Humaston v. American Telegraph Company

APPEAL from the Circuit Court for the Southern District of New York; the case being thus:

Humaston having invented certain instruments for expediting the transmission and reception of messages by telegraph, and especially for perforating paper for the purpose of such messages, which inventions were patented, and having also, as he alleged, discovered a process by which paper could be chemically prepared, so as to be sensitive to the electric current, and by which its value would be greatly enhanced (a process which he kept secret), entered in April, 1861, along with one Lefferts, who had some interest in the matter with him, into an agreement, as follows, with the Amreican Telegraph Company, a company already established in the business of telegraphing:

'The American Telegraph Company agree to buy, and Humaston agrees to sell a full, perfect, and unincumbered title to all his inventions for all electric telegraph machines and processes, ad particularly the patented invention for perforating paper for the purpose of telegraphic messages, and the adaptation and manner of using such perforated paper in the transmission of such messages, including whatever is patented by Humaston in the transmission of messages by telegraph, and also including the secret process of preparing the chemical paper, with the right to procure letters-patent therefor.

'The said Humaston and Lefferts agree not to engage, derectly or indirectly, in telegraphing during the period of ten years, in competition with the American Telegraph Company, nor in any way aid, countenance, or encourage any telegraph line doing business in any of the States bordering upon the Atlantic Ocean or Gulf of Mexico, &c., so as to in any way injuriously affect the business or interests of the American Telegraph Company.

'The consideration to be paid by the company for the said inventions and patents, and agreement against competition, is one dollar, and at least 50 shares of the capital stock of the American Telegraph Company. Upon the execution and delivery by said Humaston of conveyances of the aforesaid inventions and patents, conveying a full, unincumbered, and perfect title to the whole thereof, the said American Telegraph Company are to issue to the said Humaston 100 shares of the stock of said company, and a further consideration of not exceeding 400 shares of the capital stock of said company is to be paid or issued to the said Humaston upon the following stipulations and conditions: Three distinterested referees or arbiters are to decide how much (if any) more is to be issued to the said Humaston after such arbiters shall be satisfied as to the capability and value of said patented inventions; the said referees or arbiters to be mutually selected.

'It being understood that the aforesaid maximum amount of stock consideration is stated under a claim by the said Humaston and Lefferts that his patented inventions will enable the said company to do by the Humaston system, and on one wire; five times as much business, regularly and accurately, as can be done now on one wire, in the same time, by any system now used by said company, it being also understood that compensation is not to be allowed to Humaston for what is now public, but only for what their patented improvements in telegraphy are worth more than any other of said systems.

'The arbiters or referees are also, in estimating the value of said patented inventions, to consider the comparative reliability, accuracy, rapidity, cost, and also the expense of working and using said inventions with those now in use. To enable the said Humaston and Lefferts to prove the capacity and value of the said inventions, full, fair, and sufficient trials are to be allowed to them, and made in such manner, and as often, and for such period of time, as the referees may determine, and the final decision is to be given before the expiration of one year from the date hereof. Each party are to have the right to suggest to the referees such experiments for the testing of such inventions as to them may seem proper. The referees to have full opportunity of investigating and deciding in the matter. It is also understood and agreed that the company are to have reasonable opportunity to examine into the validity and patentability of the patented inventions, and place any questions which may arise thereon before the referees for their decision. But the referees are hereby instructed that under the foregoing paragraph the company are to require only a reasonable amount of evidence as to the validity of the Humaston inventions, and further agreed that, should the referees decide that the invention is wholly invalid, and not patentable, then the company will surrender up and transfer to Humaston, by a good and sufficient assignment, the title to the said patents on the retransfer of 50 shares of stock of the company. Upon the award or decision of said referees, or a majority thereof, being made in writing and delivered to said company, said company are to pay or issue to said Humaston the additional amount, if any, of stock (not exceeding 400 shares), determined or stated in such award.'

Humaston made the requisite transfers, and the matter meant to be submitted was referred to the arbitrators. They accepted their office and entered upon the discharge of their duty, but the telegraph company withdrew its submission. Humaston now brought special assumpsit against the company, claiming not only the 100 shares of stock which he actually received in 1861 (and then worth $100 a share, or $10,000, and which in 1866 was worth $18,000), but claiming also the value of the other 400 shares. His position was that by the terms of the contract, he was entitled to the 400 shares unless the arbitrators named a smaller compensation, and that as the company had withdrawn its submission, and so prevented the arbitrators from naming any such smaller compensation, he was entitled to the whole 400 shares.

At the trial, the instruments invented by Humaston were submitted to the jury and explained, and experts, mechanics, and telegraphers examined upon them for several days.

After the plaintiff had established what was perhaps a prima facie case, his counsel, for the purpose of furnishing a rule for estimating his damages, offered to show that the market value of the stock of the American Telegraph Company on the 12th day of June, 1866, on which day the company had been consolidated with the Western Union Telegraph Company, was $150. The court excluded the evidence for the purpose for which it was offered, but admitted it as a fact which the jury might consider in estimating the value of the property sold. Subsequently the parties agreed that the market value of the stock of the company on the 1st day of April, 1861, was $100 per share, and made their agreement known to the court. Thereupon the court held that the evidence as to the value of the stock on the 12th of June, 1866, and at subsequent dates, which had been admitted, was immaterial; and under plaintiff's exception struck it out and excluded it.

Some of the defendant's evidence tended to show that the plaintiff's invention had no value and had never been used.

The court charged—

That the plaintiff was not entitled, as matter of law, to Recover of the defendants the value of the remaining 400 shares:

Also that the plaintiff did not, as matter of law, become entitled to the said 400 shares of stock by reason of the defendants' revocation of the powers of the referees or other breach of contract alleged, but that the plaintiff was entitled, in consequence of the revocation, to bring an action and to recover the excess (if any there was) which the value of what he sold, assigned, and transferred to the defendants (enhanced by the agreement of the plaintiff and Lefferts not to enter into competition with the defendants) had when sold and delivered, over the amount which he had already received (and that this he parties agreed was 100 shares, of the aggregate value of $10,000), with interest on such excess from the 13th of February, 1867; but if in their judgment there was no such excess, then that their verdict should be for the defendant.

To these instructions the counsel for the plaintiff excepted.

The jury found for the plaintiff, and assessed his damages at $7500.

The exclusion of the evidence and the charge of the court were the matters now assigned for error.

Messrs. Truman Smith and Cephas Brainard, for the plaintiff in error, argued the case much at length, and showed, as they conceived, that it was well established both in England and this country, that a stipulation in a contract for a reference of any matter of difference likely or certain to arise thereunder, might be connected with the principal undertaking in such a manner as to make it a condition, and that as such it might essentially qualify or affect the rights of one party, or the obligations of the other; that if it were a condition precedent and was not performed, the obligation would be null; and if it were a condition subsequent and not performed (which the counsel alleged was the case here), then that the condition became null and the obligation absolute. If the party bound by a condition precedent did not submit, or offer to submit, or having submitted, revoked, his right of action was gone; and if a party bound by a condition subsequent refused to submit, or having submitted, revoked, then the qualification of his liability was gone, and that liability became absolute.

The learned counsel referred to twenty-nine different cases, English and American, beginning with Vynior's Case, reported by Sir Edward Coke, which sustained, as they conceived, their views.

Messrs. J. R. Porter and G. P. Lowry, contra, citing Cowper v. Andrews, and the opinion of Hobart, C.J., therein; Brewer v. Hill, and other cases.

Mr. Justice DAVIS delivered the opinion of the court.