Kardo Co. v. Adams

• Decision Date: 18 February 1916
• Docket Number: 2803.
• Citation: 231 F. 950
• Parties: KARDO CO. v. ADAMS.
• Court: U.S. Court of Appeals — Sixth Circuit

231 F. 950

KARDO CO. v. ADAMS.

No. 2803.

United States Court of Appeals, Sixth Circuit.

February 18, 1916

Hoyt Dustin, Kelley, McKeehan & Andrews, of Cleveland, Ohio (Edward R. Alexander, of Cleveland, Ohio, Edward Rector, of Chicago Ill., and Horace Andrews and Paul J. Bickel, both of Cleveland, Ohio, of counsel), for appellants.

Lawrence Maxwell, of Cincinnati, Ohio, and R.A. Parker, of Detroit Mich., for appellee.

Before WARRINGTON and DENISON, Circuit Judges, and HOLLISTER District judge.

HOLLISTER District Judge.

Three corporations, the American Ball Bearing Company, the Packard Motor Car Company, and the Peerless Motor Car Company, were each the owners of separate patents on equipment for the rear axles of automobiles. Their patents were of such nature that apparently, as found by the trial court, they 'interlaced or overlapped one another, so that, if one company gave a license under the patent which it owned, complaints of infringements and threatened suits straightway arose from one or another of the other companies.'

They thereupon, so that the ownership of all of the patents might be in one company, which, as owner, could grant licenses, thus saving uncertainty in dealing with the patents, and for the purpose of avoiding litigation between themselves, sought to organize a corporation of Ohio under the name of 'The Kardo Company,' with a capital stock of $1,000,000. Articles of incorporation were signed February 21, 1914, by five men in the employ of the law firm in charge of the organization, not connected otherwise than as attorney with any of the three companies. The articles were filed with the Secretary of State February 24, 1914. On the same day, each of the incorporators subscribed for one share of the capital stock, and one of them subscribed, as trustee for the American Ball Bearing Company for 995 shares, agreeing to pay $9,500 in cash and $90,000 by the transfer of patents by the American Ball Bearing Company to the Kardo Company. Ten thousand dollars, one-tenth of the $100,000 subscribed, were paid on the day of subscription by the American Ball Bearing Company, and the incorporators at no time paid any sum of money. Each of the other corporations paid in $10,000, the Peerless Company about the 1st of March, and the Packard Company about two weeks afterwards, so that each of the corporations paid in equal amounts; the $10,000 paid on subscription by the American Ball Bearing Company being for itself and the other two.

At the first stockholders' meeting, February 24, 1914, the five incorporators being present and voting as stockholders, a code of regulations and by-laws was adopted, in which it was provided that the board of directors should be five stockholders, a majority of whom should be citizens of Ohio. The same parties elected themselves directors, and at their meeting as such, 30 minutes later, four of them were elected officers, and adopted a proposed agreement between the three corporations, providing for the sale and transfer to the Kardo Company of the letters patent owned by each, respectively, for which each was to receive $200,000 of the capital stock, which agreement the incorporators, as stockholders, at a meeting held immediately, approved.

February 27th, the same individuals called a special stockholders' meeting, and the regulations were amended to make the number of directors six, instead of five. On the same day, the directors met, and, as one after another resigned as directors and officers, their places were filled by officers and directors of the three corporations. As each resigned, the certificate for the one share he had subscribed was assigned to his successor, each of whom believed himself to be the owner of the share thus assigned to him, and kept it in his possession. So far as the record discloses, he was the owner. During the pendency of this suit, and after the question as to the propriety of the formation of the Kardo Company had been raised, each director, upon the advice of counsel, actually paid in money for the share thus transferred to him. All of the formal steps, notices, waivers and certificates strictly complied with the law. No salaries have been paid to officers. The bookkeeper of one of the corporations did such bookkeeping for the Kardo Company as was necessary. Its office is in the office of its local patent attorney. It has a seal. The evidence shows that, while it has granted no licenses on its patents, it has, nevertheless, earnestly tried to grant them, and it is fully equipped to carry on its business, and apparently has ample capital with which to carry it on.

The purpose of the incorporation, expressed in the articles of incorporation filed with the Secretary of State, was--

'purchasing, leasing, or otherwise acquiring, and of registering, owning and using inventions, improvements, trade secrets, processes, or interests therein, and applying for and receiving, purchasing, or otherwise acquiring, letters patent, or rights or interests in or under letters patent, for or upon motor and other vehicles, or means of transportation, and traction and propelling machinery, and for or upon the mechanism, parts or equipment of the same, or the tools or machinery for the manufacture of the same; and of selling, assigning, or granting licenses and rights under or in respect of such secrets, processes, inventions, improvements or patents, and otherwise dealing in respect of or with the same, or either of them; and of manufacturing, using and dealing in the vehicles, articles, machinery, equipment and parts covered by or provided for in said inventions, patents or improvements, and of doing all things necessary, proper and incidental to the transaction of said business, or any part thereof.'

The bill of complaint was filed, June 25, 1913, by the American Ball Bearing Company, a corporation of Ohio. The defendant answered July 15, 1913, and amended its answer September 25, 1913. The bill was for infringement of a patent, of which the American Ball Bearing Company claimed to be the owner, for an accounting of profits, for treble damages by reason of the aggravated nature of the claimed infringement, and for the destruction of the alleged infringing mechanism in defendant's possession.

On October 20, 1914, the Kardo Company filed a bill in the nature of a supplemental bill alleging its corporate character and the assignment to it of complainant's patents and prayed to be substituted as complainant and for relief as prayed in the original bill. The defendant, January 25, 1915, filed a further amendment to its answer, but did not put in issue the validity of the Kardo Company's corporate existence under the laws of Ohio, nor did it in any way challenge the propriety of its maintaining the suit, except by the 'vague suggestions' referred to in the opinion of the trial court.

On the issues made by the pleadings, proofs were taken, and at the final hearing, the court, without considering the merits of the case, of its own motion, dismissed the bill on the ground that the Kardo Company had no corporate existence de jure or de facto, was not the real party in interest, and that its suit was a fraud on the jurisdiction of the court. The court did so on the theory, apparently, that a District Court of the United States has power, for the purpose of protecting its jurisdiction, to inquire, in all cases, of its own motion, into the steps taken by a complainant, alleging itself to be a corporation, through which it acquired the corporate character claimed by it. The action of the court in making the inquiry was based on his views of section 37 of the Judicial Code, equity rule 37, and of the inherent power in a court of the United States to protect its jurisdiction.

Original jurisdiction has been conferred by Congress by virtue of article 3, Sec. 2, of the Constitution on the District Courts in many classes of cases, of which attention need be called to two:

'Of all suits of a civil nature, at common law or in equity, * * * where the matter in controversy exceeds, exclusive of interest and costs, the sum or value of three thousand dollars, and * * * is between citizens of different states;' and 'Of all suits at law or in equity arising under the patent * * * laws." Judicial Code U.S. Sec. 24, subds. 1, 7.

The provision as to the sum or value of the matter in controversy, does not apply to patent cases. Section 24, subd. 1.

This suit arose under the patent laws, and the jurisdiction of the court to hear and determine the issues raised in it cannot be doubted.

Jurisdiction conferred by reason of diversity of citizenship is a different matter. In Cohens v. Virginia, 6 Wheat. *264, *393 (5 L.Ed. 257), it was said by Chief Justice Marshall:

'In one description of cases, the jurisdiction of the court is founded entirely on the character of the parties; and the nature of the controversy is not contemplated by the constitution-- the character of the parties is everything, the nature of the case nothing. In the other description of cases, the jurisdiction is founded entirely on the character of the case, and the parties are not contemplated by the constitution-- in these, the nature of the case is everything, the character of the parties nothing.'

The court, therefore, had jurisdiction of the subject-matter, and it was immaterial, so far as jurisdiction is concerned, what the citizenship of the parties might be.

In 1875, Congress passed the law, now section 37 of the Judicial Code, providing:

'If in any suit commenced in a district court, or removed from a State Court to a district court of the United States, it shall appear to the satisfaction of the said district court, at any time after such suit has been brought or removed thereto,

...