April 27, 2020 HISTORY AND THE LAW

Theft of IP, U.S. Style

Thomas J. Shaw

Acquiring the intellectual property of U.S. companies through theft or economic pressure is a key issue in the current trade dispute between the United States and China. However, not so long ago, it was the United States that was doing the confiscating. During World War I, without agreement or compensation, the U.S. government seized and sold the IP of companies owned by its enemies.

Interrupting the commerce of opposing belligerents is a common tactic in war. Blockades at sea and seizures of property on land are almost invariably employed. For example, during the American Revolutionary War, seizures of real property owned by loyalists were widespread, and payments on contracts with and loans from British citizens were frozen.

First a Law, then Licenses

Although World War I started in 1914, the United States didn’t become a belligerent until 1917. After declaring war, Congress passed statutes targeting American enemies, including their economic capabilities. One of these was the Trading with the Enemy Act of 1917. This act prohibited entering into a contract with, extending credit to, or paying a debt to an enemy alien.

The act also allowed for the appointment of an alien property custodian. The APC was to oversee and conserve the American property of enemy aliens that had been placed under trust by the government. Acting as a common-law trustee, the APC would deprive enemies of revenue from America to support the war effort.

This property included American IP, such as patents, copyrights, and trademarks, owned by enemy aliens. These had to be registered with the Federal Trade Commission, which could then license the IP, for a 5 percent royalty, to any American-owned companies that needed it to manufacture products required for “the successful prosecution of the war.”

At the time of World War I, Germany dominated the world’s organic chemistry markets, including dyes used in manufacturing, medicines including aspirin and salvarsan (the treatment for syphilis), and war materials such as explosives and poison gases. Because of the Allied blockade, imports of dyes and chemicals manufactured and shipped from Germany to American businesses were interrupted. American chemical companies, using licenses of enemy-owned IP, stepped in to fill the production void caused by the blockade.

The original person appointed to head the APC office was lawyer A. Mitchell Palmer, who would later become U.S. attorney general. He believed that merely licensing the enemy’s IP wouldn’t be sufficient to keep the United States involved in the organic chemistry business after the war. Along with his assistant, lawyer Francis Patrick Garvan, they lobbied Congress to revise the Trading with the Enemy Act in 1918 to allow the APC to sell the IP of enemy-owned corporations to American-owned corporations.

Wartime Theft by Statute

Just after the armistice in November 1918, the APC used his new powers to seize and sell the IP of German-owned companies. He started with the American business of the Bayer company, including its patent for the formula of aspirin. The patents held by Bayer were sold to a single company, which bid the highest price at a public auction.

However, the APC then realized that by selling to a single company, the buyer could turn around and sell the IP back to Bayer after the war. Also, any sale to a single purchaser would just be substituting a German monopoly with an American one. A different approach was required, leading to the creation of the Chemical Foundation.

The Chemical Foundation was set up to provide a legal entity that would allow U.S. manufacturers to license this IP, especially patents, on a nonexclusive basis. Additionally, the U.S. government would have unlimited access to the patents. U.S. chemical manufacturers would buy stock in the Chemical Foundation, which would be held in trust.

The foundation’s articles of incorporation stated that it was to use the patents in a:

“fiduciary capacity for the Americanization of such industries as may be affected thereby, for the exclusion or elimination of alien interests hostile or detrimental to the said industries, and for the advancement of chemical and allied science and industry in the United States.”

More than 6,000 German-owned patents, copyrights, and trademarks were sold to the Chemical Foundation by the APC.

Litigation Ensued

After the war and the subsequent change from a Democratic to a Republican administration, new U.S. President Warren Harding brought suit against the Chemical Foundation. The U.S. government charged, among other things, that members of the American chemical industry, in collusion with the APC, created a monopoly by seizing the German IP and selling it for an inadequate price to the Chemical Foundation, a private organization controlled by the chemical industry and individuals tied to the APC.

At trial, the district court ruled against the new government, which then appealed the decision to the U.S. Court of Appeals for the Third Circuit. As that court described it:

“every case has a story. This case, however, has two: One told by the evidence as the attorneys for the Government read it and the other told by the evidence as we read it.”

The government portrayed the actions of the previous Democratic administration as working from the plans of American industry to create their own monopolies using the German patents. To make it permanent, the American chemical and dye manufacturers needed to act before the peace stripped away their newfound sources of revenue.

APC Palmer instead said that it was his idea to build up an American chemical industry that could protect the country both in peacetime and in war. Contrary to the current administration’s view that industry drove the sale of the enemy-owned IP for personal gain, the APC claimed he had originated the idea of selling the enemy-owned IP for public gain.

The government’s position focused on who derived the plan to sell the IP and who benefitted from it. The government claimed the idea originated with the American chemical industry and that key men with roles at the APC also had important roles in the Chemical Foundation. In essence, they confiscated and sold this IP to benefit themselves, deriving big legal fees off of future work done for the foundation.

For example, Garvan became the second APC when Palmer became attorney general but also was president of the Chemical Foundation. The chief counsel of the APC’s investigations bureau, Joseph Choate, became legal counsel for the foundation. The patent lawyer for the APC, Ramsay Houget, became the foundation’s patent lawyer. Five members of the APC’s advisory sales committee became trustees of the foundation’s stock.

The defense instead asserted that it was Palmer’s idea to sell the IP to the foundation and that despite the dual roles, the various men involved, including a former appeals court justice, received no compensation for their roles. Instead, they were what was called dollar-a-year men, working for nothing for the government during the war.

Follow the Money

The government also asserted that the price paid for the patents by the Chemical Foundation, $250,000, grossly undervalued the property and was unfair, so the transaction was void. (The Bayer auction price, $5.3 million, wasn’t a good comparison because it included manufacturing facilities.)

The court believed that $250,000 would significantly undervalue the patents’ worth to their previous owners. However, because at the time of the transfer the patents had already been confiscated, their current value to the German owners was $0.

The court then looked at the value of the patents to the American companies that would bid for them if there was an open auction. The court’s belief was that the patents, without usable processes available, would be very difficult to value. Even more, the court looked to legal writings that claimed that German patents filed in America often didn’t have adequate disclosures to make them usable.

The court considered a third possible method to evaluate the price paid. Given the royalties received on the patents while held by the government, if sold unconditionally, the $250,000 price would be inadequate. But because of certain restrictions, such as the United States being able to freely use any of the patents and the lack of monopolistic rights, this conditional price should be considered fair.

Having refuted all of the government’s contentions, the appellate court, in an opinion written by Victor Baynard Woolley, affirmed the district court’s ruling against the government. This was later upheld by the U.S. Supreme Court. However, the role of the APC didn’t go away with this war, nor did the Trading with the Enemy Act.

During World War II, the APC’s role was revived to deal with Axis-owned assets in America, as well as those owned by individuals in Axis-occupied countries. The APC was to be responsible for nearly 20 times as much property value in this later conflict. The Trading with the Enemy Act was revised during the Depression and World War II to expand its scope to include peacetime national emergencies and all foreign nations, not just enemies.

This statute and its successor have been used in peacetime to sanction countries. Current sanctions include those on countries like Iran, Cuba, and North Korea and for foreign interference in U.S. elections. Recent penalties include Standard Chartered Bank, fined $657 million in 2019 for violating many sanctions, including those on Iran and Cuba.

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Thomas J. Shaw

Thomas J. Shaw, CPA, CIPP/EU, CIPP/US, CISM, CRISC, ECMM, ERMP, CISA, CGEIT, CCSK, is an EU-based lawyer and the author of 10 books, including: World War II Law and Lawyers https://www.americanbar.org/products/inv/book/137436634/, World War I Law and Lawyers https://www.americanbar.org/products/inv/book/186230861/, and Revolutionary War Law and Lawyers https://www.amazon.com/dp/1688873422?ref_=pe_3052080_397514860.