Brief for the Respondent in Opposition — Patch v. Solar Corp.

on.

Supreme Court of the Anited States

OCTOBER TERM, 1944

No. 20 2

ALLAN J. PATCH, Petitioner,

vs.

SOLAR CORPORATION.

On Petition for Writ of Certiorari to the

United States Circuit Court of Appeals

For the Seventh Circuit.

BRIEF IN OPPOSITION

G. A. YOUNGQUIST,

A. E. CARLSEN,

Attorneys for Appellant.

F, W. THOMAS,

FOWLER, YOUNGQUIST, FURBER,

TANEY & JOHNSON,

Of Counsel.

Hayward Brief Co., 646 Sexton Building, Minneapolis 15, Minn.

SEP 4 1945

INDEX

PAGE

Opinions below 1

Jurisdiction 2

Questions presented 2

Statement 2

Argument 4

1. No federal question is involved 4

2. The decision i§ not in conflict with applicable local decisions...........00 5

3. There is no special and important reason for review 7

CASES CITED

Alfred Marks Realty Co. v. Hotel Hermitage Co., 170 App. Div. 484, 156

N. Y. S. 179 (1915) 8

Ask Mr. Foster Travel Service, Inc., v. Tauck Tours, Inc., 43 N. Y. S.

(2d) 674 (1943) 8

Berg v. Erickson (C. C. A. 8), 234 Fed. 817. 10

Bottlers’ Seal Co. v. Rainey, 225 N. Y. 369, 122 N. E. 200, 201 (1919)... 8

Brown v. Oshiro, 58 Cal. App. (2d) 190, 136 Pac. (2d) 29 (1943) ..ssssssssssvess 8

Carr v. Whitebreast Fuel Company, 88 Iowa 136, 55 N. W. 205 (1893)........ 6

Cold Metal Process Co. v. United Engineering and Foundry Co., 107 F.

(2d) 27, 32 (C. C. A. 3, 1939) 9

Columbus Railway & Power Co. v. Columbus, 249 U. S. 399 10

Critcher v. Linker, 169 Fed. 653 (C. C., W. D., Wis., 1909) ..-ccssvesssessneeneesneenes 9

Denecke v. Henry F. Miller & Son, 142 Iowa 486, lly N. W. 380 (1909)...... 9

Erdreich v. Zimmerman, 190 App. Div. 443, 179 N. Y. Supp. 829 (1920)...... “o

Foster Hose Supporter Co. v. Taylor, 184 Fed. 71 (C. C. A. 2, 1911) s.ssssssssse 9

Fritzler v. Robinson, 70 Iowa 500, 31 N. W. 61 (1886) 6

General American Tank Car Corporation v. Goree, 296 Fed. 32, 37 (C. C. A.

4, 1924) 9

Hess Brothers v. Great Northern Pail Co., 175 Wis. 465, 185 N. W. 542

(1921) rae

Krell v. Henry (1903), 2 K. B. 740 8

LaCumbre Golf and Country Club v. Santa Barbara Hotel Co., 205 Cal. 422,

271 Pac. 476 (1928) 8

Marshall v. Vicksburg, 15 Wall. 146 (1873) 9

McCoy v. New York Life Ins. Co., 219 Iowa 514, 258 N. W. 320 (1935)...... 9

New York Life Ins. Co. v. Stratham, 93 U. S. 24 10

Ohio Citizens Trust Co. v. Air-Way Electric Appliance Corp. (D. C., Ohio),

56 F. Supp. 1010. 10, 11

‘Otto v. Orange Screen Co. (D. C., N. J.), 57 F. Supp. 134 11

Parrish v. Stratton Cripple Creek Mining and Development Co., 116 F. (2d)

207 (C. C. A. 10, 1940)

Slezak v. International Ticket Scale Corporation, 21 F. Supp. 688 (D. C.,

Del., 1937) 9

Societe Anonyme des Sucreries de Saint Jean v. Bull Insular Line, 276 Fed.

783 (C. C. A. 1, 1921) 9

Sola Electric Company v. Jefferson Electric Co., 317 U. S. 173......csscsseseeseseees 5

Standard Dental Mfg. Co. v. National Tooth Co., 95 Fed. 291 (E. D., Pa,

1899) 9

Standard Stoker Co., Inc., v. Brewster, 277 Fed. 783 (C. C, A. 7, 1921)........ 9

Thomson y. Thomson, 315 Ill. 521 10

Virginia Iron, Coal & Coke Co. v. Graham, 124 Va. 692, 98 S. E. 659 (1919) 8

TEXTS CITED

Restatement of the Law of Contracts, Sec. 288

Williston on Contracts (Rev. ed., 1938) :

Section 838

Section 1931

Section 1954

Section 1957

Section 1958

“N

Co onanneo

2a : . 2 was 7 see

Supreme Court of the Anited States

OCTOBER TERM, 1944

No.

ALLAN J. PATCH, Petitioner,

vs.

SOLAR CORPORATION.

On Petition for Writ of Certiorari to the

United States Circuit Court of Appeals

For the Seventh Circuit.

BRIEF IN OPPOSITION

OPINIONS BELOW

The opinion of the trial court (R. 38-40) is not yet

reported. The opinion of the Circuit Court of Appeals

(R. 56-61) is reported in 149 F. (2d) 558.

JURISDICTION

The judgment of the Circuit Court of Appeals was

entered May 29, 1945 (R. 62) and petition for rehearing

was denied June 22, 1945 (R. 63). The petition for cer-

tiorari was filed August 7, 1945, and notice of the filing

served August 16, 1945. Petitioner invokes the jurisdic-

tion of this Court under Section 240 (a) of the Judicial

Code, as amended by the Act of February 13, 1925.

2

QUESTIONS PRESENTED

1. Whether frustration of performance of a contract

licensing the use of a patent in the manufacture of wash-

ing machines by a governmental order of prohibition

excused the licensee from obligation to pay the annual

minimum royalty during the period of suspension.

2. Whether the licensee’s failure to pay the minimum

royalty because of the frustration gave the licensor the

right to cancel the contract under a provision permitting

cancellation for nonpayment of royalty.

STATEMENT

Petitioner is the owner of United States patent No.

1964440 issued June 26, 1934, covering a “link” trans-

mission used in washing machines (R. 5, 41). On June

19, 1937, he granted to Beam Manufacturing Company

an exclusive license for the manufacture and sale of the

transmission to chain store, mail order and rubber tire

companies (R. 2, 5, 41-42). The contract includes also a

non-exclusive license for manufacture and sale to others,

but that feature is not involved in this case. The agree-

ment requires the licensee to pay petitioner for the ex-

clusive license a royalty of 20c for each transmission

manufactured and sold and a minimum royalty of $2500

for the year 1939 and $5,000 for subsequent years, and

gives petitioner the right to terminate the license if the

minimum royalty is not paid (R. 6, 8, 42); otherwise the

license is to remain in force during the life of the patent

(R. 8, 42).

The licensee advanced petitioner $3,000 to pay the cost

of litigation involving the patent, spent at least $10,000

in developing other designs for use in the event peti-

tioner should lose in that litigation, and, on the assump-

tion it would enjoy the license granted to it, in addition

3

to agreeing to pay the minimum royalty it spent more

than $100,000, over and above the cost of advertising

and of building machines, in developing and promoting

petitioner’s invention as an exclusive feature (R. 31-32).

In 1938 the licensee began the manufacture of wash-

ing machines embodying the patented transmission and

continued until May 15, 1942. During that period it paid

petitioner in royalties $30,688.80, or $17,256.32 in excess

of the minimum royalties. It paid petitioner (at the rate

of 20c per unit) $3,902.40 for machines manufactured

from January 1 to May 15, 1942 (R. 31). From and after

that date the manufacture of washing machines was

prohibited by a general limitation order issued by the

War Production Board in March of 1942 (R. 13, 17, 32,

34-37, 43). At the time of trial respondent had orders

for 67,000 machines and was prepared to increase its

production by 50% above the 50,000 machines manufac-

tured in 1941 (R. 33).

On March 29, 1943, petitioner served notice of can-

cellation of the license for failure to pay the full mini-

mum royalty for 1942 (R. 3, 19-20, 43). The licensee ad-

vised petitioner that it refused to consider the notice an

effective cancellation and that any attempt to license

another would be regarded as a breach of contract (R. 3,

20-21). On June 21, 1943, petitioner made an agreement

purporting to grant a license to Zenith Machine Com-

pany (R. 4, 26-30). Later the licensee assigned its rights

under the license to respondent, Solar Corporation. In

July of 1943 petitioner brought this action for a judg-

ment declaring the license terminated and enjoining re-

spondent from manufacturing and selling under the ex-

clusive license (R. 2-4). Respondent answered denying

that failure to pay the minimum royalty constituted a

breach, denying that petitioner had performed his part

ee ers 8 HE

yO

va ai

4

of the contract, and counterclaiming for a judgment de-

claring that it retained the license and enjoining peti-

tioner from granting any license that would interfere

with it (R. 10-15). Both parties moved for summary

judgment on affidavits (R. 18-38). The trial court made

findings of fact and conclusions of law (R. 41-44) and

ordered judgment for petitioner which was entered Sep-

tember 28, 1944 (R. 44-45). On appeal to the Circuit

Court of Appeals for the Seventh Circuit (R. 45) the

judgment was reversed (R. 56-61).

ARGUMENT

There is no conflict with the decision of another Cir-

cuit Court of Appeals. It is claimed that an important

question of local law has been decided in a way probably

in conflict with applicable local decisions; at the same

time it is claimed that the question is one of federal law

which has not been but should be settled by this Court

and also that a federal question has been decided in a

way probably in conflict with the applicable decisions of

this Court. No federal question is involved; the decision

is not in conflict with local decisions; and the writ will

issue only if the Court finds some other “special and

important reason” for review.

1. No Federal Question Is Involved.

The complaint alleges that the action is one for a

declaratory judgment under Section 274d of the Judicial

Code as amended. The jurisdiction of the federal court

is invoked by the allegations that the amount in contro-

versy exceeds $3,000 and that the parties are citizens of

different states (R. 2), as provided by Section 24 of the

Code as amended. No allegation raises a federal ques-

tion. In his brief below (p. 50) petitioner said that “fun-

damentally the problem is one of construction of the

contract and a determination cf what the parties in-

tended.”

The claim that a federal question is involved appar-

ently rests on the defensive allegations and proof that

the contract was frustrated by the operation of a War

Production Board order prohibiting the manufacture of

washing machines. Neither the validity nor the interpre-

tation of the order is involved. Neither party contends

that the order did not effectively prohibit the manufac-

ture of washing machines. If frustration by operation of

federal law raises a federal question, frustration by war

would raise a question of international law, and frustra-

tion by act of God one of divine law. Plainly the only ques-

tions involved are the interpretation of the contract and

the doing of equity (since the principles of equity are

applicable to proceedings to cancel and to enjoin), and

those questions remain the same whatever the cause of

the frustration. The contention that the rule laid down

in the case of Sola Electric Company v. Jefferson Elec-

tric Co., 317 U. S. 173, creates a federal question here

(Pet. 19) is denied by the holding in that case that:

“Local rules of estoppel which would fasten upon the

public as well as the petitioner the burden of an

agreement in violation of the Sherman Act must

yield to the Act’s declaration that such agreements

are unlawful, and to the public policy of the Act

which in the public interest precludes the enforce-

ment of such unlawful agreements” (p. 177).

2. The Decision Is Not in Conflict With Applicable

Local Decisions.

In the court below petitioner contended that since the

governmental order did not prevent payment of the

minimum royalty by the licensee the contract was not

frustrated and that default in making that payment

brought the cancellation provision into operation. To

meet this contention respondent cited decisions of the

Supreme Court of Iowa among many others. Fritzler v.

Robinson, 70 Iowa 500, denied recovery of a minimum

royalty under a coal mining lease on the ground that

contrary to the belief of the parties there was no coal on

the land. Carr v. Whitebreast Fuel Company, 88 Iowa

136, denied recovery of royalty under a coal mining lease

because it became impracticable to remove coal except at

great expense. These cases present examples of, or are

at least analogous to, frustration. The Iowa cases cited

by petitioner are of a somewhat similar character al-

though they relate more specifically to impossibility of

performance than to frustration of the desired object or

effect of the contract. This is quite different from saying

that the contract is at an end, regardless of the nature

of the contract and the character and duration of the

frustration. The local decisions recognized. the doctrine

of frustration and the related rule of failure of con-

sideration, and no local decision is cited or has been

found that is in conflict with the decision in the case at

bar to the effect that frustration may be temporary,

that the liabilities under the contract are suspended for

the time, and that the excuse for nonperformance will

end when the cause of the frustration is removed.

:

7

38. There Is No Special and Important Reason

for Review.

Petitioner rests his argument largely on the claim

that the decision is against the weight of authority. This

Court is not concerned with that unless the question is

one of federal law. As has already been pointed out, no

question of federal law is involved; and this Court will

not correct mistakes and cannot resolve conflicts in deci-

sions resting on local law.

The rule applied by the Court below is thus set forth

in the Restatement of the Law of Contracts, Section 288:

“Where the assumed possibility of a desired object

or effect to be attained by either party to a contract

forms the basis on which both parties enter into it,

and this object or effect is or surely will be frus-

trated, a promisor who is without fault in causing

the frustration, and who is harmed thereby, is dis-

charged from the duty of performing his promise

unless a contrary intention appears.”

The “assumed possibility of a desired object * * * to

be attained” in this case is the uninterrupted right to

manufacture washing machiues. This right formed the

basis on which both parties entered into the agreement,

and it has been suspended by governmental order. The

object of the contract was thereby frustrated during the

life of the order, without fault on the part of respondent.

Respondent as promisor has by the order been deprived

for the time being of the right to manufacture; hence it

was discharged from performing its promise to pay

royalties while the order was in effect. The right to can-

cel the license rests on respondent’s default in payment

of royalties, but since under the rule respondent was

excused from making payment the right to cancel did

not arise.

8

The consequence of frustration is thus set forth in

Williston on Contracts, Section 1931:

“The important question is whether an unantici-

pated circumstance has made performance of the

promise vitally different from what should reason-

ably have been within the contemplation of both

parties when they entered into the contract. If so,

the risk should not fairly be thrown upon the

promisor.”

Performance here is vitally different from what was

contemplated in that the licensee could not exercise its

right under the license, and petitioner, though he could

grant a license in form, could not vest in the licensee the

enjoyment of the patent, and indeed could not have used

it himself.

Even though literal performance of a contract is still

possible, a party not at fault will be excused from per-

forming if the object contemplated by the contract can-

not be attained.

Krell v. Henry (1903), 2 K. B. 740;

Alfred Marks Realty Co. v. Hotel Hermitage Co.,

170 App. Div. 484, 156 N. Y. S. 179;

Ask Mr. Foster Travel Service, Inc., v. Tauck Tours,

Inc., 43 N. Y. S. (2d) 674;

Brown v. Oshiro, 58 Cal. App. (2d) 190;

Parrish v. Stratton Cripple Creek Mining and De-

velopment Co. (C. C. A. 10), 116 F. (2d) 207;

LaCumbre Golf and Country Club v. Santa Barbara

Hotel Co., 205 Cal. 422;

Virginia Iron, Coal & Coke Co. v. Graham, 124 Va.

692;

Bottlers’ Seal Co. v. Rainey, 225 N. Y. 369;

Williston on Contracts, Section 1954.

LPF OTE ENS PTE PL ETI RET TN TR I PRT ————

9

Frustration or failure of consideration may operate to

suspend rather than terminate the contract and excuse

performance during the period of suspension.

Erdreich v. Zimmerman, 190 App. Div. 443, 179

N. Y. S. 829;

Societe, etc., v. Bull Insular Line, 276 Fed. 783;

Hess Brothers v. Great Northern Pail Co., 175 Wis.

465;

General American Tank Car Corporation v. Goree

(C.C. A. 4), 296 Fed. 32, 37;

Williston on Contracts, Sections 838, 1957, 1958.

This would be especially true where considerable

money has been spent in reliance on the contract.

See Cold Metal Process Co. v. United Engineering

and Foundry Co. (C. C. A. 3), 107 F. (2d) 27, 32.

Equity will not permit a forfeiture under such circum-

stances.

See Foster Hose Supporter Co. v. Taylor (C. C. A.

2), 184 Fed. 71;

Slezak v. International Ticket Scale Corporation

(D.C, Del.), 21 F. Supp. 688.

Forfeitures are not favored.

See McCoy v. New York Life Ins. Co., 219 Iowa 514;

Denecke v. Henry F. Miller & Son, 142 Iowa 486;

Marshall v. Vicksburg, 15 Wall. 146;

Standard Dental Mfg. Co. v. National Tooth Co.

(E. D., Pa.), 95 Fed. 291;

Critcher v. Linker (C. C., W. D., Wis.), 169 Fed. 653;

Standard Stoker Co., Inc., v. Brewster (C. C. A. 7),

277 Fed. 783.

SHS EON EE AS PE EE SP RK SPI AE SEF

10

The cases relied on by petitioner fall into several

classes. Some involve leases where the leased property

was useful for purposes other than the frustrated pur-

pose contemplated by the parties. Some involve shipping

charters where it would be impracticable to require per-

formance at a later date; and in most of the charters

considered the impossibility of the performance was

specifically provided against. Some involve construction

contracts where possible rise in costs of labor and mate-

rials over a period of time would make performance un-

duly burdensome. Some involve commercial enterprises

where postponement of performance would be imprac-

ticable and unfair from a business point of view. Sub-

stantially all of them, including such cases as New York

Life Ins. Co. v. Stratham, 93 U. S. 24, involve contracts

in which time was of the essence and where suspension

would operate to the disadvantage of one party and

the advantage of the other. Others, such as Columbus

Railway & Power Co. v. Columbus, 249 U. S. 399, and

Ohio Citizens Trust Co. v. Air-Way Electric Appliance

Corp. (D. C., Ohio), 56 F. Supp. 1010, merely held that

performance of a contract is not excused because it be-

comes unprofitable. Thomson v. Thomson, 315 Ill. 521,

held only that the rules of the Chicago Board of Trade

were part of the contract and compliance with the rules

did not constitute a breach. All but one or two involve

contracts cailing for a single act and not for a continu-

ing performance by both parties over a long period of

years as is the case here.

The case of Berg v. Erickson (C. C. A. 8), 234 Fed. 817,

held that a drouth did not excuse performance by an

agister where drouths were a matter of common knowl-

edge and in contemplation of the parties and were not

protected against by the terms of the contract.

OEE LIT PSL LE EY MER at DACRE NLA SS LEE I TERE ANE FEM S

V7"

11

If decisions of district courts affecting situations

somewhat similar to this need be considered (petitioner

cites only two of the many he says have arisen or will

arise), it is pointed out that in Otto v. Orange Screen

Co. (D. C., N. J.), 57 F. Supp. 134, in which the licensee

sought cancellation, it does not clearly appear whether

only aluminum, the use of which was prohibited, and no

other metal could be used in the manufacture of the

patented screen. Furthermore the court, apparently

without considering the numerous pertinent authorities

dealing with frustration, undertook to follow two state

decisions involving real estate leases that had no appli-

cation.

In Ohio Citizens Trust Co. v. Air-Way Electric Ap-

pliance Corp., supra, where also it was the licensee who

sought relief on the basis of its own default and because

of alleged frustration, the court considered the doctrine

of frustration, but held that since manufacture had not

been prohibited but only restricted the contract was not

frustrated. It appeared that the unit royalty earned un-

der the restricted production was substantially greater

than the minimum royalty called for by the contract.

None of the cases relied on by the petitioner have

application to the situation here presented, where the

licensor is unable to perform his part of the contract by

putting the licensee in a position to enjoy the use of the

patent; where the patent is of no value for the time

being because no one, not even the patentee himself, can

use it; where neither party is at fault and one suffers

no more than does the other; where time is not of the

essence; where the license has many years still to run;

where no change has occurred such as would occur in

commercial ventures, construction contracts and cases

of that character, but the parties will be in exactly the

12

same relative situations as they were when the suspen-

sion began, and where the party whose rights are sought

to be forfeited has expended large sums of money in

reliance on the continuance of the contract and is able,

ready and willing to continue its performance to the

substantial benefit of the licensor.

G. A. YOUNGQUIST,

A. E. CARLSEN,

Attorneys for Appellant.

F. W. THOMAS,

FOWLER, YOUNGQUIST, FURBER,

TANEY & JOHNSON,

Of Counsel.

eg eee a ee te ee