Appendix — Automatic Die & Products Co. v. Campbell

Supreme Court brief1955

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APPENDIX.

DECISION OF THE SUPREME COURT OF OHIO.

THE SUPREME COURT OF OHIO

Of the Term of January, A. D. 1954

To-wit: Wednesday, December 15, 1954.

No. 33,851.

JOHN M. CAMPBELL and PHILMORE J. HABER,

as Trustees for

THE CORK-A-LITE DEVELOPMENT TRUST,

Plaintiffs-Appellees,

vs.

THE AUTOMATIC DIE & PRODUCTS CO.,

an Ohio corporation,

Defendant-Appellant.

APPEAL From

THE Court oF APPEALS oF CuYAHOGA CouUNTY.

This cause came on to be heard upon the transcript

expended taxed at $

hoga County, “For Entry.” (SEAt.)

Appeals of Cuyahoga County, Journal 20, page 2.)

of the record of the Court of Appeals of Cuyahoga County,

and was argued by Counsel. On consideration whereof, it

is ordered and adjudged by this Court, that the judgment

of the said Court of Appeals be, and the same is hereby,

affirmed; and it appearing to the Court that there were

reasonable grounds for this appeal, it is ordered that no

penalty be assessed herein. It is further ordered that the

Appellees recover from the Appellant their costs herein

ORDERED, that a special mandate be sent to the Court

of Common Pleas of Cuyahoga County to carry this judg-

ment into execution. OrpERED, that a copy of this entry

be certified to the Clerk of the Court of Appeals of Cuya-

(Application for Rehearing Denied January 5,

1955. Judgment entered January 6, 1955 by Court of

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OPINION OF THE SUPREME COURT OF OHIO.

Contracts—Agreement between patentee and manufac.

turer of device—Manufacturer agreeing not to engage

in competing business—Not per se illegal under fed.

eral statute, when—Section 14, Title 15, U. S. Code—

Lessening competition or creating monopoly—Con-

troversy as to rights under contract—Voluntary sub.

mission to arbitration—Estoppel to question illegality

of contract.

1. A written contract by which a patentee of a device

gives one agreeing to manufacture it an exclusive right

to manufacture and sell the device is not per se illegal

and void and violative of Section 3 of the so-called

Clayton Act (Section 14, Title 15, U. S. Code) because

of the inclusion of a provision to the effect that the

manufacturer will not make or sell any similar device

and will not engage in any business competing there-

with.

2. Where such device is never produced for sale or mar-

keted and a controversy arises between the patentee

and the manufacturer regarding the performance of the

contract and the respective rights of the parties there-

under and such controversy is voluntarily submitted

by the parties to arbitrators for full and final disposi-

tion as stipulated by the terms of the contract. the

manufacturer is estopped, after the arbitration pro-

ceeding has progressed to a considerable extent, to

raise the question of the illegality and unenforceability

of the contract based on the provision relating to the

manufacture and sale of a similar device and the en-

gaging in any business competing therewith.

(No. 33851—Decided December 15, 1954.)

AppEAL from the Court of Appeals for Cuyahoga

County.

The present case involves the validity of a court ap-

proved arbitration award, which award was made pursuant

to provisions of a contract covering the manufacture and

sale of automobile mufflers.

On January 30, 1950, John M. Campbell and Phil-

more J. Haber, Trustees of the Cork-a-Lite Development

Trust, hereinafter designated the trust, and The Auto-

matic Die & Preducts Company, an Ohio corporation,

hereinafter called Automatic, entered into a written con-

tract relating to the manufacture and sale by Automatic

of Campbell Super Silent automobile engine mufflers.

Pertinent provisions of such contract as they may

have a bearing on this case are:

“3. The trust hereby grants to Automatic the ex-

clusive license and right to manufacture and sell, in

the United States of America, the Campbell Super

Silent automobile engine muffler * * *.

“6. Automatic agrees to pay the trust a minimum

royalty of five hundred dollars ($500) per month, on

the last day of each calendar month, commencing with

the month of February, 1950. * * *

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“8. Automatic is hereby given the right at any

time to cancel this agreement and be relieved from

further responsibility thereunder, and from further

minimum royalty payments upon six (6) months’

written notice, but any such cancellation shall not be

effective before February 1, 1951.

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“10. Automatic will commence the production of

mufflers as soon as possible, and will use its best en-

deavors to market and sell to as wide an extent as its

facilities permit the mufflers which are the subject

matter of this agreement. Automatic agrees that it

will not manufacture or sell any muffler other than the

Campbell Super Silent automobile engine muffler, and

will not, at any time, engage in any business com-

peting therewith.

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“15. Automatic may sublicense others to manu.

facture and sell the mufflers under the terms of this

agreement, with the same royalties to the trust.

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“24. It is hereby agreed that, in case any disagree-

ment or difference shall arise at any time hereafter

between the parties hereto, * * * in relation to this

contract, either as to the construction or operation

thereof, or performance thereunder, or the respective

rights and liabilities thereunder, such disagreement

or difference shall be submitted to the arbitration of

two (2) persons, one to be appointed by each party to

this agreement. If the two persons so appointed are

unable to agree within a period of seven (7) days, then

such two arbitrators shall appoint a third arbitrator.

* * * Thereafter, the three arbitrators shall decide the

arbitration as soon as possible. * * * An award, in

writing, signed either by the first two arbitrators ap-

pointed, or by two of the three arbitrators, if there are

three, shall be final and conclusive as to both parties,

and shall not be appealable, nor shall either party

have recourse to any court of law or equity as to any

disagreement or difference which is subject to arbi-

tration under this clause, if such arbitration is had,

and both parties are required to follow the provisions

of this agreement as to arbitration.”

No mufflers were manufactured for sale, and a dis-

pute arose between the trust and Automatic with respect

to the performance of the contract and the respective rights

and obligations of the parties thereunder.

As provided by paragraph 24 of the contract the con-

troversy was referred by the parties to two arbitrators,

one selected by each side, for decision. These arbitrators

were unable to agree and pursuant to paragraph 24 they

selected a third arbitrator.

On December 19, 1952, after many months of con-

sideration and deliberation, an award in the sum of $5,000

was made to the trust by two of the arbitrators, the third

registering a dissent on the ground that the contract was

illegal and unenforceable.

Subsequently, the trust filed a petition in the Court

of Common Pleas of Cuyahoga County to confirm the

award. Automatic filed an answer alleging that the con-

tract was illegal and void and a cross-petition praying that

the petition be dismissed and that the award be set aside.

A hearing was had in the Court of Common Pleas, and

all the arbitration proceedings, including the written re-

ports of the arbitrators, were introduced in evidence.

Thereafter, the court rendered judgment in favor of

the trust, confirming the award and ordering Automatic

to pay the trust the sum of $5,000.

An appeal from such judgment was taken to the

Court of Appeals, which affirmed the judgment below.

There was no written opinion by either of the lower courts.

The allowance of a motion to require the Court of

Appeals to certify its record brings the cause here for

review on its merits.

Messrs. Halle, Haber, Berick & McNulty, for appel-

lees.

Messrs. Spieth, Spring & Bell, Mr. William M. Nelson,

Jr.,and Mr. James S. Pedler, Jr., for appellant.

ZIMMERMAN, J. Automatic, in seeking a reversal of

the judgment of the Court of Appeals and the rendition of

a final judgment in its favor by this court, makes three

principal contentions:

1. The contract of January 30, 1950, between the

trust and Automatic is illegal and void because the second

sentence of paragraph 10 thereof represents an attempt by

the trust to enlarge its patent monopoly contrary to pub-

lic policy and in violation of Section 3 of the so-called

Clayton Act (Section 14, Title 15, U. S. Code); hence any

attempt by arbitrators to award royalties to the trust un-

der such contract is a nullity.

2. The question of the illegality of the contract could

be raised at any time before the arbitration award was

made.

3. The award of royalties by the arbitrators being jl.

legal can not be enforced in a court action to confirm the

award.

Section 3 of the Clayton Act reads as follows:

“It shall be unlawful for any person engaged in

commerce, in the course of such commerce, to * * *

make a sale or contract for sale of goods, wares, mer-

chandise, machinery, supplies, or other commodities,

whether patented or unpatented, for use, consump-

tion, or resale within the United States * * * on the

condition, agreement, or understanding that the * * *

purchaser thereof shall not use or deal in the goods,

wares, merchandise, machinery, supplies, or other

commodities of a competitor or competitors of the

* * * seller, where the effect of such * * * sale, or

contract for sale or such condition, agreement, or

understanding may be to substantially lessen com-

petition or tend to create a monopoly in any line of

commerce.”

For convenience, we repeat paragraph 10 of the con.

tract here involved:

“Automatic will commence the production of

mufflers as soon as possible, and will use its best en-

deavors to market and sell to as wide an extent as its

facilities permit the mufflers which are the subject

matter of this agreement. Automatic agrees that it

will not manufacture or sell any muffler other than

the Campbell Super Silent automobile engine muffler,

and will not, at any time, engage in any business com-

peting therewith.”

In contending that the second sentence in paragraph

10 renders the contract illegal and unenforceable, Auto-

matic leans heavily on the cases of National Lockwasher

Co. v. George K. Garrett Co., Inc. (C. C. A. 3, 1943), 137

F. (2d) 255; McCullough v. Kammerer Corp. (C. C. A. 9,

1948), 166 F. (2d) 759, certiorari denied, 335 U. S. 813,

93 L. Ed., 368, 69 S. Ct. 30; and Park-in Theatres, Inc., v.

Paramount-Richards Theatres (D. C., Del., 1948), 81 F.

Supp. 466, affirmed 185 F. (2d) 407, certiorari denied 341

U.S. 950, 95 L. Ed. 1373, 71 S. Ct. 1017.

The first two of the cases above cited involved suits

strictly for patent infringements, and the third included

that element. The opinions in all three of the cases con-

tain language, based on the facts of the particular cases,

which supports the proposition that a licensing contract,

containing a provision whereby the licensee undertakes not

to manufacture, sell or use any devices other than those

of the patentee, is monopolistic, goes beyond the patent

grant, and, contrary to public policy, could result in driv-

ing competiting devices from the market.

However, we are not here dealing with a patent in-

fringement suit, and Section 3 of the Clayton Act upon

which Automatic relies in pressing this appeal would

seem not to make such a provision in a contract ipso facto

unlawful or unenforceable. The validity or invalidity of

such provision depends upon its operative effect. Thus in

the case of Pick Mfg. Co. v. General Motors Corp. (1936),

299 U.S. 3, 81 L. Ed. 4, 57 S. Ct. 1, there was challenged

the validity of a contract wherein the dealer agreed that

he would not sell, offer for sale or use in the repair of a

designated make of motor vehicle any part or parts not

manufactured or authorized by the motor car manufac-

turer. Both the United States District Court and the

United States Circuit Court of Appeals found as a matter

of fact that the effect of the clause had not been in any way

substantially to lessen competition or to create a monopoly

in any line of commerce and rendered decrees for the

manufacturer; and the Supreme Court affirmed the decree

of the United States Circuit Court of Appeals.

In the case of Kay Petroleum Corp. v. Piergrossi

(1951), 137 Conn. 620, 79 A. (2d) 829, plaintiff and de-

fendants entered into an exclusive sales contract whereby

defendants, for a specified number of years, agreed to pur-

chase from the plaintiff their entire supply of gasoline and

oil to be used or sold at their gasoline service station. De-

fendants breached the contract and plaintiff brought an

action to recover damages for such breach, in which it

was successful.

Defendants claimed that the contract was violative

of Section 3 of the Clayton Act by reason of the restric.

tion not to deal in the gasoline and oil products of anyone

other than the plaintiff.

Disposing of this contention the Connecticut Supreme

Court of Errors said:

“To bring a case within the section, it is essential

that the contract be operative to foreclose competition

in a substantial share of the line of commerce affected,

* * * In the absence of evidence that a contract is

thus effective to preclude competition, there is no

basis for considering that it is unlawful under the

act. * * * In the instant case, not only were no facts

found but no evidence was offered to indicate that this

contract was operative to foreclose competition in any

degree, let alone to the extent of a ‘substantial share

of the line of commerce affected.’ ”’

So in the case before us, none of the trust’s mufflers

were manufactured for sale and there is nothing to show

that the restriction contained in the second sentence of

paragraph 10 had any effect in substantially lessening

competition or tending to create a monopoly.

It is a matter of common knowledge that there are

many different makes of motor car mufflers on the market

and in use. Here, the trust’s muffler was never produced

commercially and never entered the competitive field.

But assuming that the trust in an action brought by

it for patent infringement or to recover royalties or both

would be defeated by reason of the second sentence in

paragraph 10, it does not follow that such sentence is so

pernicious and so inherently bad that its provisions could

not be waived in a dispute between the parties with respect

to liabilities and obligations under other parts of the con-

tract and which dispute by agreement of the parties was

submitted to arbitration under the terms of paragraph 24

of the contract.

Here the parties did agree to arbitration, and ar-

bitrators were chosen as prescribed in paragraph 24. A

protracted hearing took place at considerable expense in

which a great deal of evidence was introduced and in

which each of the parties was represented by counsel. It

was not until far into the hearing that Automatic made the

claim that the contract was illegal and unenforceable by

reason of the second sentence in paragraph 10.

Two of the arbitrators determined, and we think

correctly, that Automatic’s claim of illegality came too late,

and that it was then estopped from successfully raising

that issue. Compare Parks, a Taxpayer, v. Cleveland Ry.

Co., 124 Ohio St. 79, 177 N. E. 28.

If Automatic wished to test the legality of the contract,

it could and should have brought an action to rescind on

the ground of illegality or it could have refused to arbitrate

under the contract thus forcing the trust to call upon the

courts under the arbitration statutes (Section 12148-1

et seq., General Code [Section 2711.01 et seq., Revised

Code|) to compel Automatic to submit the controversy to

arbitrators for disposition.

It is the policy of the law to favor and encourage

arbitration and every reasonable intendment will be in-

dulged to give effect to such proceedings and to favor the

regularity and integrity of the arbitrator’s acts. 6 Corpus

Juris Secundum, 152, Arbitration and Award, Section 1;

Corrigan v. Rockefeller, 67 Ohio St. 354, 367, 66 N. E. 95,

98.

In the instant case the arbitrators considered and de-

cided the questions presented to them with respect to the

conflicting claims of the parties under the contract and

they did not exceed their powers within the contempla-

tion of subdivision (d) of Section 12148-10, General Code

(Section 2711.10, Revised Code).

We find no error in the judgment of the Court of Ap-

peals, and the same is hereby affirmed.

Judgment affirmed.

MippLeton, Tart, Hart and Lamneck, JJ., concur.

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REPORT OF ARBITRATORS, WITH FINDINGS OF

FACT, CONCLUSIONS AND AWARD.

(Defendant’s Exhibit 1.)

In Re Arbitration Between the Automatic Die & Products

Company and Cork-a-lite Development Trust.

SUBJECT OF THE ARBITRATION.

The subject matter of this arbitration is a controversy

between the above named parties involving a number of

disputed questions, both of fact and law, arising from

and under a written contract between these parties dated

January 30, 1950. For convenience, these parties will

hereinafter be referred to, respectively, as “Automatic”

and “‘Cork-A-Lite,” and the contract just mentioned will

be referred to as the “Second Contract.” At the time this

contract was made, these parties were already in con-

tractual relationship with each other under a written con-

tract dated August 26, 1949, which will hereafter be re-

ferred to as the “First Contract.” Since each of these

contracts contain recitals which indicate that they were

executed in various counterparts and since it appeared at

the hearings that one of these counterparts was in the

possession of each party in interest, the arbitrators have

seen no need to include a complete digest of either con-

tract in this report. They will therefore try to summarize

or quote only such portions of each contract as appear

necessary to a statement of the matters in controversy.

Partly by a recital in said First Contract and partly by

the statements of counsel at the outset of the arbitration

hearing, it appears without controversy that at some time

before the First Contract was made, one John M. Campbell

had made three interrelated applications for United States

Letters Patent contemplating production of an insulating

material and of an automobile engine muffler of which the

basic principle was the substitution, in place of the metal-

lic partitions or baffles of the metallic cylindrical mufflers

then and now in general use, of a lining composed of an

insulating and sound-absorbing material which was to be

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inserted into the mufflers in plastic form by an extruding

machine and then to be dried and solidified by heat; that

Mr. Campbell had subsequently assigned all his rights

under said applications for patents and under any Letters

Patent which might be granted thereon to the Cork-A-Lite

Development Trust; and that later the Cork-A-Lite De-

velopment Trust, of which Mr. Campbell was one of the

two operating trustees, had granted to a corporation

known as Campbell Industries, Inc., of which Mr. Camp-

bell was the president and presumably a substantial stock-

holder, an exclusive license to manufacture and sell in the

United States of America a muffler embodying the mate-

rial and principle on which said patent applications were

based, known as the “Campbell Super Silent Automobile

Engine Muffler,” and to use in connection therewith

“formulas and methods” owned by Cork-A-Lite for ex-

truding and making Cork-A-Lite plastic insulation to be

inserted and contained in said muffler. The First Contract

was primarily an agreement between Automatic and

Campbell Industries, Inc., which for convenience was

generally referred to in that contract and will hereafter be

referred to as “Campbell.”

By that First Contract, following recitals that Camp-

bell had been given an exclusive license by Cork-A-Lite

to manufacture and sell the Campbell Super Silent Auto-

mobile Engine Muffler and to use formulas and methods

owned by Cork-A-Lite as stated in the preceding para-

graph, and that Campbell desired to engage Automatic to

manufacture and make said mufflers so that the same

could be sold by Campbell, Campbell granted to Auto-

matic an exclusive license to manufacture said muffler in

the United States for a term of fifteen years from the date

of that agreement. Campbell further agreed to purchase

from Automatic and Automatic agreed to make, in con-

formity with working drawings and specifications to be

supplied by Campbell, production dies necessary for the

fabrication of all metal parts of the mufflers. For these

dies, Campbell was to pay a total sum of $11,850.00 in

instalments, viz., $5,925.00 contemporaneously with the

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execution of the contract; $2,925.00 within sixty days

thereafter; and the balance of $3,000.00 by adding 20 cents

to the price of each of the first 15,000 mufflers to be

produced by Automatic (and which as provided later in

the contract were to be purchased by Campbell) and in

any event within a period not to exceed ninety days after

the beginning of production.

These dies were then to be left in the possession of

Automatic and to be used by them in the production of

mufflers. Automatic was to keep them in good working

condition, and to repair and maintain them, but any new

or additional dies which were required were to be at

Campbell’s expense.

Campbell further agreed, in the First Contract, to

furnish to Automatic a considerabie number of items of

equipment specifically enumerated to be used in produc-

ing the plastic parts of said mufflers, among which may

be noted a Cork-A-Lite “extruding machine” and two

adapters to be used in connection therewith, “and all other

necessary equipment to efficiently produce the plastic

parts of said muffler.” The only item excepted from the

language of the preceding paragraph was a drying oven,

which was to be procured by Campbell at joint and equal

expense of the parties. Campbell reserved title to all this

special equipment but agreed that it was to remain in the

possession of Automatic to be used by it in the production

of mufflers. Automatic agreed in the First Contract to

furnish all labor and material necessary to manufacture

and produce said mufflers and the component parts thereof

in accordance with the working drawings furnished by

Campbell; to furnish various machinery and equipment,

including various items specifically enumerated, ‘‘and the

necessary machinery to form, shape and fabricate all of

the metal parts of said muffler”; to produce said mufflers

in good workmanlike manner, to have the same packed

and ready for shipment in special cartons each of which

was to contain six mufflers and to ship the same from

time to time upon orders or instructions from Campbell.

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For all mufflers thus produced and shipped, Campbell

was to pay at an agreed scale of prices per muffler, which

prices were to be subject to adjustment under certain

contingencies, and in general, to diminish as the quantities

produced and shipped increased.

By one of the earlier paragraphs of this First Con-

tract, Campbell warranted that it had full right to grant

to Automatic the foregoing exclusive right to manufac-

ture said muffler, and covenanted (1) that so long as

Automatic fully performed this agreement, it should not

be affected by any cancellation or termination of Camp-

bell’s license from Cork-A-Lite and that Cork-A-Lite

should not grant any further license as to said patents

except upon the stipulation that Automatic should con-

tinue as the exclusive manufacturer of said mufflers

“under the terms and conditions of this agreement.”

By a special paragraph signed in its behalf by its

trustees at the end of the foregoing First Contract, the

Cork-A-Lite Development Trust approved the foregoing

agreement between Campbell Industries, Inc. and Auto-

matic and agreed to be bound thereby in so far as the

contract related to it.

THE SECOND CONTRACT.

The Second Contract, dated January 30, 1950, begins

with a recital of the execution of the First Contract, and

recites that Campbell proposes to dissolve and go out of

business and that “the parties hereto are desirous of sus-

pending the further operation and effect of said agreement

of August 26, 1949, and * * * of contracting with respect

to the matters therein contained.”

Next, Cork-A-Lite warrants (in paragraph numbered

1) that it is the sole and exclusive owner of two United

States Letters Patent and one application for Letters Pat-

ent (presumably covering the same inventions described

in the First Contract) and that no licenses have been

granted under the same except the license heretofore

granted to Campbell, which license is to be wholly can-

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celed. The next paragraph (numbered 2) reads in full,

as follows:

“2. The Trust warrants that, by virtue of said

patents and application for patent, it thereby exclu-

sively owns the right to manufacture and sell, in the

United States of America, the Campbell Super Silent

Automobile Engine Muffler, adapters or attachments

to fit the mufflers to the manifolds, and/or tail pipes

of motor vehicles, and formulas and methods for ex-

truding and making Cork-A-Lite plastic insulation,

to be inserted and contained in said mufflers.”

By the next two paragraphs (numbered 3 and 4)

Cork-A-Lite grants to Automatic an exclusive license to

manufacture and sell in the United States the Campbell

Super Silent Engine Muffler (except for use in airplane

engines), and attachments for the same, and to use, in

connection therewith, “formulas and methods for extrud-

ing and making Cork-A-Lite plastic insulation to be in-

serted and contained in said mufflers,” under said patents

or any extensions thereof and any additional patents

which may be issued, and stipulates that said license shall

extend throughout the life of said patents.

The next three paragraphs (numbered 5, 6 and 7)

‘ provide that Automatic shall pay to Cork-A-Lite royalties

j at various percentages of its selling prices of the mufflers,

which percentages are to be reduced as the quantities sold

increase, and in any event shall pay a minimum royalty of

$500.00 per month on the last day of each month, begin-

ning with the month of February, 1950, and a minimum

royalty of $1,000.00 per month, beginning with the month

following the month in which it shall have completed the

manufacture and sale of the first 200,000 mufflers, all of

which minimum royalties are to be credited against and

deducted from the general royalty account.

It appears to be logical and may save time to quote in

full at this point two portions of the Second Contract from

each of which one of the questions at issue between the

parties, and which the arbitrators will find it necessary to

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decide, is based. These are the paragraph numbered 10

and the first sentence and last two sentences of paragraph

12, which respectively read as follows:

“10. Automatic will commence the production of

mufflers as soon as possible, and will use its best

endeavors to market and sell to as wide an extent as

its facilities permit the mufflers which are the subject

matter of this agreement. Automatic agrees that

it will not manufacture or sell any muffler other than

the Campbell Super Silent Automobile Engine

Muffler, and will not, at any time, engage in any busi-

ness competing therewith.”

“12. Automatic shall continue to use without

charge under this agreement the tools, dies, machines

and equipment heretofore furnished by Campbell,

consisting of dies to make the following parts: end,

centering, disk, cap, center tube and cone, paint spray

booth, Buick auto engine, and extruding machine.

* * * Automatic agrees to furnish such further tools,

dies, machines and equipment as may be necessary to

properly manufacture and ship the mufflers.

“The Trust agrees to cooperate at all times in the

manufacture and sale of the mufflers, and to give to

Automatic the use of all drawings, blueprints, en-

,99

gineering data and ‘know-how’.

By paragraph numbered 8, Automatic was given the

right at any time to cancel the agreement and to be relieved

from further liability thereunder upon six months’ written

notice, but with a reservation that such a cancellation

should not be effective before February 1, 1951.

Paragraph 9 provided in substance that in the event

of such cancellation and provided Automatic was not then

in default, Automatic should continue to have an exclusive

license to manufacture said mufflers and that the contract

of August 26, 1949 (First Contract) should thereupon be

“automatically reinstated” with Cork-A-Lite substituted

in lieu of Campbell Industries, Inc., as if it had originally

executed said contract as the licensor.

16a

Another provision for cancellation involved in the

present controversy appears at paragraph 19 and reads as

follows:

“19. Should the mufflers which are the subject

matter of this agreement, when constructed in a

workmanlike manner, in accordance with the said

invention, fail to perform their functions to the satis.

faction of the normal purchaser or purchasers, then

Automatic may cancel this agreement, and be relieved

from further liability thereunder, by serving a sixty

(60) day written notice on the Trust to this effect.”

Another pertinent provision of the Second Contract

showing the intention of the parties as to the limited

scope of their contractual rights and obligations is para-

graph 25, which reads as follows:

“25. This agreement shall inure to the benefit of,

and bind, the respective parties, and their respective

successors and assigns, and the parties agree that this

is their entire contract, and that there are no other

terms, conditions or obligations except as expressed

herein. No waiver or modification of any of the terms

and conditions of this agreement shall be binding un-

less in writing and executed with the same formalities

as this agreement, and any waiver or modification as

to any particular performance under this agreement

shall not be deemed as a waiver or modification of

any similar or future performance hereunder.”

Finally, it may be appropriate to mention the para-

graph numbered 24, which provides for arbitration of any

disagreement or difference that may arise between the

parties in relation to and under this contract and pre-

scribes in detail how such arbitrators shall be appointed

and the procedure to be followed to effectuate said

arbitration.

By a letter dated July 31, 1951, addressed to Cork-A-

Lite Development Trust, Automatic notified Cork-A-Lite

that it claimed that both contracts above described had

been breached by Cork-A-Lite in various particulars de-

BFS ER EE RENIN ER LIL SIT IN TPL TRG LEG EE OLB IY BURT INE AI EY

17a

tailed in that letter and that by reason thereof, Automatic

had been damaged to an amount in excess of $20,000.00,

for which it then made demand. Further by this letter,

Automatic asserted that on or about January 1, 1951, it

had notified Cork-A-Lite through Mr. Campbell “that

both of the agreements had been breached and we there-

upon terminated them because of your breaches of the

same.” Relative to the same subject, this letter further

reads as follows:

“Therefore, we hereby reiterate, in writing, the notice

that we gave you at the first of this year that the

agreements in question were terminated because of

your breach of the same and your failure to perform.”

In the alternative, this letter then gave 60 days’ notice of

cancellation of the agreement of January 30, 1950 (Second

Contract) in accordance with paragraph 19 thereof, on the

ground (as alleged) that the mufflers fail to function to

the satisfaction of the normal purchaser or purchasers,

and as a second alternative gave six months’ notice of

Automatic’s election to have cancellation of said agree-

ment in accordance with paragraph 8 thereof. A copy of

this letter is hereto attached marked Exhibit A and refer-

ence is made to the same for further details of Automatic’s

claim.

HISTORY OF THE ARBITRATION.

By letter dated October 16, 1951, counsel for Cork-A-

Lite replied to the letter referred to in the preceding para-

graph and, after denying various claims thereof and as-

serting that all defaults were on the part of Automatic,

formally requested that the controversy be arbitrated, as

authorized by paragraph 24 of the Second Contract, and

designated Mr. Bruce B. Krost as the arbitrator selected

by Cork-A-Lite. By letter dated October 19, 1951, Auto-

matic acknowledged receipt of the letter of October 16,

and appointed Mr. James T. Hoffmann as the second

arbitrator.

These two arbitrators and counsel for the respective

parties met in conference on November 6, 1951, at which

a RAE ne oe Not iw \

8 gre on stinvin Ben Me

Picea RE Sanna

18a

time the arbitrators were informed in a general way as to

the controversy and were given, for examination at their

convenience, copies of the two contracts. Formal hearing

was begun on February 7, 1952 and concluded on Febry-

ary 8, with both arbitrators present and counsel for the

respective parties present and participating. Various

witnesses testified orally and various exhibits were in.

troduced in evidence, after which arguments were made

by counsel for each side and the matter was submitted for

decision.

In passing it should be noted that during the hearing

on February 7, a question was raised as to whether Auto-

matic would voluntarily return an extruding machine,

dies and other equipment belonging to Cork-A-Lite which

Automatic had been permitted to use under one of the

provisions of the contract, or whether this question was to

be decided by the arbitrators. Counsel for Automatic and

the president of that company then agreed of record that

in the event of an award in favor of Cork-A-Lite, this

equipment would be returned promptly to Cork-A-Lite.

By letters dated February 18, 1952, the two arbitra-

tors named above informed counsel for the respective

parties that after due deliberation they had not been able

to agree upon an award, after which by a letter dated

February 21, 1952, these two arbitrators, in accordance

with the applicable provisions of the Second Contract,

selected and appointed Mr. Harrison W. Ewing as the third

arbitrator and duly informed the respective parties of that

appointment.

On March 6, 1952, the three arbitrators and counsel

for the respective parties met by agreement for further

hearing and re-argument. At the outset of this meeting,

all exhibits were submitted to the last appointed arbitrator

and by agreement oral statements were made by both

counsel and by the original two arbitrators designed to

inform the third arbitrator in a general way as to the

substance of the evidence which had been received at the

earlier hearings. This matter was then re-argued by coun-

sel on that day, March 6, 1952 and further re-argument

Fea)

19a

was had on March 12, 1952, on which date the arbitrators

requested that briefs be filed by both parties and fixed the

dates for filing the same. Thereafter, at the request of the

third arbitrator and by agreement of parties, the testimony

which had been taken at the hearings of February 7 and

8, 1952, was transcribed, delivered to the third arbitrator

and read by him, after which this transcript was made

available to the other two arbitrators. Shortly thereafter,

counsel for the respective parties successively filed briefs

consisting of an initial brief on behalf of Automatic, a brief

contra on behalf of Cork-A-Lite and a reply brief on

behalf of Automatic.

CLAIMS OF THE PARTIES AND QUESTIONS

FOR DECISION.

By its letter of July 31, 1951 and by the original argu-

ment of its counsel, Automatic claimed that it was entitled

to terminate the contract of January 30, 1950 and had re-

scinded the same on or about January 1, 1951 by reason of

various breaches of the contract on the part of Cork-A-

Lite, particularly by Cork-A-Lite’s failure to furnish

proper working drawings, by its failure to furnish various

enumerated items of equipment required to produce and

insert the plastic parts of the mufflers, and by failure to

furnish an adequate and efficient method for producing

the plastic part of the mufflers.

By the final argument of its counsel and by the briefs

in its behalf, the foregoing alleged ground for rescission

was in effect abandoned, or at least modified, and in lieu

thereof, Automatic finally asserted four claims which we

quote from their brief as follows:

“(I) THE TRUST BREACHED THE EXPRESS WAR-

RANTY CONTAINED IN ITEM 2 OF THE AGREE-

MENT.

(II) THERE WAS A MISTAKE OF FACT.

(III) THERE WAS A FAILURE OR WANT OF CON-

SIDERATION.

(IV) THE CONTRACT IS IN RESTRAINT OF TRADE

AND IS ILLEGAL AND UNENFORCEABLE.”

Inia winnie]

20a

In connection with the foregoing claims numbered I

II, and III, Automatic claimed in argument and continues

to claim by its final brief that it suffered damage by and

through Cork-A-Lite’s alleged breach of the contract in

the sum of $21,886.16, and that it is entitled to an award

against Cork-A-Lite for that amount.

Finally, by its letter of July 31, 1951, as well as by the

arguments of its counsel and by the briefs filed in its behalf,

Automatic claims in substance and effect that in the event

of an adverse ruling by the arbitrators on the foregoing

claims, it is entitled to have the contract of January 30,

1950 canceled as of September 30, 1951, under paragraph

19 of the contract on the ground that the mufflers which it

manufactured, although manufactured in a workmanlike

manner, did not function to the satisfaction of the normal

purchaser or purchasers; and that in any event, and as a

final alternative, that it is entitled to have said contract

canceled and elects to have the same canceled under para-

graph 8 of said contract (Second Contract).

By the arguments of its counsel and by its brief,

Cork-A-Lite denies all of Automatic’s foregoing claims

except its claim of the right to have the contract canceled

on six months’ notice under paragraph 8 of the contract,

and asserts that it is entitled to an award against Auto-

matic in the sum of $7,000.00, or alternatively to an award

of at least $5,000.00, if the arbitrators find that Automatic

is entitled to have the contract canceled under paragraph

19 (Second Contract).

Automatic concedes by its brief that the amount of its

liability upon cancellation of the contract under paragraph

8 would be $7,000.00, and alternatively, upon cancellation

under paragraph 10, would be $5,000.00.

After all briefs had been filed and copies of the same

delivered to each of the arbitrators, the three arbitrators

held two meetings on different days and together reviewed

and fully discussed the issues enumerated above and the

evidence.

They hereby report that after due consideration of the

evidence, arguments and briefs, they have been unable to

2la

reach a unanimous agreement, but that, as permitted by

the contract provisions for arbitration, the undersigned

two arbitrators, being a majority, have agreed upon find-

ings of fact, conclusions and an award as follows:

FINDINGS OF FACT.

(1) At or about the date when the First Contract was

signed, Mr. Campbell delivered to Mr. Breckenridge (presi-

dent of Automatic) a set of drawings (or possibly of blue-

prints of drawings) and stated that this was a complete

set of working drawings showing all component parts of

the muffler which Automatic was to manufacture for

Campbell Industries, Inc. These drawings had been pre-

pared by Mr. C. W. Demore who then had some arrange-

ment with Mr. Campbell, and possibly with Cork-A-Lite,

by which he was to share financially in the benefits to

accrue from the exploitation of the Campbell Muffler, and

were either the same drawings or prints, or facsimiles of

the drawings or prints, which had been exhibited and used

by Messrs. Campbell and Demore in the negotiations which

led up to the execution of the First Contract.

(2) Also, at about the date of execution of the First

Contract and in connection with its execution, Mr. Camp-

bell, on behalf of Campbell Industries, had given to Auto-

matic an order for the manufacture of six of the mufflers

which were to be used as samples.

(3) Shortly after the execution of the First Contract,

Mr. Campbell caused to be delivered at the Automatic

plant an extruding machine which had been built by The

Yoder Manufacturing Company on Mr. Campbell’s order

and in accordance with his ideas to be used in the produc-

tion of the plastic portions of the mufflers, and also caused

to be delivered there a Buick automobile engine and a paint

spraying machine.

(4) At about the same time, Automatic began work

upon the production of various production dies which had

been ordered by Campbell Industries, Inc. under para-

graph 2 of the First Contract, and upon the production

of certain special tools required for its own use in manu-

22a

facturing the metal portions of the mufflers. Before the

execution of the Second Contract, Automatic had com.

pleted and billed Cork-A-Lite for production dies amount-

ing, at agreed prices, to a total of $6,275.00, and apparently

was far along with its tooling program.

(5) Also, shortly after the First Contract was exe-

cuted, Automatic had purchased some small sheets of stee]

of the proper size and had manufactured “by hand” and

with such tools as it already had more than enough parts

to enable it to assemble the metallic parts of the six sample

mufflers which Campbell had ordered. After the metallic

parts of these six mufflers had thus been assembled, Mr.

Campbell came into the Automatic plant, mixed a quan-

tity of Cork-A-Lite with water—enough to produce a

plastic mixture—and attempted by the use of his extrud-

ing machine to insert this mixture into the mufflers. He

did not succeed in filling any of these mufflers properly by

the use of this machine. The extruding machine did force

a considerable amount of the mixture into the mufflers,

but it did not completely fill the space which was designed

to be filled with the mixture, it did not distribute the mate-

rial evenly, and did not produce solidly compacted fillers,

but on the contrary left numerous unfilled spaces and air-

pockets. He eventually found it necessary to complete

the fillers in these mufflers by manual processes, and did

not succeed in filling more than one or two mufflers on any

day. These experiments also indicated that the Cork-A-

Lite mixture did not function uniformly in successive at-

tempts on days of varying humidity, by reason of which

Mr. Campbell repeatedly found it necessary to make

changes in the water content of the mixture and various

adjustments of the extruding machine.

(6) Mr. Foy, who had apparently been assigned by

Automatic to cooperate with Mr. Campbell and to observe

these early efforts to manufacture sample mufflers, per-

sonally observed the difficulties which were encountered

in the use of the extruding machine, and Mr. Breckenridge

either saw or was fully informed concerning the unsatis-

factory results of these operations. By reason of this knowl-

23a

edge on the part of these two officers of Automatic, and

Campbell’s status as a trustee of Cork-A-Lite, we find

that at the date when the Second Contract wes executed,

both parties already knew, and had known, that the ex-

truding machine and the Cork-A-Lite mixture had not

functioned satisfactorily nor as expected and that this

method and treatment which Campbell had devised and

suggested for filling the mufflers had not yet been proven

to be efficient and practical for use in quantity or com-

mercial production.

(7) At this stage of operations, Mr. Foy had noted

that Campbell Industries, Inc. was having little, if any,

success in securing orders for mufflers and discussion of

this fact between him and Mr. Breckenridge led to Auto-

matic’s opening negotiations for a new contract under

which Automatic would have the exclusive right and li-

cense under the patents to sell mufflers as well as to manu-

facture them. These negotiations culminated in the execu-

tion of the Second Contract, as stated earlier, on January

30, 1950.

(8) At the time when the Second Contract was made,

the production dies that had been made up to that time,

the paint spray booth, Buick automobile engine and ex-

truding machine were all at Automatic’s plant, and all

these items remained available for its use throughout all

later activities under the contract. Not long after this Sec-

ond Contract was made, the evidence does not show exactly

when, Automatic manufactured enough metal parts for

the production of approximately one hundred mufflers,

and with the assistance of Mr. Demore, who had in the

meantime been employed by Automatic, renewed the at-

tempts to fill some of these mufflers with Cork-A-Lite by

the use of the extruding machine. Mr. Campbell also con-

tinued to visit the plant frequently, and fully cooperated,

sometimes for several days at a time, in these activities,

as requested by Automatic. Cork-A-Lite and Mr. Camp-

bell gave full cooperation to Automatic and furnished to

it all “know-how,” technical information and drawings

that were available.

24a

(9) During this period a very few experimental muf.

flers were assembled, one at a time; the record does not

show how many, but enough to install one each on cars

of Messrs. Breckenridge, Foy and Demore, who tried them

out for some time.

(10) By early summer of 1950, probably about the

fore part of July, twelve mufflers were assembled. Mr.

Campbell is said to have stated that these were as good as

he could make and approved their being used to submit for

test by a potential purchaser. Foy took two of these muf-

flers to the Ford Company’s Lincoln Mercury plant which

was then developing a new model of an automobile. After

laboratory and road tests, extending through a period of

two months, this company’s engineers advised Automatic

that the muffler did not meet the claims which had been

made by Automatic for it and that the muffler was not

satisfactory for use with their high compression engine and

was not as adequate as the muffler they were then using on

their low compression engine.

(11) Other mufflers from this batch of twelve were

submitted for tests to New England Auto Parts, The Mack

Truck Company, and one or two other companies whose

names were not stated in the evidence. The evidence does

not show what these tests were, nor what the results were,

but in any event none of these companies bought any

Campbell Mufflers.

(12) Shortly after Mr. Campbell had been informed

of the result of the tests made by Lincoln engineers, he is

said to have gone to Mr. Breckenridge and complained to

him that they were not making the mufflers properly and

not in accordance with the original drawings; that they

should have been made with a filler of clover-leaf pattern

as indicated by the patent drawings or the first drawings

submitted to Automatic. It had, in fact, been expressly

agreed by all parties before the First Contract was made

that, in order to reduce the cost of production, the fillers

should be made in cylindrical form with a cylindrical re-

tainer, rather than as originally planned. Notwithstanding

this fact and the fact that Mr. Campbell himself had par-

25a

ticipated in making the mufflers with cylindrical fillers,

which were sent to Lincoln engineers for test, Mr. Breck-

enridge agreed that some other sample mufflers should be

made with fillers of clover-leaf shape. Mr. Campbell then

ordered a new adapter or spout for the extruding machine

and made up “about half a dozen” mufflers with the

“clover-leaf insert” (filler).

| (13) The extrusion process still failed to fill this batch

| of mufflers satisfactorily on a commercial standard and the

| evidence indicates that it took Mr. Campbell and Auto-

matic two or three weeks to make and to fill the first muf-

fler and about a month to complete this batch of six clover-

leaf design mufflers. At about this time, Automatic stopped

paying the monthly royalty, which had been paid up to

and including November, 1950. When Mr. Campbell in-

quired why the payment for December had not been made,

Mr. Breckenridge told him that they “did not intend to

make any more.” We believe it reasonable to assume that

the present controversy began to take shape at about that

time, since the evidence shows that on February 19, 1951

there was a meeting at the office of Automatic’s counsel

(Mr. H. K. Bell), at which there was discussion of a pos-

sible settlement, but so far as the evidence shows, no com-

plete breaking off of relations between the parties. There

was no unequivocal or definite step taken by Automatic

or notice to Cork-A-Lite under the terms of the Second

Contract to terminate until the letter of July 31, 1951 (Ex-

hibit A).

(14) Some kind of continued interest was shown by

Automatic in an arrangement made by it in which some

of the last batch of mufflers, having the clover-leaf fillers,

were taken or sent by Automatic during March, 1951 to

the McKenzie Company of Youngstown, Ohio, a substan-

tial manufacturer and distributor of automobile mufflers,

and tested by them in competition with mufflers of three

types, which the McKenzie Company was then making or

handling, for comparison as to noise level (decibel rating),

back pressure and shell temperature. The McKenzie Com-

pany’s report on these tests is shown in detail in the tran-

pee’ Si RE fae eee

26a

script of evidence and may be fairly summarized by say.

ing that as to back pressure and shell temperature the

Campbell Muffler was fairly comparable with, and in some

instances superior to one or another of the McKenzie muf-

flers, but that its noise level was the highest among the

four types of mufflers tested.

(15) The mufflers thus tested by the McKenzie Com-

pany, as well as those tested earlier by the engineers of

the Ford Company’s Lincoln Motor Car Division, were ac-

tually constructed in workmanlike manner, having metal

parts which had been made and assembled in full com-

pliance with the working drawings furnished by Cork-A-

Lite and fillers which had been completed and solidly com-

pacted by Mr. Campbel! or under his supervision. These

mufflers were in our opinion entirely adequate to permit

a fair test of their performance and functioning or to be

exhibited as samples to prospective purchasers.

(16) The evidence does not show any further opera-

tions of the parties under the Second Contract from the

end of the test by the McKenzie Company until the trans-

mittal of Automatic’s letter of July 31, 1951, which led to

this arbitration proceeding, being the first written and

definite declaration of Automatic’s decision to forego its

license and to terminate the Second Contract.

CONCLUSIONS.

I. (a) The evidence does not establish a breach, as

claimed, of the warranty contained in paragraph 2 of the

Second Contract (contract of January 30, 1950). In our

opinion, all that this paragraph contains is a warranty of

title or ownership of the right to manufacture and sell the

Campbell Muffler and adapter and attachments for the

same, and formulas and methods for making Cork-A-Lite

plastic insulation and extruding the same into the muf-

flers. It is not a warranty of the efficiency of the method

or of the quality or fitness of the material or extruding

machine to accomplish any particular result.

(b) We do not agree with the contentions of Auto-

matic that there is a warranty either express or implied

in paragraph 3 of the contract, nor that the “claims” made

27a

in the patent application or patents are representations or

warranties on the part of Cork-A-Lite under the Second

Contract.

breach of the contract, as claimed in the earlier arguments

of Automatic, by failure on the part of Cork-A-Lite to

furnish proper drawings and various items of equipment.

On the contrary, we believe that the evidence affirmatively

shows that Cork-A-Lite furnished everything which the

Second Contract required. In particular, there was no

default by Cork-A-Lite under paragraph 12 nor any other

paragraph of the Second Contract.

In this connection, we hold that there is no uncer-

tainty nor ambiguity in the requirements of the Second

Contract and that the requirements or obligations of Cork-

A-Lite cannot lawfully be enlarged by construction nor

by reference to the First Contract.

II. In our opinion, the evidence does not establish that

the contract was made under mistake of material fact,

either on the part of both parties or on the part of Auto-

matic only. On the contrary, we believe the evidence af-

firmatively shows that when this Second Contract was

made, both parties fully knew that the mixture, the ex-

truding machine, and the extrusion process (method) had

not functioned sufficiently to permit the manufacture of

mufflers in practicable or commercial quantity and that

the question whether it would ever be practicable to use

these instrumentalities, mixture and extrusion method in

quantity or commercial production was highly speculative,

and recognized as such by all parties although all had great

hopes of success.

III. The claim of failure of consideration is based upon

assumptions that the contract contains (a) one or more

express warranties, (b) language from which a warranty

should be implied, or (c) representations, as to the effi-

ciency and practicability of the Cork-A-Lite mixture and

of the machine and method for extruding this material

into the mufflers.

In accordance with our earlier finding that the con-

tract evidences no such warranty or representation, we

WSS ALIA DG A SF,

MeED

Se ae

Bah en a NE BNE ORSINI RENE

28a

now find that the evidence does not show failure of con.

sideration.

IV. The contract of January 30, 1950 (Second Con-

tract) is not in restraint of trade, is not illegal and is not

unenforceable. Automatic totally failed to mention or sug-

gest to the arbitrators the issue as to the alleged illegality

of the contract as being in restraint in any argument, hear-

ing or paper until it filed its brief with the arbitrators on

May 7, 1952. Prior to that time, that issue had never been

presented to the arbitrators by Automatic, notwithstand-

ing the earlier urgent request made of the parties to pre-

sent in writing all the issues for arbitration. In the lists of

questions or issues presented to the arbitrators by the

parties in compliance with this request, there was not in-

cluded this issue as to alleged illegality of the contract for

restraint of trade. In our opinion, this issue was not sea-

sonably presented for inclusion in the arbitration.

Nevertheless, and notwithstanding the tardy raising

of the issue, we have considered the issue as raised and

the decisions and arguments presented by the parties

thereon. We find and hold that under the applicable law,

the contract of January 30, 1950 is not in restraint of trade,

is not illegal and is not unenforceable. Under the facts

found here and the law governing this contract and the

parties, the said contract of January 30, 1950 is valid, legal

and enforceable.

V. We conclude that the meaning of the phrase

“normal purchaser or purchasers” in paragraph 19 of the

contract is not limited to actual purchasers but by fair and

reasonable construction includes bona fide prospective

purchasers who have shown a definite interest in the

mufflers and might reasonably be expected to purchase, if

the mufflers performed satisfactorily. Under this con-

struction of this paragraph, we find that the mufflers which

were tested respectively by the Ford-Lincoln engineers and

by the McKenzie Company failed to function to the satis-

faction of normal purchasers and that by reason thereof,

Automatic is entitled to have the contract of January 30,

1950 canceled and rescinded as of September 30, 1951,

29a

and to be relieved from further liability thereon from and

after that date.

VI. In accordance with conclusions above, we find

that Automatic is not entitled to an award of damages

against Cork-A-Lite for the amount claimed nor for any

amount, and with respect to such claim find in favor of

Cork-A-Lite.

VII. In the conclusion of its brief, Cork-A-Lite as-

serts that it has claims against Automatic for $2,670.00,

allegedly paid for a die which was never manufactured and

$200.00 allegedly overpaid on its purchase of certain dies.

These claims apparently arise under the First Contract or

purchase orders prior to the First Contract, were not in-

cluded in the statements by counsel as to the matters pre-

sented for hearing in this arbitration, and were actually

not heard upon evidence. We accordingly make no finding

upon these claims totaling $2,780.00.

In accordance with the foregoing findings and conclu-

sions, the undersigned arbitrators have made the following

award:

Automatic Die and Products Company shall pay

forthwith the sum of Five Thousand Dollars ($5,-

000.00) to the Cork-A-Lite Development Trust, and

shall forthwith surrender to said Cork-A-Lite De-

velopment Trust the property (extruding machine,

Buick automobile engine, paint spray booth, and dies

to make the following muffler parts: end, center ring,

disc, cap, center tube and cone), belonging to said

Cork-A-Lite Development Trust now in the posses-

sion of said Automatic Die and Products Company.

The said contract of January 30, 1950 is terminated

as of September 30, 1951 under the provisions of para-

graph 19 of said contract and contractual relations

between the parties are terminated.

Harrison W. EwI1na,

Bruce B. Krost.

Cleveland, Cuyahoga County, Ohio,

July 28, 1952.

Ena with

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‘fae Bu Lis Lea LS

Peitacn SPRATT

30a

EXHIBIT A.

July 31, 1951

Cork-A-Lite Development Trust,

1090 Union Commerce Building,

Cleveland 14, Ohio.

Attention Mr. Philmore J. Haber and

Mr. John M. Campbell, Trustees,

Gentlemen:

On August 26, 1949 The Automatic Die & Products

Co. entered into an agreement with Campbell Industries,

Inc., to which you were a signatory party. Under this

agreement Campbell Industries, Inc. agreed to furnish, in

Item 2 thereof, working drawings of the Campbell Super

Silent Automobile Engine Muffler and all of the component

parts thereof, showing the design and complete specifica-

tions of the same. Mr. Campbell did furnish such working

drawings to us, but late in the fall of 1950 he advised us

that they were the wrong working drawings. Conse-

quently, although we had been working on the muffler

for approximately a year, we were suddenly informed that

we had been working upon the wrong design.

Also, in Item 3 of said agreement of August 26, 1949,

Campbell Industries, Inc. agreed to supply and furnish,

at its expense, subject to our approval, the following equip-

ment, towit:

Cork-A-Lite extruding machine, adapter for ex-

truder for filling mufflers, adapter for forming and

producing Cork-A-Lite donut ring, saw or slicing ma-

chine, dry Cork-A-Lite cone filler, and seaming ma-

chine, paint spray booth and accessories, conveyor

trucks for the drying oven, powder mixer, dry plastic

mixer, wet plastic mixer, scales, measuring containers,

and all other necessary equipment to efficiently pro-

duce the plastic parts of said muffler.

All that Campbell Industries, Inc. ever furnished of

the foregoing which was approved by us was a spray booth

and an adapter for forming and producing Cork-A-Lite

3la

donut rings. While it did, in addition, supply a Cork-A-

Lite extruding machine the same was never approved by

us and Mr. Campbell has never been able to get it to work

satisfactorily.

On January 30, 1950 we entered into an agreement

directly with you as to the Campbell Super Silent Auto-

mobile Engine Muffler, Mr. Campbell having decided to

dissolve Campbell Industries, Inc., and from February

1950 through November 1950 we paid a minimum royalty

of $500.00 per month, or a total of $5,000.00. Nevertheless,

you failed to provide us with the following items which

you were obliged to supply and furnish, towit:

Adapter for extruder for filling mufflers, donut ring

saw or slicing machine, dry Cork-A-Lite cone filler,

and seaming machine, paint spray booth accessories,

conveyor trucks for the drying oven, powder mixer,

dry plastic mixer, wet plastic mixer, scales, measur-

ing containers, and all other necessary equipment to

efficiently produce the plastic parts of said muffler.

A Cork-A-Lite extruding machine was furnished, but it

has never been satisfactory and has never received our

approval. Mr. Campbell was obliged to see that the plastic

portion of the muffler could be properly produced and ex-

truded into the muffler by the equipment you were to

furnish.- This he has been unable to do.

When Mr. Campbell advised us late in the fall of 1950

that the working drawings he had furnished us were for

the wrong design and that we had spent approximately a

year working on the wrong design, we stopped paying the

minimum royalty in view of this and also in view of your

failure to supply the necessary equipment to properly ex-

trude the Cork-A-Lite into the muffler.

Being unable to work out any satisfactory arrange-

ment with you through Mr. Campbell on or about January

1, 1951, we notified you, through Mr. Campbell, that both

of the agreements had been breached and we thereupon

terminated them because of your breaches of the same.

Because of your breaches of contract we have been dam-

asi

SRA ES SSRN TS: Seb UBS BOL

wast

32a

aged to an amount in excess of $20,000.00, demand for

which is hereby made.

Subsequently we have negotiated with you for a set.

tlement of the entire matter, but as a result of our last con-

ference of July 27, 1951, it would appear that we will be

unable to reach any settlement. Therefore, we hereby re-

iterate, in writing, the notice that we gave you at the first

of this year that the agreements in question were termi-

nated because of your breach of the same and your failure

to perform.

In any event, and in the alternative, we hereby give

you sixty days’ written notice of the cancellation of said

agreement of January 30, 1950, in accordance with Item

19 thereof, for the reason that the mufflers which are the

subject matter of said agreement, when constructed in a

workmanlike manner, in accordance with the said inven-

tion, fail to perform their functions to the satisfaction of

the normal purchaser or purchasers and, accordingly, we

will be relieved from further liability thereunder.

In any event, and in the alternative, we hereby give

you six months’ written notice of cancellation of said

agreement of January 30, 1950, in accordance with Item

8 thereof and, accordingly, we will be relieved from further

responsibility thereunder and from further minimum roy-

alty payments.

Kindly be governed accordingly.

We are sending copies of this letter directly to the two

Trustees, Mr. Campbell and Mr. Haber.

Very truly yours,

THE Automatic Dir & Propucts Co.

By R. W. BreckKenRIDGE (Sgd.)

HKB: gs President

ee Mr. John M. Campbell

3776 East 153rd Street

Cleveland, Ohio

Mr. Philmore J. Haber

3021 Courtland Blvd.

Shaker Heights, Ohio

33a

SUPPLEMENTAL REPORT OF ARBITRATION.

(Defendant’s Exhibit 2.)

In Re Arbitration Between the Automatic Die & Products

Corporation and Cork-A-Lite Development Trust.

This report is intended to supplement and in certain

particulars to modify the “Report of Arbitrators with

Findings of Fact, Conclusions and Award” made and is-

sued in multiple copies on and as of July 28, 1952 by two

arbitrators (Messrs. Harrison W. Ewing and Bruce B.

Krost), being a majority of the board of arbitrators here-

tofore duly selected in this matter, and delivered to and

received by counsel for the respective parties on or about

July 29, 1952.

On July 31, 1952 the two arbitrators above mentioned

respectively received by mail from their associate arbi-

trator, Mr. James T. Hoffmann, letters of identical language

dated July 30, 1952 and addressed to them jointly in which

Mr. Hoffmann stated in substance that he desired to make

of record the fact that he had not been consulted by the

arbitrators who joined in the above-mentioned award be-

tween the date of a conference of all three arbitrators on

June 3, 1952 and the delivery to him personally on July

28, 1952 of a signed copy of the “Report, etc., and Award”

referred to in Mr. Krost’s letter to Mr. Bell and Mr. Kauf-

man on July 29, 1952, and that at the time of the confer-

ence of arbitrators on June 3, 1952 (mentioned above), it

was his definite understanding that a majority of the arbi-

trators had tentatively agreed on a disposition of the arbi-

tration which would leave both parties where they were,

or are, except for the delivery by Automatic to Cork-A-

Lite of ‘‘certain tools, etc.”” (presumably meaning certain

other chattel property).

Counsel for both parties will, of course, recall that

carbon duplicates of the letter just referred to were at or

about the date of that letter mailed to them and presum-

ably received by them at about the date when the originals

reached the addressees. Counsel will, of course, also recall

that shortly after their receipt of copies of Mr. Hoffmann’s

Na Sti 52

34a

letter, they (Messrs. Harold K. Bell and David A. Kauf.

man) were informed by Mr. Krost by telephone that by

reason of the statements of Mr. Hoffmann’s letter, the other

two arbitrators had agreed to arrange and intended to

arrange for another meeting of all arbitrators at the earliest

date found to be mutually convenient and desired that

pending such meeting and further consideration of their

report, the award of July 28, 1952 should be held in abey.

ance.

In accordance with this promise, another meeting of

all three arbitrators was held on August 13, 1952 at which

counsel for the respective parties (Messrs. Bell and Kauf-

man) were present. At this meeting, the arbitrators agreed

that the Report, Findings and Award of July 28, 1952 be

reviewed and discussed by the full board of arbitrators.

At Mr. Bell’s request he was given an opportunity to file

supplemental brief as to his claim that the provision of the

contract of the parties forbidding Automatic Die & Prod-

ucts Company to manufacture or sell any muffler other

than the Campbell muffler was against public policy and

rendered the entire contract void and unenforceable.

Such a brief was submitted about August 28, 1952

and the cases therein cited and contentions therein made

have been carefully examined, but owing to successive

absences from the city of each of the arbitrators, it has not

been practicable, until a recent date, to have a further

meeting of the board of arbitrators.

However, a further and final meeting of said board

with all three abritrators present was held on October 24.

1952 at which the proceedings had and evidence submitted

in this arbitration and the various claims of the parties, in-

cluding the claims made in said last filed brief, have been

reviewed and discussed at length and given careful con-

sideration.

It having appeared at the end of such reconsideration

that the arbitrators were still unable to reach a unanimous

agreement, the undersigned, being a majority of said three

arbitrators, hereby make the following supplemental find-

35a

ings and conclusions, in which, in harmony with the origi-

nal report the parties will be referred to as “Automatic”

and “Cork-A-Lite”’:

SUPPLEMENTAL FINDINGS AND CONCLUSIONS.

(1) The first step which led to this arbitration was

the transmittal by Automatic to Cork-A-Lite of a letter

dated July 31, 1951, in which Automatic asserted (a) that

both contracts between the parties referred to in our origi-

nal report had been breached by Cork-A-Lite in various

particulars; (b) that by reason of these breaches of con-

tract Automatic had suffered damage in excess of $20,000,

for which demand was thereby made; and (c) that in the

alternative, it thereby gave notice of its election to have

the contract of January 30, 1950 cancelled in accordance

with item 19 thereof, and as a second alternative gave

notice of its election to have said contract cancelled in

accordance with item 8 of said contract. (A copy of this

letter, identified as Exhibit A, is attached to our original

report and is made an exhibit to this supplemental report

by reference as fully as if hereto attached).

(2) Cork-A-Lite replied to the letter referred to in

the preceding finding on October 16, 1951 and by such

reply, after denying Automatic’s various claims of breach

and asserting that all defaults were on the part of Auto-

matic, formally requested that the claims made by Auto-

matic in that letter should be referred to arbitration, as

provided by paragraph 24 of the contract of January 30,

1950, and designated Mr. Bruce Krost as the arbitrator of

its choice.

(3) Automatic acknowledged receipt of this letter

by a letter dated October 19, 1951, and by this letter desig-

nated Mr. James T. Hoffmann as the arbitrator chosen by

it.

(4) After a preliminary meeting on November 6,

1951, at which the two arbitrators were informed in a

general way of the subject matter of the controversy, and

hye S youre

36a

given copies of the two contracts to be studied at their

convenience for their further information, the first forma]

hearing of the arbitration began on February 7, 1952. At

the outset of this hearing, as shown by the transcript of

evidence and proceedings (pages 3-51), Mr. Bell, as coun-

sel for Automatic, stated the various claims of Automatic

in substantial accord with Automatic’s letter of July 31,

1951 (that is, as a claim for damages in excess of $20,000

for various alleged breaches of contract and alternatively,

as alternative demands for cancellation of the contract in

accordance with the respective provisions of items 19 and

8 of the contract of January 30, 1950). Mr. Kaufman

stated the claims of Cork-A-Lite (transcript pages 10-11,

inclusive, and pages 27-51, inclusive), as claims for ac-

crued royalties totaling either $7,000 or $5,000 (dependent

upon which provision for cancellation should be found by

the arbitrators to be applicable) and for return of certain

tools, dies and other chattel property, which Cork-A-Lite

had entrusted to Automatic as provided in the respective

contracts.

(5) Counsel for Automatic then submitted evidence

(transcript pages 52-244, inclusive) tending prima facie

to show various breaches of contract by Cork-A-Lite, that

Automatic had sustained damage by reason of these alleged

breaches of contract totalling $21,886.16, and that the

mufflers had not operated to the satisfaction of a normal

purchaser, that is, evidence tending prima facie to support

Automatic’s alternative claim of right to cancellation of

the second contract as of September 30, 1951.

(6) At the end of this hearing, which extended

through February 7, 1952, and was concluded on February

8, 1952, counsel for the respective parties made oral argu-

ments and submitted this matter to the two arbitrators

then serving for decision. The argument of counsel for

Automatic was directed exclusively to the claims made in

Automatic’s letter of July 31, 1951 and in the opening

statement of counsel, to-wit: that Cork-A-Lite had

breached the second contract in various particulars; that

37a

Automatic had thereby suffered damage in the amount

shown by the evidence and was entitled to an award of

that amount as damages; and in the alternative, that Auto-

matic was entitled in any event to cancel the second con-

tract as of September 30, 1951 under authority of para-

graph 19 of that contract, and that the award made against

it should in no event exceed $5,000. No claim was then

made that the contract was in restraint of trade and

therefore void and unenforceable.

(7) Upon the failure of the arbitrators to agree, as

shown by our original report, the two arbitrators then

serving appointed a third arbitrator, as provided by the

contract, and notified the respective parties of said ap-

pointment. A formal meeting of the enlarged board of

arbitrators was then called and held on March 6, 1952.

At this meeting counsel for the respective parties restated

their respective claims substantially as they had been

stated at the hearing of February 7 and 8, 1952. In the

course of these statements counsel for each party stated,

as he had stated in the statements at the beginning of the

hearing of February 7 and 8, that in any event, and no

matter what the finding of the arbitrators might be on the

matters in dispute, his client did not desire reinstatement

of the first contract and desired the arbitrators to disregard

the provision in the second contract for reinstatement of

the first contract. No claim was then made by counsel for

Automatic that the second contract of the parties was

against public policy and therefore wholly void and un-

enforceable.

At the suggestion of the newly appointed arbitrator

and with the concurrence of the two arbitrators who had

been appointed earlier, counsel for the parties were re-

quested to prepare and join in a written statement defining

clearly the issues of law and fact involved in this arbitra-

tion and the questions to be decided by the arbitrators.

Further hearing was then postponed to March 12, 1952 to

permit such statement of the matters in issue to be pre-

pared and for rearg «ment of the controversy.

38a

(8) The board of arbitrators and counsel met again

as agreed on March 12, 1952. The arbitrators were then

informed that counsel had not agreed upon a written state.

ment of the issues to be determined, but that counsel on

each side had prepared a list of the questions which he be.

lieved were presented for determination. Counsel for

Automatic then submitted a list of 58 questions entitled

“QUESTIONS PRESENTING THE ULTIMATE ISSUES

TO BE DECIDED IN THE ARBITRATION” and later sub-

mitted a list of 17 questions entitled “ULTIMATE ISSUES

TO BE DECIDED BY THE ARBITRATORS.” Copies of

these two lists of questions are attached to this report

marked respectively, Exhibit B and Exhibit C.

Counsel for Cork-A-Lite similarly submitted two lists

of questions, the first entitled “STATEMENTS OF JS.

SUES IN THE ARBITRATION PROCEEDINGS BE.

TWEEN CORK-A-LITE DEVELOPMENT TRUST AND

THE AUTOMATIC DIE & PRODUCTS COMPANY?” and

the second entitled “POINTS OF CONTROVERSY BE.

TWEEN THE CORK-A-LITE DEVELOPMENT TRUST

AND THE AUTOMATIC DIE & PRODUCTS COMPANY.”

Copies of these two documents are attached to this report

marked respectively, Exhibit D and Exhibit E.

Oral arguments were then made by respective coun-

sel pertinent to various questions presented by these re-

spective four sets of questions. No claim was made in these

arguments that the principal contract in issue was against

public policy or unenforceable and it will be noted that no

such contention was suggested in either or any of the

above mentioned statements of questions to be considered

by the arbitrators.

(9) After submission of the controversy at the end

of these oral arguments, the arbitrators requested counsel

on both sides to file written briefs in support of their re-

spective claims. In compliance with this request, there

were filed a brief by Automatic, a brief contra by Cork-

A-Lite and a reply brief by Automatic. By its primary

brief, dated May 7, 1952, following contentions (1) that

the contract contained a warranty which had_ been

39a

preached by the Cork-A-Lite; (2) that the contract was

made under mutual mistake of material fact; and (3)

that there was a failure or want of consideration, Automa-

tic, for the first time presented, as the IVth and final head-

ing of its brief, a claim that “The contract is in restraint

of trade and is illegal and unenforceable.”

(10) The supplemental brief submitted by counsel

for Automatic on or about August 27, 1952, is in its en-

tirety merely an amplification of the claim thus made as

paragraph IV of its original brief that the contract is in

restraint of trade.

(11) In reliance upon the action of Automatic in

joining in these arbitration proceedings, Cork-A-Lite ex-

pressly agreed to pay one-half of the fees of arbitrators

herein at $150 per day for each arbitrator, thereby in-

curring a liability of many hundreds of dollars; also in-

curred further liability of many hundreds of dollars, the

exact amount of which cannot yet be determined, for the

services of its counsel in conducting the arbitration pro-

ceedings: also incurred substantial liability for services

of stenographers who recorded the evidence and proceed-

ings at all hearings herein.

Upon consideration of the foregoing findings of fact,

the undersigned arbitrators hereby make the following

additional conclusions of law:

I. By its letter of July 31, 1951, to Cork-A-Lite,

stating its various claims of fact and the relief to

which it claimed to be entitled, by its letter of October

19, 1951, concurring in Cork-A-Lite’s demand for ar-

bitration of the claims thus made and appointing the

second arbitrator, by the various oral statements made

in its behalf by its counsel of the claims which Auto-

matic desired the arbitrators to consider, by its state-

ment in writing at the request of the arbitrators of the

questions which it claimed were presented for deci-

sion by the arbitrators and by its submission of this

matter on evidence and in argument as a claim for

damages for breach of the contract and alternatively

Seah Oa ees OSS

aNd S BS

OA EOE

Re stati ie

RIED ALK

40a

as a demand for cancellation of the contract by author.

ity of provisions for cancellation contained in the con.

tract of January 30, 1951, Automatic Die & Products

made an election of remedies and thereby elected to

treat the contract of January 30, 1951 as valid and

enforceable.

II. By its election to participate, and by its par.

ticipation in arbitration under the contract and in

accordance with the contract, Automatic not only

waived whatever right it might have had to disaffirm

or repudiate the contract of January 30, 1951 and to

challenge its validity, but impliedly asserted and

conceded the validity of the contract.

III. By its election of remedies, as set forth in

Conclusion No. I, and by its waiver as set forth in Con-

clusion No. II, and further by reason of the liabilities

incurred by Cork-A-Lite through reliance upon said

election and upon said waiver, Automatic became and

has ever since been estopped to assert that said con-

tract of January 30, 1951 is void, illegal, against pub-

lic policy, and unenforceable.

IV. The belated claim made by Automatic in its

brief that the contract is against public policy and un-

enforceable is completely inconsistent with and irre-

concilable with the position which it took at the out-

set of this arbitration and maintained throughout the

hearing and oral arguments of counsel, and by the

well-established principle of jurisprudence that a

claimant in any judicial proceeding should be pre-

cluded from taking and maintaining two inconsistent

positions, Automatic after asserting rights under the

contract, is precluded from claiming that the contract

is against public policy and void.

V. From these conclusions, it follows that the

arbitrators not only owed no duty to consider, but

were not and are not now at liberty to consider the

claims made by Automatic in successive briefs, includ-

ing the supplemental brief recently filed, that para-

4la

graph 10 of the contract of January 30, 1951 is against

public policy and makes the entire contract void and

unenforceable.

In conformity with the foregoing findings and conclu-

sions, the undersigned arbitrators hereby amend their orig-

inal report, findings and conclusions by withdrawing and

striking therefrom in its entirety Conclusion No. IV.

As thus amended, the findings and conclusions of said

original report are hereby adopted, reaffirmed and made

part of this supplemental report as fully as if herein set

forth in full—

Upon due consideration of the findings of fact and

conclusions of said original report, as above amended, and

of the findings of fact and conclusions shown by this sup-

plemental report, the undersigned arbitrators hereby make

the following award; to wit:

The Automatic Die & Products Company shall pay

forthwith to the Cork-A-Lite Development Trust the

sum of Five Thousand Dollars ($5000.00), and shall

forthwith surrender to said Cork-A-Lite Development

Trust the chattel property tools and equipment now

in possession of said Automatic Die & Products Com-

pany, belonging to said Trust, to wit: (Extruding ma-

chine, Buick automobile engine, paint spray booth,

and dies to make the following muffler parts: end,

center ring, disc, cap, center tube and cone.)

The said contract of January 30, 1950 is hereby ter-

minated as of September 30, 1951 under the provisions of

paragraph 19 of said contract.

In accordance with the oral stipulation made in be-

half of the respective parties by their counsel during the

hearing of this arbitration, the contract of August 26, 1949

is hereby adjudged to be abrogated and terminated by

agreement of the parties.

Harrison W. EwIinc

Bruce B. Krost

Cleveland, Cuyahoga County, Ohio

December 19, 1952.

red

€

42a

DISSENTING REPORT OF JAMES T. HOFFMANN.

(Defendant’s Exhibit 3.)

In Re Arbitration Between The Automatic Die & Products

Corporation and Cork-A-Lite Development Trust

The Report, Supplemental Report, and Award made

by my associate arbitrators cannot be concurred in. The

Second Contract is against public policy, unlawful and un-

enforceable—

(a) as being in direct violation of the Clayton Act

which specifically provides that “It shall be unlawful for

any person * * * make a * * * contract for sale of goods

* * * whether patented or unpatented, * * * on the condi-

tion, agreement, or understanding that the lessee or pur-

chaser thereof shall not use or deal in the goods, wares,

merchandise, machinery, supplies, or other, commodities

of a competitor or competitors of the lessor or seller, where

the effect of such lease, sale, or contract for sale or such

condition, agreement, or understanding may be to sub-

stantially lessen competition or tend to create a monopoly

in any line of commerce.” (U.S. Code, Title 15, § 14)

and

’

(b) as being an unlawful extension of the patent

monopoly enjoyed by Cork-A-Lite by virtue of its owner-

ship or control of the Campbell patents enumerated in

Paragraph One of the Second Contract.

The Second Contract, Paragraph 10, provides, in part,

as follows:

“Automatic agrees that it will not manufacture

or sell any muffler other than the Campbell Super

Silent Automobile Engine Muffler, and will not, at any

time, engage in any business competing therewith.”

This provision specifically prevents Automatic from

dealing in mufflers which might be competitive with the

“Campbell Super Silent Automobile Engine Muffler.”

In the present instance, no actual restraint was ef-

fected. The language of the Clayton Act, however, is:

“where the effect may be to substantially lessen competi-

43a

tion or tend to create a monopoly” (emphasis added) but

the U. S. Supreme Court in the case of Standard Oil of

California vs. United States, 337 U. S. 293; 69 S. Ct. 1051;

L. Ed. , stated as follows:

“evidence that competitive activity has not actually

declined is inconclusive. Standard’s use of the con-

tracts creates just such a potential clog on competition

as it was the purpose of § 3 to remove wherever, were

it to become actual, it would impede a substantial

amount of competitive activity.” (p. 2062.) (Em-

phasis added. )

Paragraph 5 of the contract refers to “the next 1,800.,-

000 mufflers, and four and one-half per cent (442%) on

all mufflers sold thereafter.” Surely a contract which re-

fers to automobile mufflers in terms of millions contem-

plates substantial commerce.

By restricting Automatic’s activities in the muffler

field to the “Campbell Super Silent Automobile Engine

Muffler,” Cork-A-Lite effected a restraint upon the manu-

facture and sale of other mufflers; that is, mufflers not in-

cluded within the patent grant. That this is against public

policy and unlawful is so well established as, in my opin-

ion, to be no longer open to any question nor do I under-

stand that my associate arbitrators question this principle.

It is noted that by the Supplemental Report, the previous

holding of my associate arbitrators to the contrary, in “Con-

clusion No. IV” is withdrawn.

To me this is a concession on their part that the con-

tract under which they are making an award is unlawful.

As for authorities see the following cases: Park-In

Theatres vs. Paramount-Richards Theatres, 81 Fed. Supp.

466, decided in the District Court of Delaware on Decem-

ber 8, 1948, affirmed by a per curiam opinion of the Third

Circuit Court of Appeals on December 3, 1950, 185 Fed.

(2nd) 407, certiorari denied June 4, 1951, 341 U. S. 950,

95 L. Ed. 1373; McCullough vs. Kamerer, 166 Fed. (2d)

759, decided by the 9th Circuit Court of Appeals on Feb-

ruary 26, 1948, certiorari denied, 335 U. S. 813, 93 L. Ed.

368; National Lockwasher vs. Garrett, 137 Fed. (2nd) 255,

Sikes:

RB ia pA 2 ITCRA EON DART DEES:

iS aS ioe

LibincaO SaaS

Jaan at ce

44a

decided by the Third Circuit Court of Appeals on July 13,

1943.

As I understand the actions of my associate arbitra.

tors, it is the consensus of the opinion of the majority of

the arbitrators that the “equities” of the situation are with

Automatic but that they are making an award to Cork-A.

Lite because they feel bound to do so by certain technicali-

ties of contract law. If this is the situation, they are dis-

regarding another and controlling technicality; that is, the

unlawfulness of the contract, which requires no award to

either party. They overcome this question of unlawful-

ness by what I consider misinterpretation of other tech-

nicalities of a procedural nature, see particularly para-

graph 11 of the Supplemental Report and especially sub-

paragraphs 1, 2 and 3. In my opinion the law is well

established that in the case of an invalid contract there

can be no “election of remedies,” “conceded * * * validity”

or “estopped to assert.”

As for “election of remedies,” it is elementary that

there must be two valid remedies from which to choose

before a binding election can be made. As for “conceded

* * * validity,” the present case is not one of a voidable

contract where an “election of remedies,” that is, reliance

on the contract, constitutes a confirmation, making the

contract binding. The same applies to “estoppel.” The

contract is either unlawful or it is lawful and, if unlawful,

no election of remedies, concession of validity or estoppel

can make it lawful and enforceable.

As for sub-paragraph 4 of paragraph 11 of the Sup-

plemental Report, there are no restrictions in this day and

age against asserting inconsistent positions in a legal pro-

ceeding, see Federal Rules of Civil Procedure, Rule 8(e)

(2) which reads, in part, as follows:

“A party may also state as many separate claims or

defenses as he has regardless of consistency.”

As for the timeliness of raising the defense of illegality,

which appears to be the deciding issue in the present in-

stance, in my opinion, the case of McCullough vs. Kamerer,

323 U. S. 327, 65 S. Ct. 297, 89 L. Ed. 273 is controlling.

45a

In this case the Supreme Court of the United States

said in part, as follows:

“the answer made no mention of the restrictions con-

tained in the license agreement. The District Court

made no findings of fact or law with respect to them.

On appeal to the Circuit Court of Appeals petitioner

assigned no error with reference to them and the Cir-

cuit Court of Appeals did not consider them, * * *

“Thus the only question for which we granted cer-

tiorari is one not properly raised, litigated or passed

upon below.” (Emphasis added.) (p. 298.) (65

S. Ct. 297.)

The writ of certiorari was dismissed and the Circuit

Court of Appeals remanded the case to the District Court

with authority to “take such action as it may determine”

concerning the issue of unlawfulness.

When the Supreme Court of the United States allows

the defense of unlawfulness of a contract to be raised after

decision by a Circuit Court of Appeals, I cannot go along

with my associate arbitrators and now say that Automatic

is estopped, under the present circumstance, to assert the

defense of unlawfulness and that the arbitrators are “not

now at liberty to consider the claim” where the question

was raised by Automatic before decision by the arbitrators.

Aside from the question of the unlawfulness of the

contract, in my opinion, neither party should be awarded

any recovery against the other on grounds which I will

call, for want of a better term, “the laws of natural justice”

or “the equities”; and bearing in mind that I am of the

opinion that questions submitted for or to arbitration

should not be decided on technical legal principles.

The contracts of August 26, 1949 and July 30, 1950

are inseparable. The Second Contract is ambiguous with-

out the First Contract; for example, what is the “Campbell

Super Silent Automobile Engine Muffler” of the Second

Contract except the “Campbell Super Silent Automobile

Engine Muffler” of the First Contract; that is, the muffler

shown in certain drawings referred to in paragraph 2 of the

RiP aa Rt RAT RS sec AA oer aa ke RS

aad, Sideiot

Kaa ag ie Tid eer St Ree AE

Oe ett se

<ael

46a

first contract, which drawings were introduced into the

present proceedings as Exhibits 1 to 12.

The undertakings of the respective parties were jn

the nature of a joint enterprise, Mr. Campbell, a plastic

expert, and Automatic, metal working experts. Mr. Camp.

bell relied upon Automatic to supply the metal working

technique and know-how and Automatic relied upon Mr,

Campbell to supply the plastic technique and know-how.

The venture failed because Mr. Campbell’s extruding

machine would not work to extrude Mr. Campbell’s plas-

tic material as contemplated by both parties. Automatic

never interfered with Mr. Campbell’s activities as to the

“plastic” aspect of the venture and Mr. Campbell accepted

responsibility for the “‘plastic’”’ aspect without question or

protest.

Why should Automatic now be further penalized for

failure of the ‘plastic’ aspect or end of the venture. If

Mr. Campbell honestly believed that his extruding ma-

chine and his patented plastic material would perform, as

represented by him to Automatic at the time the negotia-

tions were entered into, there was a mutual mistake of

fact, somewhat similar to that in the cases where parties

enter into a contract for mining operations and subse-

quently discover that they made a mutual mistake as to

presence or quantity of mineral; for example, the case of

Edwards v. T. B. V. R. Co., 54 Tex. App. 334, 118 S. W.

572, wherein the Court said:

“If it had developed that in fact ‘gravel overlaid

by a deposit of sand clay’ did not exist at all on the

land, we think it could not be questioned that appel-

lee should be held excused from the obligation to take

it out and pay for it, even if it had been guilty of negli-

gence in failing to discover this fact before making the

contract. Or if it had been discovered that, while some

of the material existed, yet there was only a limited

quantity, and not as much as under the contract ap-

pellee was required to remove, it would have been en-

titled to be relieved of the obligation pro tanto. It

47a

could not be denied that this would have been a mis-

take as to the subject-matter, going to the very es-

sence of the contract. This might be placed on the

ground of mutual mistake, or, if the appellants knew

of this nonexistence of the subject-matter of the con-

tract, it would have been a fraud on their part to take

advantage of appellee’s ignorance, as to such a matter.

Bishop on Contracts, sec. 588, 9 Cyc. 399.”

The record clearly shows that in the present instance

both Mr. Campbell and Automatic worked diligently to

make the venture a success. The record also shows that

Automatic spent some $20,000.00 in the venture and

Campbell, I believe, some $6,000.00 which, I presume, is

in addition to his time.

Perhaps, the non-existence of the subject matter of

the contracts; that is, a practical or commercial “Campbell

Super Silent Automobile Engine Muffler” should be termed

failure of consideration, but to me this being an arbitra-

tion proceeding and having in my views as to the formality

of such proceedings, the name by which it is called is im-

material.

CONCLUSION.

The Second Contract is unlawful.

The venture failed because of the failure of the “plas-

tic’ aspect, which was the responsibility of Mr. Campbell

and Cork-A-Lite.

Regardless of whether the matter is disposed of on

strictly “legal” or “equitable” principles, neither party

should recover against the other.

JAMES T. Horrmann /s/

James T. Hoffmann

Cleveland, Cuyahoga County,

Ohio, December 19th, 1952.

48a

SEPARATE CONCURRING OPINION.

(Defendant’s Exhibit 4.)

In Re Arbitration Between

The Automatic Die & Products Company

and

Cork-A-Lite Development Trust.

To: Mr. Harold K. Bell

and

Mr. David A. Kaufman.

By a Supplemental Report and Award dated Decem-

ber 19, 1952 and signed by Harrison W. Ewing and Bruce

B. Krost, there was affirmed, adopted and ratified the “Re-

port of Arbitrators, With Findings of Fact, Conclusions

and Award” dated July 28, 1952, deleting therefrom only

Conclusion No. IV relative to the legality of the arbitrated

agreement of January 30, 1951 for the reasons set forth in

detail in said Supplemental Report and Award.

I concur with that Supplemental Report and Award

as evidenced by my signature thereon. However, inas-

much as I have previously stated my own conclusions on

the issue of the legality of the arbitrated agreement, and

inasmuch as Mr. James T. Hoffmann, the other arbitrator,

has indicated his dissent, counsel for the parties may de-

sire to have the benefit of my personal views on that issue.

With this in mind, I submit to counsel the attached Memo-

randum as reflecting and explaining my individual opinion

upon this question of law.

Therefore, it is my opinion that if it were necessary

or required for the issue of legality to be decided by the

arbitrators, then the arbitrated agreement should be found

to be legal and enforceable. This opinion thus provides a

secondary reason for my concurrence with award.

As stated, I fully agree with the conclusion that a

finding by the arbitrators upon the legality of the agree-

ment is not necessary or required in the arbitration of this

case for the reasons set forth in detail in said Supplemental

Report and Award. The submission of this Memorandum

disclosing my personal opinion upon the legality of the

49a

agreement does not impair nor lessen my concurrence and

agreement in the Supplemental Report and Award signed

by me as arbitrator.

Respectfully,

Bruce B. Krost.

December 19, 1952,

Cleveland, Cuyahoga County, Ohio.

MEMORANDUM.

In Re the Arbitration Between

Cork-A-Lite Development Trust

and

Automatic Die & Products Company.

The Agreement, subject of this arbitration, dated

January 30, 1950 between Cork-A-Lite Development Trust

and The Automatic Die & Products Company includes a

license under certain patents to make automobile mufflers,

and contains the following paragraph consisting of two

sentences:

“10. Automatic will commence the production of

mufflers as soon as possible, and will use its best en-

deavors to market and sell to as wide an extent as its

facilities permit the mufflers which are the subject

matter of this agreement. Automatic agrees that it

will not manufacture or sell any muffler other than

the Campbell Super Silent Automobile Engine Muf-

fler, and will not, at any time, engage in any business

competing therewith.”

The above agreement was arbitrated in accordance

with paragraph 24 thereof. Hearings were held at various

times from February 7, 1952 to March 12, 1952 and there-

after briefs were filed by counsel for the respective parties.

In the brief filed upon behalf of Automatic, there was pre-

sented for the first time the argument that the inclusion

of the above quoted paragraph 10 in the agreement ren-

dered it illegal and unenforceable. This tardiness in rais-

ing the issue is mentioned here because it is to be noted

50a

that there was no evidence in the case as to how para-

graph 10 had actually operated, as to whether there had

been restraint in fact, as to whether there had been re.

straint of interstate commerce, as to how much competi.

tion had in fact been curtailed, as to whether the provi-

sions of paragraph 10 were unreasonable in view of all

the circumstances in which one party acquired a business

or commercial rights from the other, nor as to other facts

which would support the charge of “illegality” other than

express words of the quoted paragraph themselves. Thus,

the challenge to the paragraph is strictly a legal challenge

and has not presented a question of fact because there js

no evidence, other than the agreement itself, in the record

establishing a restraint of trade in violation of law. The

challenge raised by Automatic’s brief of May 7, 1952 there-

fore presents the following:

ISSUES.

What is the legal effect of the mere inclusion of para-

graph 10 in the subject agreement of January 30, 1950?

Sub-issues may be listed as:

(1) Does the inclusion of this paragraph (upon

which there has been no testimony) make illegal the

entire agreement and render it completely unenforce-

able?

(2) If the entire agreement is entirely illegal and

unenforceable, does this include paragraph 24 under

which the arbitrators were appointed and thus also

render as void and of no legal effect their appoint-

ment, hearings, proceedings and award (including an

opinion as to legality) ?

(3) Does the inclusion of this paragraph but

without any evidence, other than the agreement, as

to its effect, as to the intent and purpose of the par-

ties, as to the actual results accomplished, and as to

the surrounding circumstances, sufficient in itself to

render the entire agreement illegal and unenforce-

able as a matter of law? (Challenged as a matter of

law as by a demurrer.)

5la

(4) Does the inclusion of that paragraph, if the

provisions of the paragraph are illegal, operate to

merely make that paragraph unenforceable without

affecting the remainder of the agreement? (No at-

tempt has been made to enforce the specific provisions

of that paragraph. )

(5) Are the provisions of paragraph 10 un-

reasonable as restraints in view of all the circum-

stances wherein a business or commercial activity

was in effect being transferred from one party to

another?

(6) Are the provisions of paragraph 10 shown

to be in unreasonable restraint of interstate com-

merce?

(7) Is the situation in which counsel for Auto-

matic helped draft the agreement, in which the par-

ties acted under the agreement for months, in which

Automatic used the Trust’s property and possessed

the Trust’s patent rights for months, in which Auto-

matic did not present or discuss the issue of the legal-

ity of paragraph 10 throughout the hearings nor in

any letter or brief until raised by its brief of May 7,

1952, such as to estop Automatic from now relying

upon such issue to escape liability for payment it

would otherwise be required to make to the Trust?

A. LAW CITED BY AUTOMATIC REGARDING LEGALITY

OF PARAGRAPH 10.

No specific statutory provisions applicable to the

situation have been identified. The law on the subject is

“court made law” as to whether obligations said to be

similar to that found in paragraph 10 are in violation of

federal statutes, specifically 15 U. S. C. 1.

The decisions cited by Automatic in support of its

contention of illegality, and considered at all relevant to

the point, are three in number, the first two being cited in

Automatic’s brief of May 7, 1952 and the third being cited

on August 27, 1952 after the date of the award. These

three decisions are:

it a

ES ety Sie, bea

= ee, See

52a

Case 1: National Lock Washer Co. v. Geo. K. Garrett Co,

137 Fed. (2nd) 255; 58 U.S. P. Q. 460, CCA 3—1943,

Case 2: McCullough v. Kammerer Corporation, 166 Fed.

(2nd) 759; 76 U.S. P. Q. 503, CCA 9—1949.

Case 3: Park-In Theatres v. Paramount-Richards, 81 Fed.

Supp. 466; 80 U.S. P. Q. 6, Del.—1948.

Final decision at: 90 Fed. Supp. 730; 85 U. S. P. Q.

353, Del.—1950.

Affirmed at: 185 Fed. (2nd) 407; 88 U. S. P. Q. 165,

CCA 3—1950.

CoMMENT ON Case 1:

(a) This was a patent infringement suit whereas the

instant matter involves a controversy for breach of con-

tract.

(b) There were a number of non-exclusive licenses

containing the restrictions whereas in the instant matter

there is only one license, an exclusive license.

sidered in that case as broader than necessary under the

circumstances of that case and hence unreasonable. Here

there is no evidence upon which to base such a conclusion.

(d) The ruling of this case has not been adopted in

the Sixth Circuit. The “new law” created in that decision

is unique and there is no precedent for it. This entirely

novel doctrine of law “discovered” for the first time by the

Third Circuit of Appeals and radically pushing the frontier

on the “abuse of patents” philosophy to a new limit is not

authority controlling in this Sixth Circuit. It is not author-

ity in the instant case, in any event and in any circuit, be-

cause the facts, principles and basic nature of the case are

far removed from that of the cited decision. Although

urged to apply the doctrine of that decision to a case be-

fore him, Judge Jones of the Northern Ohio District Court

declined to do so and instead said that the inclusion of a

covenant not to engage in a competing activity, such as in

the subject paragraph 10 (whether the covenant is ex-

pressed or implied) “would not convert a seemingly valid

53a

patent license into an illegal and unenforceable contract,”

in the case of Steffen v. W. J. Schoenberger Co., 90 Fed.

Supp. 710; 85 U.S. P. Q. 207.

CoMMENT ON CASE 2:

(a) This decision of the Ninth Circuit Court of Ap-

peals, like that of the National Lock Washer case, was a

patent infringement suit. As in that case, the parties were

not in a fiduciary relationship created by one party being

entrusted through an agreement with the exclusive con-

trol and possession of the other’s property. The infring-

ing defendant used no contractual duty nor obligation of

good faith to the patent owner.

(b) The large size of the business conducted by the

licensee in the McCullough case and its alleged near-

monopoly on use of all devices of the general class involved

seemed to be an important factor in the making of the

decision in that case. In the instant agreement, subject of

arbitration, none of those elements have been shown to be

present. There is no suggestion that Automatic exercised

the large monopoly in its field that was found in the Mc-

Cullough case.

lough decision are not valid authorities for the holding

made. The only “authority” for the McCullough decision

is the National Lock Washer decision.

(d) Whatever “authority” the McCullough case

might purport to be, its voice is considerably weakened by

the fact that Judge Yankwich, presiding in the District

Court, and Judge Bone, dissenting in the Court of Appeals,

were of an opposite view.

(e) The frail and thin kind of arguments supporting

the majority holding and the lack of authoritative prece-

dent for it, are best stated by the vigorous dissenting opin-

ion of Judge Bone, as for example:

“Tt is a significant and interesting fact that no case

has been cited to us which is ‘on all fours’ with the

case at bar. So in order to plaster this license agree-

TESS HeLa e SiGS CRE arte eo |

Seti CMAN GA i ie

54a

ment with badges of illegality, said to clearly appear

on its face, this court turns to and lists quotations from

cases dealing with totally different states of fact. Em-

ploying this process of analogy, it concludes that the

instant agreement, per se, is legal proof that the parties

thereto deliberately contracted and agreed to engage

in the activities, and commit the various legal sins,

found to be present, and constituting the dominant

legal issue in such cases as (here listing some recent

Supreme Court cases dealing with abuse of patents.—

Ed.).

“This oblique process undertakes to prove too

much. The facts and the real legal issue in this case

are poles apart from those in the cases just referred

to, some of which are relied upon in the court’s opin-

”

10n.

Commenting upon the crocodile tears shed, and the in-

dignant protestations made by the defendant Kammerer

in behalf of the “public interest,” “free enterprise” and

the usual phrases used as a shield to hide his derelictions

and to escape personal liability, Judge Bone dryly noted:

“On the contrary he busied himself in the work

of preserving and promoting his own special brand of

‘free enterprise’ by calmly appropriating another

man’s original and patented idea.”

(f) The ruling of the McCullough decision, like that

of the National Lock Washer decision, has not been

adopted by the Sixth Circuit. As noted, Judge Jones ex-

pressly refused to follow the “law” enunciated by the Mc-

Cullough and National Lock Washer decisions.

(g) The rulings in the McCullough and National Lock

Washer decisions, if extended to the extreme limit required

for the purpose of supporting Automatie’s contentions,

would logically encompass and invalidate thousands of

contracts upon which everyday business is conducted.

Such an extension would involve a radica: change in the

rules of the game while the game is in progress. For

55a

example, an employment contract wherein the employee

agrees to devote his full time and best efforts to perform-

ing the contracted-for service carries with it a negative

covenant implied by law. This negative covenant “re-

strains trade” in that it prevents the employee from work-

ing for someone else and from using his time, effort and

facilities for producing things for others, during the term

of employment. Other examples of ordinary commercial

contracts which in effect “restrain trade,’ whether ex-

pressed in negative terms or not, could readily be given.

To suggest the further extension of the doctrine of these

cases is treading on exceedingly dangerous ground. Any

extension of the doctrine beyond the facts in those cases

and any adoption of the “law” of those cases of the Third

and Ninth Circuits in this jurisdiction, particularly when

the District Court in Cleveland has expressly refused to do

so, is not appropriate for action by arbitrators.

CoMMENT ON Cass 3:

(a) This, the Park-In Theatres case, is more in favor

of Automatic’s position than was the National Lock Wash-

er case because in the latter decision there were two ac-

tions involved, one for breach of a patent license agree-

ment and the other, in the alternative, for patent infringe-

ment if the defendant were not operating under the license.

The decision in the Park-In Theatres case extended the doc-

trine of the National Lock Washer decision to cover both

the action on the license agreement and the action for

patent infringement and thus ruled that a negative ‘“non-

competition” covenant in a license agreement provided a

defense in the action for breach of the license agreement.

(b) The Park-In Theatres decision is also a decision

of the Third Circuit Court of Appeals. The only authori-

ties in point cited by the Court were the prior National

Lock Washer case of the Third Circuit and the McCul-

lough case of the Ninth Circuit. The National Lock Washer

decision of the same circuit was held controlling in the

Park-In Theatres case, but is not so controlling in the Sixth

Circuit.

9 CET RS 8 a ac tae eh ces

a ARADO REMI Ne aoe te JT ee

oi eh ER RS

56a

expressly refused to consider whether or not the law im-

plied such a negative covenant (as expressed in instant

paragraph 10) in an exclusive license agreement, but

merely followed and extended the holding in the prior

National Lock Washer Company. A consideration of all

the law on the subject would have led to a different result.

(d) In the latest decision, as in the earlier decisions,

the basis for the holding made was not a finding of a con.

tract in restraint of trade as a violation of statute. Rather,

the basis for those decisions is “court made law” that the

inclusion of such negative covenants in a patent license

agreement is against that vague concept known as “public

policy” and therefore constituted an “abuse of the patent

monopoly.” It was indicated in the Park-In Theatres deci-

sion that if a patent had not been involved, the holding

might have been otherwise, but there was no offer of a

rationale or explanation for the distinction nor was there

a suggestion as to how public policy was injured more

when there was restraint in a patent license agreement

than when there was the same restraint in a non-patent

agreement.

(e) The decision in the Park-In Theatres case is full

of cliches and trite remarks about the philosophical pur-

poses of the patent system. It reveals a determination to

avoid consideration of all pertinent law and to blindly fol-

low the prior National Lock Washer decision and to even

extend its effect. Because the two decisions of the Third

Circuit and the one decision of the Ninth Circuit are not

legally binding in the Sixth Circuit, they may be analyti-

cally considered and the merits of the decisions duly

weighed. The type of reasoning, the kind of philosophy,

and the determined attitude to reach a so-called “liberal”

view upon patents regardless of all the law on the subject,

do not recommend those decisions as persuasive authori-

ties.

(f) The fact that the Park-In Theatres case and the

McCullough case were not admitted to the Supreme Court

57a

for review on the petitioning for a writ for certiorari

neither adds to nor detracts from those cases. It is well

known that refusal of the Supreme Court to review a case

does not imply approval of the holding in the case below.

To try to read into a denial of the writ by the Supreme

Court any intent or mental views of the Supreme Court

regarding the merits of the decision is not warranted.

(g) The decision which comes the closest in facts to

the instant controversy, that is, the Park-In Theatres deci-

sion of the Third Circuit, stands alone and is supported

partially only by the prior Third Circuit decision in the

National Lock Washer case.

The ‘“court-made law” discovered and enunciated in

the above three decisions and based upon an alleged theory

of “abuse of the patent monopoly in violation of public

policy” and not upon statute law nor upon general con-

tract law, constitutes the authority of Automatic for its

argument of “illegality” of paragraph 10.

B. THE OBLIGATIONS OF PARAGRAPH 10 ARE NECES-

SARILY A PART OF AN EXCLUSIVE PATENT LICENSE

AGREEMENT.

There is a line of decisions which hold that in an ex-

clusive patent license agreement there is an implied obliga-

tion that the licensee will not engage in competitive activi-

ties to the detriment of his positive duties to fully and

faithfully exploit the exclusive patent rights possessed by

him. These cases hold in effect that the obligations as set

forth in paragraph 10 of the instant agreement are neces-

sarily a part of every exclusive patent license agreement

whether expressed or not. Some of these decisions are:

Cast 4: General Finance Corp. v. Dillon, 172 Fed.

(2nd) 924; 80 U. S. P. Q. 341, C. C. A. 10—1949.

Case 5: Guardina Tank Corp. v. Olsson, 89 N. Y. S.

(2nd) 691; 81 U.S. P. Q. 318, N. Y. S. Ct.—1949.

Case 6: Brawley v. Crosby Research Foundation, 166

Pac. (2nd) 392; 68 U.S. P. Q. 406, Cal. App.—1946.

pene aac Si AEC TEE ASS,

PLOT NORE

eels

58a

Case 7: Crowe v. Oscar Barnett Foundry Co., 213 Fed.

864, N. J.—1914.

(Slightly modified & affirmed, 219 Fed. 450; C. C. A

3—1915).

Case 8: Neenan v. Otis Elevator Co., 194 Fed. 414,

C. C. A. 2—1912.

Case 9: Matzka Corp. v. Kelly Dry-Pure Fruit Corp., 19

Del. Ch. 359; 168 Atl. 70, Del.—1933.

Case 10: DeStubner v. Microid Process, 121 W. Va. 773:

6S. E. (2nd) 777, W. Va.—1939.

Case 11: Nelson et al. v. Mills Music, Inc. et al., 278 App.

Div. 311; 89 U.S. P. Q. 554, N. Y.—1951.

It seems clear that we have here presented a conflict

and direct inconsistency between two lines of cases. The

decisions of Cases 1, 2 and 3 cited by Automatic are

irreconcilable with the above last listed Cases 4 to 11.

To suggest that provisions like paragraph 10 of the

instant agreement are “unlawful” is to suggest that the

law implies the unlawful. Even the statement of the

proposition provides its own answer. Of course, a provi-

sion which the law implies and which therefore by law is

a part of a contract cannot under the same legal system be

considered to be unlawful. A contract cannot be any more

illegal by expressing in it that which the law says is in-

herently a part of it.

The law in this jurisdiction is in line with the last

listed line of cases as indicated by the decision of Judge

Jones in the case of Steffen v. W. J. Schoenberger Co.

when he was confronted with the election of following one

or the other of the two lines of decision. The language of

his decision made clear his preference for the philosophy

and authority of the last listed line of decisions, Cases 4 to

11.

59a

C. THE SECOND SENTENCE OF PARAGRAPH 10 IS BUT

THE NEGATIVE EXPRESSION OF THE POSITIVE

COVENANT OF THE FIRST SENTENCE WHICH IS

LEGAL.

Paragraph 10 of the subject agreement consists of two

sentences. The first sentence is in positive terms and

reads:

“Automatic will commence the production of

mufflers as soon as possible, and will use its best en-

deavors to market and sell to as wide an extent as its

facilities permit the mufflers which are the subject

matter of this agreement.”

The above is a usual provision and no reason has been

given as to why it is not perfectly proper and fully legal.

As is often done in the drafting of legal documents,

the thought of the first sentence was repeated but phrased

in the negative rather than in the positive. The same

covenant of Automatic to use its best endeavors to the

widest extent of its facilities as repeated in the negative,

was phrased in the second sentence of paragraph 10 as

follows:

“Automatic agrees that it will not manufacture or sell

any muffler other than the Campbell Super Silent

Automobile Engine Muffler, and will not, at any time,

engage in any business competing therewith.”

This second sentence only means that Automatic will

use its best endeavors to market and sell subject mufflers

to as wide as an extent as its facilities permit and further

that

it will not engage in any activity inconsistent with, or

detrimental to, the positive covenant made, and obli-

gation assumed, that were previously expressed (and

inherently implied as well).

Such obligations, although there is in them an in-

cidence of restraint, have been recognized as proper and

legally part of contracts in the following situations:

60a

Case 12: Harris v. Ohio Oil Co., 57 O. S. 118; 48 N.E

502, Ohio—1897.

In the above case involving a five-year lease giving

the exclusive rights to drill for oil and gas on the premises,

it was held that there is an implied obligation on the

lessee to diligently and fairly exploit the drilling rights.

In view of the obligation imposed by law upon the

lessee to drill and develop wells on the leased land and in

view of the limited drilling facilities of the lessee (facilities

of every oil driller and of every manufacturer are

“‘limited”’), it follows that the lessee’s right to drill at other

places at the same time with the same facilities was in-

herently limited. An obligation to perform a positive

duty necessarily carries with it a negative restriction on

doing that which is inconsistent with the performance of

the positive duty. For example, we loosely say that

restraint of trade is illegal and yet every sale involves a

restraint on trade. The seller of property is necessarily

restrained from selling the same property to another.

There is an inherent inconsistency between a private sale

or contract and a theoretical freedom of restraint on trade.

Every covenant to positively do something includes a

negative covenant to refrain from doing anything in-

consistent with the positive covenant.

CasE 13: Fuchs v. Motor Stage, Inc., 135 O. S. 509; 21

N. E. 669, Ohio—1939.

In this last cited case, it was held in effect that the

positive covenant by a purchaser to purchase all of his

requirements from a seller inherently implied a negative

covenant to restrain from buying the requirements from

another who was a competitor of the seller. Here as in

other decisions, the positive covenant carried with it a

negative covenant to refrain from doing anything incon-

sistent with, or detrimental to, the performance of the

positive covenant. The positive covenant being legal, its

equivalent in negative phrasing is equally legal.

| 6la

Case 14: Kane v. Chrysler Corporation, 80 Fed. Supp.

360, Del —1948.

In this case involving an automobile exclusive agency

contract, there was recognized the validity of an express

agreement not to engage in the sale and promotion of com-

peting automobiles of other manufacturers. This situation

is typical of many exclusive distribution or agency agree-

ments. Whether or not there are patents on the auto-

mobiles (and there are patents on them) or on the other

goods being sold is of no consequence. There is no logic

or reason for applying the law differently in the situation

where there is a patent involved than where there is not.

The majority view is that the presence of a patent does

not affect the legality of a contract in regard to whether or

not it is in illegal restraint of trade in violation of the

anti-trust statutes. Only in the decisions of Cases 1, 2 and

3 has a court gone off on a theory of “abuse of patents” as

distinct from contract law in relationship to the anti-trust

statutes and thus ignored all other aspects of the law in

order to announce the new discovery of another “abuse of

patents” doctrine.

CasE 15: Brosius v. Pepsi-Cola Co. et al., 155 Fed. (2nd)

99; 69 U.S. P. Q. 284, C. C. A. 3—1946.

In this case it was held that a contract between a

manufacturer (Pepsi-Cola Co.) and its distributor and

containing a covenant restraining the distributor from

handling the goods of a competitor was not illegal restraint

of trade nor in violation of the anti-trust statutes. The fact

that the drink concentrate being distributed was subject

of a trademark (Pepsi-Cola) did not appear to change the

law any more than it would if the goods were subject of

a patent. Whether the goods are trademarked or patented

is irrelevant to the true point of law involved, to-wit: is

there a contract in unreasonable restraint of trade in inter-

state commerce in violation of the anti-trust laws?

Whether the obligation is stated in positive terms as

in the first sentence of paragraph 10 or is stated in nega-

pr |

ISVS Ae LILI SREB SE

WDD wes

62a

tive terms as in the second sentence of paragraph 10 is

not the question. Stated either positively or negatively, as

found in the above cases, the covenant can be fully legal

and enforceable. These last cited decisions of Cases 12 to

15 illustrate that obligations as expressed in paragraph 10

of the instant agreement are legal, are not in violation of

statutes, and are enforceable.

D. THERE IS NO EVIDENCE OF ANY RESTRAINT OF

TRADE IN INTERSTATE COMMERCE.

As there is no evidence of any sales of any mufflers

by Automatic, there was no trade in mufflers arising from

the subject agreement, neither interstate nor intrastate in

character. Before the anti-trust statutes, 15 U.S. C. 1-33,

can apply, interstate commerce must be involved. The sole

authority of Congress to legislate on the subject is derived

from the constitutional clause giving it power to regulate

commerce among the several states, with foreign nations

and with the Indian tribes. None of these types of com-

merce have been shown to have been affected.

That interstate commerce, as distinct from intrastate

commerce, must be substantially and directly affected by

the alleged restraint has been held in:

Case 16: Anderson v. United States, 171 U. S. 604; 19

S. Ct. 50—1898.

E. THERE IS NO EVIDENCE OF ANY RESTRAINT THAT

IS “UNREASONABLE.”

It is well accepted that before a contract can be con-

sidered as in violation of the anti-trust statutes the re-

straint that arises from the contract must be an “unrea-

sonable” restraint of trade. This is necessarily so because,

as previously pointed out, almost all contracts to some

degree are in restraint of trade. It is only those restraints

which are unreasonable in the common law sense of the

word that can be considered as violative of the statutes.

Some substantial part of interstate commerce must be

involved and the injury to the public must be real rather

63a

than fanciful. In other words, the law must be realistic or

otherwise many private contracts would be set aside and

there would be little stability or certainty in business af-

fairs. Some decisions indicating the requirement of un-

reasonableness in the restraint to be unlawful are the

following:

Case 17: District of Columbia Pub. v. Merchants Assn.,

83 Fed. Supp. 994, D. C. D. Ct.—1949.

Case 18: United States v. Timken Bearing Co., 83 Fed.

Supp. 284, Ohio—1949.

Case 19: United States v. Swift & Co., 52 Fed. Supp.

476, Colo.—1943.

Case 20: United States v. Associated Press, 52 Fed. Supp.

362, N. Y.—1943.

Affirmed: 326 U.S. 1; 65S. Ct. 1416.

F. IN THIS JURISDICTION PROVISIONS LIKE THOSE OF

PARAGRAPH 10 ARE LAWFUL.

The decisions in this jurisdiction are not in accord

with the decisions of Cases 1, 2 and 3. The holdings of the

decisions in our jurisdiction clearly indicate that covenants

like those of paragraph 10 of the instant agreement,

whether stated in positive or negative terms, are not in

violation of law and are enforceable.

In addition to the Ohio decisions of Cases 12 and 13,

supra, the following decisions in this jurisdiction demon-

strate that the provisions of paragraph 10 are not unlaw-

ful, and particularly are not unlawful in Ohio:

Case 21: Gordon v. Deckebach, 12 Ohio Weekly Bulletin

169; 9 Ohio Dec. Reprint 324, Hamilton Dist.—1883.

Case 22: International Paper Box Co. v. Wolfe Env. Co.,

4 Ohio Law Abstract 482, Oh. App.—1926.

Case 23: List v. Tobacco Grower’s Assn., 114 O. S. 361;

151 N. E. 471, Ohio—1926.

Case 24: Producer’s Assn. v. Milk Co., 129 O. S. 159;

194 N. E. 16, Ohio—1934.

Fk OGRE ee OLLI EA CA

pobre i ee

we:

BM Cheb es

64a

Case 25: Steffen v. W. J. Schoenberger Co., 90 Fed,

Supp. 710; 85 U.S. P. Q. 207, Ohio—1950.

In the last cited decision, Case 25, it was pointed out

that if such obligations to refrain from competition were

illegal, that would only make that obligation unenforce-

able and would not make the entire agreement illegal,

This is in line with a decision that even if a combination

of the defendants were illegal, they cannot refuse to pay

for material bought for them under contracts, reported

in the following:

Case 26: Connolly v. Sewer Pipe Co., 184 U.S. 540; 22

S. Ct. 431—1902.

It appears clear that in this jurisdiction contracts con-

taining covenants similar in restraining effect to that found

in paragraph 10 are not illegal and are enforceable.

G. “ABUSE OF PATENTS” IS NOT A CONCLUSION TO BE

SUMMARILY REACHED FROM MERE READING OF

WORDS IN A CONTRACT BUT MUST BE BASED UPON

EVIDENCE OF RECORD AS TO CIRCUMSTANCES, IN-

TENT, RESULTS, AND THE LIKE.

The defense of “‘abuse of patents” is such that it should

not be considered as an absolute defense apparent on the

face of a pleading or contract. It has been held that a

motion for summary judgment should not be given on the

defense of “‘abuse of patents” because this is a factual ques-

tion to be decided on the evidence at trial. ‘““Abuse of pat-

ents” as a defense is a matter of the spirit and intent with

which the course of business conduct allegedly constituting

the misuse is done. Purpose or intention is a fact infer-

ence. All of the facts as to the circumstances, results, pur-

poses and effect of the alleged ‘‘misuse” must be placed in

evidence and a judgment formed upon the basis of that

evidence. A summary judgment based merely on the

words in a contract rather than upon factual evidence is

not appropriate.

65a

Decisions indicating that it would not be proper to

summarily hold the subject agreement containing para-

graph 10 to be illegal per se include the following:

Cask 27: Paul E. Hawkinson Co. v. Dennis, 166 Fed.

(2nd) 61; 76 U.S. P. Q. 363, CCA 5—1948.

Case 28: Gray Tool Co. v. Humble Oil Co., 186 Fed. (2nd)

365; 88 U. S. P. Q. 165, CCA 5—1951.

Case 29: Fluid Systems, Inc. v. Great Lakes Eqpt. Co.,

98 Fed. Supp. 220; 89 U.S. P. Q. 366, Ohio—1951.

In the last cited case, Judge Jones of the District

Court at Cleveland, citing Cases 27 and 28, held that abuse

of patents as a defense was not a matter to be concluded

without evidence upon all the pertinent facts by grant of

summary judgment. Similarly, the alleged illegality of the

instant agreement cannot be found from the mere words

found in paragraph 10. There is a complete absence of evi-

dence in the record upon which a judgment of illegality

could possibly be based.

CONCLUSION.

It is my opinion that the agreement of January 30,

1950, containing paragraph 10, is not illegal and is en-

forceable. The inclusion of paragraph 10 in the agreement

did not render the agreement invalid, illegal or unenforce-

able, in my view of the law.

Bruce B. Krost.

Cleveland, Cuyahoga County, Ohio.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.