United States v. Scophony Corporation of America

• Decision Date: 26 April 1948
• Docket Number: No. 41,41
• Parties: UNITED STATES v. SCOPHONY CORPORATION OF AMERICA et al
• Court: U.S. Supreme Court

333 U.S. 795

68 S.Ct. 855

92 L.Ed.1 091

UNITED STATES

v SCOPHONY CORPORATION OF AMERICA et al.

No. 41.

Argued Jan. 12, 13, 1948.

Decided April 26, 1948.

Appeal from the District Court of the United States for the Southern District of New York.

Mr. Sigmund Timberg, of New York City, for appellant.

Mr. Edwin Foster Blair, of New York City, for appellees.

Mr. Justice RUTLEDGE delivered the opinion of the Court.

The appellee Scophony, Limited, is a British corporation which has its offices and principal place of business in London, England. The question is whether that company 'transacted business' and was 'found' within the Southern District of New York under § 12 of the Clayton Act,¹ so that it could be sued and served there in a civil proceeding charging violation of §§ 1 and 2 of the Sherman Act. 26 Stat. 209, 50 Stat. 693, 15 U.S.C. §§ 1, 2, 15 U.S.C.A. §§ 1, 2. The violations stated were that Scophony and the other defendants² had monopolized, attempted to monopolize, and conspired to restrain and monopolize interstate and foreign commerce in products, patents and inventions useful in television and allied industries. The cause is here on direct appeal³ from an order of the District Court granting Scophony's motion to quash the service of process and dismiss the complaint as to it. 69 F.Supp. 666.

Scophony manufactures and sells television apparatus and is the owner and licensor of inventions and patents covering television reception and transmission.⁴ With the outbreak of the European War in 1939, the British Broadcasting Corporation stopped television broadcasting. Consequently it became impossible for Scophony to continue in the commercial development, manufacture and sale of television equipment in England. It therefore sent personnel to the United States, opened an office in New York City, and began demonstrations of its product and other activities preliminary to establishing a manufacturing and selling business in this country.

Late in 1941 Scophony found itself in financial distress, in part because of restrictions imposed by the British Government on the export of currency. It became imperative that new capital from American sources be found for the enterprise. Accordingly Arthur Levey, a director of Scophony and on of its founders, undertook negotiations in New York with American motion picture and televisions interests, including Paramount and General Precision. They culminated in the execution of three interlacing contracts, the so-called master agreement of July, 1942, and two supplemental agreements of August 11, 1942. Copies of the latter had been attached to the master agreement, which provided for their later execution, and they when executed in effect carried out its terms. The alleged violations of the Sherman Act center around these agreements.

The master agreement was executed by Scophony, William George Elcock, as mortgagee of all of Scophony's assets, General Precision, and Productions, the latter a wholly owned subsidiary of Paramount. It provided for the formation of a new Delaware corporation, American Scophony, with an authorized capital stock of 1,000 Class 'A' shares and a like number of Class 'B' shares. Scophony and individuals interested in it⁵ were to be given the Class 'A' shares. Under the agreement, ownership of those shares conferred the right to elect three of American Scophony's five directors and its president, vice president and treasurer. The Class 'B' shares were allotted to General Precision and Productions. By virtue of such ownership those two corporations were entitled to name the remaining two directors and the secretary and assistant secretary of American Scophony. Levy was named in the agreement as the president and a director of the new corporation.

The master agreement set forth the general desire of the parties to promote the utilization of the Scophony inventions 'particularly in the United States of America and generally in the Western Hemisphere.' It then stated that American Scophony had been organized 'as a means therefor.' Scophony agreed to transfer all its television equipment then in the United States to American Scophony and to enter into the first supplemental agreement. Scophony, with the other parties, also undertook to cause American Scophony to enter into both supplemental agreements. For the 'B' stock in American Scophony and other rights acquired, General Precision and Productions agreed to enter into the second supplemental agreement and to pay specified sums in cash to Scophony or for its benefit in liquidation of listed obligations.

Pursuant to the master agreement's terms, the first supplemental agreement was executed by Scophony, Elcock, as mortgagee of its assets, and American Scophony; the other, by American Scophony, General Precision, and Productions. For present purposes it is necessary to set forth only the general effect of the agreements taken together. Scophony transferred to American Scophony not only all of its equipment in the United States, but also all patents and other interests in the Scophony inventions within the Western Hemisphere. General Precision and Productions were granted exclusive licenses under American Scophony's patents. They agreed to pay royalties on the products produced under the licenses and American Scophony undertook to transmit fifty per cent of such royalties to Scophony. American Scophony gave Scophony an exclusive sublicense for the Eastern Hemisphere on a royalty basis under all patents licensed to American Scophony by General Precision and Productions. Provision was also made for the interchange of technical data and information respecting the Scophony inventions. Finally, it was agreed that Scophony would not market any product involving the Scophony inven- tions in the Western Hemisphere and that General Precision and Productions would not export any such product to the Eastern Hemisphere.⁶

This rather complex plan soon fell of its own weight. Starting in 1943, an impasse developed in the affairs of American Scophony. It stemmed from the failure and unwillingness of General Precision and Productions to exploit the Scophony inventions themselves and their refusal to modify the agreements to permit the licensing of other American firms under the inventions. Several manufacturers expressed an interest in obtaining licenses. But in each instance the directors representing the American interests holding the Class 'B' shares were unwilling to approve the necessary modifications in the existing arrangements. In July, 1945, the directors representing the 'B' interests resigned. This made it impossible for American Scophony to transact business, since charter and by-law provisions adopted pursuant to the master and supplemental agreements required the presence of at least one Class 'B' director for a quorum. Adding to the difficulties were American Scophony's shortage of funds and the apparent reluctance of the American interests to cooperate in efforts to place American Scophony on firmer financial footing. American Scophony's affairs were further complicated by the institution of the present antitrust proceeding on December 18, 1945.

Levey kept Scophony advised of developments in the dispute between the 'A' and 'B' factions and otherwise made progress reports to Scophony on its interests in the United States. As the impass heightened, other individuals were authorized by Scophony to act in its behalf in the United States.⁷ Service of process as to Scophony was made first on Levey in New York City on December 20, 1945.⁸

On April 5, 1946, a summons and a copy of the complaint directed to Scophony were also served on Elcock in New York City. He was a dominant figure in Scophony. He arrived in this country in March, 1946, with the mission of investigating and ending the impasse and disposing of Scophony's interest in American Scophony. Elock not only was mortgagee of Scophony's assets by virtue of having made a large loan to the company. He was also its financial comptroller and a member of its board. At the time of service on him, he held a comprehensive power of attorney, irrevocable until March, 1947, giving him complete power to act with regard to Scophony's interests in the United States, including those in American Scophony.⁹

The District Court, in granting the motion to quash service and dismiss the complaint as to Scophony, held that it was not 'found' in the Southern District of New York within the meaning of § 12. The court rejected the contention that Scophony was within thej urisdiction by reason of the activities of its agents. It concluded that none of those activities related to Scophony's ordinary business of manufacturing, selling and licensing television apparatus, but all were confined to protecting Scophony's interest in American Scophony. It also found that the conduct of American Scophony did not serve to bring Scophony within the jurisdiction. 69 F.Supp. 666.

I.

Section 12 of the Clayton Act has two functions, first, to fix the venue for antitrust suits against corporations; second, to determine where process in such suits may be served. Venue may be had 'not only in the judicial district whereof it is an inhabitant, but also in any district wherein it may be found or transacts business.' And all process may be served 'in the district of which it is an inhabitant, or wherever it may be found.' (Emphasis added.)

A plain and literal reading of the section's words gives it deceptively simple appearance. The source of trouble lies in the use of verbs descriptive of the behavior of human beings to describe that of entities characterized by Chief Justice Marshall as 'artificial * * *, invisible, intangible, and existing only in contemplation of law.' Trustees of Dartmouth College v. Woodward, 4 Wheat. 518, 636, 4 L.Ed. 629.¹⁰

The process of translating group or institutional relations in terms of individual ones, and so keeping them distinct from the nongroup...