Opinion
17331
July 24, 1957.
Messrs. Carlisle, Brown Carlisle, of Spartanburg, for Appellant, cite: As to a right in a patent being either a license or an assignment: 40 Am. Jur., Patents, Sec. 146; 138 U.S. 252, 34 L.Ed. 923, 11 S.Ct. 334; 183 F.2d 281. As to the payments under the contracts in question being royalties: 40 Am. Jur., Patents Sec. 149; 339 U.S. 827, 70 S. Ct. 894; 115 N.Y.S.2d 479. As to necessity for appellant to know respondent's possible fiduciary position: 206 S.C. 344, 34 S.E.2d 218; 193 S.C. 412, 8 S.E.2d 740; 200 S.C. 75, 20 S.E.2d 636; 54 Am. Jur., Trusts, Sec. 225; 3 Pomeroy's Eq. Jur. 2426-7-8; 40 Am. Jur., Patents, Sec. 201; Anno. 167 A.L.R. 1114. As to agreements, inartificially drafted, or containing language which is obscure, imperfect, or ambiguous, being always open to interpretation: 12 Am. Jur., Contracts, Sec. 229; 93 S.C. 203, 76 S.E. 464, 43 L.R.A., N.S., 377, Ann. Cas. 1914D 900. As to a sound public policy requiring the enforcement of contracts deliberately made, which do not clearly contravene some positive law or rule of public morals: 222 S.C. 248, 72 S.E.2d 446; 227 S.C. 125, 87 S.E.2d 34. Messrs. Means Brown, of Spartanburg and Wyche, Burgess Wyche, of Greenville, for Respondent.
The opinion of Judge Martin follows:
This action was brought by plaintiff seeking a declaratory judgment interpreting a contract between the parties and, particularly, their rights and liabilities in so far as the same may be affected by a certain agreement between plaintiff and one V.K. Dell.
Defendant demurred to the complaint and filed an answer claiming a default by the plaintiff under the terms of the contract between the parties. Subsequently, a supplemental answer was filed in which it was alleged that the default had been cured by reason of a payment made by plaintiff to defendant under a notice preserving its rights under the suit.
The demurrer was overruled by order of Honorable J. Henry Johnson, Presiding Judge, on the 27th day of September, 1955, in which it was held that the complaint states a "justiciable controversy which can only be properly and justly determined after a hearing on the merits."
Thereafter, on the 26th day of March, 1956, a hearing on the merits was held before me in Spartanburg, South Carolina, testimony taken and evidence received. Briefs have been submitted by counsel for the parties in the matter and carefully considered.
Plaintiff in this case is engaged in the development, promotion and licensing and use of certain wood impregnation processes. The plaintiff succeeded another South Carolina corporation, Taylor-Colquitt Company, of Spartanburg, South Carolina, in this field.
Two processes were developed, one known as "vapor drying", which is not involved in this action, and "solvent recovery". The defendant was issued patents on these processes. It is the "solvent recovery" process which is involved in this suit. The process involves the removal and recovery of organic solvents from wood impregnated with preservaties dissolved in said solvents, the removal being accomplished by heating the impregnated wood in vapor of the solvents.
In October, 1940, the defendant and Taylor-Colquitt Company entered into a written agreement for the promotion, use and licensing of the patented solvent recovery process. Under this agreement, defendant granted to Taylor-Colquitt Company a license to use the process of the invention, to make, use and sell the apparatus and the products thereof, with the license to be exclusive in Taylor-Colquitt Company as to all persons except the defendant, who reserved to himself the right only of personal use of the process. Under this agreement, Taylor-Colquitt Company was given the right to sublicense the use of the process upon any terms and conditions, subject to the agreement with the defendant, and provided the stipulated royalty payments are made to the defendant.
The determination of the amount of royalty payments depended to some extent on whether Taylor-Colquitt Company did or did not "monopolize" the invention in designated fields. The question of "monopoly" deals with the amount of use made by Taylor-Colquitt Company as compared to the amount of use made by all sub-licensees. In so far as this case is concerned, the question of monopoly or nonmonopoly is not in issue.
Paragraphs 8(b) and 8(d) of the October, 1940, agreement provide that Taylor-Colquitt Company "shall pay to the Licensor ( i. e., Hudson) 27 1/2% of the gross royalties received during that year from sub-licensees." Taylor-Colquitt Company also computes the average rate of royalties per cubic foot paid to it by sub-licensees and applies that rate to its own use of the process and pays as a royalty to Hudson for its own use of the invention 27 1/2% of the total sum so calculated that year, with Taylor-Colquitt Company guaranteeing the annual minimum payments provided in paragraph 8(f), which guaranteed payments are now $5,000.00 per year.
Payments are made quarterly, based on the specified 27 1/2% of all royalties collected by Taylor-Colquitt Company from sub-licensees in field A and field B defined by the agreement, and the amount arrived at by the prescribed formula and rate on wood processed by Taylor-Colquitt Company.
In January, 1948, Hudson and Taylor-Colquitt Company modified and amended the 1940 agreement. These modifications and amendments dealt solely with the provisions relating to the monopolization of the process and a new requirement that Taylor-Colquitt Company should bear all expenses and fees in connection with further and continued patent applications. These changes, brought about by the 1948 agreement, are not applicable to this action.
To further promote and expand the use of the process, Taylor-Colquitt Company, on March 26, 1953, by letter entered into an exclusive franchise agreement with V.K. Dell of New Orleans, Louisiana, for him to construct and operate solvent recovery plants in certain southern states and parts of states as set forth in the agreement. This contract contemplated the construction and operation by Dell of a minimum of three plants. The Dell contract of March, 1953, expressly provided that "each solvent recovery plant will be issued and granted a license agreement for the use of the process substantially in accordance with the attached sample license agreement." Each separate plant, under the license agreement, would pay royalties to Taylor-Colquitt Company as follows: For the first two million board feet, $2.00 per thousand board feet; from two million to five million board feet, $1.65 per thousand board feet; and over five million board feet, a royalty of $1.25 per thousand board feet, with a minimum annual royalty of $4,000.00 after the first year of commercial operation.
For the granting of the exclusive franchise, Dell guaranteed a minimum annual payment to Taylor-Colquitt Company as follows: Nothing for the first year, $27,000.00 for the second year, $35,000.00 for the third year, $40,000.00 for the fourth year, and $58,000.00 for the fifth year and thereafter. Royalty payments made by the solvent recovery plants were to be credited against the required sums to be paid by Dell.
In 1955, Taco Corporation was formed out of Taylor-Colquitt Company, taking over the business of developing and promoting wood preserving and treating processes and techniques, including Taylor-Colquitt's rights in the vapor drying and solvent recovery processes under the Hudson agreement and rights in the Dell contract.
In March of 1955, Dell and Taco Corporation entered into a second agreement modifying and reforming the original agreement and merging it into the new contract. In the main, the new agreement with Dell was basically the same as the original agreement, but with more formality and detail, particularly as to the granting of licenses to users of the process. Dell retained the identical exclusive franchise territory in return for the same prescribed annual payments to Taco and was to promote and advance the construction and operation of plants using the solvent recovery process in treating wood. The Dell agreement specifically limits the use of the solvent recovery process to only those instances where a separate license has been granted and issued by Taco to a proposed user of the process. Thus, no person, including Dell, can employ the solvent recovery process unless a sub-license agreement is first entered into between the sub-licensee and Taco Corporation and such sub-licensee pays the required royalties to Taco, as contemplated by and provided for in the agreement with Hudson. The sample license agreement is a part of the Dell contract.
Hudson by his letter of July 28, 1953, to Mr. Dell, agreed as patentee to the March 26, 1953, letter agreement between Taylor-Colquitt Company and Dell and agreed that Taylor-Colquitt Company was acting within its rights under the licensing agreement with him. Also, Hudson, by his letter of March 29, 1955, made the same agreement and commitment in connection with the later and new agreement between Dell and Taco Corporation, dated March 29, 1955.
As provided by his franchise agreement with Taco, Dell made the required payment in 1955 of $27,000.00.
An issue then arose between Hudson and Taco Corporation. Hudson maintained that under the agreement between the parties, he should have 27 1/2% of the Dell payment, while Taco Corporation maintained that Hudson was not entitled to the percentage of the Dell payment. Hudson contends that Dell is a sub-licensee and the payments made by him for the franchise were royalties in which Hudson was to participate.
The issue in the case is this:
Under the agreement between Hudson and Taco Corporation, is Hudson entitled to 27 1/2% of the sums paid by Dell for the exclusive franchise territory or only to 27 1/2% of royalties received by Taco from sub-licensees of Taco in said territory?
It is quite obvious that it is to the mutual advantage of both the plaintiff and defendant to obtain as many users and as much use of the process by sub-licensees as possible because this results in a greater royalty revenue. The agreement giving Dell the franchise for the territory is for the mutual advantage of the parties because it is intended to result in a greater use of the process by sub-licensees. For this reason and because the defendant gave his written consent to the Dell agreement, no question can be raised as to its propriety. It was obviously the contemplation of Taylor-Colquitt, now Taco, and Dell that the utilization by newly built plants of the patented process under separate sub-licensing agreements entered into between Taco and the individual plants would produce royalties to Taco in excess of the minimum annual payments guaranteed by the said schedule. Otherwise, Dell would suffer financial loss to the extent that such payments from actual processing would not equal the guaranteed minimum. This consideration is significant in determining whether the minimum payments made by Dell are "royalties" within the meaning of the contract between plaintiff and defendant.
Plaintiff acknowledges that defendant is entitled to share in all payments made by concerns processing wood in Dell's territory under a sub-licensing agreement. That is, any royalties received from operating plants in the Dell territory, even if they exceed the minimum payments which Dell is required to make, are treated as any other payments by a sub-licensee, but the issue arises as to payments made by Dell to make up the difference between the guaranteed minimum and actual royalties if any received from operating sub-licensees.
The agreement between plaintiff and defendant carefully spells out the manner and method of computing the compensation which defendant is to receive.
Paragraphs 8(b) and 8(d) of the October, 1940, agreement between defendant and Taylor-Colquitt Company provide that the licensee "shall pay to the licensor ( i. e., Hudson) 27 1/2% of the gross royalties received during that year from sub-licensees."
In the event Taylor-Colquitt Company, or now plaintiff, uses the patented process in processing wood, it computes the average rate of royalties per cubic foot paid by sub-licensees, applies that rate to its own use and pays a royalty to defendant of 27 1/2% of the total sum so calculated that year.
It seems clear that defendant is not entitled to 27 1/2% of the payments made by Dell for the reason, first, such payments are not payments received from sub-licensees and second, such payments are not royalties within the meaning of the agreement between Hudson and Taco. The agreement sets forth that Hudson is entitled to receive "27 1/2% of the gross royalties received during the year from sub-licensees." There is no other provision in the agreement for the payment to Hudson of a percentage of any other sums which Taco might receive from any other source. Thus, the question resolves itself into whether the minimum payments made by Dell are royalties received from a sub-licensee. If such payment is not a royalty or is not received from a sub-licensee, then defendant is not entitled to a percentage thereof.
The contract between Taco and Dell under which Dell is required to make the payments in controversy is not a sub-licensing agreement and does not grant to Dell the right to use the process. In order for Dell or any other person to become a sub-licensee, he or they must enter into a separate sub-licensing agreement in accordance with the sample attached to the Dell contract. Then and only then would Dell or such other person become a sub-licensee, and then and only then would the defendant be entitled to a share of the payments made by such sub-licensee.
Dell has agreed for the consideration of being granted an exclusive franchise over a certain territory to guarantee that there will be use of the process by sub-licensees to produce the minimum royalty set out in the agreement. If such minimum royalty is not produced, then Dell must make up the difference. But the difference paid by Dell is not paid by him as a sub-licensee but is paid by him as consideration for the exclusive franchise.
The phrase "sub-licensee" obviously contemplates the right to use processes covered by the patent. If payments are made for some other purpose or by some other person than a sub-licensee, the defendant is not entitled to share in them. By no interpretation of the word could the phrase "sub-licensee" be interpreted as including Dell unless and until he entered into a separate sub-licensing agreement.
The agreement with Dell expressly refers to and designates the plants themselves as the sub-licensees, and the sample sub-license agreement with each proposed plant is referred to and made a part of the franchise agreement in paragraph 7(a) of the last Dell agreement, providing that Taco shall "issue and grant a separate license for the use of said process, substantially in accordance with the attached sample License Agreement, to such person or firm or corporation designated by Dell." The license agreement referred to provides for the royalties to be paid by the sub-licensee, and it is only these royalties that Mr. Hudson shares or participates in by virtue of his agreement now with Taco.
It is also apparent that the payments made by Dell are not gross royalties and unless the payments made by Dell to Taco are royalties, then defendant is not entitled to share in the payments.
All applicable definitions of "royalty" relate to the payment proportionate to or based on use. "Royalty" as used in the contract between the parties here is based on revenue derived from use.
Nowhere in the agreement between Taco and the defendant is any mention made of defendant's being entitled to share in any payment made except those payments which become due by reason of the use, that is the number of cubic feet processed, by sub-licensees or by plaintiff.
Likewise, nowhere in the agreement between Taco and Dell is any mention made of Dell's being obligated to Taco for payments proportioned on the amount of board feet processed. Dell's obligation is the same regardless of the amount of wood processed.
The payments made by Dell are not in any way connected with the use or the number of units processed by Dell for the reason that Dell has no right under his agreement to do any processing or make any use of the patented process. As provided by the agreement, this can only be done under a separate sub-licensing agreement.
The fallacy of the contention that payments made by Dell are royalties is demonstrated by the fact that if such payments were considered as royalties, then the payments would have to be used in computing the "average royalty" from sub-licenses which form the basis for computing what Taco must pay for its own use of the process. As stated above, when Taco uses the process, it in effect "pays" a royalty to the defendant — 27 1/2% of the average rate of royalties paid by all other sub-licensees.
For example, according to the evidence, the average royalty on wood processed in 1955 by sub-licensees was 1.643 ¢ per cubic foot. If the payments made by Dell in 1955 were considered as royalties, as contended by defendant, the average rate per cubic foot would be 3.32 ¢ . The testimony by plaintiff was to the effect that having to pay such a royalty would effectively price plaintiff out of a competitive position in the market.
In the event the quantity of wood processed by sub-licensees decreased, it would have the effect, if the Dell payments are considered royalties, of increasing the average rate per cubic foot which plaintiff would pay and conceivably the average rate per cubic foot which plaintiff would have to pay could become more than the price plaintiff could charge on the market for its products.
Such an interpretation of the agreement which results in an absurd result obviously not contemplated by the parties should not be given by this Court. To consider the payments made by Dell under his agreement with Taco as a royalty would not only do injustice to the word as commonly understood, but would result in a situation contrary to the intention of the parties.
Contention is made by the defendant that since the contract between the plaintiff and Dell refers to payments by Dell of "royalties" then defendant is entitled to 27 1/2% of the moneys so designated as "royalties." This argument overlooks the fact that the use of the word "royalties" in the Dell agreement is in conjunction with the guarantee by Dell that the royalty payments by sub-licensees, including Dell, in the territory, would amount to a certain minimum and in the event such royalty payments did not amount to such minimum, Dell would pay the guaranteed amount to Taco. It was obviously contemplated that sub-licensee would pay sufficient royalties for the use of the process, but such not having been the case, the payment made by Dell in guarantee of such royalties is not in itself a royalty arising from the use of the process and more particularly is not a gross royalty from a sub-licensee.
The only basis upon which the defendant may be entitled to share in the payments made by Dell to Taco is that such payments are "gross royalties from sub-licensees." If such payments are not gross royalties from sub-licensees, then the defendant is not entitled to any part thereof. To construe the payments made by Dell to Taco as royalties would be to ignore the commonly understood meaning of the word "royalties" and the intent of the parties under their agreement. It would be equally as strained a construction to hold that Dell in making such payments was a sub-licensee because such is not a fact and Dell has no rights which a sub-licensee does have under a sub-licensing agreement.
Defendant has filed a counterclaim in which it is claimed that the filing of this suit seeking interpretation of the contract amounts to an anticipatory breach of the contract. This contention is without any merit and the counterclaim should be dismissed.
It, therefore, follows that under the contract between plaintiff and defendant, defendant is entitled only to a percentage of royalties received from sub-licensees and is not entitled to any part of the payments made or to be made by Dell under its contract with plaintiff.
And it is so ordered.
July 24, 1957.
This is an appeal from (1) an order of Judge Johnson overruling a demurrer interposed by appellant to a complaint seeking relief under the Uniform Declaratory Judgment Act, Volume 1, Title 10, Chapter 24 of the 1952 Code, and (2) an order of Judge Martin deciding the case on its merits.
The order of Judge Martin, which will be reported, is affirmed and adopted as the opinion of this Court. The controversy between the parties as to the construction of the contracts referred to in the order of Judge Martin presented a proper case for declaratory relief. The order overruling the demurrer to the complaint is also affirmed.