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American Photocopy Equipment Co. v. Ampto Inc.

Decided: February 20, 1964.

AMERICAN PHOTOCOPY EQUIPMENT COMPANY, A CORPORATION (SUBSTITUTED AS PLAINTIFF-APPELLANT FOR COPEASE MANUFACTURING CO., INC.), PLAINTIFF-APPELLANT,
v.
AMPTO, INC., A CORPORATION, DEFENDANT-RESPONDENT, AND AMPTO EQUIPMENT CORPORATION, ET AL., DEFENDANTS



Conford, Freund and Sullivan. The opinion of the court was delivered by Conford, S.j.a.d.

Conford

This is an action to recover royalties under a patent license agreement allegedly entered into by Copease Manufacturing Co., Inc. (Copease), a corporation of the State of New York, and Ampto, Inc. (Ampto), a corporation of the State of New Jersey. The action was originally brought by Copease against Anken Chemical & Film Corp. (Anken) and its two wholly-owned subsidiaries, Ampto and Ampto Equipment Corp. At the pretrial conference, the suit was voluntarily withdrawn, without prejudice as to Anken and Ampto Equipment Corp. American Photocopy Equipment Company (Apeco) is the substituted plaintiff as assignee of the interest of Copease in the license agreement.

The subject matter of the contract in question is U.S. Patent No. 2,657,618, issued to one Walter Eisbein on November 3, 1953. The patent claims invention of a machine designed to develop photocopies according to the diffusion-transfer-reversal process. Copease acquired title to this patent by assignment, and in 1956 granted the license in dispute to Ampto. The royalty provision of the agreement follows:

"2. Licensee agrees to pay a royalty of six percent (6%) of the net retail selling price for each photocopying machine embodying any of said inventions [of the Eisbein patent] and made, used or sold or otherwise disposed of under the provisions of this agreement."

Ampto has asserted two defenses. First, it disputes the authority of the officer who signed the agreement to bind the defendant corporation. Second, it contends that the photocopy machines it made or sold do not "embody the inventions" of the Eisbein patent and therefore do not come within the obligating terms of the contract. The trial judge, sitting

without a jury, entered judgment for defendant on the latter ground and found it unnecessary to decide the former. Since we find that the machines involved do embody the invention disclosed by the patent in suit, it will be necessary for us to consider the issue as to whether the corporate defendant is bound by the agreement.

I.

Charles E. Hallenborg, president of Copease, testified that negotiations with Ampto for the sale of photocopying machines were initiated by representatives of Ampto in January 1956. At various times Ampto was represented by Mahlon Boyer, an employee of Ampto and vice-president and a director of Anken, Anna C. Campbell, vice-president, treasurer, and a director of Ampto and president and majority shareholder of Anken, and Louis P. Ratti, president and a director of Ampto. Ratti testified that he was at all times opposed to taking a license from Copease and that he never discussed such an arrangement with Hallenborg.

In February 1956 Hallenborg sent a form of license agreement to Boyer. An executed verbatim copy thereof, naming Ampto as the licensee, was returned by Boyer to Copease on March 8, 1956. As returned, this contract form was signed for the licensee by Anna C. Campbell, "Pres." It had been prepared by Morris, Downing & Sherred, attorneys for Ampto, and was contained within the form backer of that firm. Willis H. Sherred, a partner in the firm, and secretary and director of Ampto, testified that the Copease form of contract came across his desk, but that he gave it to a secretary to use in preparing the agreement without reading its contents. He stated that he knew at the time that the instrument was a license agreement between Copease and "some other corporation." Execution of the disputed agreement was completed on March 19, 1956 with the appending thereon of the signature of Hallenborg on behalf of Copease.

The conduct of the parties following the execution of the license agreement bears significantly upon the issue of defendant's

responsibility thereon. The contract called upon Ampto to furnish Copease with annual financial and sales statements. Failing to receive such statements for the first year of the agreement, Hallenborg wrote to Boyer in June 1957 requesting them. In a telephone conversation on August 13, Boyer agreed to comply. Still not having received statements by September 4, Hallenborg telephoned Ratti, who was vague as to his intentions with respect to the license but never questioned its validity. He suggested that Hallenborg call Sherred.

A telephone call to Sherred was made shortly thereafter by William C. Conner, patent attorney for Copease. Conner testified that he complained to Sherred that Copease had received neither royalty payments nor any statement as to how many machines Ampto had sold, as was required under the agreement. Sherred assertedly said he knew of no sales of any machines. Sherred also said, according to Conner, that Ampto was awaiting the outcome of an infringement suit in Illinois in which the validity of the Eisbein patent was at issue (Copease Mfg. Co. v. American Photocopy Equipment Co. , 189 F. Supp. 535 (N.D. Ill. 1960), reversed in part 298 F.2d 772 (7 Cir. 1961)), and that if the patent was there determined to be invalid Ampto would be absolved of liability for royalties. Conner testified that when he then explained to Sherred that the validity of the patent was not relevant to Ampto's liability under the license agreement, Sherred stated that if Ampto sold the Eisbein machines, it would pay the royalties. Sherred's testimony for defendant, though vague and evasive, was essentially corroborative of Conner's version of the conversation except for the affirmative statement as to intention to pay royalties.

The authority of Mrs. Campbell to execute the license agreement was never questioned by Ampto until it filed its amended answer on January 20, 1960. (This action was instituted March 2, 1959.) At all pertinent times, all of the offices and directorships of Ampto were held by Ratti, Sherred, and Mrs. Campbell. Mrs. Campbell, of course, knew of the

agreement from its inception, while Ratti learned of it "shortly after it was signed." Sherred, if he did not read the contract when he undertook to prepare the copy for Mrs. Campbell's signature, which strains credulity, became aware of its existence at least in the fall of 1957 when he spoke with Conner. Sherred also testified that the license was discussed at an informal meeting of the directors of Ampto in April of 1957 or 1958.

Since we find that there is no serious dispute over the basic, operative facts, a remand to the trial court for findings of fact on the issue is unnecessary. Nor need we decide whether Mrs. Campbell possessed actual or apparent authority in the matter. We find that the defendant corporation ratified the license contract by acquiescing, through its officers and directors, in what we shall assume, arguendo , was the unauthorized act of its vice-president.

It is well established that binding ratification of an unauthorized contract by a corporation "will be implied from acquiescence or the acceptance of the benefits of such contract; it being essential to implied ratification that it and the acceptance of benefits be with knowledge of the facts." Feist & Feist v. A. & A. Realty Co. , 105 N.J.L. 461, 464 (E. & A. 1929). See also Oliver v. Autographic Register Co. , 118 N.J. Eq. 72, 75 (Ch. 1935), affirmed o.b. 119 N.J. Eq 481 (E. & A. 1936); Royal Blue, &c., Inc. v. Delaware River, &c., Inc. , 140 N.J. Eq. 19, 23 (Ch. 1947), appeal dismissed, 2 N.J. 73 (1949); Beach v. Palisade Realty and Amusement Co. , 86 N.J.L. 238, 242 (E. & A. 1914). In the New Jersey cases, acquiescence has been concomitant with or evidenced by the acceptance of tangibly ascertainable benefits of the contract. E.g., Feist & Feist v. A. & A. Realty Co., supra , 105 N.J.L. 461 (defendant corporation accepted rents under realty management contract with plaintiff); Shaten v. American Nat. Bank of Camden , 109 N.J. Eq. 307 (Ch. 1931) (officers of corporation deposited bonds with bank as collateral for loan; corporation used proceeds of loan to meet payroll). However, evidence of acceptance of benefits is not absolutely required,

for the general rule is set forth in the disjunctive; either "acquiescence or the acceptance of benefits" will suffice. See Freeport Journal-Standard Pub. Co. v. Frederick W. Ziv Co. , 345 Ill. App. 337, 103 N.E. 2 d 153 (App. Ct. 1952). Since it is the formation of the contract with which the doctrine of ratification is concerned, it is the principal's acceptance of the existence of the contract that is dispositive, not its acceptance of benefits thereunder. The latter circumstance is merely probative of the former, i.e. , evidence from which approval can be implied. See 2 Williston, Contracts (3 d ed. 1959), § 278. It may be here noted that Ampto did in fact enjoy the only benefit contemplated under the license agreement, i.e. , liberty to manufacture or sell the patented machine free from suit by Copease for patent infringement.

It is also well established that silence on the part of the corporation, i.e. , failure to disaffirm the unauthorized act of its agent within a reasonable time, will under certain circumstances amount to the acquiescence from which ratification will be implied. Royal Blue, &c., Inc. v. Delaware River, &c., Inc., supra (140 N.J. Eq. , at p. 23); Johnson v. Hospital Service Plan of N.J. , 25 N.J. 134, 141 (1957); 2 Fletcher, Cyclopedia of Corporations (rev. ed. 1954), § 769, pp. 1121-1123; 19 C.J.S. Corporations § 1019, p. 497; 13 Am. Jur., Corporations , § 983, p. 935; Restatement, Agency 2 d (1958), § 94, p. 244, comment (a). The circumstances in which silence will amount to ratification are those where, "according to the ordinary experience and habits of men, one would naturally be expected to speak if he did not consent." Ibid. One of the most important of such circumstances is full knowledge of the nature and extent of the unauthorized act. Feist & Feist v. A. & A. Realty Co., supra , 105 N.J.L. , at p. 464; Royal Blue, &c., Inc., supra , 140 N.J. Eq. , at p. 23.

It is undisputed that all three directors of Ampto had full knowledge of the license agreement within approximately one year of its formation. Two of these, the president and vice-president, knew of the contract practically from its inception.

Yet, as noted above, no question as to the authority of Mrs. Campbell was raised until January 20, 1960, almost four years after execution of the agreement, when the amended answer was filed below. Cf. Royal Blue, &c., Inc., supra , 140 N.J. Eq. , at p. 23. Ampto's original answer, filed July 3, 1959, admitted the existence of the license agreement "except as to legality."

Defendant, through its president and secretary, remained silent in respect of acquiescence or disaffirmance when it was directly confronted through telephone calls from Hallenborg and Conner with the fact of the existence of the license and Copease's assumption that it was in effect between the parties. Cf. Royal Blue, &c., Inc., supra , 140 N.J. Eq. , at p. 23, where the court pointed out that the officers and directors of the defendant silently permitted its president to carry on further negotiations on its behalf in relation to the subject matter of an originally unauthorized contract. When one is directly confronted with the unauthorized act of his agent, "according to the ordinary experience and habits of men, one would naturally be expected to speak if he did not consent." Restatement, supra , § 94. In this regard, it is not necessary, in order to find evidence of acquiescence in the conduct of Sherred, to accept Conner's testimony, disputed by the former, that he affirmatively signified acceptance of the contract. Sherred's admitted silence on the subject of authority and the natural implications implicit in his discussion of the effect of the Illinois infringement suit on Ampto's liability are sufficient. As stated in 13 Am. Jur., Corporations , § 983, p. 935:

"The acquiescence of a corporation which will amount to ratification of an unauthorized act may be evinced by mere silence under circumstances giving rise to a duty to repudiate the transaction; a corporation cannot stand by after it has learned of an unauthorized act or contract * * * and have its benefit if it should prove to be favorable and reject it if it should prove unfavorable."

We hold that the officers and directors of Ampto ratified the act of its vice-president, Mrs. Campbell, by their acquiescence

therein, and that the corporation is bound by the terms of the license agreement on which this suit is based.

II.

The remaining and central question on this appeal is whether the photocopy machines manufactured or sold by Ampto "embody any of said inventions" disclosed in the Eisbein patent in suit. At the outset, we note that the finding by the trial judge that there was no proof that defendant sold any machines ("if there were any such" within the patent) is contradicted by the record, and defendant does not seek to sustain the judgment on any such ground. Boyer testified defendant sold machines of the kind in controversy. Further, defendant expressly conceded at the trial that it had sold the type of machine alleged to come within the patent.

It is settled that the test of whether machines sold by a patent licensee come within the coverage of the patent, for purposes of a suit for royalties, is the same as that employed in a patent infringement suit. Cold Metal Process Co. v. United Engineering & Foundry Co. , 235 F.2d 224, 229 (3 Cir. 1956). Most of the cases cited in the discussion which follows involved infringement. We also note, but do not rely for our conclusions on the fact that some of the machines sold by Ampto were purchased from the Speed-O-Print Corporation, which consented to a decree of infringement in an action brought by Apeco under the Eisbein patent here involved. American Photocopy Equipment Company v. Speed-O-Print Corp. , (N.D. Ill. Docket No. 60-C-1053, consent decree entered November 2, 1962).

In the case at hand the trial court found that the machines sold by defendant were so dissimilar to that envisaged by the Eisbein patent as not to "embody the inventions" of that patent. For reasons to be stated, we hold to the contrary. The trial court's decision appears to have been based on the erroneous concept that an accused machine is not covered by a patent if it is not within the expressed "specifications"

of the patent, independently of whether it comes within its "claims." But it is elementary that while the claims of a patent must be "interpreted in the light of its specifications," Schriber-Schroth Co. v. Cleveland Trust Co. , 311 U.S. 211, 217, 61 S. Ct. 235, 85 L. Ed. 132 (1940), it is the claims which are the real measure of the invention covered by the patent. Aro Mfg. Co. v. Convertible Top Replacement Co. , 365 U.S. 336, 339, 81 S. Ct. 599, 5 L. Ed. 2 d 592 (1961); 35 U.S.C.A. § 112. The cited statutory section recites that: "The specification shall conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant regards as his invention." There is a substantial difference between interpreting a claim "in the light of" the specifications, on the one hand, and raising the specifications to the level of a declaration of invention on the other. As we read its conclusions, the trial court in effect did the latter in determining this controversy. This was error.

We have decided, nevertheless, to dispose of this case at the appellate level. No advantage would be gained by a remand. The machines have been exhibited to us and we have carefully considered all the extensive documentary exhibits in evidence, although we have not deemed it necessary to refer to all of them in this opinion. Solution of the question of coverage turns basically on construction of the Eisbein patent, and that issue is ultimately one of law. Solomon v. Renstrom , 150 F.2d 805, 808 (8 Cir. 1945); 2 Walker, Patents (Deller's ed. 1937), § 245, pp. 1209-1210. Since the questions of fact that are implicated do not in our analysis of the issues significantly involve the credibility of the witnesses who testified at the trial, the interests of expediency will best be served by our deciding the entire matter on this appeal. The parties have been given the opportunity to file supplemental briefs and appendices on all the issues and we have considered all of them.

As noted above, all the machines involved in this litigation, both that described in the patent and ...


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