Watson v. United States

• Decision Date: 12 May 1955
• Docket Number: No. 5042.,5042.
• Parties: Orla E. WATSON and Edith Watson, Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

222 F.2d 689 (1955)

Orla E. WATSON and Edith Watson, Appellants, v. UNITED STATES of America, Appellee.

No. 5042.

United States Court of Appeals Tenth Circuit.

May 12, 1955.

Lancie L. Watts, Kansas City, Mo., (Charles C. Shafer, Jr., and William J. Bell, Kansas City, Mo., on the brief), for appellants.

Joseph F. Goetten, Washington, D. C. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott, Walter Akerman, Jr., Sp. Assts. to Atty. Gen., and William C. Farmer, U. S. Atty., Wichita, Kan., on the brief), for appellee.

Before PHILLIPS, Chief Judge, and BRATTON and MURRAH, Circuit Judges.

BRATTON, Circuit Judge.

The crucial question in this case is whether for income tax purposes a contract constituted an assignment of patent rights and therefore the income which the patentee derived therefrom was long-term capital gain, or whether the contract constituted a license and hence the income derived from it was ordinary income.

Orla E. Watson conceived the idea of a cart that could be telescoped horizontally, one into another. The cart was designed particularly for use in grocery stores. Watson made a pencil drawing of the cart, finished two experimental models, tested them successfully, and demonstrated them to others. Watson and Fred E. Taylor entered into a partnership agreement by the terms of which it was agreed that, in consideration of advancements made and to be made by Taylor for use in financing the manufacture and distribution of the carts, Watson would for a term of ten years give Taylor an undivided forty-nine per cent interest in and to the telescope feature. Notwithstanding the language contained in the agreement, it was the intention of the parties that Taylor should receive one-half of the profits derived from the invention but no interest in the patent rights. An application for a patent on the cart was filed and later the patent issued. While the application was pending, Watson — with the consent and assistance of Taylor — entered into an agreement with George Oliver O'Donnell, as trustee for Telescope Carts, Inc., to be thereafter incorporated. The agreement provided among other things that Watson thereby granted to the corporation the exclusive right, license, and privilege to manufacture, distribute, sell, develop, and use the telescope carts for and during the period of the application for letters patent, during the term for which letters patent were issued, and during any extension of such patent or patents. The corporation was organized and O'Donnell assigned to it all of his right, title, and interest in and to the agreement between himself and Watson. During 1950, Watson received from the corporation payment or payments under the contract in the aggregate amount of $78,442.75, out of which he paid Taylor $39,221.38. In their income tax return for the year 1950, Watson and his wife reported as ordinary income $39,221.37 which had been received from the corporation and paid the tax thereon. Within the statutory time, they filed a claim for refund in the amount of $7,450.04 upon the ground that the income received under the contract was part of the purchase price of the invention and therefore was subject to tax as long-term capital gain. The claim was not acted upon within six months after the date of its filing, and this action was filed to recover the asserted refund. In its findings of fact, the court found among other things that Watson held the invention relating to the carts for more than six months prior to the execution of the contract with O'Donnell; that he did not hold the invention primarily for sale to customers in the ordinary course of his trade or business; and that the agreement was a license agreement and did not constitute a sale of the invention. In its conclusions of law, the court concluded that for income tax purposes the contract did not constitute a sale of the invention; and that the income received from the corporation constituted ordinary income, not capital gain. Judgment was entered against the taxpayers, and they appealed.

It is a firmly accepted principle of law that if the patentee conveys by an instrument in writing the exclusive right to make, use, and vend the invention throughout the United States, or an undivided part or share of that exclusive right, or the exclusive right under the patent within a specified area within the United States, the conveyance constitutes an assignment of the patent, complete or partial as the case may be; and that a transfer short of that is not an assignment but a license. Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923; United States v. General Electric Co., 272 U.S. 476, 47 S.Ct. 192, 71 L.Ed. 362; Doherty Research Co. v. Vickers Petroleum Co., 10 Cir., 80 F.2d 809, certiorari denied 299 U.S. 545, 57 S.Ct. 9, 81 L.Ed. 401; Broderick v. Neale, 10 Cir., 201 F.2d 621. In language too clear for doubt, the agreement into which Watson and O'Donnell entered expressly granted to Telescope Carts, Inc., the exclusive right to make, use, and vend the carts throughout the United States.

The agreement between Watson and O'Donnell was entitled License Agreement, and in it the parties were referred to as licensor and licensee, respectively. But nomenclature of that kind has little if any significance in resolving the question whether the instrument amounted to an assignment or was a license. The calling of the instrument a license agreement, and the denomination of the parties thereto as licensor and licensee, respectively, did not fix, limit, or qualify the scope and effect of the grant. The legal question whether the instrument constituted an effective assignment or was a license must be determined by considering together the several provisions contained in the instrument, not its title or the manner in which reference was made to the parties. Heryford v. Davis, 102 U.S. 235, 243, 26 L.Ed. 160; D. M. Sechler Carriage Co. v....