Thе major issues in this case are whether the district court properly declined to decide the validity of plaintiff’s patent in a suit for fraud, breach of a confidential relationship and negligent misrepresentation in defendant’s procurement of an assignment of plaintiff’s patent rights and whether the district court properly concluded that plaintiff had elected his legal remedies and, therefore, was barred from seeking his equitable remedies of rescission and restitution.
I
This case involves the efforts of one of this nation’s largest retail companies, Sears, Roebuck & Co. (Sears), to acquire through deceit the monetary benefits of an invention of a new type of socket wrench created by one of its sales clerks during his off-duty hours. That sales clerk, Peter M. Roberts (Plaintiff), initiated the unfortunate events that led to this appeal in 1963, when at the age of 18 he began work on a ratchet or socket wrench that would permit the easy removal of the sockets from the wrench. He, in fact, designed and constructed a prototype tool with a quick-release feature in it that succeeded in permitting its user to change sockets with one hand. Based on that prototype, plaintiff filed an application for a United States patent. In addition, since he was in the employ of Sears, a company that sold over a million wrenches per year, and since he had only a high school education and no business experience, he decided to show his invention to the manager of the Sears store in Gardner, Massachusetts where he worked. Plaintiff was persuaded to submit formally his invention as a suggestion to Sears. In May 1964, the prototype, along with a completed suggestion form, was sent to Sears’ main office in Chicago, Illinois. Plaintiff, thereafter, left Sears’ employ when his parents moved to Tennessee.
It was from this рoint on that Sears’ conduct became the basis for the jury’s determination that Sears appropriated the value of the plaintiff’s invention by fraudulent means. Plaintiff’s evidence proved that Sears took steps to ascertain the utility of the invention and that based on the information it acquired, Sears became convinced that the invention was in fact valuable. Sears had two sets of tests run on plaintiff’s wrench by its custom manufacturer of wrenches, Moore Drop Forging Co. (Moore). The first test was conducted in *979 July 1964, and it proved that the wrench operated normally and that the quick-release feature did not substantially weaken the structure of the wrench. The second test, conducted in May 1965, showed that actual mechanics liked the quick-release feature. Moore reported the results of these tests to Sears.
Based presumably on these tests, and the expert opinion of its senior tool buyer, Arthur Griesbaum, Sears in March 1965, had Moore design a fine-tooth wrench with the quick-release feature built into it. In addition, at about the same time, Sears put in motion plans to incorporate the quick-release feature into then-existing wrench models that constituted 74.27 percent of all the wrenches Sears sold. Thus, by eаrly 1965, it was clear to Sears that this invention was very useful and probably would be quite profitable.
Sears also received reports from Moore regarding the manufacturing cost of plaintiff’s quick-release feature. In the initial prototype built by Moore, the cost was 44 cents per unit. By June of 1965, Sears had received a report indicating that the cost could be reduced to 20 cents per unit. Thus, early in 1965, Sears learned that the feature was relatively inexpensive to manufacture.
Sears also took pains to ascertain the patentability of the quick-release feature. In April 1965, it received outside patent counsel’s advice that there was “some basis for limited patentability” (defendant’s Exhibit 9). It had previously learned in February 1965 from plaintiff’s lawyer, Charles Fay, that he believed the invention was patentable based on a limited search. In addition, Sears was informed in early May 1965, by plaintiff’s lawyer that a patent had been issued to plaintiff. 1
With all of this information either available or soon to be available, Sears contacted plaintiff in January 1965, and began negotiations regarding the purchase of rights to use plaintiff’s invention. During these negotiations, conducted with plaintiff’s attorney, Sears’ lawyer, Leonard Schrаm, made various representations to plaintiff that serve as the essential basis for plaintiff’s complaint. In April 1965, in a letter seeking merely a license, Schram first told plaintiff that the invention was not new and that the claims in any patent that would be permitted would be “quite limited” (plaintiff’s Exhibit 34). Second, Schram told plaintiff that the cost of the quick-release feature would be 40-50 cents. Third, he told plaintiff the feature would sell only to the extent it would be promoted and thus $10,000 was all that the feature was worth. Finally, and perhaps most ironically, Schram wrote to plaintiff that “[o]nce we have paid off the royalty expense, thеn we would probably take the amount previously allocated to said expense and use it for promotional expenses if we desire to maintain sales on the item.” (Emphasis added).
Based on this letter, plaintiff entered into the agreement on July 29, 1965, which provided for a two cent royalty per unit up to a maximum of $10,000 to be paid in return for a complete assignment of all of plaintiff’s rights. In fact, for no extra charge, plaintiff’s attorney gave Sears all of plaintiff’s foreign patent rights. A provision was included in the contract regarding what would happen if Sears failed to sell 50,000 wrenches in a given year, thus reinforcing the impression that the wrenches might not sell very well. Also, a рrovision was inserted dealing with the contingency that a patent might not be issued, notwithstanding that Sears already knew, and plaintiff did not, that the patent had been granted.
By July, Sears knew that it planned to sell several hundred thousand wrenches with a cost per item increase of only 20 cents, that a patent had issued and that this *980 product in all likelihood would have tremendous appeal with mechanics. Nonetheless, it entered into this agreement both having failed to disclose vital information about the product’s appeal and structural utility and having made representations to plaintiff that were either false at thе time they were made or became false without disclosure prior to the time of the signing of the contract.
Within days after the signing of the contract, Sears was manufacturing 44,000 of plaintiff’s wrenches per week — all with plaintiff’s patent number prominently stamped on them — and within three months, Sears was marketing them as a tremendous breakthrough. Within nine months, Sears had sold over 500,000 wrenches and paid plaintiff his maximum royalty thereby acquiring all of plaintiff’s rights. Between 1965 and 1975, Sears sold in excess of 19 million wrenches, many at a premium of one to two dollars profit because no competition was able to market a comparablе product for several years. To say the least, plaintiff’s invention has been a commercial success.
Plaintiff, a Tennessee resident, filed suit against Sears, an Illinois Corporation, in federal district court in December 1969, based on diversity jurisdiction, seeking alternatively return of the patent and restitution or damages for fraud, breach of a confidential relationship and negligent misrepresentation. A jury trial was held from December 20, 1976, until January 18, 1977. During the trial plaintiff basically proved the facts as presented above. Sears argued that it did not misrepresent any facts to plaintiff, that he had a lawyer and thus there wаs no confidential relationship and that the success of the wrenches was a function of advertising and the unforeseeable boom in do-it-yourself repairs, and thus Sears did not misrepresent the salability of plaintiff’s wrenches. The jury was instructed on each of the three counts in plaintiff’s complaint and told that it could award plaintiff profits 2 for Counts I and II and could consider a reasonable royalty as a remedy for Count III. The jury apparently believed the plaintiff’s evidence because it found Sears guilty on all three counts and entered judgment for one million dollars on each count, but the award was not cumulative.
Both parties filed post-trial motions. Sears filed for judgment NOV and plaintiff sought rescission of the contract and restitution. The district court denied both motions holding as to Sears’ motion that the jury verdict was in accordance with the evidence and that the damages award was reasonable and holding as to plaintiff’s motion that when he permitted the case to go to the jury he had elected his legal remedy and could not later also seek his equitable relief. Plaintiff appealed seeking equitable relief and Sears cross-appealed the one million dollar judgment against it. Since Sears’ cross-appeal raises basic issues of liability, we will deal with it first. We will subsequently consider plaintiff’s appeal on the issues of the appropriate remedy.
II
Sears’ primary argument in its cross-appeal is that the district court erred in not determining conclusively the validity of plaintiff’s patent as a precondition to trying plaintiff’s claims for fraud, breach of a confidential relationship and misrepresentation. Relying on
Lear, Inc. v. Adkins,
Sears’ analysis, however, misconсeives the Supreme Court’s holding in
Lear.
There the Court held that a patent licensee was not estopped to contest the validity of the licensor’s patent, and, in fact, was not required to pay the contractually-provided royalties for the license on the invalid patent during the pendency of the litigation. Contrary to Sears’ implication, the
Lear
Court did not hold that the potentially invalid patent was worthless and thus the royalties offered in exchange for the right to use that patent would be unjustified. Instead, the Court explicitly recognized that there was significant economic value in the rights to an unchallenged patent.
Other courts have also acknowledged that significant economic value attaches to the rights to an uncontested patent. The Supreme Court recognized this recently in an opinion by Chief Justice Burger: “[E]ven though a discovery may not be patentable, that does not ‘destroy the value of the discovery . . .
Kewanee Oil Co. v. Bicron Corp.,
The facts of this case, by themselves, make abundantly clear both that Sears believed that the uncontested patent had significant economic value as a deterrent to competitors and that the patent, in fact, did serve to deter competitors. Sears had the patent number stamped on all of its wrenches with plaintiff’s quick-release feature, which presumably was done for the purpose of scaring off competitors. Also, Sears’ competitors did not enter this lucrative market for several years after it became clear that this product had genuine sales appeal, which can only be explained by the existence of the patent.
It is at least somewhat disingenuous for Sears to argue before this court that plaintiff’s patent was valueless when it made every effort in its marketing to exploit the economic value of the uncontested patent, received the benefits of a factual monopoly for several years bеcause of that uncontested patent and to this day has refused to return the patent rights to plaintiff in return for the $10,000 originally paid to acquire these “valueless” rights. We, therefore, have little difficulty finding that Sears’ deception caused plaintiff to be injured in fact.
The issue remains whether the public interest, recognized in
Lear,
in having patent validity challenged is of such significance that we should extend
Lear
to cover this case. The
Lear
Court held that a licensee should be permitted to contest the validity of a licensor’s patent because “[licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery.”
We believe that the reasoning in
Lear
does not extend to this case for two reasons. First, we deal here with a complete assignment of plaintiff’s patent rights to Sears.
See generally Heltra, Inc. v. Richen-Gemco, Inc.,
Second, and perhaps even more fundamentally, the Court’s analysis in
Lear
initiated with an assessment of “the spirit of contract law, which seeks to balance the claims of promisor and promisee in accord with the requirements of
good faith.”
III
Having determined that the district court properly declined to decide the validity of the plaintiff’s patent, we can readily dispose of Sears’ second contention in its cross-appeal. Sears argues that the district court erred in not permitting the introduction of certain evidence dealing with the prior art surrounding plaintiff’s invention. Sears, however, attempted to introduce all of the prior art evidence at issue (defendant’s Exhibits 25, 26, 29, 33, 34, 39, 40, 41, 42 and 43) for the purpose of proving that the patent was invalid. Since that contention was irrelevant to the case, it seems, a fortiori, that the materials introduced to prove it must also be deemed irrelevant to this case.
Sears, howеver, argues that the district court recognized that patent validity was a relevant issue. By citing materials out of context, Sears has severely mischaracterized the district court’s analysis. During the trial, the district court properly recognized that some evidence of prior art was relevant for the issue of Sears’ intent. Prior art was relevant to the limited extent that if Sears could prove it knew about the prior art at the time it was negotiating with plaintiff then the jury might conclude that Sears had not intentionally deceived plaintiff about the novelty and value of his invention.
*983 The best example of this reasoning by the district court was with regard to the Carpenter patent (defendant’s Exhibit 29). In considering its relevance the court asked when Sears had become aware of the patent. Counsel for Sears stated that the Carpenter patent was not discovered until 1971, after the law suit was initiated (Tr. at 2409). Since it was clear that the Carpenter patent had not entered into Sears’ assessment of the value of plaintiff’s invention when it made its representations to plaintiff, the district court properly concluded the patent was irrelevant and refused to admit it into evidence (Tr. at 2425). We have examined the record concеrning the other prior art evidence that was not admitted and about which Sears complains, and we conclude that the district court properly applied its rule of limited relevance and thereby correctly excluded all of it.
IV
Sears’ final argument in its cross-appeal is that plaintiff failed to prove the existence of a confidential relationship between himself and Sears. In assessing that argument, we recognize at the outset that there are no hard and fast rules for determining whether a confidential relationship exists. See G. Bogert, The Law of Trusts and Trustees § 482 (2d ed. 1960). The trier of fact must examine all of the circumstances surrounding the relationship between the parties and determine whether “one person reposes trust and confidence in another who thereby gains a resulting influence and superiority over the first.”
Kester v. Crilly,
Various factors have been recognized judicially as being of particular relevance to that inquiry. Among them are disparity of age, education and business experience between the parties.
Melish v. Vogel,
Sears argues, however, that there are two factors involved here that eliminate any possible confidential relationship. They are that plaintiff never provеd that Sears had knowledge of the confidential relationship upon which plaintiff was relying and that plaintiff retained counsel to guide him, and therefore, did not rely on Sears. We find neither factor sufficient to justify overturning the jury’s verdict on this issue.
Sears cites several cases that emphasize that a confidential relationship cannot be thrust upon an unknowing party.
See Broomfield v. Kosow,
In the cases cited by Sears, all of the circumstances surrounding the transactions that were being attacked suggested an arms-length arrangement, and thus the plaintiffs in those cases attempted to thrust a confidential relationship on the unknowing defendants after the fact. Here, Sears’ knowledge is circumstantially proved by all of the facts surrounding its dealings with plaintiff. In addition, as suggested above, there was direct testimony to the effect *984 that Sears expected plaintiff to rely on its representations. 6
With regard to the existence of counsel representing plaintiff, we conclude that that is merely one factor to be considered along with all of the others. In fact, once plaintiff established the existence of a confidential relationship through proof of the five factors previously discussed, the burden was on Sears to prove that plaintiff had competent and independent advice.
See Jones v.
Washington,
For all of the above-stated reasons, we find no merit to any of the issues raised in Sears’ cross-appeal. We, therefore, affirm the district court’s judgment of liability against Sears on all three counts of plaintiff’s complaint.
V
Plaintiff, in his appeal, seeks review of the district court’s decision that he elected his legal remedies by taking the case to the jury, and therefore, is barred from pursuing his equitable remedies of rescission and restitution. Plaintiff argues that the district court, as a court of equity, should have accepted the jury’s liability determination, but should have disregarded its damages verdict and instead should have granted rescission and restitution. 7
Before considering the substance of the doctrine of election of remedies, we should determine what law, state or federal, should control our decision. Sears relies almost exclusively on Illinois decisions in arguing that after plaintiff takes his case to the jury in a court of law he cannot thereafter seek rescission of the contract from a court of equity. We, however, conclude that federal courts are not bound by the Illinois elеction of remedies doctrine.
The choice of law issue in diversity cases, where no Federal Rule of Civil Procedure clearly controls, is governed by the Rules of Decision Act, 28 U.S.C. § 1652.
8
See generally
Redish & Phillips,
Erie and the Rules of Decision Act: In Search of the Appropriate Dilemma,
91 Harv.L.Rev. 356, 357-58 (1977); Ely,
The Irrepressible Myth of Erie,
87 Harv.L.Rev. 693, 697-700 (1974). In interpreting that Act, at least one circuit has recognized that where a state procedural rule is derived from a judicial system that is fundamentally inconsistent with the federal judicial system, then the state rule need not be slavishly adhered to by a federal district court.
Atkins v. Schmutz Mfg. Co.,
Under the Illinois cases cited by Sears, a plaintiff had to elect his remedies аt the
*985
time of filing suit because Illinois had retained separate courts of equity and courts of law.
See, e. g., Carr v. Arnold,
Having determined that the district court is not bound by the rigid requirements of Illinois law on election of remedies, there remаins the question whether plaintiff can still pursue his equitable remedies under the facts of this case. We conclude that the district court correctly decided not to disturb the jury’s monetary award, but that the court erred in not considering whether rescission of the contract and return of plaintiff’s patent were appropriate.
The general rule as to when an election is necessary is that “ ‘a certain state of facts relied on as the basis of a certain remedy is inconsistent with, and repugnant to, another certain state of facts relied on as the basis of another remedy.’ ”
Prudential Oil Corp. v. Phillips Petroleum Co.,
With regard to an election between the profits awarded by the jury and return of the patent based on rescission, however, we see no basis for invoking the election of remedies doctrine. Based on the jury instruction, plaintiff will receive one million dollars as the measure of past profits earned by Sears up to the time of trial. That award, however, is not inconsistent with return of the patent so that plaintiff can reсeive the future benefits of the patent that Sears fraudulently acquired. There will be neither a double recovery nor a factual inconsistency between these remedies. See Prudential Oil Corp., supra at 257; G. Bogert, The Law of Trusts and Trustees § 946 (2d ed. 1962). Therefore, we conclude that going to the jury under a past profits instruction did not bar plaintiff *986 from seeking rescission and thereby possibly recovering his patent. Whether rescission is appropriate, however, is an issue that should be decided in the first instance by the district court.
For the reasons stated above, we affirm the district court’s judgment against Sears on all three counts in plaintiff’s complaint and the court’s decision not to alter plaintiff’s monetary award, but reverse the court’s determination that it lacked the power to award rescission and remand to the district court for a determination of whether rescission is appropriate under the facts of this case.
Affirmed in part; Reversed in part; and Remanded
Notes
. We might note here that Mr. Fay contacted Sears before informing plaintiff that a patent had issued. In addition, it was shown that Sears had contacted Mr. Fay during the period of these negotiations about doing some work for it and that he, in fact, did perform a couple of routine matters for Sears, thus raising some doubt about the independence of his advice- to plaintiff.
. The court instructed the jury on damages for Counts I and II, fraud and breach of a confidential relationship, as follows:
The award of money damages you make may equal the net profits which you find the defendant gained as a result of its merchandising of wrenches incorporating Plaintiff’s quick release invention and idea, minus any expenditures which you find the defendant has proved it incurred which it would have incurred had it not merchandised such wrenches incorporating plaintiff’s quick release invention and idea from the time of the contract in question to the present.
(Tr. at 3469).
. This valuable benefit wаs available even in the case of a non-exclusive license because the royalty charged to the licensee “serves as a barrier to entry.”
. The court subsequently defined more specifically the nature of the economic value created by the uncontested patent during the period of its presumptive validity:
While Moraine was the holder of a presumptively valid patent, it could legally entertain the expectation, unless it had in some manner deprived itself thereof, of receiving royalties from licensing arrangements which in final analysis are agreements in which the licensee is purchasing the right to be free from infringement litigation, which Moraine did have to sell during the period of validity.
. The policy against deterring licensees from attacking the validity of the licensor’s patent also justified not requiring the licensee to pay royalties under the license agreement during the litigation. The Court reasoned:
Enforcing this contractual provision would give the licensor an additional economic incentive to devise every conceivable dilatory
tactic in an effort to postpone the day of final judicial reckoning. . . . [T]he cost of prosecuting slow-moving trial proceedings аnd defending an inevitable appeal might well deter many licensees from attempting to prove patent invalidity in the courts.
. Sears also argues that the district court failed to instruct the jury on the issue of Sears’ knowledge of the confidential relationship. In view of our holding that knowledge does not have to be proved as an element of the tort, we find no basis for requiring any specific mention of this factor. In our view, the district court’s instructions on the confidential relationship issue were proper.
. Plaintiff asks this court to leave undisturbed his one million dollar judgment in Count III, negligent misrepresentation, because that is аn action at law and therefore was properly given to and decided by the jury.
As to Counts I and II, plaintiff claims that the evidence proves that Sears’ profits on the sale of quick-release wrenches was in excess of 40 million dollars. Sears argues that that figure is based on a misinterpretation of Sears’ sales techniques. Given our disposition of this case, we need not resolve this dispute, although we do agree with the district court that the jury’s damage award was not unreasonable.
. The Act provides:
The laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwisе require or provide, shall be regarded as rules of decision in civil actions in the Courts of the United States, in cases where they apply.
28 U.S.C. § 1652.
. This result accords with the approach recently suggested in Redish & Phillips, supra. The authors in that article suggest that the best approach to Rules of Decision Act cases is to examine the policy underlying the state rule to determine if it affects primary conduct, is intended to benefit one class of litigants over another or is merely the state’s evaluation of the most efficient way to handle its docket. Id. at 394-96. The Illinois rule separating the courts would appear to fall within thе third category. In such a situation, the authors conclude, “The federal diversity court should be permitted to adopt or reject such rules since, as noted previously, it retains some interest in regulating its own internal procedures.” Id. at 395. We agree with that conclusion.
. See note 2 supra.
. The district court reasoned that such an approach would create the type of res judicata problems mentioned in our earlier decision in
Federal Savings & Loan Ins. Corp. v. American Nat’l Bank & Trust Co.,