Ar-Tik Systems, Inc. v. Dairy Queen, Inc.

legalistic highly declining did in judgment request default technical for slight consequence.

for an such a error of

Reversed and remanded. INC., SYSTEMS, Appellee,

AR-TIK QUEEN, INC., Appellant.

DAIRY 13447.

No. Appeals

United Court of States Third Circuit.

Argued March

Decided March Newcomb, Philadelphia, D. Wallace (Paul Paul, Austin,

Pa. & John H. Egnal, Philadelphia, Pa., Michael H. brief), appellant. Alspach, Philadelphia, Mark D. Pa. (Virgil Bozeman, Moline, Ill., Owen J. Ooms, Bradway, Ooms, Malcolm S. Welsh Bradway, Chicago, Ill., & Krusen, Evans Shaw, Philadelphia, Pa., brief),, & on the appellee. GOODRICH, Before McLAUGHLIN Judges. FORMAN, Circuit See 22 F.R.D. 122. Judge. FORMAN, Circuit complaint

In the amended filed in District Court States United Pennsylvania, Eastern District Inc., (Ar-Tik) Systems, corporation Dairy acquisition by defendant, alleged into the Indiana, that it entered rights Queen, Inc., agreement of the and liabilities September 7, 1946 with 29, under and the contract of McCullough, November H. A. H. F. obligated doing it became to Ar-Tik McCullough, co-partners busi to account F. J. showing Queen,1 McCulloughs Dairy McCullough’s and the the ness as McCulloughs quantity and whereby of frozen mix used dessert licensed the it payments upon frozen thereof use a make basis permit the use and to others to agreement machine, its in violation of constructed dessert defendant, Dairy 2080971, Queen, failed “within United States Patent part payments Ar- comprised to account eastern and make the area the including States, Com- Tik and to use the has forfeited the of the United pay- upon Pennsylvania, trade the name. monwealth based ment of certain consideration prayed, among things, other upon quantities frozen dessert the records; production for the of books upon considera- used and certain other money might judgment as such sum therein”; fully tions more enumerated due; temporary in be found be of as- of a series that under the terms junction enjoining permanent to be made McCulloughs signments from the Dairy defendant, Queen, con- a certain others there was executed doing anything connected with sale 1949, 29, which tract dated November pub product of the frozen dessert assigned to the had been Ar-Tik averred “Dairy Queen”; lic under the name trade corpora- Dairy Queen, Inc., a defendant and that court declare that shall register- Washington, tion of the State paragraph violated 3 of the defendant has in the Commonwealth ed to do business agreement 29, November Pennsylvania, whereby en- it became agreement paragraph of October 9 of the limits the territorial to use within titled 18, shall 1949 and that the said contracts “Dairy Pennsylvania name the trade any declared null void as Queen” manufac- with the connection Dairy Queen, Inc., may defendant, have “upon, frozen dessert ture sale acquired therein.2 con- alia, certain inter defendant, its answer plain- plaintiff and siderations allega- Inc., generally Queen, denied agree- assignors” under the said tiff’s However, ad- eompaint. tions of the 1946; prior 7, September ment of agree- assignment to it of mitted the 29, 1949 the to November ment of November 1949. registered name trade coined and Dairy Queen, Inc., defendant, fur The conjunction “Dairy Queen” and in agree that the in its answer ther averred developed plaintiff and others 1949 “referred to of October ment super- advertising, nation-wide extensive any complaint and paragraph 10 of the manufacture, and method sale vision assignments are unenforceable thereof “Dairy known dessert as of frozen of sale paragraphs result of and ineffective” as Queen” en- the trade name was agreement so of October 12 of the 7 and said value; 1949;3 defendant, the result of the and that hanced in only amended; Actually complaint was executed with subsequently McCullough who as 1949 is men- of November A. H. partnership. Paragraphs signed and 12 it to there. tioned pro- of October respective Paragraphs and 9 as follows: vide Apparently agreements defaults. concern Party any others, or Second “That paragraph 3 of relies any for sale other not sell or offer pro- dairy product, semi-frozen frozen payments “in the nature vides freezer, type any or make of although specific royalty” no reference machines, move of the said sell complaint as amended. to it made purchased said machines Party specific through reference to the con- First outside 3. There purpose 1949 in of October State of tract sideglance pos- pleadings Queen, Inc., tend sole owner is the Queen” “Dairy real drawn issues in the case which were name sessor of the trade Pennsylvania. sharper pretrial into much focus within the State hearings proceedings and the before Dairy Queen, Inc., defendant, court. declaratory filed a a counterclaim right opinion District in An filed judgment the Ar-Tik has findings Queen” Court, con “Dairy fact and the in which of within trade name plaintiff made and Pennsylvania. Ar- of law were discussed.4 The clusions of State among things, held, by deny- In effect was counterclaim Tik answered the govern allegations. the law of should ing substantially Illinois 4. The less of viduals Illinois, was at all times and still is fice of vania freezing Howard tors themselves four chines restricted Dairy these Queen himself, Robert J. described written sions tion. operators subject First Cullough’s it is them, of approve a findings gallon subcontract set Cullough “1. This “2. “7. “6. On October “12. That law: operating forth ^[*****] freezing written and all District completed individuals opinion of the offer of Queen Party. unless on all on all of The contract plaintiff four First Machines operated matter and direct an exclusive of fact read: contract with H. F. H. A. Dale under the name and machines territory in the contract. Rydeen, consideration within the State higher conduct Dairy under the Court has shall nature of a consent machines.” the mix used thorn, is Party individuals, Stores, Court and or cause to be That and granting these four indi- the sum of four cents unpublished. The critical rights the mixes and/or McCullough, acting shall be forwarded charge maximum until First M. E. Queen, entered into a without first signed. within ten stated, 18, 1949, at and Pennsylvania subject and Pennsylvania two the four individuals contract, right jurisdiction Burton F. parties to not exceed their Montgomery per royalty ‘regard- approval dispensing used or sold they obligated copies operate as conclusions stores this operation charge to the sold of gallon.” style subcontrac- Party patent’ days inter to the J. valid obtaining grant Pennsyl- through of this Moline, F. and/or Myers, of of provi- Dairy direct to after each alia, Mc- ma- Mc- per ac- of- all a December vided, vania and that tween lon under flict of on the In its Illinois the the aforesaid breach and violation of its contractual claratory and freezing and after in defendant’s ah, terminate subsisting four cents action gallonage December, 1954, ent Pennsylvania duty. evidence defendant ern the required by the contract of October or sold trict Court said: fore dismissed.” breached and violated its obligated thereto. stores been “4. “5. Defendant has failed “3. From and after the “The contract of October “8. Defendant’s “6. Plaintiff is “7. Plaintiff is was entered into place on all mix used or sold valid excuse or at all times and still is and/or this inter By failing discussion of Daws, through amount of mix machines and without Judgment enforce the to payments with the December, 1954, the sum four cents freezing contract between the 23, 1949, place per gallon contract, Restatement, performance alia, freezing payments territory § undertaking. Pennsylvania territory as this any 332(f). with interest and costs. entitled to entitled to Queen liabilities operated and that a direct machines. made to counterclaim for De- is from the defendant. contracting, and plaintiff justification merit, right unsupported by the defendant machines refusing to make on all sold Illinois. to from and after all and the to recover from stores case the Dis- to receive in defendant’s assignment defendant plaintiff from maintain this Dairy through any contractual The law of Myers, would mix used will is there- Pennsyl- operated establish per present for the sum parties parties and/or Queen based Con- gov- pro- pat- gal- and has be- of of is et Ar-Tik had third law to sue crucial party beneficiary. under that and that case claims this Suppiger Co., per- Co. v. G. S. U.S. with matters itself concerns ease (1942); sup- [62 363] 86 L.Ed. would S.Ct. doctrine General formance. port Corp. proposition law Mercoid U.S. 661 v. Mid-Continent case, govern 376] 88 L.Ed. Pennsylvania Restatement, [64 this S.Ct. should (1944); Squibb 358(c); Laws, E. R. & Sons v. Chemi § Conflict (3rd Foundation, Inc., (2nd Laws, Ed. cal F.2d 475 Goodrich, Conflict 1937); 1949). American Securit Co. v. hesitant Cir. Court But Shatterproof Corp., appears general apply Glass 268 F.2d 769 when it rule theory (3rd contrary apparent Cir. intention The defendant’s run to of the inapposite point parties. one because this Court charac at which agreement operates oth- terizes the as a franchise to the exclusion rule agreement sense or a trademark license con common a matter of more er is Laws, patent agreement, Restatement, tract and a logic, of not license Conflict than Competition agreements Callman, 358(b) 3 Unfair All the Comment. § 1950). McCulloughs (2nd by Trademarks 1007 Ed. were executed their business made the agreement Illinois, “The Ar-Tik and between locale the of H. operation. which was executed on is reasonable A. Therefore it September McCulloughs 7, patent 1946 was a license contracted the assume that agreement. By agreement, having of virtue of this the law towards with a view legal McCulloughs acquired right totality govern the their the to use of the Illinois parties. patent contracting ma- and manufacture the freezer with other relations Particularly upon chine, Systems, v. consid- Inc. McCul is this evident franchising plan. lough, F.Supp. (S.D.Ill.1955). general 133 807 the eration of McCulloughs subsequently plan of was na- When the ex ultimate extent The 18, scope. the contract of In order to achieve uni- ecuted October 1949 tional they granted patent certainty result, formity a of rea- more than mere They parties granted intend- the exclusive that the license. to assume sonable parts jurisdiction, e. to for the In certain of law one i. that the of ed Dairy Queen legal operation govern Illinois, of stores. extent would Boyd Wagner, Inc., transactions, Lorenzen, “Va- v. 132 Medd F. various Supp. 399, (N.D.Ohio 1955), lidity of Contracts in the 407 and Effects (1921). court, considering McCulloughs’ Laws”, 53 31 Yale L.J. Conflict purpose, plain- business said: contends “The defendant “ McCullough) provisions (H. may ‘The fact that he S. sue to enforce the not tiff of the the use of the name in 1949. It licensed connection October patent right long that a with a license of the ren- the rule Illinois been position stronger. person promise a third his much He was a sum to ders may entering party into a mere naked en- not license be not a agreement.’ person, Webster v. the third forced part purpose, Fleming, 52 Ill. N.E. 975 As of this overall the de- alia, (1899). duty, the contract confers a direct under a inter If fendants were person upon the third then he freezers. However to use the benefit Cherry duty entirely may breach, Aetna for its v. was incidental to the sue this main sity Casualty Surety Co., purpose By & 372 Ill. neces- contract. (1939); see Reconstruc situation is in accordance with N.E.2d also Corporation Bairstow, v. of trademarks well as Finance the law effi- tion (7th practices. It F.2d 353 cannot cient business Morse Starett 140 be doubted Cir. Steccone, F.Supp. that the contract October Products Co. v. Pepsi upon (N.D.Cal.1949); a 1949 conferred direct benefit Brosious Cola language expressly (3rd 1946); plaintiff since 155 F.2d 99 Cir. Mani the provides, Pay direct, Rosenberg, ‘3. or cause to be chewitz Food Products * * Systems, (E.D.Pa.1949). Mc- direct 9 F.R.D. Culloughs merely controlling four a on all mix were the sum cents * * Pennsylvania’. type Ac- used in sold of machine exactly plaintiff, cordingly, benefi- similar a direct stores. This is like may mix, physical ciary, for a sue breach of the con- charac- control teristics, Williston, standards of and the the stores tract Ed.). agreement (1936 called for § 399 which were Contracts Accordingly, there has denominated the “The defendant of October is patent patent question agreement misuse since of October 1949 a thereby agreement have entered into the raises the could license agreement patent misuse, de- Morton Salt same restrictive defense of agreement held that properly was further Jurisdiction of the court was grounded franchise of October was a found to diversity be citizenship. or trademark license and not 28 U.S.C.A. § so that license phenom suit an incident theory misuse raised defense development merchandising enal inappo- found the defendant was to be this frozen prod dessert or soft ice cream site. public by uct literally thousands Mc- court held that The trial individual country stores all over controlling Culloughs merely practically uniform with methods Queen’s type used in of machines period years.5 in a of less than 23 It had mix, stores, to like control of the similar inception July 31,1939 Harry when on physical characteristics grant M. Oltz a license to A.H. stores; Ar-Tik’s standards McCullough to manufacture an ice cream thinly product “the of a claim freezer on which Oltz held United States technique mo- veiled create Patent No. 2080971 in 23 states west nopoly indirection” and that four Mississippi River, known figure can not termed cent Agreement”. McCullough “Western for Ar-Tik’s to product furnish mix to make the accordingly by were entered Orders pay royalty and to Oltz a from four against Ar-Tik court in favor of and gallon per to cents one cent on all the Dairy Queen, $86,169.- Inc. sums of depending mix furnished to the machines representing principal $32,424.99, 08 and upon put op the number made into Dairy Queen, due from interest expiration dismissing patent eration until the of the counterclaim of the appeal May 18, 1954, As result latter. a was taken. on at which the manufac- A could final having fense from would be unreasonable to raise Warner-Lambert Pharmaceutical royalty enjoyment ty fendant cent turned four cent if the exacted ly independent [John do All ty payment lect facts plaintiff a uct of fendant even if on “The defendant’s “The patent to the fortiori, the freezer at anything four cent four assignee, gallonage disclose that McCulloughs the defendant’s have J.] a payments plaintiff’s plaintiff it as is plaintiff. thinly figure monopoly by cents of benefits under the Reynolds for Ar-Tik’s McCullough. assignee obligated 1949. This in relation to the part veiled cannot royalty they there had been no payment forcing per McCulloughs, desires to do misuse any patent is coextensive with the claim two had of the enure [Inc.], the four cent time. technique be termed a predecessors. desired to receive cents patent. indirection. The the defendant to is not the the contract claim was to Therefore the defendant, consideration such rights. to make the themselves, could have instead to contract, Further, F.Supp. the de- the de- patent. to be re- Co. entire- patent royal- create royal- prod- case. four col- 5. For details of the would militate a contract business tems, tiff sued ligated that defendant would be under continue plaintiff ther regardless lon under name. tiff so benefits from the tention is vision able to ing not date or cept 655 obligation brief, page 20); ent “There is no stated * * * “ ‘ ^[*] such an for royalty payments.’ expiration. specifically (S.D.N.Y.1959). obligation ^[*] Inc. v. calling long payment interpret Conversely, ” to continue need see Medd (S.D.Ill.1955), using perpetual payment, to make of the contract. precisely calling agreement. provision as it not and for an exact McCullough, set out to make the 40 against defendant is so the contract as continues to long for royalty payments the absence of a should on development enjoying payments Boyd The duration of the The public policy relating by royalty payments does not contend as benefits accrue the enforcement point (plaintiff’s In Ar-Tik plaintiff’s for breach of defendant dis- Wagner, Inc., present plain of the Dairy Queen it is termination clearly parties to the to reap per one F.Supp. patent. reason- which name, plain- Sys call- fur- pro- con- pat- gal- was ob- ex- during end, taring used the machines built but he were to number, keep said permitted machines said his be operate during paying the independently continue ma- the life of the them regardless chines as usual.6 ” * * * of said Evidently parties considered Copies “5. of all sublieenses Agreement” exploitation “Western granted Party by Second shall be satisfactory for them successful promptly Sys- to Ar-Tik furnished 1946, Ar-Tik, corpora- September tems, Incorporated. All machines and to Oltz had formed tion which manufactured bear shall serial assigned into interests entered he his Systems, number Incor- H. A. porated, kept at informed granting manufac- the exclusive of ma- all times of the location ture, use and machines sell manufactured Second Par- chines many states east same ty or his sublicensees.” Pennsyl- including Mississippi River contract, as the supplement known vania. A Agreement”, February 20, 1953, was to terminate “Eastern into on as of entered September May 18, patents im- if but Ar-Tik and F.H. McCullough’s McCullough acting to run provements secured was improvements. Mc- Dairy Queen, for the life the fol- which substituted $10,000 Cullough original lowing 4 of the percent agreement: received and 60 sums in cash rights he, by him reason of territorial “4. All issued sub-contracts grant McCullough, might par- to third Party [McCullough’s Dairy Second $102,000 was to Ar-Tik. until ties Queen] provision shall contain ob- agreement Paragraphs 4 and 5 of the ligating sub-contractor, succes- read: sors, assigns, pay and to Ar-Tik to granted “4. All sublicenses sum of Four Systems, gallon Party [McCullough] per (.040) shall on Cents all mix Second obligating provision in built under said contain used machines Sys- number, payments pay to Ar-Tik to to con- sublicensee said during tems, Incorporated, the sum of Two the life tinue regardless of machines gallon per expiration all mix (.020) on of Cents (N.D.Ohio 1955) indefinitely my F.Supp. them within 399 erate allotted 132 McCullough, Systems territory. royalty 133 Tour is to F. continue as (S.D.Ill.1955). Supp. 807 usual.” agreement By September 7, Paragraph 6 of the of No. a rider dated 6. en- July Ar-Tik and reads: into between H. tered Cullough A. Mc- McCullough] paragraph am to furnish above [H. “I A. 6 was product, to whatever mix make the to read as follows: amended you [Harry you royalty is, Oltz] I am to M. “I am as the sum gallon royalty per (.040) per gallon on all the mix Cents of Four on all machines, first in to the mix used machines built under furnished Patent operated per gallon the next 20 I on machines. within No. 2080971 the above opera- territory. in then have machines are to would described We consider expiration on to From that time the termina- in force until tion. this contract your agreement, royalty your of tion which I of understand per gallon May 18, my on be all machines would At that time be facturing rights manu- operation, end, in and would continue are but I then am to be per gallon keep my operate be all machines machines and allowed indefinitely my are to made thereafter. We consider this within them ritory. allotted ter- in until force of Your is to continue as your patent, improvements I In the understand be usual. event are May 18, my agreement patent, At time manu- made on said then this facturing end, rights during are but am to be the life I shall extended such my keep machines, op- improvements.” be allowed to * * Party, addition, pay- patents. The said ond in 50% all Four Cents the sale value of said franchise amount ments rights gallon per divided or territorial used Second (.040) shall be Party.” parties hereto equally between Party remit and First year A minimum for each Two Party the amount Second $18,625 fixed in the sum of until the full gallon month per each (.020) Cents $149,000 liquidated. balance of sub-contrac- collected from the agreement 8 of said tor.” Dairy Queen Pennsylvania McCullough as- Subsequently H. A. to: agreement signed rights his “Pay direct, cause partnership September 1946 to direct, Systems, Inc., to Ar-Tik consisting him, H. F. Avenue, Miami, Florida, NW 17th McCullough, name F. under the J. the sum of four cents a mix used or sold McCullough’s Queen. Dairy through any and all McCullough’s On October Dairy Queen Stores said and/or Dairy Queen into an entered Freezing Dispensing Machines Rydeen, Myers, Robert J. Burton F. with operated by Second Dale, Montgomery M. and Howard E. Party Subcontractors, their and/or Queen Dairy trading under the name beginning from hereof, operations Pennsylvania. The recited in the nature of a re- Dairy Queen reg McCullough’s gardless Queen” “Dairy the trademark istered ” * * * on said machines. Pennsylvania; that Ar with the State of owner of Patent No. Tik was the Dairy Queen In addition Pennsyl- Freezing Dispensing 2080971 on Machine; vania keep covenanted to records and man and that “the maintain operations methods of store sell, use, ufacture, Sub-contract conformity regulations and/or with established parties under said Patent were to other McCullough’s Dairy Queen agree- granted McCullough.” pro to H. A. Queen operators ments then McCullough’s vided force other states. convey four should individuals Queen Dairy Pennsylvania of spe- constituting Dairy Queen Pennsyl of cifically agreed as follows: right “an exclusive vania territory Pennsyl of certain the State of “7. That Party the Second Dairy for the restricted conduct of vania [Dairy Queen Pennsylvania] of or ** *."7 Queen Among Stores, any others, shall not sell or offer for Dairy Queen by conditions assumed Pennsylvania of any sale other frozen or semi-frozen was the “direct dairy product, any type other or * ** McCullough’s Queen Dairy freezer, any make of or sell $150,000 $1,000 of of cash” which machines, said move of the said payable at once and the balance as fol purchased through machines lows: Party First outside of the State of “* * * Pennsylvania forthwith of purpose all op- 50% of erating them, of amounts sales of franchises or obtaining without first rights made Territorial approval Second written consent and Queen Party [Dairy Pennsyl- Party days, the First within ten completed signed. under sold vania] contracts Sec- after it is and ville, following Bethlehem, Chester, areas West Coats- agreement: Allegheny ville, Morristown, Chester, Reading, excluded Al- County Greenburg, and Union- Cities and lentown Easton. Washington, Pottstown, town, Phoenix- commencing month, Party vious calendar shall or- “8. That Second January 1950.” Party through of said First der develop- said needed for machines Messrs. Martin December On selling ment, manufacturers at assignment Thompson and made an prices factory. Said price o. f. b. agreement rights under their all their depend- may vary time from time to they corporation 29, 1949 to a November upon labor. and guarantee material costs of ent organized the laws Party First Dairy does Washington as known State dates, furnish delivery or prices, herein, Queen, Inc., the defendant charge on the parts free of labor fol- as whereof it consideration Party shall Second said machines. lows: mat-' up manufacturer take with hereby accepts “Dairy Queen, Inc. necessary adjustments ter assignment said parts unsatisfactory defective hereby and under- assume and does Party or Second First of machines. obligations duties take all of the Party to as- not be upon Martin, imposed D. Jr. C. defending responsibility for sume Thompson the terms Edward such de- Patent Number agreement, in accordance said fense C. D. with thereof said the terms Systems, Inc.” Thompson Martin, Jr. and Edward * * * No- into on In an entered per- no further shall have Myers, Rydeen, vember Montgomery Messrs. agree- liability sonal under said doing Dale, business ment.” Queen conveyed Pennsylvania, Dairy turn, Dairy Queen, Inc., in executed Martin, Thompson to Edward and D.C. nearly agreements franchise with Jr., con- all of their under the territory acquired storekeepers in tract of October McCul- as the “owner was described which it lough’s Dairy Queen right and the to con- right license exclusive vey corporation all of their interest to a Queen Dairy manufac- Freezers use of they might organize subject to: 2080971 and the under Patent No. tured “(b) Par- Performance Second Dairy right name the use of trade ty [Thompson and of all of Martin] * * territory Queen in the obligations Party First Pennsylvania.” Each fran- State Montgomery [Myers, Rydeen, granted holder was chise Dale, doing business as under the frozen food make sell Pennsylvania] (cid:127)of under the McCul- Among Queen. obli- name lough Contract. gations by the franchise undertaken Payment “(c) by pay a stated was the Party holders Second of in- Systems, all the franchise in cash or sums due to Ar-Tik amount McCullough’s Dairy Queen a addition stallments gallon royalty per McCullough on all mix 29 cents under the of terms of the long they as the freezers as (cid:127)Contract. used in operation. or in use “(d) Payment Party, to First agreements 8,000—in contained demand, franchise of the sum of understood and per liquid provision, “It is plus cash Systems, Inc. own (or mix) Ar-Tik equivalent powdered that mix * * *” (No. through patent, processed all machines agreed that product franchise holder Each manufacture busi- of the ‘Dairy Queen’ of the conduct records in the ter- his ness, known as and location ritory by McCullough numbers the serial covered freezers, mix used all the Contract, payable on or before the open by held would be day processed him pre- for the 10th of each month inspection 18, Ar- October supposed “an actual to the examination satisfied are among provisions duty prom- These of the others. asserted Tik beneficiary [McCullough] franchise isee forms of contained agreement year [Ar-Tik].” until in use sions franchise used fines the contention party cover since Pennsylvania itor no of plaintiff, but mention vania cuted contract formance is standing 2080971 is not dictates conflict of laws bankruptcy, or able because of ficiary against purpose Limitations or Frauds.” performances person beneficiary, the terms satisfy serted person promise in a contract will benefit a The District Court held Preliminarily another, Illinois standing “(b) “(1) beneficiary accompanying circumstances and in one state beneficiaries been barred performance Restatement, creditor that, in this case and of October duty other than the is, an actual or V/here to sue for a breach to make ^[*] creditor place to sue. of Ar-Tik * controlling; law a direct where the or a beneficiary neither a law of the applicable arewe ^[*] ** found and hence the defendant which applicable to the third rule of performance of a promise Ar-Tik 3 of the contract of Contracts § gift beneficiary performance the Statute of promisee promisee is ^[*] supposed beneficiary, promisee, confronted with to be is contract is exe- appears and thereafter. promise discharge donee nor cred- of the bene- royalty provi- and that as follows: Pennsylvania place unenforce- that the law Statute of in view of may ^[*] Ar-Tik has Patent performed under the Pennsyl- form or as- that 133, de- if will ^[*] per- No. re- the freezer manufactured under United exclusive eration is of Dairy Queen lough’s McCullough’s set and cash and installment four cents rights. As Pennsylvania it made no difference which law the Dis was a royalty. Contrary to the contention of trict Court the defendant, it seems v. Great mix States Patent No. 2080971 and 1949, Myers ingdon Twp., for the ment, Contracts assignees standing to sue on the instant contract Pa. sublicensees. This amount September Pa. Cullough ance Since the law of Illinois and the law of (1957); Spires v. Hanover Fire Insur Under Pennsylvania of a four cents Pennsylvania. New Amsterdam heretofore for used in the duty the use of the creditor the right 185 A. 198 167 A. 793 right American payable provided applied. use of the provide et al. stated before a Stores. Pa. are alike in noted. Dairy of two cents beneficiary to a § has Ar-Tik the four cents- Pa. to Ar-Tik Burke v. North acquired supplemental 133. Commonwealth Ar-Tik name Indemnity Co., for 70 A.2d 828 (1) (1936). (1933); for each of these 4 of A Casualty If adopted clear that patented separate machines of October was to Dairy Queen.9 giving the 136 A.2d 310 certain required operation payments per gallon from McCul directly right were fixed contract of McClelland increased territory Co., Restate (2) freezer (1950). consid satisfy to use Hunt parts Mc law his all1 to- to Corporation 8. See Reconstruction Finance 9. If clarification needed -wore concern- Bairstow, (7 parties 1944) ing sup- v. F.2d 140 it 353 Cir. the intent the testimony plied and Illinois cases cited of H. therein. the F. McCul- lough, as follows:

505 justifies its 1949, more The defendant termination a little On November ground it, payments acquired the they than a month after provision of Oc- that the of the contract Myers assigned the contract et al. payments turn, requiring who, on tober Martin, in Thompson and month, royalties expira- beyond Ar-Tik of the 23, 1949, less than December patent, tion is unenforceable corporation, date transferred to their because it a misuse constitutes Dairy Queen, defendant, patent. Inc., Queen, Dairy Thus, defendant, Early posi- not sustain that cases do directly obligation to assumed the Squibb Chem- tion. In E. R. & Sons v. royalty to Ar-Tik the four cent (2 Foundation, Cir. ical 93 F.2d pattern be- in the contract established 1937) it was said: Sep- McCullough of tween presumption “There that is a Indeed, Ar-Tik, admit- tember royalties paid after not to be are tedly signatory not a contract patent; in- if of a present claim its bases them tention is to have continue beneficiary under party as a named third longer, parties phrase should that contract. language from their may fairly which such intention Queen, defendant, con- inferred.” di- cent tinued to the four Appeals Court the Second 1954, The rectly through to Ar-Tik November authority earlier cited Circuit two as expiration of some months six after Sproull Pratt & in that circuit: cases v. fur- make It refused to then 1901) Whitney Co., (2 108 F. 963 Cir. although payments mix con- ther Pac. and Pressed Steel Car Co. v. Union freezers tinued be used in the Co., (2 R. F. 518 Cir. Dairy Queen stores noted, however, in all should be However, holders. its franchise suggestions royalties eases the three payments defendant continued to make expired payable patents made could be separate on account three dicta because in each of the were McCulloughs arising under con- con cases it was found that 18, 1949. con- of October It also tract provide payment. tract did such payments to Messrs. tinued to make Sproull, earliest And in of the Sec Myers al. et authority cases, no is cited ond Circuit 29,1949. of November support there dictum stated.10 going trade granted words, for ments that “By Mr. rect sideration “By Mr. “Q. “Q. “Q. “A. ^[*****] ***** Arctic to testimony correct? correct? name, you Let And That you I not. in all franchises Egnal: Egnal: am to use this for the ask tryme made ^[*] going get correct. you cases also use 4 territories where ^[*] to read to whether you gave, cents recorded Arctic gave of the you again. ^[*] freezer; freezer; their con- were cor- and I am you arranged operator state- ^[*] you 10. One or more of v. American Ore Reclamation Rubber National Bank of velopment Corp. 1951); F.Supp. 396 use instalments made cases. house, cases (1938); (D.Mass.1954); “A. “A. That “Q. F.Supp. (D.Mich.1959), 233 P.2d 82 have your As That Six Star Tate trade Co. Dwight far as been own is correct.” is (S.D.N.Y.1939); Colo. v. name correct. Kleaner, cited Starke Lewis, Lubricants you deal, & (Cal.Dist.Ct. of (D.N.J.1947); right Detroit, affirmed 283 F.2d these Watson-Stillman Lloyd in a either v. Manufacturer’s number Second Circuit Queen? concerned, you Sintering Co. v. 174 F.Supp. H-P-M De you in cash or P.2d 1239 Cal.App.2d Co., 44 F.Supp. gave Appeal Bettis More later 117 Co. (1961 Supp. expiration Patents, of the p. of the The con Walker, In grant upon brought Li ed.); tract Patent which suit was Ellis to Vol. II Deller’s Deller, McCulloughs right (3rd ed the to manu censes, 109, p. ed. Sec. freezing facture, 262, p. 1958) cream ice Patents sell and 69 C.J.S. § dispensing provided an that machines and there are to the effect statements patent payment royalties ma royalties for the on all pay a after binding.11 agree chines expired may manufactured be valid developed ment and Sec used in the business The are either authorities cited hereto noted ond cases four Circuit the licensee. The was per processed fore. cents mix on all through the The court with machines. McCullough, Systems In Ar-Tik v. citing any authority out held there that present (S.D.Ill.1955) F.Supp. 807 nothing illegal contrary public plaintiff breach sued agreement. policy July 31, court made The Agreement” of the “Western patent in its assignment, reference to misuse they acquired which opinion.12 calling regardless royalty payments by background 12. Another case (6 1960); related Cir. In all the cited cases Boyd litigation any opinion the instant Medd except is- Six Star on Wagner, Inc., F.Supp. (N.D.Ohio sue involved Six here was dictum. doing partners Supreme Medd et al. were Star the of Colorado re- Court They Dairy judgment plaintiff business as Stores Ohio. on versed ground Boyd Wagner, and individual sued it the use failed to establish alleged any patented patented The Medds that on defendants. of the formulae or they patented any December secured formulae or modification. right H. A. to- exclusive It remanded the case for new trial. on, however, express the use of Patent 2080971 United States The court went patent an in Ohio for the life of the its views on appellant made the contention assignment McCullough’s rights provision re- They quiring royalties trade name of Ohio. on exploit proceeded expired patent then the name was invalid. It stated: conjunction against legal Queen of with Ohio the- “There is no inhibition phrase they party contracting pat- with' had coined “The Cone on a July Top”. period the Curl on On ented article or formula for a be- yond expiration Medds entered a distant franchise- the date into Boyd giv- Wagner, patents.” p. at P.2d 1242. ing It exclusive and- instructed the lower court that under question the name in 21 counties of Ohio which the facts of that case rights expire required royalty with the on whether payments were May Boyd Wagner, expired patent 1954. Inc. sub- was for jury. sequently into a number of fran- entered cited Pressed Steel Car. Co. supra agreements by v. Union P. R. and Mitchell chise licensed operators (co-defendants Hawley, 16 Wall. store 83 U.S. the- (1872) question Boyd Wagner, Inc.) L.Ed. 322 but the instant case with patent to use the appear not does to have been and trade name which raised in likewise ex- pired May 18, the Mitchell case. with the they The defendants announced English 11. The rule would also seem to “Dairy would continue to use the name agreement. permit such an Siemens v. phrase, they but Queen” and the Taylor, (1892); 9 R.P.C. 393 Terrell any royal- would refuse to the Medds (10th Shelley, Patents, p. 234 ed. 1961 May 18, ties after Shelley). patentee grant- In Siemens the brought Medds their action to re- pat- a license for the ed use of several strain unauthorized use of the trade pay royal- licensee ents. The Dairy Queen and of name the trade any patents ties for the use of of the un- phrase. patents. of all til court, dictum, royalties said that The defendants contended that after the patent, property must be patents the use of long patents lodged so name became the defendants subsisting but it held that li- and that of the Medds to the trade using any phrase censee name and ceased to exist. inventions.

507 applied ques the analo- construction gous first case Apparently the royalty agree- patent field of Squibb Baker- the dictum tioned Squibb & v. ments. E. R. Sons Hosiery See Davis Mills v. Cammack Foundation, Cir., 2 93 F.2d Chemical There (4 181 F.2d Cir. 475, 477; Lewis, D.C., 127 Tate v. court stated: 105; Dwight Lloyd F.Supp. & Sin- Company new “The Davis tering Ore Co. v. American Reclama- provision as offer also eliminated Co., D.C., F.Supp. 396. tion expiration the license. to the date royal- presumption ‘There a justify its 'Theretofore in order not after ties are be requirement license taken that a expiration patent; of a if the inten- last until a manufacturer should longer, tion is to have continue them youngest patent in (cid:127)expiration of the parties phrase their con- should upon group, relied it had language tract from which such as E. a case rule in such announced fairly may be inferred.’ intention Squibb R. & Chemical Sons Squibb E. R. Foundation, v. Chemical & Sons 475, 477, Foundation, Cir., F.2d supra, F.2d 477. par if the between the point fact, In expressly provides, ties so royalties on the manufacture may payments after the be collected a ‘after the article expiration of the Such legal expires, device whatever the might easily however, provision, may employed,’ be unenforcible lend itself an unreasonable re contrary public policy. Pa- Scott extending pat straint trade Mfg. Co., per Co. v. Marcalus beyond legal limit; ents but it their 104, 90 U.S. S.Ct. pending been has eliminated purposes, L.Ed. 51. For our longer case need no be consid apply rules same should p. ered.” F.2d at agreements involving copyrighted Appeals The New York Court literary property, inasmuch as both questioned Squibb dictum in copy property—patent forms April Schirmer, Inc., Productions G. right—may enjoyed only 308 N.Y. 126 N.E.2d 69 A.L.R. period time under the limited (1955). 2d 1305 held There court Constitution, art. United States copyrighted that where a licensee p. 8.” at cl. 126 N.E.2d § composition in its own name in accord vitality Further is cast doubt publi ance with the custom in the music Squibb, set forth in in War rule provid cation and the contract business Reyn Co.v. John J. Pharm. ner-Lambert royalties licensor, ed for who was (S.D.N.Y. olds, F.Supp. 655 calling assignee composer, "the for each 1959). There for the a contract copy sold, payment royalties was royalties payment of indefinite not after the n copyright. The drug upheld. formula was use of secret said: court formula, however, unpatented. reading “Our discussing issue instant the court imposing suit—as pay said: royalties after “Paralleling concept underlying copyrights—is that the re- licensing copyright patent or of a inforced an established rule distinction marked between The court concluded from the evidence complete- phrase it revolved this is that trade name and case were not ownership ly the trade associated around with the ma- freezer phrase. Ar-Tik did not attempt and trade chine was no name there to ex- appear issue of the in the suit tend the life of the use of the royalties enjoined on the freezer phrase. trade name and using any raised. defendant them. only statutory contracts the from derived his free use the granted monopoljr public in such cases is disclosures. The has invested concept frequently grant ex- the not so such free of a may pressed public policy monopoly patentee re- limit- for a quire any attempted a termination of ed time. Hence res- copyright patent pat- when the or ervation or continuation in the ” ** claiming term is 178 F. entee or ended. those him of Supp. patent p. patent monopoly, at after the expires, legal whatever device authority for As statement employed, policy runs counter to the Paper court Scott Marcalus cited Co. v. purpose patent And laws. Co., (1945). 326 U.S. 66 S.Ct. 101 stranger, for the same reason a such Paper In the inventor Scott case an respondent, Marcalus, cannot, by assigned patent employer. He to his securing assigning patent employment left that to start his own expired the invention of Inman business, allegedly produced an where he patent, right any petitioner confer on infringing brought by In a device. suit deprive public employer his former ground he on the defended benefits of the use of free the inven- patent assigned that the he had public tion for which the copied expired patent. had been an from grant monopoly. of a limited reply urged employer In estopped defendant was in- to assert the “By patent the force of the laws validity patent because only he patent is the invention of a assigned value. public upon dedicated to the its ex- piration, public thereby but the be- assignor The Court held that of a good comes entitled to share in the patent estopped denying was not from patentee up will which the has built assignee’s validity in the action for in the product article or infringement where the accused device through enjoyment patent of his prior patent expired monopoly. Hence we have held that patent precluded since the signor laws the as- patentee may not exclude the estopping from himself from en- public participating from in that joying rights policy which it was good any secure, extent, will or laws to free from all restric- monopoly by continuation his re- stating tions. the rationale for its sorting to the trademark law and holding the Court said in words which registering any par- aas trademark appear applicable to the instant issue: descriptive appearing ticular matter “The aim of the laws is not drawings specifications, or only public that members of expired patent, claims of the wheth- shall be free to manufacture the or er not such matter describes es- product employ process or dis- sential elements of the inventions expired patent, closed but also Kellogg claims. Co. v. National Bis consuming public large that the at Co., supra, cuit 117-120 [59 S.Ct. shall receive the the un- benefits of 109]; Singer Manufacturing Co. v. exploitation, by others, restricted Manufacturing Co., June 163 U.S. Kellogg its disclosures. Co. v. Na S.Ct. [16 41 L.Ed. tional Biscuit 305 U.S. 118]. 117-120 S.Ct. [59 83 L.Ed. 73]. If a manufacturer or user could apparent pat- “It is thus that the himself, by express contract, restrict preclude patentee ent laws an by give action which would expired and all includ- others ‘estoppel’, using rise an from petitioner ing recapturing expired patent, invention part he patent monopoly; the former deprive would himself and the con- those laws dedicate for public suming advantage public the ideas inventions em- They royalties expired patent. extends in an bodied may patents patents anyone contemplate under which that do not of expire expiration ar private that to date or contract of of form patent recently granted may most Se- to rangement withhold from ” ** sup- (Emphasis public curit. invention use for of plied omitted.) its 268 public and footnotes has which p. grant monopoly F.2d at which aof all. appropriated been of Oltz, assignor, sought to bind Ar-Tik’s then rights are invention The McCulloughdirectly original H. A. in the barter, private subject longer no 1939, July 31, contract of the “Western Phillips Co. v. sale, waiver. Cf. royalties Agreement”, of Co., U.S. R. Trunk Grand patent. after the of his 774]; Mid 59 L.Ed. [35 S.Ct. McCulloughs Sep- its contract with of Pennsyl Horticultural Co. state tember them 356, 361 [64 R. U.S. vania obligate themselves and all sub-li- Brooklyn 96]; 128, 88 L.Ed. S.Ct. pay royalty beyond censees to it a O’Neil, [Savings] 324 U.S. Bank v. patent. of its 895, 89 L.Ed. 697, 704 [65 S.Ct. McCulloughs dutifully The met this It follows that 1296]. requirement by imposing upon their assignee petitioner preclude the laws agree- paragraph licensees invoking estop the doctrine from obligation ment of October continuing as pel, means of aas directly paying Ar-Tik four cents assignor, against respondent, his gallon royalty. per before, As noted expired monopoly, and of an benefit assignments sought carry subsequent assignor they es- preclude the from obligation the same defendant. enjoying topping himself willing fact that was to di- policy of the it is the which royalties its with vide makes restric from all laws free no tribute them less for use of the private than For more tions. patent license. estoppel means can be the avoiding successfully require There no evidence in this case to- legislation support any for the claim that Ar-Tik was vested enacted ments of any ownership protection public interest. interest ”* * * Pennsyl- Queen, supplied.) (Emphasis trade name pp. 255-257, name was Mc- at 66 S.Ct. at vania. The created U.S. Cullough exploited and has been in Penn- pp. sylvania defendant, Dairy Queen, by the expressed its court views This acquired the title stem- present question American Securit McCullough. ming originally from Ar- Cir., Shatterproof Corp., 3 Co. Glass royalty as contracted Tik’s for (1959). held invalid a 268 F.2d assigns McCulloughs and their down to licensing agreement “package” wherein solely for defendant was the use of obliged to take license licensee its patents only group of if even one stating: wanted, we In this view differ from the Findings Fact, also, quite apart in its conclude District Court “We 7, supra, foregoing, 6 and Nos. clearly must hold as- from all Para- 8(a) graph Li- determination Standard erroneous Securit’s Agreement censing provides under the assignees obli continue royal gated expira- Ar-Tik a themselves full force and effect to the ‘in any’ per expire ty used, four of the last to cents mix tion grant- consideration, alia, patents inter Securit’s out set ‘Schedule Pennsylvania territory A’ constitutes misuse operation present interpretation of with its the restricted conduct Dairy Queen of its obligation hereto- contractual As stated in that it has en- stores. many forth tered separate is set into sublicenses fore a consideration at substan- profit incorporating tial of Octo- same right. including structure supra, which it now assails ber type the same four cent restrictive covenants ones; and said additional 3 of the and con- is found in that it has solely pay “separate” tinued for the use of its and is McCulloughs assignors patented and machines. to its conveyed nothing who more than their expiration of Patent After the under the contract of October grant 18, 1954, May No. 2080971 on 1949. Ar-Tik further that submits spent. patent monopoly An at Dairy Queen, Inc. has taken con- monopoly by tempt the ex to extend that tinues to take the benefits of the royalties was unenf thereafter action recognized 1949 contract and has all of clearly appears orceable.13 Such action obligations its except thereunder con- Paper be interdicted Scott Co. v. duty Ar-Tik, thereby tinued manifest- Co., supra, and American Marcalus Se ing by interpreted conduct that it its has Shatterproof Corp., curit Co. v. supra. Glass legal binding the contract as that may it serting not now contradict as- itself Dairy Queen, further Inc. contends illegal is that it and unenforce- that there was misuse of the in able. paragraph 7 the restrictions contained None defendant, acts of the October be- however position inconsistent with the McCulloughs Myers, tween et it case, preclude taken can al., provided wherein that it neither asserting it invalidity from of the latter nor others “use requirement royalties pay after the type or of freezer.” other urged make It is expiration of the freezer in view in this connection that the effect reasoning holding of the in Scott the restriction to force “was the de- Paper Marcalus, supra. Co. v. only fendant and its sublicensees to use the * freezer and thus free [it] payments by The continued defendant * * competition from with freezers assignors to its and the un- coming patent.” not In view obligations only der its to them indicates holding our earlier as to the unen- recognition duty of its forceability agreements royal- the tory terri- described ties after the operation Dairy Queen for its unnecessary is to rule the issue of stores. further misuse. Ar-Tik further contends that: urges Ar-Tik also the de- “ * * * promis- Defendant is a “by fendant its own conduct and inter- * * * party beneficiary or in a third con- pretation of the contract is raising tract. It has received precluded from entire con- here defenses sideration promise. Dairy Queen for which contends that made that asserted.” asserting transpired estopped royal- Whatever from is ty that the past plaintiff patent, and, between to Ar-Tik is to a tied so illegal, interpreted, McCulloughs, expressed is because it con- whether motivation, tinued terms of consideration whatever, until November well after led to the re- quirement pay plain- It also that defendant urges its conduct is tiff none inconsistent of defendant’s concern. Scapa Dryers, Abney Mills, 13. See v. Tinnerman Products F.2d (5 1959); Corp. (6 269 F.2d 6 Cir. Prestole Cir. beyond go may not Defendant Appellant, Henry YOUNG, Defendant, H. own contract.” words, contends America, UNITED STATES argue may the defendant not Appellee. supple- September contract of mented, No. 5954. illegal We unenforceable. de- dispute do not this contention. Appeals United States Court defense fendant does patent base its First Circuit. be- misuse on April McCullough. It sub- tween Ar-Tik and provision mits that the McCul- 1949 between

loughs Myer al., eventual- Messrs. et ly assigned defendant, beyond it to freezer for the use of the illegal patent expiration date points Indeed, Ar-Tik

unenforceable. brief, out in its the defendant nothing at the trial that its defense passed

to do consideration which McCulloughs. between Ar-Tik and the only

The 1946 in so contract is relevant provisions

far as it illuminates the of October A number of are other contentions They

raised Ar-Tik. examined

and found to influence re- have no on the

sult reached herein. position argued by No party either disposition

as to the of the counterclaim. question is, event, raised encompassed by main issue settled in Therefore, may

this case. stand dis-

missed.

The orders of the District Court of

September 30, 1960 and November granting judgments favor Ar- Systems, against Dairy Queen,

Tik Inc. $86,169.08 $32,- Inc. the sums of

424.99, respectively, will be vacated and

the case remanded with instructions to judgment Dairy Queen, enter in favor of Judge McLAUGHLIN, (dis- Circuit

senting) . findings fact,

I think that the con- opinion

clusions of law and of completely justified by

district court are Bernstein, Boston, Mass., the record I case. would affirm Israel judgment. appellant.

Case Details

Case Name: Ar-Tik Systems, Inc. v. Dairy Queen, Inc.

Court Name: Court of Appeals for the Third Circuit

Date Published: Mar 28, 1962

Citation: 302 F.2d 496

Docket Number: 13447_1

Court Abbreviation: 3rd Cir.