Bell Intercontinental Corp. v. United States

                    UNITED STATES COURT OF CLAIMS

Judgment is entered to this effect with the amount of recovery to be determined pursuant to Rule 47(c).

OPINION OF COMMISSIONER /*/

This is a suit for refund of income taxes for the years 1953-1958 and excess profits taxes for the year 1953. At issue is whether payments received under each of nine separate agreements transferring patent and other rights were payments for the sale of those rights taxable as long-term capital gains or payments for the license of such rights taxable as ordinary income. ¹

Plaintiff is a successor in interest, by consolidation, to the former Bell Aircraft Corporation (Bell), an aircraft manufacturer. During the years involved in this suit, 1953-1958, Bell received certain payments pursuant to seven agreements transferring patent and other rights known as the Houde, Square D, Weatherhead, Wiesner-Rapp, Scovill, Prime Mover and Agusta Model 47-J agreements (which will be discussed below). For the years 1953-1956, Bell reported the payments on its income tax returns as ordinary income and paid the taxes thereon. For the years 1957 and 1958, Bell reported the payments on its tax returns as long-term capital gains and the Internal Revenue Service assessed various tax deficiencies which were paid by Bell. Bell then filed claims for refund for the years 1953-1958 which were disallowed, whereupon the present suit was instituted. Subsequently, defendant asserted, by way of offset, claims in regard to payments received by Bell in some of these same years pursuant to two other agreements transferring patent and other rights known as the Agusta Model 48 and Nippon agreements (which will also be discussed below).

By way of background, a patent confers upon the owner the right to exclude others from making, using or selling the invention during the life of the patent, and in order that a transfer constitute a sale, there must be a grant of all substantial rights of value in the patent. The transfer of anything less is a license which conveys no proprietary interest to the licensee. E.g., Waterman v. MacKenzie, 138 U.S. 252, 255 (1891); Merck & Co. v. Smith, 261 F. 2d 162, 164 (3d Cir. 1958); Lockhart v. Commissioner, 258 F. 2d 343, 349 (3d Cir. 1958). Whether a transfer constitutes a sale or license is determined by the substance of the transaction and a transfer will suffice as a sale if it appears from the agreement and surrounding circumstances that the parties intended that the patentee surrender all his substantial rights to the invention. Rose Marie Reid, 26 T.C. 622, 632 (1956); Eterpen v. United States, 124 Ct. Cl 20, 28-30, 108 F. Supp. 100, 104-05 (1952), cert. denied, 346 U.S. 813 (1953). The question does not depend upon the labels or the terminology used in the agreement; hence, the fact that an agreement is termed a license and that the parties are referred to as licensor and licensee is not decisive. E.g., Kronner v. United States, 126 Ct. Cl. 156, 163, 110 F. Supp. 730, 734 (1953); Watson v. United States, 222 F. 2d 689, 691 (10th Cir. 1955); Kimble Glass Co., 9 T.C. 183, 190 (1947). Nor is the question governed by the method of payment, and it is, therefore, immaterial that payment is based on a percentage of sales or profits, or on an amount per unit manufactured. E.g., Rose Marie Reid, supra, 26 T.C. at 632: Myers, 6 T.C. 258 (1946); Allen v. Werner, 190 F. 2d 840 (5th Cir. 1951). Moreover, clauses in an agreement permitting termination by the grantor upon the occurrence of stated events or conditions will not preclude the transaction from being considered a sale; such clauses are uniformly treated as conditions subsequent, akin to provisions in realty conveyances calling for reversion of title previously vested. Kronner v. United States, supra, 126 Ct. Cl. at 163, 110 F. Supp. at 734; Commissioner v. Celanese Corp., 140 F. 2d 339, 341-42 (D.C. Cir. 1944); First National Bank of Princeton v. United States, 136 F. Supp. 818, 822-23 (D. N.J. 1955); Massey v. United States, 226 F. 2d 724, 727 (7th Cir. 1955). The fact, too, that the grantee has the right to terminate the agreement at will does not defeat a sale. E.g., Allen v. Werner, supra, 190 F. 2d at 842; Lawrence v. United States, 242 F. 2d 542 (5th Cir. 1957); Myers, supra, 6 T.C. at 264; Golconda Corp., 29 T.C. 506 (1957).

It is in this setting that we now examine each of the nine agreements here involved.

THE HOUDE AGREEMENT

Bell and Houde Engineering Corporation entered into an agreement dated September 15, 1940, whereby Bell granted to Houde the sole and exclusive right and license to manufacture, use and sell, and sublicense others to manufacture, use and sell an anti-shimmy device covered by a United States patent application Bell then had pending. ² The rights granted to Houde extended to the United States and its possessions, and the agreement was to remain in effect until the expiration date of the last expiring United States patent which might thereafter issue upon such application.

If both parties desired to bring suit for infringement, the suit could be brought in Bell's name, with the expenses and any recovery to be shared equally. In the event only one party desired to bring suit, such suit could be brought in Bell's name, with the expenses to be borne by and any recovery to be retained by the party instituting the suit.

The agreement could be terminated by mutual consent of the parties, and Houde could terminate by giving six months notice. Bell had no right of cancellation.

The agreement was expressly made subject to a cross-licensing agreement of the Manufacturers Aircraft Association (MAA), an organization comprised of aircraft manufacturers and holders of aircraft patents. Bell as a member of the Association was bound by the terms of this agreement and required, at the time of its agreement with Houde, to provide that it be subject to the prior MAA agreement. In essence, the MAA cross-license agreement was an agreement between all member aircraft manufacturers or holders of aircraft patents with respect to the manufacture and use of each other's inventions. The agreement was limited to airplane patents which had been issued by the United States and allowed the MAA member to manufacture the patented device only for installation on his own aircraft and not for sale to others. More particularly, under the terms of the MAA agreement each member of the Association agreed to grant all the other members a non -exclusive license to make, use and sell airplanes under all patents owned, controlled or licensed by the member. All licenses so granted were to run for the full term of the patent, regardless of whether the granting member withdrew from the Association prior to expiration of the patent. Upon withdrawal, however, the member lost all his right to patents owned or controlled by the other members. See Young v. Commissioner, 269 F. 2d 89, 91-92 (2d Cir. 1959). The rights granted under the license were subject to the following limitations: (1) they did not extend to the invention until and unless a patent was issued by the United States Patent Office; (2) they applied to airplane patents only as defined by the agreement; (3) the rights were limited to the manufacture of the invention for installation on the member's own aircraft and not for sale to others. Under the MAA agreement a member was given a right to receive royalty income contigent upon the following conditions: (1) the issuance of a patent by the United States Patent Office; (2) submission of a claim to the MAA; (3) the MAA in an arbitration proceeding, upon the application of the member, determined that the invention sufficiently advanced the art so as to entitle the member to a monetary award and payment from other members; (4) other members of the MAA elected to manufacture the device for installation on aircraft manufactured by them.

Some 10 months after the Houde agreement was executed, the patent on the anti-shimmy device was issued. Within 30 days after this, Bell reported the patent to the MAA and requested royalties on the device. The usual MAA arbitration proceedings were held, and the MAA made an award to Bell. Later, the MAA made another award to Bell which removed the limit on the maximum compensation Bell could receive on the device and stated that royalty payments on the device were to continue until the patent expired. During the years involved in this suit, three MAA members (Boeing, Lockheed, and Douglas Aircraft companies) manufactured the anti-shimmy device for use on their airplanes and by virtue of the MAA award, paid Bell royalties of some $ 59,000.

Shortly after the execution of the Houde agreement and with the increase in tempo of World War II in Europe, the agreement between Bell and Houde was amended to provide that if and to the extent that Houde or its sublicensees failed to supply the reasonable requirements of Bell and other United States aircraft manufacturers for the anti -shimmy device, Bell was to have the right to have manufactured or itself manufacture the anti-shimmy device and to use and sell the device. Houde was one of the country's leading manufacturers of shock absorbers and other automotive parts, and the purpose of the amendment was to insure a second source of supply and protect Bell (and presumably the United States Government, its principal, if not only customer) in the event of a catastrophe or some other unforeseen event which would prevent Houde from meeting Bell's needs. Other amendments to the Houde agreement were also effected adjusting the rate of royalty payments to reflect the market demand for the anti-shimmy device and to reduce the royalties payable by the United States.

The factual situation thus recounted points to the conclusion that Bell transferred all its substantial rights in the anti-shimmy device to Houde and that the Houde agreement, therefore, constituted a sale rather than a license. Bell granted to Houde, subject to the MAA cross-license agreement, the sole and exclusive right to manufacture, use and sell the invention. The rights thus transferred extended to the United States and its possessions, and the agreement lasted until the expiration date of the last patent that might issue upon the invention. Houde was granted the right to bring suit for infringement in the name of Bell and to retain any recovery in the event Bell should not desire to join in such suit. Bell had no unilateral right to terminate the agreement, although Houde could terminate on six months notice. Thus, upon execution of the Houde agreement, Houde and its sublicensees, if it chose to sublicense, became not only the holder of all substantial rights in the patent, but stood in the place of Bell as holder of the invention in the United States and its possessions for the life of any patent which might thereafter issue upon such application. So long as Houde lived up to the terms of its agreement, there was no way in which Bell could recapture its patent or even manufacture for its own use without the consent of Houde.

Nor is a different result required by reason of the fact that the transfer to Houde was subject to the MAA cross-license agreement. Under the MAA agreement, each member was required to contribute its inventions and patents, and all future agreements with non-MAA members were expressly subject to this limitation. The MAA agreement was, therefore, a previously imposed limitation upon, not a reserved right to, the invention. Stated otherwise, Bell, by reason of its membership in the MAA, granted what amounted to a non-exclusive and irrevocable limited license for all other members of the Association to manufacture and use the invention -- when patented -- in the planes they themselves produced. When Bell later granted to Houde the exclusive right, subject to the MAA agreement, to manufacture, use and sell the invention, Bell divested itself of all control and ownership right in the invention, the effect of the reference to the MAA agreement being to recognize the prior limited grant to other MAA members to manufacture and use, but not to sell, the device. By analogy, the Houde transaction would thus seem no different in principle than one in which a grantor conveys a fee simple interest in land, subject to an irrevocable easement in perpetuity the grantor had previously conveyed to a third party. The fact that the grantor in such circumstances reserved the right to obtain future payments from the easement holder does not mean that the grantor retained a continuing property interest in the realty -- indeed, in the present illustration he divested himself entirely of that; it means rather that the grantor retained a contractual right vis-a-vis the easement holder to receive payments for an interest already conveyed. Similarly, Bell's right -- dependent upon the MAA arbitration proceedings -- to receive future payments for the limited license it previously conveyed was based not on a continuing proprietary right in the invention, but on a contractual right to receive payments for a prior transfer.

Though a "hard" precedent is lacking, the case law, too, would indicate that a sale is not defeated because the agreement was subject to an existing limited license previously granted. Thus in General Aniline & Film Corp. v. Commissioner, 139 F. 2d 759 (2d Cir. 1944) a sale was held to have taken place notwithstanding that the patent assignment was to be "subject to all prior commitments of * * * [the grantor] including certain exclusive obligations to various named corporations." Id. at 760. In the court's view it seemed to be of no significance, with respect to the transfer of title, whether, when a patent is assigned, the assignee simultaneously grants a license to the assignor or the assignor reserves a license. "Nor does it seem to us important, in such a context [the court added] , that the assignor, before making the assignment, had granted to others some rights under the patent." Id. at note 2. ³ Likewise in Rollman v. Commissioner, 244 F. 2d 634 (4th Cir. 1957), an agreement was found to be a sale notwithstanding that it was apparently subject to two existing non-exclusive licenses previously granted. ⁴ Contrary is First National Bank of San Diego v. United States, 200 F. Supp. 274 (S.D. Cal. 1961), holding that the grant of an exclusive license to make and sell a patented invention, subject to a previously granted non-exclusive license, was not a sale. To constitute a sale, the court concluded, a conveyance is required of all substantial rights given by a patent when issued and, therefore, a sale is not accomplished by a grant of all substantial right remaining in the transferor at the time of transfer. Alternatively, the court considered that even if the latter method of appraisement was the proper criterion, the transferor's retention of the right to receive royalties from the limited license constituted retention of a substantial right. The first basis for the holding -- that a sale requires transfer of all substantial rights in the patent when issued -- would appear inconsistent with what would seem an established principle that for capital gain purposes, a taxpayer may sell a partial interest in an invention. E.g., Kavanagh v. Evans, supra, 188 F. 2d at 236; Walen v. United States, supra, 273 F. 2d at 602, note 3. Indeed, it has been held that for capital gain purposes the patent grant may be separated into different fields of application and each field transferred to a different transferee, with each transfer qualifying separately as a sale. Rouverol, 42 T.C. 186 (1964). To like effect, capital gain treatment has been allowed for a transfer limited to one industrial use only, First National Bank of Princeton v. United States, 136 F. Supp. 818, 823-24 (D.N.J. 1955); for a transfer of only one of the claims in the general patent, Merck & Co. v. Smith, 261 F. 2d 162 (3d Cir. 1958); and for a transfer limiting the use of the patent to a particular territory or industry. United States v. Carruthers, 219 F. 2d 21 (9th Cir. 1955); cf. American Chemical Paint Co. v. Smith, 131 F. Supp. 734 (E.D. Pa. 1955). ⁵ Nor can I agree that the grantor's retention in the San Diego case of a right to receive future payments under the limited license constituted the reservation of a "substantial right" in the patent. The "substantial right" in a patent, the retention of which by the grantor will preclude a sale, has reference -- as seen above -- to the substantial property right in a patent, i.e., the right to exclude others from making, using or selling under the patent grant -- and not to the grantor's contractual right to obtain future payments in return for his conveyance of that property right. ⁶

Allied Chemical Corp. v. United States, supra, note 4, on which defendant places emphasis, is clearly distinguishable from the situation here. In Allied, the court held that the taxpayer was not entitled to capital gain because the transfer of patent rights by the grantor expressly reserved in him the right to grant a non-exclusive license in the same field to another party. Cf. Kavanagh v. Evans, supra, 188 F. 2d at 236. Here, however, Bell's grant of an exclusive license to Houde was not subject to any such reservation; Bell reserved no right to grant a non -exclusive license either to itself or anyone else, the MAA agreement being -- as pointed out before -- a prior limitation upon, not a reserved right to, the invention in question.

Likewise not negating a sale is the provision in the agreement permitting Bell to manufacture, have manufactured, use and sell the anti-shimmy device in the event Houde or its sublicensees failed to supply the reasonable requirements of Bell and other United States aircraft manufacturers. Considering (1) that the purpose of the amendment was to insure a second source of supply and to protect Bell in the eventof a catastrophe or some other unforeseen event which would prevent Houde from meeting Bell's needs, and (2) that as further protection Bell relied not only on Houde's position as a leading national concern of automotive parts and shock absorbers, but also conducted a survey of the financial and manufacturing resources of its licensees, the reserved right of Bell to manufacture for its own use would seem so insubstantial as to be of little tangible value. Monie S. Hudson, 15 TCM 284 (1956); Arthur C. Ruge, 26 T.C. 138 (1956); Puschelberg v. United States, 330 F. 2d 56 (6th Cir. 1964). Moreover, this "second source" provision is not different in effect from provisions frequently included in patent agreements which permit termination upon the happening of stated subsequent events beyond the control of the grantor, such as failure by the grantee to meet a minimum production volume or to use its best efforts in marketing the invention. Such provisions have uniformly been held to be consistent with a sale of patent rights. E.g., Watson v. United States, 222 F. 2d 689 (10th Cir. 1955); Kronner v. United States, 126 Ct. Cl. 156, 110 F. Supp. 730 (1953); Golconda Corp., 29 T.C. 506 (1957); Dreymann, 11 T.C. 153 (1948). Without significance is the clause in the agreement enabling infringement actions to be brought in Bell's name. This is not the reservation of a proprietary right in the invention but a procedural matter in no way determinative of whether the grantor has retained any substantial right in the patent. E.g., Merck & Co. v. Smith, 261 F. 2d 162, 165 (3d Cir. 1958) ; Watson v. United States, supra, 222 F. 2d at 692; Commissioner v. Celanese Corp., 140 F. 2d 339, 342 (D.C. Cir. 1944); First National Bank of Princeton v. United States, 136 F. Supp. 818, 822 (D.N.J. 1955); Rouverol, 42 T.C. 186, 193 (1964). Moreover, Leubsdorf v. United States, 143 Ct. Cl. 165, 164 F. Supp. 234 (1958), on which defendant relies, does not resemble the present factual situation. In Leubsdorf, the taxpayers claimed that certain payments were received under a 1940 contract in return for the sale of patent rights and should be treated as capital gains. The exclusive rights to the patent had been granted to four different parties. The court specifically pointed out that agreements following the alleged 1940 sale of the patent recited on repeated occasions that the plaintiff taxpayers were still "the owners." The court held that the "multiplicity of transactions involving these patents" by the original owners with other parties after the original owners had claimed to have sold the patents "negative the idea of such an absolute sale." 143 Ct. Cl. at 174, 164 F. Supp. at 239. Here, on the other hand, Bell at no time entered into a licensing agreement of any kind with respect to the anti-shimmy device after the agreement with Houde. And changes in the Houde agreement varying the terms of payment and agreed to by both parties are in no way inconsistent with a sale. The fact that parties to a contract later agree on adjustments in the rates to be paid has no relation to the question whether the grantor retained substantial proprietary rights in himself.

In summary, the Houde agreement constituted a sale and not a license and the payments received by Bell pursuant thereto were properly taxable as long-term capital gains rather than ordinary income.

THE SQUARE D AGREEMENT

Bell and the Square D Company entered into an agreement dated March 1, 1945, whereby Bell granted to Square D an exclusive license to manufacture, use and sell a mach speed indicator covered by a patent application Bell then had pending. ⁷ The agreement was to be effective for the duration of World War II, plus six months, with an option, which Square D exercised, to renew the agreement for the life of the last expiring patent in the agreement. ⁸ The Square D agreement was subject, in effect, to the MAA cross-licensing agreement and Bell reserved the right to have manufactured and/or itself manufacture the instrument for its own use in the event Bell's requirements could not be met by Square D. The original agreement did not give Square D the right to sublicense others; however, in August 1951, the parties entered into a supplemental agreement to permit the sublicensing of not more than five other manufacturers of the instrument or for two years, whichever should be shorter, which supplemental agreement was entered into to provide additional procurement sources during the Korean war. The agreement of March 1, 1945 could not be assigned by Square D except with the entire assets and good will of the business to which it related. Bell could cancel the agreement if Square D became involved in legal proceedings relating to its solvency or if it failed to meet the minimum payments or to pay the required royalties. Suit for infringement could be brought in the name of either or both parties, with expenses and recoveries shared equally, or if only one party wished to sue, suit could be brought in that party's own name, with the expenses to be borne by and any recoveries to be retained by that party.

From these facts, it is concluded that Bell transferred all substantial rights in the mach speed indicator to Square D and that a sale thus resulted. That the original agreement did not transfer to Square D the right to sublicense others is without significance for such a limitation "does not interfere with the full use of the patent by the assignee * * * [and] the assignor retains no use of the patent for himself by reason of the limitation since he has granted the exclusive rights to the assignee * * * ." Rollman v. Commissioner, 244 F. 2d 634, 640 (4th Cir. 1957), and cases there cited; Parke, Davis & Co., 31 BTA 427, 430 (1934); Crook v. United States, 135 F. Supp. 242, 252 (W.D. Pa. 1955). The clause prohibiting the grantee from assigning its interest except in connection with the transfer of the entire assets and good will of the business to which it related was a reasonable method to protect Bell's right to royalty payments, and in no way negatived a sale. Allen v. Werner, 190 F. 2d 840, 842 (5th Cir. 1951); Carroll Pressure Roller Corp., 28 T.C. 1288, 1292 (1957). Further, the provisions authorizing cancellation by the grantor Bell upon Square D's involvement in legal proceedings relating to its insolvency or upon its failure to pay royalties or to make the minimum payments required were conditions subsequent which were entirely consistent with a sale. ⁹

THE WEATHERHEAD AGREEMENT

Bell and the Weatherhead Company entered into an agreement, dated June 15, 1955, granting Weatherhead an exclusive license to manufacture, use and sell under rights to an invention known as a pressure accumulator -- a device developed for use in the aero-dynamic control system for the Rascal missile. The agreement was substantially similar to the Square D agreement in that it was subject to the MAA agreement; it contained a second source provision whereby Bell reserved the right to manufacture the device itself in case Weatherhead could not meet its requirements; Bell was authorized to terminate the agreement in the event Weatherhead defaulted as to its minimum payments or became involved in legal proceedings relating to its solvency; Weatherhead could not assign the agreement except with the entire assets and good will of the business to which it related; and infringement suits could be brought in the name of either or both parties. For the reasons previously set out, it is concluded that the Weatherhead agreement was a sale.

THE WIESNER-RAPP AGREEMENT

Bell and the Wiesner-Rapp Company entered into an agreement dated May 1, 1948, whereby Bell granted to Wiesner-Rapp an exclusive license to manufacture, use and sell a spar milling machine and attachments covered by various patents. The agreement contained a "second source" and other provisions relating to infringement actions, restrictions on assignment, and termination by Bell in the event of Wiesner-Rapp's failure to make minimum payments or its involvement in legal proceedings pertaining to its solvency, which were similar to the provisions in the agreements previously considered.

The spar milling machine had been the subject of an earlier agreement between Bell and the Farnham Manufacturing Company for a term of years which would overlap the Wiesner-Rapp agreement for two years if it continued in existence -- and defendant points out there was thus a possibility an outstanding license was in effect for the machines covered by the Wiesner-Rapp agreement. Aside from the fact (as seen before) that a sale is not defeated because an agreement is subject to an existing limited license previously granted, the record shows that after the Farnham agreement was executed, Farnham was absorbed by Wiesner-Rapp. Accordingly, it is apparent that when Wiesner-Rapp entered into the agreement with Bell, it was vested with all rights to the patent without reservation -- a conclusion made doubly plain by the fact that the agreement itself was not by its terms subject to any other grant. The Wiesner-Rapp agreement, accordingly, constituted a sale.

THE SCOVILL AGREEMENT

Bell and the Scovill Manufacturing Company -- a company engaged in the business of manufacturing and selling fastening devices -- entered into an agreement dated April 1, 1954, whereby Bell granted to Scovill an exclusive license to manufacture and sell under rights to an invention covering a fastening device. The device is used to fasten two pieces of metal together, being used, for example, to fasten an access cover of a hole in the fuselage of a helicopter or to affix a panel over an access opening in electrical equipment.

The agreement contained a second source provision in case Scovill could not meet Bell's requirements; a restriction on assignment; provisions relating to the rights of the parties with respect to infringement actions; and a provision that in the event sales did not equal 300,000 units for any calendar year, the parties agreed to discuss the then current market toward possible revision or modification of the terms of the agreement, except that in the event the parties did not agree to any proposed revision or modification, Bell reserved the right to terminate the agreement on 90 days notice. The right to "use" the invention was not, however, conveyed. Even so, a transaction may still constitute a sale if such failure does not represent the retention of a substantial right by the grantor. Rollman v. Commissioner, 244 F. 2d 634 (4th Cir. 1957); Lockhart v. Commissioner, 258 F. 2d 343, 349 (3d Cir. 1958); Rose Marie Reid, 26 T.C. 622, 633-34 (1956); cf. Broderick v. Neale, 201 F. 2d 621 (10th Cir. 1953). ¹⁰ Whether the right retained is substantial depends, of course, upon the circumstances of each case; in the present case it is evident that this right had so little commercial value as to be entirely insubstantial. Scovill was in the business of manufacturing and selling fastening devices -- not in the business of manufacturing products which incorporated such devices and, therefore, the rights which had any value were the rights to manufacture and sell the device, not the right to incorporate the device into other products. In these circumstances, the rights to manufacture and sell the fastening device "amount to full and complete control, for the omission from the contract of the express right to use the patented article did not in any way limit or restrict * * * [Scovill] in its operations under the patent, or reserve any right of practical value to * * * [Bell]." Rollman v. Commissioner, supra, 244 F. 2d at 639. Likewise consistent with a sale is the provision permitting termination if sales did not equal 300,000 units in any calendar year. As seen before, provisions such as this, authorizing cancellation by the grantor if a specified number of the patented units are not sold in a prescribed period, are conditions subsequent which do "no more than provide that upon the occurrence of a stated event the grantor was empowered to terminate the exclusive right and title theretofore conveyed." Watson v. United States, 222 F. 2d 689, 691 (10th Cir. 1955). See also e.g., Golconda Corp., 29 T.C. 506, 509 (1957). It is concluded that the Scovill agreement was a sale.

THE PRIME-MOVER AGREEMENT

On February 20, 1950, Bell entered into an agreement with the Prime-Mover Company to sell its entire mechanized wheelbarrow business, including (i) all of Bell's interest in patents and patent applications identified with that device, and (ii) raw materials, tools, work in process, future orders, planning sheets, production know-how and related instructions for manufacturing the parts and assembling the machines to enable Prime-Mover to produce the mechanical wheelbarrows in a production line. The agreement provided, among other things, that as soon as possible after the signing of the agreement Bell (1) would deliver to Prime-Mover the subassemblies and parts, tools, jigs, fixtures, etc. relating to the mechanical wheelbarrow, and (2) would assign to Prime-Mover all its rights and title in and to the patents and patent applications covering the device. ¹¹ It appears from the record, however, that Bell did not actually execute an assignment of the principal wheelbarrow invention -- and defendant argues that this prevents the agreement from being a sale. ¹² The short answer is that the agreement to assign the invention -- without more -- vested in Prime-Mover the entire beneficial ownership (i.e., equitable title) in the invention since that agreement carried with it an implied agreement -- which was enforceable in the courts -- that the assignor Bell would take all steps necessary to vest title therein in the assignee. E.g., 2 Walker on Patents (Deller's ed.) Subsection 354, 355; Ridsdale Ellis, Patent Assignments and Licenses (2d ed.) Section 290. ¹³ The Prime-Mover agreement, it is concluded, constituted a sale.

THE AGUSTA MODEL 47-J AGREEMENT

Bell and Agusta ¹⁴ entered into an agreement dated November 1, 1956, under which Bell granted to Agusta the exclusive right to manufacture, assemble and sell the Bell Model 47-J helicopter in Italy. The agreement provided for the transfer to Agusta of (i) all the necessary patent rights, and (ii) Bell's production know-how, including engineering and manufacturing data which would enable Agusta to enter the helicopter business and to reproduce and duplicate the particular model helicopter. The agreement was for the full remaining term of the latest patent coming thereunder; however, Bell could terminate for breach by Agusta of any of the terms and conditions upon 60 days notice and Agusta's failure to cure the breach during that notice period. The agreement also contained a provision allowing either party to terminate it at any time after 10 years, with or without cause, upon 60 days notice, which provision was included for Bell's protection since it had no prior experience with Agusta's financial capacity or technical ability.

The patent rights furnished to Agusta were necessary in order to give it the legal right to manufacture the Model 47-J helicopter. As to the transfer of know-how, Bell had spent over $ 10,000,000 in the research, development and manufacture of the world's first commercially licensed helicopter, which helicopter was licensed and certified by the Civil Aeronautics Administration (now the Federal Aviation Authority) in 1946. ¹⁵ The subsequent larger and more powerful 47-J helicopter was developed and certified at an additional cost of $ 3,500,000. By virtue of the agreement with Bell, Agusta received the benefit of the FAA certification and obtained engineering know-how (from this and a prior agreement) which enabled it to build a small replica of the Bell Fort Worth plant and to enter into the helicopter business without the years of research and development and the expenditure of the millions of dollars which Bell had been required to spend in order to develop this over-all helicopter know -how. The know-how and capability to produce helicopters thus furnished to Agusta did not depend upon reference to the patent drawings. An added factor relevant to the agreement is that the "production life" of a particular Bell model helicopter is limited to eight years or less, though its "operating life" is unlimited. However, even had Bell discontinued a certain model of helicopter, it would take steps to prevent its being manufactured by anyone else without its permission, since a helicopter model is an asset even if Bell is not manufacturing that particular model.

Against this background, it is clear -- and the parties agree -- that the bundle of rights transferred by this agreement -- consisting of patents and engineering information or know-how -- constituted a capital asset, the know-how being an incident of the patents and thus taking on their nature as property. Heil Co., 38 T.C. 989, 1001-02 (1962); Dairy Queen of Oklahoma v. Commissioner, 250 F. 2d 503 (10th Cir. 1957); Gowdey's Estate v. Commissioner, 307 F. 2d 816 (4th Cir. 1962); Moberg v. Commissioner, 305 F. 2d 800 (5th Cir. 1962); Moberg v. Commissioner, 310 F. 2d 782 (9th Cir. 1962); United States v. Wernentin, 354 F. 2d 757 (8th Cir. 1965); Rev. Rul. 64-56, 1964-1 CB 133.

While there is thus no question that a capital asset was transferred by the agreement, the provision therein giving either side the right to terminate the agreement, with or without cause, at the end of 10 years necessitates the conclusion that the transaction constituted a licensing arrangement and not a sale. As in the case of realty where a conveyance in perpetuity is needed to constitute a sale, so in the case of a patent (and rights incident thereto) a transfer for the remaining life of the patent is generally a prerequisite for a sale. By this token, a transfer limited in duration to a period less than the remaining life of the patent, or a transfer -- as here -- terminable by the grantor not on the happening of a future event beyond his control but at his own discretion prior to the patent's expiration date will ordinarily constitute a licensing arrangement rather than a sale inasmuch as the transfer does not convey to the transferee all substantial rights in the patent. This is to say that when such power of cancellation exists, the conclusion is usually unavoidable that the grantor retained a substantial interest in the rights which he transferred. See Commissioner v. Sunnen, 333 U.S. 591, 609 (1948); Pickren v. United States, 249 F. Supp. 560, 561 (M.D. Fla. 1965), aff'd, 378 F. 2d 595 (5th Cir. 1967); Thomas D. Armour, 22 T.C. 181, 188-89 (1954); Young v. Commissioner, 269 F. 2d 89, 92-94 (2d Cir. 1959); Gregg, 18 T.C. 291 (1952), aff'd 203 F. 2d 954 (3d Cir. 1953); Treas. Reg. Section 1.1235-2(b).

In some cases, however, the grantor's reservation of the right to cancel at his own discretion will not preclude a sale where it appears from all the circumstances that the right so reserved has no practical value. Bannister v. United States, 262 F. 2d 175 (5th Cir. 1958). See also Young v. Commissioner, supra, 269 F. 2d at 92-93. ¹⁶ Plaintiff indicates in this connection that Bell's right to terminate at the end of 10 years had no commercial value because (i) the particular model helicopter would become obsolete within eight years; and (ii) once the know-how was transferred to Agusta it was indelibly implanted in its mind and hence could never be taken back. But while the production life of any model helicopter is relatively short, its operating life is virtually unlimited, and even though the production rights for a particular model helicopter have diminished over the years, these rights would still have sufficient value that Bell would take necessary steps to prevent any model helicopter from being manufactured without its permission, regardless of whether or not production of that model had been discontinued. For (as pointed out) Bell's patents and manufacturing know-how protect its assets, and a helicopter model is an asset even if manufacture of that model has been discontinued; and, indeed, the termination clause wasadmittedly included for Bell's own protection since Agusta's financial and technical ability to produce helicopters was unknown to it. Moreover, while some of the value of the manufacturing data and know-how would unquestionably be lost through the transfer since Agusta would retain most of the knowledge, yet Bell could sell the data and information to someone else after the 10-year period ended. See Pickren v. United States, supra, 249 F. Supp. at 561.

Plaintiff, in addition, places heavy emphasis on Heil Co., 38 T.C. 989 (1962), acq. 1963-1 CB 4, which, it says, squarely supports its argument that in the situation here presented Bell's right to terminate prior to the expiration date of the patents did not preclude a sale. In Heil, the taxpayer entered into an agreement transferring all patents, patent applications and inventions relating to its tractors, its trade name and substantial engineering and manufacturing information for $ 1 million. The agreement covered 14 basic patents and was for a period of 11 years, but was cancellable by either party at the end of five years, which period was prior to the expiration date of virtually all the patents involved. The Internal Revenue Service, seeking to defeat capital gain treatment for most of the $ 1 million payment, contended that although the patents transferred may have been capital assets held for more than six months, the engineering and manufacturing know-how was not such an asset, but was, in effect, merely a payment for the performance of personal services. The Tax Court disagreed and stated (p. 1003): "Concededly the patents here involved were long-term capital assets and were sold. The contracts under which they were transferred by way of sale likewise provided for the transfer of the engineering manufacturing information, or know-how, pertinent and necessary to the successful manufacture of products under the patents. In such situation, the information, or know-how, was an incident of the patents, took on the nature of such property, and constituted a long-term capital asset that also was sold." In short, the issue that was litigated in Heil was not whether the cancellation provision defeated a sale, but whether the manufacturing information, or know-how, constituted a capital asset. In these circumstances, Heil cannot be considered as a persuasive precedent for plaintiff's argument that Bell's reservation of the right to terminate at will prior to the expiration date of the patents did not prevent a sale. Cf. Pickren v. United States, supra. It is concluded rather that the reservation represented the retention by Bellof a substantial interest in the rights transferred to Agusta, which reservation is characteristic of a license and incompatible with a sale.

THE AGUSTA MODEL 48 AGREEMENT

Bell and Agusta entered into an agreement dated May 1, 1956, under which Bell granted to Agusta the exclusive right to manufacture and sell the Bell Model 48 helicopter -- an experimental model -- in Italy. The agreement provided for the transfer to Agusta of (i) all necessary patent rights, and (ii) Bell's production know-how, including engineering and manufacturing data which would enable Bell to reproduce and duplicate a Bell Model 48 helicopter. Pursuant to the agreement, Agusta paid Bell $ 40,000 for the transfer of this technical information and data. The agreement was for the full remaining term of the latest patent coming thereunder, but could be terminated by either party for breach of any terms or conditions upon 12 months notice and failure of the other party to cure the breach within that period. But unlike the Agusta Model 47-J agreement, there was no provision in this agreement giving Bell a right to terminate at will.

For the reasons previously set out, the technical information for which the payment was made constituted a capital asset. Moreover, since the agreement did not contain a provision allowing Bell to terminate at its discretion prior to the expiration date of the patents, it is concluded -- and defendant so concedes -- that the agreement constituted a sale.

THE NIPPON MODEL 47-D-1 AGREEMENT

Bell and Nippon ¹⁷ entered into an agreement dated September 19, 1952, under which Bell granted to Nippon the exclusive right to manufacture and assemble the Bell Model 47-D-1 helicopter in Japan. The agreement also gave Nippon sales rights as specified in a supplemental foreign dealer agreement under which Nippon was given the exclusive dealership rights for Bell helicopters in Japan and other countries. The foreign dealer agreement was cancellable by either party upon 90 days notice.

The Nippon agreement provided for the transfer to it of (i) all necessary patent rights, and (ii) Bell's production know-how, including engineering and manufacturing data which would enable Nippon to reproduce and duplicate the Bell Model 47-D-1 helicopter. The Nippon agreement was for the full remaining term of the latest patent coming thereunder, but could be terminated by Bell for breach by Nippon upon six months written notice and Nippon's failure to cure the breach within the notice period. In addition, the agreement could be terminated at the end of 10 years by either party, with or without cause, upon six months written notice, which termination clause was included for Bell's protection since it had no prior experience with Nippon and was not familiar with its technical ability or financial capacity.

In view of this termination provision, which is similar to the provision contained in the Agusta 47-J agreement, it is concluded for the reasons previously discussed that the Nippon agreement constituted a license and not a sale. ¹⁸

Findings of Fact

1. Plaintiff is a corporation organized and existing under the laws of the State of Delaware with an office and place of business at 103 Park Avenue, New York, New York.

2. (a) Plaintiff was formed on July 5, 1960, by the consolidation of Bell Aircraft Corporation, a New York corporation, Bell Aircraft Corporation, a Delaware corporation, and Wheelabrator Corporation, a Nebraska corporation.

(b) Plaintiff by reason of the aforesaid consolidation is the successor to Bell Aircraft Corporation, a New York corporation, and is now the sole and unqualified owner of any claims described in the petition filed in this action.

3. (a) This is a suit to recover income and excess profits taxes for the year 1953 and income taxes for the years 1954-1958. During the years 1953-1958, plaintiff received certain payments pursuant to the Houde, Square D (Kollsman), Wiesner-Rapp, Prime-Mover, Scovill, Weatherhead, Agusta (Model 47-J) and Bell Helicopter agreements, which agreements will be discussed below. Amounts received under these various agreements were reported on plaintiff's income tax returns for the years 1953-1956 as ordinary income, and the taxes were paid thereon. Amounts received under these various agreements were reported on plaintiff's income tax returns for the years 1957 and 1958 as long-term capital gains. Thereafter, various deficiencies were assessed and paid, and claims for refund of taxes were filed and disallowed. The present suit followed.

(b) Subsequent to the filing of the answer to the petition, defendant filed an amended answer, in which it asserted an offset in regard to certain additional amounts received pursuant to the Nippon and Agusta (Model 48) agreements, which agreements will be discussed below. Those amounts had been accorded tax treatment as long-term capital gains, and defendant's amended answer asserted that, unless plaintiff sustains its burden of proving that such tax treatment so accorded those payments was correct, defendant is entitled to an offset in regard to such payments to any refund of taxes which the court may ultimately allow.

THE HOUDE AGREEMENT

4. Bell Aircraft Corporation (hereafter referred to as "Bell") and Houde Engineering Corporation (hereafter referred to as "Houde") entered into an agreement dated as of September 15, 1940, covering rights to an anti-shimmy device under United States Patent Application Serial No. 256839-1/2.

5. (a) This anti-shimmy device was developed by George Hineman, an employee in the Landing Gear Division of the Engineering Department of Bell Aircraft Corporation, in the course of his work as an engineer to solve a problem of shimmying encountered with the front wheel on the tricycle landing system. This anti-shimmy device was a cylinder piston mechanism, like a shock absorber, which dampened the tendency of a plane's nose wheel to oscillate from side to side when the aircraft was taxiing at high speeds. It was designed for use on the nose wheel of Bell's then newlydeveloped tricycle landing gear for military aircraft being developed by Bell at that time. Hineman made an assignment of his rights to Bell Aircraft Corporation under its standard agreement with employees.

(b) This standard agreement was signed by an employee when he was hired by Bell and provided for his assigning to the company all inventions obtained by him during his employment. As a matter of company policy, the employee received $ 25.00 when he signed a patent application, $ 50.00 when the patent was issued, and 10 per cent of any royalties or other income Bell thereafter received from that patent. The company policy was in effect from 1940 to 1958 and later, the amounts increasing after 1958.

6. United States Patent Application Serial No. 256839-1/2 covering the anti-shimmy device was filed on February 17, 1939, and United States Letters Patent No. 2,284,148 was issued on said application on May 26, 1942.

7. The anti-shimmy device was reduced to practice by successful flight of the Bell P-39 aircraft incorporating such device and by acceptance by the United States Government of that aircraft in April 1939. The anti-shimmy device has no other use except on the nose wheel of the landing system of a plane.

8. Paragraph 1 of the Houde agreement of September 15, 1940 provided:

     Except as hereinafter provided, BELL does hereby grant unto HOUDE

10. The Manufacturers Aircraft Association, which is referred to in the Houde agreement of September 15, 1940, is a membership corporation comprised of most of the aircraft companies in the United States for the purpose of pooling or cross-licensing airplane patents. To be a member or "subscriber" of MAA, one must be an aircraft manufacturer or the owner of aircraft patents. Bell was a member of MAA, but Houde was not.

11. Article II of the MAA cross-license agreement, referred to in the Houde agreement of September 15, 1940, provided:

                   II. LICENSES AND POWERS GRANTED

                 III. COVENANTS OF FURTHER ASSURANCE

13. (a) In the event an aircraft patent was issued, the MAA cross-license agreement granted to members alone the right to manufacture the device in the United States and only for installation on aircraft manufactured by such member. It did not include the right to manufacture either outside of the United States or for sale to others.

(b) Under the MAA agreement, all licenses granted were to extend for the full term of the underlying patent, regardless of whether the granting member withdrew from the Association prior to the expiration of the patent. Upon withdrawal, however, the member lost all his rights to patents owned or controlled by the other members.

14. (a) Under the MAA agreement, Bell's right to receive royalty income or income of any kind from the anti-shimmy device was contingent upon the following conditions: (1) the issuance of a patent by the United States Patent Office; (2) submission of a claim to MAA; (3) a favorable determination of an award by MAA after arbitration; and (4) actual manufacture of the device by an MAA member for use only on such member's aircraft.

(b) Under the MAA agreement, a member was entitled to royalty or compensation for use of his patent in the event the patent (i) covered an invention which secured the performance of a function not before known to the art; (ii) constituted an adaptation for the first time to a commercial use of an invention known to the industry to be desirable of use but not used because of lack of adaption; (iii) was otherwise of striking character or constituted a radical departure from previous practice; or (iv) if either the price paid therefor or the amount expended in developing the patent was such as to justify the compensation claimed. Whether or not an issued patent met these tests was determined by the arbitration proceeding described above.

15. In July 1941, the time when the Houde agreement of September 15, 1940 here involved was executed, a patent on the anti -shimmy device had not been issued to Bell; rather, as set forth in finding 6, a patent on that device was first issued to Bell on May 26, 1942 -- some ten months after the Houde agreement here involved was executed.

16. After the patent was issued, Bell, within 30 days, reported it to MAA, indicating that it was asking for royalties on the anti-shimmy device. Thereafter, the usual MAA arbitration proceedings on such a claim for compensation were held, and an award was made to Bell by MAA on June 1, 1943.

17. By reason of the actual manufacture of the patented anti-shimmy device by Boeing, Lockheed and Douglas Aircraft companies, Bell, for the years at issue, 1953-1958, received under the MAA agreement approximately $ 59,036.51 as royalties.

18. The rights granted by the Houde agreement of September 15, 1940 extended to the territory of the United States of America and its possessions and all foreign countries.

19. Paragraph 5 of the Houde agreement of September 15, 1940 related to the rights of the parties with respect to infringement actions. If both parties desired to bring suit to enjoin infringement, the suit could be brought in Bell's name, with the expenses and any recoveries shared equally. In the event only one party desired to bring suit, such suit could be brought in Bell's name, with the expenses to be borne by and any recoveries to be retained by the party instituting the suit.

20. Paragraph 10 of the Houde agreement of September 15, 1940 provided that, unless previously terminated by mutual consent of the parties or unless terminated by Houde by giving six months notice in writing to Bell, the agreement shall remain effective until the date of expiration of the last expiring Letters Patent coming thereunder.

21. Bell and Houde entered into supplemental agreements to the agreement of September 15, 1940 on April 10, 1941, December 22, 1942, March 1, 1948 and August 7, 1953.

22. The supplemental agreement of April 10, 1941 provided that if and to the extent that Houde or its sublicensees shall at any time fail to supply the reasonable requirements of Bell and other United States aircraft manufacturers for devices embodying this invention, Bell shall have the right to manufacture or have manufactured for it the invention covered by the agreement and to use and sell such devices and parts thereof.

23. Bell was an airframe manufacturer, making the basic structure of the aircraft, and the manufacture of devices such as the anti-shimmy device was outside the scope of the company's general operations. It purchased or obtained from other sources the competent parts, such as wheels, electrical equipment, engines and propellers. Bell never manufactured nor assembled or had manufactured for it by other than Houde any anti-shimmy devices.

24. At the time it entered into the agreement with Bell, Houde was a national company and one of the country's leading manufacturers of shock absorbers and other automotive parts.

25. Bell had reserved the right to manufacture the anti -shimmy device or to have it manufactured for Bell's own use in accordance with a standard practice to provide two sources in the event of a catastrophic-type situation. Throughout World War II, Houde was able to and did fulfill all of the production requirements of Bell for the anti-shimmy device.

26. (a) The supplemental agreements of December 22, 1942, March 1, 1948 and August 7, 1953, referred to in finding 21, revised the rates set forth in the Houde agreement of September 15, 1940.

(b) More particularly, the supplemental agreement of December 22, 1942 reduced the royalty rate payable to Bell from 10 per cent to 4 per cent, reciting that:

     * * * both parties hereto understand that the Army Air Force now

     3. In consideration of the premises BELL hereby agrees, through

28. Bell executed a United States Air Force Unilateral Agreement Adjusting Royalties, as of April 1, 1951, in connection with the anti-shimmy device involved in the Houde agreement of September 15, 1940, and supplemental agreements thereto. Bell agreed to reduce the royalties payable by the United States on the anti-shimmy devices from 5 per cent to 4 per cent from and after April 1, 1951.

29. In the supplemental agreement of August 7, 1953 between Bell and Houde (which was completed and accepted by Bell on September 1, 1953 and revised the rate of payments (see finding 26)), it was agreed that from and after April 1, 1951 the royalty rate on the anti-shimmy device "charged or chargeable directly or indirectly to the government of the United States" was to be 4 per cent. As to the difference between the 5 per cent rate already charged to the United States between April 1, 1951 and September 1, 1953 and the 4 per cent rate, Bell agreed to make a refund to the United States, and Bell did so in November and December of 1953. The 1953 supplemental agreement between Bell and Houde further provided that on all sales of anti-shimmy devices after September 1, 1953, the royalty rate would be 4 per cent "in all cases where such royalties are charged or chargeable directly or indirectly to the United States Government."

30. The Houde agreement of September 15, 1940 and the supplemental agreements thereto expired by the terms of the basic agreement on May 26, 1959, when United States Letters Patent No. 2,284,148 expired.

31. For the years 1953-1958, Bell received the following amounts under the Houde agreement of September 15, 1940 and supplements thereto:

              Year                         Amount

THE SQUARE D (KOLLSMAN) AGREEMENT

33. Bell and Square D Company (hereafter referred to as "Square D") entered into an agreement, dated March 1, 1945, covering rights to a mach speed indicator under United States Patent Application Serial No. 528,534.

34. The mach speed indicator is an instrument for showing the speed of aircraft in relation to the speed of sound at sea level rather than the miles per hour in air speed indicators in use prior to its invention. The mach speed indicator shows the speed of the aircraft at any temperature, pressure or altitude as a fraction of the speed of sound, which varies depending upon those factors. It indicates to the pilot at a single glance, when the aircraft is approaching the speed of sound, where the phenomenon of "buffeting" or violent vibration may occur and cause difficulty in controlling the plane or possible structural damage. The device was not used on Bell's World War II propeller-driven P-39 fighter aircraft. While the device's principal utility is on subsequently developed jet aircraft, any airplane, whether conventional propeller or jet, is subject to buffeting as it approaches the speed of sound.

35. The mach speed indicator was developed by Bell employees in the course of their employment as the chief test pilot and the assistant chief project engineer, and was assigned to the company under the company's standard agreement with employees.

36. United States Patent Application Serial No. 528,534 was filed on March 29, 1944, and United States Letters Patent No. 2,424,511 issued on said application on July 22, 1947.

37. The invention covered by the patent application and Letters Patent was reduced to practice by completion of operating drawings of such instruments on or before October 23, 1943, and construction of three instruments by the Kollsman Division of Square D on or before September 1, 1944.

38. Paragraph 1 of the Square D agreement provided as follows:

     BELL hereby grants to SQUARE D an exclusive license to

40. Bell never manufactured or had manufactured for its own use by other than Square D (or Kollsman) any mach speed indicators. The manufacture of such devices was outside the scope of the company's general operations.

41. Kollsman Instrument Division of Square D Company was one of the leading instrument manufacturers for the United States Government and the aircraft industry. Kollsman Instrument Division of Square D, in fact, met all of Bell's requirements for the instrument. Bell's right to manufacture for its own use or have the instrument manufactured for its own use was provided in order to furnish a second or alternate source of production in case of some unforeseen event or catastrophe.

42. The agreement of March 1, 1945 was to remain in full force and effect for the duration of World War II plus six months, with an option to Square D to renew (within 30 days next following the six months period after the war) the agreement for the life of the latest patent coming thereunder. This option was exercised by Square D.

43. The agreement of March 1, 1945 could be canceled by Bell upon failure of Square D to make the minimum payments called for or in the event Square D should become involved in legal proceedings relating to its solvency. Bell could also terminate that agreement upon Square D's failure to pay all royalties due at the end of each three-month reporting period. There were no other provisions in the agreement for cancellation by Bell.

44. The agreement of March 1, 1945 could not be assigned by Square D except with the entire assets and good will of the business to which it related.

45. Paragraph 8 of the agreement of March 1, 1945 related to the right of the parties with respect to infringement actions. If both parties desired to bring suit to enjoin infringement, the action could be brought in the name of either or both parties, with expenses and any recoveries shared equally.In the event only one party desired to bring suit, such suit could be brought in that party's own name, with the expenses to be borne by and any recoveries to be retained by that party.

46. Bell and Kollsman Instrument Corporation, successor to Square D Company, entered into a supplemental agreement as of August 8, 1951, which agreement granted to Kollsman the right to sublicense not more than five other manufacturers of the instrument for military use during the Korean war or for two years, whichever should be shorter. This agreement was entered into in order to provide additional procurement sources during the Korean war. Pursuant to the supplemental agreement, Kollsman granted sublicenses to Bendix, Robertshaw-Fulton, Sunbeam and Greenleaf.

47. For the years 1953 through 1958, Bell received the following amounts under the agreement of March 1, 1945 and the supplement thereto:

              Year                         Amount

48. Bell Aircraft Corporation and The Weatherhead Company entered into an agreement dated June 15, 1955, covering rights to an invention known as a pressure accumulator.

49. The invention covered by the agreement dated June 15, 1955 consists of a hydraulic pressure accumulator of the piston cylinder type designed to absorb hydraulic shock and/or accumulating reserves of hydraulic fluid pressure for use in an aerodynamic control system for a missile. This invention was an improvement over previous types because the internal pressure was used to counteract the deformation of the [SYMBOL OMITTED] rings used to seal the inner pressure against ambient pressure and was developed by Bell for use on the Rascal missile manufactured for the government by Bell at that time. The invention was developed by employees of Bell and assigned to Bell under its standard agreement with employees.

50. Patent Application Serial No. 537,962 covering said invention was filed on October 3, 1955, and United States Patent No. 2,870,791 was issued on January 27, 1959.

51. The invention covered by said application and Letters Patent was reduced to practice by Bell by preparation of a test report including photographs of the device on June 30, 1954.

52. Paragraph 1(b) of the agreement of June 15, 1955 provided:

     Subject to the limited licenses required and to be granted as per

54. The Rascal missile program was an important part of Bell's business from 1953 until the project was concluded in 1958. At the time Bell entered into the agreement with Weatherhead, Bell expected to use this pressure accumulator on the Rascal missile and reserved the right to manufacture the device itself in case Weatherhead could not meet its requirements for the device.

55. The pressure accumulator covered by the agreement was outside the scope of Bell's manufacturing operations. At no time did Bell manufacture or have manufactured for its own use the devices covered by said agreement. Under the usual Bell procedure before a contract was entered into, Bell completed an entire review of a company, including its credit, types of customers, financial resources, and manufacturing potential and facilities. Bell investigated the credit status of Weatherhead but the record does not show whether the remainder of the pre-award survey was made. Following the execution of the Weatherhead agreement, a different hydraulic system was developed for the Rascal missile and for that reason the device was never used, although it could have been used anywhere anyone wanted to use a pressure accumulator.

56. Article 6 of the agreement of June 15, 1955 related to the rights of the parties with respect to infringement actions. If both parties desired to bring suit to enjoin infringement, the action could be brought in the names of either or both, with expenses and any recoveries to be shared equally. In the event only one party desired to bring suit, such action could be brought in its own name, with the right to use the name of the other party, and with all expenses to be borne by and any recoveries retained by the party bringing such action.

57. The rights granted by the agreement of June 15, 1955 extended to all of the United States and Canada.

58. Paragraph 10 provided that the agreement of June 15, 1955, unless sooner terminated as provided therein, was for the life of the latest patent coming thereunder.

59. The agreement of June 15, 1955 could be canceled by Bell upon failure of Weatherhead to remit the minimum payments called for by the agreement or in the event that Weatherhead should become involved in any legal proceedings relating to its solvency. Bell could also terminate upon Weatherhead's failure to pay any royalties due at the end of each three-month reporting period. These were the only provisions for cancellation.

60. The agreement of June 15, 1955 could not be assigned by Weatherhead except with the entire assets and good will of the business to which it related.

61. For the years 1953-1958, Bell received the following amounts under the agreement of June 15, 1955:

              Year                         Amount

62. Bell Aircraft Corporation and Wiesner-Rapp Company, Inc. entered into an agreement dated May 1, 1948 covering rights to three machines and attachments under United States Letters Patent Nos. 2,341,194, 2,284,972, 2,271,717, 2,264,508 and 2,409,903.

63. The inventions covered a spar milling machine and attachments invented by Bell to facilitate milling of aircraft spars produced by Bell in connection with its military aircraft production, together with a machine for drilling holes in aluminum and a pantograph also invented and used in connection with Bell's military aircraft production. The inventions were developed by employees of Bell and rights were assigned to Bell under its standard agreement with employees.

64. The inventions covered by said Letters Patent were reduced to practice by issue of the latest of the five patents (set forth in the agreement) on October 22, 1946.

65. Paragraph 1 of the agreement of May 1, 1948 provided:

     BELL hereby grants to WIESNER-RAPP, subject to the following

67. This spar milling machine had been the subject of an earlier agreement with the Farnham Manufacturing Company, dated September 5, 1940. The Farnham agreement was for a term of 10 years and contained a provision that Bell could, under certain circumstances, terminate the exclusive feature of that license and leave Farnham only a non-exclusive license. Farnham later became an operating division of Wiesner-Rapp.

68. Paragraphs 1 and 11 of the agreement of May 1, 1948 provided that, unless sooner terminated as provided therein, it shall remain in full force and effect for the life of the latest patent coming thereunder.

69. The agreement of May 1, 1948 could be canceled by Bell upon failure of Wiesner-Rapp to make the minimum payments called for or in the event Wiesner-Rapp should become involved in legal proceedings relating to its solvency. Bell could also terminate upon failure of Wiesner-Rapp to pay all royalties due at the end of any three-month reporting period. These were the only provisions for cancellation by Bell.

70. Article 8 of the agreement of May 1, 1948 related to the right of the parties with respect to infringement actions. If both parties desired to bring suit to enjoin infringement, such action could be brought in the name of either or both parties, with expenses and any recoveries shared equally. If only one party wished to bring suit, such action could be brought in its own name and at its own expense, with any recoveries to be retained by the party bringing the suit.

71. The agreement of May 1, 1948 could not be assigned by Wiesner-Rapp except with the entire assets and good will of its business or of that portion of its business to which it related.

72. Bell and Wiesner-Rapp amended the agreement of May 1, 1948 by a letter of Bell dated July 31, 1953, accepted by Wiesner -Rapp on August 5, 1953, and by an exchange of letters dated July 30, 1956 and August 2, 1956. The amendment accepted on August 5, 1953 was for the purpose of clarifying the description of the products, while the amendment of 1956 was for the purpose of reducing "royalties from 10 per cent to 5 per cent on Spar Mills of our manufacture which embody principles and claims disclosed in patent No. 2,341,194."

73. Bell and Wiesner-Rapp, on December 23, 1957, entered into a supplemental agreement to the agreement of May 1, 1948, by which Wiesner-Rapp agreed to pay and Bell agreed to accept a fixed sum in final and full payment of all amounts due and to become due under the agreement for machines covered by U.S. Patent No. 2,341,194. The agreement of May 1, 1948 remained in full force and effect for the remaining devices covered by the other patents.

74. For the years 1953-1958, Bell received the following amounts under the agreement of May 1, 1948 and supplements thereto:

              Year                         Amount

75. Bell Aircraft and Scovill Manufacturing Company entered into an agreement dated April 1, 1954 covering rights to a fastening device under United States Patent Application Serial No. 388,117.

76. The invention covered by said patent application and the agreement dated April 1, 1954 consists of a fastening device invented and developed by Bell for the purpose of fastening an access door in the cowling of a Model 47 helicopter. The invention was developed by employees of Bell and assigned to Bell under its standard agreement with employees.

77. The fastening device was only of use as a part of some other piece of equipment where it was necessary to fasten two pieces of metal together. The patented fastener operated with a simple turn by the fingers or a screwdriver, and replaced the usual nuts and bolts or other more cumbersome method of fastening. Common uses were to fasten an access cover of a hole in the fuselage of a helicopter or to affix a panel over an access opening in electrical equipment.

78. United States Patent Application Serial No. 388,117 was filed October 26, 1953, and United States Letters Patent No. 2,772,906 was issued on such application on December 4, 1956.

79. The invention covered by said application and Letters Patent was reduced to practice by preparation of a test report, including photographs of the device on November 20, 1952.

80. Paragraph 1 of the Scovill agreement provided:

     BELL hereby grants to SCOVILL an exclusive license to manufacture

(b) Scovill was engaged in the business of manufacturing and selling fastening devices.

82. Paragraph 9 of the agreement provided that the agreement, unless sooner terminated as provided therein, shall remain in full force and effect for the life of the latest patent or patent application coming thereunder.

83. (a) The agreement could be canceled by Bell upon failure of Scovill to remit the minimum payments or to sell the minimum number of units called for by the agreement or in the event that Scovill should become involved in any legal proceedings relating to its solvency. Bell could also terminate upon Scovill's failure to remit all royalties due at the end of each three-month reporting period. These were the only provisions for cancellation by Bell.

(b) Paragraph 3(c) of the agreement of April 1, 1954 provided as follows:

     (c) In the event that if at the end of any calendar year after

84. Paragraph 6 of the agreement of April 1, 1954 related to the rights of the parties with respect to infringement actions. If both parties desired to bring suit to enjoin infringement, such action could be brought in the names of either or both parties, with expenses and any recoveries shared equally. If only one party wished to bring such suit, it could bring the action in its own name and at its own expense, with any recoveries to be retained by the party instituting such action.

85. The agreement could not be assigned by Scovill except with the entire assets and good will of the business to which it related.

86. For the years 1953-1958, Bell received the following amounts under the agreement of April 1, 1954.

              Year                         Amount

87. (a) Pursuant to an agreement dated February 20, 1950 between Bell and the Home-O-Nize Co. (Home-O-Nize), Bell entered into a further agreement as of that date with the Prime-Mover Co. (Prime -Mover), a wholly-owned subsidiary of Home-O-Nize. Home-O-Nize was in the business of manufacturing agricultural equipment, and Prime-Mover was organized and created for the purpose of entering into this agreement with Bell. The agreement between Bell and Prime-Mover covered the transfer of Bell's complete mechanical wheelbarrow business, including (i) all of Bell's right, title and interest in all the patents and patent applications identified with that device, and (ii) raw materials, tools, work in process, future orders, planning sheets, production know-how and related instructions for manufacturing the parts and assembling the machines to enable Prime-Mover to produce the mechanical wheelbarrows in a production line.

(b) More particularly, the agreement of February 20, 1950 between Bell and Prime-Mover provided in part as follows:

     Whereas the Seller [Bell] has developed a certain power-operated

           Domestic Patents and Application for Patent

89. The invention was reduced to practice by Bell by commercial manufacture and sale of mechanized wheelbarrows incorporating all such designs and inventions beginning on October 31, 1947, the date of the first unit sold.

90. United States Letters Patent No. 2,533,549 was issued on December 12, 1950 upon application Serial No. 721,020 filed January 9, 1947. Design Patent Nos. D- 153,255, D-152,819 and D-156,387 were issued respectively on April 5, 1949, February 22, 1949 and December 6, 1949. On July 2, 1960 Bell executed an instrument under which it assigned the foregoing three design patents to Prime -Mover; the instrument contains no reference to the basic wheelbarrow patent No. 2,533,549. The record does not show that Bell executed an instrument assigning the latter patent to Prime-Mover.

91. Paragraph 17 of the agreement of February 20, 1950 between Bell and Prime-Mover provided that upon the happening of certain events of default, including failure of Prime-Mover to make any payments required within 10 days after the due date, violation or default in any of the terms and conditions of the agreement for 30 days after written notice from Bell, the institution of proceedings relating to Prime-Mover's solvency which remained undismissed for 30 days, a failure of Prime-Mover to continue manufacture and supplying of repair parts, or any material adverse change in the management of the buyer, Bell had the right to terminate the agreement and receive the re-assignment of all patent applications and patents which may have been issued on such applications or continuations or divisions thereof, together with all right, title and interest of Prime-Mover in and to the same.

92. Until the purchase loans made by Bell to Prime-Mover were repaid and until the inventory, parts and accessories transferred to Prime-Mover were paid for, Bell retained the right to designate two members of Prime-Mover's board of directors. Bell has exercised this right.

93. Bell and Prime-Mover entered into supplemental agreements dated July 13, 1950, January 4, 1951 and December 14, 1953. These supplemental agreements provided for revisions in the time and method of payment under the basic agreement.

94. The supplemental agreement of December 14, 1953 revised the schedule of maturity dates of the outstanding purchase loans from 1953-1956 to 1954-1958. Home-O-Nize approved and consented to this supplemental agreement and agreed to deliver to Bell all capital stock of Prime-Mover not already delivered, which may have been or may thereafter be issued or outstanding, to be held by Bell as collateral security.

95. For the years 1953 through 1958, Bell received the following amounts under the agreement of February 20, 1950 and supplements thereto as payment of a certain percentage of Prime -Mover's net sales price to distributors for each unit sold, as provided in paragraph 12(f) of the agreement of February 20, 1950:

              Year                         Amount

THE HELICOPTER AGREEMENTS

INTRODUCTION

97. Bell was established in 1935 and prior to World War II was a comparatively small company with a total employment at the end of 1938 of 852. It expanded rapidly during World War II manufacturing thousands of P-39 fighter planes and other aircraft, and by the end of 1944 it had a total work employment of 47,654. However, early in World War II, Bell became concerned about the future of fixed -wing aircraft and decided to go into the rotary-wing field. In 1941 Bell employed an inventor named Arthur Young to conduct research in the rotary-wing field. Young had already invented some devices and obtained certain basic patents on the main rotor structures. Young developed other devices after being employed by Bell, and some of the other basic Young helicopter patents included the stabilizer bar, the dynamic stop and certain blade patents. These are the chief patents which later protected the Bell helicopters in all the Model 47 series and Model 48.

98. In 1944 Bell's first helicopter was flown, although Sikorsky had flown its own helicopter about two years earlier. In 1946 Bell obtained the first Civil Aeronautics Administration (CAA and now known as FAA) certification ever issued for a helicopter. The certification was issued for the Model 47-A helicopter and permitted its production for use by the general public.

99. A CAA certification is required for commercial production of any aircraft for sale to or use by the public; it is not required for military aircraft. The CAA certification is a matter of public record, comprising a one-page production certificate, with data sheets attached thereto giving the basic characteristics of the craft. The certification gives no protection against infringement or competition. Under an international interchange agreement, a CAA (or FAA) certification is recognized in most foreign countries for commercial production there.

100. Bell's major customer for helicopters at all times was the United States Government, and most of Bell's production has been for the military. Bell produced certain helicopters strictly for the military, but usually the military helicopters were basically the same as the commercial models. On the Model 47 series helicopters, about 50 per cent was produced for the military and about 50 per cent for commercial sales.

101. Up to 1946 Bell had spent about $ 10,000,000 in helicopter research and development, including expenditures necessary to qualify the 47-A helicopter for CAA certification. Such certification procedure requires exhaustive testing and is quite costly. Following development of the Model 47-A, Bell introduced the Models 47-B, 47-C, 47-D, 47-E (a military model), and the 47-G. Up to the Model 47-J, these models were basically the same helicopter with some mechanical or performance improvements. The basic Young helicopter patents were common to all these models, including the later Model 47-J and Model 48. In the period 1952 to 1956, the Young patents were the major patents used by Bell. In the last five years from about 1960 to 1965, the patent protection had become about two -thirds Young patents and one-third other Bell patents.

102. Although Bell (and later its licensees in Italy and Japan) ceased producing a particular Bell helicopter model, such as the Model 47-D-1 or the Model 47-G, a discontinued helicopter model (no longer in production) is still an asset. Bell's patents and know -how protect such an asset and Bell would not want to give such an asset away. Bell would not want anyone else to produce a discontinued Bell helicopter model and would take steps to prevent its being manufactured by anyone else without Bell's permission.

103. In 1952 Bell decided to enter into two license agreements, one with a firm in Italy and one with a firm in Japan.

104. Bell and Costruzioni Aeronautiche Giovanni Agusta (hereafter referred to as "Agusta") entered into an agreement, dated August 11, 1952, relating to the manufacture, use and sale by Agusta in Italy of the Bell Model 47-D-1 helicopter.

105. Paragraph B(1) of that agreement provided that the right and license granted by the agreement was to be for the term of the latest patent coming thereunder, with the right of Bell to terminate upon breach by Agusta after 12 months written notice and failure of Agusta to cure the breach in such period. The right and license could also be terminated at the end of 10 years or at any time thereafter by either party, with or without cause, upon 12 months written notice. Agusta had manufactured fixed-wing aircraft for the Italian Government during World War II. In 1952 it was in the business of manufacturing motorcycles and bicycles but was interested in getting back into aircraft production. Agusta's financial and technical ability to produce helicopters was unknown to Bell in 1952, and the termination clause was inserted for Bell's protection.

106. This 1952 agreement with Agusta listed the various drawings, technical and engineering data, and manufacturing and tooling data which would be supplied to Agusta. The type of technical engineering data and manufacturing and tooling data supplied to Agusta was of the type which Bell would have to furnish to any firm which was going to manufacture the helicopter; it was the same type of data which Bell would have to furnish to a firm in the United States if that firm was going to manufacture the helicopter for Bell to sell to Bell's customers.

107. Bell also furnished the services of its engineers to Agusta, for which services separate and specific payments were made, and Bell's engineers have been in the Agusta plant from 1952 until the present time. Agusta did not actually produce any Model 47-D-1 helicopters under this 1952 agreement but went directly into production of the Model 47-G which became available about that time, the contract apparently being informally modified by letter. The Model 47-D-1 and the Model 47-G were basically the same helicopter. A supplemental agreement was entered into on June 3, 1955 to cover manufacture of the Model 47-G-2.

THE AGUSTA MODEL 47-J AGREEMENT

108. Bell and Agusta entered into an agreement dated November 1, 1956 relating to the manufacture, use and sale by Agusta in Italy of Bell Model 47-J helicopters. That model helicopter was a larger model than the preceding Model 47 series, seating four passengers rather than the three as in the prior models. It had a completely different type of fuselage construction and basically a new rotor system.

109. Paragraphs A (1), (2) and (3) of the agreement of November 1, 1956 provided as follows:

     (1) The exclusive right and license to manufacture and assemble

111. The development program for the Model 47-J helicopter cost Bell an estimated $ 3,500,000, of which amount approximately $ 1,000,000 was expended to obtain an FAA certification.

112. (a) Under the agreement of November 1, 1956, Bell furnished to Agusta a complete set of Model 47-J FAA-approved Bell Specification No. 47-947-039, dated September 1, 1955, including all engineering drawings, complete sealed drawing list of all Bell process specifications, material specifications, complete sets of Bell maintenance manuals, flight illustrated parts manual, tool drawings, parts manufacturing operation sets, and all other data and rights which would enable Agusta to get into the helicopter business and reproduce and duplicate a Bell Model 47-J helicopter.

(b) Bell also furnished to Agusta, pursuant to the agreement, planning sheets and a detailed description for each item to be manufactured. Included, for example, was such information as the heat treatment, nitriding and carburizing necessary for the manufacture of a particular gear; how to twist a blade to the proper contour; templates showing the layout of particular parts and where each hole should be punched or drilled; tool designs, inspection standards and engineering and manufacturing information including operation specifications and standards which would enable Agusta to get into the helicopter business and to reproduce and duplicate a Model 47-J helicopter.

113. The data which Bell supplied to Agusta was the type of data one would have to furnish to any firm which was going to manufacture a Model 47-J helicopter. See finding 106.

114. Prior to the agreement of November 1, 1956 with Agusta, Bell was the only party in the world which had the know-how and right to produce the 47-J helicopter. Without the complete design, production and operation helicopter know-how, the license to use the related patents alone would not enable any party to manufacture a Model 47-J helicopter. However, without the right to use the patent, one would not have the legal right to manufacture a Model 47-J helicopter. Agusta, upon receipt of the helicopter rights and know -how, had the capability to manufacture a 47-J helicopter without reference to the patent drawings or the necessity of transfer of patent rights held for the protection of Bell.

115. By virtue of the agreement of November 1, 1956, Agusta received the benefit of the FAA certification which it had cost Bell $ 1,000,000 to obtain. This certification was recognized by the Italian Government, as well as the United States Government, and (as previously pointed out, findings 98-99) was required of any commercial aircraft before it could be sold to the public or used to transport the public in commercial operations.

116. Such FAA certification required a complete set of flight tests, as well as fatigue and fire tests, including, for example, shaking a minimum of six specimen rotor blades for a given number of cycles on a fatigue machine to determine the fatigue life of a rotor blade; fire tests of the complete power plant section to determine that the necessary fire walls are included; a flight test program to establish the flight envelope of the helicopter, how high it can fly, how fast, stability, controllability and all other features. Also included in the FAA certification is FAA approval of a complete set of operating manuals, flight manuals and maintenance manuals.

117. The agreement of November 1, 1956 provided that Agusta would pay Bell $ 10,000 for reproducing and forwarding the technical drawings, engineering and manufacturing data. It appears that Bell's cost for reproducing the technical drawings, engineering and manufacturing data was about $ 25,000 and that the total helicopter know-how material thus reproduced constituted over a half -ton of documents. Some of the data for the Model 47-J was the same as that for earlier models which Agusta had been producing, and to the extent that the data was duplicative, it was not furnished again under the agreement of November 1, 1956. Bell also continued, as it had done since 1952, to furnish the services of its engineers to Agusta, for which services Agusta made specific payments. See finding 107. If Bell terminated the agreement, Agusta could not continue to use any of the drawings or data furnished to it.

118. The Model 47-J helicopter was reduced to practice by successful flight operations of such model on or before January 1, 1955.

119. The "operating life" of a helicopter is unlimited, being comparable in durability to the Douglas DC-3 airplanes, and some of the helicopters first produced back in 1946 are still flying today. However, the various helicopter models, like automobiles and airplanes, have a limited "production life" due to improvements in performance and payload which make the earlier models obsolete. None of thehelicopter models manufactured by Bell or Agusta and Nippon, its only licensees, has had a "production life" of more than eight years. However, even if Bell had discontinued a certain model of a helicopter, it would not want that particular model to be manufactured by anyone else and would take steps to prevent its being manufactured by anyone else without its permission. Bell's manufacturing know-how and patents protect its assets (helicopter models), and a helicopter model is an asset even if Bell is not manufacturing that model. See finding 102.

120. Paragraph M(1) of the agreement of November 1, 1956 provided that the rights and licenses granted by the agreement would be for the full remaining term of the latest patent or patents coming thereunder, and that Bell could terminate for breach by Agusta of any of the terms and conditions upon 60 days written notice and Agusta's failure to cure the breach during that notice period. That paragraph further provided that:

     This Agreement of license may be terminated at any time following

122. The know-how that Agusta has obtained from Bell cannot be taken from it, in the sense that what a company has learned in performing a contract cannot be taken away from it. By being in the business of building helicopters from 1952 to 1965, Agusta was enabled to build in Italy a replica on a small scale of Bell's Fort Worth helicopter plant and uses in that plant the same know-how that Bell uses in its Fort Worth plant. In fact, Agusta has used its know-how to design its own helicopter model.

123. Paragraph L of the agreement of November 1, 1956 called for, among other things, minimum payments aggregating $ 340,000. That paragraph provided as follows:

     AGUSTA agrees to pay to BELL in U.S. dollars in New York City,

124. Bell Aircraft Corporation and Bell Helicopter Corporation, a wholly-owned subsidiary, entered into an agreement, dated June 16, 1958, whereby Bell Aircraft assigned and transferred to Bell Helicopter all of Bell Aircraft's remaining rights under the agreement dated November 1, 1956 between Bell Aircraft and Agusta in consideration for which Bell Helicopter agreed to pay Bell Aircraft a fixed sum and to assume all Bell Aircraft's obligations and liabilities under said agreement.

125. The agreement of June 16, 1958 called for the payment of $ 175,000 to Bell Aircraft for all of its remaining rights in such agreement. Of this amount, $ 150,000 represented the balance of the minimum payments due from Agusta that were required by paragraph L of the agreement of November 1, 1956, and which payments had been accrued by Bell Aircraft and reported in its returns for 1957. The net balance of $ 24,385 was paid by Bell Helicopter to Bell Aircraft in 1958.

THE AGUSTA MODEL 48 AGREEMENT

126. Bell Aircraft Corporation and Agusta entered into an agreement dated May 1, 1956 relating to the manufacture, use and sale by Agusta in Italy of Bell Model 48 helicopters.

127. Paragraph 3(a) of the agreement of May 1, 1956 provided:

     3. Grant of Licenses. Subject to the terms and

128. Under the agreement of May 1, 1956, Bell furnished to Agusta a complete set of Model 48 Bell Specification No. 48-947-001 dated October 18, 1945, including all engineering drawings, complete sealed drawing list of all Bell process specifications, material specifications, complete sets of Bell maintenance manuals, flight illustrated parts manual, tool drawings, parts manufacturing operation sets and all other data and rights which would enable Agusta to reproduce and duplicate a Bell Model 48 helicopter, and to give Agusta the opportunity to acquire experience in larger helicopters, which experience the Italian Government wanted Agusta to obtain.

129. The Model 48 helicopter was reduced to practice by Bell by successful flight operations of such model sometime in 1947.

130. The Model 48 helicopter (an eight-place craft) was an experimental model designed and originally built by Bell. Bell built only 13 prototype models for the United States Government.

131. Paragraph C(1) of the agreement of May 1, 1956 provided that the rights and licenses granted were for the full remaining term of the latest patent or patents coming thereunder, and further provided that such rights and licenses of either party could be determined by either party for breach of any terms or conditions upon 12 months written notice and failure of the other party to cure the breach within such period. That paragraph did not provide for termination at the end of 10 years by either party, with or without cause, as in the 1952 agreement with Agusta and as inthe November 1, 1956 agreement with Agusta. See findings 105, 120 and 121.

132. Agusta paid Bell $ 40,000 for the transfer of know -how in the form of technical information and data relating to the large-size prototype Model 48 military helicopter. There were no subsequent royalty payments because Agusta never produced this particular model.

133. The Model 48 had not gone into mass production and there were no production drawings, only the experimental drawings Bell had used to build the prototype Model 48 helicopters. Bell licensed the Model 48 to Agusta with the intention that Agusta would improve the craft and produce it for sale. Bell furnished its engineers to Agusta, the cost of which Agusta paid, to try to incorporate the improvements in the aircraft that were desired for the "Bell-Agusta" model.

134. Paragraph B(1) of the agreement of May 1, 1956 granted to Bell "the exclusive, royalty-free right and license to make, use and sell the 'Bell-Agusta Model' in the United States of America, its territories and possessions, and Canada."

135. After the agreement of May 1, 1956 was executed, Bell developed a larger 10-passenger, turbine-powered helicopter and Agusta was never able to sell the Model 48 in the public market. No Model 48 helicopters were ever sold commercially in the United States or Italy, and Agusta never manufactured any Model 48 helicopters.

THE NIPPON MODEL 47-D-1 AGREEMENT

136. Bell and Nippon Kikai Boeki Kaisha, Ltd. (hereafter referred to as "Nippon") entered into an agreement dated September 19, 1952, relating to Bell Model 47-D-1 helicopters. The agreement provided in part:

     Whereas, BELL is the owner of and has acquired numerous patents,

138. Under the agreement of September 19, 1952, Bell furnished to Nippon (as it had to Agusta, see findings 112 (a) and (b) ) a complete set of Model 47-D-1 specifications, all engineering drawings, complete sealed drawing list of all Bell process specifications, material specifications, complete sets of Bell maintenance manuals, flight illustrated parts manual, tool drawings, parts manufacturing operation sets, a license to the patent rights applicable to that model and all other data and rights which would enable Nippon to reproduce and duplicate a Bell Model 47-D-1 helicopter.

139. Upon receipt of such know-how, Nippon had the capability to manufacture a 47-D-1 helicopter without reference to the patent drawings or the necessity of transfer of patent rights held for the protection of Bell. See finding 114. The know-how that Nippon obtained from Bell cannot be taken from it, in the sense that what a company has learned in performing a contract cannot be taken away from it. See finding 122.

140. The agreement of September 19, 1952 provided that Nippon would pay Bell $ 50,000 for reproducing and forwarding the technical drawings, engineering and manufacturing data. It appears that Bell's cost for reproducing the technical drawings, engineering and manufacturing data was $ 25,000 and that the total helicopter know -how material thus reproduced constituted over a half-ton of documents.

141. The type of technical and engineering data and manufacturing and tooling data furnished to Nippon under the agreement of September 19, 1952, would have to be furnished to any firm that was going to manufacture the Model 47-D-1 helicopter; for example, a firm in the United States manufacturing that same helicopter for Bell to sell to Bell's customers would have to be supplied with that same data. Bell also furnished the services of its engineers to Nippon, the cost of which services was paid by Nippon. The record does not show whether Bell's engineers were in the Nippon plant from 1952 to the present time, as is and has been the case with Agusta, but apparently such Bell engineers would be made available as long as needed by Nippon.

142. Paragraph B(1) of the agreement of September 19, 1952 provided that the term and license granted by the agreement should be for the life of the latest patent or patents coming thereunder, ¹ with the right of Bell to terminate for breach by Nippon upon six months written notice and Nippon's failure to cure the breach within the six-month period. Paragraph B(1) further provided that the right and license could be terminated at the end of 10 years, by either party, with or without cause, upon six months written notice. In 1952 Bell had not had any prior experience with Nippon and was not familiar with Nippon's technical ability or financial capacity. The termination clause was put in for Bell's protection.

143. The Model 47-D-1 helicopter (involved in the 1952 Agusta agreement and in the 1952 Nippon agreement) was reduced to practice by successful flight operation of such model in December 1948. Under its agreement of September 19, 1952, Nippon manufactured some Model 47-D-1 helicopters and then went into production of the Model 47-G helicopters, without any change in the basic agreement of September 19, 1952, except for an informal letter modification authorizing such production.

144. Paragraph H of the agreement of September 19, 1952 called for, among other things, minimum payments by Nippon aggregating $ 200,000 for "the rights granted under this agreement." The first payment of $ 100,000 was to be made within 60 days from the date of the agreement, the second payment of $ 50,000 on September 19, 1954, and the third payment of $ 50,000 on September 19, 1955.

145. Bell also received other payments for each helicopter manufactured under the agreement of September 19, 1952, and the informal letter amendment or amendments thereto and sold under the foreign dealer agreement. Nippon's right to sell these helicopters was granted under the foreign dealer agreement; the royalty rate per helicopter was recited in the agreement of September 19, 1952. Those payments have been reported by Bell and taxed to it as ordinary income.

146. Nippon was offered the opportunity to produce the larger and more expensive Model 47-J helicopters but declined to do so. Because of the economic conditions in that part of the world and because its business with the old models had been quite satisfactory, Nippon preferred to confine itself to the old models.

GENERAL

147. The royalty payments involved here were for each year in issue an insignificant part of Bell's over-all gross business.

148. Upon order of the commissioner, and by agreement of the parties, the trial was limited to the issue of liability, reserving the determination of the amount of recovery, if any, for further proceedings.

Conclusion of Law

On the basis of the foregoing findings of fact which are made part of the judgment herein, the court concludes as a matter of law (i) that the payments Bell received in the years 1953-1958 pursuant to the Houde, Square D, Weatherhead, Wiesner-Rapp, Scovill and Prime -Mover agreements were properly taxable as long-term capital gains rather than ordinary income, and plaintiff is entitled to recover accordingly; (ii) that the payments Bell received in the years 1953-1958 pursuant to the Agusta Model 47-J agreement were properly taxable as ordinary income rather than long-term capital gains, and plaintiff is not entitled to recover in regard to such payments; (iii) that the payments Bell received pursuant to the Agusta Model 48 agreement were properly taxable as long-term capital gains, and defendant is not entitled to an offset in regard to such payments; and (iv) that the payments Bell received pursuant to the Nippon agreement were properly taxable as ordinary income rather than long-term capital gains, and defendant is entitled to an offset in regard to such payments.

Judgment is entered to this effect. The amount of the recovery will be determined pursuant to rule 47(c).

In accordance with the opinion of the court, a memorandum report of the commissioner and a stipulation of the parties, it was ordered on October 20, 1967, that judgment for the plaintiff be entered for $ 436,455.70, plus statutory interest thereon as provided by law.

¹ The applicable statutory provisions are sections 1221 and 1222 of the Internal Revenue Code of 1954 (26 U.S.C. (1958) Subsection 1221, 1222) and the similar provisions in sections 117(a)(1) and (4) of the Internal Revenue Code of 1939 (26 U.S.C. (1946) Subsection 117(a)(1) and (4)). Section 1221 of the 1954 Code provides:

     CAPITAL ASSET DEFINED.

     OTHER TERMS RELATING TO CAPITAL GAINS AND LOSSES.

² The device worked like a shock absorber and decreased the oscillation of a plane's nose wheel from side to side when the plane was taxiing at high speeds.

³ Judge Frank who wrote for the court in General Aniline made the following supplemental comment in Rohmer v. Commissioner, 153 F. 2d 61, 64 (2d Cir. 1946): "[There] [in General Aniline ] we held that the transfer was such that the transferee probably acquired title to the patents; at any rate we considered that virtually all the patentee's rights passed to the transferee, so that there was a sale. * * * To be sure, in the General Aniline case * * * we said that it was unimportant that the patentee, before making the assignment, 'had granted to others some rights' under the patents; but, as the record shows that the extent of those previous grants was not disclosed to us, we must be taken as having regarded them as relatively insubstantial; consequently, as we regarded the case, the patentee had transferred to a single grantee substantially all the rights it had originally acquired as patentee under the patents."

⁴ The point does not appear to have been litigated in Rollman and its force as a precedent is thus considerably lessened. It is interesting to note that the lower court (i.e., the Tax Court) in Rollman (while reversed on other grounds by the Fourth Circuit) seems to have taken it for granted -- that the existence of the two previously granted non -exclusive licenses did not prevent the transaction from being a sale. Rollman, 25 T.C. 481 (1955). The Sixth Circuit has gone considerably farther and held a transaction to be a sale notwithstanding that the grantor retained the right to make, use and sell with power to transfer this right from himself to one other person, the court observing that "it was entirely lawful for * * * [the grantor] to retain an undivided part or share of his exclusive patent rights." Kavanagh v. Evans, 188 F. 2d 234, 236 (6th Cir. 1951). The decision in Kavanagh v. Evans, however, has been questioned in Walen v. United States, 273 F. 2d 599 (1st Cir. 1959), and a contrary result was reached in Allied Chemical Corp. v. United States, 17 AFTR 2d 316 (S.D.N.Y. 1966), aff'd 370 F. 2d 697 (2nd Cir. 1967). In Walen, the First Circuit observed (273 F. 2d at note 3): "We do not question that a taxpayer might sell a partial interest in an invention. However, to do so it should be a transfer of a measurable, identifiable share, and not of an undefined one of elastic proportions dependent upon how many subsequent 'shares' the grantor might elect to create." It may be added that in the present case, by contrast, Bell's assignment to Houde was the "transfer of a measurable, identifiable share" which Bell could not later enlarge or diminish in any way, having through such transfer divested itself of all its remaining ownership right in the invention. Allied Chemical is discussed below.

⁵ The holding in First National Bank of San Diego also seems inconsistent with the Treasury Regulations under section 1235 of the Internal Revenue Code of 1954 (26 U.S.C. (1958) Section 1235), which section deals with capital gains treatment for individuals holding patents as distinguished from corporations, but is otherwise virtually identical to the sections applicable here. Section 1.1235-2(b) of the regulations provides in part: "The term 'all substantial rights to a patent' means all rights * * * which are of value at the time the rights to a patent (or an undivided interest therein) are transferred." [Emphasis added.]

⁶ In passing it will be noted that at the time of the conveyance from Bell to Houde, Bell was not receiving any payments under the limited license, and its future right to payments, if any, rested upon events largely outside its control.

⁷ The mach speed indicator is an instrument for showing the speed of aircraft in relation to the speed of sound at air level.

⁸ The amount received under an option agreement qualifies for capital gains treatment in the year the option is exercised, provided that the transaction otherwise qualifies for such treatment. After exercise of the option, amounts received under the agreement constitute amounts received from the sale or exchange of a capital asset. Rev. Rul. 57-40, 1957-1 CB 266.

⁹Oak Manufacturing Co. v. United States, 301 F. 2d 259 (7th Cir. 1962), on which defendant places emphasis, presents a factual situation quite different from that involved here. In that case, Oak was in the electrical switch, vibrator and parts business and granted exclusive foreign rights (with the exception of Canada) to its entire line of products to the grantee, N.S.F. Among other things, the agreement provided that N.S.F. was to occupy the position of an expert sales organization and that it assumed all risks with regard to the customers. On the basis of this provision and the balance of the agreement, together with the facts of the case, the court concluded that the parties contemplated that the grantor was to exercise continuing control over the business established by the transfer of the exclusive license, and that the agreement, therefore, was not for the sale of patent rights, but was an agreement in the nature of a franchise for the distribution of Oak products in new markets and, in reality, represented the establishment of an agency relation.

¹⁰ Pertinent is the following comment in the Senate Finance Committee report dealing with section 1235 of the Internal Revenue Code of 1954 (26 U.S.C. (1958) Section 1235): "* * * [The] courts have recognized that an exclusive license agreement in some instances may constitute a sale for tax purposes even where the right to 'use' the invention has not been conveyed to the licensee, if it is shown that such failure did not represent the retention of a substantial right under the patent by the licensor. It is the intention of your committee to continue this realistic test, whereby the entire transaction, regardless of formalities, should be examined in its factual context to determine whether or not substantially all rights of the owner in the patent property have been released to the transferee, rather than recognizing less relevant verbal touchstones." 3 U.S. Code Cong. & Adm. News (1954) p. 5083.

¹¹ There is no dispute that the payments involved in this suit were not for repayment of loans or payments for inventory or work in process.

¹² Defendant concedes that but for this fact the payments Bell received under the agreement would be periodic payments of the purchase price of the business and taxable as long-term capital gains.

¹³ By contrast, an agreement to assign a patent when issued constitutes an executory contract to assign the invention upon the happening of a later event, i.e., the issuance of the patent, and thus does not constitute a sale at the time of the execution of the agreement. Dreymann, 11 T.C. 153, 161 (1948) .

¹⁴ Costruzioni Aeronautiche Giovanni Agusta.

¹⁵ The usefulness and value of the rights to any commercial aircraft, including helicopters, depend upon such FAA certification. Without certification by the government, the commercial aircraft or helicopter cannot be sold to the public or used to transport the public. Such certification is recognized not only in the United States but also in foreign countries, including Italy and Japan. Before any such certification is granted, the helicopter and each of its major component parts are submitted to an exhaustive series of fatigue and flight tests to determine the serviceability and safety of the craft.

¹⁶ In Magnus v. Commissioner, 259 F. 2d 893 (3d Cir. 1958), the agreement provided that either party could terminate after two years by giving three months notice in writing, with the agreement to continue in effect unless such notice was given. The court held that despite this termination provision, the agreement considered as a whole did not actually give the grantor a right to terminate at will.

¹⁷ Nippon Kikai Boeki Kaisha, Ltd.

¹⁸ It is unnecessary because of this conclusion to pass upon defendant's additional contention that the Nippon agreement did not constitute a sale for the stated reason thatit did not convey the right to sell the helicopters and the later foreign dealer agreement granting such right could be terminated on 90 days notice.