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Richards v. Liquid Controls Corp.

MARCH 6, 1975.




APPEALS from the Circuit Court of Lake County; the Hon. LLOYD A. VAN DEUSEN, Judge, presiding.


George B. Richards (hereinafter Richards) sought a declaratory judgment to interpret the deferred payment provision of a written contract under which he had assigned his patents pertaining to positive displacement meters, air eliminators, valves and proportioners *fn1 to Liquid Controls Corporation (hereinafter Liquid Controls). The trial judge entered a judgment for Richards in the amount of $276,706.36 and interest, from which Liquid Controls appeals. 73-117.

Richards also filed an action seeking a return of the patents on the theory that the trial court adjudicated that the agreement had been breached. In this suit, however, relief was denied and Richards appeals.


The appeals have been consolidated.

Richards is an inventor who, in the early 1950's, developed certain concepts *fn2 for improving equipment used in control of fluids for industry. In the course of completing patent applications Richards' attorney introduced him to another of the attorney's clients, Mr. Fred Wacker of Ammco Tools Incorporated. Mr. Wacker lacked experience or particular knowledge in the fluids control industry, and Richards prepared an analysis of the market for meters using his rotary displacement device.

After various negotiations, an agreement between Wacker and Richards was reached in April of 1954. Under it Richards was employed in the new venture at a $12,000 annual salary and agreed that any future inventions would become the property of Ammco. Under the agreement Richards also sold and assigned certain patent applications and "inventions disclosed and claimed therein" together with any "improvements" on such inventions which Richards then or thereafter might own. "Improvements" were defined in the agreement to mean "modifications of, mechanical betterments of, and competitive substitutes for" such inventions which Richards then or thereafter owned.

In addition to providing for a lump sum payment of $10,000 to Richards which was paid upon the execution of the agreement, the contract provided for deferred payments in the following language, which is the substantial basis of the dispute:

"(b) AMMCO shall make the following deferred payments to RICHARDS for the life of the longest lived patent acquired by AMMCO under paragraph 1 of this Section, unless this agreement is sooner terminated as hereinafter provided:

1) An amount equal to five per cent (5%) of the net selling price of each and every Air Eliminator sold by AMMCO embodying the air eliminator invention or inventions and/or improvements acquired by AMMCO hereunder; *fn3 and

2) An amount equal to two and one-half per cent (2 1/2%) of the net selling price of each and every other device sold by AMMCO and embodying the inventions and/or improvements acquired by AMMCO under paragraph 1 of this Section.

(c) `Net selling price', as used herein, shall mean list price less all trade and cash discounts. Date of sale shall be considered to be date of invoicing.

Only one deferred payment shall be made on each complete device or mechanism sold by AMMCO and embodying any invention and/or improvements conveyed to AMMCO under paragraph 1 of this Section, and no deferred payment shall be made on repair and replacement parts."

Under the agreement no minimum payments were due for the first year; an annual minimum deferred payment of $15,000 was provided for the second year; and during the third and following years an annual minimum deferred payment of at least $25,000 was specified. The agreement also provided that Ammco would keep the records of all of its operations under the agreement "requisite for true determination of deferred payments accruing hereunder to RICHARDS, which records shall be open to inspection by RICHARDS * * *." Ammco further agreed to render quarterly reports "showing the sales and sales price of devices and/or mechanisms sold hereunder."

In 1955, Liquid Controls was created to take over the liquid control business as a separate entity and was substituted for Ammco in the agreement. Initially Liquid Controls produced what it described as the "M-60" meter pursuant to a government contract. In 1957 the "M-7" meter was developed, and commercial sales began to increase. Liquid Controls widened its product line to include numerous attachments by which adaptation of the basic meter models could be created to suit customer interests. Among other attachments, meters were adapted with counters, printers, preset counters, air eliminators, strainers, flanges, and faucets.

Richards had been receiving his $25,000 annual minimum deferred payment under the contract but in 1962 became concerned that he might be entitled to more and broached the issue with the company. In the discussions which followed, it became apparent that Richards and Liquid Controls had different impressions of what was called for by the contract, particularly whether or not certain of the concepts were "improvements" of Richards' inventions and what constituted a "device" embodying those inventions. The dispute which affected the amount of deferred payments due Richards was not resolved by the end of 1962, and Richards requested an accounting for the four quarters of 1962. In January of 1963, Mr. Wacker sent a communication to Richards indicating that amounts due in 1962 did not exceed $25,000. Richards disagreed and threatened to resign. There were further discussions and in August of 1963 Richards again requested an accounting and Mr. Wacker indicated that such an accounting would be a practical impossibility. It was therefore informally agreed that Richards would accept an accounting beginning with the year 1963.

Disagreement over the payment basis continued and in 1964 Richards was presented with a partial scheme for computing deferred payments which the parties had referred to as the "M-7 Tabulation." The tabulation was prepared by Robert Pranke, the treasurer and comptroller of Liquid Controls, who had been previously instructed by Mr. Wacker to attempt to reach an accurate determination developed from each invoice for payment of Richards under the contract. It appears from an examination of the M-7 tabulation that the 2 1/2% deferred payment was to be applied to what appeared in the sales brochure as the "A" meter which included the rotary displacement device covered by the patent and a counter which was not. Where the products sold included a strainer or a preset valve, described in the brochure as subassemblies, the deferred percentage was also applicable to these items. The tabulation did not provide for deferred payments on the faucet or printer mechanism when attached to the basic meter.

Richards, however, did not agree with the M-7 tabulation for the reason that in his view it did not comport accurately with his interpretation of the contract. It appears from his testimony that he agreed that if only a basic meter ("A") were invoiced, the computation was correct. But where a printer, strainer, or preset counter were added, he considered them to be an integral part of the meter device which embodied his positive displacement invention and upon which the deferred payment was due. By July of 1964 Richards insisted that, in accord with his interpretation of the contract, at least $15,000 was due for the year 1963 over the $25,000 already paid. He was thereafter paid accordingly and the necessity for an accounting for that year was eliminated.

When the time came for calculating the payment due for 1964 no agreement had been reached concerning the deferred payments formula. In order to determine a deferred payment which would roughly parallel the $40,000 figure for 1963 which Richards had accepted, Mr. Pranke applied the basic 2 1/2% figure to 95% of the total annual sales. Apparently Richards was not informed of this formula of computation.

In 1964, 1965 and 1966 payment to Richards was made according to this formula (2 1/2% x 95% total of sales). These payments were characterized as "preliminary amounts." Richards testified that although he believed the payments to be a few percentage points less than his due, he accepted them nevertheless.

At approximately this time Richards resigned his position with Liquid Controls, and he received an accounting with indicated to him the formula by which he was being paid in 1964-66. According to this formula the proper payment for 1967 would have been $75,700.

In March of 1968, Richards requested an accounting for the year 1967. He met with Mr. Wacker who explained that following newly obtained legal advice it was the intention of Liquid Controls to pay Mr. Richards only $46,000 for the year 1967. The figure was apparently based upon a letter from Wacker's attorney in which he advised that the 2 1/2% of the net selling price of each and every device sold embodying Richards inventions as provided in paragraph 2(b)(2) of the agreement did not apply to the counter (referred to as the "Veeder-Root" product) or any other item added to the device which was not one of the patented inventions actually assigned by Richards. Richards was informed that if he did not accept the $46,000 there would be nothing and that if it came down to litigation the company could withstand it better than he could. Richards refused the decreased sum. In subsequent months Wacker proposed to pay the full $75,700 for 1967 if Richards would agree to an alteration in the accounting methods from 1968 on. Richards declined, and this law suit followed in July of 1968.

Since the filing of the suit Liquid Controls has paid Richards on a basis which excludes the counter and any other added accessories (except for the air elimination device). Amounts in excess of the totals have apparently been placed in a deferred payment reserve. These amounts reflect the difference between the payments made and what the payments would have been under the formula applied between 1963 and 1966.

In mid-1969 a computerized "Sentinel 10" accounting process was developed which allowed precise computation of amounts due Richards as deferred payments in accordance with Liquid Controls' more current interpretation of the original agreement. The percentage amounts paid were ...

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