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LEKTOPHONE CORP. v. PHILADELPHIA STORAGE BATTERY C

September 5, 1934

LEKTOPHONE CORPORATION
v.
PHILADELPHIA STORAGE BATTERY CO. et al.



The opinion of the court was delivered by: KIRKPATRICK

These are additional interrogatories filed by the plaintiff in a suit in equity against two defendants, Philadelphia Storage Battery Company and J.S. Timmons, Inc., who will be called Philco and Timmons respectively. The bill of complaint prays for an injunction to restrain patent infringement and violations of covenants of a license agreement which the plaintiff entered into with Timmons, and also an accounting for damages for past violations. Relief is sought against Timmons as an original party to the agreement, and against Philco upon the theory that Philco had and exercised such power and dominance over the affairs of Timmons that the latter was in effect a mere instrumentality, adjunct, or department of Philco.

If such power to direct operations and manufacture is, really, in Philco, it may be held liable for infringing acts on the part of the subsidiary "as being its own act done through a controlled agency. * * * A court of equity may well look behind the corporate screen and determine where the real and responsible power lies." Westinghouse Electric & Mfg. Company v. Allis-Chalmers Company, 176 F. 362, 368 (C.C.A. 3); De Forest Radio Tel. & Teleg. Company v. Radio Corporation of America, 20 F.2d 598 (C.C.A. 3).

 To the bill of complaint each of the defendants filed a separate answer. Both admit that from March 1, 1928, to June 19, 1933 (on which latter date the stock was surrendered for cancellation in connection with dissolution proceedings), Philco owned all of the capital stock of Timmons, except qualifying shares. Both deny, however, that Philco exercised the power which it had by virtue of such stock ownership to control, manage, and operate Timmons as a mere adjunct or instrumentality.

 The interrogatories which are the subject of this motion supplement interrogatories previously filed and answered, and relate exclusively to the manner in which Timmons' business was conducted following the acquisition of all its stock by Philco. By their answers to the earlier interrogatories the defendants have admitted that, since the acquisition of the Timmons stock, Philco has exercised its rights of stock ownership to elect directors of Timmons; that all the directors so elected were persons associated with Philco, some as officers, some as directors, and some as employees; and that for each of the calendar years 1928, 1929, 1930, 1931, and 1932, Philco reported the income of Timmons to the United States government in a consolidated income tax return as being income received by a wholly owned subsidiary.

 In response to interrogatories relating to the manufacturing operations carried on by Timmons for Philco since the acquisition of Timmons' stock by Philco, the defendants answered that such operations were carried on pursuant to an oral agreement by which Philco agreed to buy and Timmons agreed to manufacture Philco's requirements for loud speakers; that under the contract Timmons derived a profit on each loud speaker manufactured for Philco; and that up to January 1, 1929, the profit was based on a list price to all manufacturers and thereafter was "derived" at the rate of 2 1/2 per cent. The basis upon which the 2 1/2 per cent. profit was computed was not explained.

 The issue thus raised comes down to the question whether, for all practical purposes, whatever the legal form may be, Timmons is a mere department of Philco. This is indisputably an ultimate fact in the case against Philco, although it may be of little or no importance in the case against Timmons. The pleadings and the interrogatories already answered have brought the inquiry to this point: The defendants admit corporate control by stock ownership and allied directorate and officers; they assert, however, complete disassociation and independence in the conduct of the Timmons business. If their assertion is true, the admitted fact of corporate control would, probably, not make Philco responsible for Timmons' acts of infringement. If, however, the business of Timmons is being conducted entirely by Philco so that, as in the Westinghouse Case, supra, Philco "has taken over all that is valuable in this business and made it a department of its own" and is "the unquestioned master, whose orders are obeyed," Philco's responsibility would follow.

 The earlier interrogatories have established the fact that the conduct of Timmons' business is governed by an oral contract with Philco. Upon the nature of this contract the defendants base their claim of mutual independence. They have disclosed certain terms or phases of the contract relation. They now object to disclosing others, to which these interrogatories are directed.

 1. Ownership by Philco of the premises on which Timmons carries on its manufacturing operations and occupation of said premises by Timmons without payment of any rent or upon payment of rental so low as to be inconsistent with independence between Timmons and Philco.

 2. Failure of Timmons to keep such records of its costs as would secure to an independent company the compensation due it under its agreement with Philco for a 2 1/2 per cent. profit on manufacturing operations for Philco.

 3. Purchase by Philco of raw materials for Timmons without charge to Timmons.

 4.Employment by Philco of labor for Timmons without charge to the latter.

 5. Payment by Philco of insurance premiums on policies insuring Timmons and reservation to Timmons of the beneficial ...


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