United States v. Chemical Foundation, 127

• Citation: 47 S.Ct. 1,272 U.S. 1,71 L.Ed. 131
• Decision Date: 11 October 1926
• Docket Number: No. 127,127
• Parties: UNITED STATES v. CHEMICAL FOUNDATION, Inc
• Court: United States Supreme Court

272 U.S. 1

47 S.Ct. 1

71 L.Ed. 131

UNITED STATES

v CHEMICAL FOUNDATION, Inc.

No. 127.

Argued Dec. 9, 10, 11, 1925.

Decided Oct. 11, 1926.

[Syllabus from pages 1-3 intentionally omitted] The Attorney General and Messrs. Henry W. Anderson, of Richmond, Va., and Herman J. Galloway, Asst. Atty. Gen., for the United States.

Messrs. John W. Davis, of New York City, William G. Mahaffy, of Wilmington, Del., and Moorfield Storey, of Boston, Mass., for appellee.

Mr. Justice BUTLER delivered the opinion of the Court.

Suit was brought by the United States in the District Court for Delaware to set aside sales made by it to the Chemical Foundation of a number of patents, copyrights, trademarks, and other similar properties-which for brevity will be referred to as 'patents'-seized pursuant to the Trading with the Enemy Act of October 6, 1917, c. 106, 40 Stat. 411, as amended by the act of March 28, 1918, c. 28, 40 Stat. 460, and the Act of November 4, 1918, c. 201, 40 Stat. 1020, and other acts (Comp. St. § 3115 1/2 a et seq.). The complaint alleges that a number of domestic manufacturers as a result of war conditions had been able to combine and monopolize certain chemical industries in this country, and, fearing that at the end of the war German competition would destroy the monopoly, they conspired to bring about transfers and sales of the patents at nominal prices to themselves or to a corporation controlled by them; that the patents so obtained would control the industries in question and perpetuate the monopoly; and that the sales were procured through the fraudulent deception of the President, the Alien Property Custodian, and other offi- cials. The answer denies conspiracy and fraud, and asserts that the transfers were made in good faith and pursuant to law, and that they are valid. There was a trial at which much evidence was taken. The District Court dismissed the complaint (294 F. 300), and its decree was affirmed by the Circuit Court of Appeals (5 F. (2d) 191.) Both courts found that no unlawful scheme, combination, or conspiracy was shown, and that there was no deception or fraud.

The United States took an appeal under section 241, Judicial Code (Comp. St. § 1218), and has applied for a writ of certiorari under section 240 (Comp. St. § 1217). The decree of the Circuit Court of Appeals was entered March 26, 1925, prior to the taking effect of the Act of February 13, 1925, amending the Judicial Code. Chapter 229, 43 Stat. 936 (Comp. St. § 1120). Since this is not a case in which the decree of that court is made final by section 128, the United States had the right of appeal. The application for certiorari is therefore denied.

The chemical industries in question are closely related to the production of explosives, gasses, and other things directly used in waging war, as well as to the production of dyestuffs and medicines essential to the welfare of the people. At the outbreak of the war many necessary medicines and other substances, as well as most of the dyestuffs used in this country, were imported from Germany or were manufactured under patents owned by enemy Germans. The amount of such things here produced was small. Importations were hindered by the blockade and ceased when this country entered the war. To meet the demand numerous plants were developed and by 1919 chemicals, dyestuffs, medicines, and the like were being produced here in large quantities. A number of associations of manufacturers were formed for the advancement of such industries; they included in their membership the producers of nearly all the dyestuffs and like chemicals made in this country. Mr. A. Mitchell Palmer was the Alien Property Custodian until he was appointed Attorney General, March 4, 1919. In order to protect the United States against enemy and foreign control of its chemical industries and to stimulate production here, he favored the seizure and sale of the patents in question. To that end a number of conferences were held between his representatives and those of the industries. The plan that was carried into effect was formulated under his direction.

In February, 1919, the Chemical Foundation was incorporated under the laws of Delaware. The certificate of incorporation discloses that it was created and empowered to purchase enemy-owned patents seized by the Custodian and to hold the 'property and rights so acquired in a fiduciary capacity for the Americanization of such industries as may be affected thereby, for the exclusion or elimination of alien interest hostile or detrimental to the said industries, and for the advancement of chemical and allied science and industry in the United States'; to grant to the United States nonexclusive licenses to make, use, and sell the inventions covered by the patents, and also to grant like licenses, on equal terms and without advantage as between licensees, to American citizens and corporations under control of American citizens. The board of directors is authorized to prescribe the terms and conditions of such licenses. It may refuse to issue any license or may revoke any license granted by it. The corporation is required to enforce its rights and to protect the rights of its licensees. The authorized capital stock is $500,000, consisting of 5,000 shares of the par value of $100 each: 4,000 shares constitute nonvoting preferred stock, the holders of which are entitled to a cumulative dividend of 6 per centum per annum, and 1,000 shares constitute the common stock, the holders of which are entitled to dividends not exceeding 6 per centum per annum after dividends on the preferred stock have been provided for. The preferred stock is subject to redemption at par plus accumulated dividends, if any, and after such redemption net earnings not needed for working capital 'shall be used and devoted to the development and advancement of chemistry and allied sciences, in the useful arts and manufactures in the United States, in such manner as the board of directors may determine.' The holders of the common stock have all the voting power. The certificate provides that, without the approval of the board of directors, stockholders may not sell any of their stock. The board of directors consists of three members. The executive officers are president, vice president, and a secretary and treasurer. The president and vice president are required to serve without pay. The shares of the Foundation were subscribed by those interested in the chemical and dye industries. But a voting trust agreement was made, pursuant to which all common stock was deposited with, and all voting power was vested in, five trustees. Directors and officers were chosen March 8, 1919. Francis P. Garvan, Douglas I. McKay, and George J. Corbett were made directors and constituted the board. Mr. Garvan, then Alien Property Custodian, was elected president. Mr. McKay was elected vice president, and Mr. Corbett secretary and treasurer. Otto T. Bannard and four others were made voting trustees. All the directors, officers, and voting trustees were chosen by or in accordance with the direction of Mr. Palmer, given while he was Custodian.

The President, by Executive Order December 3, 1918, declared:

'I hereby vest in Frank L. Polk all power and authority conferred upon the President by the provisions of section 12' of the Trading with the Enemy Act as amended (Comp. St. § 3115 1/2 ff).

Mr. Polk was then counselor for the Department of State, but was not so described in the order. He made two orders, dated respectively February 26, 1919, and April 5, 1919, to authorize the Custodian to sell at private sale to the Foundation without advertisement, at such places and upon such terms and conditions as to the Custodian might seem proper, all patents found to relate to the objects and purposes of the Foundation as expressed in its charter. These orders contained a statement of the reasons therefor in the public interest. Briefly they were that the patents could not be sold to the best advantage at public sale after advertisement; that the Foundation had been incorporated to hold the patents as a trustee for American industries affected by the patents, to eliminate hostile alien interests and to advance chemical and allied industry in the United States, and that it was obligated to grant nonexclusive licenses upon equal terms to qualified American manufacturers and was empowered to grant free licenses to the United States; that the public interest would be best served by a wide use of the inventions, which most readily could be promoted by licenses which the Foundation was obligated to grant; that a private sale would prevent the patents from falling into the hands of purchasers unwilling or unable to use the inventions or who would use them for speculative purposes; that it would be impossible to make a public sale that would secure these benefits, and that a private sale would avoid unnecessary expense, delay and inconvenience.

Prior to and contemporaneously with the organization of the Foundation, the representatives of the chemical industries co-operated with those of the Custodian in making lists of the patents to be seized and sold by the Custodian to the Foundation. Mr. Garvan, the Custodian, from time to time commencing April 10, 1919, executed and delivered to the Foundation various assignments of the patents. The considerations paid by the Foundation to the Custodian amounted in all to $271,850.00. The President, February 13, 1920, made an executive order which was held by both courts below to constitute a ratification of the transactions. And pursuant to that order, the Custodian confirmed the assignments theretofore made.

We come to the question whether, as held below, the Act as amended March 28, 1918, empowered the President to authorize, and the Custodian under his supervision to consummate, these sales.

The pertinent provisions of the act are in section 12 as amended:

'The Alien Property Custodian shall be...