American Bank Note Co. v. Edson — 56 Barb. 84

Majority

p. 84

The American Bank Note Company vs. Tracy R. Edson.

Headnote

The true meaning of the general rules applicable to the fights and duties of partners, as between themselves, is to require the members of a partnership firm to devote their time, labor and skill to the benefit of the firm, and not to themselves individually, and to forbid their purchasing for their own use articles in which the firm necessarily deals, at the risk of having 'the same and the profits arising therefrom, claimed by the firm as belonging to them.

These rules aré not to be understood as prohibiting such dealings, nor as mailing void any contracts which violate such rules; but only as exposing the member of the firm who makes them to a liability to the firm to render to them an account of the profits.

The firm of R. & Co., of which E. was a member, was engaged in the business of bank note engraving and printing. One M. discovered a new process or ink for printing bank notes, known as the “ green tint.” In April, 1857, he sold to E. the absolute right and property in his discovery, with authority to take out letters patent in the name of M. for the benefit of E. E. agreed to pay M., for the transfer thereof, $500 in cash, and a specified sum by way of royalty, for every thousand impressions on which the ink should be used, until M. should have received $3500, and to pay all expenses of obtaining the patent and testing the ink. E. subsequently obtained a patent, in the name of M. Immediately after obtaining the right to this discovery, E. offered it to the firm of which he was a member, for $3000 and the payment of a royalty of $5 for every thousand impressions that might be printed by them, &c. The firm of R. & Co. held the matter under advisement some three months, in the meantime using and paying for the patented article. They then refused to purchase, preferring to use the same and pay a royalty therefor. They continued to use the ink, charging their customers $5 per thousand impressions, which was placed by the firm to the credit of E. down to the the time when the firm ceased to exist, by merger in the plaintiff’s corporation. No claim was ever made by the firm during its existence, of any right to an account from E. of the profits arising from the patent.

Held 1. That whatever might have been the rights of the firm originally, such rights were waived; and their refusal to. accept the purchase when offered, and their neglect to claim any rights which they might have possessed originally, prevented any enforcement of a claim, after the dissolution of the firm, that the purchase of the patent by E. was for their benefit.

2. That the omission to insert the patent in an inventory of the property and effects of the firm, or in a schedule of the property transferred to a corporation in which the firm became merged, was further evidence that at the time when the existence of the partnership was to terminate, the partners did not consider themselves in any way the owners of the patent.

On the 29th of April, 1858, the plaintiff’s corporation was formed, being composed of G. and of the individual members of six firms engaged in the business of bank note engraving, including the firm of R. & Co. It was agreed,

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in the 2d section of the articles of association, that upon signing the same, all the machinery, presses, tools, instruments, stock of materials, furniture and effects belonging to their establishments in the said business, &c., and all orders and contracts, should be transferred and assigned to the new company.

Held 1. That these words included all the property of the establishments for the business of bank note engraving and printing. That whether those establishments were conducted by firms or by individuals, all such articles which belonged thereto were to go into the common property of the association ; but the words used did not embrace individual property of members of firms, nor any property not used in the establishments.

2. That the separate execution by the individuals was controlled by the provisions of the second section of the articles, which specifically declared the property to be transferred, and confined it to that which appertained to their respective establishments.

3. That the language did not include a patent right belonging to an individual member of one of the firms, which had never belonged to such firm, but had always been acknowledged to be individual property.

The third section of the articles of association provided for the distribution of the shares of stock in the new company, to the respective firms and to G., who was not a member of any firm, and stated that such shares were so issued and delivered to each firm or individual, and should represent the estimated and agreed value of the property &c. sold and transferred to said company.

Held 1. That if there could be any doubt as to what was to be transferred, under the second section of the articles, it would be removed by these provisions of the third section.

2. That the enumeration of the firms showed that the property transferred was the property of such firms; and the omission of any individual member of any such firm showed that it was not contemplated that the individual property of any member was to be included.

3. That the omission of any compensation to any such individual member showed that no property of any such person had been taken into the estimate of valuation for which stock was to be issued.

4. That the like inference must follow from the inventory of the property of the firm of R. & Co., as taken for the purpose of forming the new company, in which there was no mention of the patent right; which excluded the idea that the “ green tint” entered into such valuation, or was considered, at that time, as forming any part of the assets of that firm.

Held, also, that it was clear, upon the facts, that at the time of entering into the articles of association, neither the old firm, of which E. was a member, nor any of the parties uniting to form the new association, considered the patent as their property, or as transferred to the association; and no provision was made for its transfer, and no allowance made to any one, as having transferred it to the association; and that consequently the right to use the discovery of M., under the patent, did not pass to the new company by virtue' of the articles of association.

p. 86

APPEAL from a judgment entered upon the report of a referee.

The action is brought to declare the exclusive right to make and use in the United States a certain patented ink, known as the “ green tint,” to be vested in the plaintiff; to compel the defendant to account for and pay over any and all sums of money received by him for permission to use, or as compensation for the use of the “ green tint” by others than .the plaintiff; to declare the capital stock of the plaintiff owned and held by the defendant, forfeited to the plaintiff, and to compel the transfer of said stock to the plaintiff"; to recover, with interest, the s,um of $3910.52, alleged to have been procured by the defendant from the plaintiff" as compensation for the plaintiff’s use of said “green tint,” under pretense that it was for one George Matthews; to recover, with interest, the sum of $38,129.58, alleged to have been wrongfully taken by the defendant from the plaintiff, as compensation for the plaintiff’s use of said “ green tint;” and for other and further relief.

The answer denies the allegations of the complaint and prays its dismissal, with costs. <•

Prior to 1858, and for a number of years previous, the firm of Bawdon, Wright, Hatch & Edson had existed as the leading house in the bank note engraving business,. and the defendant was a member of that firm. One Matthews, who was in the employ of the firm, discovered a new process or ink for printing bank notes. This ink was subsequently known by the designation of the “ green tint.” On 29th April, 1857, Matthews sold to the defendant the. absolute right and property in his discovery, with authority to take out letters patent in the name of Matthews, for the benefit of Edson. On 30th June Edson procured the patent, in the name of Matthews, but held it for his own use, under the "assignment. Edson agreed to pay Matthews for the transfer of this patent, &c., $500 in cash, and $2 for every thousand impressions on which the ink should

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be used, until Matthews received $3500, and all expenses of taking out patent and testing the ink were to be at Edson’s cost. Immediately after Edson obtained the right to this discovery, he offered it to the firm of which he was a member, for $3000, as he testifies, and the payment of a royalty of $5 for 'every 1000 impressions that might be printed by them—they to pay the expense of patenting and testing the discovery. One of the other members of the firm states that it was offered at a higher price and the same royalty, and that the firm declined the offer. The referee finds the offer to have been as stated by Edson. It is stated by Edson that the firm held the matter under advisement some three months, while they were testing the discovery. From May until the fall of 1857 the matter was under consideration, when the firm decided not to buy, and concluded that they would prefer to take their chance with others in the use of it, and pay for the right to use it. From that time until the formation of the plaintiff’s corporation, on 29th April, 1858, the firm of Raw-don, "Wright, Hatch & Edson used this ink, and charged their customers $5 per thousand impressions, which was placed by the firm to the credit of Edson. On the 29th April, 1858, the plaintiff’s corporation was formed, and was composed of the individual members of six firms engaged in that business, and Mr. Gavit. It was agreed, in the articles of association, that upon signing the articles, all the machinery, presses, tools, instruments and implements, plates and dies, stock of materials, furniture and effects belonging to their establishments, in the business of bank note engraving and printing, or the business collateral thereto, and all order's and contracts, should be transferred and assigned to the new company.

After the organization of the new company the “ green tint” was used in their work, and the charge of $5 was made to customers therefor, and this amount was paid over to Edson, the same as under the old firm, though the referee

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finds there was no express arrangement in reference to its use.

In October, 1860, a committee of the new company, which had been appointed some time previously, on an opinion of Daniel Lord, Esq., reported that Edson had a right to receive the compensation for the use of the “green tint,” and the board appointed a committee to negotiate with him for the sale of his entire interest. Edson refused to sell, and the company continued the payments to him until 1863, amounting to large sums of money.

On these facts the referee found that the right to use the “green tint” passed to the plaintiff under the articles of association; that the money received by the defendant was without right, and the plaintiff was entitled to have the same repaid with interest. From ■ this judgment the defendant appealed to this court.

Wm. F. Allen and John E. Parsons, for the appellant.

Evarts, Southmayd §■ Qhoate, for the respondent.

It is not claimed on the part of the plaintiff, that the discovery made by Matthews was, while owned by him, subject to any claim of the firm in whose employ he was, or that he had not a perfect right to use or sell the patent for it, while under his control. His relations to the firm of Eawdon, Wright, Hatch & Edson were at no time such as to impose on him any duty or obligation to give the benefit of his discovery to that firm. Whatever reservation there may have been made in the articles of association, of authority to the firm of Eawdon, Wright, Hatch & Edson, to convey shares to Matthews for his interest in the firm, it was long after the transfer of this patent to Edson, and there was no proof of any such subsisting interest ever existing, either before or after such transfer.

p. 89

The case then presents two questions for our decision; one, whether the firm of Eawdon, Wright, Hatch & Edson, by their relations with Edson, could claim the purchase by Edson to be for their benefit; and the other, whether the right to the use of this discovery under the patent passed to • the plaintiff by virtue of the articles of association.

The terms of the partnership of the first firm are not in evidence; and if there is anything which prevented Edson from obtaining this patent for his own use, it must be found in the general rules applicable to partners, viz., that one partner cannot deal on his own account in any matter at variance with the business of the partnership, or that would deprive the firm of any portion of his skill, industry or capital, which he is bound to employ in the business of the firm; or to prefer his own interest to that of the firm, or purchase articles needed for the firm on his own account; or, generally, make bargains for himself, by which the firm sustains a loss, or takes to himself benefits, the profits of which legitimately belong to the firm.

The true meaning of all such provisions is to require the members of the' firm to devote their time, labor and skill to the benefit of the firm, and not to themselves individually, and to forbid their purchasing for their own use articles in which the firm necessarily deal, at the risk of having the same claimed by the firm as belonging to them and having a right to the profits arising therefrom.

I do not understand these rules as prohibiting such dealings, nor as making void any such contracts which violate these rules, but only as exposing the member of the firm who makes them to a liability to the firm to render to them an account of the profits. Ho such claim was ever made by this firm during its existence. They had notice of the discovery, and of the patent; they had notice that Edson was interested in it; they had the offer from Edson to sell it to them ; they had that offer under consideration

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for months, while they were using the patented article; and they finally refused to purchase, expressing their choice to be to use and pay for the same, rather than to be the purchaser; and they did continue to pay for the same, doVra to the time when the firm ceased to exist by merger in the corporation.

Whatever may have been their rights originally, I think there can be no doubt that their rights were waived, and that their refusal to accept the purchase when offered, and their neglect to claim any rights which they might have possessed originally, prevented any enforcement of such a claim after the dissolution of the firm. I do not mean to concede that the purchase of a patent right, such as this was, would be a violation of duty on the part of Edson; but I deem it unnecessary to discuss that question, because it seems to me that even if it were so, the acts of the firm were such as to put an end to any claim which they might otherwise have made.

It is suggested, in the respondent’s points, that Edson did not communicate to the firm the terms on which he had become the purchaser, and therefore they were not bound by his offer and their refusal. It must be observed that no representation was made as to its cost, nor was any such inquiry made of Edson. He was negotiating the sale as of property belonging to himself, and there is no finding by the referee that Edson was guilty of any intentional fraud; on the contrary, the referee, in his opinion, exonerates him from any such imputation for anything done in regard to this offer to his firm. It is obvious that, at this time, the firm did not consider the invention of sufficient value to warrant the payment of the price suggested. The demand for such printing being at that time comparatively ,small, the firm preferred paying a royalty for its use, rather than to become the purchaser. 1 ■

The omission to insert this patent in the inventory of the property and effects of the firm, or in the schedule of

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the property transferred, is further evidence that at the time when the existence of the firm was to terminate, they did not consider themselves in any way the owners of this patent.

The second inquiry is, whether it passed to the plaintiff under the articles of association signed by the members of the different firms in their individual capacities.

From what has already been stated, it is apparent that it could not pass as the property of Eawdon, Wright, Hatch & Edson, because it did not at any time belong to them during the existence of their firm, but on the contrary they had expressly refused to become such owners. Did it pass as the individual property of Edson ? It can hardly be urged that these articles were intended to transfer to the association all the private property of the individuals, although such property might have been tools, instruments, furniture, &c., applicable to the business of bank note engraving and.printing, which they might have owned, if the same had not been used in the establishment of one or more of the contracting parties. Such property would still remain the property of the individual owning it at the time of executing the articles.

The agreement recites that the parties to it as firms and individuals theretofore and then engaged in the business, &c., were desirous of uniting their establishments. The evident meaning of this recital is, that such as had firms were to unite, and those who were individually carrying on the business were also to unite in the consolidation.

The portion of the agreement which specially defined what was to be transferred is contained in the second article, viz: “We agree that upon signing these articles, all the machinery, presses, tools, implements, instruments, plates and dies, stock of materials, furniture and effects belonging to our establishments, in the business of bank note engraving and printing, or the business collateral thereto,

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shall he and by virtue of these articles are transferred to the trustees,” &c. These words include all the property of the establishments for the business of bank note engraving and printing. Whether those establishments were conducted by firms or by individuals, all such articles which belonged thereto were to go into the common property of the association. It did not embrace individual property of members of firms, nor any property not used in the establishments as they existed previous to the association. The separate execution by the individuals is controlled by the provisions of the second article, which specifically declares the property to be transferred, and confines-it to that which appertained to their respective establishments. It did not include a patent right belonging to an individual member of one of the firms, which had never belonged to such firm, but had always been acknowledged to be the individual property of some other person. If there could be any doubt as to what was to be transferred under the second section of the articles of association, that would be removed by the provisions of the third section, which provides for the distribution of the shares of stock to the respective firms and to Mr. Gavit, who was not a member of any firm, and which states that such shares were so issued and delivered to. each firm or individual, and should represent the estimated and agreed value of the property &c. sold and transferred to the said company.

The enumeration of the firms shows that the property transferred was the property of such firms, and the omission of any individual member of such firm shows that it was not contemplated that the individual property of any member was to be included. Likewise the omission of any compensation to any such individual member shows that no property of such person had been taken into the estimate of valuation for which stock was to be issued.

The like inference must follow from the inventory of

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the property of Eg.wdon, Wright, Hatch & Edson, as taken for this purpose. It excludes the idea that the “ green tint” entered into such valuation, or was considered at that time as forming any part of the assets of that company.

In whatever view this question is examined, it seems to me clear that, at the time of entering into these articles, neither the old firm, of which Edson was a member, nor any of the parties uniting to form the new association, considered this patent as their property, or as transferred to the association; that nothing was allowed for it in the appraisement; and although it had cost a considerable sum, no provision was made for its transfer, and no allowance made to any one as having transferred it to the association. The probability is, that at the time of forming these articles, its value was uncertain; that the price was more than they were willing to pay for it; and that, as appears from their subsequent conduct, the associates deemed it wiser to collect the royalty and pay it over, rather than to assume the ownership by purchase, and the expenditure of the money demanded for it.

The subsequent course of the plaintiff, in continuing its use and paying the royalty for it, from 1858 to 1863, without objection, and the attempt to negotiate, in 1860, for the purchase from Edson, show clearly the understanding of the trustees as to their rights, and that up to 1860, none of them doubted the right of Edson to the patent, as his property.

It may be that the arrangement with Eawdon, Wright, Hatch & Edson, by which they had the use of this “ green tint,” on payment of the royalty, may be a continuing agreement, and if so, that it might be considered as transferred to the plaintiff, although the omission to include it in the inventory taken at the time, would throw doubt on that supposition. That, however, is not necessary to be examined at this time, and is only referred to as explain

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ing the letter of Edson to the Secretary of the Treasury, in regard to the use of the “ green tint” by the plaintiff.

The views above expressed render it unnecessary to examine the other points raised on this appeal, as to the effect of these payments being voluntarily made for so long a period of time, and during a portion of time when he was not trustee or acting in that relation to the stockholders.

The judgment should be reversed and new trial ordered, costs to abide the event.

Geo. G. Babnaed, J., concurred.

My conclusions in this case are :

1. That the purchase of the patent from Mathews by the defendant was, in form, the individual acquisition of an important element in the business of the firm, namely, ink.

2. That the purchase involved the use of capital, and its development and success time and diligence; and if successful, which it was, would give him an advantage over his co-partners, by subjecting them to the payment of a royalty for its use, if desirable in their business.

3. That such purchase was therefore a violation of his duty to his co-partners—an act of infidelity to his associates which could not enure to his individual benefit, to their exclusion.

4. That such acts and results are prohibited and guarded against by doctrines which are well established and clearly expressed in the elementary books, (Kent’s Com. p. 52; Story on Part. §§ 177, 178; Pars, on Part. p. 225; see also Smith’s Merc. Law, p. 37, and cases cited by referee;) and are particularly applicable in this case, because the purchase was made from a person in the employment of the firm.

5. That the purchase having been thus made, the title

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to the patent vested not in Edson alone, but equitably in himself and his partners, subject only to their burden of the consideration paid, and of the expenditures made by him in relation to it.

[New York General Term,

January 3, 1870.

6. That the offer by him to sell it to his associates does, not change these results, inasmuch as he did not disclose to them, at the time of such offer, his entire interest in it, or the absolute nature of the purchase made by him, and did not then or at any time offer to make the transfer of it, or any interest in it, upon the terms upon which he had bought it, but at a profit, and with a condition of great advantage to himself.

7. That there is nothing in the case which justifies the legal conclusion that his partners waived their rights in the purchase growing out of their relations to him.

8. That the patent therefore belonging to the firm passed to the plaintiff under the articles of association, but that the payment of royalty cannot be recovered back by them, whatever may be the equities between the defendant and his partners, inasmuch as they were made with full knowledge of the facts; and

9. That for these reasons the judgment should be reversed.

blew trial granted.

Ingraham, Geo.