B-127407, MAY 4, 1956, 35 COMP. GEN. 622

B-127407, MAY 4, 1956, 35 COMP. GEN. 622

PATENTS - ROYALTY PAYMENTS - TERMINATION OF WORLD WAR II UNDER A CONTRACT BY WHICH THE GOVERNMENT ACQUIRED EXCLUSIVE RIGHT FROM 1942 TO 1962 TO CERTAIN INVENTIONS SUBJECT TO A ROYALTY PAYMENT FOR PURCHASES FROM OTHER THAN THE CONTRACTOR "AFTER GOVERNMENT CEASES TO BE A BELLIGERENT," THE GOVERNMENT BECAME OBLIGATED TO MAKE ROYALTY PAYMENTS ON SUCH PURCHASES ON AND AFTER JANUARY 1, 1947, THE UNITED STATES HAVING CEASED TO BE A BELLIGERENT NO LATER THAN DECEMBER 31, 1946, WHICH WAS PROCLAIMED BY THE PRESIDENT AS THE EFFECTIVE DATE OF THE CESSATION OF HOSTILITIES. THE USE BY THE DEPARTMENT OF THE AIR FORCE OF CERTAIN ROYALTY-FREE INVENTIONS ACQUIRED BY THE NAVY DEPARTMENT, UNDER A CONTRACT WHICH REQUIRED THE PAYMENT OF ROYALTIES FOR THE USE OF THE INVENTIONS AFTER WORLD WAR II, ESTOPS THE AIR FORCE FROM DENYING LIABILITY UNDER THE TERMS OF THE CONTRACT; AND ON THE BASIS OF AN IMPLIED CONTRACT, THE AIR FORCE IS LIABLE FOR ROYALTY PAYMENTS FOR THE USE OF THE INVENTION AFTER TERMINATION OF WORLD WAR II. A PROPOSED LICENSE AGREEMENT BY WHICH THE DEPARTMENTS OF THE NAVY AND AIR FORCE WOULD LIMIT THE ROYALTIES PAYABLE FOR THE EXCLUSIVE USE OF A CONTRACTOR'S PATENTS IN THE FUTURE, AND WOULD BE RELEASED FROM ROYALTY CLAIMS FOR PURCHASES MADE FROM OTHER THAN THE CONTRACTOR SINCE TERMINATION OF WORLD WAR II, IS PROPER UNDER THE COMPENSATION PROVISIONS OF THE SECRECY STATUTES, AND 31 U.S.C. 649B, WHICH RELATE TO THE AVAILABILITY OF MILITARY APPROPRIATIONS FOR ACQUISITION OF PATENT RELEASES BEFORE SUIT IS BROUGHT FOR PAST INFRINGEMENTS.

TO THE SECRETARY OF THE NAVY, MAY 4, 1956:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 20, 1956, WITH ENCLOSURES, PRESENTING SEVERAL QUESTIONS IN REGARD TO THE EXTENT OF THE GOVERNMENT'S OBLIGATION UNDER ARTICLE 5 (B) OF CONTRACT NORD-597, DATED DECEMBER 1, 1942, WITH THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY, AND REQUESTING OUR ADVICE AS TO WHETHER IT IS LEGALLY PROPER FOR THE DEPARTMENTS OF THE NAVY AND THE AIR FORCE TO ENTER INTO A PROPOSED LICENSE AGREEMENT PREPARED ON THE BASIS OF THE CONTRACTOR'S OFFER OF SETTLEMENT AND RELEASE OF ALL CLAIMS FOR ROYALTIES PAYABLE UNDER THE TERMS OF SAID ARTICLE 5 (B) ON ACCOUNT OF PURCHASES BY THE NAVY AND THE AIR FORCE OF CERTAIN DEVICES FROM OTHER THAN THE CONTRACTOR'S SPONSOR, THE SPERRY GYROSCOPE COMPANY OF NEW YORK.

UNDER THE TERMS OF THE CONTRACT, THE GOVERNMENT ACQUIRED CERTAIN RIGHTS IN FIVE PATENT APPLICATIONS WHICH HAD BEEN PLACED IN SECRECY UNDER THE PROVISIONS OF THE SECRECY STATUTES (THE ACT OF OCTOBER 6, 1917, 40 STAT. 394, AS AMENDED BY THE ACT OF JULY 1, 1940, 54 STAT. 710, 35 U.S.C. 42, AND BY THE ACT OF JUNE 16, 1942, 56 STAT. 370), 35 U.S.C. 42 NOTE. UNDER ARTICLE 4, THE GOVERNMENT AGREED, DURING THE PERIOD JUNE 1, 1942, UNTIL APRIL 15, 1962, TO PAY ROYALTIES AT STIPULATED RATES BUT NOT EXCEEDING $400,000 FOR DEVICES "MADE BY GOVERNMENT OR FOR GOVERNMENT OR FOR ANY OTHER PERSON OR GOVERNMENT OR GOVERNMENTAL DEPARTMENT WITH GOVERNMENT'S KNOWLEDGE AND CONSENT," AND INCORPORATING EITHER OR BOTH OF THE INVENTIONS CLAIMED IN U.S. PATENT APPLICATIONS, SERIAL NOS. 438,997 AND 440,660.

IT WAS FURTHER AGREED IN ARTICLE 5 (B) THAT "AFTER GOVERNMENT CEASES TO BE A BELLIGERENT IN THE PRESENT WAR AND UNTIL APRIL 15, 1962 IF GOVERNMENT MANUFACTURES OR BUYS DEVICES EMBODYING THE INVENTIONS CLAIMED IN ANY ALLOWED CLAIM OR CLAIMS OF SAID APPLICATIONS SERIAL NO. 438,997 OR SERIAL NO. 440,660 OR IN ANY LETTERS PATENT ISSUED ON EITHER OR BOTH OF SAID APPLICATIONS FROM ONE OTHER THAN SPERRY * * * IT WILL PAY CONTRACTOR OR REQUIRE THE SELLER OR LICENSEE TO PAY CONTRACTOR A ROYALTY OF THREE PERCENT (3 PERCENT) OF THE SELLING PRICE OF EACH DEVICE EMBODYING SAID LAST IDENTIFIED INVENTIONS MANUFACTURED OR SOLD.'

THE RECORD SHOWS THAT IN 1949 IT WAS DETERMINED THAT SECRECY WAS NO LONGER NECESSARY AND AN ASSIGNMENT IN FAVOR OF THE CONTRACTOR WAS EXECUTED BY THE GOVERNMENT PURSUANT TO THE PROVISIONS OF ARTICLE 9 OF THE CONTRACT WHICH PROVIDES, IN PERTINENT PART,"THAT GOVERNMENT SHALL RECEIVE FROM CONTRACTOR AT THE SAME TIME AN EXCLUSIVE LICENSE SUBJECT ONLY TO THE NON- EXCLUSIVE LICENSE TO SPERRY HEREIN RECITED, TO MAKE, USE AND SELL ALL SUCH INVENTIONS FOR PURPOSES OF FIRE CONTROL AS HEREINBEFORE DEFINED, GOVERNMENT TO REMAIN LIABLE TO CONTINUE TO MAKE ALL PAYMENTS TO CONTRACTOR HEREUNDER TO THE SAME EXTENT AS IF SUCH EXCHANGE OF THE TITLE FOR SUCH EXCLUSIVE LICENSE HAD NOT YET BEEN MADE.' U.S. PATENT APPLICATION, SERIAL NO. 438,997, HAS BEEN ABANDONED BUT ON SEPTEMBER 9, 1952, U. S. PATENT NO. 2,609,606, ENTITLED " GUNSIGHT HAVING LEAD COMPUTING DEVICE," WAS ISSUED IN RESPECT OF U.S. PATENT APPLICATION, SERIAL NO. 440,660, FILED APRIL 27, 1942. FOR THE USE OF SUCH PATENTED DEVICE, THE SUM OF $400,000 HAS BEEN PAID UNDER ARTICLE 4 OUT OF NAVY APPROPRIATIONS BUT THE CONTRACTOR HAS NOT BEEN PAID ANY ROYALTIES BY THE GOVERNMENT OR BY ITS SUPPLIERS IN CONNECTION WITH PURCHASES MADE FROM OTHER THAN SPERRY AFTER THE GOVERNMENT CEASED TO BE A BELLIGERENT IN WORLD WAR II.

APPARENTLY, FOR THE PERIOD SUBSEQUENT TO THE CESSATION OF HOSTILITIES IN WORLD WAR II UNTIL JUNE 30, 1953, THE NAVY MADE NO PURCHASES FROM OTHER THAN SPERRY OF DEVICES COVERED BY THE PATENT APPLICATION OR PATENT IN QUESTION. HOWEVER, IT IS ESTIMATED THAT SUCH PURCHASES SINCE JUNE 1953 THROUGH DECEMBER 1956 MAY AGGREGATE AS MUCH AS $23,990,784 WITH A CORRESPONDING ROYALTY PAYMENT OBLIGATION OF APPROXIMATELY $719,723.52. OF THE DATE OF YOUR LETTER, IT IS ESTIMATED THAT THE AIR FORCE MADE SIMILAR PURCHASES SINCE JANUARY 1, 1947, IN THE AGGREGATE AMOUNT OF $81,227,580.07, INCLUDING PURCHASES AGGREGATING THE SUM OF $22,920,993.02 FOR THE PERIOD JANUARY 1, 1947, TO JULY 1, 1952, THE DATE ON WHICH A CONTRACT WITH THE FEDERAL REPUBLIC OF GERMANY, INTENDING TO END THE WAR STATUS, WAS RATIFIED BY THE UNITED STATES SENATE.

PARTICULARLY IN REGARD TO WHATEVER OBLIGATION THE DEPARTMENT OF THE AIR FORCE MIGHT HAVE IN THE MATTER, THE QUESTION IS RAISED AS TO WHEN THE UNITED STATES CEASED TO BE A BELLIGERENT IN WORLD WAR II, WITHIN THE MEANING OF ARTICLE 5 (B) OF THE CONTRACT. YOU REFER TO THE FACT THAT FROM A POLITICAL STANDPOINT, THE UNITED STATES DID NOT CEASE TO BE A BELLIGERENT IN WORLD WAR II UNTIL JULY 1, 1952.

ON THE BASIS OF THE COURT DECISIONS CITED IN YOUR LETTER TO THE EFFECT THAT CONTRACTUAL TERMS LIKE "DURATION OF THE WAR" SHOULD BE GIVEN THEIR COMMON AND ORDINARY MEANING IN THE ABSENCE OF ANY CLEAR INDICATION THAT THE PARTIES INTENDED OTHERWISE, THE CONCLUSION IS WARRANTED THAT THE UNITED STATES CEASED TO BE A BELLIGERENT IN WORLD WAR II, WITHIN THE MEANING OF ARTICLE 5 (B) OF THE CONTRACT, NO LATER THAN DECEMBER 31, 1946, WHICH WAS PROCLAIMED BY THE PRESIDENT AS THE EFFECTIVE DATE OF THE CESSATION OF HOSTILITIES. IN THIS CONNECTION, IT IS GENERALLY RECOGNIZED THAT WORLD WAR II ENDED EITHER ON AUGUST 14, 1945, THE DATE OF THE UNCONDITIONAL SURRENDER OF JAPAN, OR ON VJ-1DAY, SEPTEMBER 2, 1945, WHEN THE SURRENDER DOCUMENT WAS SIGNED. THUS, IT IS APPARENT THAT THE PROVISIONS OF ARTICLE 5 (B) REQUIRE ROYALTY PAYMENTS TO BE MADE ON ALL OF THE REPORTED PURCHASES FROM OTHER THAN SPERRY ON AND AFTER JANUARY 1, 1947.

OTHER QUESTIONS HAVE BEEN PRESENTED IN VIEW OF A DECISION OF OUR OFFICE, A-76676, DATED MAY 5, 1937, TO THE SECRETARY OF WAR, IN WHICH A PROPOSED LICENSE AGREEMENT WAS FOUND TO BE WITHOUT OBJECTION IF THERE WERE ELIMINATED THOSE TERMS WHICH MIGHT BE UNDERSTOOD TO RELATE TO PROCUREMENT INDEPENDENTLY OF THE WAR DEPARTMENT. THAT DECISION WAS DIRECTED PRIMARILY AGAINST THOSE PARTS OF THE PROPOSED AGREEMENT WHICH WOULD HAVE MADE IT NECESSARY FOR OTHER DEFENSE ESTABLISHMENTS TO PURCHASE FROM THE LICENSOR TWO-THIRDS OF THEIR REQUIREMENTS FOR MACHINE GUNS OF THE TYPES COVERED BY THE PATENTS INVOLVED, AND FOR THE WAR DEPARTMENT TO MAKE REPORTS TO THE LICENSOR CONCERNING THE QUANTITIES OF EQUIPMENT MANUFACTURED BY THE GOVERNMENT. IT WAS CONSIDERED THAT THE WAR DEPARTMENT HAD NO AUTHORITY TO BIND OTHER DEPARTMENTS IN SUCH MATTERS.

THE INSTANT NAVY CONTRACT CONTAINS NO SUCH REQUIREMENTS RESPECTING THE PROCUREMENT ACTIVITIES OF OTHER DEPARTMENTS. IT VESTS IN THE GOVERNMENT TITLE TO THE INVENTIONS, SUBJECT TO CERTAIN RESERVATIONS; AND AS LATER MODIFIED, IT RESERVES TO THE GOVERNMENT AN EXCLUSIVE LICENSE FOR THE USE OF THE INVENTIONS FOR FIRE CONTROL PURPOSES, BOTH SUBJECT TO THE STIPULATED ROYALTY PAYMENTS. SUBJECT TO THE MAXIMUM ROYALTY PAYMENT OF $400,000 UNDER ARTICLE 4, OTHER DEPARTMENTS COULD, IF THEY SO DESIRED, TAKE ADVANTAGE OF A ROYALTY-FREE USE OF THE INVENTIONS DESCRIBED IN THE CONTRACT DURING WORLD WAR II, AND COULD ALSO CONTINUE USING THE INVENTIONS SUBJECT TO THE ROYALTY-PAYMENT PROVISIONS OF ARTICLE 5 (B) OF THE CONTRACT. THE CONTRACT WAS BINDING UPON THE AIR FORCE ONLY TO THE EXTENT THAT IT EXERCISED THE RIGHT TO USE THE INVENTIONS.

OF COURSE, THE AIR FORCE MIGHT HAVE UNDERTAKEN TO ACQUIRE THE RIGHT TO USE THE INVENTIONS ON DIFFERENT TERMS. HOWEVER, THE CORRESPONDENCE IN THE FILE DISCLOSES THAT IN 1944 THE CONTRACTOR FURNISHED A COPY OF THE NAVY CONTRACT TO THE AIR FORCE AND THAT IN 1949 THE SPERRY GYROSCOPE COMPANY, AFTER ADVISING THE AIR FORCE THAT SOME 32 CLAIMS HAD BEEN ALLOWED IN THE U.S. PATENT APPLICATION, SERIAL NO. 440, 660, REQUESTED THAT THE NECESSARY STEPS BE TAKEN TO EFFECT PAYMENT OF THE 3 PERCENT ROYALTIES DUE ON GUNSIGHTS BEING MANUFACTURED FOR THE AIR FORCE BY OTHER CONCERNS. THE AIR FORCE IN A LETTER DATED JUNE 29, 1949, TO SPERRY, EXPRESSED THE OPINION "THAT THE GOVERNMENT HAS NOT YET CEASED TO BE A BELLIGERENT IN THE PRESENT WAR AND, THEREFORE, NO PAYMENTS ARE REQUIRED TO BE MADE TO M.I.T. BY THE GOVERNMENT FOR THE BENEFIT OF YOUR COMPANY.' EVIDENTLY, THE AIR FORCE, AFTER HAVING SOUGHT TO TAKE ADVANTAGE OF THE ROYALTY-FREE PROVISIONS OF THE NAVY CONTRACT, IS NOT NOW IN A POSITION TO CONTEND THAT IT IS NOT BOUND BY THE TERMS OF THAT CONTRACT.

MOREOVER, IT IS WELL ESTABLISHED THAT AN IMPLIED CONTRACT TO PAY FOR THE USE OF A PATENT ARISES OUT OF ITS USE BY THE UNITED STATES WITH THE PATENTEE'S CONSENT. UNITED STATES V. ANCIENS ETABLISSEMENTS, 224 U.S. 309; BROOKS V. UNITED STATES, 39 C.CLS. 494; BETHLEHEM STEEL CO. V. UNITED STATES, 258 U.S. 321; DF. OBERLIKON MACHINE TOOL WORKS V. UNITED STATES, 118 C.CLS. 614. THE CONTRACTOR HAD IN 1944 EFFECTUALLY CONSENTED TO THE USE OF THE INVENTION BY THE AIR FORCE SUBJECT TO THE PROVISIONS OF THE NAVY CONTRACT AND AT NO TIME DID THE AIR FORCE EVIDENCE AN INTENTION TO USE THE INVENTION EXCEPT ON THE BASIS AS AUTHORIZED UNDER THE NAVY CONTRACT. HENCE, ASIDE FROM THE QUESTION AS TO WHETHER THE DEPARTMENT OF THE NAVY WAS AUTHORIZED TO BIND THE AIR FORCE, THE CIRCUMSTANCES OF THE CASE ARE SUCH AS TO SUGGEST THAT THE AIR FORCE IS OTHERWISE LIABLE TO THE CONTRACTOR ON THE BASIS OF AN IMPLIED CONTRACT TO PAY ROYALTIES AT THE RATE SPECIFIED IN ARTICLE 5 (B) OF CONTRACT NORD-597 IN CONNECTION WITH ITS PURCHASES FROM OTHER THAN THE SPERRY GYROSCOPE COMPANY AFTER THE CESSATION OF HOSTILITIES IN WORLD WAR II.

UNDER THE TERMS OF THE PROPOSED LICENSE AGREEMENT BETWEEN THE CONTRACTOR AND THE DEPARTMENTS OF THE NAVY AND THE AIR FORCE, A MAXIMUM OF $600,000 WOULD BE PAYABLE BY THE GOVERNMENT. THAT AMOUNT INCLUDES $200,000 AS ROYALTIES ON PURCHASES MADE BY THE AIR FORCE PRIOR TO 30, 1953; THE RESPECTIVE AMOUNTS OF $166,500 AND $83,500 ON AIR FORCE AND NAVY PURCHASES DURING THE PERIOD JULY 1953 THROUGH DECEMBER 1956; AND ROYALTIES AT STIPULATED RATES BUT NOT EXCEEDING $150,000 FOR DEVICES PURCHASED FROM OTHER THAN SPERRY ON AND AFTER JANUARY 1, 1957, AND UNTIL APRIL 15, 1962. IT IS RECITED THAT ,THIS AGREEMENT IS AUTHORIZED BY THE ACT OF AUGUST 1, 1953, 31 U.S.C. 649B.'

YOU STATE THAT THE DEPARTMENTS OF THE NAVY AND THE AIR FORCE CONSIDER THAT IT IS IN THE BEST INTERESTS OF THE GOVERNMENT TO ENTER INTO THE PROPOSED LICENSE AGREEMENT. SINCE THE APPARENT OBLIGATION OF THE GOVERNMENT UNDER ARTICLE 5 (B) OF CONTRACT NORD-597 WOULD BE SUBSTANTIALLY REDUCED THEREBY, YOU ARE ADVISED THAT, IN OUR OPINION, THE DEPARTMENTS OF THE NAVY AND THE AIR FORCE ARE AUTHORIZED TO ENTER INTO SUCH AGREEMENT PURSUANT TO THE COMPENSATION PROVISIONS OF THE SECRECY STATUTES AND SECTION 649B, TITLE 31, U.S.C. WHICH RELATES TO THE AVAILABILITY OF MILITARY APPROPRIATIONS FOR THE ACQUISITIONS OF COPYRIGHTS, PATENTS, LICENSES, DESIGNS, ETC., AND "FOR THE PURCHASE OR OTHER ACQUISITION OF RELEASE, BEFORE SUIT IS BROUGHT, FOR PAST INFRINGEMENT OF LETTERS PATENT.'