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Kinley v. Alexander

Citations: 137 Cal. App. 2d 382; 290 P.2d 287; 1955 Cal. App. LEXIS 1195Docket: Civ. 20754

Court: California Court of Appeal; November 30, 1955; California; State Appellate Court

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A judgment was issued in favor of Myron M. Kinley, affirming that he is the rightful owner of a patent license royalty interest and that Ford I. Alexander holds this interest in trust for him. Kinley is entitled to recover $196,263.96 in accrued royalties and will receive half of any future royalties from the patent. The case centers on United States Patent Number 2,305,261, related to a method for removing stuck pipe sections from oil wells, known as the "back-off" patent. In 1946, Kinley and Alexander entered an agreement where Kinley assigned the patent to Alexander, who was to exploit it for mutual benefit and pay Kinley half the royalties, excluding certain states.

Alexander, however, breached this agreement by misleading Kinley about the patent's enforceability and secretly aiding a third party, the McCullough Tool Company, in infringing the patent. Alexander attempted to acquire Kinley's interest by falsely claiming he was selling his own interest to a buyer for $50,000. Kinley, believing Alexander's representations, agreed to sell his interest for the same price, while Alexander was negotiating a much higher price of $450,000 for his stake. Under the guise of acting as Kinley’s agent, Alexander instructed Kinley to refrain from negotiating directly with the buyer, leading Kinley to grant an option for his interest at the lower price.

Plaintiff assigned his interest in a patent to Homco, believing that defendant was also selling his interest to the same company for an equivalent amount. However, defendant concealed an agreement with Homco to grant a license for 10% royalties, with a minimum of $20,000 annually, contingent upon Homco exercising plaintiff's option to purchase the patent interest and then assigning it back to defendant. This arrangement allowed defendant to retain his patent and acquire plaintiff’s interest without compensation, benefiting solely from the licensing agreement. Additionally, on October 21, 1947, defendant entered into a hidden "Commission Agreement" with the Ford Alexander Corporation, which effectively provided him with extra royalties. He concealed this agreement and the additional income from plaintiff by omitting relevant information from the accounting records he provided.

Defendant contended that there was insufficient evidence supporting the trial court's findings, but the court affirmed that substantial evidence existed to support its conclusions. It noted that reviewing courts do not re-evaluate evidence or credibility but merely check for substantial support for the findings. The court found no merit in defendant’s claim regarding the trial court’s ruling on his affirmative defenses, including the assertion that plaintiff was guilty of laches in pursuing the action.

Fraud against the plaintiff occurred in May 1949, with the action initiated on December 27, 1951, well within the three-year statute of limitations (Code Civ. Proc. § 338, subd. 4). The defendant argued that the plaintiff's prior dismissal of a similar action without prejudice barred the current case, but this claim was rejected as the dismissal does not preclude subsequent actions based on the same cause within the statutory timeframe. The defendant's assertion of being a joint tortfeasor with Homco was found unsupported by evidence. 

Defenses claiming a settlement due to the plaintiff cashing a check for $2,901.80 on June 20, 1949, were also dismissed. The check represented unpaid royalties issued before the plaintiff discovered the fraud, as confirmed by correspondence indicating the payment was for royalties due under a prior agreement. 

Additionally, the defense that the plaintiff waived any fraud through dealings with Homco was deemed incorrect, as the plaintiff was not required to rescind upon learning of the fraud and could seek a constructive trust instead. Evidence supported that the plaintiff did not intend to waive the defendant's fraudulent actions. The trial court was found to have erred in accounting by treating payments received by the defendant for services to Petro-Tech as royalties, which were rightly included in the accounting based on the terms of the license agreement that defined royalties to encompass both the U.S. patent and the invention itself.

The trial court correctly classified the payments received by the defendant from Ford Alexander Corporation as royalties for the use of a patent, rather than as commissions for other services. The court found no evidence supporting the defendant's claim for a credit related to refunded commissions and royalties, as the defendant failed to demonstrate that the settled litigation involved a dispute over royalties. Consequently, the court ruled against the defendant on this point.

Furthermore, the court disallowed a credit for $45,000, which was the original purchase price agreed upon by Homco, as the plaintiff only received $35,000. Thus, the defendant was credited with half of this actual amount, consistent with legal precedent. The court also denied the defendant credit for a refund adjustment to Homco, determining it would be inequitable for the plaintiff to reclaim royalty rights while retaining the full $35,000 received. The trial court's decision to grant the defendant credit for the $35,000 but not for the subsequent $30,000 repayment obligation was deemed equitable.

Additionally, while the plaintiff sought interest on the amounts due, the trial court did not award it, despite calculations indicating that it could have added $15,974.51 to the plaintiff's total. Lastly, the trial court's exclusion of certain cross-examination testimony was upheld, as the questions posed were considered vague and irrelevant to the matter at hand.

The trial court sustained objections to questions regarding Mr. Kinley's satisfaction with the $45,000 received from Homco and his willingness to return that amount in exchange for his patent rights. The court deemed these inquiries hypothetical and immaterial, as they did not pertain to the defendant's alleged fraudulent actions. The core issue was whether Mr. Kinley was satisfied with the amount he received and willing to let the defendant retain his patent rights at the time he learned about the Homco-Alexander transaction on August 23, 1949. The court found that Mr. Kinley had already expressed satisfaction with the price, further confirming that his state of mind towards Homco was irrelevant to the case against the defendant. The appellate court affirmed the trial court's rulings, indicating that the objections raised by the defendant did not warrant a reversal of the judgment, as the material facts had been adequately addressed. The evidence was considered in a manner favorable to upholding the trial court's decision.