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Timken-Detroit Axle Co. v. Alma Motor Co.

August 7, 1944


Appeal from the District Court of the United States for the District of Delaware; William H. Kirkpatrick, Judge.

Author: Goodrich

Before MARIS, GOODRICH, and McLAUGHLIN, Circuit Judges.

GOODRICH, Circuit Judge.

This action was brought under the Declaratory Judgment Act*fn1 by the Timken Detroit Axle Company (herein called "Timken") against Alma Motor Company (herein called "Alma"). The plaintiff in the action sought a declaration that certain patents owned by Alma covering a mechanism known as a "transfer case" which Alama had licensed Timken to use for a stipulated royalty were invalid and further that transfer cases manufactured by it did not come within the scope of the license agreement so as to require payment of royalties. Alma counterclaimed for damages on account of alleged unpaid royalties. On September 23, 1942, the District Court held that Timken, as licensee, was estopped to contest validity and, second, that certain of the transfer cases manufactured by Timken were within and certain others were without the license. Alma appealed to this Court on February 27, 1943.

On July 28, 1943 the United States War Department issued Royalty Adjustment Order No. W-3 pursuant to the Royalty Adjustment Act of October 31, 1942.*fn2 That order directed Timken to pay no more royalties whatever to Alma under the license agreement for transfer cases manufactured for the United States. Alleging that the "structures here in suit have all been made for the Government," Timken then moved to dismiss the appeal on the grounds that there was no longer a justiciable controversy under the Declaratory Judgment Act.Alma, in response to directions from this Court, asserted its position with regard to constitutionality of the Royalty Adjustment Act by questioning its validity. The Clerk of this Court certified to the Attorney General that the constitutionality of the Act had been questioned and the United States, in response to this certification, filed a petition of intervention on December 30, 1943, pursuant to the Act of August 24, 1937.*fn3

Since the transfer cases manufactured by Timken on which royalty payments are claimed were all made in fulfilment of a contract with the United States and since the War Department's order forbade Timken to pay any royalties thereon, it follows that if the statute applies and the order was made pursuant to it, the order in this appeal should be so framed as not to pass upon what has, by events since the original trial, become moot.Before consideration of the statute on which the litigation turns, however, it will be well to see just what ground was covered by earlier legislation, the constitutionality of which has been settled by authoritative court decisions, and thus more clearly appreciate the scope of the questions involved in the presently considered legislation.

Congress by statute provided in the Act of 1910,*fn4 as amended by the Act of 1918,*fn5 that when a patented invention is used or manufactured by or for the United States without license from the owner, the latter's remedy for recovery of his compensation should be by suit against the United States in the Court of Claims.Thus, patents could be infringed in the course of governmental production or procurement free from threat of injunction against the manufacturer for use of the invention, leaving the amount to be paid to the patentee to be adjusted by suit in the Court of Claims. The constitutionality of this legislation has been upheld. Crozier v. Fried. Krupp Aktiengesellschaft, 1912, 224 U.S. 290, 307, 32 S. Ct. 488, 56 L. Ed. 771; Richmond Screw Anchor Co. v. United States, 1928, 275 U.S. 331, 48 S. Ct. 194, 72 L. Ed. 303.

This legislation and the decisions upholding it go very far in taking away might impress one first confronted with the 1942 statute. The monopoly given to a patentee, itself a right created by federal legislation, may be in effect requisitioned by the United States, in carrying out its constitutional powers, leaving the patentee to recover through litigation the value of the partial appropriation of his patent right.The upholding of this statute demonstrates the constitutionality of the exercise of eminent domain in the patent field and, likewise, the sufficiency of the provision for recovery of compensation by a suit in the Court of Claims.

The 1910 statute, as amended, did not cover quite the entire field. If the patentee had licensed the contractor to use the invention the statute was not available. Newport News Shipbuilding & Dry Dock Co. v. Isherwood, 4 Cir., 1925, 5 F.2d 924, certiorari denied, 1925, 269 U.S. 552, 592, 46 S. Ct. 13, 70 L. Ed. 429. In such a case there was no threat of injuction for infringement of the patent which could stop the supplying of goods for the use of the United States. But the testimony presented at the Congressional hearings prior to the passage of the 1942 Act showed a difficulty which, while less acute than the possibility of injunction, was nevertheless thought to be important.*fn6 It was developed that contractors supplying materials to the Government were under license contracts with patent owners entered into with peacetime scales of production in mind. License rates which were fair enough on a peacetime production scale became unduly high when the demand was increased many fold by the Governmental requirements for global war. The result was high cost of the articles to the public and what was considered to be an unduly rich reward to the owner of a particular patent whose licensee was producing war goods for the United States. Congress, with these considerations in mind, passed the Act of October 31, 1942, the constitutionality of which is questioned here. The statute, the pertinent part of which is quoted in the margin,*fn7 fills the gap left by the Act of 1910, as amended. It permits a Governmental agency to adjust royalty payments to a patentee if the payments provided for in the royalty agreement are thought to be too high. The patent owner is given the opportunity to be heard concerning the matter before the Governmental agency and if the price to be paid is not fixed to his satisfaction as a result of such a hearing he has the right to sue the Government for his compensation.

What we have here is a taking of private property for public use. The property involved is the patent owner's royalty rights under the license with the manufacturer. No one doubts, of course, the power of the Government to take private property for public use if the constitutional requirements for compensation are met. The necessity for the taking in a particular instance is for the legislative body, not the courts, assuming that the purpose is one for which the power might be exercised. North Laramie Land Co. v. Hoffman, 1925, 268 U.S. 276, 45 S. Ct. 491, 69 L. Ed. 953; Joslin Co. v. Providence, 1923, 262 U.S. 668, 43 S. Ct. 684, 67 L. Ed. 1167; Bragg v. Weaver, 1919, 251 U.S. 57, 40 S. Ct. 62, 64 L. Ed. 135.

Was the taking provided for in the 1942 statute one for a public use?It certainly was if it was in pursuance of the war power of the United States, expressly delegated to the national Government by the Constitution. Furthermore, we have authority which supports appropriations in the patent field in the decisions, already cited, applying the 1910 Act. Our only new question here, therefore, is the public use aspect of the extension by legislation to include the taking over of license agreements as well as patent rights not subject to such agreements. It hardly requires discussion to demonstrate that the scope of Governmental activity involved in the prosecution of a war upon the scale which armed conflict involves today reaches far beyond that pertaining directly to the clash of arms. It justifies legislation providing for price control of commodities, Yakus v. United States, 1944, 321 U.S. 414, 64 S. Ct. 660, the fixing of rents, Bowles v. Willingham, 1944, 321 U.S. 503, 64 S. Ct. 641, the furnishing of housing for workers in communities where war goods are made and the determination of what the houses shall be, United States v. City of Chester, 3 Cir., 1944, 144 F.2d 415. Total war, today, is not a figure of speech but a grim fact.

The readjustment of royalties to be paid to a patent owner by his licensee upon articles supplied to the United States in wartime is also within the scope of the conduct of total war. The demands of the war effort have made first call upon the industrial power of the nation to an extent hitherto unknown. Goods in gigantic quantities are produced as a result of this mobilization. They must be paid for by the taxpayers of the United States. A legislative provision, the purpose of which is to secure the necessary materials at reasonable prices, is not less a part of the general war effort than the procurement of goods of war themselves. The subject matter of the Royalty Adjustment Act is clearly within the war power of Congress.

We think the statute may constitutionally be applied to royalties which had accumulated between the passing of the statute and the giving of the notice to the patentee by the War Department and also to those which had accumulated prior to the statute. It is especially provided by the Act that the public is to get the benefit of any readjustment in royalties made by a reduction in the price paid for goods purchased from the licensee. The wartime conditions which prompted the passing of the statute existed prior to the date of its enactment and the statute seeks to cover them.It is true that in so doing the public right is asserted against the individual patent owner who has made an advantageous contract for the use of his patent. If the public right is constitutionally asserted within any particular field it prevails over private contracts even in cases of exercise of police or other regulatory power where the person affected is not given compensation. Thus a man who has secured a contract for a free pass cannot claim it against Congressional legislation invalidating his agreement. Louisville & Nashville R.R. v. Mottley, 1911, 219 U.S. 467, 31 S. Ct. 265, 55 L. Ed. 297, 34 L.R.A., N.S., 671. Nor a shipper who has secured a favorable rate by contract have the advantage of that agreement when legislation provides a different rate. New York v. United States, 1922, 257 U.S. 591, 600, 601, 42 S. Ct. 239, 66 L. Ed. 385. Nor can one with a profitable contract for the sale of intoxicating liquor enforce it after the sale of the subject-matter has been forbidden. Boer v. Garcia, 1925, 240 N.Y. 9, 147 N.E. 231. Nor can a contractual provision for limited benefits to employees preclude the right to recovery under a subsequent enactment of the Federal Employers' Liability Act, 45 U.S.C.A. ยง 51 et seq. Philadelphia B. & W.R. Co. v. Schubert, 1912, 224 U.S. 603, 32 S. Ct. 589, 56 L. Ed. 911. So, here, the exercise of the public use in the pursuance of the wide-sweeping and important war power cuts across private interests. The patent owner's right is, for war purposes at least, subject to be appropriated in the public interest and his individual contract claims are subordinate thereto. If individual contract rights may be interfered with in pursuance of regulatory power exercised on behalf of the general public it is even clearer that such rights are subordinate to the public interest when compensation is given the individual for such interference.

We pass then to the question of compensation.Alma complains that the hearing before officials of the War Department was, as to it, a deprivation of constitutional rights. The hearing, or conference, is provided for in the sections of the Act quoted above. Alma was notified of a proposed action under the statute with regard to its license agreement with Timken. It appeared by its president, accompanied by counsel, and was heard. Alma complains that the scope of the notice given it and the order, following the hearing, reducing its fees under the license agreement to nothing did not correspond; that is, that the order, was not responsive to the notice. We think that the complaint in this respect misconceives both the nature of the hearing and the order which resulted therefrom. The hearing provided for is not in the nature of a complaint before a regulatory agency, but, instead, gives an opportunity for possible amicable adjustment between the Government agency and the patent owner. But the result does not bind the patent owner. By the express terms of the statute he is entitled to sue for what he believes himself to be entitled and the conclusions of the administrative officer are in no way binding upon him or the court.*fn8 Provision for such a hearing is not constitutionally required; the 1910 Act, as amended did not include it. The insertion ...

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