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American Machine & Metals, Inc. v. De Bothezat Impeller Co.

United States District Court for the Southern District of New York · 1948 · Civil Procedure

Civil ProcedureSeparate TrialsPretrial ProcedureDeclaratory JudgmentChoice of LawRule 42(b)separate trialpretrial conference

Facts

In 1934, defendant assigned certain patents, conveyed plant and equipment, and leased other equipment to plaintiff so plaintiff could carry on defendant's former fan business, and plaintiff agreed to pay royalties. The contract expressly allowed plaintiff, after one year, to terminate the agreement by notice effective six months later. Plaintiff sought a declaration that it could terminate and still remain in the fan business. Defendant asserted four alleged wrongs by plaintiff—conversion of leased equipment, failure to use defendant's name in promotion, refusal to furnish a proper audit, and failure to use best efforts to promote sales—and claimed those wrongs made plaintiff's exercise of the termination option inequitable and also supported damages counterclaims.

Issue

Whether, on pretrial motion, the court could determine the legal insufficiency of defendant's four asserted defenses and order a separate trial on plaintiff's complaint. More specifically, the question was whether plaintiff's alleged prior wrongs could either bar its exercise of an express contractual right to terminate or prevent it from continuing in the fan business after termination.

Rule

Where a contract expressly permits termination on notice, prior wrongful conduct by the party exercising the option does not make the termination ineffective merely because termination may cause irreparable injury to the other party. Under Rule 42(b), if asserted defenses are legally insufficient to defeat the plaintiff's claim, the court may strike or disregard them at pretrial and order a separate trial of the dispositive issues, leaving damages counterclaims or other later issues for a second trial.

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North Harbor Systems, a Delaware manufacturer with executive offices in New York, signed a licensing contract with Lakeview Rotor Works in Buffalo. The contract lets North Harbor terminate on six months' notice after the first year. North Harbor files a declaratory action in federal court seeking a ruling that it may terminate and keep selling compressors, while Lakeview pleads that North Harbor previously failed to provide reports and mishandled leased tools, making termination inequitable, and also seeks damages for those acts.

At a pretrial conference, North Harbor asks the court to try first only whether it may terminate and continue competing, leaving Lakeview's damages counterclaims for later. Under the majority rule of the case, what is the best ruling?

Explanation. The majority held that the court may assess at pretrial whether asserted defenses are legally sufficient. If they would not bar declaratory relief as a matter of law, the court may strike or disregard them for that phase and order a separate trial under Rule 42(b), leaving damages counterclaims for a later trial.