author: LUMBARD, Circuit Judge: TIMBERS, Circuit Judge

text:
    YOUR HOST, INC., et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. CHEF FOODS, INC., et al., Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
    Nos. 242, 268, Dockets 73-1311, 73-1337.
    United States Court of Appeals, Second Circuit.
    Argued Oct. 18, 1973.
    Decided Dec. 11, 1973.
    Timbers, Circuit Judge, filed an opinion dissenting in part.

      Ralph J. Gregg, Buffalo, N. Y. (Al-brecht, Maguire, Heffern & Gregg, and George M. Zimmermann, Albany, N. Y., on the brief), for Your Host, Inc., et al., petitioners-appellants and Chef Foods, Inc., et al., petitioners-appellees.
    William A. Friedlander, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Ernest J. Brown and Richard S. Halberstein, Attys., Tax Div., Dept, of Justice, Washington, D. C., on the brief), for Commissioner of Internal Revenue.
    Before KAUFMAN, Chief Judge, and LUMBARD and TIMBERS, Circuit Judges.
   LUMBARD, Circuit Judge:

Petitioners-appellants, Your Host, Inc., and its affiliated companies, appeal from judgments of the United States Tax Court (Irwin, J.) which upheld determinations by the Commissioner of income tax deficiencies assessed for the years 1965 through 1968. Your Host, Inc., et al., 58 T.C. 10 (1972). The deficiencies were assessed pursuant to 26 U.S.C. § 482, which allows the Commissioner to allocate income among affiliated companies more properly to reflect the earning of income, and pursuant to 26 U.S.C. § 269, which permits the Commissioner to deny tax exemptions and deductions where an affiliated company was “acquired” for tax avoidance purposes. We affirm.

Your Host, Inc., and its affiliates, operate a restaurant chain and food business in the Buffalo area. From modest beginnings in a one-restaurant partnership of A. J. Durrenberger and R. T. Wesson in 1944, the business grew so that by the mid 1960’s it consisted of sixteen interrelated corporations which, operated some forty “Your Host” restaurants, a food supply commissary, a bakery, a real estate holding company, and a vending machine and leasehold operation. All of these enterprises remained under the control of two original partners and later, after Wesson’s death in 1956, under the control of Durrenber-ger alone.

Out of the sixteen companies the Commissioner, pursuant to 26 U.S.C. § 482, allocated the income of twelve of them to Your Host, Inc. and the income of one of them (Your Host Bakery, Inc.) to Sher-Del Foods, Inc. He furthermore determined that, pursuant to 26 U.S.C. § 269, thirteen of the companies had been established for the principal purpose of tax avoidance and he accordingly denied them the corporate surtax exemption.

Upon review the Tax Court upheld the Commissioner’s determinations under § 482 as to only-two of the affiliated companies : .the allocation of Chef Foods’ income to Your Host, Inc., and the allocation of Your Host Bakery’s income to Sher-Del Foods, Inc. The Tax Court held that the ten restaurant operating companies whose income had been allocated were “viable economic entities which earned their own income” and hence were not subject to income allocation.

The Tax Court also upheld the Commissioner’s determinations under § 269 as to five of the affiliated companies: 309 Delaware Ave., Inc., Royal Host, Inc., Main Host, Inc., Telesnax, Inc., and Alro Realty, Inc. With respect to the other eight companies which had been denied surtax exemption, however, the court held as to six that the Commissioner had erred in finding that they had been established for the principal purpose of tax avoidance. The court did not assess the validity of the Commissioner’s § 269 determinations as Chef Foods and Your Host Bakery, having already sustained the Commissioner’s 100% reallocation of the income of both companies under § 482.

Since the Commissioner has elected not to appeal the Tax Court’s finding adverse to the government, we need concern ourselves here only with the Tax Court’s findings sustaining the Commissioner’s determinations. As to these we note at the outset that the Commissioner’s determinations are to be set aside only if “unreasonable, arbitrary, or capricious,” in the case of § 482 allocations, Wisconsin Big Boy Corp. v. C. I. R., 452 F.2d 137, 140 (7th Cir. 1971); Philipp Bros. Chemicals, Inc. v. C. I. R., 435 F.2d 53, 57 (2d Cir. 1970), and only if “clearly erroneous” in the case of denials of surtax exemptions under § 269, Dorba Homes, Inc. v. C. I. R., 403 F.2d 502, 505 (2d Cir. 1968); J. T. Slocomb Co. v. C. I. R., 334 F.2d 269, 273-274 (2d Cir. 1964).

Under these standards of review, we cannot say that the Commissioner’s § 482 determinations were arbitrary or unreasonable. In the case of Chef Foods, Inc., whose income was allocated to Your Host, Inc., for the four years in question, it was found that Chef Foods was originally formed in 1958 to provide a vehicle for developing catering services in industrial plants. This line, however, was never developed. Instead Sher-Del Foods acquired all the stock of Chef Foods for $6,000. Chef Foods was then used to purchase cigarette vending machines which were placed only in “Your Host” restaurants. It purchased cigarettes wholesale and sold them through vending concessions at the restaurants, the profits being shared through concession commissions to each restaurant. Chef Foods also acquired refrigeration and storage facilities in Buffalo, almost all of which were leased to Sher-Del Foods and to Your Host Bakery. For these operations, Chef Foods utilized one employee, a vending machine repairman, whose salary and expenses constituted virtually all of the operating expenses of the company. Otherwise Chef Foods shared its aliquot portion of taxes, insurance, utility, and other costs along with the other corporations as summarily determined by the common executive management of the companies. The portion of Chef Foods’ profit which Durrenberger, then the surviving original partner, took as his salary was also similarly determined. Chef Foods’ income from the vending machine sales and from rents averaged roughly $160,000 for each year between 1965 and 1968, with approximately 75% coming from the vending machines sales. Thus while it is true, as the dissent suggests, that Chef Foods conducted sizea-ble business operations in terms of cash flow, the very imbalance between the firm’s posture on its balance sheets and the actual scope of its operations, in terms of its labor force, capitalization, work site, and so forth, suggests that the firm was kindred in nature to the kind of sham enterprise which this court held properly subject to income allocation in Philipp Bros. Chemicals, Inc. v. C. I. R., supra,. At least, given Chef Foods’ position within the “Your Host” group, it was not unreasonable for the Commissioner to have allocated the income of Chef Foods as he did. See also Wisconsin Big Boy Corp. v. C. I. R., supra; and Hamburgers York Road, Inc., 41 T.C. 821 (1964).

For the same reasons we are constrained not to disturb the Commissioner’s allocation of the income of Your Host Bakery, Inc., to Sher-Del Foods, Inc. The bakery sold its products only to Sher-Del. Sher-Del in turn sold these products to the various “Your Host” restaurants but at the same price at which it had bought them. The entire profit of the baking part of the enterprise thus went to the bakery even though Sher-Del Foods was the seller to the rest of the chain. In addition, although the bakery did employ a sizeable work force (unlike Chef Foods), it did share the same top-level management as Your Host, Inc., and Sher-Del Foods, Inc., with similar apportionment of salaries and expenses. Furthermore, it shared the same premises with Sher-Del Foods.

Although not conceding the point, appellants contend that under these circumstances the Commissioner was at best entitled to allocate the bakery’s income to Sher-Del only to the extent of determining a reasonable profit to Sher-Del for its services in distributing the bakery’s products to the “Your Host” chain. The dissent endorses this position, and cites in support of it language in our decision in W. Braun Co. v. C. I. R., 396 F.2d 264 (2d Cir. 1968). However, in view of the highly integrated nature of the business enterprise, we do not believe that it was unreasonable for the Commissioner to have concluded that all of the bakery’s income should be attributable to Sher-Del. As we said in the later case of Philipp Bros. Chemicals, Inc. v. C. I. R., supra, 435 F.2d at 59:

[T]he taxpayer had the burden of showing that the 100% allocation of income to the [parent] corporation was unjustified. Taxpayers ask us to remand the case in order to allow them an opportunity to establish that the 100 per cent allocation was unreasonable and to show what a reasonable allocation would be. We see no reason for according them another chance.

The petitioners here having similarly failed to demonstrate the reasonable allocation which they claim was their due, we believe our position as stated in the Philipp case is controlling. See also Wisconsin Big Boy Corp. v. C. I. R., supra, 452 F.2d at 140; Ballentine Motor Co. v. C. I. R., 321 F.2d 796 (4th Cir. 1963); Hall v. C. I. R., 294 F.2d 82 (5th Cir. 1961).

The Commissioner’s determinations under 26 U.S.C. § 269, to disallow the surtax exemption for five of the appellants’ corporations, were also within permissible limits. We note that four of these five (Telesnax, Inc., Royal Host, Inc., Main Host, Inc., and 309 Delaware Ave., Inc.) were merely alternate vehicles for operating additional “Your Host” restaurants. They were all thinly capitalized. They were all financed by substantial loans from Your Host, Inc., and from Sher-Del Foods, Inc., loans either not evidenced by notes or established through a system of delayed billing. More importantly, in none of these four instances were the appellants able to proffer reasons for their separate incorporation other than a desire to limit liability for its own sake (which is in any event a necessary consequence of incorporation) and, in the case of Telesnax, the additional desire to give Wesson and Durrenberger’s accountant a capital share in the business. Unlike the situation regarding the six “Your Host” companies where the Tax Court found the principal purpose of incorporation to have been other than tax avoidance, for these four restaurant operating corporations the appellants cited no unusual risks incumbent on the ventures, such as location in an untried shopping center development or in a community with strong pre-established competition, nor any other factors, such as the need to protect a corporate name not already-protected or to protect the goodwill of a particular restaurant, which might have been persuasive of the necessity for separate incorporation. Accordingly, the Commissioner’s conclusion that tax avoidance was the principal purpose behind their separate incorporation was not “clearly erroneous.” See Scroll, Inc. v. C. I. R., 447 F.2d 612 (5th Cir. 1971); Bobsee Corp. v. United States, 411 F.2d 231 (5th Cir. 1969); Borge v. C. I. R., 405 F.2d 673 (2d Cir. 1968).

Although incorporated for reasons other than operating a “Your Host” restaurant, Alro Realty, Inc., presents no different considerations in regard to the Commissioner’s disallowance of its surtax exemption. Appellants argued before the Tax Court that the principal purpose for establishing Alro was to facilitate real estate mortgage financing for the overall enterprise. Yet, the operation of Alro subsequent to its formation undercuts that contention.

Alro was created by Wesson and Durrenburger in 1951 with a capitalization of $2,000. It then purchased all of Sher-Del Foods’ business real estate, including the commissary building, by delivering promissory notes totalling $112,822.93, but failed to assume SherDel’s prior mortgage obligation. Moreover, although Alro has repaid a mere $3,000 on these notes, Sher-Del has continued making capital advances to Alro. In sum, Alro has never been utilized as a financing vehicle or in any other manner to improve the working capital position of its parent, Sher-Del, or its affiliate, Your Host, Inc. On these facts the Commissioner was not clearly erroneous in determining that Alro was established for the principal purpose of tax avoidance. See Bobsee Corp. v. United States, supra, 411 F.2d at 238; Dorba Homes v. C. I. R., supra, 403 F.2d at 505-506.

The only troublesome point which remains concerns the apparent inconsistency of the Tax Court’s conclusions under §§ 482 and 269. The four restaurant operating corporations of the “Host” group which have been denied the surtax exemption because of their “acquisition” for the principal purpose of tax avoidance were also found, however, to have “sound business reasons” for their separate corporate existence, so that as to them the Tax Court reversed the Commissioner’s income allocations under § 482. This apparent inconsistency is resolved by the fact that a company may operate from day to day as a valid economic entity although it may have originated as a tax avoidance device. Sections 482 and 269 of the Code look to different periods in a corporation’s existence, as they also look to different elements of proof: economic reality in reference to income versus inference . of intent in reference to tax savings. Thus even though the establishment of these elements requires in part the assessment of common facts in the conduct of a company after its “acquisition,” the purposes relevant to such assessment may be quite distinct. In a case very similar to the present one, this court cautioned against

confus [ing] “a purpose,” the continued existence of which may be enough to eliminate [an adverse determination under § 482], with “the principal purpose” to evade or avoid the Federal income tax, the initial presence of which governs § 269 and which may exist alongside other secondary reasons for the formation of the corporation.

Dorba Homes, Inc. v. C. I. R., supra, 403 F.2d at 506. That caution is no less applicable to the facts of the instant case.

We find no merit in the appellants’ final contention that the application by the Commissioner of the sanctions of § 269 “so many years after the fact” is a violation of the due process clause.

The judgments of the Tax Court are accordingly affirmed.

TIMBERS, Circuit Judge

(dissenting in part):

Since I am disturbed by certain inconsistencies in the Tax Court decision and by the majority’s placing the imprimatur of our Court on those inconsistencies, I respectfully dissent in part.

With respect to the Section 482 allocations, I dissent from the majority opinion to the extent that it affirms the Tax Court in upholding the Commissioner’s allocation of Chef Foods’ income to Your Host and his allocation of the entire income of Your Host Bakery to Sher-Del Foods. As 'to the Chef allocation, I would reverse. As to the Bakery allocation, I would reverse and remand for determination of a proper adjustment and a reallocation of income.

With respect to the Section 269 surtax exemptions, I agree with the majority’s affirmance of the Tax Court in upholding the Commissioner’s disallowance of surtax exemptions for four of appellant’s five affiliated companies. As to the 309 Delaware restaurant, however, I would reverse and hold that the Commissioner’s disallowance of its surtax exemption was clearly erroneous.

I.

Section 482 of the Internal Revenue Code of 1954, 26 U.S.C. § 482 (1970), authorizes the Commissioner to “allocate gross income” among the units of commonly controlled business organizations. Its purpose is to prevent tax evasion or clearly to reflect the income of the various parts of an integrated corporate group. While this statute gives the Commissioner broad discretion to allocate income, it does not permit him to disregard a separate corporate entity if it exists for “a bona fide business purpose”, W. Braun Co. v. C. I. R., 396 F.2d 264, 268 (2 Cir. 1968), and if it conducts substantial business activities and earns its own income. Philipp Brothers Chemicals, Inc. v. C. I. R., 435 F.2d 53 (2 Cir. 1970). Nor does this statute permit the Commissioner to substitute his business judgment for that of management. The fact that a parent corporation might have performed services for itself rather than establishing a subsidiary for that purpose is irrelevant so long as the latter is a viable, going concern. Philipp Brothers Chemicals, Inc. v. C. I. R., supra, 435 F.2d at 58. Income allocation is proper only when the income earned by one corporation is artificially deflected to another.

Applying these criteria to the instant ease, the Tax Court held that the ten restaurant corporations were “economically viable business entities”. 58 T.C. at 27. It refused to uphold the Commissioner’s allocation of their income to Your Host. The Tax Court based its conclusion on the fact that these corporations earned their own income and paid their own costs of doing business.

If the Tax Court was correct in holding such operational autonomy to be a bar to income allocation with respect to the ten restaurant corporations, I fail to understand the majority’s conclusion with respect to Chef Foods. Chef was a viable, independently functioning business enterprise. It had cigarette vending machine sales averaging $130,000 per year; it had a salaried employe for whom it paid workmen’s compensation and social security contributions; it owned its own vending machines and maintained a substantial inventory; it paid its own utilities, taxes, automobile expenses and, as did the ten restaurant corporations, a proportionate share of group insurance and general administrative costs. Chef conducted its business no differently than did its competitors. It serviced its own machines, collected receipts and paid commissions based upon the amount of merchandise sold.

These factors clearly distinguish the instant ease from Philipp Brothers Chemicals, Inc. v. C. I. R., supra. There we affirmed the Tax Court in sustaining the Commissioner’s allocation of the entire income of foreign sales subsidiaries to their parent upon a finding that they had had no employees, no inventory and did nothing whatever to earn the income they reported. That is a far cry from the situation here.

The case against allocating all of Your Host Bakery’s income to Sher-Del Foods is even more compelling. Bakery had sales in excess of $175,000; it had a payroll of approximately $50,000; it purchased more than $80,000 worth of raw materials; and it paid for its own insurance, linen, laundry and operating supplies. These are clear indices of operational autonomy. They demonstrate that Bakery was a viable, income earning enterprise. I see no basis for the Tax Court’s conclusion that Bakery “could hardly be considered to have conducted any business.” 58 T.C. at 28-29.

True, Bakery sold its entire output through Sher-Del which acted without charge as Bakery’s middleman, delivery and billing agent. There was some income distortion. This does not mean, however, that a Section 482 allocation of 100% of the subsidiary’s income is appropriate. While Sher-Del has not established the adjustment necessary to reflect the cost to it of these services, it has demonstrated that Bakery earned a substantial portion of its reported income. In an analogous situation, we held that

“[t]he Commissioner was not justified in arbitrarily allocating all of [the subsidiary’s] taxable income to petitioner.” W. Braun Co. v. C. I. R., supra, 396 F.2d at 268. (emphasis added).

I would remand for a determination of the proper adjustment of Sher-Del’s costs as a basis for reallocating Bakery’s income to Sher-Del according to law.

II.

Since Your Host did not demonstrate non-tax avoidance reasons for the separate incorporation of Telesnax, Inc., Royal Host, Inc., Main Host, Inc. and Arlo Realty, Inc., the Tax Court correctly upheld the Commissioner’s disallowance of their surtax exemptions pursuant to Section 269 of the Internal Revenue Code of 1954, 26 U.S.C. § 269 (1970).

The specific findings of the Tax Court with respect to 309 Delaware Ave., Inc., however, establish that it was formed for the very reasons said to have justified the formation of the eight other “Host” companies as to which the Tax Court found the principal purpose of incorporation to have been other than tax avoidance. These findings by the Tax Court strike me as undermining the majority’s assumption that there were “no unusual risks . . . which might have been persuasive of the necessity for separate incorporation” of 309 Delaware. I would hold that the Commissioner’s disallowance of its surtax exemption was clearly erroneous. See Borge v. C. I. R., 405 F.2d 673 (2 Cir. 1968).

      . 26 U.S.C. § 482 provides:
      In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.

      . 26 U.S.C. § 269 provides in relevant part: (a) In general. — If—
      (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or
      (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation,
      and the principal purpose for which such acquisition was- made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary or his delegate may disallow such deduction, credit, or other allowance.

      . The principal corporations among the group were Your Host, Inc., the original company begun as a partnership in 1944 and incorporated in 1947 and which now operates fifteen “Your Host” restaurants, and Sher-Del Foods, Inc., also incorporated in 1947, which owns and runs the food processing part of the business. In addition to these two principal companies, there are ten subsidiaries and affiliates which run “Your Host” restaurants: 309 Delaware Ave., Inc. (four restaurants), Royal Host, Inc. (one), Boulevard Host, Inc. (two), Utica Host, Inc. (four), Niagara Host, Inc. (four), Main Host, Inc. (three), Transit Host, Inc. (two), Sharlem Host, Inc. (three), Rochester Host, Inc. (originally three, now one), and Tele-snax, Inc. (one). There is also Air Host, Inc., which runs the business’s one “Royal Host” restaurant. The remaining three companies are Your Host Bakery, Inc. (supplier of bakery goods to the business), Chef Foods, Inc. (a subsidiary of Sher-Del which handles vending machine operations and which leases storage facilities to Sher-Del and' Your Host Bakery), and Alro Realty, Inc. (another subsidiary of Sher-Del which owns the principal business property of Sher-Del and Your Host).

      . These were the ten companies (aside from Your Host, Inc.) which operated “Your Host” restaurants (see fn. 3), plus Air Host, Inc., and Chef Foods, Inc.

      . These were again the ten companies operating “Your Host” restaurants, plus Chef Foods, Inc., Your Host Bakery, Inc., and Alro Realty, Inc.

      . The Commissioner has filed a protective cross-appeal requesting that, in the event we reverse the Commissioner’s § 482 determinations as to Chef Foods and Your Host Bakery, we remand to the Tax Court for consideration of the Commissioner’s § 269 determinations with respect to both companies. Since we affirm the decision below, we need not consider this cross-appeal.

      . We have not thought it necessary to recount all the findings of the Tax Court since they are set out in detail in its opinion, 58 T.C. 10 (1972).

      . There is, of course, no longer any question that the formation of a new corporation can be an acquisition for the purposes of § 269, James Realty Co. v. United States, 280 F.2d 394 (8th Cir. 1960), and also that § 269 applies to an acquired corporation as well as to an acquiring corporation, Concord Supply Corp., 37 T.C. 919 (1962).

      . The circumstances which the dissent urges as justifying the separate incorporation of 309 Delaware Ave., Inc., for example the slightly higher rent, the smaller number of pedestrians, and so forth, are marginal at best. These factors are not equivalent to such substantial risks as taking on established competition or beginning business operations in a city where the “Your Host” name was generally unknown.

      . See 7 Mertens, Law of Federal Income Taxation § 38.63 (Zimet & Barton rev. 1967):
      “The identity of businesses is to be preserved and the Secretary or his delegate has no authority under [§ 482] to merge them into one single business unless the businesses are carried on and manipulated in such a way as to constitute one single business, or unless the ‘controlled enterprise’ is a sham.” (citations omitted).

      . Each of the ten restaurant corporations paid for its own nonadministrative help, supplies, utilities, state and federal taxes, social security contributions, fire insurance premiums and license fees. Each was solely responsible for payment of its own rent. Each paid a proportionate share of the common administrative and group insurance costs.

      . The majority notes that Chef had insubstantial business expenses. As long as Chef was a viable enterprise and received no services from Your Host for which the latter was not adequately compensated — i. e. no income distortion — that fact would appear irrelevant.

      . A proper adjustment would involve an increase in Sher-Del’s income sufficient to reflect the cost to it of the billing and delivery services provided for Bakery and a corresponding decrease in Bakery’s income.

      . The Tax Court found with respect to the 309 Delaware restaurant:
      “The prospects for a restaurant at 309 Delaware Avenue were not as favorable as those enjoyed at the other Your Host locations. The rent was higher there than ■ for other locations ($250 to $300 per month over a seven-year period compared to a $200 maximum per month on a ten-year lease at 3232 Bailey Avenue). There were no adjacent parking facilities, and pedestrian traffic was not as heavy as at other locations.” 58 T.C. at 14.


source: Caselaw Access Project

author: PER CURIAM.

license: Public Domain

text:
    Cheryl JEROME, Plaintiff-Appellant, v. VIVIANO FOOD COMPANY, INC., Defendant-Appellee.
    No. 73-1813.
    United States Court of Appeals, Sixth Circuit.
    Argued Dec. 5, 1973.
    Decided Jan. 10, 1974.
    Lutz Alexander Prager, Wayne State University Law School, Detroit, Mich., on brief, for plaintiff-appellant; Paulette LeBost, Irving M. Miller, Detroit, Mich., of counsel.
    Jerome Goldman, Cincinnati, Ohio, on brief, for defendant-appellee; Paul H. Tobias, Goldman, Cole & Putnick, Cincinnati, Ohio, of counsel.
    Before EDWARDS and PECK, Circuit Judges, and McALLISTER, Senior Circuit Judge.
   PER CURIAM.

This is an appeal from the denial of a temporary injunction and dismissal of a complaint entered by the United States District Court for the Eastern District of Michigan, Southern Division.

Appellant Jerome sought relief in the District Court before complying with the waiting periods established by the Equal Employment Opportunity Act, 42 U.S.C. § 2000e et seq., (1970). Appellant sought a preliminary injunction after being denied employment by the Viviano Food Company, Inc., because, she claims, she is a woman. She did not await disposition of her complaints before the EEOC and the Michigan Civil Rights Commission, or the issuance of a letter by the EEOC certifying that there was reasonable cause for her to bring suit. 42 U.S.C. § 2000e-5(b), (e), (f)(1) (1970).

The District Judge originally issued a temporary restraining order, but then dismissed it and dismissed the complaint at the same time.

It appeared to our panel that appellant was seeking by case law decision to obviate the statutorily required cooling off and conciliation period set forth in the Equal Employment Opportunity Act. Generally adherence to the time schedule set forth by the Act has been enforced by the courts. In Love v. Pullman Co., 404 U.S. 522, 92 S.Ct. 616, 30 L.Ed.2d 679 (1972), the United States Supreme Court said:

“A person claiming to be aggrieved by a violation of Title VII of the Civil Rights Act of 1964, 78 Stat. 253, may not maintain a suit for redress in federal district court until he has first unsuccessfully pursued certain avenues of potential administrative relief.” Love v. Pullman Co., supra at 523, 92 S.Ct. at 617.

In Goodman v. City Products Corp., 425 F.2d 702 (6th Cir. 1970), this court held that: “Compliance with the statutory requirements is a prerequisite to the institution of a civil action based on the statute.” Id. at 704.

Appellant relies strongly upon a Fifth Circuit ease decided in 1973, Drew v. Liberty Mutual Insurance Co., 480 F.2d 69 (5th Cir. 1973). There the court approved injunctive relief to maintain the status quo prior to asserted discriminatory discharge where it was alleged that the discharge was occasioned by an equal employment opportunity complaint by the employee. In the instant case there is no existing relationship between the employee and the employer, and monetary damages in the form of back wages can compensate for the injury. These facts serve as valid distinctions in terms of the proofs essential to establish irreparable harm between the instant case and the Drew case.

The judgment of the District Court is affirmed.

      . Since 1972 the EEOC has been authorized to institute civil actions against nongovernmental respondents (in which the aggrieved person may intervene) if the Commission has been unable to secure an agreement with the entity charged. 42 U.S.C. § 2000e-5(f)(1) (Supp. 1972).


author: PER CURIAM:

text:
    James E. SWANN et al., Appellees, v. CHARLOTTE-MECKLENBURG BOARD OF EDUCATION et al., Appellants.
    No. 73-2048.
    United States Court of Appeals, Fourth Circuit.
    Argued Jan. 8, 1974.
    Decided Jan. 15, 1974.

      William W. Sturges, Charlotte, N. C. (Weinstein, Sturges, Odom, Bigger & Jonas, William J. Waggoner, Waggoner, Hasty & Kratt, Charlotte, N. C., on brief), for appellants.
    Julius L. Chambers, Charlotte, N. C. (Chambers, Stein, Ferguson & Lanning, Charlotte, N. C., Jack Greenberg, James M. Nabrit, III, and Norman Chachkin, New York City, on brief), for appellees.
    Before HAYNSWORTH, Chief Judge, and WINTER, BUTZNER, RUSSELL, FIELD and WIDENER, Circuit Judges, sitting en banc.
   PER CURIAM:

In this latest chapter in this now famous school case, the School Board appeals from an order entered on June 19, 1973, directing that it modify its plan for the operation of its schools for the 1973-74 school year, and directing that by March 1, 1974 the School Board submit a plan for the operation of the schools for the 1974-75 school year.

The appeal was processed routinely, the briefs having been filed in November and December 1973. The School Board, meanwhile, took appropriate steps to put itself into compliance with the requirements of the District Court’s order with respect to the school year 1973- 74. On oral argument in this Court, counsel for the School Board disclaims any purpose or wish on the part of the School Board to change the assignment plan in any respect during the current school year. It thus appears that the only matter in practical dispute between the parties is the plan for the school year 1974-75, which has not yet been produced by the School Board.

We cannot anticipate the content of the School Board’s plan for the school year 1974-75, and this Court does not sit to render decisions on abstract legal propositions or advisory opinions. All requisite and appropriate judicial review may be had after the School Board has developed and presented its final plan for the 1974-75 school year, which is due to be presented by March 1.

If either party should desire review in this Court of any order which may be entered by the District Court with respect to the School Board’s plan for the 1974- 75 school year, an expedited appeal should be had and brief filing schedules should be established with the aid of the Clerk of this Court without the necessity of any letter press printing. For its part, this Court will undertake to hear and decide the appeal promptly, so that all legal issues may be resolved at this level in ample time for the opening of the schools for the 1974-75 year.

Since it appears that the Board’s compliance with the District Court’s order for the current school year has mooted any issue with respect to this year and since the appeal with respect to the plan for the school year 1974-75 is premature, we conclude the appeal must be dismissed. In taking this action, we intimate no view on the merits of any of the legal propositions tendered for decision.

Appeal dismissed.


author: PHILLIPS, Chief Judge.

text:
    The TROXEL MANUFACTURING COMPANY, Plaintiff-Appellant and Cross-Appellee, v. SCHWINN BICYCLE COMPANY, Defendant-Appellee and Cross-Appellant.
    Nos. 73-1330, 73-1331.
    United States Court of Appeals, Sixth Circuit.
    Argued Oct. 16, 1973.
    Decided Dec. 19, 1973.
    Certiorari Denied April 15, 1974. See 94 S.Ct. 1942.
    Affirmed in part; reversed and remanded in part.

      George E. Morrow, Memphis, Tenn., for plaintiff-appellant; John R. Walker, III, Memphis, Tenn., on brief.
    William E. Lucas, Chicago, 111., for defendant-appellee; Walter P. Armstrong, Jr., Memphis, Tenn., on brief; Malcolm McCaleb, Malcolm McCaleb, Jr., Chicago, 111., of counsel.
    Before PHILLIPS, Chief Judge, WEICK, Circuit Judge, and O’SULLIVAN, Senior Circuit Judge.
   PHILLIPS, Chief Judge.

This is the second appeal in patent royalties litigation between the licensee of a patent (Troxel) and the owner of the patent (Schwinn) where the patent ultimately was ruled to be invalid. Reference is made to the earlier decision of this court reported at 465 F.2d 1253 (6th Cir. 1972) [hereinafter cited as Troxel /] for details of the background of the case.

Troxel was a licensee under the Schwinn patent. The patent was held invalid by a California District Court on January 3, 1969. The United States Court of Appeals for the Ninth Circuit affirmed on December 22,1970.*

In Troxel I this court held, among other things, that: (1) Troxel was not entitled to recover all the royalties it had paid to Schwinn from the inception of the license agreement; (2) the eviction of the patent occurred on December 22, 1970, the date of the Ninth Circuit decision of invalidity; and (3) Troxel was not entitled to recover royalties for any period prior to the eviction, i. e., December 22, 1970.

Also involved in this litigation is Schwinn’s counterclaim for the final quarterly royalty payment asserted to be due under the license agreement for the last quarter of 1970.

The District Court had ordered Schwinn to refund to Troxel all royalties collected under the license agreement. In Troxel I this court reversed and remanded with directions to dismiss the complaint and to make appropriate disposition of Schwinn’s counterclaim for royalties asserted to be due for the last quarter of 1970.

In the proceedings in the District Court on remand, Troxel moved to amend its pleadings to set forth an alternative theory of recovery, which it contends is consistent with the holding of this court in Troxel I. The District Court denied leave to amend. The District Court also denied Schwinn any recovery under its counterclaim for royalties for the last quarter of 1970. All other motions were denied and costs were taxed against Troxel.

Both Troxel and Schwinn have appealed to this court. Troxel appeals from the denial of its motion to amend its pleadings so as to aver an alternative theory of recovery. Schwinn cross-appeals from the denial of its counterclaim for royalties for the final quarter of 1970.

We affirm as to the denial of Troxel’s motion to amend its pleadings. We reverse as to the action of the District Court on Schwinn’s counterclaim and remand for entry of judgment in favor of Schwinn for royalties found to be owed by Troxel for the period prior to December 22, 1970.

1) Motion to Amend

Troxel strenuously contends that denial of its motion for leave to amend, especially in the absence of stated reasons, was an abuse of discretion. We disagree.

The grant or denial of a motion for leave to amend is within the sound discretion of the District Court and will be reversed only for an abuse of discretion. Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330, 91 S. Ct. 795, 28 L.Ed.2d 77 (1971); Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). Rule 15(a), Fed.R.Civ.P., mandates that leave to amend “shall be freely given when justice so requires.”

In Foman v. Davis, supra, the Supreme Court set forth the guidelines governing motions to amend under Rule 15(a). They are as follows:

“Rule 15(a) declares that leave to amend ‘shall be freely given when justice so requires’; this mandate is to be heeded. See generally, 3 Moore, Federal Practice (2d ed. 1948), jfjf 15.08, 15.10. If the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits. In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be ‘freely given.’ Of course, the grant or denial of an opportunity to amend is within the discretion of the District Court, but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules.” 371 U.S. at 182, 83 S.Ct. at 230.

These guidelines are founded on the hornbook proposition that piecemeal litigation should be discouraged, not only because it is antagonistic to the goals of public policy, but also because it is prejudicial to the rights of individual litigants.

With these considerations in mind, we come to the facts of this case. Troxel has moved to amend its pleadings to assert an alternative theory of recovery based on an August 31, 1967, modification of the license agreement. This modification has been of record in the case since September 20, 1971. The only excuse offered for this delayed presentation is that Troxel misconceived the law. Troxel now seeks to present a theory of law that is alleged to be consistent with the prior law in this Circuit as reaffirmed by Troxel I.

A misconception of the law is not an excuse for the late presentation of an alternative theory of recovery. No reason is shown why Troxel could not have presented its alternative theory initially. Drackett Chemical Co. v. Chamberlain Co., 63 F.2d 853, 858 (6th Cir. 1933), the case relied on, was and still is the law of this Circuit. That Troxel misconceived the effect of Lear v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), is of no consequence. A losing party can always argue in retrospect that he misconceived the law. Rule 15(a) mandates more of a showing than Troxel has presented here.

As pointed out by the Supreme Court in Zenith v. Hazeltine, supra, a trial court is required to take into account any prejudice that the party opposing the motion to amend would suffer. Here the prejudice to Schwinn is obvious. The case has been pending for more than two and one-half years, and Schwinn already has had to defend against one theory at both the district court and the appellate court levels. The District Court would have been justified in concluding that to put Schwinn through the time and expense of continued litigation on a new theory, with the possibility of additional discovery, would be manifestly unfair and unduly prejudicial.

Troxel places primary reliance on Fo-man v. Davis, supra. In Foman the District Court had entered judgment and dismissed a complaint for failure to state a claim upon which relief could be granted. One day later, the plaintiff moved to vacate the judgment and amend the complaint to state an alternative theory of recovery. These motions were denied and the Court of Appeals affirmed. That decision was reversed by the Supreme Court.

The present case is readily distinguishable from Foman. In Foman the plaintiff had not attained a decision on the merits of his cause of action. The lawsuit was barely underway when it was terminated. Here Troxel proceeded under one theory through the Court of Appeals where it lost. Now it wants to repeat the whole cycle again. We are unwilling to reverse the decision of the District Court. The time has come to bring this extended litigation to an end.

Other authorities cited by Troxel do not force a contrary conclusion. In Western Urn Mfg. Co. v. American Pipe & Steel Corp., 113 U.S.App.D.C. 378, 308 F.2d 333 (1962), a motion to amend was allowed after a reversal and remand because of new facts. Here there are no new facts. Jones v. St. Paul Fire & Marine Ins. Co., 108 F.2d 123 (5th Cir. 1939), was an equity case where the court allowed the plaintiff leave to amend its complaint to assert an additional claim arising out of the same facts. Troxel already has asserted its claim and is merely seeking to justify it' with a different legal theory.

We hold that it was not an abuse of discretion for the District Court to deny Troxel leave to amend its pleadings.

In so holding, we note that the better practice is for a district court to state reasons for its denial of a motion to amend. However, as the court said in Foman v. Davis, supra, when reasons are readily apparent it is not per se an abuse of discretion to omit them. See also Komie v. Buehler, 449 F.2d 644, 648 (9th Cir. 1971).

In order to foreclose any doubts as to the equities of the matter, we hold that even if leave to amend had been allowed, Troxel could not have been successful on its alternative theory. Troxel’s new theory is as follows:

“The theory of recovery proposed to be submitted by Troxel on remand is that the parties, by amendment to the patent license agreement between them, have stipulated that on termination of the agreement, their rights relative to the validity of the patent are to be the same as if there had been no license agreement. Absent a license agreement, it is made clear by Drackett that there is a complete failure of consideration where the underlying patent is invalid. Such failure of consideration has long been recognized as a ground for recovery of moneys paid.”

The amendment to the license agreement is as follows:

“Adverting to Section 2 of the license agreement dated June 1, 1967: On the basis of our consideration of the several specimens of your current saddles, we concur that the saddles now designated by you as Series 100 and Series 200 are subject to the royalty provisions of Section 2 of the license agreement and that Series 11 and Series 14 are not.
“It is further agreed that if the license agreement of June 1, 1967, is terminated for any reason, both Trox-el and Schwinn, insofar as the question of the validity and scope of said patent is concerned, shall be deemed to be in the same positions after such termination has become effective as they would have been if the license agreement had never been entered into.”

In an effort to rely on the rationale of Drackett Chemical Co. v. Chamberlain Co., supra, Troxel contends that this modification makes the contract void ab initio and entitles it to a complete refund of all royalties paid. This interpretation would sidestep completely our holding in Drackett, as reaffirmed in Troxel I, by eliminating the effect of any benefits Troxel may have received as consideration for the royalty payments. We hold this to be an untenable position.

The contract modification was pre-Lear and provided that the parties shall be deemed to be in the same position after such termination has become effective as they would have been if the license agreement had never been entered into. This amendment does not void the contract ab initio, but rather gives Troxel the right to contest the validity and scope of the patent after termination of the license agreement.

Aside from, and in addition to, the contract argument, Troxel contends that it is entitled to recover solely under the rationale of Drackett. This court noted in Drackett that an eviction will terminate a patent license agreement. The court stated:

“Prior to such eviction, the mere invalidity of the patent is properly held not to be a sufficient defense, because the licensee may still continue to enjoy all the benefits of a valid patent. It may be respected, and the licensee would then have just what he bargained for.” 63 F.2d at 854.
******
“Licenses may be exclusive, partially exclusive, or nonexclusive. The principles which we have stated apply with equal force to all these types. . . .” Id. at 855. .

In Troxel I we held that, absent a bad faith appeal, the eviction occurred on December 22, 1970, the date of the Ninth Circuit’s holding of invalidity. 465 F.2d at 1255. There has been no showing that Schwinn prosecuted its appeal in that case in bad faith.

Troxel’s position is that it received no benefits from the license agreement. In Troxel I we stated:

“During all this time it had the benefit of freedom from suit for infringement and agreement of Schwinn to attempt to halt unlicensed infringers. It also enjoyed freedom from liability for past infringement.” 465 F. 2d at 1260.

Troxel disagrees by contending that these benefits can not provide support for the royalties, relying on Lear v. Adkins, supra, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969). Again we reject this argument.

In Lear the Supreme Court weighed equities when it discussed contract consideration. The precise issue was licensee estoppel, and the Court was primarily concerned with the existence of unchallenged patents and their effect on competition. This is an entirely different situation from the case at bar. Here the patent already has been challenged and invalidated. Troxel seeks to recover all royalties that it previously had paid, even though it received numerous benefits. We reaffirm our prior holding that the equities weigh heavily against Troxel. 465 F.2d at 1257-1260. Troxel is not entitled to a refund of any royalties paid prior to the eviction of the patent on December 22,1970.

2) The Counterclaim

In Troxel I we remanded with directions to dismiss Troxel’s complaint and make appropriate disposition of Schwinn’s counterclaim. We stated:

“The sole remaining issue is the disposition of Schwinn’s counterclaim for royalties due for goods sold during the last quarter of 1970. Lear makes it clear that Troxel may defend against this counterclaim on the ground that the Brilando patent is invalid. Further, the Ninth Circuit ruling of invalidity is ‘available [as] an estoppel defense that can be pleaded affirmatively and determined on a pretrial motion for judgment on the pleadings or summary judgment.’ Blonder-Tongue [Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation], supra, 402 U.S. [313] at 348, 91 S.Ct. [1434] at 1452 [28 L. Ed.2d 788].” Id. at 1260.

This counterclaim was to be disposed of in light of the following preceding statement:

“A licensee may at any time cease royalty payments, secure in the knowledge that the invalidity of the patent may be urged when the licensor sues for unpaid royalties. Lear, supra. If the patent is declared invalid through the efforts and expenditures of another, no further royalties are due under the license agreement. Drackett Chem. Co. v. Chamberlain Co., supra, 63 F.2d 853. Further, if the evicted licensee is sued as an infringer, the prior adjudication of invalidity enables the licensee to secure pretrial judgment in his favor. Blonder-Tongue, supra, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788. To permit a licensee in addition to recoup royalties paid is to extend Lear far beyond its rationale. Congress has not seen fit to create an implied warranty of validity in license agreements. We decline to do so by judicial action.” Id.

■Troxel did not cease royalty payments prior to the Ninth Circuit’s holding of invalidity. Drackett makes it clear that Troxel cannot avoid liability for royalties prior to this date. The court in Drackett stated:

“It is only when, by judicial decree or otherwise, it is published to the world that the monopoly is destroyed, that the licensee can claim a corresponding release from his obligation to pay royalties.” 63 F.2d at 854.

It was our intention in Troxel I that the District Court on remand would compute royalties due for products sold prior to the eviction and enter judgment for this amount against Troxel.

The District Court’s denial of relief to Schwinn on its counterclaim and granting of Troxel’s motion for summary judgment on the counterclaim is reversed.

The District Court is directed to compute the amount of royalties due for the last quarter of 1970 and enter judgment against Troxel for that amount. These royalties are to be computed for the period embracing the fourth quarter of 1970 and ending on December 22, 1970, the date of eviction of the patent.

We hold that Schwinn is not entitled to recover double costs, damages or attorney’s fees. The costs on these cross-appeals will be taxed against Troxel.

The case is remanded for further proceedings not inconsistent with this opinion.

      . 160 U.S.P.Q. 587.

      . Schwinn Bicycle Co. v. Goodyear Tire & Rubber Co., 444 F.2d 295 (9th Cir. 1970).

      . 334 F.Supp. 1269.

      . The contract was terminated effective December 22, 1970, the date of the Ninth Circuit’s holding of invalidity, and we are concerned only with royalties for the products sold before then.

      . Reference is made to Ransburg Electro-Coating Corporation v. Spiller and Spiller, Inc., 489 F.2d 974 (7th Cir. 1973), in which the Court of Appeals of the Seventh Circuit adopted the rationale of Troxel I.


author: SWYGERT, Chief Judge.

text:
    RANSBURG ELECTRO-COATING CORPORATION, Plaintiff-Counter-Defendant-Appellant, v. SPILLER AND SPILLER, INC., Defendant-Counter-Claimant, Third-Party Plaintiff-Appellee, v. IONIC ELECTROSTATIC CORPORATION, Third-Party Defendant-Appellee.
    Nos. 72-1496, 72-1497.
    United States Court of Appeals, Seventh Circuit.
    Argued April 18, 1973.
    Decided Nov. 16, 1973.
    Order Dec. 7, 1973.

      David J. Gibbons, Clyde F. Willian, Chicago, 111., for Ransburg.
    Robert E. Wagner and Robert E. Brown of Stone, Wagner & Aubel, Chicago, 111., for Spiller.
    Before SWYGERT, Chief Judge, and MURRAH  and BARNES, Senior Circuit Judges.

       The Honorable Alfred P. Murrah, Senior Circuit Judge of the United States Court of Appeals for the Tenth Circuit, is sitting by designation.

       The Honorable Stanley N. Barnes, Senior Circuit Judge of the United States Court of Appeals for the Ninth Circuit, is sitting by designation.

   SWYGERT, Chief Judge.

This is an appeal and a cross-appeal from summary judgments granted in a diversity action brought by Ransburg Electro-Coating Corporation against Spiller and Spiller, Inc. The action stems from an agreement executed in settlement of a 1965 patent infringement suit brought by Ransburg against Spiller. The background leading to the settlement included a series of prior and contemporaneous patent infringement suits litigated by Ransburg against Ionic, the manufacturer and vendor of the Ionic Models 25 and M50 Electrostatic Sprayers utilized by Spiller, At all pertinent times Ransburg manufactured and marketed electrostatic spray coating systems and owned basic patents in the field of commercial electrostatic painting.

In 1957 Ransburg brought an action in the United States District Court for the District of Maryland against Ionic and one of its customers claiming that the Ionic Model M50 atomizer infringed Ransburg’s patents. The Maryland district court held the Ransburg patents valid and Ionic guilty of infringement. Ransburg Electro-Coating Corp. v. Proctor Electric Co., 317 F.2d 302 (4th Cir. 1963). In 1965, in a separate but related action, the Maryland district court held Ionic in contempt of the injunctive provisions of its prior decree, for manufacturing and selling the Ionic Model 25 atomizer (not directly litigated in the prior suit). Ransburg Electro-Coating Corp. v. Proctor Electric Co., 242 F.Supp. 28 (D.Md.1965). Shortly before the Maryland district court’s decision holding Ionic in contempt, Ransburg brought suit against Spiller in the United States District Court for the Northern District of Illinois. Ransburg charged that Spiller’s use of Ionic Models M50 and 25 atomizers was an infringement of its patents. Thereafter a number of meetings were held between the parties which culminated in a settlement agreement and the dismissal of Ransburg’s suit against Spiller.

The agreement, dated November 12, 1965, provided that Spiller would pay Ransburg $70,000 in sixty monthly installments as compensation to Ransburg for infringement of specified Ransburg patents because of Spiller’s prior use of the Ionic Models M50 and 25 equipment. The agreement further provided that Ransburg would license Spiller’s future use of Ionic Model 25 equipment, the license agreement being embodied in a separate document dated December 1, 1965. During 1966, 1967, and the first half of 1968, Spiller met its monthly obligations on the settlement agreement. In April 1968 the Fourth Circuit reversed the Maryland district court’s decision, holding that the Ionic Model 25 Electrostatic Sprayer did not infringe Ransburg’s patents. Ransburg Electro-Coating Corp. v. Ionic Electrostatic Corp., 395 F.2d 92 (4th Cir. 1968). In June 1968 Spiller notified Ransburg that it would no longer make payments on the settlement agreement.

On January 16, 1970, Ransburg commenced this action to recover $33,833.-23 as the balance due on the settlement agreement. Spiller counterclaimed against Ransburg requesting a refund of all monies paid under the agreement. Spiller, in a second count, also requested a refund of all payments made on the license agreement. In addition, Spiller filed a third-party complaint against Ionic, asserting various theories of indemnification. On motion for summary judgment, Ransburg was denied enforcement of the settlement contract, and judgment was entered for Spiller. The district court denied, also by way of summary judgment, Spiller’s counterclaims and the third-party claim and entered judgment for Ransburg and Ionic respectively. Ransburg Electro-Coating Corp. v. Spiller & Spiller, Inc., 340 F. Supp. 1385 (N.D.Ill.1972).

We reverse the summary judgment granted Spiller on Ransburg’s complaint. We affirm the summary judgment, denying Spiller’s counterclaims. Finally, we reverse the denial of summary judgment on Spiller’s third-party claim against Ionic and remand for a resolution of the issues raised by the third-party complaint.

I

As has been noted, the settlement agreement consisted of two parts: the agreement to pay a specific sum for past infringements and a license agreement to use in the future equipment covered by Ransburg’s patents. In the instant action Ransburg sought only to recover the balance due on the covenant covering past infringements; it did not seek to enforce the license agreement.

Spiller contends, in effect, that the agreements signed on November 12 and December 1 comprise a single license agreement — retroactive for the period of time covered by the $70,000 settlement figure. On that premise it argues that since the Fourth Circuit determined that the subject of the agreement, the Ionic Model 25 atomizer, does not infringe Ransburg patents, an application of the principles laid down in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L. Ed.2d 610 (1969), and Blonder-Tongue Labs., Inc. v. University Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), precludes enforcement of the settlement agreement.

The district court essentially agreed with Spiller’s contention with respect to the unfulfilled portion of the agreement. It did, however, conclude that as to the partial performance, Spiller was not entitled to a refund of the sums previously paid. As to Ransburg’s claim for enforcement of the agreement, the district judge wrote:

Under the overriding federal policy expressed in Lear and reaffirmed in Blonder-Tongue that “all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent”, I find based on the foregoing facts that the 1965 settlement agreement between Ransburg and Spiller is unenforceable because it represents a demand for royalties for the use of an idea (i. e. the Model 25) which because it belongs to the prior art system is a part of the public domain.

With respect to Spiller’s counterclaim for a refund of the monthly installments already paid, the district judge also found support in Lear and Blonder-Tongue for concluding that Spiller should not prevail. On that point the judge said:

The remaining issue as between Ransburg and Spiller is whether Spiller should be permitted to prevail on its counterclaim and thereby recover all sums previously paid pursuant to the settlement agreement. In this regard Spiller relies on a statement in Lear that the licensee would be permitted to avoid the payment of all royalties accruing after Adkins’ 1960 patent issued if he could prove the patent was invalid. The context in which the statement was made, however, demonstrates that it was not intended to create in a patent licensee the unfettered right to recover all royalties paid under a patent later declared invalid. The only thing decided in Lear was that a licensee in that situation would be, relieved from the liability of paying royalties during the time he is challenging the validity of the patent. My reading of Lear on this point is buttressed by language appearing in the Supreme Court’s opinion in Blonder-Tongue. There the court said “Lear permits an accused infringer to accept a license, pay royalties for a time, and cease paying when financially able to litigate validity, secure in the knowledge that invalidity may be urged when the patentee-licensor sues for unpaid royalties.” Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 346, 91 S.Ct. 1434, 1451, 28 L.Ed.2d 788. I find no expression in either Lear or Blonder-Tongue which would create an independent cause of action in a licensee permitting the recovery of royalties paid on a patent which is subsequently held invalid. Therefore, with respect to its counterclaim, defendant Spiller’s motion for summary judgment is denied and the counterclaim is ordered dismissed and judgment entered for Ransburg.

Addressing ourselves to Spiller’s retroactive licensing argument, we hold the settlement agreement to be nothing more than a promise by Spiller to pay liquidated damages for past infringements in return for a dismissal of the infringement suit. Spiller erroneously equates a settlement for past infringement with a license for prospective use requiring the payment of continuing royalties. In those cases where the courts have been confronted with the precise issue of settlement for past infringement versus a license, they have recognized that release for past wrongdoing is not the equivalent of a license to do rightfully the same thing in the future. Rude v. Wescott, 180 U.S. 152, 9 S.Ct. 463, 32 L.Ed. 888 (1889); United States v. Youngstown Sheet & Tube Co., 171 F.2d 103 (6th Cir. 1948); Raytheon Mfg. Co. v. Radio Corporation of America, 286 Mass. 84, 190 N.E. 1 (1934).

Having characterized the agreement of the parties as a settlement to pay damages for past injuries and not a retroactive licensing agreement, it would appear that, on its face, Lear is inappo-site. It is argued, however, that enforcement of the settlement agreement would be contrary to the federal patent policy enunciated in Lear of ridding the public of invalid patents thereby dedicating ideas to the common good.

We recognize that enforcement of the settlement contract will result in the payment of damages, in part, for the use of a device that has judicially been determined to be outside of the scope of Ransburg’s patents and part of the “prior art.” Nonetheless, it is well established that the good faith compromise of a bona fide claim is a valid consideration to support^ a settlement contract, Gallon Iron Works & Mfg. Co. v. J. D. Adams Mfg. Co., 105 F.2d 943 (7th Cir. 1939); Koelmel v. Kaelin, 374 Ill. 204, 29 N.E.2d 106 (1940); and that

. . where parties have knowingly and purposely made an agreement to compromise and settle a doubtful claim, whose character and extent are necessarily conditioned by future contingent events, it is no ground for the avoidance of the contract that the events happen very differently from the expectation, opinion, or belief of one or both of the parties. Chicago & N.W. Ry. Co. v. Wilcox, 116 F. 913, 915 (8th Cir. 1902).

It cannot be gainsaid that in general settlements are judicially encouraged and favored as a matter of sound public policy. Williams v. First National Bank, 216 U.S. 582, 30 S.Ct. 441, 54 L.Ed. 625 (1910).

Spiller urges, however, that the federal patent policy, as enunciated in Lear, that “all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent,” prevails over the policy favoring settlement of disputes. Although the federal patent policy prevails over “the technical requirements of contract doctrine” (395 U.S. at 670, 89 S.Ct. at 1911), we believe that such policy must occupy a subsidiary position to the fundamental policy favoring the expedient and orderly settlement of disputes and the fostering of judicial economy. To allow a subversion of the deeply instilled policy of settlement of legitimate disputes by applying the federal patent policy as enunciated in Lear would effectively strip good faith settlements of any meaning. The vehicle of settlement would be a useless item if contracts, such as the one here, were subject to invalidation after they were consummated. We think the federal patent policy should not be carried so far. Indeed, in our decision in Maxon Premix Burner Co., Inc. v. Eclipse Fuel Eng. Co., 471 F.2d 308 (7th Cir. 1972), we were faced with a choice between the public policy encouraging tests of patent validity and the public policy favoring conservation of judicial time and limitations on expensive litigation. We held the policy favoring judicial economy to be more significant. To allow Spiller to reopen this settlement contract would be contrary to the avowed need for judicial economy declared in Blonder-Tongue, Labs., Inc. v. University Foundation, 402 U.S. 313, 334-49, 91 S.Ct. 1434, 28 L.Ed. 2d 788 (1971), and hardly consonant with our decision in Maxon.

Moreover, if we were to allow the successful challenge of the instant settlement contract, we would do little toward furthering the collateral policy declared in Lear favoring the expeditious and early challenge to the validity of the underlying patent. 395 U.S. at 673, 674, 89 S.Ct. 1902. See also Troxel Manufacturing Co. v. Schwinn Bicycle Co., 465 F.2d 1253, 1257 (6th Cir. 1972). To permit such a challenge would be to condone a potential practice wherein the alleged patent infringer would settle on more favorable terms than those if he were to be adjudged an infringer and, secure with his settlement, he would sit back and await the challenge to the underlying patent by another, an event which might come years after he had entered into his settlement contract. If the patent were successfully challenged, he would then turn to the courts, seeking the benefit of a fortuitous event, and would contest the settlement consummated perhaps years prior and at a time when he too had an opportunity to question the patent’s validity. To facilitate such tactics would be inconsistent with the Lear doctrine favoring the expeditious and early challenge to the validity of the underlying pateht.

II

Spiller counterclaimed for refunds of monies paid on the settlement contract, and on the license agreement. Since we have determined that Ransburg may enforce the settlement contract, it necessarily follows that Spider’s claim for refund of monies paid on the contract must fail. With respect to the license agreement the decision in Troxel Manufacturing Co. v. Schwinn Bicycle Co., 465 F.2d 1253 (6th Cir. 1972), is dispositive, and we therefore hold that Spiller’s claim for a refund on the license agreement should have been summarily denied. (The district court, for reasons unexplained, did not decide this issue.)

Spiller raises various affirmative defenses of patent misuse, fraud, duress, and attorney misconduct. The district court did not discuss these issues, but after a review of the record we find these asserted defenses to be without merit.

Ill

The district judge denied Spiller’s motion for summary judgment on its third-party complaint on the ground that Spiller’s payments on the settlement agreement should be characterized as “essentially royalties.” Since the record is barren of any evidence that Ionic had agreed “to reimburse Spiller for royalties paid to Ransburg pursuant to a license agreement,” the judge reasoned that Spiller could not prevail on its third-party complaint. In view of our holding that the settlement agreement cannot be characterized as a promise to pay royalties for past infringements, we reverse the summary judgment in favor of Ionic and remand for a trial of all the issues raised by the third-party complaint and the answer addressed thereto. Each party will bear his own costs on these appeals.

Reversed in part; affirmed in part.

ON MOTION FOR CLARIFICATION

ORDER

This matter comes before the court on the motion of plaintiff-eounter-de-fendant-appellant for clarification of this court’s decision in the above captioned cause. On consideration whereof, said decision is modified by the following additions :

1) The denial of Ransburg’s motion for summary judgment is reversed;

2) This case is remanded for any further proceedings with respect to Rans-burg’s motion.


author: KILEY, Circuit Judge.

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Robert CARMICHAEL, Defendant-Appellant.
    No. 71-1492.
    United States Court of Appeals, Seventh Circuit.
    Argued Sept. 14, 1972.
    Decided Nov. 6, 1972.
    Fairchild, Circuit Judge, dissented.

      Gerald M. Werksman, Chicago, III, for defendant-appellant.
    James R. Thompson, U. S. Atty., William T. Huyck, Arnold Kanter, Asst. U. S. Attys., Chicago, 111., for plaintiff-appellee.
    Before SWYGERT, Chief Judge, and KILEY and FAIRCHILD, Circuit Judges.
   KILEY, Circuit Judge.

Appellant Robert Carmichael was indicted in five counts, each charging violation of 18 U.S.C. § 1708 by his possession on five different dates of a United States Treasury Check stolen from the mail, knowing it had been stolen. He was tried by a jury and convicted on two counts and sentenced to concurrent five year terms. We reverse.

Before trial Carmichael filed a motion to suppress a quantity of checks seized in his automobile at the time of his arrest under an arrest warrant. The judge conducted a hearing during which a Secret Service agent, Hussey, whose affidavit was filed in sole support of the arrest warrant, testified. The agent’s affidavit was based upon information given to him by an informant alleged to be reliable. The judge precluded inquiry into the reliability of the informant, found the supporting affidavit of the agent was not facially insufficient, and denied Carmichael’s motion on the ground that the warrant was valid.

Carmichael contends that the district judge erred in denying him an opportunity to challenge the reliability of the government informant. He further contends that the judge erred in ruling that the affidavit supporting the application was sufficient on its face. We hold that the affidavit was facially insufficient and that the district judge erred in refusing to suppress the evidence. We need not consider whether the judge erred in precluding defendant’s questioning of the agent concerning the reliability of the informant.

After the judge precluded questions concerning the informant’s reliability, Carmichael’s attorney stated that the “first” reason for the motion to suppress was that “on its face the affidavit is insufficient” as based on “hearsay upon hearsay.” The court denied the motion to suppress urged on the basis of this “first” reason.

A federal magistrate issued the war-' rant for Carmichael’s arrest. The affidavit supporting the warrant application is:

And the complainant states that this complaint is based on the fact that your complainant was told by a reliable informant, whose information in the past has led to the conviction of at least six people, that T. W. ALLEN, ROBERT E. CARMICHAEL and JOHN DOE have in their possession numerous treasury and commercial cheeks one which is a check made payable to Photo Finishers, in the amount of $5,276.00. The confidential informant told your complainant that he has seen these checks in the possession of one of the defendants and that the defendant who had possession told him that the checks would be given by ROBERT E. CARMICHAEL to JOHN DOE and then to T. W. ALLEN, and that these checks were stolen from the mail, and that ROBERT E. CARMICHAEL, T. W. ALLEN and JOHN DOE would cash or cause these checks to be cashed.

The substance of the affidavit is that the agent’s “confidential informant” told him that he, the informant, had “seen” the cheeks in possession of “one of the defendants,” that that defendant in possession of the stolen checks told the “confidential informant” that the checks would be given by Carmichael to “John Doe” and then to T. W. Allen, that the checks were stolen, and that Carmichael, Allen and “Doe” would cash, or cause the cashing of, the checks.

We think the affidavit is insufficient on its face to establish probable cause for Carmichael’s arrest. We shall assume that the “confidential informant[’s]” reliability is sufficiently established. A common sense reading of the affidavit, Spinelli v. United States, 393 U.S. 410, 415, 89 S.Ct. 584, 21 L.Ed.2d 637 (1969), justified the magistrate in treating as probable the “confidential informant[’s]” report relating to those matters which he personally observed. We think that there was probable cause shown for the magistrate to conclude that “one of the defendants” possessed the checks. Spinelli at 412, 89 S.Ct. 584.

Nevertheless, there is nothing in the hearsay information given by the “confidential informant” that identifies Carmichael as the possessor. Carmichael is implicated in the check cashing scheme solely through the allegations of “that defendant” whom the “confidential informant” had seen in possession of the checks and who told the “confidential informant” what role he said Carmichael would play in cashing the stolen checks.

When the affidavit of special agent Hussey was presented to the magistrate for his consideration it was patently ambiguous. Given the information provided on the face of the affidavit it is not possible to identify the “defendant who had possession” of the checks and therefore it is not possible to establish his reliability. During the hearing on the motion to suppress the government revealed that T. W. Allen was the informant. At that point it became possible to read agent Hussey’s affidavit in such a fashion that the ambiguity is somewhat dissipated. The statement can now be read to indicate that T. W. Allen told agent Hussey that he saw the checks in the possession of Robert Carmichael and that Carmichael told Allen that he would give the cheeks to “John Doe” who would in turn give them to Allen. Nothing in the record before this court intimates that the magistrate was presented information at the time the arrest warrant was sought that would allow him to interpret the affidavit in the manner we have described.

We recognize that an affidavit “need not reflect the direct observations of the affiant and may rest upon hearsay” so long as a substantial basis for crediting the hearsay is presented, Jones v. United States, 362 U.S. 257, 271, 80 S.Ct. 725, 4 L.Ed.2d 697 (1960); and that the affidavit must be tested by us in a “commonsense and realistic fashion,” United States v. Ventresca, 380 U.S. 102, 108, 85 S.Ct. 741, 13 L.Ed.2d 684 (1965). We find nothing, however, in the affidavit before us which tends to show the reliability of “that defendant” who had possession of the stolen checks. The government does not argue that this unidentified “defendants[’s]” statements were against his penal interest. See United States v. Harris, 403 U.S. 573, 583, 91 S.Ct. 2075, 29 L.Ed.2d 723 (1971). The “confidential informant [’s]” report to the agent of the hearsay implication of Carmichael is of no aid to establish reliability or credibility of “that defendant.” Spinelli, supra at 413 n. 3, 89 S. Ct. 584. The “confidential informant” received his information indirectly and the affidavit does not show that he explained to the agent why “that defendant” in the alleged conspiracy was reliable. Spinelli, supra at 416, 89 S.Ct. at 589. There is nothing in the affidavit which sets forth “underlying circumstances” necessary to enable the magistrate “independently to judge” the validity of “that defendant[’s]” observation of the criminal activity attributed to Carmichael. Nor was there any other source of information given in the affidavit to corroborate the statement of the second informant.

We hold, by virtue of this court’s decision in United States v. Roth, 391 F.2d 507, 511 (7th Cir. 1967), that the district judge committed reversible error in denying Carmichael’s motion to suppress. The arrest warrant was based on hearsay upon hearsay. Roth, supra at 511, and thus the district judge erred in admitting at trial the evidence seized incident to Carmichael’s arrest under the warrant. The government does not argue that even if the arrest warant was invalid there was nevertheless sufficient evidence to support Carmichael’s conviction. The conviction must be reversed.

Should Carmichael be tried again under the counts in the indictment before us, it may be useful for the trier of fact to have our decision on contentions —other than that with respect to the motion to suppress — raised by Carmichael. We see no merit in his contention that reversible error was committed in the ruling which permitted the government to cross-examine Carmichael about criminal activity on February 4, 1969, where the offense in issue was alleged to have been committed February 10, 1969. In the first place, a government witness testified that he was in Carmichael’s apartment on February 4 and saw Carmichael with a check subject of Count IY of the indictment, that it was taken from an envelope containing a number of other checks and that he heard discussion that the checks were stolen and efforts would be made to cash them. This testimony tended to prove Carmichael’s knowledge that the checks he was accused of possessing had been stolen.

Carmichael testified that he did not know how the checks got into his car. The court permitted the government to cross-examine Carmichael concerning the February 4 incidents. This ruling was not erroneous, since the examination bore on an element of the offense charged. United States v. Wall, 225 F.2d 905, 907 (7th Cir. 1955); United States v. Turner, 423 F.2d 481, 483, 484 (7th Cir. 1970); United States v. Phillips, 375 F.2d 75, 79 (7th Cir. 1967). This court’s opinion in United States v. Phillips, 401 F.2d 301, 305 (7th Cir. 1968), is not to the contrary.

There is no merit in the contention that the court erred in permitting the agent to testify in rebuttal in view of Carmichael’s denial of knowledge of the theft of the checks. See United States v. Lambert, 463 F.2d 552 (7th Cir.) decided June 12, 1972. The contention presupposes that the cross-examination of Carmichael was “impermissible.” We have decided to the contrary.

Because the court erred in denying the motion to suppress the facially insufficient affidavit and erred in permitting the introduction of the evidence at the trial, the judgment is reversed and the cause remanded for further proceedings consistent with this opinion.

Reversed and remanded.

FAIRCHILD, Circuit Judge, dissents.