
    Riley Stoker Corp., Appellant, v. The Jeffrey Mfg. Co., Appellee.
    (Decided March 22, 1939.)
    
      Messrs. Vorys, Safer, Seymour S Pease, for appellant.
    
      Mr. W. Wilson Carlile and Mr. Claude J. Bartlett, for appellee.
   Geiger, J.

This case is before this court on appeal on questions of law. In the court below many pleadings were filed to which motions were addressed resulting in decisions by three separate judges. The case was finally tried upon the amended petition and the third amended answer.

For a cause of action the plaintiff states that on May 1, 1933, it entered into a written contract with the defendant by the terms of which plaintiff granted defendant a non-exclusive license to make, use and sell certain patented articles relating to pulverizing apparatus, covered by fifteen separate patents, the last of which was granted January 12, 1932. It is alleged that it was agreed that defendant would pay plaintiff a royalty for each pulverizer made and sold, or made and used, by the defendant after the date of the contract, in accordance with a stated formula by which the royalty for each device was to be determined.

The petition states that it was further agreed in the contract that if for the period ending December 31, 1933, the accrued royalties did not amount to $300 defendant should pay on the first of January, 1934, the difference between the sum of $300 and the accrued royalties; that if for any subsequent year during the life of the ‘contract the accrued royalties did not amount to $1,000 the defendant should pay plaintiff on January 1st of the ensuing year the difference between the sum of $1,000 and the accrued royalties.

It is alleged that there is due plaintiff from the defendant the sum of $2,300 for the period ending January 1, 1936, for which judgment is prayed.

In the third amended answer to the amended petition the defendant admits certain allegations, among them being that the defendant entered into a written license with the plaintiff; that by the terms of the instrument the plaintiff granted a non-exclusive license, and that it was agreed in certain events the defendant would pay plaintiff a royalty for each pulverizer made and sold or made and used by defendant after the date of the license in accordance with the formula stated.

The defendant denies that any license granted to it by the plaintiff contained the remaining terms alleged by the amended petition not expressly admitted, and denies all other allegations and prays to be dismissed. Allegations of fraud and a counterclaim asserted in the first three answers were abandoned in the third amended answer.

A jury was waived and the cause submitted to the court on the pleadings and evidence and the motion of defendant for judgment, made at the close of the evidence. The court found for the defendant and that defendant’s motion should he sustained, and ordered that the motion he granted and judgment entered in favor of defendant. Motions by plaintiff for a new trial and for judgment in its favor notwithstanding the verdict were overruled. The appeal of the plaintiff was from this judgment.

The sole question for the court to determine is whether the contract, and particularly paragraph four thereof, provides for payment of minimum royalties in the amount specified therein, and whether the liability of the defendant for these royalties is absolute and not conditioned upon the manufacture, sale or use of any pulverizers.

The agreement was made on the first of May, 1933, between the licensor, the owner of certain letters patent, granted at different dates on pulverizing machines and apparatus, and the licensee, who was desirous of making, using and selling pulverizing apparatus embodying the inventions of said patents. The parties agreed:

(1) Licensor grants to licensee a non-exclusive license under said patents to make, use and sell throughout the United States pulverizers embodying the invention of said patents for the full terms of said patents, the licensee being restricted to a certain size.

Licensee agrees not to make or sell replacement parts of a certain kind.

(2) Licensee agrees to pay a royalty for each pulverizer made, sold, or made and used by licensee after the date of the agreement in accordance with a certain formula from which the price is to be determined. Licensee agrees to pay a royalty of 10 per cent of the net selling price of all replacement parts covered by two of the patents and made and sold by licensee.'

(3) Licensee agrees to submit to licensor within thirty days after the expiration of each quarter beginning January 1, April 1, July 1, and October 1, of each year during the life of this agreement, a sworn statement in writing giving a list of pulverizers and patented replacement parts sold or installed during the preceding quarter, and at the same time agrees to pay the royalty due on the pulverizers and replacement parts covered by such statement. If, for any quarter, no pulverizers or replacement parts shall have been sold or installed, a report so stating shall be made.

(4) If, for the period ending December 31, 1933, the accrued royalties shall not amount to $300, licensee shall pay to licensor the difference when submitting the statement due in January, 1934. If, for any subsequent year during the life of this agreement, the accrued royalties shall not amount to $1,000, the licensee shall pay to licensor the difference when submitting* the statement due in January of the ensuing year.

(5) On failure of the licensee to account for and pay any royalty due, licensor may cancel agreement on thirty days notice, provided that licensee does not within thirty days repair or remedy such failure. Cancellation of this agreement shall not affect the right of licensor to collect royalties which have already accrued.

(6) Licensee agrees to keep books with reference to the manufacture, sale, billing and shipment of all pulverisers and replacement parts, the subject of this agreement.

(7) Licensor shall have the right to purchase of licensee pulverizers of the type covered at a discount from the lowest net price allowed any dealer who buys for re-sale, the pulverizers so purchased by licensor to be free from royalties.

(8) Licensee agrees to furnish licensor with complete assembly drawings of various pulverizers mcmufactured under this license, these drawings to show fully the construction being employed.

. (9) The licensor agrees to furnish licensee, upon request, with the services of an engineer skilled in the art of pulverizer designing and construction.

(10) It is also understood and agreed that in the event of dispute between the parties hereto as to the meaning, effect or operation of this agreement, the parties hereto will, upon the request in writing of one party, promptly submit the question in dispute to arbitration by a disinterested person or persons and will abide by the result of such arbitration.

.Exhibit B is short and is embodied in a letter to the Riley Stoker Corporation, Worcester, Massachusetts, dated July 5, 1933, and stating “For the period ending June 30th there are no commissions due on license agreement dated May 1, 1931.” The true date is 1933.

This is all the evidence submitted by either side.

The court below in its opinion, dated July 22, 1938, arrived at the conclusion that the terms and words used in the contract disclosed that it was the intention of the parties that defendant act under the contract and produce and sell pulverizers and that if so acting under the contract the accrued royalties owing by licensee to licensor did not amount to the specified sums at the specified periods as shown by the sworn statements of licensee, then the licensee should pay to the licensor the difference provided for; “that a difference was intended in the use of the words ‘sworn statement in writing’ and the word ‘report’ and that the terms and words used do not disclose an intention that the licensee should pay to the licensor a minimum royalty as such and in any event and without regard to whether the licensee acted under the terms of the contract in the manufacture and sale of pulverizers and parts.”

The court also states that it was mindful of the fact that the contract was drawn by the licensor and should therefore be strictly construed against it, and that had the licensor intended that a minimum royalty should be paid in any event licensor could and should have used terms clearly showing this intention. The court concludes that the terms and words used disclose the intention that the difference provided for should be paid only when and if statements become due at the times provided for by virtue of the sale of the pulverizers during that period.

We find no assignment of errors on behalf of the plaintiff, appellant herein, among the papers, but the brief filed discloses the errors complained of.

It will be observed in the first place that the licensee is desirous of making, using and selling the apparatus, and that the licensor grants a non-exclusive license to make, use cmd sell. The licensee agrees to pay a royalty for each pulverizer made, sold or made and used, in accordance with a certain formula from which a price is to be determined. It agrees on quarterly dates to make a statement giving a list of the pulverizers sold and at the same time to pay the royalty due as covered by the statement. If no pulverizers have been sold a report shall be made. Thus far we have covered the first three items of the contract and will pause here before approaching the critical No. 4.

It appears that the contract was made with the defendant, who was a manufacturer, for royalties based upon the number of patented articles it might make in any given period. A royalty is a payment reserved by the grantor of a patent and payable proportionately to the use made of such right. A license to use a patent estops the licensor from exercising his prohibitory powers in derogation of the privileges conferred by him upon the licensee. A license is the right not to be sued. Under this contract a royalty was provided for according to the number of articles made by the licensee. It was proper also to license the party proposing to manufacture the patented article. The first three paragraphs are appropriate to the declared purpose of the parties. The licensee was granted the right to manufacture the patented article at a price fixed and was required to pay the royalties upon the making of a statement of the number of articles manufactured. So far the contract is clear and needs no interpretation.

By the fourth paragraph it is provided that if for the period ending December 31, 1933, the accrued royalties shall not amount to $300, licensee shall pay to licensor the difference when submitting a statement due in January, 1934, and that if for any subsequent year the accrued royalties shall not amount to $1,000 the licensee shall pay to the licensor the difference when submitting a statement in January of the sue ceeding year.

In the case of American Delinting Co. v. Pomeraning 274 F., 212, the judge delivering the opinion of the court states at the top of page 213 in reference to a contract requiring the payment of a minimum amount:

“In contracts of this nature, probably the most usual method of expressing the consideration flowing to the assignor is to provide for a ‘royalty’ of a certain amount per article on each article manufactured or sold, with a provision usually inserted, for the protection of the assignor, that such royalty shall equal at.least a certain amount, or that the assignee shall pay royalty on not less than a certain number of such articles, or that the assignee agrees to sell not less than a certain number of such articles, during a stated period. The effect in each case, in the absence of anything specifically to the contrary in the contract, is the same, namely, to provide for a minimum liability on the part of the assignee and to protect the assignor. In such case, the assignee is bound to pay at least the minimum royalty, regardless of the actual number of articles sold.”

We deem this a fair statement of the usual conditions under which it has been held that the licensee is required to pay a fixed minimum amount irrespective of the amount manufactured or sold, although the parties may vary these formulas by contract.

Do the conditions set out in paragraph four fall within any of the provisions above stated? The licensee in this case does not agree to pay royalty on any number of articles and does not agree to make or sell any during the period stated. If its engagement falls within any of the provisions it must be a provision for a royalty of a certain amount for each article manufactured or sold with a provision “that such royalty shall equal at least a certain amount. ’ ’ Is there a provision that the royalty shall equal a certain amount? The provision is that if the accrued royalties shall not amount to the sum stated for the respective period the licensee shall pay the difference. Manifestly we must give the appropriate meaning to the word “accrued.” The parties did not provide for a gross, annual royalty, but kept in mind the initial provision of the contract, which was to the effect that the licensee desired to make, use and sell the apparatus, and that the licensor granted it á non-exclusive license to do so at a certain fixed price per item so manufactured. Paragraph four clearly contemplates that there must be accrued royalties for apparatus actually made within the period as a basis for ascertaining the difference between such a sum due as royalty and the gross sum mentioned for the particular period. It is provided that the licensee shall pay to the licensor the “difference.” The use of the word “difference” both in reference to the $300 gross payment and the $1,000 payment has a very definite meaning. The schedule of payment provided is a mathematical formula and the definition of the word “difference” as it relates to mathematics is:

“The magnitude or quantity by which one magnitude or quantity differs from another of the same kind; the remainder left after subtracting the one from the other.” Webster’s International Dictionary.

The word clearly indicates that there must be two quantities, or in this case, two figures which will permit a remainder to be determined after subtracting one from the other. In the common use of the word “difference” as it relates to figures there is always a necessity that there be two figures which will produce a difference when one is subtracted from the other.

Under paragraph five it is provided that on failure of the licensee to pay any royalty due the licensor may cancel and that this cancellation shall not affect the right to collect royalties which have already accrued. Paragraph six seems to be a declaration by the parties as to what was within their contemplation when the contract was made. It provides:

“Licensee agrees to keep books with reference to manufacture, sale, billing and shipment of all pulverizers and replacement parts the subject of this agreement.”

To what does the term “the subject of this agreement” have reference? Definitely it has reference to manufacture, sale, billing and shipment of pulverizers, and has no reference to a minimum payment if no such manufacture, sale, billing or shipment actually takes place. •

Paragraph eight again refers to pulverizers “manufactured” under this license. Taking the contract by its four corners and examining the words and phrases used by the parties and considering the purposes to be accomplished we can arrive at no other conclusion than that paragraph four, which relates to minimum gross payments, has no force unless there be some manufacturing of the patented articles, and that until the licensee is engaged in snch manufacture the fourth paragraph has no effect to require a stated minimum payment. It is urged by the plaintiff that inasmuch as its right to cancellation depends upon the failure' of the licensee to pay for royalties due, it is deprived of a right to cancel even though the licensee may refuse to proceed. That may be true but we fail to see that it has any bearing upon the question as to the proper interpretation of paragraph four. Inasmuch as it is a non-exclusive contract the fact that it may not be cancelled is of little consequence. However that may be, it is so written in the contract and the parties must abide by their agreement.

It may be claimed that if our interpretation of this contract is correct it would lead to the ridiculous conclusion that if the licensee manufactured only one of the articles upon which a royalty was due that it would thereby become obligated to pay the balance of the gross sum for that particular period. When we consider the process of manufacture the conclusion is not as ridiculous as it may appear at first. The licensee in order to avail itself of its privilege to manufacture under the patent must equip itself with expensive machinery and establish a market through exploitation of the goods produced. If it has taken this step so that it may make the first article it may well be assured that it can make and sell enough of the articles to bring the total royalties reasonably close to the gross amount. Of course, the manufacturer in entering into this contract probably contemplated that it could manufacture and sell a sufficient number of the devices to render the gross provisions of the fourth paragraph of little consequence.

We have been much interested in this controversy and have studied the briefs of counsel with care and have read many of the cases referred to, among which we cite as those most nearly paralleling the case at bar, the following: Meyer v. Brenzinger, 22 N. Y. Misc., 712, 49 N. Y. Supp., 1091; American Delinting Co. v. Pomeraning, supra; Beaumon v. Kittle Mfg. Co., 122 Cal. App., 547, 10 P. (2d), 508; Preston v. Smith, 156 Ill., 359, 40 N. E., 949; Elliott v. Barrett Co., 25 F. (2d), 125. These cases are quite near the mark in the case at bar, and if it be found that this court is wrong in its conclusion it will be because of the principles announced in the above cases. See also Dall Motor Parts Co. v. Packard Motor Car Co., 124 Ohio St., 363, 178 N. E., 835.

The evidence shows that this contract was prepared by the licensor, and submitted to and accepted by the licensee. At least this is a legitimate inference. If it were not so, the witness of the licensor could have so stated but did not. This brings the contract within the rule that in case of ambiguity, it shall be strictly construed against the party drafting it.

While we proceed by a different route from that followed by the court below we arrive at the same conclusion, to the effect that unless the licensee has produced under this contract a manufactured article upon which a royalty is due, the plaintiff can not recover under the provision of paragraph four providing for gross payment.

The judgment of the court below is affirmed.

Judgment affirmed.

Hornbeck, P. J., and Barnes, J., concur.  