1931 BTA LEXIS 1928 | B.T.A. | 1931
Lead Opinion
The parties are in agreement that the primary issue here presented for determination is the March 1, 1913, value of certain patent applications which were held by the petitioner on March 1, 1913. The history of the applications in question from the time they were filed in the Patent Office in 1909 until they ripened into patents in 1919 and 1920, and the manner in which the issue here involved arises, are set forth in much detail in our findings and will not be repeated except in a brief summary. In short, what occurred was that the petitioner, an inventor, had been engaged prior to 1909 in making certain inventions relating to oil-refining processes and in December, 1909, filed two applications for patents in the Patent Office on inventions alleged to have been perfected by him with respect to what is referred to in the art as “ cracking oil.” The first application was filed on December 1, 1909, and the second on December 31, 1909, and patents thereon were issued on October 28, 1919, and January 6, 1920, respectively. The former is referred to as an “ apparatus ” patent and the latter as a “ process ” patent. Prior to the issuance of the foregoing patents, namely, on February 27, 1919, petitioner entered into an agreement with the Texas Company under which he sold and assigned his rights under the applica
That there is a real difference between the parties on the foregoing question is shown by the petitioner’s allegation that the applications had a fair market value on March 1, 1913, of at least $25,000,000, whereas the Commissioner contends that such applications had no fair market value on that date. The Commissioner at first urged that as a matter of law patent applications, irrespective of their character, have no fair market value and therefore it is unnecessary to consider evidence with respect to the value of the applications here in question, though in his brief he concedes that the Board has taken the opposite view on many occasions (Hershey Manufacturing Co., 14 B. T. A. 867, and cases therein cited (affd., Hershey Manufacturing Co. v. Commissioner, 43 Fed. (2d) 298)). However, without receding from the foregoing position, he now urges that in any event the patent applications with which we are here concerned had no fair market value on March 1, 1913. We do not consider it necessary to discuss our reasons for the conclusion that there is a property right attaching to a patent application which may be of value; our reasons are fully set forth in the case referred to above, and it will suffice here to affirm our previous position. What that value
In support of their respective positions, a voluminous record has been prepared, consisting of more than 1,500 pages of transcript, in addition to lengthy exhibits in the form of carefully compiled data and graphs, reports of hearings and decisions in related proceedings, treatises on the art of “ cracking oil ” and much other information. Expert witnesses of the highest order, some of them not only skilled in the art with which we are concerned, but also versed in a knowledge of patent law, were introduced by both parties. That is, we do not have the situation which often occurs in our proceedings where witnesses are produced only by the petitioner, but both parties were well fortified with experts who shared their respective views as to value. And it might be added further that the views of the experts were, without exception, in accordance with the allegations of the respective parties, the Commissioner’s witnesses insisting that no fair market value existed at March 1, 1913, whereas the petitioner’s chief witness, around whom his case as to value is built, testified that after allowing for all possible contingencies the fair market value at March 1,1913, was even in excess of $25,000,000. With these sharply conflicting and widely divergent views, we are faced with the situation such as faces a jury in a trial court where our duty is to consider all of the evidence and seek to form our conclusion as to the fair market value of the applications in question on March 1, 1913. And in making our determination we must keep in mind the well established principle that such a value must be based only upon the facts in existence or in reasonable contemplation on March 1, 1913, as shown by the evidence. :
On a consideration of the entire record, we are convinced that the petitioner is far too optimistic with respect to the situation as it existed on March 1, 1913, and as to the manner in which we believe parties would have dealt with respect to the purchase or sale of the applications in question on that date. At that time the patents had not issued and the applications themselves were in a state of rejection in the Patent Office. While rejections such as had here occurred are not to be considered final and a skilled patent attorney' might' well have been able to have foreseen the ultimate outcome with a reasonable degree of certainty, we certainly have in this situation an unfavorable factor existing at March 1, 1913, even when looked at in the most favorable light for the petitioner. How common it is for patent applications to be beset with the difficulties which attended these applications in their course through the Patent Office we do not know, and well may it be that these applications were “ diamonds in the rough ” awaiting discovery by and the touch of skilled hands
On the other hand, we are of the opinion that we must accept the patents as valid and as properly issued on the original applications. In other words, collateral attack may not be made in this proceeding upon the action of the Patent Office in the issuance of the patents and, since such an attack may not be countenanced, we must consider that the applications which were filed in 1909 and were in existence on March 1,1913, properly disclosed the inventions which were protected by the patents as issued in 1919 and 1920. While the foregoing conclusion may be at variance with the recent decision of the United States District Court for the District of New Jersey in the case of Texas Co. v. Warner Quinlan Co., decided January 8, 1931, wherein the court held that the petitioner, “ through extensive manipulation and alteration of specifications and claims, came out of the Patent Office with something entirely different from that which he took there in the original instance,” we know nothing of the facts upon which this conclusion is based and the opinion-sets out the conclusion of the court with very meager reasons therefor. Further, the foregoing decision is at variance with the report of the special master referred to in our findings and which was approved by the District Court having jurisdiction thereof. (United States v. Standard Oil Co. of Indiana et al., supra.) In view of the foregoing, we shall proceed on the theory that the patents were valid when issued and that the inventions as disclosed therein were properly disclosed in the original applications. Cf. also Standard Oil Co. of Indiana et al. v. United States, referred to in our findings
When viewed in that light, we find that the petitioner had on March 1, 1913, patent applications for cracking oil which antedated those on any process which has been perfected, except an application by one Dubbs, but, because of differences in the character of process there involved, Ave do not think the Dubbs application materially affects the value with which we are concerned. The petitioner’s applications contained seven basic features, one or more of which are embodied in every successful commercial process which has since been placed in operation.. The Holmes-Manley process, now owned and operated by the Texas Company and almost universally recognized as the highest embodiment of the art of bulk pressure distillation, makes use of the seven features disclosed and contributed by the petitioner’s patents. The Burton process which was perfected and placed in successful operation prior to March 1, 1913, makes use of two of the aforementioned features of petitioner’s patents. The foregoing process demonstrated the practicability of a cracking process on a large commercial scale. It also demonstrated what had theretofore been considered impossible and what had been carefully avoided by men in the oil industry, namely, the use of pressure in an oil-cracking process. Prior to that time pressure in its relation to cracking oil was well known, but it was very much feared because of the dangers attending its use. The two features in the petitioner’s process which are common to the Burton process are those having to do with the use of pressure.
In the next place, we think it fairly established and we have found as a fact that there was a shortage of gasoline on March 1, 1913, both present and reasonably to be anticipated, and that the oil industry then realized that the demands for gasoline could not be met from the crude-oil production then reasonably to be expected unless some better method could be devised to secure a higher percentage of gasoline from crude oil. At that time the automobile industry was well established. The status of that industry on March 1, 1913, and our conclusions as to its reasonably certain favorable future prospects are set forth by us in the case of James Couzens, 11 B. T. A. 1040, and need not be here repeated other than to state that the data here furnished amply confirms what we said in the Gouzens case where, in discussing the automobile industry, we said that “ it had passed the incipient stage and in 1913 its only uncertainty was the breadth of its future expansion.” Since the auto'mobile was the most important factor in the increased demand for gasoline, it is worthy of notice that the consumption of gasoline
Manifestly, if the demand for, and production of, cracked gasoline could have been accurately forecast on March 1, 1913, and if on the same date a person had had the right under a patent or patents under which he could have produced the additional gasoline needed to the exclusion of all other persons, it is easy.to see that such a property right would have been of great value. In substance, such is the contention of the petitioner, namely, that it could have been reasonably foreseen on March 1,1913, that approximately 800,000,000 barrels of gasoline would be supplied by a cracking process or cracking processes during the next 17 years and that the dominating or controlling factor in such production lay in the petitioner’s patent applications here in question. At that time the Burton process was in commercial operation and the owner thereof had, in 1913,
In the first place, we are unwilling to say that there was such a reasonable expectation on March 1,1913, of a shortage of 800,000,000 barrels of gasoline to be met over the following 17 years through the use of a cracking process or cracking processes that patents on a cracking process would have been dealt with on that basis. By this we do not mean to reflect on the ability or integrity of Mr. Westcott, who gave his opinion to that effect. "We are convinced that he is a man of the highest attainments as an analyst in the oil industry, to which he has devoted his attention for the past 13 years. However, the opinion as given was not that of a man who was familiar with the situation in the oil industry on March 1, 1913, but rather of one who would now say what he insists could have been said on March 1, 1913, on the basis of facts then known. Of course, such testimony may be competent, but its weight will depend on a multitude of factors which are present to a greater or less extent in evidence of this character. In brief, it may be said that one would be little short of a prophet and endowed with supernatural powers to be able to say in 1930 that if he had scanned the oil horizon on March 1, 1913, he could have foreseen not only the increased demand for gasoline, but also the manner in which this increased demand would be met. Particularly is this true in the oil industry, which is referred to in the book of this witness as the least understood of all industries and where data even as to the available supply on a given date is necessarily only an estimate. Further, even if we knew the available supply and if we could foresee the future de
In the next place, what did the applications contain on March 1, 1913, which made them of value in meeting the shortage of gasoline referred to above? The petitioner says that the value lies in the fact that his “inventions dominate the successful processes practiced today and did so on March 1, 1913,” and that the important, successful processes as now operated could not be carried on except with his permission and upon the payment of royalties to him. We have found as a fact that of the seven important features disclosed by the petitioner’s applications, one or more of these were contained in each of the successful cracking processes which have since been perfected. Whether this means that each of these processes was dominated by that of petitioner we shall not attempt to say, though we have found as a fact that the Burton process was dominated as to two features and the Holmes-Manley process as to seven features by the Adams patents. In view of the importance attaching to the various processes which have been developed and the common features found in all of them, it may seem unusual that patent infringement litigation has not resulted therefrom, though the explanation seems to be that the powerful oil companies elected to compromise their conflicting claims through the exchange of reciprocal licensing agreements rather than resort to expensive litigation. Because of this interchange of license agreements, an action was brought by the Government against the various companies involved on the ground that such action resulted in a violation of the Sherman Anti-Trust Act, which contention was sustained. United States v. Standard Oil Co. of Indiana et al., supra. In that action the court was divided as to the right of the Government to attack the validity of the patents in that proceeding and further found it unnecessary to determine their validity. The court did, however, state that an independent producer “ could hardly engage in the process of refining gas by a cracking process without infringing one or more of. the patented cracking processes.” As shown by our findings, the action of the District Court was recently reversed by the Supreme Court as to the antitrust feature (Standard Oil Co. of Indiana et al. v. United States, supra), and the court found it unnecessary to consider the validity or scope of the cracking patents, though it accepted them as presumptively valid. Further, the evidence is unmistakably to the effect that one of the major considerations which enabled the Texas Company to negotiate favorable reciprocal licensing agreements with the important oil-producing companies was that it was the owner of the patents which were issued on the basis of the applications here in question. This is particularly true in the case of the
In the next place, to meet the requirement often reiterated by us to the effect that the commercial and practical success of the invention disclosed by a given application must have been demonstrated on a given basic date in order to show a value therefor, the petitioner relies on the fact that on March 1, 1913, the Burton process was a demonstrated success and that two of its features were dominated by the petitioner’s applications. But in whatever light the Burton demonstration may be viewed in its relation to that which was disclosed by the petitioner’s applications, we think it must be recognized that the petitioner, in approaching a prospective purchaser, could not have shown more than that two of his basic features had been demonstrated by another process which was in commercial operation and which was covered by outstanding patents. Under such circumstances it would seem reasonable' to say that such prospective purchaser would have considered that he was purchasing something which almost certainly would require litigation before he could come into complete enjoyment of his full rights. In other words, at best he would not have been purchasing an issued patent on a demonstrated process then in operation, but only an application for a patent (then in a state of rejection) when some of the features therein were then in commercial operation under the assumed protection of issued patents.
On the other hand, the Commissioner contends not only that there had been no successful commercial demonstration at March 1, 1913, but also that the inventions disclosed by the applications were a demonstrated failure on that date. The basis of this claim is the Jacks Bun experiment, which was started in 1911 and 1912 by the petitioner, in conjunction with a syndicate, for the purpose of demonstrating what petitioner had invented. The project was undertaken on the basis of an option agreement under which the syndicate members agreed to pay petitioner a small salary and to supply $12,500 for experimental purposes in return for an option to acquire a half interest in petitioner’s invention when and if they were a demonstrated success. The syndicate members advanced more than
The Commissioner also contends that at most the petitioner,had only a 60 per cent interest on March 1, 1913, in his inventions and applications for patents thereon for the reason that he had entered into a contract with one Rogers in 1907 under which Rogers had advanced $5,000 to petitioner and in consideration therefor petitioner had agreed to grant to Rogers an interest of 40 per cent in his inventions and patents thereon. The evidence largely relied upon in support of the foregoing contention is a copy of the findings of fact and conclusions of laAv which were found and decided by the Supreme Court of New York in a suit instituted in 1922 by Rogers against petitioner and the Texas Company on account of the alleged contract referred to above. By stipulation of the parties it was agreed that the copy of the said findings of fact and conclusions of law as submitted with other facts which were stipulated was a true copy, but we find nothing in the record to justify the conclusion that said copy was offered or accepted in evidence as proof of the facts therein found. In fact, at the hearing the petitioner stated “ they have asked us to stipulate the judgment in the Rogers case, and I have stipulated as to the fact, but when it is offered I am going to object. The government is not a party and if they claim Rogers
Other features were urged upon us by the respective parties as tending to show value or lack of value on the basic date in question, but it would serve no useful purpose to extend our discussion further. Suffice it to say that we have carefully considered all evidence and arguments presented and have endeavored to roach a conclusion which we think fair and reasonable. And in failing to comment more at length on the expert testimony offered by the Commissioner, we have not overlooked the high qualifications of his witnesses nor the opinions expressed by them. Nor have we attempted to assign a definite weight to any of the evidence offered, and admittedly no particular evidence or mathematical formula forms the basis of oursconclusion. The only valuation offered by the petitioner’s witnesses was that of $25,000,000, whereas the Commissioner’s witnesses testified only that there was no value. Obviously, it is not possible to reconcile these widely divergent views. The most we can say is that we are satisfied that a willing purchaser, skilled in the art with which we are concerned and fully cognizant of all conditions as they existed and were reasonably contemplated at that time, would have recognized a fair market value attaching to the applications at March 1, 1913, though we are not convinced that he would have considered "a purchase on anything like the high valuation urged by the petitioner. Too little had been proven and the hurdles to be overcome before realization thereon were too great. And, likewise, we think the petitioner, even when trading on equal terms with the aforementioned purchaser, would have gladly disposed of his rights for an amount far less than that now claimed. Of course, if we would ascribe a state of omniscience to these parties, a different conclusion might be reached, but we do not understand that we are to fix value in that way even in the little known and highly technical oil field with which we are concerned. And, too, we agree with the Commissioner that, other things being equal, the issuance of a pat
At the conclusion of his oral argument, counsel for the Commissioner called our attention to the fact that the contract of petitioner with the Texas Company provided for the assignment of some 17 applications for patents which were filed subsequent to March 1, 1913, as well as the two applications heretofore discussed which were filed in 1909, and that the evidence of value offered relates entirely to the two applications which were filed in 1909. He accordingly urges that, since no segregation of income produced under the contract has been made, it is not possible to say whether the income derived from the contract was produced by the applications filed prior to March 1,1913, for which we have determined a fair market value on that date or from applications filed subsequent to March 1, 1913, for which there was apparently no cost to petitioner, and that therefore the determination made by the Commissioner which would subject to tax the entire amount received under the contract should be sustained. On a consideration of the entire record we are convinced that the only applications which were considered of any appreciable value under the contract were those filed in 1909. That is certainly the basis on which the case was presented by both parties in the extended hearing and the evidence in the case tends to show that what petitioner had which was of value was those applications filed in 1909. In fact, it would appear that the greater part of the value attached to one of these applications, namely, the process application. Under the first contract, executed February 27, 1919, the “ liquidated royalties ” to be paid the petitioner were to be paid “ during such time as the Company shall operate under the claims ” of the patent issued on the process application. When the supplemental or amended agreements were executed the process patent had
The correct view, we think, under the circumstances of this case, is that the petitioner had property on March 1, 1913, of a fair market value now determined by us; that, through the execution of a contract in 1919 by which the property was sold and assigned to the Texas Company, the petitioner would receive income over a period of years not greater than the life of the process patent; and that in the absence of better evidence as to a more equitable means of providing for the return of the capital involved, a subtraction should be made in each of the years here in question of $44,117.65 (one-seventeenth of $750,000).
Reviewed by the Board.
Judgment will be entered under Bule 50.
Dissenting Opinion
dissenting: I dissent from the views expressed m the majority opinion wherein it is held:
The correct view, we think, under the circumstances of this case, is that the petitioner had property on March 1, 1913, of a fair market value now determined by us; that, through the execution of a contract in 1919 by which the property was sold and assigned, to the Tea/as Company [italics supplied], the petitioner would receive income over a period of years not greater than the life of the process patent; and that in the absence of better evidence as to a more equitable means of providing for the return of the capital involved, a subtraction should be made in each of the years here in question of $44,117.65 (one-seventeenth of $750,000).
I find no basis in tbe applicable revenue act for providing that petitioner, who parted with title to his patents at the time of their sale to the Texas Company, shall have his return of capital (in this case March 1,1913, value of his patent application) over a period of 17 years. Of course if petitioner had licensed the use of his patents to the Texas Company and the payments received during the taxable years were payments received under that license contract, then he would have been entitled to deduct from his gross income one-seventeenth of the cost of the patents, which in the instant case was the March 1, 1913, value of these patent applications. Service Recorder Co., 2 B. T. A. 96. But these payments which petitioner received from the Texas Company were not payments under a license —they were sums of money received in payment for the assignment of petitioner’s title to the patents. For example, it is stated in the opinion, “Prior to the issuance of the foregoing patents, namely, on February 27, 1919, petitioner entered into an agreement with the Texas Company under which he sold and assigned [italics supplied] his rights under the applications in question.”
“ Pursuant to the foregoing agreement and certain supplements ■thereto, the petitioner received lump sums or down payments in 1919 and 1920 of $95,000 and $35,000, respectively.”
Paragraph (4) of the agreement between Adams and the Texas Company reads:
4. Adams agrees to execute immediately upon tbe execution of tbis contract:
(a) Assignment transferring all bis right, title and interest in and to the invention set forth in the United States Patent No. 976,975 granted to him on November 29, 1910 for Oil Converting process.
(b) Assignment or assignments transferring all bis right, title and interest in the inventions set forth in applications for Letters Patent in the United States identified as follows: [Here follows description of various applications and Letters Patent.]
So it seems to me this transaction between Adams and the Texas Company must be treated as a sale of patents, rather than as a license of patents. The gain or loss from this sale must of course be determined under the provisions of the applicable revenue act and valid
But if the contract which petitioner received in part payment for his assignment of the title to his patents to the Texas Company did not have a readily realizable market value in the year when received, then petitioner is entitled to recover his cost (which in this case is March 1,1913, value of his patent applications) before reporting any taxable gain. D. M. Stevenson, 9 B. T. A. 552. I know of nothing in the Revenue Act of 1918 which was in force at the time petitioner made his sale of patents to the Texas Company, nor in the Commissioner’s regulations interpretative thereof, which would require the petitioner to recover his capital costs in installments of one-seventeenth each year and render the balance as income.
Of course if he had not parted with title to the patents by virtue of sale to the Texas Company and the payments received were mere royalty payments under a patent license, then all the sums which petitioner received during the taxable years would be a part of his gross income and from this gross income he would be entitled to deduct as exhaustion in each of the taxable years one-seventeenth of the cost of his patents (in this case March 1, 1913, value). Service Recorder Co., supra. But, as I have already endeavored to point out, that is not the transaction which we have before us.
It will be readily conceded that the owner of patents having a’ March 1, 1913, value has the right to deduct from gross income one-seventeenth of such March 1,1913, value as exhaustion of the patents during such years as the patents have to run. Keystone Steel & Wire Co., 16 B. T. A. 617. But in the instant case, the Texas Company was the owner of the title to the patents in question, not the petitioner, and by reason of such ownership it was entitled to take ' deduction for exhaustion of the cost to it of these patents and doubtless did so in its corporation income-tax returns.