Hooker Chemicals & Plastics Corp. v. US, 452-71.

• Citation: 591 F.2d 652
• Decision Date: 24 January 1979
• Docket Number: No. 452-71.,452-71.
• Parties: HOOKER CHEMICALS AND PLASTICS CORPORATION v. The UNITED STATES.
• Court: Court of Federal Claims

591 F.2d 652

HOOKER CHEMICALS AND PLASTICS CORPORATION v. The UNITED STATES.

No. 452-71.

United States Court of Claims.

January 24, 1979.

COPYRIGHT MATERIAL OMITTED

Raphael Sherfy, Washington, D.C., attorney of record, for plaintiff; Miller & Chevalier, James R. Ron, Los Angeles, Cal., and Robert D. Heyde, Washington D.C., of counsel.

Michael J. Dennis, Washington, D.C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D.C., for defendant; Theodore D. Peyser, Jr., Washington, D.C., of counsel.

Before FRIEDMAN, Chief Judge, and NICHOLS and SMITH, Judges.

OPINION

PER CURIAM:

This case comes before the court on plaintiff's motion, filed October 27, 1978, requesting that the court adopt the recommended decision of Trial Judge Robert J. Yock, filed June 13, 1978, pursuant to Rule 134(h), as the basis for its judgment in this case, defendant having withdrawn its previously filed notice of intention to except thereto. Upon consideration thereof, without oral argument, since the court agrees with the recommended decision, as hereinafter set forth,^* it hereby affirms and adopts the decision as the basis for its judgment in this case. Therefore, the court concludes as a matter of law that the plaintiff may treat the proceeds received from the transfers as long-term capital gain. In so concluding, the court has relied heavily on the fact that plaintiff's reservation of the "right to import" into the exclusive territories of transferee corporations was not a reservation of a substantial right of value under the particular facts of this case. Because the "right to import" was of no practical value to plaintiff, it was deemed not to defeat the "sale" status of the transaction.

Therefore, plaintiff is entitled to recover the difference between ordinary income tax treatment accorded it on receipts of $60,042.62 in its 1963 fiscal year and the amount that would be due if capital gains tax treatment had been accorded it, together with interest as provided by law, and judgment is entered to that effect. The full amount of recovery will be determined in further proceedings pursuant to Rule 131(c).

Plaintiff's remaining claims for FY 1962 and 1963, according to the parties' stipulation, are hereby dismissed with prejudice.

OPINION OF THE TRIAL JUDGE

YOCK, Trial Judge:

This is an action for the recovery of a portion of the federal income taxes paid by plaintiff for its fiscal year ending November 30, 1963, plus interest as provided by law. Jurisdiction is based on 28 U.S.C. § 1491. The case presents one basic issue: whether payments received by the plaintiff in exchange for the transfer of certain patent rights and know-how is taxable as ordinary income, as argued by the Government, or deserves long-term capital gains treatment, as contended by the plaintiff. For the reasons set forth below, it is concluded that plaintiff is entitled to recover.

Facts

Plaintiff, Hooker Chemicals and Plastics Corporation ("Hooker"), is a New York corporation involved in the manufacture and sale of chemicals and related products. In 1962, Hooker underwent a consolidation with the Parker Rust Proof Company ("Parker") in which Hooker acquired Parker. Parker had been, since 1914, involved in the development, manufacture, and sale of chemical products and processes for metal treating and rustproofing, and operated as a division of Hooker after the consolidation.

Parker had for years beginning in the 1920's, maintained relationships with certain foreign corporations in Europe whereby they used Parker technology, trademarks, and patents in specified foreign countries. In 1952, Parker entered into agreements with Societe Continentale Parker ("SCP"), a French corporation, and Metallgesellschaft Aktiengesellschaft ("MG"), a German corporation, in which Parker licensed some of its technology and patents to them for their use in different parts of Europe.

The 1952 agreements were for 10 years, and in 1962, shortly after the consolidation between Hooker and Parker, Hooker terminated the agreements. There followed a period of negotiation which Hooker hoped would culminate in new agreements with MG and SCP by January 1, 1963. However, because Hooker wanted to redraft the agreements to take advantage of the favorable U.S. capital gains tax, additional time was needed, and the agreements were not entered into until July 1, 1963 (the "1963 agreements").

Each of the three 1963 agreements involved a transfer by Hooker of all its right, title, and interest in its patent rights and know-how concerning the chemical treatment of metal surfaces for bonding and rustproofing, and each was to last from July 1, 1963 through June 30, 1973, with provision for automatic 5-year extensions if mutually desired. In one agreement, Hooker made the transfer to MG for MG's exclusive use in the Netherlands, Turkey, and Yugoslavia. In a second agreement, Hooker made the same transfer to SCP for SCP's exclusive use in France, Belgium, Luxembourg, Spain, Portugal and the overseas territories which were included within the French Union in 1952. In the third agreement, Hooker transferred the same patent rights and know-how to MG and SCP, jointly, for their exclusive use in Italy, Switzerland, Sweden, Norway, Denmark, and Finland. MG and SCP received the right, under the agreements to sue infringers or unauthorized users of the patents and know-how in their respective geographic territories.

The patent rights transferred were to include all the patents, patent applications, and claims or rights to inventions which concerned the particular chemical treatment, that were owned or thereafter acquired by Hooker during the term of the agreement, and that were held by plaintiff for at least 7 months. The know-how transferred was to include the secret processes, formulae, drawings, operating manuals, and other technical information which related to the chemical treatment, that were owned or subsequently developed by Hooker during the period of the agreement, and that were held by Hooker for at least 7 months. The parties by stipulation agreed that the patent rights and know-how were property used by plaintiff in its trade or business and were not held primarily for sale to customers in the ordinary course of its trade or business. Upon termination of the agreements, the patent rights and know-how transferred were to remain the property of the transferee.

The parties mutually agreed to keep in confidence all of the know-how transferred. Hooker agreed not to communicate knowingly the know-how to any person, firm or company other than the transferee, its assignees, and its licensees, for use within the particular geographic territory. MG and SCP agreed to keep the know-how received confidential, except to the extent that it was public knowledge, or except to the extent that it was necessary to disclose it for the effective use, sale, or licensing of the products or processes to which the know-how pertained. Both obligations survived the termination of the agreements.

The transferee had the option under the agreements either to have the patents covering the inventions in the particular geographic territory issued in Hooker's name, or to have them issued in the name of the transferee. Hooker agreed to cooperate with the transferee in any such efforts, but it was the transferee's obligation to bear all related expenses.

The parties agreed that should a law or requirement of any government hamper the performance of the agreement in any way, the performance would be excused to that extent, although the party whose performance was affected agreed to use its best efforts to avoid any such cause of nonperformance. It was also agreed that neither party had the right to transfer or assign, to any extent, its ultimate rights and obligations under the agreement, except to its successors in business, without the prior written consent of the other.

Sometime after the basic terms of the 1963 agreements had been agreed to, but prior to signing, Hooker sought to reserve to itself the right to sell to customers in the transferee's geographic territory, and to allow them to use, products relating to the chemical treatment which were manufactured by Hooker in the United States (the "right to import"). Hooker would then also necessarily have the right to divulge to its customers such information needed for the effective use of the product, regardless of whether the information was covered by the agreement (patents or know-how). The reason that Hooker sought the provision was to avoid any possible implication that the transfers of patent rights and know-how constituted a territorial division in violation of U.S. antitrust laws. MG and SCP were at first reluctant to include the provision, but agreed to it so long as Hooker granted to them the reciprocal rights. None of the payment provisions in the agreements were changed, nor was plaintiff obligated to make any payments to MG or SCP on sales made pursuant to the exercise of the right to import. Hooker's right to import survived the termination of the 1963 agreements, although the transferee's obligation not to bring an action against plaintiff, if Hooker exercised that right, terminated with the agreements.

There was no agreement that the right to import would not be exercised but, as a practical matter, its exercise would not have been commercially feasible. Approximately 80 percent of the products that would have been manufactured in the United States and then shipped to Europe contained about 70 percent water. Thus, the low value per pound of weight would have made shipping costs relatively expensive. This, together with the duties to be added to the cost would have made the importation commercially infeasible.

Furthermore, whereas the manufacture of the products was relatively simple, problems sometimes arose in the application of the products to the metal, which would take place in the customers' plants. Thus, the products exported...