that the cause of the drop stitches was that there is a mechanical piece of work, a rod going across called a "latch opener," and that this piece of rod would not open the latches and the needles in time to take the yarn as it was delivered from the yarn bag. He proceeds: "I had a machinist all the time. He would not have one hour in the machine shop, but what I was after him; and when he went away from the machine, after repairing it, the machine was just about the same as before. There were always 3 or 4 out of the 20 machines out of order. We had trouble with the shaping of the hose. In some cases the sinkers did not work properly, and in others the jacks threw the needles up too far." Upon being shown Exhibit D 1, he said that the average quality of goods was a little worse than that. He also says that, because of the imperfections of the machines in setting up the stockings, there was more waste of yarn than be ever saw in any other machine. This is the substance of the testimony of Mr. Tustin. Another witness for the defendants is Rudolph H. Hunter. He is a lawyer, and testifies as a mechanical expert. He was taken to see these machines in December, 1898, just before the trial of this cause. Mr. Tustin and Mr. Evan M. Brown accompanied him. He was an hour and a half attempting to run one machine. Mr. Tustin and his assistants tried to run the machine while Mr. Hunter watched it. Mr. Hunter says that his aim was to make it work with proper effect, if they could do so. He says that he did not make any material portion of a stocking, because it was impossible to get the machine to knit properly, even from the start. The needles would not take the loops and the thread, so that the course was invariably imperfect. He afterwards said that a setting up might be had at the start, in some cases; but those cases would be exceptional. He says that this results from an inherent defect in the design of the machine, and proceeds to describe the specific imperfections in its operations. Another witness for the defendants is Mr. Henry Beal, who was a buyer of hosiery for Hood, Fulkrode & Co. Mr. Beal says that in the spring of 1897, he ordered 122 dozen of hose from the Leicester Mills Company, which hose were delivered about July of that year; that these goods were not first-class; that he bought them by sample, and that they were not as perfect as the sample: that the defect was in the big mark on the side, which they called "fashioning." When asked if he observed any slipping of stitches, he said: "Yes; there were some Imperfect goods in the lot." When shown the stocking marked Exhibit D 1, he said that they were imperfect, and he would consider them seconds. It does not appear that any complaint was made to the Leicester Mills Company of the character of these goods. All the stockings were sold; but witness says that he did not wish to buy any more. The testimony of these three witnesses constitute the case of the defendants respecting the Inoperative character of the machines.
For the complainants there is the testimony of Joseph Bennor, the patentee, under whose supervision the 20 machines were made at Macon and tested; the testimony of Joseph N. Bennor, his son, who was sent to the Leicester Mills to install them and teach some one to operate them; and the testimony of Mr. Hall, who was in charge of the machines for six weeks in 1897. They all testify to the efficiency of the machines. Joseph Bennor, who visited the Leicester Mills occasionally while his son was in charge, says that the Messrs. Brown did complain of the cost of the machines which they were building, and of the fulling and scouring of the goods, which is an after process, but that no complaint of the work done by the machines themselves was made. Mr. Hall testifies that the machines, while he was there, operated all right so far as he knew,and made good hosiery. He says that they ran the 20 machines at the Macon Knitting Company before they came up, and that he started every one of them there; that he ran the 20 machines, with the exception of one, which they did on small hose for which they bad no orders. He also says that just before he left, in the middle of March, 1897, Mr. Everitt Brown said that he was perfectly satisfied. This Mr. Brown denies, and says that, on the contrary, Mr. Hall asked for a commendatory letter, which he declined to give. Mr. Joseph N. Bennor first explains the manner of running the machines. The machines are operated by a boy, and kept in running order by a fixer, whose duty it is, not to mend, but fix and replace screws or parts which are wrong. The machine has to be timed, which is done by a chain in a pattern wheel. The boys become proficient in time, but not in fixing the machines. Mr. Bennor then describes the setting up of a course at the toe, and also what will cause a drop stitch in setting up a course, namely, where the latch opener is not straight. The duty of the latch opener is that, when the cams raise the needles, the latch opener opens the latch of the needles, and slides under it. It will be recalled that one of the criticisms which the defendant's expert witness made upon these machines was that the stitches were dropped because of the defective operation of the latch opener. Mr. Bennor says that, while he and Mr. Hall had the fixing and adjusting of the machines, they ran all right.
In analyzing the conflicting testimony, I will first allude to that of Mr. Beal, the purchaser of the 122 dozen of the stockings delivered in July, 1897. He first states that the eyelet holes produced by the fashioning of the hose are a defect. Now, it is entirely clear that the presence of these eyelet holes in the stocking knit by these machines was known to the defendants before the machines were purchased—certainly before they were delivered. It appears that in a letter of July 14th the defendants, in speaking of some stockings which had been sent from Macon as samples, say that they would advise having all samples made in future with the holes closed. Mr. Bennor answered: "If you prefer to have them closed, or if the trade demands to have them closed, they will have to be mended, the same as the balance of the goods sent to you. But, in my humble opinion, I think it will not be necessary after the goods are introduced. These holes are made by any machine which makes fashioned seamless hose; that is, hose with varying diameters, to conform to the shape of the leg. If the market does not call for the hose as made, the holes can be closed by mending, which is a technical term for closing them, or they can be concealed by clocking." Prom this it appears that, before the machines were delivered, the defendant knew that these machines would so knit the holes, and it appears that for a year after wards they practically operated in this way, Mr. Beal also thinks that there were imperfections in other parts of the stocking, darned places, and says that Exhibit D 1 is imperfect, in that it has been darned on the side opposite the heel, the same as in Exhibit C 7. Mr. Beal admits, however, that all machines will drop stitches. His main complaint, however, is respecting the mending on the heels in the fashioning.
If there were other defects, other than those on the heels, the complainants insist that it was because of the unintelligent operation of the machines, and not from any defect in the machines themselves. The goods sold to Hood, Folkrode & Co. were made while Mr. Tustin had charge of the machines. Mr. Tustin says that lie did not run the machines himself, but only superintended the work. The machines were run by a boy, Harry, who had never seen a knitting machine before he came there. Mr. Tustin did not ever fix the machines; for Mr. Bennor did that before he left, and it was afterwards done by a machinist. The fixer is one who keeps the machines in order. Now, Mr. Bennor, as already remarked, left about July 4th, and seems not to have had much to do with the machines which Mr. Tustin was superintending for some weeks before he left. Who the machinist was, who acted as fixer in place of Mr. Bennor, does not appear; nor is he produced in the cause. Whatever defects may have appeared in the hosiery bought by Mr. Beal are attributed by the complainants to the inexperience of the boy who ran the machine, and of those whose business it was to keep the machines in time and otherwise properly adjusted, and also in feeding lumpy worsted. Much significance, it seems to me, is to be accorded to these views, from the fact that, of the thousands of pairs of hose that were knitted and sold, Mr. Beal is the only buyer who testifies to the imperfections of the purchased goods.
I will now turn to the testimony of Mr. Hunter, the expert. The purport of his testimony is that the machine was radically defective in design—so defective that he found it impossible to knit a perfect stocking. He admits that the eyelet holes made by the fashioning process are not an imperfection. The defects of which he complains is that the machines would not set up a stocking without dropping stitches. He asserts that for an hour and a half they tried over and over again to start a stocking, and they did not succeed in knitting one complete. His language is: "They could not make one perfect setting up; not one first course. The needles would not take all the loops—would not take the thread —so that the first course was invariably defective." Then, on further examination, defendants' counsel said to him: "I presume a setting up might be made at the start in some cases. There might not be trouble of dropping stitches?" To which he answered: "Yes, sir." He was then asked: "And that would be, from what I understand you to say, exceptional?" To which he answered: "That would be exceptional." The testimony of this witness must be viewed with the circumspection with which the testimony of any person who is paid to support a certain position is viewed. It is to be recalled that most of the machines had been idle for a year, and all for 11 months. It does not appear what, if anything, had been done in the way of oiling, cleaning and adjusting the examined machines beforehand. The only explanation possible of this testimony is that the machines did not work for Mr. Hunter as they had worked for Mr. Bennor. The testimony of the Bennors, the fact that thousands of dozens of hose had been made upon these machines, and the specimens of its work presented, seem to prove either that the witness overstates the defects of the machine he saw, or that it was not properly adjusted to do its work. It is also to be observed that the witness attributed the inability of the machine to set up the first course to a defect in design, namely, that the needles did not always take the yarn, which was due to the fact that the latches would not open. Yet, according to the testimony of Mr. Bennor who built the first one of the Powell machines, the latch-opening device upon the Powell and Bennor machines were alike, and Mr. Hunter says that the Powell machine had none of the defects which he found in the Bennor machine.
Now, respecting the testimony of Mr. Tustin: He was with Mr. Hunter and ran the machine when the latter made his observations. From Mr. Tustin's statement, particularly that part which described the alleged defective operation of the machines, I surmise that the tone of his testimony is influenced by what he saw and heard while with Mr. Hunter on that occasion. Mr. Tustin had had no experience with this kind of knitting machine before he came to the Leicester Mills in May, 1897. He took some instructions from Mr. Bennor, but, as Mr. Bennor says, "He soon knew it all." He admits that he never started to operate a machine; that he went to superintend the hosiery plant, not as a fixer, or to run a machine, but to see that the machines were run; that he never fixed one of these machines, and either sent for a machinist or Mr. Bennor to do it. So the fixing after July 4, 1897, was left to this unknown machinist, and the running of the machines to the boy Harry. It was while Harry was running the machines that the goods sold to Mr. Beal were turned out, and it appears that goods with drop stitches will be produced by lumpy yarns, as well as by any maladjustment of parts of the machinery.
I think that the testimony of both Mr. Hunter and Mr. Tustin is overdrawn and Intemperate. It is opposed by the conduct of the defendants themselves; for it is utterly impossible to believe that the radical inoperativeness of these machines, testified to by these witnesses, could have existed, and yet that the defendants would have kept these machines in operation, and put their products upon the market for a year, with no written complaint. Even after the letter of December 21, 1897, defendants used some of the machines in working up some yarn on hand, making about 100 dozen pairs of stockings. In fact, the defendants have made a case against themselves by conduct which refutes their present Insistence. Not only were the 20 machines used whenever there was yarn to knit, but the defendants proceeded with their construction of new machines. When Mr. Tustin came to Germantown, he found 21 machines, and when he left there were 40. Again, in July, 1897, defendants tried to purchase from the Macon Knitting Company people the additional right to make cotton hose on these machines. The machines had then been running about seven months, and the goods sold to Mr. Beal, I presume, had been made upon them. Again, the contract provides that upon the delivery and practical operation of the 20 machines, $5,000 worth, par value, of the capital stock and bonds should be delivered to the complainant. These were delivered on December 20, 1896, after the machines were in operation. The interest on the bonds accrued in June and December, and it appears that the interest due June 1 and December 1, 1897, was paid by the defendants when due. From the case thus made, I am constrained to the conclusion that the machines sold must be regarded as practically operative.
There are, however, other questions in the case. After the original cross-bill and answer were filed, mainly attacking the operativeness of the machines, a supplemental cross-bill and an answer were filed, setting up, in substance, that the machines in question were in some material part infringements upon the rights of Messrs. Powell, the owners of a patent for an improvement in the web-holding actuating mechanism for automatic knitting machines; that on November 12, 1898, the Messrs. Powell had begun a suit against the defendants, among other things, because of such infringement. In the complainant's answer to the cross-bill they admit the pendency of the suit, but denied the fact of infringement. Upon the trial of the present case, it was stipulated that the decision of the issue raised by these supplemental pleadings should be suspended until after the decision of the federal court in the suit mentioned, and that the decree of the court in that case might be pleaded in this, as to its legal effect in this court, subject to an appeal in the Powell case. On appeal to the Circuit Court of Appeals, the decree of the Circuit Court (103 Fed. 476) holding that there had been no infringement was reversed (108 Fed. 386), and the record was remitted to the Circuit Court, where, on October 25th, it was decreed that the Browns had infringed the Powell patents, and their exclusive right thereunder, by the manufacture and use of knitting machines having web-holding actuatingmechanism, substantially the same in construction and operation as in the Powell patents. This decree has been pleaded and is in evidence by stipulation in this suit. The conclusion of this decree of the federal Circuit Court is this: "It being shown to the court by stipulation this day filed, and now made a part of this decree, that the intervening defendant, the Macon Knitting Company, has made settlement with complainants for said infringement, and has taken a license under said letters patent, as in and by said stipulation appears, and complainants having thereupon waived an account of profits and damages and injunction, it is decreed that the complainants do recover of said defendant [Brown] and intervening defendant [Macon Knitting Company] the costs of suit."
Now, this stipulation is not a part of the judgment, but is recited to show why there is no injunction order and decree for an accounting, namely, because the complainant waives his right to such decree. The recital amounts to an admission in open court by the parties that the annexed stipulation had been executed. The decision of the Circuit Court of Appeals was rendered on April 4, 1901, and the stipulation annexed to the final decree is dated July 3, 1901. The stipulation or agreement witnessed that the Powells, owners of letters patent of the United States No. 510,934, dated December 19, 1893, for improvements in web-holder actuating mechanism for knitting machines, "for and in consideration of the sum of five thousand dollars ($5,000) and other good and valuable considerations to us in hand paid, have authorized and empowered, and do hereby authorize and empower, the Macon Knitting Company to sublicense and empower the Leicester Mills Company, and no other party or parties, retroactively from the date of the said letters patent, and hereafter during the remainder of the term thereof, to make for its own use only, and to use, said patented web-holder actuating mechanism in or upon, or as part of, knitting machines heretofore employed or hereafter to be employed by the said Leicester Mills Company exclusively in the knitting of hosiery or other goods from woolen, worsted, or merino yarns, and for no other purpose or purposes. The intent of this instrument is to authorize and license, subject to the terms, conditions, and limitations hereinabove expressed, as well the use heretofore by the said Leicester Mills Company as the continued use hereafter during the term of said letters patent No. 510,934, of said patented web-holder actuating mechanism to and upon twenty (20) knitting machines heretofore made by the said Macon Knitting Company and Joseph Bennor, and by them sold and delivered to the said Leicester Mills Company, under a certain license agreement made by and between the said Bennor and the said Macon Knitting Company, of the one part, and the said Leicester Mills Company and Wilson H. Brown of the other part, dated the 10th day of February, A. D. 1896, and also to authorize and license the said Leicester Mills Company, subject to the same restrictions and limitations as to use, as well the manufacture and use by said Leicester Mills Company heretofore as also the manufacture and use hereafter, during the term of said letters patent, of other specimens of said patented device in or upon or as part of any knitting machines made or to be made, and used or to be used, by the said Leicester Mills Company, under and in accordance with the terms of said agreement of February 10, 1896, copy of which is hereto annexed, marked 'Exhibit A,' and for no other purpose or purposes, to the end that said Leicester Mills Company, as the sublicensee of the said Macon Knitting Company hereunder, shall not be evicted, disturbed, or interfered with, by reason of said recited letters patent No. 510,934, owned by said licensors herein, from and in the full enjoyment of all the rights and privileges granted to it, the said Leicester Mills Company, by the Macon Knitting Company and Joseph Bennor, in and by said recited licensed contract or agreement, nor be held liable to the said licensors herein in damages for infringement or costs of suit in any action brought or to be brought by them under said recited letters patent for any acts rightly done by the said Leicester Mills Company in the exercise of such license rights as by the said recited contract of February 10, 189(1, have been granted to or vested in them; it being the further declared intent and object of this instrument to settle and adjust the claim and demand for which a suit in equity was lately brought by the said licensors as complainants in the Circuit Court of the United States for the Eastern District of Pennsylvania, of October sessions, 1898, No. 20, against the said Leicester Mills Company and its officers as defendants, with the said Macon Knitting Company and Joseph Bennor as interveners, and to discharge, release, and acquit, as well said defendants as also said intervening defendants, of and from all liability for damages and costs which have been or might be adjudged, ascertained, or assessed therein."
The question which presents itself is, what are the rights of the parties, in view of the decree, coupled with the agreement just displayed? It is first insisted by the defendants that they are assignees, and not licensees, and that the rule respecting the failure of consideration resulting from the invalidity of the patents should be applied as if the agreement for the use of these" patent rights was an assignment. Whether the rule respecting the right of an assignee to set up the invalidity of a patent differs from the right of a licensee to do the same is not to be considered; for the defendants are clearly licensees, and not assignees. Any assignment which does not transfer thewhole patent, or an undivided part of the whole patent, or an exclusive right to some part of the country, is a mere license. Waterman v. Mackenzie, 138 U. S. 252, 11 Sup. Ct. 334, 34 L. Ed. 923. This transfer did neither of these three things. It did not transfer the whole or an undivided part of the patent and it did not transfer an exclusive right to use the same in the whole or any part of the United States. It only transferred the exclusive right to use the patented machine for one use, namely, for the manufacture of woolen goods. What, then, is the privilege of the defendants as licensees? There is a line of cases holding that a licensee cannot set up the invalidity of a patent, the right to use which he holds by license, unless there has been something equivalent to an eviction of the licensee. Judge Lowell in White v. Lee (C. C.) 14 Fed. 789-791, said: "The law is, I think, that a plea or answer that a patent is void is not of itself a sufficient defense, but that evidence of what may be called an 'eviction' is such defense. The difficulty is to ascertain what amounts to an eviction in patent cases. It is easily discovered whether the tenant of a certain piece of land has or has not been evicted; but, if a patent is void, still the licensee may have had all the benefit of a valid patent, because his exclusive title may never have been disputed." In that case there was no suggestion that the exercise of the pretended right conferred by license was any violation of the rights of a patentee superior to the licensor. The invalidity of the licensor's patent defeated the exclusive right of the licensee, and put him upon a footing equal with the world, but did not expose him to liability for infringement. He could still recognize and use his license and receive the protection of what the world might suppose or recognize as an exclusive license in fact. In this group of cases, so long as a licensee recognizes the license and uses it, he must pay the royalties which accrue under the terms of his license. If, however, the patent was adjudged invalid, or was repealed by judicial decree, this amounts to an eviction. In my judgment, the decree of the Circuit Court of Appeals must be regarded as an eviction.
It is, indeed, insisted that the Bennor patents have not been annulled. It is said that the decree in the infringement suit only established the fact that in some respects only the Bennor were infringements of the Powell patents. It is true that the decree in the infringement suit only establishes the fact that the Bennor patent is invalid only so far as it includes the generic novelty already obtained by Powell. In no other respect was the Bennor patent directly or inferentlally annulled. But it is manifest that no one could use the Bennor machines without infringing the Bennor patent, as well as the Powell patent. It is obvious that the licensees could not use the machine without liability to Powell for damages for every day's use; and I am unable to understand how the effect of a decree for infringement differs this from any other case, except in respect to the amount of damages recoverable by the superior patentee. The decree for infringement amounted to an eviction. An eviction occurs whenever a licensee is enjoined from acting on it at the suit of the owner of a senior patent; and by parity of reasoning it occurs whenever a judgment or decree is obtained by the owner of a senior patent against the licensee for an infringement which consists of acting under the license. Walker on Patents (3d Ed.) § 307. It is clear, therefore, that, putting aside for a moment the effect of the agreement entered into between the Bennors and the Macon Mills Company on the one part, and the Powells on the other, the complainants cannot compel the delivery to them of the remaining bonds and stock of what constituted the consideration for the license.
The question, then, recurs, what is the effect of the agreement thus referred to? By this agreement the Powells licensed and empowered the Macon Knitting Company to sublicense and empower the Leicester Mills Company to make for its own use only, and to use, said patented web-holding actuating mechanism upon or as a part of the knitting machines heretofore or hereafter employed by the Leicester Mills Company exclusively in the knitting of hosiery or other goods from woolen, worsted, or merino yarn. Now, the defendants insist that this agreement does not restore them to the position which they would have occupied, had the original license protected them from all liability to a suit for an infringement. This appears to be so. First, the license purported to give the complainants the exclusive right to use the web-holding actuating mechanism. The stipulation only confers the right to use it in common with others who may acquire the same rights from the Powells. Again, the Powell patents expire before the Bennor patents, and so the use of the device mentioned will be thrown open to the world before the end of the period of exclusive use which the original license granted to the complainant. What the stipulation does is to release the complainant from liability for past infringement, and to entitle it to use in future the Bennor machines free from any claim by the Powells. But by doing this the agreement, I think, nullified the effect of the eviction proved by the decree of infringement This is the effect of the rule, as I understand it, that, while there is an implied warranty of title by the licensor, there is no warranty of the validity of the letters patent. All that the licensor warrants is that the licensee shall not be evicted from his enjoyment of his rights under his license. Walker on Patents, p. 257. The licensor absorbed the force ofthe decree which would have otherwise amounted to an eviction. By force of the agreement with the Powells, the disturbing force of the decree was arrested at the moment of its birth. Therefore, if the eviction rested solely upon the entry of the decree in the Powell suit, there would exist no defense whatever.
But there is another aspect of the case to be considered. The defendants ceased to use the license from the Macon Knitting Company in January, 1898. On November 21, 1898, the defendants filed their supplemental answer and cross-bill, praying for a rescission of the contract on the ground that the Bennor patents were invalid and because they infringed the Powell patent. From that date the cessation from use by the defendants of their license must be regarded, in part at least, as caused by the paramount title claimed by the Powells. It is perceived, therefore, that from November 21, 1898, until October 25, 1901, the date of the. infringing decree, the defendants not only did not use the machines, but could not use them without being liable for infringement, and it appears that they had asked for a rescission of the license agreement upon that ground. There is a class of cases in which a licensee can successfully defend against an action for royalties when there has been no eviction. If the patent which he is licensed to use is an entire nullity—if it is inoperative, not merely in respect to some of its claims, but in all of its claims—the licensee need not wait until some act equivalent to an eviction occurs. In this class of cases, the weight of authority is that without an eviction, where there are no recitals in the license recognizing the validity of the patent, the licensee can cease to recognize and act under the license, by notice to the licensor of his determination to repudiate the license. Thereafter, if the patent proves to be invalid, the licensee is free to use and manufacture without liability to pay royalty. If the patent proves to be valid, the licensee thereafter is liable to the licensor for damages as an infringer.
In Crossley et al. v. Dixon, 20 Eng. Rul. Cases, 764, 10 H. L. Cas. 293, Lord Chancellor "Westbury said: "The license being the foundation of the claim (for royalties), and being, of course, determinable by it, if be chooses to put an end to that license, it follows that the present appellants, if he [the licensee] continues to use the machine, must treat him as a person infringing their patent rights." Lord Chelmsford said: "He [the licensee] cannot act under the agreement and at the same time repudiate it. He may, if he pleases, put an end to the agreement; and he may use the machine which he has purchased from the appellants [the licensors], but he must do so at his peril. He must do it under the liability to be treated as an infringer, and be subject to an action for damages for that infringement." In Marston v. Swett, 82 N. Y. 526-534, the rule laid down by Judge Earle in Lawes v. Purser, 38 L. & E. Rep. 48, was adopted, namely, that if the plaintiff believed the patent to be valid, and the defendant believed so too, the defendant must pay for the privilege until after he can show that the patents have been rescinded or revoked, or that notice has been given to the plaintiff that the defendant will not pay any more under the contract. And in Mudgett v. Thomas (C. C.) 55 Fed. 645, the judicial language was that if the exclusive licensee, under a license which contained no recitals as to the validity of the patent, repudiates and abandons the license, he is not estopped from setting up the invalidity of the patent for lack of invention or want of novelty as a defense to an action for royalties alleged to have become payable subsequent to the repudiation. The cases are reviewed by Judge Sage in his opinion in this case. Upon this point are the cases of Harlow v. Putnam et al., 124 Mass. 553; Standard Button Fastening Co. v. Ellis et al., 159 Mass. 448, 34 N. E. 682; Edison Gen. Electric Co. v. Thachara Mfg. Co., 167 Pa. 530, 31 Atl. 856.
This rule seems inapplicable, however, when the patent, while invalid as to some of the points claimed, is valid as to others. The continued use of a license under such a patentee would leave the licensee liable for royalties and also responsible for infringing the rights of any paramount patentee. "But, while he may not free himself from liabilities, if he continues to use the license, I am of the opinion that such a licensee can cease to use and repudiate his license. He is not bound to wait until he is actually evicted by a paramount owner. The doctrine of estoppel which is applied to a licensee is analogous to that applied to a tenant. The well-known rule as to the latter is that, so long as he remains in undisturbed possession, he is estopped from attacking the title under which he entered, unless his entry was induced by the fraud of the landlord, or by mistake, or for some unlawful purpose. The fact that the lease is void, or that the lessor has no title whatever, makes no difference. If a lessee is in possession as a tenant, he must pay for what he enjoys. If his possession is disturbed by what amounts to an eviction, either by the landlord or by the owner of a paramount title, the right of the landlord to rent from that moment ceases. Nor is it necessary for the tenant to await the entry of a judgment against him. In case some claimant of a paramount title asserts his right against a tenant, the latter is not bound to remain in possession, and so become liable to pay rent to his landlord and also damages to the claimant. He can abandon the possession of the leased premises, and take his chance of establishing his liability to be ejected by the paramount claimant. If he proves the existence of such liability, there can be no recovery for rent from the time of the tenant's abandonment. So a licensee, who may become aware of a claim of a right paramountto that of his licensor, may upon the same principle repudiate his license, and abandon its use; and, if the existence of the paramount right is established, the licensee is discharged from the payment of royalties, subsequent to the date of his cessation from use. This is the posture of the defendants. From November 21, 1898, until October 28, 1901, their abandonment of the use of the license discharged them from any liability to pay royalties for that period.
The question then arises, what is the equitable course to be taken in dealing with this situation? Should the court refuse to grant any relief, or should it decree specific performance, with an allowance to the defendants of a pecuniary compensation equal to the royalties which would have accrued during the idle period? The allowance of compensation in suits for specific performance is a familiar feature in the administration of equity jurisprudence. When jurisdiction to decree a specific performance exists by reason of the character of the contract to be performed, a court, if it finds that it is beyond the ability of a party to specifically execute its terms, will compel him to do so, as far as he can, and will compel him to compensate in money for so much of the contract as he cannot specifically perform. Even if the party cannot, perform any part of the contract, equity does not hesitate to decree compensation for the whole.
That this court has jurisdiction in this case is clear. Jurisdiction rests upon two grounds: First, because the subject-matter of the contract is a patent; and, second, because the consideration was securities not listed, and so without a market value. The power of this court to decree compensation in this class of cases cannot be doubted. The instances in which this power has been exerted have been generally where the defendant has been unable to deliver what he had bargained to deliver, and the complainant is content to accept pecuniary compensation. When, however, it is sought to compel a defendant to accept that for which he has not contracted, the case presents quite another aspect. There must be circumstances rare and peculiar when a court will so decree. The present case is sui generis. The contract has been partially performed. The securities have been in part delivered. The license has been for a time enjoyed. There is nothing to indicate that the existence of a paramount title in the Powells was suspected by the licensors until suit was brought for an infringement. The conditions which its existence created were remedied as soon as it was judicially determined that there was a paramount right. Then, too, it is to be particularly observed that the cessation from use began, not because of a knowledge of the claim made by the Powells, but because of defendants' insistence that the machines were inoperative. It is quite likely that, had the Powell claim been the only objection to the further use of the license, the licensor would have indemnified the defendant at once against liability for any infringement.
In view of these conditions, I have concluded to advise a decree that the defendants shall deliver the remaining stock and bonds upon being compensated in money for the loss of the use of the license for the period beginning when the defendant filed its amended answer, and ending with the final decree in the Powell suit, at which time the defendants first had knowledge of the execution of the new license by the Powells. There will be a reference to a master to find the amount of such compensation.
A decree will be framed upon notice by the counsel of the complainants to the counsel of the defendants.