A bicycle manufacturing company made a contract with an inventor
to use, obtain patents for, and exploit the sale of improved
coaster brakes, for which applications for patents were then
pending, the company to be relieved from payment of royalties in
case of adverse action of the patent office. Subsequently the
company, having acquired and used other inventions
Page 199 U. S. 582
the inventor brought suit alleging neglect to use diligence in
obtaining the patents for, or pushing the sales of, his brakes, and
demanding royalties on all coaster brakes used and sold by the
company.
Held that, although the company might not be able
to obtain the patents as expected it could not rescind the contract
without returning what it had received under it and it must pay
royalties on any devices used by it embodying the invention unless
and until final adverse action by the patent office.
That, as the contract was not made on the footing that no such
brakes had ever been invented, the inventor could not claim the
entire field, and was not entitled to royalties on other brakes
used by the company radically different from his both in
construction and operation and which could not have been an
infringement of any patent contemplated by the contract.
The facts are stated in the opinion.
MR. JUSTICE HOLMES delivered the opinion of the Court.
This is an appeal from a final decree upon a bill for an
account. As there was a technical doubt whether the decree first
appealed from was final, a second decree was entered and a second
appeal taken, but no point is made upon that matter here. There is
one question and one case.
See 16 App.D.C. 468, 18
App.D.C. 101.
The bill was brought upon an agreement under seal, dated June 5,
1897, of which the material portions are as follows: it begins with
a recital that Farrow has invented certain improvements in
bicycles, etc., pertaining to automatic mechanism for coasting and
braking, for which he has made two numbered applications for
patents and intends to file additional ones, and that the Eclipse
Bicycle Company desires to acquire the entire right and title "to
said inventions as described in the above
Page 199 U. S. 583
identified applications, and any letters patent that may be
issued thereon," and to all improvements that may be made by Farrow
upon the same. Then Farrow conveys to the company "his entire
right, title, and interest in and to the inventions in bicycles, as
fully described and claimed in the applications above referred to,"
letters patent and improvements as above. The company is to pay
$2,500 within certain short times as advanced payments on
royalties, and to pay royalties, as specified, "on all the devices
made or sold embodying the invention above referred to," and to
that end to make returns of the number of devices sold. The title
is to revert to Farrow in default of payment for more than sixty
days. Arrangements are made for taking out foreign patents, and
then the company agrees to "defend said invention against piracy or
infringement," and to "use due business diligence in the
manufacture and sale of the devices embodied in said letters
patent, and to push the sale by all proper and legitimate
enterprise." Then follow further agreements as to taking out
foreign patents, and finally it is covenanted that, in case
Farrow
"for any reason fails to procure letters patent of the United
States for the improvements above referred to, the [company] shall
be relieved from the payment of all royalties from and after the
date of final adverse action of the Patent Office on the
application or applications for patents for said improvements."
The invention described was an automatic brake and coaster, one
of the applications being for a hub brake, the other for a tire
brake, both operating on the rear wheel by backpedaling.
The bill alleges that, soon after this agreement was made, one
Morrow, the defendant's general manager, applied for a patent on a
device in effect the same as Farrow's, accomplishing the same
result and being a mere mechanical equivalent for the same, that he
forthwith assigned a half interest to the company's president, and
that the company began to manufacture and sell the Morrow device.
It further charges a failure to use the diligence which the company
covenanted to use in pushing the Farrow device, and a sale of
substituted things. A supplemental
Page 199 U. S. 584
bill alleges that, upon the consummation of the sale of Farrow's
interest, the company caused an assignment to it of Farrow's
application to be made, and a power of attorney to be executed by
Farrow to the company's attorney for the purpose of permitting the
company to prosecute applications for patents, after which, under
its rules, the Patent Office would recognize Farrow no more. It
charges that the company, thus having the whole matter in his own
hands and power, is failing to prosecute the applications, and will
allow the claims to be rejected or lapse upon points easily
obviated, in furtherance of a scheme to substitute the reproduction
of Farrow's device and thus, it is implied, to get rid of the
contract.
The answer does not need to be stated. It admits the contract,
but denies the plaintiff's case, charges him with fraud, and sets
up that his invention had been anticipated by a patent to Stover
and Hance and otherwise, and that it was impossible to obtain a
patent for it, and that therefore the defendant was not bound by
the contract further. The case went to a hearing and a decree was
made to the effect that the plaintiff was entitled to royalties
upon all the devices manufactured by the defendant embodying the
inventions mentioned in the plaintiff's applications, and
specifically upon devices manufactured under the patent to Morrow,
and the cause was referred to an auditor to state the account. This
decree was affirmed by the Court of Appeals for the District. 16
App.D.C. 468. It was found that one of Farrow's applications was
placed in interference after its patentability had been allowed,
and thereupon was abandoned, his acquiescence not appearing, and
that the other was not contested, and, after some modification, was
allowed and authorized to go to an issue, but was permitted by the
company to lapse. The purchase by the company of the Stover and
Hance patent, and an interest in the Morrow patent, and the
adoption of the latter for the purpose of evading the contract with
Farrow were found.
After the decree which we have mentioned, the defendant moved
for leave to amend its answer, and to introduce new testimony,
Page 199 U. S. 585
on the grounds that the plaintiff knew that the broad claim for
a coasting device in combination with a backpedaling device had
been anticipated by the Stover and Hance patent when he made the
contract, that the defendant had been under a misapprehension as to
the scope of the contract and of the suit until the former
decision, and that it now had learned that there were other patents
which would defeat any broad claim on the part of Farrow, etc. The
motion was allowed by the Supreme Court, but, on a second special
appeal, the Court of Appeals held that the Supreme Court was not at
liberty to allow the motion after the decree directing an account
had been affirmed by the Court of Appeals, until leave had been
granted by the latter, and also held that no sufficient grounds for
an amendment were shown, as no fraud on the plaintiff's part was
made out, and it appeared that the company knew of the Stover and
Hance patent and sufficiently understood the situation when it made
the contract, and as the company certainly knew the facts when its
former answer was filed. 18 App.D.C. 101. We are satisfied that the
company suffered no injustice by this decision, and, in view of our
conclusion upon the merits, we need say no more about it.
The case went to an account, and, before the auditor, Farrow
sought to make the defendant account not only for the Morrow device
heretofore mentioned, but also for another, known as Exhibit E 10,
which the company had been manufacturing since the bill was filed.
The auditor rejected this claim on the ground that an important
part of the Farrow device was not used in E 10, that there was a
radical difference in both construction and operation, and that one
could not be called the mechanical equivalent of the other. On
exceptions, the auditor was directed by the Supreme Court to
include royalties on E 10 in his account. Accordingly, he made a
further report, which, after some subordinate modifications, was
confirmed by the Supreme Court and by the Court of Appeals (23
App.D.C. 411), and the defendant ordered to pay the amount found
due. From this decree the defendant appeals. It takes the technical
objection that E 10 was not within the scope of the bill or the
reference, and the substantial one that it was not within the scope
of the contract. There is also an objection
Page 199 U. S. 586
to the allowance of interest because it was not claimed in the
earlier hearing, but, as the defendant says, was waived.
We do not perceive any sufficient reason for saying that the
plaintiff was estopped to claim interest. As to the technical
objections to including E 10 in the account, the bill charges that
a large number of devices similar to Farrow's are being
manufactured and sold by the defendant, avers the plaintiff's
ignorance of details and want of means of learning them except by
discovery, and prays for disclosure of the number of both the
devices manufactured, sold, and held by the defendant. The word
"both" means in the context the Farrow brake and the Farrow
coaster, and the disclosure obviously is intended to include
substitutes. An account is prayed of the Farrow brakes and of the
device substituted by the defendant for the same. This, we think,
means not merely the specific Morrow device previously referred to,
but any device the defendant might be using, in view of the
plaintiff's alleged ignorance, as is made plainer by the fact that
the bill goes on to pray that any improvement or elaboration in the
original device may be declared to have been made by the defendant
for the benefit of the parties to the contract. The decree
directing an account specifically mentions the first Morrow device,
it is true; but it declares in general terms the rights of the
plaintiff to royalties upon all devices manufactured by the
defendant and embodying the inventions mentioned in the contract,
and directs an account in accordance with the decree. We are of
opinion that these terms warranted the auditor in charging
royalties upon any device found to come within the contract, and we
agree with the Court of Appeals that the defendant had sufficient
opportunity to contest the claim, and that therefore the objection
is purely formal. No special point is made of the fact that the use
was after the filing of the bill.
The real questions in the case are whether the
first-mentioned
Page 199 U. S. 587
Morrow device and the subsequent E 10 fall within the scope of
the contract, and these questions depend more upon a careful
construction of that instrument than upon nice discriminations
between the patents that were or might have been issued. If either
of the contrivances used embodies the invention described in
Farrow's applications, then the defendant is bound to account for
it by the express terms of its covenant, unless the contract is at
an end. It is argued that the contract is at an end, that there was
a total failure of consideration, because, it is said, there was no
invention disclosed by Farrow. In answer to this it is enough to
say that, although patents were refused upon some of his claims
irrespective of any fault of the defendant, others were allowed,
and there was no such final adverse action of the Patent Office
upon either application as a whole as to exonerate the defendant by
the terms of the agreement which we have recited. An appreciable
part of Farrow's supposed invention was upheld and remained in the
defendant's hands. We are spared the necessity of considering how
much, or whether there was so considerable a failure of what was
expected that it would have warranted a rescission of the contract
outside of its express terms, by the fact that the defendant still
keeps what was assigned to it. On February 15, 1898, it wrote to
Farrow that it could not get a patent that was worth a pinch of
snuff, but, so far from tendering a reconveyance, went on to say
that, if the work which the company was turning out "holds up all
right, we may be able to work your brake in with ours, but as to
this it is uncertain, and we doubt it." Of course, the defendant
could not rescind the contract without returning what it had
received under it. So the contract remained in force.
See
United States v. Harvey Steel Co., 196 U.
S. 310,
196 U. S.
315-316.
We come back to the construction of the contract. The royalty is
to be paid on the "invention above referred to." The use of the
word "invention" does not open the state of the art and allow the
defendant to meet the plaintiff's claim by proving that he had
invented nothing new. The royalty is to
Page 199 U. S. 588
be paid on the invention described in the specified applications
-- that is to say, on the contrivances there described -- unless
and until there is final adverse action by the Patent Office. That
is the measure of the defendant's self-protection. It could not
have asked or been allowed more. For it took an assignment of
Farrow's right, title, and interest, took charge of his
applications, and agreed to defend the invention against
infringement, which, of course, involved maintaining its novelty
and patentability. It had all Farrow's interests in its hands, and
it took the risk of their worth, except as against what the Patent
Office might do. It should be repeated that, so far as the company
made any device embodying Farrow's invention, by the fair
construction of its express covenant it was bound to account,
whether the manufacture was ostensibly Farrow's or not, and he was
not left merely to an action for such damages as he could
prove.
On the other hand, the contract was not made on the footing that
no coaster or no combination of coaster and brake ever had been
invented, and that the whole field belonged to Farrow. Both parties
knew something of the state of the art. The very facts which show
that they stood on an equal footing, and that the company was not
deceived by Farrow, show that. The contract shows the same thing on
its face. It recites that Farrow has invented not a mechanism for
coasting and braking, but an improvement pertaining to such
mechanism. It was a contract having definite reference to the
course of the Patent Office, and was for the contents of the
application already filed. The application recognizes the existence
of coasters. So that the contract only embraces what the parties
reasonably may be understood to have expected to be patented.
Furthermore, the provision for the cessation of payments on final
adverse action must be applied to such claims as were rejected for
want of novelty; and, after such rejection, Farrow can make the
defendant account only for the use of devices embodying what
remained of his claims. Obviously, also, the fact that, subject to
the foregoing qualifications, the defendant took the risk of
Page 199 U. S. 589
the value of Farrow's alleged invention, even when coupled with
its covenant to use due business diligence in pushing their sale,
did not preclude it from using any later invention, if one were
made which superseded Farrow's and did not embody it. Due business
diligence would not require it to enter into a hopeless contest,
and would not prevent it from avoiding such a contest by purchase.
In that event, it would not be accountable to Farrow for royalties
on the new machine.
See Thorn Wire Hedge Co. v. Washburn &
Moen Manufacturing Co., 159 U. S. 423.
Applying this construction to the case, there is little
difficulty in arriving at our judgment. The defendant at the
original hearing, when the first Morrow device alone was in
question, offered no evidence to controvert that of the plaintiff's
expert that it was a palpable attempt to evade Farrow's rights. Its
argument upon that point before us depended largely upon the
contention that, in view of the state of the art, Farrow's claims
must be narrowly limited, and gave too little effect to the
contract. It is evident from the latter as well as from the
evidence that a patent of a certain breadth was expected. The
plaintiff, on the other hand, did not chiefly rely upon maintaining
that the second device, E 10, would have been an infringement of
any patent that the contract can be taken to have contemplated, but
depended mainly upon construing the contract as binding the
defendant to pay royalties if any other than Farrow's braking and
coasting device were used. Therefore a summary statement of the
nature of the different devices is all that is necessary to
complete our disposition of the case.
In Farrow's application and Morrow's first device there was the
same clutch mechanism on the rear wheel to permit coasting, and in
both a contrivance for bringing a brake shoe to bear upon the rear
wheel by back pedaling. Farrow accomplished this result by means of
a hood pivoted to the bicycle frame, embracing the upper run of the
chain and having a pivoted tooth or pawl. With the hood is
connected a rod having the brake shoe on its end. Backpedaling,
causing the chain to
Page 199 U. S. 590
slacken, lets it drop down upon the pawl and engage it, and
thereby pulls back the hood and rod and brings the brake shoe to
bear. By a second device, which the defendant is not in a position
to say was not patentable, the brake was applied by the front
instead or the rear sprocket wheel, which, in case of backpedaling,
engaged a lever and put on the brake. Morrow used the front
sprocket wheel and made it apply a lever with a brake shoe by means
of a clutch. The details of the means of application differ, but it
cannot be doubted that, assuming the novelty in Farrow's invention
which the contract assumes, Morrow, in the language of the
contract, was embodying that invention. It covered the very thing
which Farrow's invention was expected and mainly relied on to
supply. Taking into account the fact that the defendant did not
make due efforts to carry out his application, and that it
certainly does not appear that the Morrow device was so much, if at
all, better than Farrow's, that due business diligence did not
require the company still to push the latter, we are of opinion
that, on this item it properly was held to account.
Farrow also embraced a hub brake in his applications. One of his
devices was to have the rear sprocket wheel connect with the hub of
the rear wheel by a screw clutch. When the sprocket wheel was
moving forward, it was screwed into fixed connections with the hub.
When the pedals were held fast, so as to hold the sprocket wheel
also fast through the medium of the chain, the bicycle, continuing
its motion, unscrewed the sprocket wheel from the hub, disconnected
it, and coasted. Back pedaling brought a projection on a spring in
and attached at one end to the rear sprocket and encircling the
hub, into contact with a fixed point on the frame, and thus caused
the spring to embrace the hub so long as pressure was applied. On
the pressure's being released, the spring expanded and allowed the
hub to revolve loosely within it. In the coasting or braking, it
will be seen, the sprocket wheel was moved along its axis a short
distance outward from the rear wheel, thus giving a slant to the
chain. When a forward movement was resumed, the tendency
Page 199 U. S. 591
of the chain under the pressure upon it to get back into a
straight line was enough to carry the sprocket wheel inward again
upon its axis so as to lock it once more to the rear wheel by the
screw clutch. There are further details, but this simple outline is
enough for our purposes, which are only those of broad comparison
and contrast.
In Exhibit E 10, the characteristic lateral motion of the
sprocket wheel on the extension of the hub does not appear, and
neither Farrow's rotating brake spring nor his lever is used. The
engagements are effected by the movement of a clutch ring with cam
inclines, the sprocket wheel having cooperating cam inclines. When
the sprocket wheel moves forward, the latter cam inclines ride upon
the former, force the clutch ring inward, and allow it to grasp the
hub by friction, and revolve with it. On backpedaling, the square
shoulders of the cam inclines engage, the clutch ring is moved
backward with the sprocket wheel, and cam inclines on the inner
side of the ring force a brake ring inward into a hollow conical
brake shoe connected with the frame of the machine, and having no
rotary movement. The brake shoe thus is forced inwardly into a
brake cup and effects the braking by its friction. In this case, as
in the former, a general indication of the nature of the device is
sufficient on the question whether the latter embodies the former
in the sense of the contract. This question is answered by the
description which we have given. It is true that in both the
sprocket wheel is arranged to engage or disengage with the main
wheels of the machine, to allow coasting and to brake by a reverse
action of the rider's feet. But the methods by which these results
are accomplished are so different that it is only on the assumption
that Farrow was, in the broadest sense, a pioneer, and had covered
the whole ground, or at least that the contract put him in that
position relatively to the defendant, that the claim in respect of
E 10 could be allowed. It is not pretended that Farrow occupied
such a position as an inventor, and our construction of the
contract does not give it the supposed extent. The auditor found
that there was a radical
Page 199 U. S. 592
difference between the contrivances in construction and
operation, and there has not been and could not be a finding to the
contrary. The ground on which the account was ordered was that the
contract required it, notwithstanding all the difference which the
auditor found. We could not come to that conclusion unless we at
least were satisfied that it was inconsistent with due business
diligence in pushing Farrow for the defendant to take up with E 10.
The witnesses pointed out important superiorities in the latter,
which we need not repeat, in the way of avoiding clogging by mud or
ice, in applicability to a chainless machine, in more immediate and
certain operation, and in requiring a less continuous exercise of
force. On these points they were not contradicted. If, as we think,
E 10 did not embody Farrow's invention, and if the company
reasonably and honestly thought it a better thing, it had a right
to do what it did. We cannot say that it was not warranted in its
preference of E 10, or that it was not honest in its choice. In
follows that, with regard to this, the decree must be reversed.
There was evidence that the defendant had sold out to another
company of a nearly similar name. It is enough to say that it does
not appear that the defendant is not still in existence, but, on
the contrary, it would seem that the corporation still exists.
Decree reversed and case remanded with directions to
reinstate the auditor's first report so far as the same disallows a
claim in respect of E 10.