Bell Intercontinental Corporation v. United States

• Decision Date: 20 July 1967
• Docket Number: No. 92-62.,92-62.
• Citation: 381 F.2d 1004
• Parties: BELL INTERCONTINENTAL CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

381 F.2d 1004 (1967)

BELL INTERCONTINENTAL CORPORATION v. The UNITED STATES.

No. 92-62.

United States Court of Claims.

July 20, 1967.

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Richard E. Moot, Buffalo, N. Y., for plaintiff. Mason O. Damon, Buffalo, N. Y., attorney of record; Robert J. Hodgson and Ohlin, Damon, Morey, Sawyer & Moot, Buffalo, N. Y., of counsel.

Edna G. Parker, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. Richard C. Pugh and Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, JONES, Senior Judge, and LARAMORE, DURFEE, DAVIS, SKELTON, and NICHOLS, Judges.

OPINION

PER CURIAM.

This case was referred to Trial Commissioner Herbert N. Maletz with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in a report and opinion filed on November 28, 1966. Plaintiff excepted to the commissioner's report and opinion only as to a single question of law pertaining to the Agusta 47-J and Nippon 47-D-1 agreements and the defendant excepted only as to the Houde agreement. The case was submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner's findings, opinion and recommended conclusions of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Therefore, the court concludes as a matter of law (i) that the payments Bell received in the years 1953-1958 pursuant to the Houde, Square D, Weatherhead, Wiesner-Rapp, Scovill and Prime Mover agreements were properly taxable as long-term capital gains rather than ordinary income, and plaintiff is entitled to recover accordingly; (ii) that the payments Bell received in the years 1953-1958 pursuant to the Agusta Model 47-J agreement were properly taxable as ordinary income rather than long-term capital gains, and plaintiff is not entitled to recover in regard to such payments; (iii) that the payments Bell received pursuant to the Agusta Model 48 agreement were properly taxable as long-term capital gains, and defendant is not entitled to an offset in regard to such payments; and (iv) that the payments Bell received pursuant to the Nippon agreement were properly taxable as ordinary income rather than long-term capital gains, and defendant is entitled to an offset in regard to such payments.

Judgment is entered to this effect with the amount of recovery to be determined pursuant to Rule 47(c).

OPINION OF COMMISSIONER^*

MALETZ, Commissioner.

This is a suit for refund of income taxes for the years 1953-1958 and excess profits taxes for the year 1953. At issue is whether payments received under each of nine separate agreements transferring patent and other rights were payments for the sale of those rights taxable as long-term capital gains or payments for the license of such rights taxable as ordinary income.¹

Plaintiff is a successor in interest, by consolidation, to the former Bell Aircraft Corporation (Bell), an aircraft manufacturer. During the years involved in this suit, 1953-1958, Bell received certain payments pursuant to seven agreements transferring patent and other rights known as the Houde, Square D, Weatherhead, Wiesner-Rapp, Scovill, Prime-Mover and Agusta Model 47-J agreements (which will be discussed below). For the years 1953-1956, Bell reported the payments on its income tax returns as ordinary income and paid the taxes thereon. For the years 1957 and 1958, Bell reported the payments on its tax returns as long-term capital gains and the Internal Revenue Service assessed various tax deficiencies which were paid by Bell. Bell then filed claims for refund for the years 1953-1958 which were disallowed, whereupon the present suit was instituted. Subsequently, defendant asserted, by way of offset, claims in regard to payments received by Bell in some of these same years pursuant to two other agreements transferring patent and other rights known as the Agusta Model 48 and Nippon agreements (which will also be discussed below).

By way of background, a patent confers upon the owner the right to exclude others from making, using or selling the invention during the life of the patent, and in order that a transfer constitute a sale, there must be a grant of all substantial rights of value in the patent. The transfer of anything less is a license which conveys no proprietary interest to the licensee. E. g., Waterman v. MacKenzie, 138 U.S. 252, 255, 11 S.Ct. 334, 34 L.Ed. 923 (1891); Merck & Co. v. Smith, 261 F.2d 162, 164 (3d Cir. 1958); Lockhart v. Commissioner, 258 F.2d 343, 349 (3d Cir. 1958). Whether a transfer constitutes a sale or license is determined by the substance of the transaction and a transfer will suffice as a sale if it appears from the agreement and surrounding circumstances that the parties intended that the patentee surrender all his substantial rights to the invention. Reid, 26 T.C. 622, 632 (1956); Eterpen Financiera Sociedad de Responsabilidad Limitada v. United States, 108 F.Supp. 100, 104-105, 124 Ct.Cl. 20, 28-30 (1952), cert. denied, 346 U.S. 813, 74 S.Ct. 22, 98 L.Ed. 340 (1953). The question does not depend upon the labels or the terminology used in the agreement; hence, the fact that an agreement is termed a license and that the parties are referred to as licensor and licensee is not decisive. E. g., Kronner v. United States, 110 F.Supp. 730, 734, 126 Ct.Cl. 156, 163 (1953); Watson v. United States, 222 F.2d 689, 691 (10th Cir. 1955); Kimble Glass Co., 9 T.C. 183, 190 (1947). Nor is the question governed by the method of payment, and it is, therefore, immaterial that payment is based on a percentage of sales or profits, or on an amount per unit manufactured. E. g., Reid, supra, 26 T.C. at 632; Myers, 6 T.C. 258 (1946); Allen v. Werner, 190 F.2d 840 (5th Cir. 1951). Moreover, clauses in an agreement permitting termination by the grantor upon the occurrence of stated events or conditions will not preclude the transaction from being considered a sale; such clauses are uniformly treated as conditions subsequent, akin to provisions in realty conveyances calling for reversion of title previously vested. Kronner v. United States, supra, 110 F.Supp. at 734, 126 Ct.Cl. at 163; Commissioner v. Celanese Corp., 78 U.S.App.D.C. 292, 140 F.2d 339, 341-342 (1944); First National Bank of Princeton v. United States, 136 F.Supp. 818, 822-823 (D.N.J.1955); Massey v. United States, 226 F.2d 724, 727 (7th Cir. 1955). The fact, too, that the grantee has the right to terminate the agreement at will does not defeat a sale. E. g., Allen v. Werner, supra, 190 F.2d at 842; Lawrence v. United States, 242 F.2d 542 (5th Cir. 1957); Myers, supra, 6 T.C. at 264; Golconda Corp., 29 T.C. 506 (1957).

It is in this setting that we now examine each of the nine agreements here involved.

THE HOUDE AGREEMENT

Bell and Houde Engineering Corporation entered into an agreement dated September 15, 1940, whereby Bell granted to Houde the sole and exclusive right and license to manufacture, use and sell, and sublicense others to manufacture, use and sell an anti-shimmy device covered by a United States patent application Bell then had pending.² The rights granted to Houde extended to the United States and its possessions, and the agreement was to remain in effect until the expiration date of the last expiring United States patent which might thereafter issue upon such application.

If both parties desired to bring suit for infringement, the suit could be brought in Bell's name, with the expenses and any recovery to be shared equally. In the event only one party desired to bring suit, such suit could be brought in Bell's name, with the expenses to be borne by and any recovery to be retained by the party instituting the suit.

The agreement could be terminated by mutual consent of the parties, and Houde could terminate by giving six months notice. Bell had no right of cancellation.

The agreement was expressly made subject to a cross-licensing agreement of the Manufacturers Aircraft Association (MAA), an organization comprised of aircraft manufacturers and holders of aircraft patents. Bell as a member of the Association was bound by the terms of this agreement and required, at the time of its agreement with Houde, to provide that it be subject to the prior MAA agreement. In essence, the MAA cross-license agreement was an agreement between all member aircraft manufacturers or holders of aircraft patents with respect to the manufacture and use of each other's inventions. The agreement was limited to airplane patents which had been issued by the United States and allowed the MAA member to manufacture the patented device only for installation on his own aircraft and not for sale to others. More particularly, under the terms of the MAA agreement each member of the Association agreed to grant all the other members a non-exclusive license to make, use and sell airplanes under all patents owned, controlled or licensed by the member. All licenses so granted were to run for the full term of the patent, regardless of whether the granting member withdrew from the Association prior to expiration of the patent. Upon withdrawal, however, the member lost all his right to patents owned or controlled by the other members. See Young v. Commissioner, 269 F.2d 89, 91-92 (2d Cir. 1959). The rights granted under the license were subject to the following limitations: (1) they did not extend to the invention until and unless a patent was issued by the United States Patent Office; (2) they applied to airplane patents only as defined by the agreement; (3) the rights were limited to the manufacture of the invention for installation on the member's own aircraft and not for sale to others. Under the MAA agreement a member was given a right to receive royalty income contingent upon the following conditions: (1)...