Lawrence v. United States
Decision Date | 21 March 1957 |
Docket Number | No. 16122.,16122. |
Parties | Richard R. LAWRENCE and wife, Dorothy Lawrence, Appellants, v. UNITED STATES of America, Appellee. |
Court | U.S. Court of Appeals — Fifth Circuit |
Lawrence P. Gwin, Bay City, Tex., Howell Cobb, Beaumont, Tex., Erwin G. Ernst, Houston, Tex., of counsel, for appellants.
Davis W. Morton, Jr., Grant W. Wiprud, Hilbert P. Zarky, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., William M. Steger, U. S. Atty., John L. Burke, Jr., Asst. U. S. Atty., Tyler, Tex., for appellee.
Before RIVES, TUTTLE and JONES, Circuit Judges.
The question for decision is whether the district court erred in entering judgment n.o.v. on the ground that, as a matter of law, under Section 117(a) and (q) of the Internal Revenue Code of 1939 as amended,1 royalties received by the taxpayer Lawrence as licensor of patent rights constituted ordinary income rather than capital gain.
Taxpayer Lawrence is the inventor of a device designed for the purpose of removing pipe and other obstructions from oil wells, known as a pulling or fishing tool.2 On November 18, 1946, he entered into an agreement with Dailey Oil Tools, a corporation, whereby he granted to Dailey the sole and exclusive right throughout the United States to manufacture, use and lease to others for use said invention and all improvements thereon. Dailey agreed to pay royalties on its use of the device and on the gross amount received by it from the lease of the tool to others. The agreement also provided for minimum guarantees of amounts of royalties to Lawrence; that Lawrence had the right to cancel the agreement upon failure of Dailey to perform its obligations thereunder; that the parties would divide the expenses or profits from any litigation concerning patent infringement; that Dailey had the right to cancel the contract at any time by giving Lawrence thirty-days written notice of its intention to do so; and that further improvements in the invention thereafter made by Lawrence would "be included within the terms of this license contract as though fully set forth and described herein."
Thereafter, Lawrence completed an improvement on his device.3 A supplemental agreement was executed between the parties on February 9, 1951 whereby it was agreed that Lawrence was to receive fifty per cent of the net profits received by Dailey for any sales of the products of the patents in export trade.
Lawrence and his wife filed income tax returns for the years 1951, 1952 and 1953 in which they treated the royalty payments received from Dailey as ordinary income, and on the 6th day of May, 1954 filed with the Director of Internal Revenue claims for a refund in which they asserted that the returns for the years in question should have been made on the basis that the royalties were long-term capital gains instead of ordinary income. The Commissioner refused the refund and on December 2, 1954, Lawrence filed an action in the district court under authority of Title 28 U.S.C.A. § 1346(a) (1).
The jury brought in a verdict for the plaintiffs, but the district court entered judgment non obstante veredicto on the ground the transfer was not "of all substantial rights to a patent," since it did not include the right to sell.
Our primary consideration is to determine whether the failure to transfer the right to sell precludes the agreement from being a transfer of all substantial rights to the patent. The jury found that all substantial rights were transferred and we think that reasonable men could so find.
In its oral argument, counsel for the Commissioner urged on this Court the rule laid down in Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923, that, unless the patentee conveyed the exclusive right to make, use and sell the patented product, then the transaction was a mere license; but we adopt Parke, Davis & Co. v. Commissioner, 31 B.T.A. 427, in so far as it distinguishes the Waterman case, supra. The question in the Waterman case concerned who had sufficient title to maintain a suit for infringement, while the question involved in this case is what rights to the patent are substantial.
The evidence before the jury in this case indicates that the tools made from this Lawrence patent are classified in the trade as service tools and that service tools are not for sale. The evidence also shows that Dailey wanted complete control of the tools. Mr. Lawrence testified:
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