Summary
In Campbell, the defendant proceeded through arbitration as provided for by contract. Well into the arbitration process, the defendant made the claim that the contract was illegal and unenforceable (on grounds not related to the arbitration provisions).
Summary of this case from Trupp v. State Farm Mut. Auto. Ins. Co.Opinion
No. 33851
Decided December 15, 1954.
Contracts — Agreement between patentee and manufacturer of device — Manufacturer agreeing not to engage in competing business — Not per se illegal under federal statute, when — Section 14, Title 15, U.S. Code — Lessening competition or creating monopoly — Controversy as to rights under contract — Voluntary submission 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 therewith.
2. Where such device is never produced for sale or marketed and a controversy arises between the patentee and the manufacturer regarding the performance of the contract and the respective rights of the parties thereunder and such controversy is voluntarily submitted by the parties to arbitrators for full and final disposition as stipulated by the terms of the contract, the manufacturer is estopped, after the arbitration proceeding 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 engaging in any business competing therewith.
APPEAL from the Court of Appeals for Cuyahoga County.
The present case involves the validity of a court approved 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 Philmore J. Haber, Trustees of the Cork-a-Lite Development Trust, hereinafter designated the trust, and The Automatic Die Products Company, an Ohio corporation, hereinafter called Automatic, entered into a written contract 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 exclusive 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.
"* * *
"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 business competing therewith.
"* * *
"15. Automatic may sublicense others to manufacture and sell the mufflers under the terms of this agreement, with the same royalties to the trust.
"* * *
"24. It is hereby agreed that, in case any disagreement 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 appointed, 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 arbitration 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 dispute 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 controversy 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 consideration 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 contract 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 reports 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 appellees.
Messrs. Spieth, Spring Bell, Mr. William M. Nelson, Jr., and Mr. James S. Pedler, Jr., for appellant.
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 public 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 under 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 illegal 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, merchandise, machinery, supplies, or other commodities, whether patented or unpatented, for use, consumption, 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 competition or tend to create a monopoly in any line of commerce."
For convenience, we repeat paragraph 10 of the contract here involved:
"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 business competing therewith."
In contending that the second sentence in paragraph 10 renders the contract illegal and unenforceable, Automatic 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 contain 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 driving competing devices from the market.
However, we are not here dealing with a patent infringement 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 manufacturer. 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 defendants entered into an exclusive sales contract whereby defendants, for a specified number of years, agreed to purchase from the plaintiff their entire supply of gasoline and oil to be used or sold at their gasoline service station. Defendants 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 restriction 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 contract 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 arbitrators 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 indulged 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 decided 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 contemplation 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 Appeals, and the same is hereby affirmed.
Judgment affirmed.
MIDDLETON, TAFT, HART and LAMNECK, JJ., concur.