United States v. Chemical Foundation

• Decision Date: 26 March 1925
• Docket Number: No. 3160.,3160.
• Citation: 5 F.2d 191
• Parties: UNITED STATES v. CHEMICAL FOUNDATION, Inc.
• Court: U.S. Court of Appeals — Third Circuit

5 F.2d 191 (1925)

UNITED STATES v. CHEMICAL FOUNDATION, Inc.

No. 3160.

Circuit Court of Appeals, Third Circuit.

March 26, 1925.

Harlan F. Stone, Atty. Gen., James M. Beck, Sol. Gen., of Washington, D. C., James H. Hughes, Jr., U. S. Atty., of Wilmington, Del., Herman J. Galloway, Sp. Asst. U. S. Atty., of Washington, D. C., and Henry W. Anderson, Sp. Asst. U. S. Atty., of Richmond, Va. (Spier Whitaker, of New York City, and James J. Lenihan, of Washington, D. C., of counsel), for the United States.

Joseph H. Choate, Jr., of New York City, William G. Mahaffy, of Wilmington, Del., Seiforde M. Stellwagen, of Washington, D. C., and Moorfield Storey, of Boston, Mass., for appellee.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY, Circuit Judge.

This suit was instituted by the United States of America against The Chemical Foundation, Incorporated, by direction of President Harding, on a bill in equity filed September 8, 1922, in the District Court of the United States for the District of Delaware. The Government in its bill declares upon the Act of Congress approved October 6, 1917 (40 Stat. 411 Comp. St. 1918, Comp. St. Ann. Supp. 1919, §§ 3115½a-3115½ff, 3115½g-3115½j), known as the "Trading with the Enemy Act," and its several amendments, particularly those of March 28, 1918 (40 Stat. 460 Comp. St. 1918, Comp. St. Ann. Supp. 1919, § 3115½ff), and November 4, 1918 (40 Stat. 1020 Comp. St. Ann. Supp. 1919, § 3115½d), creating the office of Alien Property Custodian and authorizing the seizure of property of enemy aliens and its disposition at public sale, or at private sale if the President, in the public interest, should so determine. The Government charges by the bill that certain persons and corporations engaged in the dye and chemical industry desired to acquire the great number of American patents, copyrights and trade-marks owned by German enemies and thereby obtain a monopoly of the dye industry of the United States, and that, pursuant to a scheme or conspiracy into which they entered, the Alien Property Custodian seized approximately 4,500 of such patents and many copyrights and trade-marks and sold them at private sale to The Chemical Foundation, a corporation of which he was an officer and whose stock was held by the persons and concerns that had instigated the seizure and sale. It avers that in making the sale the Custodian exceeded all powers conferred upon him by the statute; that his act was in effect a confiscation of property by one other than Congress where alone such power resides, and that the transfer of the patents to the corporation was a donation or subsidy given to a private industry without authority of law; that the Custodian, a public official, in selling the patents to a corporation of which he was an officer and in which he had an interest, violated principles of equity applicable to sales by fiduciaries, whether public or private, and that he, with others, violated section 41 of the Criminal Code (Comp. St. § 10205); that if the Custodian was authorized by the statute to sell siezed property at private sale, in this transaction he lacked the authority of the President of the United States, who alone might determine when in the public interest a sale otherwise than public should be made; and that, aside from questions of power and authority and fidelity, the sale was irregular in many particulars, especially in that the price was merely nominal, that it was arbitrarily fixed without reference to value, and was grossly inadequate. Maintaining that for these reasons the sale and assignments of patents, copyrights and trade-marks were illegal, the government by its bill prays that the court declare them void and require The Chemical Foundation to cancel all instruments of conveyance and return the properties to the United States and account for the revenues derived from them during the period of its possession.

The defendant, by its answer, traversed most of the allegations of the bill and made several specific defenses, namely: Want of equity, because of which it moved to dismiss the bill; laches and acquiescence on the part of the Government; and justification of the sale on the ground that it was made to promote the interests of the dye and chemical industry of the United States and thereby to establish a national defense in chemical warfare. The Government moved to strike out parts of the answer and particularly the part on which the defense of justification was set up. The court declined to entertain either motion at that stage and directed the parties to proceed to trial.

The case came on for hearing before the District Court on June 4, 1923, and ended on the twenty-third of July, with a record of 9,000 pages. It was argued in October of the same year. On an opinion by the trial judge, filed January 3, 1924, holding adversely to all contentions of the Government, the court, on February 18, 1924, entered a decree dismissing the bill. 294 F 300. The case is here on the Government's appeal. This is a summary of the litigation.

We now come to the story of the case, for every case has a story. This case, however, has two: One told by the evidence as the attorneys for the Government read it and the other told by the evidence as we read it. Believing that the contrast will bring the issues sharply into view, we shall give both. In reciting the Government's story we shall (in our desire to state its case on the facts precisely as it sees it) use the words of its brief as nearly as we can and the words of the transcribed stenographic notes of the oral argument made by the Special Assistant to the. Attorney General, upon whom devolved the opening on this appeal. Greatly compressed, it is as follows:

On January 13, 1919, A. Mitchell Palmer, the Alien Property Custodian, held a conference with his heads of departments with reference to a discussion between himself and the Federal Trade Commission having to do with issuing licenses under German patents upon authority of the Trading with the Enemy Act. As a result of that conference Mr. Palmer filed with the department a memorandum showing his interpretation of the amendment in respect to the seizure and sale of enemy-owned patents and laid down the general policy that the Custodian would seize and sell only such patents as form an actual part of an enemy-owned business and which, accordingly, are necessary to enable the purchaser to carry on the business protected by the patents. Two days later, January 15, 1919, Mr. Houget, patent counsel for the Custodian, wrote a long letter to his chief. That letter is the genesis of the transactions out of which this suit arises. Referring to certain extracts of the letter, Mr. Houget states:

"We have also talked over the matter with the attorneys representing some of the principal chemical industries in the country to get, if possible, the bulk of an industry which would be vitally effective by our proposed program."

"My recollection of your agreement with General Fort (Chairman of the Federal Trade Commission) is that we then had no intention of demanding and selling any patents except such as formed an actual part of the business which we had demanded and were selling so as to enable the business to continue what it had previously been doing with the assent and concurrence of the related German company."

"In view of this agreement, and of the attitude of the President towards this entire question, I believe that the power of seizure of patents should not be exercised in any wholesale fashion, but only in connection with establishing American businesses and then only for the most cogent reasons."

"My conferences with the representatives of certain chemical companies indicates a very definite and positive feeling that a very large number of German-owned American patents is necessary to the development of and the continuance of the business of American dye and chemical industries, and that it was clearly preferable to obtain a right to offer it under such patents (whether by purchase or by license), through the Alien Property Custodian rather than through the Federal Trade Commission."

"This being the feeling of the industry and our endeavor being to benefit the industry as a whole — and I believe that the industry itself is best qualified to know how this should be done — I suggest that wherever possible the industry, as represented by the patent counsel for the more important companies of the industry, determine just what patents should be seized. You could then not be accused of seizing patents in wholesale fashion but would be placed in a position of aiding an industry in a manner which it desires to be aided and I think that our position would be better than if we determined ourselves to what extent seizures were to be made."

"We have been offered the very fullest cooperation of the representatives of the chemical industry; they assured me that they would undertake to make any reasonable investigation that we may require at their own expense without any guaranty that they would ultimately become purchasers or licensees."

In a postscript he says:

"Since writing the aforegoing Mr. Garvan (Chief of the Bureau of Investigations) and I had a conference with Mr. Poucher of the Du Pont Company, who states that he believes that the Institute of Dye Manufacturers, an association representing practically all of the dye manufacturers in the country, will make a request to the Custodian that he take and sell the German-owned American patents, on the ground that proper protection is not afforded by Federal Trade Commission licenses."

Having stated what the Government represents to be the initial move by Government officials in the offending transaction, we shall do as counsel did at the argument and digress for a moment to give the background of this letter and of the events that followed.

At the time the war broke out the dye and chemical industries in the United States were...