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Hutchinson v. Fish Engineering Corp.

Court of Chancery of Delaware, New Castle County

May 18, 1964

Arthur J. L. HUTCHINSON, Plaintiff,
v.
The FISH ENGINEERING CORPORATION, a Delaware corporation, and Pacific Northwest Pipeline Corporation, a Delaware corporation, Doe One, Doe Two, Doe Three, Doe Four, Doe Five and Doe Six, Defendants.

Page 54

[42 Del.Ch. 23] Herbert L. Cobin, of Coxe, Booker, Walls & Cobin, Wilmington, and Leonard J. Meyberg, Los Angeles, Cal., for plaintiff.

Arthur G. Connolly and Januar D. Bove, Jr., of Connolly, Bove & Lodge, Wilmington, and Robert F. Campbell, of Andrews, Kurth, Campbell & Jones, Houston, Tex., for defendant, The Fish Engineering Corp.

John VanBrunt, Jr., and Andrew G. T. Moore, II, of Killoran & VanBrunt, Wilmington, for defendant, Pacific Northwest Pipeline Corp.

SEITZ, Chancellor:

The plaintiff, Arthur J. L. Hutchinson, claims the ownership of six patents (designated herein as the (a), (b), and (c) patents and the (d), (e), and (f) patents) and damages for their alleged wrongful use or detention by the defendants, The Fish Engineering Corporation ('Fish Company') and Pacific Northwest Pipeline Corporation ('Pacific'). The substance of his claims are set forth in an earlier opinion in which this court denied the defendants' joint motions for summary judgment on the grounds of laches or limitations and defendant Pacific' separate motion on another ground. See Hutchinson v. The Fish Engineering Corp., (Del.Ch.), 189 A.2d 664. This is the decision after final hearing.

Fish Company was organized in 1946 for the purpose of performing engineering services in connection with the design and construction of installations in the oil, gas, and chemical fields. Ray Fish was the founder of the company, its principal stockholder, its chief executive officer, and undoubtedly its guiding spirit. Fish was joined in 1946 by plaintiff and several other persons who thereafter participated percentagewise in the stock ownership of the Fish Company and formed the nucleus of its management. In later years Fish was instrumental in organizing a number of affiliated companies which became the means by which the Fish organization participated in specific construction projects. As each of these companies was formed, the stockholders of the Fish Company were permitted to purchase a portion of the shares of such companies equal in proportion to the amount of Fish Company stock which they owned.

[42 Del.Ch. 24] Although the plaintiff joined the enterprise at an early stage, he did not play an active role in the promotion and organization of the company. Before his employment by Fish Company he had worked for a number of years as a process engineer for the Fluor Corporation. He had also been active in conducting research for Fluor and had developed a number of patents which he had assigned to Fluor as his then employer. He was asked by Fish to join the company because of his considerable experience in process and research, and it was understood that he would be the company's chief employee in these areas.

Although the plaintiff was given an option to purchase 15% of Fish Company's stock when he joined the company in 1946, he was unable to raise the necessary investment capital at that time. In 1948, however, arrangements were made by Ray Fish whereby plaintiff was enabled to purchase 7 1/2% of the company's stock which Fish himself owned. At that time plaintiff also became a member of Fish Company's board of directors and thereafter attended the meetings of the board on a regular basis. He had participated in the management of the company prior to that time, but only on an informal basis.

Plaintiff served as a full-time employee of Fish Company from 1946 through 1950 and received a substantial annual salary for his services as well as several end-of-year

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bonuses and a proportionate stock interest in the various Fish Company affiliates as they were organized. In 1951, plaintiff was forced to leave Houston, Texas, the location of Fish Company's main offices, for the drier climate of California because of ill health. As a result, plaintiff entered into an agreement with the Fish Company on January 24, 1951, under the terms of which he became a part-time consultant of the company on an exclusive basis for a period of five years or until January 1, 1956. The circumstances surrounding the execution of this instrument and the significance of the purported change in his employment status are considered more fully later herein. In January of 1956, the term of the consulting agreement was extended by mutual agreement for a period of three months ending March 31, 1956. By the latter date, however, a serious controversy had arisen between plaintiff and the [42 Del.Ch. 25] Fish Company concerning the ownership of the (d), (e), and (f) patents, and his contract of employment was not renewed.

In the latter part of 1956 and early 1957, plaintiff's attorney, Mr. Meyberg, corresponded with defendants and their attorneys with respect to plaintiff's rights in all six patents involved in this action. Efforts at settlement proved inconclusive. On June 29, 1957, a Notice of Rescission was sent to Fish Company repudiating the assignments of the (a), (b), and (c) patents and the various contracts or transactions under which Fish Company purported to claim ownership of all six patents. Fish Company rejected this notice on July 12, 1957. Subsequently, in 1958, Fish Company and Pacific granted a license under the (d), (e), and (f) patents to a third party, and Fish Company tendered plaintiff ten per cent of the royalties earned thereunder, pursuant to terms of the purported July 24, 1954 contract, discussed later herein. Plaintiff rejected the tender, and in February 1959, his attorney filed this action.

I turn first to plaintiff's claims with respect to the (a), (b), and (c) patents all of which were developed prior to the execution of the consulting agreement in 1951. By way of background, the inventions embodied in these patents are a pulsation dampener, a process for the selective separation of acid gases, and a variable capacity dust scrubber remover respectively. Each is useful in dealing with certain specific problems that are ordinarily encountered in the construction and maintenance of gas pipeline systems. It is undisputed that Fish Company made extensive use of devices covered by the (a) and (c) patents in equipment installed by itself or its affiliates though the process covered by the (b) patent was apparently never put into use. In each instance all the development costs and all the expenses of patent prosecution were paid by Fish Company, and its lawyers hadled the patent work with the plaintiff's assistance.

Plaintiff assigned the (a) and (c) patents to Fish Company at its request in 1948 and 1949 respectively and the (b) patent in 1951. Plaintiff received no additional compensation for any of these assignments or for Fish Company's use of these patents.

[42 Del.Ch. 26] Plaintiff claims that Fish Company's officers and patent attorneys obtained the patents by fraudulently representing to him that as an employee of Fish Company he had a legal duty to execute the assignments. He urges that a kind of confidential relationship existed between himself and his associates in the Fish Company which required them to deal fairly with him, and not at arms' length, and that such persons knowingly abused this relationship in obtaining assignments of the patents. He prays therefore for rescission of such assignments and reconveyance of the patents as well as damages for their conversion or wrongful detention.

There is in my opinion no substance whatever to plaintiff's claim that he was induced to execute assignments of the (a), (b), and (c) patents by the fraudulent conduct of Fish Company or its attorneys. The simple fact is that from the time he joined the Fish Company in 1946, both he and his

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associates mutually acted in the belief that Fish Company was entitled to the patents of its employees developed in the course of its business. While he alone among the founders of the company had a substantial interest in developing a policy that would compensate employees for their inventions, he never quarreled with the fact that Fish Company did have an operative policy with respect to such inventions even though he was unhappy with the policy was then in effect. Moreover, in evaluating the substance of his claim of fraud, I think it significant that plaintiff does not claim that Fish or Fish Company's patent attorneys withheld or concealed any 'facts' bearing on his obligation to assign the patents, nor is there any suggestion in the record that they did not believe the truth of the assertions when they were made. I conclude that to the extent that these representations were the motivating factor underlying plaintiff's assignment of the (a), (b), and (c) patents to the Fish Company, they were made in good faith in the belief that Fish Company owned the patents and can in no way be characterized as 'fraudulent', and it follows that plaintiff's claim for rescission on this ground must fail.

While the record herein provides a substantial basis on which the court might have concluded that Fish Company was legally entitled to an assignment of these patents as an implied condition of plaintiff's contract of employment, it is unnecessary to decide this question here. [42 Del.Ch. 27] I say this because, assuming without deciding that absent a finding of fraud plaintiff could establish some other legal basis for rescinding the assignments in issue, I am nonetheless satisfied that any such claim is barred under the doctrine of laches. The record herein amply demonstrates that plaintiff stood by and did nothing from and after the first assignment in 1948 until the assertion of his present claims to these patents in 1957. During that period he knew that the Fish Company was making use of the patents and patented devices under a claim of ownership after having expended considerable sums in their development. Plaintiff in my opinion had full knowledge of, or independent access to, all the facts necessary to an assertion of his alleged claims on the date that each of these assignments was made and had a legal duty under the circumstances to come forward and do so. He failed to take action at the appropriate time in each instance and did not even communicate his claims to the Fish Company until several years later. Moreover, this delay took place while defendant Fish Company, to plaintiff's knowledge, clearly changed its position materially and to its detriment. Thus, I believe that these facts fully justify the court in using a rather short period of time to fulfill the lapse-of-time requirement of laches. I note that the Texas statute of limitations which might be applied by analogy is two years.

Plaintiff seeks to justify his delay in making known his claims to these patents on the ground that Ray Fish fraudulently induced him to believe by various promises or assurance that he would ultimately be rewarded for Fish Company's use or exploitation of the patents. I find plaintiff's restimony to that effect wholly unacceptable. Such promises or assurances, including an alleged oral commitment by Fish in January of 1951, in my opinion were never made or given. Passing over the fact that plaintiff produced not a single shred of corroborative evidence apart from his own testimony, I think that an evaluation of the relationship of Fish Company's interest in patent ownership to its business needs strikingly reveals the improbability of any such promises or assurances ever having been made or given.

Nor do I find any basis for plaintiff's contention that Fish or plaintiff's other associates abused any confidence which plaintiff may [42 Del.Ch. 28] have reposed in them. Indeed, I think, to ...


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