New York Automobile Co. v. Franklin

John Wilkinson is a mechanical engineer. For some time he had been interested in automobiles and, finally, on September 19, 1899, he entered into a partnership contract with Frederick D. White, Arthur R. Peck, and Ernest I. White. He agreed to devote his time to the construction of an automobile, the others to contribute the amount necessary for that purpose. Some work on a model had already been done. This was now continued and the model was completed about January 1, 1900. Experiments showed that it was not altogether satisfactory, but the parties seem to have believed that there was promise of final success.

Accordingly, on March 6, 1900, the New York Automobile Company was incorporated for the construction of automobiles. The partnership turned over to it whatever property it owned and received stock in return. Others likewise invested, among them the defendant Alexander T. Brown, who became a director. Mr. Wilkinson was not only a director, but he was hired by the month or week, at a fixed salary, and he agreed that, so long as he remained in the employment of the company, he would grant it the privilege of taking out patents at its expense upon all his discoveries and inventions with regard to motor vehicles. And he further agreed that whatever work he did in connection with such inventions should be considered a part of his regular employment as superintendent and éngiñeer of the company. At once Mr. Wilkinson began new drawings and the construction of a second

Beginning in October there was talk of engaging a manager. During the winter a Mr. Bretz was spoken of. He was unavailable and, finally, Mr. Brown suggested the defendant, H. H. Franklin. Meanwhile, nothing seems to have been actually done toward building the Brown motor. Mr. Wilkinson spent his time in testing, altering, and perfecting his own model and studying the improvements that could be made. This went on until June 30. At this time his salary was some five months in arrears. He had several times threatened to resign if he were not paid. He was not paid, and finally, on the date mentioned, he sent his written resignation of the position of engineer to the plaintiff. The two models which Mr. Wilkinson had built were four-cylinder, air-cooled, gasoline engines, with two cylinder auxiliary air engines attached. They differed considerably between themselves. The air engines were not successful, and they were removed, about September 1, 1900, from the second model. Neither of these engines was novel or patentable. Such engines had long been known; and, while there may have been some rearrangement of the parts, that was all. There was no invention. Nor does the second engine seem to have been so far perfected as to have been practical for automobile use. When Mr. Wilkinson left the plaintiff’s employment, these two models were stored in the yard of a machine shop. They are still there, and apparently, have always been subject to the plaintiff’s orders.' The plans and drawings were left in the room of the Whjte Building, where Mr. Wilkinson did his work, and have been lost. The patterns were left at the foundry.

On November 18 the Franklin Company purchased of Brown and Franklin the automobile business carried on by them, their good will and all their personal property for $50,000 of its capital stock. The tangible property covered by this purchase was represented, substantially, by the model made by Mr. Wilkinson. Mr. Wilkinson continued in the employ of the Franklin Company. The Brown and Franklin model was not deemed sufficiently perfect, and he began another one. Again, in consultation with Mr. Brown, he drew new and different plans; new patterns, except for the piston, were also made. Later, there was still a further change by replacing the cylinders with others of a new design. This model finally proved satisfactory. The first complete machine was put on the market in the spring of 1902; and, since that time, the Franklin Company has built up a large business. It has advertised extensively, claiming to be the original .American makers

Mr. Wilkinson, as an employé of the plaintiff, had, under the circumstances, a right to leave its .service when he did. Concededly, he had no right to take with him any of its tangible property, such as the model, the patterns, the drawings; and he did not. Possibly he had no right to use any designs which he might remember, and this he did not do. But he, as well as every one else, had a right to plan and use a four-cylinder, air-cooled engine. His experience, his skill, his unmatured thoughts and designs were his own. That they had been gained at the expense of the plaintiff certainly gave the latter no legal right to them. If it had possessed any unpublished inventions which Mr. Wilkinson was now using, another question would arise. But it had not. All it possessed on the 30th of June was an unperfected model of an engine; and this it still has. Nor have Mr. Wilkinson and Mr. Brown wronged it by any act as directors. True, the one, after he left the plaintiff, began at once to build a four-cylinder engine for the other, and this was ultimately sold to a corporation of which they were both directors. But I know of no rule which prohibits a director of a corporation engaging in a business similar to that carried on by the corporation, either in his own behalf or for another corporation of which he is likewise a director. True, he owes to his stockholders the most scrupulous good faith. He may not deal with the trust property for his own advantage. He may not deal in his own behalf in respect to any matter involving his rights and duties as a director. He may not seek his own profit at the expense‘of the company or its stockholders. But, so long as he violates no legal or moral duty which he owes to the corporation or its stockholders, he is entirely free to engage in an independent competitive business.

In the case at bar, Mr. Brown might very well have wronged the plaintiff if, while acting as a director, he had enticed Mr. Wilkinson away from its service. He would have wronged' it if he had been intrusted with the duty of re-engaging Mr. Wilkinson for its service and had then engaged him for his own. But where, as in this case, Mr. Wilkinson was a free agent, having rightfully left the plaintiff’s employment ; where Mr. Brown was intrusted with no duty with regard to him; where, so far as the evidence shows, there even seems to have been no desire on the part of the plaintiff to re-engage Mr. Wilkinson, Mr. Brown violated no duty to the corporation or to its stockholders in engaging Mr. Wilkinson to enter into his own service. Finally, claim is made that relief should be granted because Mr. Franklin broke his promise to build a new model and turn it over to the plaintiff at cost. I shall assume that Mr. Brown is to be charged with the knowledge of this promise, either because he was a partner of Mr. Franklin, if the promise was made after the inception of the partnership, or because he was present at a meeting of the directors of the plaintiff when it was made. I cannot hold, however, as claimed by the plaintiff, that the relation of principal and agent existed between it and Mr. Frank

There is a third objection, so far as the Franklin Company is concerned. The third model was never used. What it is manufacturing is still a fourth model, unlike the third, which Mr. Wilkinson had every right to build, whether the third model belonged to the plaintiff in whole or in part or not. The third model resulted in no profits whatever. If it had been delivered to the plaintiff Mr. Wilkinson would have built the fourth model precisely as he did. There was nothing in the third model patentable, nothing secret, nothing not open to the world. Its only value was the knowledge which its faults and defects gave to Mr. Wilkinson of difficulties to be overcome and the means of overcoming them. Finally, it appears that this action was not begun until November 28, 1904. If the plaintiff desired to compel the defendants to account for the profits which have arisen from their subsequent experiments and the large expenditures necessarily made by them, proceedings should have been begun with less delay.

I have examined with care the cases called to my attention by the plaintiff, and I find nothing in them to alter my views. The three upon which the greatest stress is laid are Keokuk Packet Co. v. Davidson, 95 Mo. 467 , 8 S. W. 545 ; Averill v. Barber, (Sup.) 6 N. Y. Supp. 258 ; and Blake v. Buffalo Creek R. R. Co., 56 N. Y. 485 .

In Keokuk v. Davidson, it appears that the plaintiff tried to obtain, through Davidson, its president, a contract for carrying mails for the United States government, but failed. Subsequently, Davidson obtained such a contract with himself, personally. The court lays down the undoubted proposition that the directors of a corporation “will not be allowed to deal with the corporation funds and property for their private gain. They have no right to deal with themselves and for the corporation at the same time and they must account for the profits made by the use of the company’s assets and for moneys made by a breach of trust.” Having these principles in mind, the court further says that Mr. Davidson, as president of the packet company, having endeavored to get these mail contracts for the company and having failed, was not forbidden from making a contract in his own behalf; but, having done so, “his relation to the packet company required that he should use all the facilities afforded by the packet company in performing the contract and, under the principle above announced, he will not be allowed to make profit out of such use, but will be held to ac

In Averill v. Barber the defendants were directors of the American Company, and the court says: “It is not necessary to cite authorities to the proposition that, if they were under a duty or obligation of any kind to get control of the patents” involved in the litigation “for the benefit of the American Company, they could not do so for their individual benefit.” This must, of course, be conceded. It then proceeds to discuss the question whether there was any such duty or obligation, and under the peculiar circumstances of that case it holds that there was.

In Blake v. Buffalo Creek R. R. Co. Campbell and Mills were directors of the defendant. As such, the duty of constructing the railroad and obtaining the right of way for it rested upon them. Under such circumstances they obtained, to themselves personally, a lease from the city of Buffalo of certain lands over which the railroad tracks had already been laid with their knowledge and consent. The court held that the defendants could not release the lands to the railroad for a much larger sum than they paid the city. It was a manifest and clear breach of trust. _ In other words, these cases all hold that, if a director or trustee violates the duties which he owes to the corporation, the courts will intervene. But, in this case, I expressly hold that no such rights or duties were, in fact, violated. The complaint must be dismissed, with costs.

Proper findings may be prepared and, if not agreed upon, will be settled upon due notice.

Complaint dismissed, with costs.