203 F.

2d 279

HIRSHHORN et al.
v.
MINE SAFETY APPLIANCES CO. et al.
No. 10894.

United States Court of Appeals Third Circuit.

Argued March 6, 1953.
Decided April 2, 1953.

John B. Doyle, New York City (Pruitt, Desvernine & Coursen, New York
City, Walker & Newman, Pittsburgh, Pa., Edwin A. McGuire, New York
City, on the brief), for appellant.
Charles E. Kenworthey, Pittsburgh, Pa. (Paul E. Hutchinson, Gilbert J.
Helwig and Reed, Smith, Shaw & McClay, Pittsburgh, Pa., on the brief),
for appellee.
Before McLAUGHLIN, STALEY and HASTIE, Circuit Judges.
McLAUGHLIN, Circuit Judge.

Plaintiff, a resident of New York, appeals from the dismissal of his complaint
by the district court sitting without a jury. The action is a double derivative
stockholders' suit on behalf of plaintiff and other stockholders of Carbon
Monoxide Eliminator Corporation, a Delaware corporation, and Catalyst
Research Corporation, a Maryland corporation. The defendants are the two
named corporations and Mine Safety Appliances Company, a Pennsylvania
corporation, as well as various directors and officers of the three corporations
and their representatives. For convenience the corporate defendants will be
referred to as Mine Safety, Carbon and Catalyst.

Mine Safety, the dominant corporation, was organized in 1917 to succeed a

partnership. It is engaged in the manufacture of industrial and military safety
equipment and is reputedly the largest manufacturer of such equipment in the
world.

Carbon was incorporated in 1929 to develop a method for eliminating carbon

monoxide from the exhaust gases of internal combustion engines through the
use of a catalyst called hopcalite. While Mine Safety has always owned a
controlling interest in Carbon plaintiff has since 1931 acquired 20,000 of
Carbon's 157,000 outstanding shares of stock.

Catalyst was organized in 1930 to develop and exploit hopcalite in fields other
than carbon monoxide elimination. Frazer, the inventor of hopcalite, was given
40% of Catalyst's stock in exchange for licensing his patent to the corporation;
the remaining 60% was issued to Carbon under an agreement whereby it was to
advance a total of $50,000 in annual installments to Catalyst.

Although the parties did not reprint the complaint in their appendices, a reading
of the trial court's comprehensive findings of fact and conclusions of law
reveals that defendants were charged with various acts of corporate
mismanagement and the exploitation of Carbon and Catalyst. The most serious
claim, and the only one pressed on this appeal, relates to the acquisition and
subsequent sales by Mine Safety of a so-called rebreather device to which, it is
alleged, Catalyst had certain rights by virtue of the fact that a Catalyst
employee, C. B. Jackson, made several inventions which were instrumental in
its development. To dispose of this appeal we must resolve three questions:

(1) Was Jackson employed by Mine Safety or Catalyst at the time he made his
rebreather inventions?

(2) Were Jackson's rebreather inventions made in connection with the business
of Mine Safety or Catalyst?

(3) Did Catalyst, as the subject corporation, have any rights in the rebreather or
in profits made from sales of the rebreather?

Under familiar rules governing appellate review we are limited, so far as the
factual issues are concerned, to determining whether the trial court's findings
are clearly erroneous.

10

From 1930 to 1935 both Carbon and Catalyst had their place of business in
Baltimore. During that period the bulk of Catalyst's research was done by
Frazer and a chemical engineer named Bennett. Early in 1931 Catalyst
employed a young chemist, C. B. Jackson, then a student at Johns Hopkins
University where Frazer taught, as research assistant. At the time Jackson

began his employment he executed a covenant with Catalyst wherein he agreed

that all inventions, ideas and discoveries made in connection with the business
of Catalyst would belong to that corporation. The agreement was, by its terms,
binding only during his employment by Catalyst. In 1934 Jackson left Catalyst
to work for Armour & Company in Chicago, returning in April, 1935, at which
time he executed another covenant substantially identical with the 1931
agreement.
11

In 1935, upon Jackson's return to Catalyst, the base of operations of Carbon and
Catalyst was, for reasons of economy, moved from Baltimore to the second
floor of a building owned by Mine Safety in Pittsburgh. The court below found
that pursuant to an arrangement arrived at by the corporations Jackson worked
for both Catalyst and Mine Safety from 1935 to 1940,1 his salary being
allocated between the corporations. The trial judge further found that the
utilization of services and the allocation of salary between the corporate
defendants was entered into in good faith and was fair and to the best interests
of Carbon and Catalyst.2

12

From April, 1935, until mid-1936 Jackson was engaged in several relatively
minor matters for Mine Safety. His work for Catalyst during that period was
confined to research on a hydrogenation catalyst. There was testimony that
upon completion of his catalyst research and for lack of other work he spent a
part of the summer of 1936 playing golf. In the meantime the officers of
Catalyst were considering whether to begin manufacturing the catalyst on a
commercial basis. The district court found that by the end of 1938 it was
determined that commercial production was not practicable and the project was
abandoned.

13

In September, 1936, Mine Safety was engaged in developing a rebreather.3 Its

director of research asked Jackson to work on it for Mine Safety and Jackson
did so. Though he was only one of several scientists so employed he did make
important contributions to the project and obtained several patents on
inventions relating to that work, all of which he assigned to Mine Safety.4 The
evidence indicates that Jackson's inventions, while not patented until 1939 and
later, were conceived from 1936 to 1938. The rebreather was perfected by 1939
and was sold in large quantities, particularly to the government during the late
war. All sales were made by Mine Safety and all profits thereon, which were
considerable, were retained by it.

14

It is clear that except for such rights as Catalyst may have to the rebreather by
virtue of the relationships of the three corporations the validity of its claims to
that invention depends upon Jackson's 1935 covenant. By the terms of the latter

Catalyst was entitled to ownership of any discoveries or inventions made by

Jackson (1) in connection with the business of and (2) during his employment
by Catalyst.
15

The trial court held, 106 F.Supp. 594, and we agree, that under the applicable
Pennsylvania law Jackson's employment with Catalyst was an employment at
will. Hogle v. De Long Hook & Eye Company, 1915, 248 Pa. 471, 94 A. 190,
and that his employment by Mine Safety did not depend upon his first
terminating his connection with Catalyst. Restatement of Agency, Section 226,
Comment b; Shaw v. Monessen Southwestern Ry. Co., 3 Cir., 1953, 200 F.2d
841. Appellant does not dispute this latter principle but asserts that Jackson was
solely employed by Catalyst during the critical period. In support of this
proposition he relies on an affidavit made by Jackson in October, 1942, in
connection with a patent application wherein he states that he was employed by
Catalyst from 1935 to 1940 and by Mine Safety since that date.5 This affidavit
is of doubtful value to appellant. Jackson's testimony shows that he was
confused as to which of the corporations employed him at specific times during
the 1930's. He testified that Mine Safety's patent attorneys prepared the patent
application for his signature but could not recall whether he had supplied the
information contained therein. This same affidavit recites that Jackson was
employed by Carbon from 1930 to 1934 and mentions no employment by
Catalyst until 1935, although he originally came to Catalyst in 1931 and was
with that concern until sometime in 1934, and in 1931 had executed his first
covenant in favor of Catalyst, referred to earlier in this opinion.

16

It would serve no useful purpose to detail all the evidence relating to Jackson's
employment and other issues of fact. Suffice it to say the findings that Jackson
was employed intermittently by both Mine Safety and Catalyst over the period
1935-1940 and that the resultant allocation of services and salary was fair and
to the best interests of Catalyst are fully supported by the record, as are the
determinations that Jackson's rebreather inventions were made in connection
with the business of Mine Safety, not Catalyst,6 and that he was employed by
Mine Safety, not Catalyst, at the time he conceived them.

17

Finally, we must determine whether Catalyst and, indirectly, Carbon are

entitled to rights in the rebreather because of the intercorporate arrangement
whereby Jackson's services were used by Mine Safety, the dominant
corporation. Appellant finds no fault with the district court's holding that
because of its control of Carbon and Catalyst through stock ownership and
interlocking directorates Mine Safety owed those corporations and their
shareholders the same fiduciary obligations it owed its own stockholders. This
rule of law was recognized by the Supreme Court in the leading case of Pepper

v. Litton, 1939, 308 U.S. 295, 60 S.Ct 238, 84 L.Ed. 281, and is equally
applicable in Pennsylvania, Weisbecker v. Hosiery Patents, Inc., 1947, 356 Pa.
244, 51 A.2d 811, whose law governs these intercompany dealings. It seems
just as apparent that the burden of proving that such transactions were entered
into in good faith and that they are inherently fair and free of fraud, consistent
with this fiduciary obligation, is on Mine Safety. Pepper v. Litton, supra;
Bonini v. Family Theatre Corporation, 1937, 327 Pa. 273, 194 A. 498. As
indicated in our earlier discussion, we are not persuaded that, on the facts, the
trial court was in error in holding that Mine Safety had sustained this burden
and that the arrangement of sharing Jackson's services and salary was fair and
to the best interests of Catalyst. To the extent that Mine Safety's alleged
misappropriation of the rebreather resulted from the mismanagement of
Carbon's or Catalyst's own directors7 the trial court properly found that the
burden was on the plaintiff and that it had not been sustained. The applicable
law on this phase of the suit is that of Delaware and Maryland, the respective
states of incorporation, but since it is not at variance with Pennsylvania's, it will
not be necessary to discuss it separately.
18

Appellant suggests that the arrangement whereby Jackson worked for both
Mine Safety and Catalyst after his return in 1935 is a nullity because minority
stockholder approval was neither requested nor obtained. We cannot agree that
such approval is a sine qua non to the validity of the arrangement.8 The
decisions on which he relies, such as Pennsylvania Knitting Mills Corp. v.
Bayard, 1926, 287 Pa. 216, 134 A. 397, involve intercorporate transactions
obviously entered into to mulct the stockholders of the subject corporation and
are inapposite here where the controlling corporation has established the
fairness and good faith of the transaction.9

19

A logical application of the theory which appellant espouses would require that
whenever there is any intercorporate dealing, no matter how unimportant it
might be, it must be passed upon by the minority stockholders of the subject
corporations. The instant case, seen in its proper perspective, illustrates the
absurdity of such a rule. At the time the arrangement was entered into it was to
Catalyst's advantage because Mine Safety in taking over part of Jackson's time
for its rebreather operation accepted responsibility for a proportionate share of
his salary. That was important to Catalyst because of its currently weak
financial status and because it helped keep Jackson available for it in the event
it was decided that the hydrogenation catalyst was to be persevered with
further. We are of the opinion that minority stockholders are abundantly
protected in that kind of situation by the rule that the dominant interests must
affirmatively establish the good faith and fairness of such transactions and we
have been cited no pertinent authority to the contrary.

20

In conclusion, we are impressed by appellee's argument that Mine Safety, as the

fiduciary corporation, not only was under no duty to its cestuis to permit them
to share in its business opportunities, profits and inventions, but that such
gratuities might well subject it to attack by its own stockholders. See Dodge v.
Ford Motor Co., 1919, 204 Mich. 459, 170 N.W. 668, 3 A.L.R. 413.

21

The judgment will be affirmed.

Notes:
1

It was not until 1940 that Jackson appears to have severed all his connections
with Catalyst to work exclusively for Mine Safety

This is supported by findings that neither Carbon nor Catalyst was

commercially successful and the inference from all of the evidence that those
corporations were not financially able to continue paying Jackson's full salary

The rebreather is a mechanism containing chemicals which, when acted upon

by the moisture of the wearer's breath, releases oxygen and makes it possible to
rebreathe air without the necessity of carrying an oxygen tank

The district court found that Jackson expressly or impliedly agreed to assign
inventions made in connection with Mine Safety projects to that corporation.
Jackson did not enter into a formal written contract with Mine Safety until
March 1, 1938

Appellee argues that the affidavit was not admitted as substantive evidence
bearing on the issue of Jackson's employment but was used by plaintiff in
cross-examining Jackson, his own witness, after a plea of surprise, presumably
to neutralize his testimony. Appellant, on the other hand, states that it was
admitted on the question of employment. The only excerpt from the trial
transcript appearing in either party's appendix which relates to this point
indicates that the trial court expressly ruled it would not consider the affidavit
as proof of Jackson's employment. No exception was taken to this ruling by
plaintiff, nor is any mention of the affidavit made in the district judge's findings
and conclusions. We have ourselves examined the full trial transcript and find
that appellee's position is justified. However, this is of no ultimate importance
since in our view of this case the purpose for which the affidavit was admitted
would not affect the result

Although Catalyst's charter may have been flexible enough to permit it to

produce the rebreather, there is no evidence that it did so. On the other hand

there is ample evidence that Mine Safety was empowered to and did develop
that device
7

This allegation is, practically speaking, the same as the charge that Mine Safety
violated its fiduciary duty to Carbon and Catalyst, since the directors of all
three corporations were virtually identical

That under Pennsylvania law transactions between corporations having

interlocking directorates are not void but only voidable and that fraud or
unfairness must be shown to avoid them, see Bonini v. Family Theatre
Corporation, supra; Bowman v. Gum, Incorporated, 1937, 327 Pa. 403, 193 A.
271 and Mercantile Library Hall Company v. Pittsburg Library Association,
1896, 173 Pa. 30, 33 A. 744. See also 114 A.L.R. 299-318

In the Bayard case the officers of an insolvent Pennsylvania corporation caused

a Delaware corporation to be organized, ostensibly to operate a spinning mill
and invest in the operations of the Pennsylvania company. Although the latter
was moribund, its earnings over the preceding three years were represented as
having been two and one-half times the dividend requirements of the Delaware
corporation's 8% preferred stock. The Pennsylvania promoters, after taking a
20% commission out of the $172,000 raised on public sales of preferred stock,
acquired control over the Delaware corporation by an exchange of stock and
then sold it old machinery which had belonged to the Pennsylvania corporation.
Shortly thereafter the latter went into receivership. The funds of the Delaware
corporation had disappeared and it found itself owing large sums on notes
given to the Pennsylvania corporation, its only asset being the second-hand
machinery. The court properly held that the Delaware organization's minority
stockholders, not having approved these transactions, had been defrauded and
ordered the bill for an accounting brought against the directors to be reinstated
See also Schmid v. Lancaster Avenue Theatre Co., 1934, 244 Pa. 373, 91 A.
363.