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District Court of Appeal, Second District, Division 1, California.


Civ. 15109.

Decided: November 21, 1946

O'Melveny & Myers, Pierce Works, and John Whyte, all of Los Angeles (Lyon & Lyon, of Los Angeles, of counsel), for appellants. Samuel L. Kurland and A. Arnold Klein, both of Los Angeles, for respondent.

This is an appeal by defendants from the judgment in an action for declaratory relief.

The action is concerned with two alleged agreements bwtween plaintiff and defendants involving plaintiff's inventions. The first agreement dated February 21, 1940, which will be referred to herein as Exhibit A, was signed by plaintiff and witnessed by defendant Clark, and conferred upon defendant Institute certain royalty rights with reference to the inventions. The other agreement, Exhibit B, dated March 13, 1940, the execution of which was approved by the Institute, was a contract between The Baldwin Locomotive Works and plaintiff relating to the development, exploitation and patenting by Baldwin of plaintiff's inventions, and, with certain reservations, granted an exclusive license to Baldwin to make, use and sell the inventions; also, like Exhibit A, it provided for the payment to the Institute of royalties derived from such use and sale, subject to plaintiff's right to demand and receive 40% of such royalties at any time upon thirty days' notice.

The remedy sought by plaintiff's first amended complaint was a judicial declaration that Exhibit A had been totally rescinded and was therefore null and void; and that Exhibit B, which was based upon Exhibit A, was also null and void and had been rescinded insofar as it purported to confer rights upon the Institute, together with a judgment for such royalties as had been received by the Institute under the agreements. The ground for rescission was alleged to be want of consideration on the part of the Institute, as to both agreements, as well as fraud in the inducement of both. The charge of fraud was predicated upon two alleged promises assertedly made without the intention to perform them by defendant Clark, who was then a member of the faculty of the Institute and in charge of a commercially sponsored project known as ‘Impact Research,’ in the activities of which plaintiff was employed at the time the two agreements were executed.

The trial court found that plaintiff received no consideration for Exhibit A, and that there was ‘no consideration for said licensing agreement, Exhibit B, in so far as said agreement purports to confer rights upon defendant’ Institute; that defendant Clark made the fraudulent statements, and that his acts and representations were neither authorized nor ratified by the Institute.

Judgment in favor of plaintiff decreed that the instrument dated February 21, 1940, known as Exhibit A, was null and void and of no effect whatsoever; that the agreement of March 10, 1940, Exhibit B, in so far as it purported to grant any rights upon the Institute was ‘null and void and of no effect whatsoever’; and that the Institute had ‘no right, title or interest in or to the royalties accrued and unpaid from Baldwin Locomotive Works in the sum of $11,454.14, or any other royalties or monies therefrom, accrued or to accrue.’ Also, that plaintiff recover from Institute the sum of $2,004.94 on account of past royalties.

From such judgment, defendants California Institute of Technology and Donald S. Clark appeal, urging as grounds for a reversal thereof the following:

A. The finding that the execution of either Exhibit A or Exhibit B was induced by fraud is without support in the evidence;

B. That the court erred in admitting any evidence under the fraud count;

C. The findings as to want of consideration for the benefits conferred upon the Institute are without support in the evidence;

D. Plaintiff is not entitled to the relief which he seeks.

Respondent entered the Institute as a student in 1930 or 1931, graduated in 1934 and received a master's degree in 1936; and during this time and for some time thereafter did various and sundry work as an employee of the Institute. During the summer and fall of 1936, respondent occupied an office in the electrical engineering department on the campus and worked for various people, both at the Institute and on the outside.

In the latter part of August, 1936, defendant Clark and Dr. Datwyler, in connection with their work for the Institute on a project in Impact Research, were in the process of developing ‘an impact dynamometer; in this case, an electrical dynamometer is a device for translating instantaneous forces into instantaneous electrical impulse so that they will be recorded by means of an oscillograph.’ In the construction of such a device, ‘there was a need of some sort of strain sensitive element,’ in regard to which Dr. Datwyler, who was working under Dr. Clark's supervision, experienced some difficulty. These two men approached respondent ‘stating their problem to him with reference to their necessities in connection with strain testing apparatus which they were then endeavoring to perfect.’ During these consultations, respondent ‘was not being paid either by the school or by anybody else.’ Respondent suggested the use of a fine wire to be bonded with a material called Glyptal to the material undergoing the test. During September or October, 1936, Dr. Datwyler reduced such suggestion to practice by the construction of a machine at the Institute successfully embodying respondent's ideas, which machine was continually in use at the Institute in connection with the impact research project from that time to June, 1941. Respondent's suggestion is the basic idea underlying the patent which constitutes the subject matter of the two contracts here involved.

The record reveals that respondent was not employed by the Institute during the period of conception of this invention, but in December of 1936, was employed by the Institute in Impact Research in the construction and operation of pump testing equipment, and continued in such employment upon a yearly basis to July, 1941. From 1938, respondent was placed on a fellowship basis in order that a specified number of hours per month might be devoted to the impact project.

In the fall of 1939, respondent was introduced to a Mr. Tatnall, head of the testing machine sales division of Baldwin Locomotive Works, who was very much interested in ‘wire strain gauge development,’ said company having already entered into a preliminary agreemnt with Mr. Ruge and Dr. deForest of the Massachusetts Institute of Technology, who ‘had built a large number of these wire strain gauges and were using them on structures without success,’ with the view to ‘obtaining a patent on this subject.’ During the course of these talks it came to light that the original bonded wire gauge was developed by respondent, hence Mr. Tatnall on a visit to the west coast ‘came in to look into the matter of my (respondent) having invented the wire strain gauge.’ Mr. Tatnall stated that Baldwin wished to obtain patent protection for such a device and that it would prosecute and obtain the patent, pay royalties for an exclusive license, and would exploit and advertise the invention to the utmost. Thereafter, Mr. Hathaway, patent attorney for Baldwin Locomotive Works, came to Pasadena to obtain the technical information necessary for the patent specifications and claims. Respondent testified that ‘after Mr. Hathaway was here, Dr. Clark suggested that there ought to be some sort of agreement entered into between myself and the Institute in order that these funds, which later would arrive from royalties, might be paid to Impact work, and he stated that the Baldwin Locomotive Works was interested in having the Institute a party in this agreement, and that he thought it would be a generally good idea that the Institute could handle these funds through their channels. The money would then be paid to the Impact fund * * * ‘and the thing to do is to use the income from this invention of yours for the further development of impact testing and dynamic test procedures, and that, along with the income from these commercial sponsors, would make the continuation of the Impact Research project a possibility.’' To this plan, respondent agreed. The record also reveals that respondent and Dr. Clark discussed the former's continued employment at the Institute, Dr. Clark stating: ‘As long as we have interests from commercial people carrying on this work, I don't see any reason why you should not continue to work here; there is development of equipment to be done, carrying on of new projects, and if you have income from this promising-looking invention, it is very probable that the Impact Research will continue on for an * * * indefinite period; there is a good deal of work to be done in this field. We are just more or less scratching the surface so far, as far as dynamic testing goes.’ The substance of the whole matter was ‘that Dr. Clark said that I had a good position with the Institute, and it probably would continue that way because my work was perfectly satisfactory to everybody concerned. * * * as long as there were funds coming into Impact from whatever source, my employment would continue because I was needed in the work.’

As a result of the various negotiations and discussions hereinbefore related in part, respondent executed the agreement, herein referred to as Exhibit A, on February 21, 1940, to the following effect: ‘In consideration of my employment by the California Institute of Technology, I agree that as to my inventions involving an electrical strain gauge wire secured throughout its length to the surface of a member adapted to be subjected to strain, and also my inventions relating to the measurements and indications of various conditions including impact testing, all as set forth in application for United States Letters Patent executed by me under date of February 9, 1940, I will not grant any licenses to make, use or sell apparatus or methods embodying any of said inventions unless such licenses are approved by the California Institute of Technology * * * any license so granted to be subject to such terms and conditions as may be reasonably required by the * * * Institute * * * The royalties on said inventions shall be paid to the * * * Institute * * * unless at my option I shall request in writing to * * * Institute * * * and any licensee at least thirty (30) days prior to the end of any three (3) months' period in which royalty accrues that up to and including forty per cent (40%) of the total royalty paid by any licensee shall be paid to me by the said licensee. I agree not to grant any license or make any assignment of said inventions or patent rights thereto without the express consent of the California Institute of Technology, or committees or other agencies or bodies which the California Institute of Technology may designate.’ To this document the name of appellant Donald S. Clark is appended as a witness.

On March 13, 1940, respondent and Baldwin Locomotive Works executed the agreement known as Exhibit B, with reference to the inventions described in Exhibit A, whereby respondent granted to said Baldwin an exclusive license to manufacture for use and sale ‘apparatus embodying said inventions throughout the United States,’ subject to certain specified reservations and conditions. In return for this, Baldwin agreed to pay a royalty of five per cent, ‘of the sales price or of the gross income received by Baldwin from rentals or other uses of that portion of any apparatus sold, rented or otherwise used embodying said inventions. * * * All royalties hereunder shall be paid within thirty (30) days after the end of any three (3) months' period in which royalty accrues * * *. Said royalty shall be paid to the Institute, unless Simmons at his option shall request in writing to Baldwin and to the Institute, at least thirty (30) days prior to the end of any three (3) months' period in which royalty accrues that any portion up to and includin forty per cent (40%) of said royalty shall be paid to him by Baldwin.’ In case of default by Baldwin, respondent, with the approval of the Institute, was given the right to terminate the license granted upon giving certain notice.

Said agreement also provided: ‘After January 1, 1942, Simmons, with the approval of the Institute, reserves the right to cancel this agreement upon sixty (60) days' notice if the income from Baldwin for such license rights falls below One Hundred Dollars ($100.00) in any quarter beginning with January 1, 1942, Provided, However, that Baldwin shall have sixty (60) days after receipt of said notice in which to make up any deficiency in said amount and that if said deficiency is not made up within that time, then this agreement shall terminate forthwith.’ Granting of such license by respondent to Baldwin was duly approved by the California Institute of Technology in accordance with agreement Exhibit A.

Under date of January 16, 1942, respondent addressed a communication to the Board of Trustees of the Institute, to the effect that since executing the two agreements, it was ‘discovered that the California Institute of Technology had no authority to enter into such agreements or to assert the claims which were made at the time the writings were executed nor were they entered into validly. In order to avoid any ambiguity, I hereby rescind and renounce the said writings in so far as they involve the California Institute of Technology’ and invited the Institute to consider the matter and present reasons for such claims as it might have.

In a second communication dated February 13, 1942, respondent demanded that Institute ‘voluntarily agree to cancel said instruments and pay to me all the royalties received by the Institute under the Baldwin license of March 13, 1940. I have delayed notifying the Baldwin Locomotive Works of my January 18 rescission and the taking of any other action in order that the Institute be in no way embarrassed. However, unless the Trustees act positively on this matter during this session, I will be forced to notify Baldwin and bring suit.’ The instant action followed.

In connection with the first contention, that the evidence fails to support the finding of fact that the two agreements were induced by fraud, appellants assert that ‘the lower court found that plaintiff was induced to execute Exhibit A and consequentially Exhibit B, because of two promises allegedly made by Dr. Clark which, assertedly, neither he nor the Institute had any intention of performing. These were in substance (1) that plaintiff would be given permanent employment in Impact Research, and (2) that the royalties received by the Institute would be utilized in maintaining that project.’

As hereinbefore stated, the record discloses that respondent and Dr. Clark discussed the question of respondent's employment ‘upon the coming in of royalties,’ at which time ‘Dr. Clark said, ‘As long as we have interests from commercial people carrying on this work, I don't see any reason why you shouldn't continue to work here; there is development of equipment to be done, carrying on of new projects, and if you have income from this promising-looking invention, it is very probable that the Impact Research will continue on for an indefinite time, indefinite period; there is a great deal of work to be done in this field. We are just more or less scratching the surface so far, as far as dynamic testing goes.’ At one time he stated that I was working myself into a very nice position at the Institute, because everybody at the Institute was convinced that I had abilities to design and develop new ideas, and that was one of the things they were much interested in, and not only Impact Research have work to do, but these various other people would also have other work to do and there was no doubt at all but what I could continue with the work. * * * The substance of the whole matter was that Dr. Clark said that I had a good position with the Institute, and it probably would continue that way, because my work was perfectly satisfactory to everybody concerned.'

With respect to Dr. Clark's alleged promise that the money received from the royalties should go to Impact Research, respondent testified that ‘Baldwin, of course, didn't want to proceed with the patent unless they were assured that they were going to get the license under the patent as they wished, so Doctor Clark and I had discussions over what kind of an arrangement we would make so that the Impact Research could obtain the funds from the royalties, and at first I suggested that some sort of agreement be made whereby Impact Research would get all the income off the royalties as long as Impact Research projects were—that is the monies for operation of the Impact Research project were furnished at least partially by commercial firms because I felt that as long as commercial firms were interested in this matter, then something of value would come out of the developments. I thought that a good proposition would be that I would agree * * * that the income from the patent royalties be all paid for the Impact Research Fund for their use in impact as long as say at least 50 percent of the impact operational expenses were paid by commercial firms and Doctor Clark took that proposition under consideration, but in a latter discussion he said it would not be possible for the Institute to handle the funds providing the royalties go to impact under those conditions, that they didn't want to enter into such an agreement as that. * * * At that time Doctor Clark told me that I had no need to worry about the matter anyway, the funds would all go to Impact Research because after all the development of this equipment leading to the interest of Baldwin in the invention, it all came from the fact that Impact was using this invention and that he couldn't see why the Institute or any of the other Institute departments would have any claim on the use of these funds because they were foreign to their operations. * * * as time went on, Mr. Hathaway was apparently pressing Doctor Clark for some sort of definite basis on which Baldwin could proceed and so these discussions would come up from time to time because of that and after awhile why I suggested that perhaps a good arrangement would be to provide that I could draw a certain portion of the royalties if it appeared that the funds were becoming large and that the funds were more than the Impact Research project needed. I thought it would be desirable whereby I could draw a portion of those funds under those conditions, but I was fully in accord of having Impact get all the funds until such time it seemed it might be from the enthusiastic words of Mr. Tatnall that the thing might produce quite an income in wide industrial application and Doctor Clark said an agreement like that would be perfectly satisfactory to him and it could be worked out in the agreement. I think that is the substance of most of the conversations along that time. Q. Did he say anything to you in regard to any necessity of or custom for the monies to be paid to the School, even though it was being used by a particular project? * * * A. Yes. * * * Sometime in discussions that came up where I thought it might be better if I held the control of the royalties and have them paid into the Impact fund. Doctor Clark said, ‘The Institute cannot operate their funds on a basis like that; they have got to have some sort of definite commitment; we cannot just go along with a haphazard arrangement of that sort. The Institute will have to have some sort of definite procedure so that the funds can be handled through the Institute account and handled through the Impact fund; the Impact fund cannot operate on funds which come in from the outside directly, they have got to be all paid into the Institute and handled in an administrative way.’ I had no need to worry about that, anyway, because the intent was, Doctor Clark stated, that all the funds would be used in Impact.'

In respect to any authority to employ persons for the Institute, Dr. Clark testified: ‘No, I wasn't authorized to employ * * * I was authorized to recommend,’ and further stated that ‘The employment itself was up to the Institute council or committee of the school,’ of which group Dr. Clark was not a member.

Further evidence disclosed by the record is to the effect that notwithstanding the inducements held out by Dr. Clark in reference to the respondent's employment, and the use of the Baldwin royalties in connection with Impact work; and despite the Institute's apparent approval of the arrangement as evidenced by the written approval appended to Exhibit B; in June 1941, respondent was informed by Dr. Clark ‘that I (respondent) would not be on Impact Research assistantship next year,’ and such employment was terminated the following month. Checks from the Baldwin royalties were then coming into the Institute in considerable amounts, a quarterly check received in July, 1941, being in the sum of $500. However, Dr. Clark informed respondent, according to the latter's testimony, that Impact was not getting these funds, that ‘he (Dr. Clark) had nothing to do with the funds, no control over the funds, that the Institute had the funds and he could do nothing about it, that there would be no possibility of being put on the Impact project regardless, that he had made up his mind, there was no further thing to it, there was no further need of discussing it.’

Appellants' basic argument is that the trial court's judgment is without evidentiary support. However, as said in Crawford v. Southern Pacific Co., 3 Cal.2d 427, 429, 45 P.2d 183, 184, ‘It is an elementary, but often overlooked principle of law, that when a verdict is attacked as being unsupported, the power of the appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, which will support the conclusion reached by the jury.’ Moreover, the rule is well established in this and many other cases, that, ‘In reviewing the evidence on such an appeal, all conflicts must be resolved in favor of the respondent, and all legitimate and reasonable inferences indulged in to uphold the verdict if possible.’ This rule applies as well to the findings and judgment of a trial court as in a case tried before a jury, and such findings and judgment must be sustained on appeal ‘if there is any substantial evidence, or reasonable inferences to be drawn, therefrom, in support thereof.’ Drabkin v. Bigelow, 59 Cal.App.2d 68, 74, 138 P.2d 750, 753. That the record in the instant appeal discloses substantial evidence in support of the trial court's findings and judgment, cannot well be doubted. The trial court found, in respondent's favor, that the written agreements in question were without consideration and were induced by fraud. Whether one or the other of these theories, or a combination of both, is borne out by the evidence, is quite immaterial since in either case the agreements would be equally invalid.

The trial judge, who heard the testimony, and who was in a position to judge of the witnesses' credibility, could well find from the evidence that, through the inducements practiced by appellants, the respondent was led to execute documents which surrendered to the Institute, without consideration, the royalty fruits of respondent's invention. Nor, if such evidence is believed, can it be doubted that an unconscionable situation was thereby created from which the respondent is entitled to relief. There was, for example evidence to the effect that Dr. Clark suggested the making of the contracts in question; that in so doing Clark assured respondent of two vitally important things, namely that respondent's employment would then be secure, and that the royalties would accrue to the Impact Research in which respondent was engaged. Both of these propositions were later repudiated, although, strange to say, the benefits of the arrangement, that is, the right to royalties, were still retained by the Institute. It may also be noted, that although initial authorization on the part of Dr. Clark, was lacking, there was apparent ratification by the Institute, signed by its president, A. C. Balch, appended to Exhibit B, and reading: ‘The granting of the foregoing license is approved by the California Institute of Technology in accordance with an agreement between Edward E. Simmons, Jr. and the California Institute of Technology dated February 21, 1940’ (Exhibit A). That the Institute could not ratify as to benefits and repudiate as to other parts of the arrangement, needs no citation of authority.

Concerning the respondent's allegation, and the trial court's finding of want of consideration, the record discloses that Exhibit A, the instrument in which respondent agreed not to ‘grant any license to make, use or sell any apparatus or methods embodying’ respondent's invention, without the Institute's approval, etc., was, according to its terms, executed by Simmons ‘In consideration of my employment.’ No other consideration is expressed or referred to either in this document or in the appellants' answer. Yet it appears that respondent was already in the employ of the Institute at that time, and there is evidence from which the trial court could conclude that there was no present consideration of any kind supporting this surrender of valuable rights by the respondent, and that the only person in any way benefited, was the Institute. The same may be also said in respect to Exhibit B, the royalty agreement, so far as the Institute is concerned. While it is true that the appellants take issue with this view of the case and presented evidence claimed to negative the respondent's claim, this fact in no manner disturbs the application of the rule hereinbefore stated, that there can be no reversal where substantial evidence is found to support the judgment.

Appellants' contention that the trial court erred in admitting any evidence whatever under respondent's fraud count, because ‘the promissory fraud alleged tended to vary the terms of the writing, Exhibit A, and hence could not be proven,’ is sufficiently answered by section 1856 of the Code of Civil Procedure, which expressly states the well known exception to the parol evidence rule as follows:

‘2. Where the validity of the agreement is the fact in dispute. But this section does not exclude other evidence of the circumstances under which the agreement was made or to which it relates, as defined in section eighteen hundred and sixty, or to explain an extrinsic ambiguity, or to establish illegality or fraud.’ (Italics added.)

Finally, it is asserted by appellents that ‘Plaintiff is not entitled to the relief which he seeks,’ by reason of respondent's ‘failure to return the benefits received,’ and because ‘Under no circumstances was plaintiff entitled to the partial rescission which the lower court granted him.’ The arguments advanced in support of these contentions are not persuasive. As hereinbefore indicated, there is evidence from which the trial court could find that respondent never received any benefits whatsoever in return for his relinquishment.

The judgment is therefore affirmed.

DORAN, Justice.

WHITE, J., concurs. YORK, P. J., dissents. Rehearing denied; YORK, P. J., dissenting.