Shelton v. Schwartz

• Decision Date: 10 November 1942
• Docket Number: No. 7948.,7948.
• Citation: 131 F.2d 805
• Parties: SHELTON v. SCHWARTZ et al.
• Court: U.S. Court of Appeals — Seventh Circuit

131 F.2d 805 (1942)

SHELTON v. SCHWARTZ et al.

No. 7948.

Circuit Court of Appeals, Seventh Circuit.

November 10, 1942.

James R. McKnight and Robert C. Comstock, both of Chicago, Ill., for appellant.

Samuel E. Hirsch, William Roger, Julian H. Levi, and Wilhartz & Hirsch, all of Chicago, Ill., for appellees.

Before EVANS, KERNER, and MINTON, Circuit Judges.

EVANS, Circuit Judge.

In this patent infringement suit a default decree was entered in the District Court for the Northern District of Illinois, Eastern Division, which was later vacated and the service of process quashed on the ground that the defendant company did not have a "regular and established place of business" in said district when service was made on its soliciting salesman.

This appeal is from the order entered pursuant to this ruling.

Plaintiff argues that the facts support the conclusion that defendant company was doing business in Illinois, within the meaning of the statutory jurisdictional provision¹ expressed in Title 28 U.S.C.A. § 109.

The District Court epitomized the facts in a short statement, as follows:

"That Carl Zeiss, Inc., is a corporation organized under the laws of the state of New York, with its principal place of business in * * * New York; that for the past 15 years, it has maintained an office in Chicago, used by two salaried employees of the company to solicit orders for the company's products from residents of the district; that the name of the corporation appears in the Chicago telephone directories, on the index of tenants of the building in which it maintains an office and on the door of its office; that the present lease for the office calls for the payment of rent by the company for `an office for said company's business'; that in the office, in which the company's two employees have desks, are show cases in which are displayed sample products of the company, and there are also kept in the office and distributed therefrom folders and circulars describing the products of the company; that samples of its products for use by its employees in soliciting orders are carried in the Chicago office; that the employees in the Chicago office have no authority to accept or fill orders for the company's products, but they have authority only to solicit such orders and to forward them, when obtained, to the office of the company in New York for acceptance and filling, or rejection; and that, when orders received from the Chicago office are accepted, the goods are shipped directly from the New York office to the purchaser in Chicago. * * *" 43 F.Supp. 328, 329.

An affidavit submitted by plaintiff asserted that, in addition to the foregoing facts, there had been at least one completed sale (as distinguished from taking orders) in the Chicago office. To this fact defendant asserts that if such sale took place, it was an isolated instance of sale, from sample stock, and in which case there were exceptional circumstances, and also, transportation charges from New York were billed on the sale.

The District Court, where this suit originated, is divided on this question. In the case of James P. Marsh Corporation v. United States Gauge Co., 42 F.Supp. 998, a District Judge of this district held that service upon the foreign corporation's agent, who made no sales, but solicited orders, was good, if the foreign corporation maintained in the state "a regular and established place of business." To the same effect was the holding of another District Judge in this district. In the former case, the ruling of the District Court was affirmed on appeal to this court. James P. Marsh Corp. v. United States Gauge Co., 7 Cir., 129 F.2d 161. To the same effect see Penn Elec. Switch Co. v. United States Gauge Co., 7 Cir., 129 F.2d 166.²

The holding of another member of the same District Court follows what appellee insists is the weight of authority.

The District Court, in the present case, relied upon Tyler Co. v. Ludlow-Saylor Wire Co., 236 U.S. 723, 35 S.Ct. 458, 59 L.Ed. 808, where the Court held the company was not "doing business" and therefore not subject to service, when it had only soliciting agents represent them in the state where service is made.

Appellee distinguishes the Marsh case, supra, because in that case the defendant corporation was licensed to do business in the state where served. In the instant case, appellee was not licensed to do business in Illinois. It is argued that a foreign corporation's action, in securing a license to do business, carried an admission from which it can not later escape.

Quite as compelling, when it comes to construing the intention of Congress and its use of words in a statute, is the contention that one who violates the statute by not obtaining a license to do business from the state wherein it is doing business, would not be rewarded by Congress for its misconduct. It would, and should, not win immunity from service in the state where the cause of action arose, because it violated the law by not securing a license from said state to do business therein.

It would seem quite intolerable (speaking from a practical point of view) to permit a foreign corporation to flood a state with soliciting agents, maintain an office for them, pay and support them, and thus obtain a large volume of business, without giving the customers who were successfully solicited by the foreign corporation's agents, redress in the state where the cause of action arose. To permit a foreign corporation which has failed to comply with the state law requiring registration and licensing, to escape, while holding the foreign corporation, which complies with the law and takes out a license, is subject to service of process, punishes the law abiding and exempts the law-breaker.

We would be slow to give any statute such a construction.

The ability to avoid suits in the states where liability arose, has been the subject of much criticism, when responsibility was sought against those who engaged in daring and fraudulent financial operations through holding companies and so-called investment trusts, following the exposures of fraud and other misconduct of the 1920-30 era. There are good reasons for holding the foreign corporation for its wrongs, both tortious and contractual, in the state where the wrongs were perpetrated.

However, our inquiry involves neither a factual nor a political question, merely a legal question.

The Marsh decision would seem decisive of the question, save as the facts in this case deal with a corporation which had not taken out a license to do business. In the Marsh case, all the business transacted was merely soliciting orders. The orders thus obtained were forwarded to an out-of-state office and there ratified before they became binding.

To meet, and dispose of, the argument based upon the aforementioned distinction, it may not be improper to set out more fully than was done in the Marsh opinion, the reasons which caused us to so conclude.

First, it must be noted that we are here dealing with a suit involving a patent infringement, a subject over which the Federal courts have exclusive jurisdiction. Equally important is the fact that Congress has specifically dealt with the subject of jurisdiction of Federal courts over such patent infringements.

Generally speaking, we are dealing with two subjects: (a) The immunity of foreign corporations, and (b) the service of process. For the latter, we turn to the Rules of Civil Procedure and to Rule 4(d) (3), 28 U.S.C.A. following section 723c. This section deals with domestic corporations, foreign corporations, partnerships, and unincorporated associations of a particular kind. We are interested merely in the foreign corporation. Sections 3 and 7 of this subdivision (d) of Rule 4 read as follows:

"(3) Upon a domestic or foreign corporation or upon a partnership or other unincorporated association which is subject to suit under a common name, by delivering a copy of the...