#### SPERRY GYROSCOPE COMPANY v. THE UNITED STATES

[No. E-354.

Decided March 8, 1926]

*On Demurrer to Counterclaim*

*Counter claim; patent interest of employee; payment of*royalty.— Where defendant makes a payment to the plaintiff for articles in excess of their fair value, patented by defendant’s employee, who had assigned his interest to his mother-in-law, who in turn had granted the plaintiff exclusive rights therein, and there is no fraud or deceit in connection with the contract between the plaintiff and the defendant for the said articles, or interest of said employee therein, and the payment made by the defendant on the contract did not include the assignee’s stipulated royalty, and was made with full knowledge by the defendant of the circumstances recited, the defendant can not recover.

*The Ref outer’s*statement of the case:

*Mr. Herbert H. Thomfson*for the demurrer. *Mr. J. H. Lifsehutz*was on the briefs.

*Mr. George Dyson,*with whom was *Mr. Assistant Attorney General Herman J. Galloway,*opposed.

The counterclaim alleges the following:

On October 22, 1917, the defendant, represented by W. N. Rose, colonel of Engineers, National Army, issued to the plaintiff purchase order No. 9339 requesting it to deliver 50,000 marching compasses at $19.85 each. The plaintiff furnished them as requested and was paid therefor by the defendant, $947,500.

On May 15, 1918, the defendant, represented by the same officer, entered into a contract with plaintiff for the furnish*824ing of 169,000 similar marching compasses at $14.50 each, total $2,450,500.

In the fall of 1911, Col. E. S. A. Dougherty, of the United States Army, was in charge of the General Engineering Depot of the U. S. Army, charged with practically all functions in connection with the procurement, storage, disposition and shipment of engineer material, equipment, and supplies. Colonel Dougherty had charge of the engineering and purchasing department, having under his supervision the designing and draughting force, the preparation of specifications, circular proposals, canvassing of bids, making recommendations as to the awards and preparation of orders and contracts, the inspection and production of the materials that were ordered. Among the duties incumbent upon him was to use his inventive genius when occasion arose for special equipment that it was necessary to purchase, and when a satisfactory type of material did not then exist on the market, it was the duty of that department to prepare designs for such material, and the designing force reported to Colonel Dougherty. Marching compasses came within this class of engineering material, and the defendant was in the market for these compasses in the fall of 1917. In the early part of the year 1917 Colonel Dougherty conceived the idea of a radium light for such marching compasses and suggested the idea to an officer of plaintiff. On August 2, 1917, the Engineer Depot placed with the plaintiff an order for 6,600 marching compasses with the understanding that the illumination should be improved. On September 10, 1917, Colonel Dougherty entered into an agreement with his mother-in-law, Mrs. J. J. Brewster, assigning to her his interest in his invention of a radium lamp and agreed to. apply for and assign to her, if granted, a patent on his invention, in consideration of her paying a note of his of $3,000 at the bank, on which she was ■ jointly liable. During the same period that he was working on the radium lamp, Edwin W. Day, an employee of the plaintiff, was also making investigations along the same line. The plaintiff knew that the experiments were being made by Colonel Dougherty and furnished him material for his work. Colonel Dougherty and said Edwin W. Day *825worked together in making the investigations and in September, 1917, an officer of the plaintiff informed Colonel Dougherty that plaintiff was about to apply for a patent through its employee Edwin W. Day, and Colonel Dougherty agreed to make a joint application with Day for a patent. On October 2, 1917, circular proposal No. 419 was issued by the General Engineer Depot of the Army, requesting bids for furnishing certain articles, including 146,000 marching compasses, with the right reserved to the Government to increase the quantity to a total of 219,000. On October 11, 1917, the said Mrs. J. J. Brewster, by her attorney, entered into an agreement with the plaintiff, granting it the exclusive right to the invention embodied in the patent applied for by Colonel Dougherty and said Edwin W. Day, of which she was the owner of Colonel Dougherty’s half interest, for and in consideration of the sum of 90 cents for each marching compass embodying this inven-1 tion sold by the plaintiff, from the date of the agreement to '' the expiration of such letters patent. On October 25, 1917, application was filed in the joint names of Colonel Dougherty and Edwin W. Day for letters patent for an improvement in self-luminous compasses by means of a radium tube which is especially adapted for compasses such as used by aviators and soldiers, and the letters patent were issued in the early part of the year 1922. On October 27, 1917, a check for three thousand dollars ($3,000) from the plaintiff to Mrs. Brewster’s attorney was endorsed by said attorney to the order of Mrs. Brewster, being an advance payment for royalties under her said contract with the plaintiff. On April 2, 1918, Colonel Dougherty executed a formal assignment to the said Mrs. J. J. Brewster, for the consideration of one dollar, of his interest in said patent application for improvements in self-luminous compasses, containing an authorization to the Commissioner of Patents to issue the letters patent to her.

On July 3, 1918, the defendant notified the plaintiff that pending an investigation of Colonel Dougherty’s conduct it would be necessary to deduct the said sum of 90 cents contracted to be paid Mrs. Brewster on each marching compass furnished by it on all payments made under the said *826purchase order No. 9339, dated October 22, 1917, and the said contract of May 15, 1918, and that this would be done by withholding by the defendant the lump sum of $45,000 on said order No. 9339 for 50,000 compasses and the sum of 90 cents for each completed and delivered under the said contract of May 15, 1918. Defendant under date of July 11, 1918, agreed to this proposal and stated further that it was reconsidering the price to be charged on the compasses to be supplied under the contract of May 15, 1918, with a view to entering into a supplemental contract to revise the price to the extent of the $0.9.0 deduction and any further deductions it might find it could make. On July 23, 1918, the plaintiff notified the defendant that it was obligated to make further reductions from the contract price fixed in the purchase order No. 9339 for parts not supplied by it on a number of the compasses delivered under it, amounting to $26,839.80. Said amount was refunded by the plaintiff and deposited in the Treasury on October 25, 1918.

The plaintiff on July 25, 1918, notified the defendant that the cost of manufacturing the first 50,000 marching compasses was $9.51, and it would be fair to both parties to the contract to add a profit of 25 per cent, bring the selling price to $11.89, and advising that it would be glad to enter into a new contract for the 169,000 marching compasses at a price of $11.89 instead of the price of $14.60 each specified in contract 2300 of May 15, 1918. A supplemental contract was entered into on September 6, 1918, between the plaintiff and the defendant, reducing the price on the 169,-000 marching compasses to $11.89 each, making a total consideration of $2,009,410. Production was subsequently suspended, and the contract was adjusted and settlement made on the basis of the price of $11.89.

The actual cost of each compass furnished by the plaintiff to the defendant under said purchase order No. 9339 was $7,308, instead of $9.51, as claimed by the plaintiff, which sum, plus 25 per cent thereon stated by the plaintiff to be a fair profit, makes the fair value of the compasses $9,135 instead of $11.89.

The plaintiff has been paid by the defendant $9,815 for each marching compass delivered in excess of its fair value. *827The plaintiff was paid by the defendant the sum of $490,750 in excess of the fair value of the marching compasses delivered under the said purchase order No. 9389, and $286,-640.06 under said contract of May 15, 1918, a total payment of $777,390.06 in excess of the fair value of the marching compasses received by the plaintiff from the defendant.

Downey, Judge,

delivered the opinion of the court:

The defendant concedes the right of the plaintiff to recover on its petition, but asserts a counterclaim which is founded upon preceding, independent, and long-since adjusted transactions. Rather than review the averments of the counterclaim, which is necessarily a part of the record, and enter into a lengthy and detailed discussion of the questions involved, it is thought that the material questions may satisfactorily and more expeditiously be disposed of by the following five propositions:

1. The counterclaim pleads a provision of the act of June 22, 1874, sec. 10, 18 Stat. 177, but only partially pleads the section and so pleads it as to give it a general application entirely different from its true one. Being, as it is, deceptive pleading, it is hoped that it is unintentionally so. The section in its entirety has no application to the present case. Reference is made to the title of the act and the full text of the section referred to.

2. The reasonable inference from all the averments- of the counterclaim is that purchase order No. 9339 and the contract of May 15, 1918, were properly placed after customary procedure. There is no allegation of any fraud or deceit in that connection.

3. The averments of the counterclaim do not show that Colonel Dougherty had any interest in either of said contracts. It is only so averred by way of conclusion and the conclusion is not sustained by the facts pleaded.

4. Colonel Dougherty had no remaining interest so far as appears in the patents involved. He had a right to sell such interest as he had and it does not appear that the transaction was other than a legitimate one based on a valuable consideration. No collusion is charged. The mere fact that *828his mother-in-law was his assignee does not serve of itself' to taint the transaction.

5. With full knowledge of all the facts averred and relied on the United States made deduction from plaintiff’s compensation for the 50,000 compasses covered by order No.. 9339 equal to the full amount of royalty the plaintiff had contracted to pay Colonel Dougherty’s assignee and entered into a new contract at a lesser price in lieu of the contract of May 15, 1918. The Government could then have been under no misapprehension as to the facts and, with such modifications as the circumstances seemed to it to require,, it ratified these contracts and made settlements accordingly-

The demurrer to the counterclaim should be sustained, and. it is so ordered.

Graham, *Judge;*Hat, *Judge;*Booth, *Judge;*and Campbell, *Chief*Justice, concur.