Source: https://casetext.com/case/mccormick-company-incorporated-v-childers?resultsNav=false
Timestamp: 2019-02-16 21:56:16
Document Index: 14663775

Matched Legal Cases: ['§ 28', '§ 1500', '§ 476', '§ 888', '§ 80', '§ 891', '§ 893', '§ 893']

McCormick Company, Incorporated v. Childers, 468 F.2d 757 | Casetext
468 F.2d 757 (4th Cir. 1972)
McCormick Company, Incorporatedv.Childers
United States Court of Appeals, Fourth CircuitOct 23, 1972
Plant v. Merrifield Town Center Limited Partnership
…This standard is an objective one; in other words, rescission is appropriate only where an omission "would be…
…Materiality for the purposes of establishing entitlement to equitable rescission requires a case-by-case…
Decided October 23, 1972.
Paul R. Connolly and J. Alan Galbraith, Washington, D.C. (Williams, Connolly Califano, Washington, D.C., on brief), for Earl L. Childers, Bedford Industries, Inc., and others.
Franklin G. Allen, Baltimore, Md. (William L. Marbury, and Piper Marbury, Baltimore, Md., on brief), for McCormick Co.
This appeal involves a dispute stemming from the sale of the assets of Childers Foods, Inc., to McCormick Company, Inc., the focal point of the disagreement being an emulsion machine and the patent application which was pending thereon at the time of the sale. In its original complaint McCormick alleged that it had been induced to enter into the contract by false representations made by Childers, and sought rescission of the contract of sale, recovery of certain shares of stock which had been issued to Childers, as well as damages.
Motions to dismiss the complaint and to quash service of process were denied by the district court. Thereafter, the defendants answered and Childers also filed a counterclaim for the balance of the consideration due him under the contract. The defendants demanded a trial by jury under the rationale of Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959), and requested that such jury trial precede a trial in equity. McCormick filed an amended complaint and an answer to the counterclaim in which it modified certain factual allegations and elected the remedy of rescission, thereby abandoning the claim for damages which had been included in the original complaint.
The trial court's opinion on these motions is reported in McCormick Company v. Bedford Industries, Incorporated, 301 F. Supp. 29 (D.Md. 1969). Subsequent to the sale, Childers Foods, Inc., changed its name to Bedford Industries, Incorporated, and the latter was named as the corporate defendant in this action. However, it was referred to as Childers Foods in the opinions filed by the district judge, and in the interest of clarity the corporate defendant will be similarly referred to in this opinion. The action was dismissed upon jurisdictional grounds as to two of the individual defendants, Eliza Childers and Marion Young.
Earl Childers has only a 9th grade education, but obviously is a man of considerable mechanical ingenuity and resourcefulness. Prior to 1968 he had engaged in several enterprises, including Childers Foods, Inc., located at Bedford, Virginia, which sold deboned chicken parts to salad makers and other customers. In the late 1950s Childers developed a "belt machine" which was designed to facilitate the separation of the meat from the bone. In 1960 he obtained a patent on this machine designated as U.S. Patent No. 2,932,058. In the early 1960s Childers developed a second machine known as the "shaker machine," U.S. Patent No. 3,118,172, which further refined the processing of deboned chicken parts.
In January of 1967 Childers retained an attorney for the purpose of obtaining a patent on the machine, and a representative of the attorney came to Bedford where he examined the machine and made several rough sketches of it. Childers did not disclose to either the attorney or his representative that the machine was an FMC pulper on which he had made certain changes. The application was filed by the attorney stating that Childers sought a patent for "Poultry Deboning and Committing Apparatus and Method." The background of the invention referred to several prior machines for deboning poultry, but made no reference to the fact that Childers had adapted an existing machine to what he believed to be a new use.
In the application the "Description," referring to the drawings, stated in effect that the terminal end of each beater blade is curved in the direction of rotation of the beater assembly and is spaced slightly from the distal end of the adjacent vane on the distributor plate. In describing the operation of the invention the language of the application reads in part as follows:
On the drawings, the radial vanes on the feed or distributor plate were designated as number 54. The beater blades were designated as number 62 and the terminal ends thereof as number 68.
On March 14 Childers and his counsel met with representatives of McCormick in Washington, D.C., to discuss the proposed contract of sale. The draft of the sales contract which McCormick had prepared contained a clause which made the contract subject to the condition that McCormick obtain a favorable written opinion from its patent counsel "that the invention claimed in U.S. Patent Pending S. N. 635,607 is a patentable invention." Childers insisted that this condition be eliminated from the contract, stating that he wanted a definite agreement with no options in it. Childers further advised McCormick's representatives that they could conduct whatever investigation they felt necessary to satisfy themselves on this aspect of the contract, but he made it clear that he was unwilling to guarantee patentability.
17.(f) "Childers Foods is the owner of U.S. Patent No. 2,932,058 dated April 12, 1960, and Mr. Childers is the owner of U.S. Patent No. 3,118,172 dated January 21, 1964, U.S. Patent Pending S. N. 635,607, United Kingdom Patent No. 983,198 and Canadian Patent No. 708-314 all free and clear of any liens, encumbrances or licenses except between Childers Foods and Mr. Childers. Sellers have no knowledge of any pending or threatened claims of infringement or interference involving such patents."
The contract further provided that the closing date would be April 1, 1968, and that as of that date the sellers would deliver to McCormick a certificate containing their representations and warranties which would survive the closing.
During the period from the closing date until August of 1968, a number of McCormick employees had occasion to observe the emulsion machine in operation and it became apparent to them that the machine had been developed from an FMC Model 50 Pulper. When this information was presented to Hayes, he advised that the origin of the machine would not affect patentability if Childers had designed changes therein which produced new, improved and unexpected results. A representative of Hayes inspected the emulsion machine in Bedford on October 30, 1968, and found it to be functioning efficiently with the feeder vanes leading the beater blades which was, of course, the reverse of their relationship as shown and described in the patent application. In his report he stated that the machine was being operated with "each beater blade * * * reasonably close to a leading radial vane" and that "[t]he invention described in the patent application differs from the apparatus actually being used in the positioning of the radial vane with respect to the beater blades." The conclusion was that the Bedford plant was not using the apparatus which was the subject of the patent application. Following this development, McCormick proceeded with further investigation, conducted discussions with Childers, and when settlement negotiations collapsed instituted the present action.
The district court made the finding that, in fact, the emulsion machine worked just as efficiently with the feeder plate vanes leading the beater blades by 1 1/8 or 1 1/4 inches as with the feeder plate vanes trailing the beater blades by 1 1/8 or 1 1/4 inches.
In analyzing the jury's answers to the interrogatories, the district judge concluded that it could have found that Childers made three misrepresentations with respect to the emulsion machine. First, he failed to disclose to McCormick that he had adapted an existing machine to a new use and gave the impression that he had designed a completely novel machine in its entirety; second, that the statement repeated several times in the patent application that the assembly rotated at 1800 r. p. m. was admittedly in error; and third, Childers statement to McCormick's attorney on March 15, 1968, relative to the relationship of the feeder cone vanes and the beater blades as shown in the patent application was incorrect. Upon the issue of rescission, the court eliminated the first two misrepresentations from consideration. Taking April 1, 1968, the closing date, as the point of reference, the district judge found that McCormick's attorney was on notice prior to that date that the emulsion machine had been developed from an existing machine constructed upon the basis of the Lewis patent; and further, that on April 1, 1968, or shortly thereafter, McCormick knew that the assemble did not rotate at 1800 r. p. m. but by reason of the "step down" from the motor, it operated at a substantially lower speed. In dependently of the jury finding, however, the district judge found that the statement made by Childers to Hayes that the gap created by the setting of the feeder vanes and beater blades shown in the patent application was important and essential to the satisfactory operation of the invention was a false (though not fraudulent) representation upon which McCormick was entitled to rely when it executed the contract of April 1, 1968. It was on this finding that the trial judge concluded McCormick was entitled to seek rescission.
In reaching this conclusion on the issue of rescission the district judge relied heavily on the Restatement, particularly § 28 of Restatement of Restitution, which reads in part as follows:
The district court noted that under Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), the conflicts law of Maryland would be applied in this case and that Maryland would apply the law of the District of Columbia, the place where the contract was made. The court recognized that absent any controlling authority in the District of Columbia, Maryland would assume that the courts of the District of Columbia would follow Maryland law. However, the court further found that there was no substantial difference between the law of Maryland and the District of Columbia, and this appears to have been conceded by all parties to this litigation.
We have no quarrel with this basic principle adopted by the trial court for it now appears to be well settled that material misrepresentations, even though innocently made, may be sufficient to warrant rescission in a court of equity. Glendale Corp. v. Crawford, 207 Md. 148, 114 A.2d 33 (1955); Williston on Contracts § 1500 (3rd ed.); Restatement of Contracts, § 476(1).
Misrepresentation as a basis for the jurisdiction of courts of equity evolved at a time when existing common law actions were inadequate to deal with a variety of injustices in cases which would not qualify as actions for deceit. Since the equity courts did not take jurisdiction for the purpose of awarding damages they were primarily concerned with the injustice of permitting a person who had made false representations, even innocently, to retain the fruits of a bargain induced by such representations. They therefore developed a remedy for innocent misrepresentation as well as for fraud and mistake. Often, however, an equity court declined to put a new label on the action but rather preferred to expand its definition of fraud and speak of an innocent misrepresentation as a form of fraud. 3 Pomeroy's Equity Jurisprudence § 888 (5th ed. 1941); McClintock, Equity, § 80 (2nd ed. 1948). While there is much apparent confusion in the cases resulting from the use of the word "fraud" in several different senses, the same basic principles are applied in all three areas. Under the restrictions peculiar to courts of equity a plaintiff in such a case cannot be guilty of conduct inconsistent with the relief demanded, and it is usually denied if the complaining party has affirmed the transaction or has been guilty of unreasonable delay in seeking relief after discovery of the facts. It was, of course, through the application of these principles that the district court denied complete restitution to McCormick. Without detailing the evidence, we agree with the trial judge that the record clearly supports a finding that McCormick was guilty of unreasonable delay in seeking rescission. However, we conclude that he was in error in his finding that McCormick had made out a case for rescission at all.
In a suit for rescission, the party seeking relief must not only show that the representation was false, but also that he relied upon the representation and was justified in such reliance. This principle and its application is aptly stated in 3 Pomeroy's Equity Jurisprudence § 891 (5th ed. 1941):
"The requisite that the representation must be relied upon, plainly includes the supposition that the party is justified, under all the circumstances, in thus relying upon it. This branch of the rule presents by far the greatest practical difficulties in the decision of cases, because, although the rule is well settled, and is most clearly just, its application must depend upon the facts of each particulate case, and upon evidence which is often obscure and conflicting in determining the effect of a reliance upon representations. It is most important to ascertain, in the first place, whether the statement was such that the party was justified in relying upon it, or was such, on the other hand, that he was bound to inquire and examine into its correctness himself. In respect to this alternative, there is a broad distinction between statements of fact which really form a part of, or are essentially connected with, the substance of the transaction, and representations which are mere expressions of opinion, hope, or expectations, or are mere general commendations."
First of all, we have serious doubts that Childers' statement to Hayes at the meeting on March 15 can be characterized as a misrepresentation. When Childers told Hayes that the gap between the feeder vanes and beater blades was "important" it was, in fact, truthful for at that time Childers was unaware that the machine would work just as efficiently when the gap was created by the reverse relationship of the vanes and blades. It is clear, however, that in asking the question Hayes was not primarily interested in the gap itself but in confirming his reading of the patent application to the effect that all of the chicken parts passed between the leading faces of the vanes and the trailing faces of the beater blades, shearing the meat from the bones in the process. The district judge made a specific finding that in this respect Hayes was reading his own ideas into what Childers said, and it should be noted that at no time did Hayes refine his question to Childers and ask him specifically whether all of the meat passed through the gap.
As previously noted the district judge made the finding that the machine operated at the same efficiency with the beater blades trailing or leading the feeder vanes. See no. 3, supra. It should be understood, however, that if the term "gap" referred to the special relationship of the two parts rather than the sequential relationship, Childers' statement of its importance was true. A smaller gap would increase bone breakage as a result of the larger meat parts attempting to pass through the openings. The 1 1/8 (chicken parts) or 1 1/4 (turkey parts) aperture described in the application provided a slightly larger opening than the dimensions of the pieces, which allowed a relatively free flow into the machine and minimal contact with the working parts of the emulsifier. An increase in the gap disrupted the feed rate, and because steady feed affected the time that parts remained in the chamber which was critical to efficiency, this naturally decreased optimum performance of the machine.
It would further appear that in the context of Hayes' question, Childers statement was merely an opinion. In concluding that the expression was a statement of fact, the district judge cited McNabb v. Thomas, 88 U.S.App.D.C. 379, 190 F.2d 608 (1951), which stated that under appropriate circumstances an opinion may become a statement of fact especially when uttered by one with superior knowledge. However, McNabb clearly recognized that such a determination depends to a large degree upon the equality of position of the parties, nation that an opinion made by a chemist to a layman about the properties of a composition should be treated quite differently from the same opinion made by a chemist to another chemist.
In Reeves v. Corning, 51 F. 774 (Cir.Ct. D.Ind. 1892), a patent case in which rescission was sought on the basis of false representations, the court stated:
Additionally, any representations regarding the validity of a patent are generally considered matters of opinion. Dillman v. Nadlehoffer, 119 Ill. 567, 7 N.E. 88; Johnson v. Brewer-Titchener Corp., 28 F. Supp. 1002 (N.D.N.Y. 1939). In this highly technical field a layman lacks the expertise to make a legal determination, a decision which can only be rendered ultimately by the courts. McCormick would have us accept its contention that the statement related only to the operation of the machine and in no way pertained to patentability. We cannot, however, close our eyes to the purpose of the questioning. Hayes sought information on the functioning of the machine to evaluate patentability, and he viewed patentability as dependent upon the gap feature and the supposed process of shearing as the meat passed through the small apertures. While Hayes questioned Childers on the importance of this feature, in essence, he was asking "was the machine patentable?", and with an affirmative answer, Hayes assumed the machine had the requisite novelty. We cannot accept the proposition that a response to a direct question on patentability represents an opinion, while a comment on the importance of a feature on which the inquiring party assumes patentability to be contingent must be cast in the posture of a statement of fact.
Finally, in our opinion McCormick's investigation of the patentability of the emulsion machine precludes it from asserting reliance upon Childers' representation. Childers had adamantly refused to condition the agreement upon an opinion of patentability and advised McCormick to take the time necessary to investigate it prior to execution of the contract. McCormick initiated the investigation and assuredly had the necessary experience and expertise to analyze the patent application and examine the machine and its operation. There was ample opportunity to explore every facet of patentability for the district court found that after February 21 Childers was willing to permit any representative of McCormick to examine the machine in operation at Bedford. Under these circumstances, a long line of authority denies to McCormick the right to rely upon Childers' statement. Slaughter's Admr. v. Gerson, 80 U.S. 379, 20 L.Ed. 627 (1871); McNabb v. Thomas, 88 U.S.App.D.C. 379, 190 F.2d 608 (1951); Horton v. Reynolds, 65 F.2d 430 (8 Cir. 1933); Attwood v. Small, (House of Lords, 1838), 6 Clarke Finnelly 232, 7 English Reprints 684; 3 Pomeroy's Equity Jurisprudence § 893 (5th ed. 1941). Nor is McCormick's position ameliorated by its decision to curtail its investigation and sign the agreement upon the basis of Childers' answers to Hayes' questions. Hayes candidly testified that there were two phases to a patent investigation; first, whether the application itself describes a patentable machine or method and, second, whether the application accurately describes the machine in operation. Apprehensive that further delay might jeopardize the agreement, McCormick saw fit to forego the second phase of the investigation. However, this decision by McCormick cannot relieve it from responsibility not shift the burden to Childers. Having entered upon the investigation, and having unimpeded access to all of the facts, McCormick was charged with knowledge of everything that a proper investigation would disclose. The principle is clearly and succinctly stated in Pomeroy's Equity Jurisprudence, supra, § 893. "The plainest motives of expediency and of justice require that he should be charged with all the knowledge which he might have obtained had he pursued the inquiry to the end with diligence and completeness."