## Facts

- In 1954, a group that included Ralph Elle and others formed The Pipe Machinery Company (the partnership) to own pipe-manufacturing equipment and lease it to Beall Pipe and Tank Corporation (the corporation) in exchange for payments tied to the corporation’s pipe sales (royalties).
- John Beall, the corporation’s president and controlling shareholder, was also a partner; E. J. Babbitt, a corporation manager, was also involved in the partnership’s affairs.
- The partnership acquired and leased two pipe mills and related equipment to the corporation under successive lease arrangements, with royalty rates later reduced in a 1962 lease.
- In 1963, the corporation needed to reduce costs to lower its bid price and obtain a major sale. Beall and Babbitt agreed—without consulting all partners—to a temporary reduction in the royalties paid to the partnership.
- The business relationship later deteriorated. The corporation terminated the leasing arrangement, dismantled and stored the partnership’s equipment, and built its own mill. Some partners claimed the new mill improperly used the partnership’s mill design.
- A dispute also arose over a cut-off saw: after an insured loss involving partnership property, a replacement saw was purchased with insurance proceeds, and the parties disagreed over ownership and damages.
- Elle and other partners brought a suit in equity for an accounting for the benefit of the partnership, naming the remaining partners as defendants along with the corporation and related individuals.
- The trial court’s decree awarded the partnership amounts for underpaid royalties, additional rent, “copying” of the mill design, and conversion related to the saw, and it allowed an offset to the corporation for dismantling and storage.
- The corporation appealed multiple parts of the accounting decree to the Oregon Supreme Court.

## Issues

1. Whether the corporation’s construction of a similar pipe mill after termination of the lease supported damages for “copying” based on alleged confidential or proprietary design information.
2. Whether Beall’s and Babbitt’s agreement to reduce royalties in 1963, made without consulting all partners, bound the partnership based on Beall’s implied authority as a managing partner.
3. Whether the lease required payment of additional rent according to its terms even when the corporation claimed it did not use, or could not use, the equipment.
4. Whether a replacement cut-off saw bought with insurance proceeds was partnership property, and what measure of damages applied to the corporation’s retention or use of it.
5. Whether the corporation was entitled to an offset for dismantling and storage costs when the partnership did not remove its equipment within the time the parties contemplated.

## Decision

- The Oregon Supreme Court affirmed the accounting decree in part and modified it in part.
- The court removed the trial court’s award for “copying,” concluding the mill’s design and features were not shown to be protected confidential information that could support that remedy.
- The court reversed the award for additional royalties based on the 1963 reduction, holding that the partnership’s course of dealing showed implied consent to Beall acting as managing partner with authority to agree to royalty adjustments.
- The court affirmed the award of additional rent due under the lease, treating the payment obligation as governed by the contract terms rather than the corporation’s use of the equipment.
- The court agreed the replacement cut-off saw purchased with insurance proceeds belonged to the partnership, but it adjusted the related recovery to reflect the correct accounting and valuation.
- The court allowed an offset for dismantling and storage and modified the amount to reflect what it considered a reasonable charge in light of the partnership’s delay in removing its property.

## Legal Principles

- Damages for misuse of “confidential” manufacturing information require proof that the information was actually secret or proprietary and was treated as such; commonly observable or generally known design elements do not qualify.
- A partner may have implied actual authority to manage partnership dealings when the other partners, through a consistent pattern of conduct, leave negotiations and key decisions to that partner and accept the results.
- Contractual rent or lease payments are generally owed according to the agreement’s terms unless the contract makes payment conditional on use or performance.
- When insurance proceeds compensate for loss of partnership property and are used to buy a replacement, the replacement is ordinarily treated as substituted partnership property absent a contrary agreement.
- In an equitable accounting, reasonable expenses incurred in dismantling and storing another’s property may be credited as an offset when the owner fails to remove the property within the expected time.

## Conclusion

Elle v. Babbitt involved an equitable accounting arising from a partnership’s leasing of pipe-mill equipment to a closely related corporation and the breakdown of that relationship. The Oregon Supreme Court affirmed the accounting framework but modified the money awards by rejecting “copying” damages, treating a temporary royalty reduction as binding based on the managing partner’s implied authority, enforcing additional rent under the lease terms, correcting the saw-related recovery based on substituted ownership from insurance proceeds, and adjusting the dismantling and storage offset to a reasonable amount.


Elle v. Babbitt, 488 P.2d 440 (1971)