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Philips Electronics & Pharmaceutical Industries Corp. v. Leavens

decided: January 13, 1970.

PHILIPS ELECTRONICS & PHARMACEUTICAL INDUSTRIES CORP., A CORPORATION OF THE STATE OF MARYLAND
v.
WILLIAM B. LEAVENS, JR., AND GREENE DATATAPE, INC., A CORPORATION OF THE STATE OF NEW JERSEY. WILLIAM B. LEAVENS, JR., APPELLANT IN NO. 17699, GREENE DATATAPE, INC., A CORPORATION OF THE STATE OF NEW JERSEY, APPELLANT IN NO. 17700



Hastie, Chief Judge, and McLaughlin and Van Dusen, Circuit Judges.

Author: Van Dusen

Opinion OF THE COURT

VAN DUSEN, Circuit Judge.

This case is before the court on the appeals (1) of the corporate defendant (No. 17700) from a District Court Judgment of October 18, 1968, awarding damages for anticipatory breach of a contract for the manufacture and repair of mechanical devices known as Letteriters*fn1 attached to I.B.M. electric typewriters and dismissing its counterclaim alleging breach of warranty, misrepresentation, and negligence by plaintiff; and (2) of the individual defendant (No. 17699) from a District Court judgment entered October 18, 1968, against him on guarantees of performance of the contract and dismissing the counterclaim which had been filed by him, as well as by the corporate defendant.*fn2

The District Court opinion uses this language in describing the background of the contract:

"Datatape [the corporate defendant] was incorporated by Leavens, Edmund Gannon and George Greene for the purpose of manufacturing and marketing automatic typing devices. Leavens, as President and a director, became the financial man and chief executive officer of Datatape. Greene was Vice President and a director and technical man and an inventor of the Letteriter. Gannon, also a Vice President and director, was in charge of sales and marketing. Initially Leavens, Gannon and Greene shared equally in the common stock of Datatape, but in July 1963 Leavens acquired 60% of its common stock and 100% of its newly issued preferred stock. * * *

"Prior to January 1960 in California, Greene, under the name of Greene Engineering Company, had commenced work on an automatic typing device using the standard bar type I.B.M. typewriter; * * *. Upon the appearance on the market in August 1961 of the I.B.M. Selectric typewriter, Greene presented to Leavens and Gannon his initial ideas respecting the Letteriter, and in January 1962 Greene demonstrated a rough prototype thereof to his associates. In March of that year, after viewing another prototype, Leavens and Gannon determined that the Letteriter was ripe for production and sale, and authorized Greene to proceed with its manufacture.

"Three distributorships*fn3 were established for marketing Letteriters to be manufactured by Greene Engineering and sold by Datatape. * *

"The Letteriter was first produced for sale by Greene Engineering in September, 1962. By November, 1962, after approximately six machines had been delivered by Greene, Leavens and Gannon decided that Greene would have to be removed as the manufacturer of the Letteriter. The machines produced for sale by Greene were poorly constructed and in an early stage of development. They were received by the distributors in inoperable condition, and, despite servicing by the distributors, frequently required further service during use by customers.

"Greene had manufactured approximately 90 Letteriters in the period from about September 1962 to July 1963. * * *

"There was no material improvement in the operation of the later machines manufactured by Greene. As time went on, the machines in the customers' premises developed new and more serious difficulties, and eventually all the Greene machines required complete rehabilitation.

"Leavens showed Walker, President of Pix [Manufacturing Company -- "Pix"],*fn4 a Letteriter machine manufactured by Greene and told him that Datatape had been experiencing great difficulty in servicing the Greene machines and was seeking a new manufacturer competent to turn out machines which would operate properly. Walker undertook to study a sample of the Greene machines and a brochure descriptive thereof, both of which Leavens left with Walker for that purpose. In late February or early March 1963, Leavens brought Edmund Gannon, the Letteriter distributor for the New York area and a Vice President of Datatape, to Walker's plant to demonstrate the machine. Thereafter Walker told Leavens and Gannon that if Pix took over the manufacture of the Letteriter, it would have the 'backing' of the entire Philips organization as a source of technical assistance for the Letteriter project. On April 4, 1963 Walker was given a working model of the Greene Letteriter and a set of related drawings for study. By arrangement with Leavens, Walker visited Greene's plant in California where he inspected Greene's manufacturing facilities and discussed with him the 'trouble areas' of the machine."

By letters of June 25 and July 3, 1963, Pix offered to produce approximately 100 units at $775. each and Leavens accepted the offer by his letter of July 15, which added:

"It is understood that certain pieces will be shipped you from our plant in Richmond, California, and that on this initial run you will credit us for the usable pieces at the price you estimated in your quotation."

At a conference between Leavens, Walker and Greene on July 17, it was made clear that Greene was to keep all master drawings and to approve all drawings (including "design changes, if any") of Pix.*fn5 Greene was to send Pix as soon as possible a Letteriter with all latest approved parts.

Pix was unable to obtain sufficient data from the defendants or from Greene to enable it to construct complete Letteriters during July-September 1963. The first Letteriter from Pix was delivered on December 2, 1963.

The trial judge found:

"The parts, tools and drawings were not finally received from Greene until October 1963 and were found to be mostly useless. The later model Letteriter also received from Greene in October failed to function to the satisfaction of Leavens and Pix."

Having commenced the practice of preparing handmade samples of Letteriter parts which he thought needed redesigning and sending them to Pix on an "almost daily basis" in September of 1963, Leavens instructed Walker to have nothing more to do with Greene, who had originally been in charge of design, the following month. It was also agreed that Pix would undertake to refurbish the Letteriter machines which had been manufactured by Greene.*fn6 In assessing the reasons for continuing delays in production, the trial court described Leavens' activities:

"Besides continuing to revise the Letteriter Manual of which he was the author, Leavens submitted lists of Letteriter faults, issued instructions for the punch cage set-up, prepared an interposer spring study and a study of the shift and shift valves, and suggested specific solutions and procedures. He frequently brought in to Pix new ideas and developments which required Pix to provide drawings, specifications, samples and ...


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