SCM Corp. v. United States

675 F.2d 280, 29 Cont. Cas. Fed. 82,334, 230 Ct. Cl. 199, 1982 U.S. Ct. Cl. LEXIS 154

• Court: United States Court of Claims
• Decided: March 24, 1982
• Docket: No. 141-80C
• Status: Published

Opinions

KASHIWA, Judge,

delivered the opinion of the court:

This suit, brought under the Contract Disputes Act of 1978, is before the court on cross motions for summary judgment. At issue is the interpretation of the royalty provision of a contract between the plaintiff, the Kleinsch-midt division of SCM Corporation (SCM), and the Government. After careful consideration of the parties’ submissions and after oral argument, we deny plaintiffs motion for summary judgment, grant in part defendant’s motion for summary judgment, and remand the remainder of the case to a trial judge for further determination.

During the mid-1960’s, the Department of the Army embarked on a program to replace its obsolete electromechanical teletypewriter field equipment with an electronic teletypewriter using modern solid state techniques.¹ The Government awarded a contract for the development of a forward area tactical teletypewriter (FATT) to the plaintiff. This contract, not in issue here, was divided into two phases. Phase I required delivery of the FATT while Phase II gave the Government an option to require plaintiff to complete an advanced production engineering (APE) effort to further develop the FATT and an option to use the technical data developed as a result.

The Government exercised the APE option. Part of this option required delivery of a technical data package (TDP) composed of engineering drawings of FATT test models. The cost of the right to use this data was covered in a second contract, Contract No. DAABO7-71-C-0294, at issue here.

This contract granted the Government a license with respect to background data and inventions owned by the plaintiff which were part of the TDP. It provided for an initial payment of $1 million upon the acceptance of the TDP. The TDP was accepted by the Government and the $1 million paid to SCM. The contract also provided for payment of royalties on the following basis:

In addition to the sum set forth in the preceding paragraph of this ARTICLE, Royalties shall accrue under this CONTRACT in favor of CONTRACTOR, upon the utilization of the TDP in whole or in part for the procurement of FATT Systems, or parts thereof, other than those furnished by CONTRACTOR, licensed under this CONTRACT and accepted by the Department of the Army, and embodying the background data supplied under the APE contract. Royalty payments will be made in accordance with the following schedule:

6% on the first Thirty Million Dollars ($30,000,000.00) procurement

4% on the next Thirty Million Dollars ($30,000,000.00) procurement

2% thereafter.

It is the interpretation of this provision that is in dispute.

After its acceptance of the TDP, the Army conducted its own modernization program of the FATT design and developed what has become known as the "smart FATT.” The "smart FATT” made improvements upon SCM’s FATT design. The Government then awarded a contract to Honeywell Incorporated for production of "smart FATT’s.” Subsequently, Honeywell made its own changes upon the FATT design.

. On May 18, 1979, plaintiff sent defendant an invoice requesting payment of royalties allegedly due under provision VI C 2 of the contract in the amount of $187,403.24. This amount was derived by applying 6 percent to the total cost as of that date of the Honeywell procurement. The Government refused to pay this amount, contending plaintiffs interpretation of Article VI C 2 was erroneous. It contends royalties should be paid only on that portion of the procurement which "embod[ies] the background data supplied under the APE contract.” The Government believes it owes the plaintiff $13,768.78 in royalty payments.

The parties rely upon the following provisions of the contract:

ARTICLE I. DEFINITION

* * * * *

B. "FATT System” is defined as any one or combination of the several components now denominated as the AN/UGC-72 ( ) V Teletypewriter Distributor-Transmitter; AN/UGC-73 ( ) V Teletypewriter Reperforator; AN/UGC-74 ( ) V Teletypewriter Page Printer with Keyboard; AN/UGC-75 () V Teletypewriter Tape Relay and Preparation Set; AN/UGC-76 ( ) V Teletypewriter Automatic Send-Receive Set, or any improved version of any one of these which embodies any background data with respect to items developed at private expense and submitted by CONTRACTOR in accordance with ARTICLE IV herein and the provisions of the APE contract, and which data has been accepted by the GOVERNMENT. "FATT System” shall not include equipment such as radio communication transmitting, receiving, relay or terminal equipment, telephone lines or cables or the like electrical signal equipment for transmission to, from and between teletype stations.

ARTICLE VI. PAYMENT

* * * * *

C. The GOVERNMENT, in consideration for this CONTRACT for RELEASE AND LICENSE FOR MANUFACTURING RIGHTS, PRIVATELY OWNED RIGHTS, DATA AND PATENTS, shall, subject to the provisions and limitations expressed in SUB-ARTICLES A, B, D, E and F of this ARTICLE, make payment to the CONTRACTOR in accordance with the following:

1. Initial Payment: Upon delivery and acceptance of the TDP under the APE contract for competitive procurement of the FATT System, in whole or in part, employing background data delivered and accepted in accordance with ARTICLE IV herein, One Million Dollars ($1,000,000.00) shall be due CONTRACTOR, and the GOVERNMENT shall within thirty (30) days of such issuance give notice to CONTRACTOR to submit the certified invoice called for by SUB-ARTICLE VI-A above.

2. Royalty Payments: In addition to the sum set forth in the preceding paragraph of this ARTICLE, Royalties shall accrue under this CONTRACT in favor of CONTRACTOR, upon the utilization of the TDP in whole or in part for the procurement of FATT Systems, or parts thereof, other than those furnished by CONTRACTOR, licensed under this CONTRACT and accepted by the Department of the Army, and embodying the background data supplied under the APE contract. Royalty payments will be made in accordance with the following schedule:

6% on the first Thirty Million Dollars ($30,000,000.00) procurement

4% on the next Thirty Million Dollars ($30,000,000.00) procurement

2% thereafter.

ARTICLE VII. REPORTING AND PAYMENT OF ROYALTIES

The U. S. Army Materiel Command or the installation thereunder designated to administer this CONTRACT shall, on or before the 60th day next following June 30 and December 31 of each calendar year during which royalties have accrued under this CONTRACT in accordance with ARTICLE VI, deliver to CONTRACTOR a report in writing stating the number of FATT Systems, or parts thereof accepted by the Department of the Army during said year on which royalties have accrued under this CONTRACT.

I.

This court’s primary function in interpretation of contracts is to discern the parties’ intentions. Dynamics Corp. of America v. United States, 182 Ct. Cl. 62, 72, 389 F. 2d 424, 429 (1968). To do so, this court must be guided by the well-accepted and basic principle that a contract should be interpreted to give effect to all parts of an agreement. An interpretation which gives reasonable meaning to all provisions is preferred to one which renders a provision useless or meaningless. ITT Arctic Services, Inc. v. United States, 207 Ct. Cl. 743, 751-752, 524 F. 2d 680, 684 (1975); Petrofsky v. United States, 203 Ct. Cl. 347, 357-358, 488 F. 2d 1394, 1400 (1973); Jamsar, Inc. v. United States, 194 Ct. Cl. 819, 826-827, 442 F. 2d 930, 934 (1971).

Article VIC 2 of the contract states that royalties shall be paid to the plaintiff "upon the utilization of the TDP in whole or in part for the procurement of FATT Systems, * * * and embodying the background data supplied under the APE contract.” Thus royalties accrue under Article VI C 2 only when the procurement utilizes the TDP and embodies the background data. Under the laws of contract interpretation we have enunciated, meaning must be given to every phrase if it is reasonable to do so. Plaintiff would interpret the phrase "embodying the background data” to merely mean "includes the background data.” This would make the phrase a redundancy. Embody means more than include; it is defined as "* * * to make concrete and perceptible * * *.” Webster’s Seventh New Collegiate Dictionary (1972). Thus we believe the embodiment of background data places a limitation upon the accrual of royalty payments. Royalties do not simply accrue upon the whole procurement cost every time a procurement utilizes the TDP; instead, royalties accrue only upon that portion of the procurement that physically contains the background data.

Plaintiffs interpretation would entitle it to royalties equivalent to 6 percent of the entire contract price of a procurement even where only a single nut or bolt is attributable to plaintiffs design. We, therefore, consider plaintiffs interpretation to be unreasonable. When a provision permits only one reasonable interpretation, that interpretation must be followed. Dana Corp. v. United States, 200 Ct. Cl. 200, 216, 470 F. 2d 1032, 1043 (1972). The only reasonable interpretation of Article VI is that royalties accrue only on that portion of the FATTs that utilize plaintiffs design.

II.

Plaintiff, to support its position, looks to other provisions of the contract. First, it contends that Article VI C 1, which governs the initial $1 million payment for the TDP, supports its interpretation of Article VI C 2. Plaintiff argues that the similar language of the provisions and the lack of any proration of the initial payment indicate royalties should not be prorated. We disagree. Article VI C 1 serves a purpose different from that of Article VI C 2. Payment of the initial $1 million was conditional only upon delivery and acceptance of the TDP. There is no indication it was intended to represent a percentage of any anticipated procurement. Article VI C 2, on the other hand, addresses the conditions upon which the subsequent royalty payments are to be made. Further, the language of the two clauses is not quite the same. Article VI C 1 uses the word "employ,” which has a somewhat different meaning from the word "embody.” Employ simply means "* * * to make use of * * *.” Webster’s Seventh New Collegiate Dictionary (1972). Embody, however, has a more concrete meaning and implies a more specific event than the mere use of background data is required for royalties to accrue. We believe the data must be physically embodied in the equipment before royalties accrue.

Second, plaintiff urges that the Article I B definition of FATT System supports its result, for Article I B considers limitations on what a FATT System is, yet fails to specify the limitations we believe Article VI provides. This argument fails for Article I B is just a basic definitional section. It is only Article VI that is specifically designed to detail the conditions for royalty payments. Article VI does not limit what a FATT System is; it merely limits the accrual of royalties to those portions of the procurement that contain plaintiffs data.

The last contractual provision plaintiff relies upon is Article VII, which provides for reporting the number of FATT Systems accepted by the Army during a given time period. Plaintiff argues that Article VII fails to provide a mechanism for reporting the amount of background data contained in a FATT System and therefore no proration could have been intended. Article VII, however, is in no way contrary to our reading of Article VI. It incorporates the provisions of Article VI when it says reporting shall take place in the periods "during which royalties have áccrued under this CONTRACT in accordance with ARTICLE VI * * The lack of a more detailed reporting mechanism in Article VII cannot override the plain meaning of Article VI, for Article VI is the only section concerning the accrual of royalties.

III.

In general, when a contract is clear and unambiguous evidence of prior negotiations and drafts is barred from consideration by the parol evidence rule. Butz Engineering Corp. v. United States, 204 Ct. Cl. 561, 578-579, 499 F. 2d 619, 628-629 (1974). Although we find the meaning of Article VI clear, the parties have spent much time discussing the prior history in support of their respective positions. We will, therefore, discuss certain aspects of the history.

An early draft of the contract proposed by the plaintiff provided:

B. In addition to the sum set forth in the preceding paragraph of the ARTICLE, royalties shall accrue under this contract in favor of CONTRACTOR, subject to the times and limitation hereinafter stated, on all the equipment specified in the APE contract or any part or parts thereof, other than those furnished by CONTRACTOR, accepted by the Department of the Army and embodying any of the rights or inventions licensed hereunder, specifically in ARTICLE III A claimed to be proprietary by CONTRACTOR. Royalty payments will be made in accordance with the following schedule: [Emphasis supplied.]

1. 6% on the first THIRTY MILLION ($30,000,000) DOLLARS, 4% on the next THIRTY MILLION ($30,000,000) DOLLARS, and 2% on the next ONE HUNDRED SEVENTY-FIVE MILLION ($175,000,000) DOLLARS. Thereafter no further royalties shall be payable.

This draft clearly indicates royalties would only accrue on that equipment which contained the specified data. The use of the word equipment demonstrates that embodying has a physical meaning in the context of the provision.

A subsequent draft proposed by the defendant provided:

2. Royalty Payments: In addition to the sum set forth in the preceding paragraph of this ARTICLE, Royalties shall accrue under this CONTRACT in favor of CONTRACTOR, on all FATT Systems, or parts thereof, other than those furnished by CONTRACTOR, licensed under this CONTRACT and accepted by the Department of the Army, and embodying the data marked by CONTRACTOR under the provisions of SUBARTICLE IIF herein. Royalty payments will be made in accordance with thé following schedule: [Emphasis supplied.]

6% on the first Thirty Million Dollars ($30,000,000.00) total procurement

4% on the next Thirty Million Dollars ($30,000,000.00) total procurement

2% thereafter.

The principal change from the earlier draft is a substitution of the words "FATT Systems” for "the equipment specified in the APE contract.” The cover letter accompanying this draft proposal indicated the change was made for greater definiteness: "the term 'FATT System,’ * * * is used throughout, in lieu of expressions such as 'equipment specified in the APE CONTRACT’ which are considered not to be definite.” It is clear no change in meaning was intended.

Later, the provision for marked data was eliminated because the plaintiff believed marking would be too expensive. It was decided royalties would bé paid on all data included in the TDP, whether limited rights data or license free data. This change had no effect on the question at issue.

Thus a study of earlier drafts of Article VI and their development supports our interpretation of Article VI. In conclusion, we hold that Article VI requires the accrual of royalties only upon those portions of the FATT Systems procured that physically contain the TDP.

IV.

This contract does not provide a mechanism for determining and reporting what portions of the FATT System contain the TDP, nor does it provide the method for prorating royalties. Without this information the royalty base of Article VI cannot be determined. The defendant has submitted its proposed figures but it is not clear how they were arrived at. The plaintiff has not agreed to defendant’s proposed amounts. It argues there are several ways for royalties to be prorated including the following:

1. Compare the cost of the structure incorporating the background data to the cost of the entire FATT System.

2. Compare the functional importance of the structure incorporating the background data to the functional importance of the other structures in the FATT System.

3. Compare the uniqueness of the structure incorporating the background data to the uniqueness of the other structures in the FATT System.

The parties have not had a full opportunity to argue the issues involved here. We therefore find further proceedings are necessary before the correct amount of royalties owed SCM can be determined.

Accordingly, plaintiffs motion for summary judgment is denied, defendant’s motion for summary judgment is granted to the extent set out above, and the case is remanded to the trial judge for further proceedings in accord with Part IV of this opinion.

1 A teletypewriter is a telegraphic device which resembles a typewriter. It is capable of sending signals when the letters of a keyboard are struck and is capable of receiving and printing signals transmitted by a similar instrument. It is used to transmit orders and commands.