author: PHILLIPS, Chief Judge.

text:
    SCHNADIG CORPORATION, Plaintiff-Appellee, v. GAINES MANUFACTURING CO., INC., Defendant-Appellant.
    No. 73-1470.
    United States Court of Appeals, Sixth Circuit.
    Argued Dec. 11, 1973.
    Decided March 12, 1974.

      Roy Keathley, Memphis, Tenn., on brief, for defendant-appellant; David Rabin, Greensboro, N. C., of counsel.
    Timothy L. Tilton, John W. Chestnut, Chicago, 111., on brief, for plaintiff-ap-pellee; Henry T. V. Miller, Memphis, Tenn., of counsel.
    Before PHILLIPS, Chief Judge, MILLER, Circuit Judge, and O’SULLIVAN, Senior Circuit Judge.
   PHILLIPS, Chief Judge.

This is an appeal from a decision of the District Court holding Design Patent No. 212,602 valid and infringed. We affirm.

Schnadig Corporation (Schnadig) is the owner of Design Patent No. 212,602 for a “Sectional Sofa.” The patent issued on November 5, 1968, on an application filed by Robert A. Gera on March 14, 1968.

Appellee, Schnadig, is a Delaware corporation having its company offices in Chicago, Illinois, and production facilities in many states. Schnadig is engaged in the manufacture and sale of living room furniture, including sectional sofas.

Appellant, Gaines Manufacturing Co., Inc. (Gaines), is a Tennessee corporation with its headquarters in McKenzie, Tennessee. Gaines is also engaged in the manufacture of living room furniture.

Jurisdiction arises under 28 U.S.C. § 1338(a).

Background

Schnadig’s Vice-President for Design, Robert A. Gera, created the patented design during November and December 1967. Mr. Gera first prepared a group of sketches and then constructed a half-scale clay model. Further refinements were effected and a full scale prototype was constructed. In January 1968 the sofa was displayed at the Winter Furniture Markets. It was designated as the Model 4000 and was the feature unit of Schnadig’s new Corona Collection. The sofa was an immediate success, remained extremely popular in subsequent years and has enjoyed respect throughout the furniture industry.

The patented design is for an L-shaped or “corner-type” sectional. It consists of a 2, 3 seat ottoman style sofa resting on a pedestal base. The two seat section is bounded on one side by a curved arm. The longer section is armless and adjoins a separate rectangular ottoman. Extensive use is made of wood trim, much of it in the form of rope turnings. Although the sofa could broadly be classified as of Spanish style, the overall effect is one of warm and inviting as opposed to the cold harsh lines of traditional Spanish style sofas. The design is illustrated in the patent drawing:

Schnadig admits that the component parts of the sofa combination were generally old and known in the trade. However, they argue that the overall appearance of the styling and decoration is patentable. They contend and the District Court found that the Gera design was a creative design, rather than a restyled design, which represented a new concept embodying a new and distinctive style. Judge Wellford characterized the style as “warm Spanish” and found that it involved distinctive differences in overall shape, form, appearance and impression from any of the prior art designs.

Gaines challenges the holding of the District Court on three grounds: 1) the patent is anticipated by and obvious over the prior art; 2) the patent was procured by fraud or unclean hands in that more pertinent and relevant prior art was concealed, suppressed and withheld from the Patent Office; and 3) there is no infringement.

Prior Art

The prior art showed 2, 3 seat ottoman sectional sofas in Modern, Contemporary, Spanish and Mediterranean styles. ' Additionally, pedestal bases, semi-circular back cushions, armless sectional units, curved arm sectional units and rope turnings were known in the art.

However, the overall appearance and emphasis of the art was either Contemporary or Mediterranean with emphasis on horizontal, angular or rectangular features, i. e., linear qualities, and was cold and harsh. To the contrary, the Gera design was smoothly flowing, warm and inviting.

With respect to specific references in the prior art, Gaines challenges Judge Harry W. Wellford’s determination that the Schnadig Model 9020 and the Gaines Model 565 were not prior art.

Relying on Illinois Tool Works, Inc. v. Solo Cup Co., Inc., 461 F.2d 265, 269-270 (7th Cir. 1972), and Application of Facius, 408 F.2d 1396, 1406 (CCPA 1969), Judge Wellford refused to include the Model 9020 in the prior art because it was Gera’s own invention and was not disclosed to the public more than one year prior to the filing date of the Gera patent. Judge Wellford, after noting that the Gaines Model 565 comprised “substantially the same design” as the Model 9020, also refused to include it in the prior art because Gaines had failed to prove prior use with clear and satisfactory evidence. See Cold Metal Prod. Co. v. E. W. Bliss Co., 285 F.2d 244 (6th Cir. 1960), cert, denied, 366 U.S. 911, 81 S.Ct. 1085, 6 L.Ed.2d 235 (1961).

Even though the District Court excluded these models from the “technical” prior art, it considered them along with the other art in arriving at the final holding of patent validity. We also have considered these models as part of the prior art and, therefore, do not reach the issues and arguments presented in Gaines’ brief with respect to their exclusion vel non.

Validity

Designs are governed by 35 U.S.C. § 171. To be patentable a design must be new, original, ornamental and nonobvious. Hadco Products, Inc. v. Walter Kidde and Co., 462 F.2d 1265, 1269 (3rd Cir.), cert, denied, 409 U.S. 1023, 93 S.Ct. 464, 34 L.Ed.2d 315 (1972). Novelty and unobviousness are separate and distinct tests, and both must be presented in a patentable design. In Monroe Auto Equipment Co. v. Heckethorn Mfg. and Supply Co., 332 F.2d 406, 414-415 (6th Cir.), cert, denied, 379 U.S. 888, 85 S.Ct. 160, 13 L.Ed.2d 93 (1964), we stated:

“We must be careful to make the distinction between novelty and invention in relation to anticipation. Novelty and invention are two separate tests, and anticipation belongs only with novelty. This Court has pointed out that some courts tend, mistakenly, to use anticipation as an equivalent of invention. Allied Wheel Products v. Rude, [6 Cir.] supra, 206 F.2d [752] at 761; Firestone v. Aluminum Co. of America, [6 Cir., 285 F.2d 928] supra. See also, Borkland v. Pedersen, 244 F.2d 501, 502 (C.A. 7). Thus it is incorrect to say that a patent lacks invention because it is anticipated. If it is anticipated it lacks novelty; it lacks invention if it would have been obvious.
“From this it should be clear that even though the prior art may not anticipate the patent in question, the disclosures of the prior art may negative invention. Harvey v. Levine, 322 F.2d 481, 483 (C.A. 6); Allied Wheel Products v. Rude, supra, 206 F.2d at 760; Leishman v. General Motors Corp., 191 F.2d 522, 530 (C.A. 9); Seymour v. Ford Motor Co., 44 F.2d 306, 309 (C.A. 6). That is, a prior device may not be substantially identical to the patented device and therefore cannot anticipate; however, it may be that in the light of this prior device the patented device would have been obvious.”

The ultimate question of patent validity is one of law and, accordingly, is not subject to the confines of the clearly erroneous test mandated by Fed. R.Civ.P. 52(a). See, e. g., Kolene Corp. v. Motor City Metal Treating, Inc., 440 F.2d 77, 81 (6th Cir.), cert, denied, 404 U.S. 886, 92 S.Ct. 203, 30 L.Ed.2d 169 (1971). However, findings bearing on novelty and unobviousness, insofar as they rest upon factual issues, are subject to the clearly erroneous rule. As we stated in Kolene, supra:

“The question of ‘obviousness’ in determining patent validity is a mixed question of both fact and law. Kaiser Industries v. McLouth Steel Corp., 400 F.2d 36, 41 (6th Cir.); National Filters, Inc. v. Research Products Corp., 384 F.2d 516 (5th Cir.); Hensley Equipment Co. v. Esco Corp., 375 F.2d 432 (9th Cir.). In ruling on that question the Supreme Court said:
‘(1) Under § 103, the scope and content of the prior art are to be determined ;
‘(2) Differences between the pri- or art and the claims at issue are to be ascertained;
‘(3) And the level of ordinary skill in the pertinent art resolved.
‘(4) Against this background, the obviousness or nonobviousness of the subject matter is determined.
* * * -X- -X- -x-
“When the District Court determines items numbered 1, 2 and 3, it makes findings of fact which are binding on appeal unless the findings are clearly erroneous. Rule 52(a), Fed.R.Civ.P. It is the ultimate determination of the trial judge (item number 4 above) which is a conclusion of law with which this Court may disagree based on the established findings of fact. See Monroe Auto Equipment Co. v. Heckethorn Mfg. & Sup. Co., 332 F.2d 406 (6th Cir.), cert, denied, 379 U.S. 888, 85 S.Ct. 160, 13 L.Ed.2d 93.”

Appellant contends that the clearly erroneous standard is inapplicable to the extent that findings rest on documentary evidence. The law in this Circuit is well settled to the contrary. See H. K. Porter Co., Inc. v. Goodyear Tire and Rubber Co., 437 F.2d 244, 246 (6th Cir.), cert, denied, 404 U.S. 885, 92 S.Ct. 203, 30 L.Ed.2d 169 (1971); United States Steel Corp. v. Fuhrman, 407 F.2d 1143, 1145-1146 (6th Cir. 1969), cert, denied, 398 U.S. 958, 90 S.Ct. 2162, 26 L.Ed.2d 542 (1970); Commissioner v. Spermacet Whaling & Shipping Co., S/A, 281 F.2d 646 (6th Cir. 1960).

Judge Wellford found that the patented design was not anticipated by the prior art. Gaines does not strenuously contest this holding. However, in the nature of a blanket attack of the District Court’s finding of novelty, they, apparently, propose a rather broad definition of anticipation.

The test for novelty in design patents is the same as for utility patents. 35 U.S.C. § 171, supra. With respect to the latter, this court has stated that a description of a patented invention within the meaning of 35 U.S.C. § 102 must be in: See also, Allied Wheel Products, Inc. v. Rude, 206 F.2d 752, 759-760 (6th Cir. 1953).

“[S]uch full, clear and exact terms as to enable any person skilled in the art or science to which the invention appertains, to practice the invention. Vague and general representations are not sufficient in law to support the defense of anticipation. . • . . ” Ballantyne Instruments and Electronics, Inc. v. Wagner, 345 F.2d 671, 673-674 (6th Cir. 1965).

Translated into design terminology, novelty is present “when the average observer takes the new design for a different, and not just a modified already existing design.” Thabet Manuf. Co. v. Kool Vent Metal Awning Corp. of America, 226 F.2d 207, 212 (6th Cir. 1955). This is the prevailing test. See, e. g., Rains v. Cascade Industries, Inc., 402 F.2d 241, 247 (3rd Cir. 1968); Hygienic Specialities Co. v. H. G. Salzman, Inc., 302 F.2d 614, 617 (2d Cir. 1962); Application of Bartlett, 300 F.2d 942, 943, 49 CCPA 969 (1962).

In determining the validity of a design patent, it is the appearance of the article as a whole, the tout ensemble, that must be compared with the prior art, since it is the appearance that constitutes the contribution to the public. Gorham Co. v. White, 14 Wall. 511, 81 U.S. 511, 20 L.Ed. 731 (1871); Hadco Products, Inc., supra, 462 F.2d at 1269; Schwinn Bicycle Co. v. Goodyear Tire and Rubber Co., 444 F.2d 295 (9th Cir. 1970); Glen Raven Knitting Mills, Inc. v. Sanson Hosiery, 189 F.2d 845 (4th Cir. 1951).

We agree with Judge Wellford’s holding that the patented design was not anticipated by the prior art.

Any discussion of obviousness would be incomplete without considering the oft-quoted words of the Supreme Court in Graham v. John Deere Co., 383 U.S. 1, 17-18, 86 S.Ct. 684, 694, 15 L.Ed.2d 545 (1966):

“While the ultimate question of patent validity is one of law, A. & P. Tea Co. v. Supermarket Corp., supra, [340 U.S. 147] at 155 [71 S.Ct. 127, 95 L. Ed. 162], the § 103 condition, which is but one of three conditions, each of which must be satisfied, lends itself to several basic factual inquiries. Under § 103, the scope and content of the prior art are to be determined; differences between the prior art and the claims at issue are to be ascertained; and the level of ordinary skill in the pertinent art resolved. Against this background, the obviousness or nonob-viousness of the subject matter is determined. Such secondary considerations as commercial success, long felt but unsolved needs, failure of others, etc., might be utilized to give light to the circumstances surrounding the origin of the subject matter sought to be patented. As indicia of obviousness or nonobviousness, these inquiries may have relevancy. See Note, Subtests of ‘Nonobviousness’: A Nontechnical Approach to Patent Validity, 112 U.Pa.L.Rev. 1169 (1964.)”

Unlike the “average observer” test for novelty, obviousness is measured by the skill of the “ordinary designer.” Cavu Clothes, Inc. v. Squires, Inc., 184 F.2d 30, 33 (6th Cir. 1950), cert, denied, 340 U.S. 920, 71 S.Ct. 357, 95 L.Ed. 665 (1951); Forestek Plating & Mfg. Co. v. Knapp-Monarch Co., 106 F.2d 554, 559 (6th Cir. 1939.)

Even though a design is a combination of old elements, it may, nevertheless, be patentable if it would not be obvious to a designer having ordinary skill in the art. Sel-O-Rak Corp. v. Henry Hanger & Display Fixture Corp. of America, 232 F.2d 176, 180 (5th Cir.), cert, denied, 352 U.S. 870, 77 S.Ct. 95, 1 L.Ed.2d 76 (1956); Glen Raven Knitting Mills, supra, 189 F.2d at 850; Forestek Plating & Mfg. Co., supra, 106 F.2d at 559; Protex Signal Co. v. Feniger, 11 F.2d 43, 46 (6th Cir. 1926).

However, mere differences between the design and the prior art are insufficient to constitute patentability when they would be obvious to a designer with ordinary skill in the art. Even though the design is “new and pleasing enough to catch the trade” it may, nevertheless, be obvious. Hygienic Specialties Co. v. H. G. Salzman, Inc., supra 302 F.2d at 618. See also Cavu Clothes, supra, 184 F.2d at 33-34; Western Auto Supply Co. v. American-National Co., 114 F.2d 711, 712 (6th Cir. 1940).

Judge Wellford determined the scope and content of the prior art, the differences between the Gera design and the prior art and the level of ordinary skill in the art. He determined that the Gera design was a new concept and distinctively different from the prior art in overall shape, form, appearance and impression. He stated that “the Gera Patent design, considered as a whole, comprises [non]obvious design subject matter . . . .” We have studied the record and examined the pictures of the prior art sofas and are in complete agreement with Judge Wellford’s holding.

Even though we do not consider it a close question, we find secondary considerations that add further support to the nonobviousness of the Gera design. The patented design met with unprecedented commercial success and was the biggest seller in Schnadig’s history. Still another secondary consideration is the fact that the Gera design was substantially copied by Gaines. Sel-O-Rak Corp., supra, 232 F.2d at 179.

Appellant has challenged Judge Well-ford’s application of the obviousness test. Specifically, Gaines alleges that the judge confused “anticipation” with “obviousness” and was not aware that references could be combined.

We find this allegation to be untenable. A reading of the opinion of Judge Wellford shows his awareness of combinations of references. When he was discussing the exclusion of the Model 9020 from the prior art, he stated that defendant “seeks to use it in combination with other art references to attack the obviousness of the patent in suit.”

Moreover, once it has been determined that the prior art does not anticipate the claimed invention and the differences between the two have been catalogued, it is well nigh implicit and most probably inevitable that combinations of references be considered in determining whether the differences would be obvious to one of ordinary skill in the art.

Appellant also challenges Judge Wellford’s finding that, “under the circumstances of this case,” the presumption of validity contained in 35 U.S.C. § 282 was appropriate. Specifically, Gaines contends that the presumption of validity is inconsistent with Judge Well-ford’s conclusion that the prior art cited by Gaines was, for the most part, more pertinent and relevant than the art considered by the Patent Office.

We have stated repeatedly that the presumption of validity is weakened when the Patent Office has not considered pertinent and material prior art. See, e. g., Westwood Chemical, Inc. v. Owens-Corning Fiberglas Corp., 445 F; 2d 911, 914, 916 (6th Cir. 1971), cert, denied, 405 U.S. 917, 92 S.Ct. 941, 30 L.Ed.2d 786 (1972); Monroe Auto Equipment Co., supra, 332 F.2d at 412-413; Preformed Line Products Co. v. Fanner Mfg., 328 F.2d 265 (6th Cir.), cert, denied, 379 U.S. 846, 85 S.Ct. 56, 13 L.Ed. 2d 51 (1964). By pertinent and material prior art, we mean art that would ordinarily be expected to influence the Patent Examiner’s decision with respect to the patentability of the invention. Alleged art that is cumulative to cited art does not weaken or destroy the presumption of validity.

Moreover, general statements that the presumption is weakened or destroyed by the Patent Examiner’s failure to consider all pertinent prior art cannot be viewed in a vacuum and relied upon as a matter of course. The facts of each case present a different problem. “The degree by which [the presumption] is weakened depends on a balancing of the pertinence of the newly cited art with the pertinence of the art considered by the Patent Office.” Tee-Pak, Inc. v. St. Regis Paper Co., 491 F.2d 1193 (6th Cir. 1974). To forestall any doubt, we agree with Judge Wellford that, under the facts of this case, and considering the pertinence of the newly cited prior art, the design patent was entitled to a presumption of validity. To quote from the record: “[N]one [of the references] are in the same . . . ‘ball park.’ ”

Infringement

Infringement is a question of fact, and, therefore, the clearly erroneous standard applies. Tappan Co. v. General Motors Corp., 380 F.2d 888, 891 (6th Cir. 1967). The test for infringement in design patent cases is the ordinary observer test as crisply stated by the Supreme Court over 100 years ago in Gorham Co. v. White, supra:

“Plainly, it must be sameness of appearance, and mere difference of lines in the drawing or sketch, a greater or smaller number of lines, or slight variances in configuration, if sufficient to change the effect upon the eye, will not destroy the substantial identity. An engraving which has many lines may present to the eye the same picture, and to the mind the same idea or conception as another with much fewer lines. The design, however, would be the same. So a pattern for a carpet, or a print may be made up of wreaths of flowers arranged in a particular manner. Another carpet may have similar wreaths, arranged in a like manner, so that none but very acute observers could detect a difference. Yet in the wreaths upon one there may be fewer flowers, and the wreaths may be placed at wider distances from each other. Surely in such a ease the designs are alike. The same conception was in the mind of the designer, and to that conception he gave expression.” 81 U.S. at 526-527.
“The purpose of the law must be effected if possible; but, plainly, it cannot be if, while the general appearance of the design is preserved, minor differences of detail in the manner in which the appearance is produced, observable by experts, but not noticed by ordinary observers, by those who buy and use, are sufficient to relieve an imitating design from condemnation as an infringement.
“We hold, therefore, that if, in the eye of an ordinary observer, giving such attention as a purchaser usually gives, two designs are substantially the same, if the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other, the first one patented is infringed by the other.” Id. at 528.

See also Smith v. Whitman Saddle Co., 148 U.S. 674, 13 S.Ct. 768, 37 L.Ed. 606 (1893); Tappan Co., supra, 380 F.2d at 891.

Judge Wellford heard much testimony to the effect that the Gaines Model 495 would appear substantially identical to the ordinary consumer. He further found that the differences between the Gera sofa and the Model 495 were minor and probably attributable to cost. We are mindful of the oft-quoted words of the Supreme Court in Graver Tank & Mfg. Co., Inc. v. Linde Air Products Co., 339 U.S. 605, 607, 70 S.Ct. 854, 856, 94 L.Ed. 1097 (1950):

“One who seeks to pirate an invention, like one who seeks to pirate a copyrighted book or play, may be expected to introduce minor variations to conceal and shelter the piracy. Outright and forthright duplication is a dull and very rare type of infringement.”

We find no error in the District Court’s holding of infringement.

Fraud and Unclean Hands

Finally, we come to appellant’s major contention. Gaines alleges that Schna-dig “concealed, suppressed and withheld” pertinent and relevant prior art from the Patent Office. The District Court found that Schnadig was not guilty of any “deliberate or negligent failure to disclose material facts on the proof and record.” Such a finding can be reversed only if it is clearly erroneous. Becton Dickinson & Co. v. Robert P. Scherer Corp., 211 F.2d 835, 838 (6th Cir. 1954).

Appellant’s fraud or unclean hands argument first arose, apparently as an afterthought, in a post-trial brief. Schna-dig had petitioned the Patent Office to grant the Gera application special examining status on the basis of actual infringement. Accompanying the petition was an affidavit by Gera’s patent attorney which established that he had caused a search of the prior art to be made by a Washington associate. The search covered the classes and subclasses suggested by the Patent Examiner in charge of the art, and a number of references were then cited to the Patent Office. Applicant’s attorney then stated that the search had failed to disclose any anticipatory reference and, in his opinion, the application was allowable over the cited prior art.

The Patent Examiner conducted his own independent search and cited two of the references furnished him by the applicant and three additional ones. The cited art was not applied against the design.

Appellant also points to testimony by the patentee and Mr. Schnadig, the President of Schnadig Corp., to the effect that they did not know what prior art was cited to and by the Patent Office during the prosecution of the Gera design.

Based on Judge Wellford’s finding that art cited by Gaines was more pertinent and relevant than art cited to or by the Patent Office and the above facts, Gaines infers that Schnadig Corporation intentionally and deliberately concealed, suppressed and withheld prior art from the Patent Examiner. Gaines contends that the Patent Examiner would not have allowed the Gera design if he had considered the concealed art.

Based upon our review of the entire record and particularly the evidence stated, supra, we agree with Judge Well-ford’s finding that Schnadig did not intentionally or negligently fail to disclose material facts to the Patent Examiner. While we do not condone the practice whereby a patent attorney keeps an inventor or others involved with the invention and having knowledge of the prior art in the dark with respect to the file wrapper, there is not one shred of evidence in this record that shows that pertinent and material evidence was concealed from the Patent Office. -On the contrary, as Mr. Gera and others testified at trial, and as found by Judge Wellford, the design was a new concept and was distinctly different from the prior art.

Fraud or unclean hands are not to be lightly inferred. They must be established by “clear, unequivocal and convincing” evidence. Becton-Dickinson & Co. v. Robert P. Scherer Corp., 106 F.Supp. 665, 671 (E.D.Mich.1952), aff’d, 211 F.2d 835 (6th Cir. 1954). See also Scott Paper Co. v. Ft. Howard Paper Co., 432 F.2d 1198, 1204 (7th Cir. 1970), cert, denied, 401 U.S. 913, 91 S.Ct. 882, 27 L.Ed.2d 812 (1971). We conclude that Gaines did not meet this burden.

Appellant has also proposed an additional theory of recovery in the nature of strict liability:

“Once the plaintiff took affirmative action to submit prior art it could not discharge its uncompromising duty by submitting only less and irrelevant prior art.” Gaines Brief at 22.
“Whether intentional, negligence, inadvertence or honest mistake does not absolve Plaintiff’s conduct and constitutes fraud upon the Patent Office. One who conceals pertinent or material evidence from the Patent Office does so at his own peril.” Gaines Brief at 26-27.

We have not been directed to any case that extends the doctrine of inequitable conduct so as to impose strict liability. Nor could we find any case that even extends it to the facts of this case where: 1) There was no showing that prior art was intentionally or negligently concealed. 2) There was no showing that the allegedly “concealed” art was even known to the plaintiff. 3) The art while more pertinent was not anticipatory or indicative of obviousness. 4) Plaintiff at all times believed the design to be patentable.

In Precision Instrument Mfg. Co. v. Automotive Maintenance Machine Co., 324 U.S. 806, 818, 65 S.Ct. 993, 998, 89 L.Ed. 1381 (1945), the Supreme Court described the duty which a patent applicant owes to the Patent Office:

“Those who have applications pending with the Patent Office or who are parties to Patent Office proceedings have an uncompromising duty to report to it all facts concerning possible fraud or inequitableness underlying the applications in issue. * * * Public interest demands that all facts relevant to such matters be submitted formally or informally to the Patent Office, which can then pass upon the sufficiency of the evidence. Only in this way can that agency act to safeguard the public in the first instance against fraudulent patent monopolies.”

In Charles Pfizer & Co., Inc. v. F. T. C., 401 F.2d 574, 579 (6th Cir. 1968), cert, denied, 394 U.S. 920, 89 S.Ct. 1195, 22 L.Ed.2d 453 (1969), we stated:

“The Patent Office, not having testing facilities of its own, must rely upon information furnished by applicants and their attorneys. Pfizer and Cyanamid, like all other applicants, stood before the Patent Office in a confidential relationship and owed the obligation of frank and truthful disclosure.”

In addition to these cases, appellant relies on Beckman Instruments, Inc. v. Chemtronics, Inc., 428 F.2d 555 (5th Cir.), cert, denied, 400 U.S. 956, 91 S.Ct. 353, 27 L.Ed.2d 264 (1970), and Monsanto Co. v. Rohm and Haas Co., 456 F. 2d 592 (3rd Cir.), cert, denied, 407 U.S. 934, 92 S.Ct. 2463, 32 L.Ed.2d 817 (1972). These cases are easily distinguishable from the case at bar. In Beckman the patentee deliberately and knowingly concealed a reference that was known to be anticipatory and intentionally made misrepresentations to the Patent Office. In short, there was an intent to deceive. In Monsanto, although the court did not require a specific intent to deceive, the patentee had intentionally made misrepresentations by presenting half-truths to the Patent Office and deliberately made representations that were inconsistent with those made on two prior occasions.

The evaluation of prior art as it bears on the patentability of an invention is a matter of good faith judgment. As long as the patent applicant fulfills his “uncompromising duty” of good faith and conducts the prosecution with utmost candor, making a frank and truthful disclosure, he is not required to “list out the full spectrum of his knowledge to establish [his] bona fides.” Eli Lilly & Co., Inc. v. Generix Drug Sales, Inc., 460 F.2d 1096, 1102-1103 (5th Cir. 1972).

Appellant’s strict liability approach to prior art citation was analyzed in detail by Judge Mansfield in Xerox Corp. v. Dennison Mfg. Co., 322 F.Supp. 963, 967-970 (S.D.N.Y.1971).

In Troxel Mfg. Co. v. Schwinn Bicycle Co., 465 F.2d 1253, 1260 (6th Cir. 1972), we refused to create an implied warranty of validity in a patent license agreement. Similarly, we refuse to create it indirectly by imposing strict liability on the results of a good faith prior art search.

The judgment of the District Court is affirmed.

      . 177 U.S.P.Q. 313 (W.D.Tenn.1973).

      . “§ 171. Patents for designs

      “Whoever invents any new, original and ornamental design for an article of manufacture may obtain a patent therefor, subject to the conditions and requirements of this title.
      “The provisions of this title relating to patents for inventions shall apply to patents • for designs, except as otherwise provided.”

      . Findings bearing on the issue of novelty are included in items numbered 1 and 2.

      . “§ 102. Conditions for patentability; novelty and loss of right to patent

      “A person shall be entitled to a patent unless—
      “(a) the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the invention thereof by the applicant for patent, or “(b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States, or . .”

      . “§ 103. Conditions for patentability; non-obviotis subject matter

      “A patent may not be obtained though the invention is not identically disclosed or described as set forth in section 102 of this title, if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. Patentability shall not be negatived by the manner in which the invention was made. July 19, 1952, c. 950, § 1, 66 Stat. 798.”

      . But see Application of Laverne, 356 F.2d 1003, 1006, 53 CCPA 1158 (1966) (obviousness measured by ordinary intelligent man); Schwinn Bicycle Co., supra, 444 F.2d at 299 (obviousness measured by ordinary intelligent man).

      . “A patent shall be presumed valid. The burden of establishing invalidity of a patent shall rest on a party asserting it.”


source: Caselaw Access Project

author: DUNIWAY, Circuit Judge:

license: Public Domain

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Oscar H. KLEE, Defendant-Appellant.
    No. 73-2741.
    United States Court of Appeals, Ninth Circuit.
    March 27, 1974.
    Rehearing Denied May 1,1974.
    David J. Cooper (argued), Jonathan Newman, San Francisco, Cal., Joseph D. Allen, Ukiah, Cal., for defendant-appellant.
    Martin A. Schainbaum, Asst. U. S. Atty. (argued), James L. Browning, Jr., U. S. Atty., San Francisco, Cal., for plaintiff-appellee.

      Before KOELSCH and DUNIWAY, Circuit Judges, and THOMPSON, District Judge.

       The Honorable Bruce R. Thompson, United States District Judge for the District of Nevada, sitting by designation.

   OPINION

DUNIWAY, Circuit Judge:

Klee was found guilty by a jury under three counts of an indictment charging willful failure to file federal income tax returns for the years 1966, 1967, and 1968, in violation of 26 U.S.C. § 7203. On appeal he alleges that nine errors were committed during his trial. Most of them do not merit discussion.

1. Instruction defining “mllfully.”

Klee asserts that the trial court incorrectly instructed the jury on the meaning of the term “willfully” as used in 26 U.S.C. § 7203. He asserts that the jury should have been instructed that the term “willfully” requires the government to prove “an intent to defraud the government, or to conceal from the government facts relevant to a determination of the accused’s tax liability.” The law is to the contrary. United States v. Andros, 9 Cir., 1973, 484 F. 2d 531, 534. Klee attempts to rely upon United States v. Bishop, 1973, 412 U.S. 346, 93 S.Ct. 2008, 36 L.Ed.2d 941, yet nothing in that opinion undermines the validity of the instruction given by the trial judge here. The court’s instruction is in substantial compliance with the Bishop Court’s requirement. See 412 U.S. at 360-361, 93 S.Ct. 2008.

Juror Misconduct. 2.

When the morning recess occurred during the selection of the jury, the court admonished the jurors:

“Don’t discuss the case among yourselves, and don’t allow anyone to approach you and address you concerning the case. Do not form or express any opinion on the case until it is finally submitted to you by the Court for your decision.”

A similar admonition was given at the end of the first day of trial. Thereafter, when a recess was taken, the court usually reminded the jury of his admonition, without repeating it.

In support of a motion for a new trial, Klee presented an affidavit of one of the jurors which says that eleven of the fourteen jurors (including alternates) discussed the case during recesses and that nine of the jurors expressed premature opinions about Klee’s guilt. If the affidavit is true, the jurors disregarded the court’s admonition.

While we are aware that most judges give similar admonitions to juries, we have never had occasion to pass upon either the propriety of or the necessity for such an admonition. The circuits are not in agreement on the question. See, e. g., Winebrenner v. United States, 8 Cir., 1945, 147 F.2d 322; 23A C.J.S. Criminal Law § 1361 (1961). But cf. United States v. Carter, 10 Cir., 1970, 430 F.2d 1278, 1279; Rotolo v. United States, 5 Cir., 1968, 404 F.2d 316, 317; United States v. Viale, 2 Cir., 1963, 312 F.2d 595, 602. Judge Woodrough, dissenting in Winebrenner, supra, said:

“No normal honest Americans ever worked together in a common inquiry for any length of time with their mouths sealed up like automatons or oysters.”

We think that there is a good deal- in what he says. The important thing is not that jurors keep silent with each other about the case but that each juror keep an open mind until the case has been submitted to the jury. Be that as it may, we need not reach the problem of the propriety of the admonition here.

This is not a case that involves “any private communication, contact, or tampering, directly or indirectly, with a juror during a trial about the matter pending before the jury.” Remmer v. United States, 1954, 347 U.S. 227, 229, 74 S.Ct. 450, 451, 98 L.Ed. 654, nor does it involve the influence of the press upon the jury. Silverthorne v. United States, 9 Cir., 1968, 400 F.2d 627.

What is involved here is the premature discussion among the jurors themselves about the case. Assuming that there was juror misconduct, it is still true that not every incident of juror misconduct requires a new trial. United States v. Goliday, 9 Cir., 1972, 468 F.2d 170, 171; United States v. Collier, 7 Cir., 1966, 362 F.2d 135, 137-138; United States v. Bando, 2 Cir., 1957, 244 F.2d 833, 848-849; Cavness v. United States, 9 Cir., 1951, 187 F.2d 719, 723. The test is whether or not the misconduct has prejudiced the defendant to the extent that he has not received a fair trial. Cavness v. United States, supra, 187 F.2d at 723.

The juror’s affidavit here does not assert that any of the jurors relied upon any evidence outside of the record in reaching their verdict, nor does it assert that any of the jurors actually decided upon the defendant’s guilt before the case was submitted to them. The trial judge carefully examined the affidavit’s allegations and ruled that even if everything in'the affidavit were true a new trial was not required. Though the judge expressed his disapproval of such juror conduct, he commented that “the question is whether such conduct prejudiced defendant’s right to a fair trial by an impartial jury.” He correctly observed that “the only genuine issue in dispute was defendant’s state of mind. On this point the jury demonstrated its open-mindedness by requesting re-reading of the instructions on willfulness before bringing in its verdict.” The trial judge therefore held that “[u]nder all these circumstances the Court finds that the affidavit does not present any questions which requires further inquiry and does not justify a new trial.”

When a wise and experienced judge, who presided at the trial and observed the jury, comes to such a conclusion, it is not for us to upset it. The trial judge “was in a better position than we are to determine whether what happened was prejudicial.” United States v. Goliday, supra, 468 F.2d at 172, cf. United States v. Noah, 9 Cir., 1973, 475 F.2d 688, 692. It was not error to deny the motion for a new trial.

3. Klee’s motion to appear pro se and through counsel.

The denial of Klee’s motion was not error. He had two competent counsel. He does not like the income tax law, or his obligation to file income tax returns. His obvious motive was to be able to spout his notions to the jury without having to take the witness stand. The constitution guarantees Klee the effective assistance of counsel; it does not give him absolute discretion to dictate the form of that representation. Klee does not assert that he was denied effective representation. What Klee wanted was equal status with his attorneys and full rights of participation at every stage of the proceedings. The trial court offered him the opportunity to participate at various stages of the trial but in the interest of courtroom order he limited Klee’s activity. The court’s action was proper. See Lofton v. Procunier, 9 Cir., 1973, 487 F.2d 434, 435. In Nelson v. People of the State of California, 9 Cir., 1965, 346 F.2d 73 at 81, we said that “counsel must be the manager of the lawsuit” and that “[o]ne of the surest ways for counsel to lose a lawsuit is to permit his client to run the trial.” See also Kuhl v. United States, 9 Cir., 1966 (in banc), 370 F.2d 20, 27. Those observations are pertinent here.

4. Klee’s December 13, 1971 tax return.

Klee filed a tax return on December 13, 1971. It contained absolutely no information about Klee’s tax status but merely stated “all details available on proper demand.” Klee cannot legitimately claimed that this return fulfilled his obligation to file. “A taxpayer’s return which does not contain any information relating to the taxpayer’s income from which the tax can be computed is not a return within the meaning of the Internal Revenue Code or the regulations adopted by the Commissioner.” United States v. Porth, 10 Cir., 1970, 426 F.2d 519, 523. United States v. Daly, 8 Cir., 1973, 481 F.2d 28, 29. The court was right in telling the jury so.

No other of Klee’s assertions of error merits discussion.

Affirmed.

      . The court instructed, in part:
      “The term willfully used in the statute which I have read to you, that is, referring to one who willfully fails to make such a return, means voluntary, purposeful, deliberate and intentionally, as distinguished from accidental, inadvertent, or negligent.
      Mere negligence, even gross negligence, is not sufficient to constitute willfulness under the criminal law.
      The failure to make a timely return is willful if the defendant’s failure to act was voluntary and purposeful, and with the specific intent to fail to do what he knew the law requires to be done; that is to say, with a
      bad purpose or evil motive to disobey or disregard the law which requires to (sic) file a timely return which discloses to the government facts material to the determination of his tax liability.
      There is no necessity that the government prove that the defendant had an intention to defraud it, or to evade the payment of any taxes, for the defendant’s failure to file to be willful under this provision of the law.
      On the other hand, the defendant’s conduct is not willful if you find that he failed to file a return because of negligence, inadvertence, accident or reckless disregard for the requirements of the law, or due to his good faith misunderstanding of the requirements of the law.”


author: OAKES, Circuit Judge: MOORE, Circuit Judge (dissenting):

text:
    UNITED STATES ex rel. Raynard DUNN, Appellant, v. J. Leland CASSCLES, Superintendent, Comstock Correctional Facility, Appellee.
    No. 671, Docket 73-2321.
    United States Court of Appeals, Second Circuit.
    Argued Jan. 24, 1974.
    Decided March 25, 1974.
    Moore, Circuit Judge, dissented with opinion.
    John A. Keeffe, New York City (Keeffe & Costikyan, New York City on the brief), for appellant.
    John Proudfit, Asst. Atty. Gen. (Louis J. Lefkowitz, Atty. Gen. of N.Y.; Samuel A. Hirshowitz and Iris A. Steel, Asst. Attys. Gen. of counsel), for appel-lee.
    Before MOORE, HAYS and OAKES, Circuit Judges.
   OAKES, Circuit Judge:

This appeal by a prisoner in state custody is from a denial of a writ of habeas corpus under 28 U.S.C. § 2254. Appellant alleges that his plea of guilty in Supreme Court, Bronx County, New York, to the crime of robbery in the third degree, NYPL § 160.05, was constitutionally invalid. The court below asserted that the appellant’s claim of invalidity was based on an assertion of his innocence at the time of his plea, but the claim as we perceive it is more complex, that, within North Carolina v. Alford, 400 U.S. 25, 91 S.Ct. 160, 27 L.Ed.2d 162 (1970), the state court judge failed to ascertain if there were a factual basis for the plea. We agree with appellant’s claim and reverse the judgment.

Appellant was charged in an indictment with second degree robbery, second degree assault and third degree grand larceny. On March 8, 1971, he appeared before Justice Postel of the New York Supreme Court, represented by a Legal Aid attorney, Robert Lupo, Esq. These proceedings commenced with Mr. Lupo stating that his client wished to enter a plea of guilty to robbery in the third degree, a Class D felony, under the first count of the indictment, to cover the entire indictment against him. The State recommended acceptance of the plea and the court clerk stated that if the final finding of the court were that appellant was a narcotic addict he could be certified to the care and custody of the Narcotic Addiction Control Commission (NACC) for a period not to exceed 60 months. The sentencing judge was very careful to ask the defendant if he wanted to enter the plea and if he wanted the court to consider placing him in the “Rockefeller Program,” that is to say, under the NACC. Justice Postel also ascertained that there were no promises and that appellant understood that his plea would act as a waiver of the various constitutional rights such as trial by jury.

The judge then went on to the question whether appellant admitted the commission of the crime. The answer was yes, and the sentencing judge asked him more specifically if he did “steal money from Judy Berloco on December 11, 1970 . . . .” After several explanations by the defendant describing his arrest but not admitting to the crime, the court asked twice, “Did you commit the (this) crime?” and the defendant responded on both occasions, “Yeah.” The court then said, “All right, that means you stole from Judy Berloco; is that right?” The defendant said, “Yeah, excuse me, may I say something, Your Honor?” He then went on to say, with the court’s permission, “If I say I didn’t do it, I won’t get the Rockefeller, you’ll give me the four years and take me to trial. I’ll say I did it.” On the strength of that, the sentencing judge said, for the third time, “Did you commit this crime?” and the defendant said, “Yeah.” At that point the court said, “Tell me what you did now in your own words,” being apparently unsatisfied that the elements of the crime had been established. The defendant then proceeded to relate that he was driving home with a companion on Bruckner Boulevard, and was stopped at Evergreen Avenue, where police jumped out of their car and searched them, taking them in a car down the block where there was a lady. This lady said she wasn’t sure but that the height of her assailant did fit appellant, the result being that the policemen put him in the car.

At this point the judge interrupted to say, “So you didn’t do this, did you?” and the defense attorney, Mr. Lupo, interjected, “Just tell the truth.” The appellant said, “No, I didn’t do it.” The court then said “All right, I won’t take your plea. Let’s go to trial.” The defendant replied, “No. Then I want to get the NACC though.” The court said, “I can’t send you to NACC unless you’ve committed a crime and if you tell me you didn’t commit a crime — ” whereupon the defendant replied, “I commit the crime.” The court then said, “What did you do?” The defendant said, “I had what you said I had down there.” Mr. Lupo then said “I can’t plead him under these circumstances, Judge.” After a conference at the bench between court and counsel, the defendant sought to and was permitted to explain. He said, “What I’m trying to say is if I do say I’m not guilty right, and it goes to trial, anything happen that they find me guilty whether I did it or not I got a lot of time facing me. That’s what I want you to understand me. That’s what has me puzzled.” The court then went on to say, “Are you taking this to avoid the possibility and risks of a trial?” and the the defendant said, “Yes.” The court said, “Take his plea. Get his pedigree.” His pedigree was taken and included the following statement: “Stands mute.” Counsel asked for and the court granted an NACC exam, and subsequently did sentence appellant on April 18, 1971, to an indefinite term of imprisonment not to exceed four years.

The conviction was unanimously affirmed without opinion by the Appellate Division, First Department. People v. Dunn, 40 A.D.2d 761, 336 N.Y.S.2d 411 (1972). Leave to appeal to the New York Court of Appeals was denied on November 1, 1972. Judge Brieant below held that “Petitioner, advised by competent counsel, made a voluntary and intelligent choice among the various alternatives open to him. His guilty plea is therefore constitutionally valid.” He based his decision principally on North Carolina v. Alford, supra, where, he said, the record also contained assertions of innocence by the defendant, but the Court held that the defendant’s guilty plea was not rendered invalid by stich an assertion.

We think the opinion below takes too narrow a view of Alford. It is true that the Court is very clear in saying that “an express admission of guilt . is not a constitutional requisite to the imposition of criminal penalty.” 400 U. S. at 37, 91 S.Ct. at 167. The Alford Court stated also that “An individual accused of crime may voluntarily, knowingly, and understandingly consent to the imposition of a prison sentence even if he is unwilling or unable to admit his participation in the acts constituting the crime.” Id. And the Court upheld the plea of guilty to second degree murder with a maximum penalty of 30 years’ imprisonment where conviction following a jury verdict of guilty on a first degree murder charge would have involved either death or a life sentence, the decision being that the plea was not rendered involuntary simply on the basis that it was entered to avoid the possibility of the death penalty.

At the same time, and this is what the court below omitted to take into account, the opinion delivered by Mr. Justice White points out that “Here the State had a strong case of first-degree murder against Alford,” and negates a distinction between a plea that refuses to admit commission of a criminal act and a plea containing a protestation of innocence “when, as in the instant case, a defendant intelligently concludes that his interests require entry of a guilty plea and the record before the judge contains strong evidence of actual guilt. Id. (emphasis added). “In view of the strong factual basis for the plea demonstrated by the State and Alford’s clearly expressed desire to enter it despite his professed belief in his innocence,” the Court held “that the trial judge did not commit constitutional error in accepting it.” Id. at 38, 91 S.Ct. at 168 (footnote omitted). An accompanying footnote is strong authority for the proposition that

Because of the importance of protecting the innocent and of insuring that guilty pleas are a product of free and intelligent choice, various state and federal court decisions properly caution that pleas coupled with claims of innocence should not be accepted unless there is a factual basis for the plea . . . and until the judge taking the plea has inquired into and sought to resolve the conflict between the waiver of trial and the claim of innocence.

Id. at 38 n. 10, 91 S.Ct. at 168 (emphasis added).

Here the judge taking the plea did not assure himself that there was a factual basis for the plea. The State did nothing to supply the missing elements by way even of an offer of what its proof would have been had the case gone, to trial. The defendant’s affirmative general statements that he did commit the crime were also offset by negative statements that he did not. He wanted NACC treatment and not to run the risk of spending some years in prison. While he may have been making a voluntary choice, nevertheless even his attorney said, “I can’t plead him under these circumstances.” Although no factual basis was established or proffered, the court took the plea.

It is true that inconsistencies on the part of the defendant are themselves insufficient to nullify a plea, but this is so only when the requirement that there be a factual basis for the plea is satisfied. Griffin v. United States, 132 U.S.App.D.C. 108, 405 F.2d 1378, 1380 (1968); Bruce v. United States, 126 U.S.App.D.C. 336, 379 F.2d 113, 119 (1967) (high probability of conviction is sufficient even though the judge need not reach a definite conclusion of guilt). See also ABA Project on Minimum Standards for Criminal Justice, Standards Relating to Pleas of Guilty § 1.6, at 30 (Approved Draft 1968). As the New York Court of Appeals said in People v. Serrano, 15 N.Y.2d 304, 308, 258 N.Y.S.2d 386, 388, 206 N.E.2d 330, 332 (1965), “the mere mouthing of the word ‘guilty’ may not be relied upon to establish all the elements of [the] crime.”

In short, there was here no factual basis for the plea other than the defendant’s own “mouthing” of the word “guilty,” or general acknowledgment of guilt subsequently denied, and explicable perhaps by the desire on the part of a narcotics addict to obtain treatment as opposed to the risk of being punished for a crime which he may well not have committed. Our own United States ex rel. Burke v. Mancusi, 453 F.2d 563 (2d Cir. 1971), also relied upon by the district court, does not seem to us to involve the point here in question. There the claim was that the guilty pleas were induced by broken promises and the court affirmed the denial of the petition on the ground that petitioner voluntarily and knowingly waived an opportunity to withdraw his pleas.

Judgment reversed; cause remanded with directions to grant the petition on condition that appellant be permitted to withdraw his plea of guilty and, if he pleads not guilty, be tried within 60 days of the order of the district court to be made pursuant hereto.

MOORE, Circuit Judge (dissenting):

Petitioner-appellant, Raynard Dunn, as appears from the minutes at the time of sentence, was obviously trying to play a game with the sentencing judge — a game in which I am not willing to participate. On this appeal, appellant asserts that: his plea of guilty was made “under the duress of his sickness” (Br., at 1); that it was “inconsistent with his protestations of innocence”; that there was no “independent evidence of his guilt”; and that his guilty plea was tantamount to the acquiescence of “one [who] has a gun put to his head and [is] told to either plead guilty or have his head blown off” (Br., at 3, 4). There is absolutely no basis for these questions. There was no proof that appellant at the time of sentence was under the influence of drugs. He did not protest his innocence. The State was under no obligation to prove a prima fa-cie ease before the sentencing judge and the gun-at-head simile is just a bit of flamboyant rhetoric.

Appellant, before pleading guilty, wanted the sentencing Judge to commit himself to certify appellant for NACC treatment. The Judge, knowing that he could not exercise his judgment in this respect until appellant pleaded, endeavored first to ascertain appellant’s decision.

The indictment charged robbery, second degree, grand larceny third degree and assault, second degree. Appellant pleaded guilty to robbery, third degree in satisfaction of the entire indictment.

When asked by the Court whether he wished to plead guilty to robbery, third degree, appellant replied, “Yes, sir.” Appellant knew the consequences of his plea. The Court three times inquired, “Did you commit the crime?”, appellant responding, “Yeah.” After appellant had stated his version of the events leading to his apprehension, the Court said, “You didn’t commit this crime, did you?”, to which appellant said, “No, I didn’t do it.” At this point, the Court said, “All right, I won’t take the plea. Let’s go to trial.” When the Court explained, “I can’t send you to NACC unless you’ve committed a crime,” appellant said, “I committed the crime.”

Quite apart from his desire for NACC treatment, appellant desired to avoid trial because if “it goes to trial, anything [may] happen . . . they [may] find me guilty whether I did it or not I got a lot of time facing me.” With appellant vacillating between having committed the crime and not having done so, the Court asked a final question, “Are you taking this to avoid the possibility and the risks of a trial?” to which which appellant replied, “Yes.”

Thus, from the same record the majority and I reach diametrically opposite results. They see the case as one in which appellant has been misled into pleading guilty by an unfulfilled judicial promise of a particular sentence or by his own conception of such a promise. I see it only as a case where appellant, unable to commit the Court in advance to an NACC certification, and well knowing the possible consequences of a trial and conviction on the charges contained in the indictment when the whistle blew to end the game, chose to settle for the single lesser count granted to him.

      . Thus obviating the kind of claim that underlies another recent habeas corpus case before us, United States ex rel. Leeson v. Damon, No. 73-2597 (2d Cir., 1974).

      . The Court in the same footnote referred to the express provisions of Fed.R.Crim.P. 11 that a court “shall not enter a judgment upon a plea of guilty unless it is satisfied that there is a factual basis for the plea.”

      . The characterization by the dissenting opinion of what we hold we do not accept: our holding does not relate to any “unfulfilled judicial promise” as we have tried to make clear; rather, it is based upon the failure of the state court judge to ascertain if there were a factual basis for the plea.


author: HILL, Circuit Judge.

text:
    MALONEY-CRAWFORD TANK CORPORATION, Plaintiff-Appellee, v. ROCKY MOUNTAIN NATURAL GAS CO., INC., Defendant-Appellant.
    No. 73-1801.
    United States Court of Appeals, Tenth Circuit.
    April 8, 1974.

      Robert A. White, Houston, Tex., for defendant-appellant.
    James R. Head, Tulsa, Okl., for plaintiff-appellee.
    Before CLARK, Justice, and HILL and HOLLOWAY, Circuit Judges.

       Honorable Tom O. Clark, Associate Justice, United States Supreme Court, Retired, sitting by designation.

   HILL, Circuit Judge.

Maloney-Crawford Tank Corporation (Maloney) brought this patent infringement action against Rocky Mountain Natural Gas Company (Rocky Mountain) to obtain damages for, and injunc-tive relief against, alleged infringement of United States Letters Patent Nos. 2,804,940 and 2,804,941.

The patents, a result of the necessity to dehydrate natural gas being transported in pipelines, involve an apparatus known as a calcium chloride dehydrator. It was designed to prevent gas from reacting with the water in the gas, thereby forming solid hydrates which plug the flow of gas in the pipeline.

The Fish Investment Corporation (Fish), a Delaware corporation operating out of Texas, is the owner of the patents. Appellee Maloney, a Delware corporation with its principal office in Oklahoma, holds the exclusive license to manufacture and sell the dehydrators. Appellant Rocky Mountain is a Colorado corporation with its principal place of business in that state.

In 1957, the patents were issued to A. J. L. Hutchinson, then an employee of Fish. A dispute arose as to the true ownership of the patents and Hutchinson instituted suit in Delaware state court. That court, in 1964, determined Fish to be the owner of the patents and ordered Hutchinson to assign them to Fish. Hutchinson v. Fish Engineering Corp., 203 A.2d 53 (Del.Ch.1964). Hutchinson delayed doing so, and the assignment was not made until 1966.

In August, 1962, while title to the patents was still being litigated, Fish discovered that Sauder Tank Company, Inc. (Sauder), a Kansas corporation, was manufacturing and selling calcium chloride dehydrators to appellant. Sau-der was notified of the possible infringement, but continued to manufacture and sell the dehydrators.

Appellee, through mesne assignments, obtained the exclusive license to .manufacture and sell the dehydrators in 1967. In 1968 appellee and Fish commenced a patent infringement action against Sau-der. Originally brought in federal district court in Oklahoma, the action was transferred to Kansas. Sauder defended on the grounds, inter alia, that the patents were invalid, that there was no infringement, and that appellee was es-topped to bring the action because of laches. The case eventually came before this court where we held the patents were valid and had been infringed. Ma-loney-Crawford Tank Corp. v. Sauder Tank Co., Inc., 465 F.2d 1356 (10th Cir. 1972).

While the Kansas suit was in progress appellee, in 1969, commenced the instant action in Colorado against appellant. Following this court’s decision in the Sauder case, appellant conceded the patents were valid but nonetheless claimed laches barred the suit. Appellee, on the other hand, argued the defense was inappropriate and alternatively was res ju-dicata. Finding that appellant had not proved laches, the trial court entered judgment for appellee.

Appellant first contends the trial court erred in failing to apply the doctrine of laches because the seven year interval between first knowledge of the infringing sales and commencement of suit amounts to an inexcusable delay.

Initially, we note that mere delay or passage of time alone does not suffice to constitute laches in a patent infringement action. Jenn-Air Corp. v. Penn Ventilator Co., Inc., 464 F.2d 48 (3d Cir. 1972). Instead, two elements must be established: inexcusable delay in instituting suit, and prejudice to the defendant resulting from such delay. Potash Co. of America v. International Minerals & Chem. Corp., 213 F.2d 153 (10th Cir. 1954). And whether or not a delay is inexcusable must be determined by the particular facts of each case.

Appellant argues appellee’s predecessors should have instituted suit when the infringement was first discovered. To bring a patent infringement action one must have title or grant to title. Waterman v. McKenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923 (1891). Since title to the patents, which belonged to Hutchinson, was in issue until 1964, any inaction on the part of Fish during that period of time was excusable. Taylor Engines, Inc. v. All Steel Engines, Inc., 192 F.2d 171 (9th Cir. 1951). Fish did not receive title to the patents until the assignment was made in 1966. Any delay subsequent to that time, on the part of appellee’s predecessors, is chargeable to appellee.

There is no fixed period of time within which a patent infringement action must be brought. Title 35 U.S.C. § 286, although it establishes only a qualification or condition upon a right of recovery, provides some guidance. The statute states, in part:

Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action.

Courts have held an analogous six year period should determine the validity of a laches defense. See, e. g., Whitman v. Walt Disney Prod., Inc., 263 F.2d 229 (9th Cir. 1958); General Elec. Co. v. Sciaky Bros., Inc., 187 F.Supp. 667 (E.D. Mich.1960), aff’d 304 F.2d 724 (6th Cir. 1962). The delay in the instant case is well within the permissible time period.

The next argument, that appellee failed to overcome the presumption of injury to appellant, is without merit. Such a presumption arises only where the delay is unreasonable or inexcusable. Where an action is brought within the analogous limitation period, as was done here, the defendant bears the burden of showing circumstances requiring the application of laches. Jenn-Air Corp. v. Penn Ventilator Co., Inc., supra. It is not until after that length of time has passed that the delay is presumed to injure the defendant. Gillons v. Shell Co. California, 86 F.2d 600 (9th Cir. 1936), cert, denied, 302 U.S. 689, 58 S.Ct. 9, 82 L.Ed. 532. Even so, appellant contends it has been substantially injured. Our search of the record, however, reveals no evidence to support this argument.

Because neither inexcusable delay nor injury has been shown, we believe the trial court was correct in finding laches did not bar appellee’s action.

Finally, appellant contends recovery from Sauder in the Kansas suit will fully compensate appellee. The trial court did not decide the question of damages, but reserved the issue for future consideration. At this point it is unknown what damages or relief, if any, will be awarded. We therefore find it unnecessary to consider the issue at this time.

The judgment is affirmed.

      . During 1962-64, Saucier sold twenty-four dehydrators to appellant. Both knew of the possible infringement, and both knew title to the patents was then being litigated.
      As an inducement to buy, Sauder agreed to indemnify appellant for any loss sustained as a result of liability in a patent infringement action.

      . Venue problems prevented a common trial of the cases.

      . Sucli a decision renders it unnecessary to consider appellee’s res judicata argument.


author: LIVELY, Circuit Judge.

text:
    WEST SIDE FEDERAL SAVINGS AND LOAN ASSOCIATION OF FAIRVIEW PARK, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
    No. 73-1718.
    United States Court of Appeals, Sixth Circuit.
    Argued Feb. 8, 1974.
    Decided March 29, 1974.

      Charles E. Anderson, Dept, of Justice, for defendant-appellant; Scott P. Crampton, Asst. Atty. Gen., Meyer Roth-wacks, Paul M. Ginsburg, Attys., Tax Div., Dept, of Justice, Washington, D. C., on brief; Frederick M. Coleman, U. S.
    Atty., of counsel.
    Harlan Pomeroy, Cleveland, Ohio, for plaintiff-appellee; James H. Rice, Baker, Hostetler & Patterson, Cleveland, Ohio, on brief.
    Before WEICK and LIVELY, Circuit Judges, and ROSENSTEIN, Customs Judge.

       The Honorable Samuel M. Rosenstein, Senior Judge, United States Customs Court, sitting by designation.

   LIVELY, Circuit Judge.

This income tax refund case was decided in favor of the plaintiff West Side Federal Savings and Loan Association of Fairview Park (West Side) on cross-motions for summary judgment. There is no actual dispute in the facts, though the parties each emphasized different facts in their presentations to the court. The issue is whether a statutory merger of an Ohio state-chartered savings and loan association, with a limited amount of par value capital stock outstanding in addition to savings accounts, into a mutually owned federal savings and loan association whose capital consists solely of savings accounts, constituted a tax-free reorganization within the meaning of § 368(a)(1)(A) of the Internal Revenue Code of 1954. The district court held that a tax-free reorganization was effected and we affirm.

The following facts are taken from the briefs of the appellant:

Taxpayer (West Side) is a federal savings and loan association, chartered by the Federal Home Loan Bank Board under Section 5 of the Home Owners’ Loan Act of 1933, as amended. Its current charter (Charter K, Rev.) was issued by the Board on February 27, 1956.
Under Charter K, taxpayer may raise its capital by accepting payments on an unlimited number of savings accounts. It may not, however, issue capital stock. All holders of savings accounts, and all borrowers of funds from taxpayer, are members and are entitled to vote on questions requiring the action of association members. A savings account holder is entitled to one vote for every $100 in his account, but may not cast more than 50 votes, in any event. Savings account holders are entitled to be paid the face value of their accounts within 30 days after a request has been filed with the association.
Parma Savings Company was a corporation organized and existing under the laws of the State of Ohio, with a limited amount of $200 par value capital stock authorized, issued, and outstanding, in addition to savings accounts. The permanent capital stock of Parma could not be redeemed until all other liabilities of the company were fully liquidated upon final dissolution of the company.
On April 12, 1967, taxpayer and Parma entered into an agreement la-belled “Agreement and Plan of Merger,” wherein a plan for the contemplated merger of Parma into taxpayer was set out. Under the plan, taxpayer was to acquire all of the assets and succeed to all of the liabilities of Parma. In addition, each holder of a savings account in Parma was to receive a savings account in taxpayer of equal withdrawal value. Each outstanding share of Parma capital stock, with a par value of $200, was to be converted into a savings account in taxpayer with a withdrawal value of $2,500. After adoption by Parma’s board of directors and stockholders and by taxpayer’s board of directors, and approval by the Federal Home Loan Bank Board and the Superintendent of Building and Loan Associations of Ohio, the plan was effectuated on September 30, 1967.

Although the Internal Revenue Service recognized the transaction between West Side and Parma to be a statutory merger within the literal language of § 368(a)(1)(A), it concluded that the additional requirement of a “continuity of proprietary interest” was not met. This determination was based on the government’s position that when the Parma shareholders exchanged their $200 par value stock for savings accounts in West Side at the rate-of $2,500 withdrawal value for each share of stock given up they converted their equity interest in Parma into cash or its equivalent. A deficiency for the year 1967 was asserted against West Side as transferee of Parma since Parma would have been required to restore to income in the year of the merger its bad debt reserve and excess investment credits if the merger were not properly treated as a tax-free reorganization. The tax was paid, a claim for refund filed and not allowed, and this suit followed.

The “continuity of proprietary interest” requirement for treatment of an otherwise valid statutory merger or consolidation under § 368(a)(1)(A) is a judicially created standard which is now promulgated in Treasury Regulations § 1.368-1 (b). [The statutory provisions referred to herein and in the Regulations are set out in the Appendix of this opinion.] In Cortland Specialty Co. v. Commissioner of Internal Revenue, 60 F.2d 937 (2d Cir. 1932), a transaction involving the transfer of assets of one corporation to another corporation in exchange for cash and short-term notes was held not to be a reorganization within § 203 of the Revenue Act of 1926. Section 203(h)(1)(A) of the 1926 Act defined reorganization exactly as it is defined in § 368(a)(1)(A) of the Internal Revenue Code of 1954. The court found that a continuance of interest in the properties transferred by the transferor was an assumed condition of each transaction which qualified as a tax-free reorganization, stating that—

In defining “reorganization,” section 203 of the Revenue Act gives the widest room for all kinds of changes in corporate structure, but does not abandon the primary requisite that there must be some continuity of interest on the part -of the transferor corporation or its stockholders in order to secure exemption. 60 F.2d at 940.

The Supreme Court of the United States adopted this construction in Pi-nellas Ice Co. v. Commissioner of Internal Revenue, 287 U.S. 462, 53 S.Ct. 257, 77 L.Ed. 428 (1933), where the Cortland decision was cited with approval. In that case a corporation acquired substantially all of the property of two other corporations in exchange for cash and short-term notes. The Court held that the secured notes given for the deferred purchase price were not securities and were properly regarded as the equivalent of cash, saying — “Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes.” 287 U.S. at 470, 53 S.Ct. at 260. The Court also found that the terms, “merger and consolidation” as used in the Act have a broader meaning than that ordinarily given to them and that transactions which might not traditionally be classified as mergers or consolidations may qualify under the Act.

In a series of opinions issued in 1935 the Supreme Court further defined the continuity of interest requirement by its treatment of various factual situations. In Nelson Co. v. Helvering, 296 U.S. 374, 56 S.Ct. 273, 80 L.Ed. 281 (1935), a transaction was held to qualify as a tax-free reorganization where substantially all of a corporation’s property was acquired by a new corporation formed for this purpose in exchange for $2,000,000 in cash and the entire issue of a new non-voting preferred stock of the acquiring corporation. Part of the cash and all of the preferred stock of the new corporation eventually went to the stockholders of the acquired corporation. Noting that the mere acquisition of the assets by one corporation of those of another is not a reorganization the Court stated:

But where, as here, the seller acquires a definite and substantial interest in the affairs of the purchasing corporation a wholly different situation arises. The owner of preferred stock is not without substantial interest in the affairs of the issuing corporation, although denied voting rights. The statute does not require participation in the management of the purchaser; nor does it demand that the conveying corporation be dissolved. 296 U.S. at 377, 56 S.Ct. at 274.

Issued on the same day as Nelson was the opinion in Helvering v. Minnesota Tea Co., 296 U.S. 378, 56 S.Ct. 269, 80 L.Ed. 284 (1935). There the stockholders of the acquired corporation ended up, after the reorganization and exchange, with the capital stock of one of the acquiring corporations. The remaining assets of the acquired corporation were exchanged for voting trust certificates in a second acquiring corporation plus cash. The acquired corporation retained the certificates and distributed the cash among its shareholders. This was held to qualify as a tax-free reorganization. The Court stated that the interest which the seller acquired in the affairs of the purchaser “must be definite and material; it must represent a substantial part of the value of the thing transferred.” 296 U.S. at 385, 56 S.Ct. at 272. Significantly, the Court went on to say, “True it is that the relationship of the taxpayer to the assets conveyed was substantially changed, but this is not inhibited by the statute.” 296 U.S. at 386, 56 S.Ct at 272. The same result was reached in Helvering v. Watts, 296 U.S. 387, 56 S. Ct. 275, 80 L.Ed. 289 (1935), also decided the same date. In that case the stockholders of one corporation exchanged all of its stock for shares of another corporation and bonds of the acquired corporation guaranteed by the acquiring corporation. The acquired corporation continued to conduct business until dissolved four years later. The Internal Revenue Service took the position that the exchange of stock for bonds resulted in substantial change of position by the stockholders of the acquired corporation and that the transaction failed as a tax-free reorganization. The Court held that the bonds were securities and could not be regarded as a cash equivalent as the short-term notes were in Pi-nellas Ice Co. v. Commissioner of Internal Revenue, supra. Thus, where shareholders of the acquired corporation received stock in the acquiring corporation the fact that they also received bonds did not disqualify the transaction.

The Supreme Court treatment of the continuity of interest requirement continued in Le Tulle v. Scofield, 308 U.S. 415, 60 S.Ct. 313, 84 L.Ed. 355 (1940), where the assets of one corporation were transferred to another in exchange for cash and bonds payable over a period of eleven years. The Court held that this was not a tax-free reorganization.

Where the consideration is wholly in the transferee’s bonds, or part cash and part such bonds, we think it cannot be said that the transferor retains any proprietary interest in the enterprise. On the contrary, he becomes a creditor of the transferee; .... 308 U.S. at 420-421, 60 S.Ct. at 316.

This court has considered the continuity of interest requirement on at least two occasions. In Miller v. Commissioner of Internal Revenue, 84 F.2d 415 (6th Cir. 1936), in reliance on Helvering v. Minnesota Tea Co., supra, we rejected the contention that the relationship of the taxpayer to the assets transferred to an acquiring corporation in a statutory merger or consolidation must continue substantially unchanged. The court noted that the application of the terms, “definite and material interest” and “a substantial part of the value of the thing transferred” must be viewed in light of the facts of each case and that no precise definition is possible. The court held, however, that it is not a requirement for tax-free recognition that the stockholders of the transferring corporation acquire a controlling interest in the transferee. Tax-free status was recognized in this case involving a merger where stock and cash were received by the transferor. In Commissioner of Internal Revenue v. Segall, 114 F.2d 706 (6th Cir. 1940), a statutory merger in which the assets of the acquired corporation were exchanged for 5% gold debentures payable in five annual installments and guaranteed by the parent of the acquiring survivor corporation was held not to qualify as a tax-free reorganization. Relying on Le Tulle v. Sco-field, supra, the court held that for a statutory merger to qualify the trans-feror must retain a proprietary interest in the surviving enterprise in the form of common or preferred stock, saying— “Accordingly, it has been held essential to reorganization that there remain in the transferor or its stockholders a substantial and material continuity of interest in the property transferred. A transfer of all the assets of one company to another for what amounts to a cash consideration is not a reorganization, but a sale, the gain on which, if any, is taxable.” 114 F.2d at 708-709. The same result was reached in Roebling v. Commissioner of Internal Revenue, 143 F.2d 810 (3rd Cir.) cert, denied, 323 U. S. 773, 65 S.Ct. 131, 89 L.Ed. 618 (1944), where stock was exchanged solely for bonds. The court found, although the transaction was a true statutory merger under the law of New Jersey, that no continuity of interest existed because the shareholders of the acquired corporation had a proprietary interest before the merger and, as bondholders, were only creditors afterward.

These cases teach us, then, that tax-free reorganization treatment under § 368 does not automatically follow from the fact that a true statutory merger or consolidation is effected under applicable state or federal law. The additional requirement is a “continuity of interest on the part of the transferor corporation or its stockholders.” The sellers must acquire “a definite and substantial interest in the affairs of the purchasing corporation” and the interest which they acquire must represent a substantial part of the value of the thing transferred. Nevertheless, there is no requirement that the relationship of the transferor or its shareholders to the assets transferred remain substantially unchanged. The interest which the transferor or its shareholders acquire must be at least in substantial part a proprietary or equity interest and where only cash or debt obligations of the transferee are received there is no qualifying reorganization.

The present case is made difficult be-' cause of the rather unique capital structure of savings and loan associations. The greater portion of the capital of Parma was represented by savings accounts and all of the capital of West Side consisted of savings accounts representing authorized share interests. While conceding that Internal Revenue Code 26 U.S.C. § 7701, defines corporations to include associations, and stock to include shares in an association, and shareholders to include members in an association, the government nevertheless maintains that the share interests in West Side received by the former shareholders of Parma did not maintain in them a “continuity of proprietary interest.” Much is made of the terminology and relative position of items on the Parma pre-merger balance sheet. The government stresses the fact that prior to merger Parma had two distinct classes of contributors to its capital. The holders of the $200 par value stock had the traditional attributes of shareholders while the holders of savings accounts were in more of a debtor-creditor relationship to the association. On the other hand, it is stated, after merger the former Parma shareholders and holders of savings accounts occupy precisely the same position as members of the federal mutual savings and loan association. All have a dual relationship to the association, being in the position of creditors as holders of savings accounts and, as members, possessing certain proprietary rights, including the right to vote, the right to share the association’s earnings and in its assets upon liquidation. While admitting that whatever equity or proprietary interest exists in a federal savings and loan association resides in its depositors and borrowers, the government maintains that each depositor’s equity or proprietary interest is minimal compared to his rights as a creditor.

The position of the Internal Revenue Service with respect to mergers and consolidations of savings and loan associations, has been set forth in a series of recent revenue rulings. In Rev.Rul. 69-3, 69-1 C.B. 103, it was held that acquisition of all of the assets of one federally chartered mutual savings and loan association by another similar association, when accomplished as a statutory merger qualifies as a tax-free reorganization. On the other hand, in Rev.Rul. 69-6, 69-1 C.B. 104, a merger substantially like the one involved in this case where a state-chartered association with capital stock was merged into a federal mutual savings and loan was held not to constitute a reorganization within the provisions of § 368. Finally, in Rev.Rul. 69-646, 69-2 C.B. 54 the merger of a savings and loan association having only savings shares into one having savings shares and guaranty shares was held to qualify as a tax-free reorganization. In Rev.Rul. 69-6, one of the factors which was relied upon to find that the merger did not qualify was that the obligation to deliver cash deposits was not severa-ble from the obligation to deliver a proprietary interest to the former shareholders of the acquired association. Yet in Rev.Rul. 69-646, the Service apparently determined that the obligation was severable and that the requirements were satisfied by issuing two different types of securities to persons who had formerly owned only one security, a savings account in the acquired association.

A few cases have been decided involving savings and loan associations which have attempted to effect reorganization under Section 368. Because of the different methods of capitalization which have developed in the various states as the savings and loan industry has grown in this country, none of the cases is identical with the case under consideration. In Everett v. United States, 448 F.2d 357 (10th Cir. 1971), the court dealt with the transfer of the assets of a state-chartered building and loan association to a federal savings and loan. In addition to an exchange of savings shares the acquiring federal association paid the state building and loan association $65,000 in cash which was used to liquidate its “permanent shares” and the government asserted an income tax deficiency against the state-chartered association for its final year. The court treated the transaction as a transfer of assets under § 368(a)(1)(C) of the Internal Revenue Code rather than a merger or reorganization under § 368(a)(1)(A). The critical issue was whether the assets of the acquired association had been exchanged “solely for voting stock.” The court held that full paid and savings shares of a federally chartered savings and loan association do constitute voting stock. Thus the somewhat stricter test for continuity of interest provided in § 368(a)(1)(C) (see Helvering v. Southwest Consolidated Corporation, 315 U.S. 194, 198, 62 S. Ct. 546, 86 L.Ed. 789 (1942)) was found to have been satisfied in a merger by a state-chartered building and loan having capital stock into a federal mutually owned association.

In Home Savings and Loan Association v. United States, 223 F.Supp. 134 (S.D.Cal.1963), the question, as here, was whether the bad debt reserves of a merged corporation became accelerated into income as a result of the merger. That case involved the merger of two state-chartered savings and loan associations of California, and the court held that there was an adequate continuity of interest. The decision was not appealed and the holding is consistent with the pqsition of the Internal Revenue Service as expressed in Revenue Ruling 69-3, supra\ A more recent district court case involved the merger of two California state-chartered savings and loan associations into a third. Holders of investment certificates in one of the acquired associations exchanged them for with-drawable shares in the surviving association. Holders of withdrawable share accounts in the other acquired association exchanged them for withdrawable share accounts in the acquiring association. Both acquired associations had outstanding “guarantee stock” all of which was first purchased by the acquiring association and then cancelled concurrently with the merger. The court held that even after the acquiring association had purchased all of the guarantee stock in both of the acquired associations the owners of shares and certificates in those associations retained an equity interest. It held that the holders of withdrawable shares and investment certificate holders of the acquired associations were among the owners of the capital stock both of the transferor and transferee associations and that there was a continuity of interest which was maintained. The fact that the investment certificate holders of one of the acquired associations had no voting rights was held to be immaterial in reliance upon Nelson Co. v. Hel-vering, supra. The court specifically refused to adopt the argument of the government, made also in this case, that since a depositor in a savings and loan association is a creditor for some purposes he must be considered a creditor of the association for all purposes. Home Savings & Loan Association v. United States (C.D.Cal. 4/11/73), 73-2 USTC para. 9609 (CCH 8/22/73).

The government’s argument that the requirement of a continuity of proprietary interest was not satisfied in the Parma-West Side merger consists basically of these contentions: (1) The former shareholders of Parma gave up pure equity in exchange for property which, though it has some minor attributes of equity, is nevertheless so liquid that it should be treated as cash equivalent. Thus in reality, these shareholders have merely sold their stock. (2) The shareholders were the owners of Parma, and the only persons entitled to vote and to share in its reserves and undivided profits in the event of liquidation, and after merger they are depositor-creditors of West Side. It is undisputed that the by-laws of West Side require a thirty-day notice before funds can be withdrawn, but the government states that in actual practice such notice is not required and that savings accounts are withdrawable at any time without notice. It also points to the fact that savings accounts of West Side are federally insured, but the record does not disclose whether some accounts of former shareholders of Parma exceed the amount of federal insurance coverage. The government relies on the fact that the voting rights of savings account owners in West Side are more restricted than the rights enjoyed by the former shareholders of Parma and are diluted by the fact that other savings depositors and borrowers are also permitted to vote. It contends, finally, that no additional value adheres to a savings account in a federal savings and loan association because of the incidental proprietary rights which go along with membership. Thus, it is said, in reality, a withdrawable savings share account in a federal savings and loan association is nothing more than the equivalent of a demand deposit bank account.

As to the status of savings account holders, we note that item 6 of Chapter K Revised of West Side Federal Savings and Loan Association provides in part as follows :

Holders of savings accounts for which application for withdrawal has been made shall remain holders of savings accounts until paid and shall not become creditors.

Furthermore since a savings account is the only proprietary interest available in a federal mutual savings and loan association and the former shareholders of Parma received such accounts in exchange for their stock, it is improper to ignore the proprietary rights included in what they received and concentrate only on their rights as creditors. In each of the cases dealing with continuity of interest the focus has been on the nature of the interest in the acquiring corporation which is received in the exchange. The courts do not conduct an examination to determine whether the shareholder of the merged corporation receives more or less of a proprietary interest than he surrendered. Instead, it is an analysis to determine if a proprietary interest is received, and the fact that what is received may be a mixture of proprietary interests and debt instruments of the acquiring corporation is not alone determinative. The reasoning of this court as set forth in Miller v. Commissioner of Internal Revenue, supra, and Commissioner of Internal Revenue v. Segall, supra, carefully following the holdings of the Supreme Court heretofore cited, is controlling in the decision of this case.

We find that each owner of a proprietary interest in Parma acquired a proprietary interest in West Side. Each such shareholder acquired an interest in the affairs of West Side which is definite and material and it represented a substantial part of the value of the stock that was given up. That the interest received need not be identical to that given in exchange is made clear by the language previously quoted from Helvering v. Minnesota Tea Co., supra: “True it is that the relationship of the taxpayer to the assets conveyed was substantially changed, but this is not inhibited by the statute.”

The judgment of the district court is affirmed.

APPENDIX

Internal Revenue Code of 1954 (26 U.S. C.):

SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS.

(a) Reorganization.—
(1) In general. — For purposes of parts I and II and this part, the term “reorganization” means—
(A) a statutory merger or consolidation ;
* * * * * *
(C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded ;
* * * -x- * *

SEC. 381. CARRYOVERS IN CERTAIN CORPORATE ACQUISITIONS.

(a) General Rule. — In the case of the acquisition of assets of a corporation by another corporation—

(1) in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies, except in a case in which the basis of the assets distributed is determined under section 334(b)(2); or
(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D) (but only if the requirements of subpara-graphs (A) and (B) of section 354 (b)(1) are met), or (F) of section 368(a)(1),

the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c).

(b) Operating rules. — Except in the case of an acquisition in connection with a reorganization described in subpara-graph (F) of section 368(a)(1)—

(1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer.
(2) For purposes of this section, the date of distribution or transfer shall be the day on which the distribution or transfer is completed; except that, under regulations prescribed by the Secretary or his delegate, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date.
(3) The corporation acquiring property in a distribution or transfer described in subsection (a) shall not be entitled to carry back a net operating loss for a taxable year ending after the date of distribution or transfer to a taxable year of the distributor or transferor corporation.
(c) Items of the Distributor or Transferor Corporation. — The items referred to in subsection (a) are:
* -x- -x- -x- -x- *
(4) Method of accounting. — The acquiring corporation shall use the method of accounting used by the distributor or transferor corporation on the date of distribution or transfer unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of computing taxable income adopted pursuant to regulations prescribed by the Secretary or his delegate.
* * * * * •»
(23) Credit under Section 38 for investment in certain depreciable property. — The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 38, and under such regulations as may be prescribed by the Secretary or his delegate) the items required to be taken into account for purposes of section 38 in respect of the distributor or transferor corporation.
X- X X X X X
SEC. 7701. DEFINITIONS.
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—
* X X X X X-
(3) Corporation. — The term “corporation” includes associations, joint-stock companies, and insurance companies.
X X- X X X X
(7) Stock. — The term “stock” includes shares in an association, joint-stock company, or insurance company.
(8) Shareholder.' — The term “shareholder” includes a member in an association, joint-stock company, or insurance company. (26 U.S.C. Sec. 7701)
X X X X X X

Treasury Regulations on Income Tax (1954 Code) (26 C.F.R.):

§ 1.368-1 Purpose and scope of exception of reorganization exchanges.
X X X X X X
(b) Purpose. Under the general rule, upon the exchange of property, gain or loss must be accounted for if the new property differs in a material particular, either in kind or in extent, from the old property. The purpose of the reorganization provisions of the Code is to except from the general rule certain specifically described exchanges incident to such readjustments of corporate structures made in one of the particular ways specified in the Code, as are required by business exigencies and which effect only a readjustment of continuing interest' in property dnder modified corporate forms. Requisite to a reorganization under the Code are a continuity of the business enterprise under the modified corporate form, and (except as provided in section 368(a)(1)(D)) a continuity of interest therein on the part of those persons who, directly or indirectly, were the owners of the enterprise prior to the reorganization. The Code recognizes as a reorganization the amalgamation (occurring in a specified way) of two corporate enterprises under a single corporate structure if there exists among the holders of the stock and securities of either of the old corporations the requisite continuity of interest in the new corporation, but there is not a reorganization if the holders of the stock and securities of the old corporation are merely the holders of short-term notes in the new corporation. In order to exclude transactions not intended to be included, the specifications of the reorganization provisions of the law are precise. Both the terms of the specifications and their underlying assumptions and purposes must be satisfied in order to entitle the taxpayer to the benefit of the exception from the general rule. Accordingly, under the Code,- a short-term purchase money note is not a security of a party to a reorganization, an ordinary dividend is to be treated as an ordinary dividend, and a sale is nevertheless to be treated as a sale even, though the mechanics of a reorganization have been set up.
X X X X* X X-