Court Opinion

ID: 8831134
Source: CourtListenerOpinion
Date Created: 2022-11-26 16:04:01.538979+00
Date Added: 2024-06-11T17:04:55.767852
License: Public Domain

HOUGH, Circuit Judge
(after stating the facts as above). The fundamental question is this: As the profits in question accrued or arose, to whom did they legally belong?
 It has never been doubted in patent litigation that where damages are not claimed the plaintiff “must be content with such indemnity for the violation of his rights as he will receive by recovery of the profits which the master has found were realized by the defendant” (per Wallace, J., Covert v. Sargent [C. C.] 42 Fed. 298; Wooster v. Trowbridge [C. C.] 115 Fed. 722, at page 728).
That is, what the plaintiff can recover must have been realized by defendant; they must be his profits, and not those of another.
Equity acts in personam, not in rem; it is impossible, under or by any process or procedure exhibited in this litigation, to seize the profits of all infringers by taking the property of one. The point is emphasized in El wood v. Christy, 18 C. B. (N. S.) 494, by declaring that a master should “take an account of the profits which have been actually made by the defendants.”
“Profit” is undoubtedly a somewhat elastic word; “popularly it is the net receipts of a business” (per Waite, C. J., Eyster v. Centennial Board, 94 U. S. 503, 24 L. Ed. 188); and when it comes to properly declaring dividends the word denotes “what remains after defraying every expense, including loans falling due as well as the interest” thereon. Mobile, etc., Co. v. Tenn., 153 U. S. 497, 14 Sup. Ct. 971, 38 L. Ed. 793. In a case of patent accounting it has been held that “ ‘Profit’ is the gain made upon any business or investment, when both the receipts and payments are taken into the account.” Rubber Co. v. Goodyear, 9 Wall, 788, at page 804, 19 L. Ed. 566. Payments are of course lawful payments.
This brings us to consideration of the legality, i. e. validity of the traffic agreement. The relation between a controlled and controlling corporation is sufficiently and instructively set out in Noyes on Intercorporate Relations (2d Ed.) §' 300. The controlling corporation assumes a trust relation to the minority shareholders of the corporation controlled. That is, it is through the right of the minority shareholders of the controlled corporation that the equities of the rest of the world are worked out.
The decisions relied on by plaintiff are fairly illustrated by Rubber Co. v. Goodyear, supra, and Bush v. Becker, 234 Fed. 79, 148 C. C. A. 95; where, in respect of accounting for profits derived from_ infringements, the courts refused to permit as proper expenses in dimi*702nution of profits exorbitant salaries paid to officials of the infringing defendants. Undoubtedly items of expenses may be looked into; the bald fact of payment by an infringing defendant under the title of expense is not enough.
Thus to the legal rule stated by the learned master we give adherence, viz:
“A fair way to determine the question (of validity of traffic contract) is to consider whether the proposition submitted would have commended itself to an independent corporation. If to such a corporation the proposition would.not have seemed unfair or unconscionable, a court should not be inclined to condemn the agreement merely because one party to it controlled the other.”
We now observe that as late as 1914, the enterprise of transoceanic radio-communication was in rather an unpromising infancy; the ship-to-shore business of Atlantic had been confessedly unprofitable, and that company was dependent upon Telefunken not only for capital but for technical supplies; its issued share capital was small, and when it was offered an annual guaranty deemed sufficient to pay expense of operation and a share of the profits which (if there ever were any profits worthy the name) would give a substantial dividend upon its capital stock, it seems to us, as to the master, that any reasonable body of men would have been glad of so secure a position in respect of a business confessedly experimental. For these reasons we hold that the traffic agreement of August, 1914, was a reasonable, lawful, valid, and indeed desirable business arrangement entered into before any of the profits sought to be reached in this case were either received or anticipated with any degree of certainty.
The attack on the agreement is substantially (though not put quite So strongly) that it was begotten and conceived in fraud. “Fraud” is a large word; and as applied to this case it can only mean that the German Telefunken, secure from the processes of this and other. American courts by its remoteness, deliberately arranged in this traffic contract a scheme by which its creature Atlantic would do the work that resulted in profits, and yet by this agreement secure the major portion thereof for itself; even in the face of gross and intended infringement by its servant. As to this suggested deep-laid scheme of fraud, we hold (by quotation from the master’s report) that we are “not persuaded either by the proofs or the argument that the traffic arrangement was a mere device to enable Telefunken’ to make profits by contemplated infringements, and slip them out of the jurisdiction of the court.”
One need only examine the history of litigation above referred to by citation of decisions, to be assured of the honestly arguable and uncertain, if not doubtful, nature of these plaintiffs’ rights as viewed with the eyes of 1914. The American patentees have been victorious in the courts of the United States; but it is going very far even in argument to assert or suggest that when this contract was made Telefunken made it for the purpose of infringing with comparative impunity patents of which there is no evidence in this record that it had any contemporaneous knowledge — much less belief in their validity. We may add that if that had been the design, intent, or purpose of Tele*703funken, the contract of 1914 was a singularly clumsy overt act of conspiracy.
If it be assumed, however, that such design was within the corporate mind of Telefunken, it follows that Atlantic was a coconspirator, although a humble one; also, that both Telefunken and Atlantic were joint infringers. Therefore they are at law jointly and severally liable for whatever damages plaintiff may be able to show; but as none has been shown, that liability may .be laid aside.
Thus if two or more conspire to gain profit by infringement, the question arises: Is each conspirator severally liable not only for the entire damages caused by the infringement, but for the profits made by all the conspirators? We think no authority can be shown, nor can reason be invoked, for a ruling in the affirmative. In Elizabeth v. Pavement Co., 97 U. S. 126, 24 L. Ed. 1000, both the city and the contractors who were laying the infringing pavement were made defendants. It was never doubted that the city was as much an infringer as the contractor; the defendants answered jointly and both had decree .against them; yet even under such circumstances Bradley, J., remarked, “Profits only, as such can be recovered;” and since the city was not shown to have made any profit although it had used the infringing article, decree for profits passed only against the contractor. Indeed the whole theory of accounting, of profits, and of the quasi fiduciary relation (even when arising ex maleficio) of trustees, is opposed to such a theory of responsibility. The foregoing is said to show to what lengths plaintiffs must go to support recovery; even if a conspiracy to prevent patentees’ recovery be assumed. But we ground decision on the finding and holding that there can be no recovery of profits from a defendant, except of profits that defendant made; and this defendant had no “profit” until it had made the payments due under the lawful traffic agreement.
The remaining question at bar, as to the proper apportionment of profits to and among a plurality of plaintiff-patentees, is in the light of the past history of patent accounting a curious puzzle; of which we are especially unwilling to attempt the solution now that the Act of February 18, 1922, has amended R. S. § 4921. It is true that the recent statute does not apply here, because these litigations were pending when the amendment became effective. But these cases- belong to a vanishing class, and any elaborate consideration of rules which it was the very object of the amendment to simplify if not to abolish is undesirable from every point of view.
It is sufficient for us to say that we are satisfied by all the evidence that without the use of the Fleming valve, and the principles of heterodyne reception and continuous wave transmission, this particular business out of which these particular profits arose would not and could not have been commercially successful. One may doubt whether the pecuniary success of wireless communication between 1914 and 1917 was not in a very true sense more a growth of war necessities than of scientific perfection and commercial reliability; but that does not affect the truth of the first proposition. Under such circumstances, there is authority too abundant to need citation justifying the master’s conclusion as hereinabove set forth.
*704The decrees appealed from are reversed, and the causes remanded, with direction to enter decree in conformity with the report of the master. Appellant will recover one hill of costs in this court; plaintiffs will recover the costs of the District Court.