VII Single firm antitrust based on creation or acquisition of rights
A. New Line of Commerce: SCM Corp. v. Xerox Corp. 645 F.2d 1195, 209 U.S.P.Q. 889, 1981-1 Trade Cas. ¶ 63,876 (2d. Cir., 1981)
B. Single Product Evolution: United States v. Jerrold Electronics Corp., 187 F. Supp. 545 (E.D. Pa. 1960), affd per curiam, 365 U.S. 567 (1961)
C. Effect on Competition: U.S. v. Lever Bros. Co. 216 F. Supp. 887; 1963 Trade Cas. ¶ 70,770 (SD NY, 1963)
D. Trade Secrets and Anticompetitive Threats: CVD, Inc. v. Raytheon Inc. 769 F.2d 842; 1985 U.S. App. LEXIS 20974; 227 USPQ 7; 1985-2 Trade Cas. ¶ 66,717 (1st Cir 1985)
E. Distribution and Breach of Agreement: Foundry Services, Inc. v. Beneflux Corp. 110 F.Supp. 857 (SD NY, 1953),
rev'd on other grounds 206 F.2d 214 (2d Cir., 1953)
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SCM Corporation v. Xerox Corporation
645 F2d 1195, 1981-1 Trade Cas. § 63,876;
209 USPQ 889 (2d Cir 1981)
The plaintiff, SCM Corporation (SCM), appeals from an order entered in the United States District Court for the District of Connecticut, Jon O. Newman, Judge, dismissing its claim for monetary damages asserted in this private antitrust action for injuries sustained as a result of alleged exclusionary acts committed by the defendant, Xerox Corporation (Xerox), in violation of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2 (1976), and § 7 of the Clayton Act, 15 U.S.C. § 18 (1976). The trebled amount of damages calculated by the jury on this claim totalled $ 111.3 million. The principal anticompetitive acts alleged by SCM concerned patent acquisitions made by Xerox. SCM averred that Xerox's acquisition of certain patents and subsequent refusal to license those patents excluded SCM from competing effectively in a relevant product market and submarket dominated by Xerox products that embraced the patented art. Judge Newman ruled below that a need to accommodate the antitrust and patent laws precluded damage liability predicated upon Xerox's refusal to license its patents; however, he left open the possibility of granting the plaintiff equitable relief.
* * *
Without commenting upon Judge Newman's remedial theory, we affirm the denial of monetary damages in connection with SCM's exclusionary claim based upon our determination that none of Xerox's patent-related conduct, the only conduct alleged by SCM to have caused it any harm, contributed to any antitrust violation.
SCM also appeals from a judgment entered pursuant to Rule 54(b), 28 U.S.C., Fed.R.Civ.P. 54(b) (1976), dismissing its claim for monetary damages based upon injuries sustained as a result of certain marketing programs it alleged violated § 2 of the Sherman Act and § 3 of the Clayton Act, 15 U.S.C. § 14 (1976). Judge Newman held that this claim could not support an award of damages because "the jury (had not been) given a rational basis for approximating" the damages incurred by SCM. 463 F. Supp. 983, 1019. We affirm Judge Newman's decision.
Chester Carlson The Inventor
In the 1930s, a patent attorney turned inventor, named Chester Carlson, invented a process, subsequently called xerography, that within two decades would revolutionize the document reproduction industry. The xerographic process is described in Judge Newman's opinion below, reported at 463 F. Supp. 983.
Two adaptations of the xerographic process are particularly relevant to this case. The first is electrofax copying, a process which involves the reproduction of images on paper coated with zinc-oxide. The second, xerography in the reusable mode, is a more complex process which permits images to be reproduced on plain paper.
The significance in distinguishing between coated-paper copying and plain-paper copying is that Xerox, which later came to control Carlson's patents and all of the xerographic improvement patents, agreed to grant licenses for coated-paper copying but refused to grant licenses for plain-paper copying. The result was that from 1960 until 1970, when IBM introduced its first plain-paper copier, Xerox enjoyed an absolute monopoly in the plain-paper copying segment of the industry.
* * *
The Xerox-Battelle Agreements
Between 1944 and 1947 Battelle experienced difficulty, as had Carlson, in its efforts to secure financial backing. Carlson and Battelle approached thirty-six companies, including IBM, but none was sufficiently interested. In 1946 the Haloid Company of Rochester, New York (later renamed and hereinafter referred to as Xerox) approached Battelle and offered its assistance in the commercialization of xerography. During the next ten years, the parties entered into a series of four basic agreements pursuant to which Xerox acquired complete title to the Carlson-Battelle patents and exclusive domain over the plain-paper copying industry.
* * *
Before discussing the fourth agreement executed by the parties in 1956, which is central to SCM's claims in this case, it is necessary to describe the circumstances of the parties and the market at that time. By the early 1950s Xerox had experienced success in two commercial applications of xerography. One machine, a flat-plate copier, which required twenty manual steps and three or four minutes to produce a single copy, found some market acceptance for preparing paper masters for offset duplicators. Another machine, the "Copyflo," a huge machine weighing approximately one ton, achieved substantial success in printing microfilm. By 1956, Xerox was deriving forty percent of its profit from its xerographic products. SCM does not contend that either of these products found commercial acceptance as convenience office copiers, the product market that SCM claims Xerox dominated for over a decade. Nevertheless, there is evidence in the record tending to prove that Xerox possessed the technology in 1955 to manufacture an automatic plain-paper copier, and that Xerox speculated that the value of even a non-exclusive license of its xerographic patents was worth $ 70 million. Despite its continuing obligation under the 1948 and 1951 agreements to secure sublicensees, Xerox turned down license requests from such potential competitors as IBM, which by then apparently had formed a different opinion concerning the commercial feasibility of xerography. Although the record is not clear, it appears that coated-paper copiers, other than the electrofax (xerographic), had made inroads into the document reproduction machine industry by the early 1950s. These coated-paper copiers included a "wet" photographic type process called "diffusion transfer," marketed by Apeco, another "wet" process called "dye transfer," advanced by Kodak, and a "dry" thermographic process that used heat-sensitive coated paper manufactured by 3M. In 1954 RCA introduced its electrofax machine and attempted to obtain xerographic licenses from Xerox. Also in this document reproduction industry in 1956 were the offset, mimeograph, and spirit machines that by then had been in use for half a century. It was in this context that Xerox entered into its final agreement with Battelle.
The fourth agreement, executed in 1956, transferred title to the four basic Carlson-Battelle patents to Xerox and abrogated Xerox's sublicensing obligation. In return, Battelle received 55,000 shares of Xerox stock and a percentage of Xerox's profits between 1959 and 1965. Xerox also received an exclusive license to the remaining Carlson-Battelle patents, title formally to be assigned on January 1, 1959. Additionally, Xerox received the right to receive all future xerographic patents and know-how developed by Battelle, provided that Xerox continued to sponsor research in the amount of $ 25,000 annually. Finally, the 1956 agreement eliminated Xerox's obligation to assign its own internally developed patents to Battelle. On January 2, 1959, the assignment from Battelle to Xerox of the xerographic improvement patents occurred pursuant to the terms of the agreement entered into between the parties in 1956.
* * *
Xerox Introduces the 914
In March 1960, Xerox made initial deliveries of the 914, its first automatic plain-paper copier. The 914 was a resounding success. Between 1960 and 1970, Xerox's revenues rose from $ 47 million to $ 1.7 billion; during the same period its gross profits increased from $ 6 million to $ 400 million. By 1975 Xerox's revenues reached $ 4 billion and its gross profits rose to over $ 800 million.
Xerox enjoyed a complete monopoly in the production of plain-paper copiers between 1960 and 1970. In 1960 SCM introduced a coated-paper copier that employed a diffusion transfer process. In 1962 SCM produced an electrofax coated-paper copier, which infringed some of Xerox's patents. Following a brief infringement suit, Xerox in 1964 granted SCM limited licenses under its patents to manufacture xerographic coated-paper copiers. Xerox refused, however, to extend licenses to SCM that would enable it to manufacture its own plain-paper copier. Similar requests were made by SCM in the ensuing years but repeatedly denied by Xerox. Finally, in 1970, without obtaining licenses from Xerox, IBM introduced a plain-paper copier into the market; other companies followed IBM's lead in the early seventies.
* * *
The patent laws were enacted pursuant to Congress' authority to "promote the Progress of Science and useful Arts, by securing for limited Times to Inventors the exclusive Right to their Discoveries." U.S.Const., Art. I, § 8, cl. 8. That the first patent laws were enacted at the second session of our first Congress manifests the importance our founding fathers attached to encouraging inventive genius, a resource that proved to be bountiful throughout this nation's history. The patent laws reward the inventor with the power to exclude others from exploiting his invention for a period of seventeen years. 35 U.S.C. § 154 (1976). In return, the public benefits from the disclosure of inventions, the entrance into the market of valuable products whose invention might have been delayed but for the incentives provided by the patent laws, and the increased competition the patented product creates in the marketplace. The antitrust laws, on the other hand, were enacted to protect competition in the market. The antitrust laws are based upon the fundamental premise that the public benefits most from a competitive marketplace. Standard Oil Co. v. United States, 221 U.S. 1, 58, 31 S. Ct. 502, 515, 55 L. Ed. 619 (1911); United States v. Aluminum Co. of America, 148 F2d 416, 428-29 (2d Cir. 1945).
The conflict between the antitrust and patent laws arises in the methods they embrace that were designed to achieve reciprocal goals. While the antitrust laws proscribe unreasonable restraints of competition, the patent laws reward the inventor with a temporary monopoly that insulates him from competitive exploitation of his patented art. When the patented product, as is often the case, represents merely one of many products that effectively compete in a given product market, few antitrust problems arise. When, however, the patented product is so successful that it evolves into its own economic market, as was the case here, or succeeds in engulfing a large section of a preexisting product market, the patent and antitrust laws necessarily clash. In such cases the primary purpose of the antitrust laws to preserve competition can be frustrated, albeit temporarily, by a holder's exercise of the patent's inherent exclusionary power during its term.
The law is unsettled concerning the effect under the antitrust laws, if any, that the evolution of a patent monopoly into an economic monopoly might have upon a patent holder's right to exercise the exclusionary power ordinarily inherent in a patent. Indeed, implicit in Judge Newman's decision below is a deep concern over the uncertain antitrust law implications just such an event might have had in this case. His thoughtful analysis of the relationship between the patent and antitrust laws led him to conclude that "the need to accommodate the patent laws with the antitrust laws precludes the imposition of damage liability for a unilateral refusal to license valid patents." 463 F. Supp. at 1012-13. Judge Newman opined that whether or not Xerox's refusal to license the patents it acquired under the 1956 agreement transgressed any provisions of the antitrust laws, monetary damage liability could not be imposed upon Xerox without seriously undermining the patent system. The district court's thesis rests on the assumption that despite the lawfulness of a patent's acquisition, "(i)n some circumstances, (a) refusal to license may be considered a § 2 violation." 463 F. Supp. at 1012.
SCM has contended that a unilateral refusal to license a patent should be treated like any other refusal to deal by a monopolist, see generally Otter Tail Power Co. v. United States, 410 US 366, 93 S. Ct. 1022, 35 L. Ed. 2d 359 (1973); Lorain Journal Co. v. United States, 342 US 143, 72 S. Ct. 181, 96 L. Ed. 162 (1951); Eastman Kodak Co. v. Southern Photo Materials Co., 273 US 359, 47 S. Ct. 400, 71 L. Ed. 684 (1927), where the patent has afforded its holder monopoly power over an economic market. While, as SCM suggests, a concerted refusal to license patents is no less unlawful than other concerted refusals to deal, in such cases the patent holder abuses his patent by attempting to enlarge his monopoly beyond the scope of the patent granted him. See, e. g., Zenith Radio Corp. v. Hazeltine Research Inc., supra, 395 US at 118-19, 89 S. Ct. at 1573-1574; US v. Singer Mfg. Co., 374 US 174, 192-97, 83 S. Ct. 1773, 1782-85, 10 L. Ed. 2d 823 (1963); United States v. Line Material Co., 333 US 287, 314-15, 68 S. Ct. 550, 564, 92 L. Ed. 701 (1948); Hartford-Empire Co. v. United States, 323 US 386, 406-07, 65 S. Ct. 373, 383-84, 89 L. Ed. 322 (1945); United States v. Masonite Corp., 316 US 265, 277, 62 S. Ct. 1070, 1077, 86 L. Ed. 1461 (1942).
Where a patent holder, however, merely exercises his "right to exclude others from making, using, or selling the invention," 35 USC. § 154 (1976), by refusing unilaterally to license his patent for its seventeen-year term, see, e. g., Bement v. National Harrow Co., 186 US 70, 88-90, 22 S. Ct. 747, 754-755, 46 L. Ed. 1058 (1902), such conduct is expressly permitted by the patent laws. "The heart of (the patentee's) legal monopoly is the right to invoke the State's power to prevent others from utilizing his discovery without his consent." Zenith Radio Corp. v. Hazeltine Research Inc., supra, 395 US at 135, 89 S. Ct. at 1582 (citing Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 US 24, 43 S. Ct. 254, 67 L. Ed. 516 (1923); Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 US 405, 28 S. Ct. 748, 52 L. Ed. 1122 (1908)). Simply stated, a patent holder is permitted to maintain his patent monopoly through conduct permissible under the patent laws.
No court has ever held that the antitrust laws require a patent holder to forfeit the exclusionary power inherent in his patent the instant his patent monopoly affords him monopoly power over a relevant product market. In Alcoa this Court never questioned the legality of the economic monopoly Alcoa maintained by virtue of the two successive patents it had acquired. United States v. Aluminum Co. of America, supra, 148 F2d at 422, 430. Indeed, Judge Learned Hand termed Alcoa's economic monopoly during the terms of those patents "lawful." 148 F2d at 430. We do not interpret Judge Wyzanski's decision in United States v. United Shoe Machinery Corp., 110 F. Supp. 295 (D.Mass. 1953), aff'd per curiam, 347 US 521, 74 S. Ct. 699, 98 L. Ed. 910 (1954), as supporting SCM's argument to the contrary. In United Shoe, the primary vehicle found to have been employed by United Shoe in achieving and maintaining its monopoly was its lease-only system of distributing its machines. 110 F. Supp. at 344. The patent acquisitions scrutinized by Judge Wyzanski occurred after United Shoe possessed substantial market power and were not "one of the principal factors enabling (United Shoe) to achieve and hold its share of the market." 110 F. Supp. at 312. Thus, contrary to appellant's contention, the United Shoe case stands in stark contrast to the one at bar where the patents were acquired prior to the appearance of the relevant product market and where the patents themselves afforded Xerox the power to achieve eventual market dominance.
* * *
In Alcoa Judge Learned Hand stated that the "successful competitor, having been urged to compete, must not be turned upon when he wins." 148 F2d at 430. And while that statement was made in regard to a hypothetical situation where only one of a group of competitors ultimately survives, it at least indicates a concern Judge Hand had for preserving those economic incentives that provide the primary impetus for competition. Subsequently, the Supreme Court in United States v. Grinnell Corp., 384 US 563, 86 S. Ct. 1698, 16 L. Ed. 2d 778 (1966), amplified this consideration when it set forth the elements of a § 2 violation as follows:
The offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development asa consequence of a superior product, business acumen, or historic accident. Id. at 570-71, 86 S. Ct. at 1703-04
Thus, in Berkey Photo, Inc. v. Eastman Kodak Co., 603 F2d 263, 275 (2d Cir. 1979), cert. denied, 444 US 1093, 100 S. Ct. 1061, 62 L. Ed. 2d 783 (1980), this Court stated that "(w)e tolerate the existence of monopoly power only insofar as necessary to preserve competitive incentives and to be fair to the firm that has attained its position innocently." In United States v. Griffith, 334 US 100, 68 S. Ct. 941, 92 L. Ed. 1236 (1948), the Supreme Court declared, however, that "the use of monopoly power, however lawfully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor, is unlawful." Id. at 107, 68 S. Ct. at 945. Echoing the same consideration in Berkey, Judge Kaufman stated that while "(t)he mere possession of monopoly power does not ipso facto condemn a market participant, the firm must refrain at all times from conduct directed at smothering competition." Berkey Photo, Inc. v. Eastman Kodak Co., supra, 603 F2d at 275.
The tension between the objectives of preserving economic incentives to enhance competition while at the same time trying to contain the power a successful competitor acquires is heightened tremendously when the patent laws come into play. As the facts of this case demonstrate, the acquisition of a patent can create the potential for tremendous market power.
Patent acquisitions are not immune from the antitrust laws. Surely, a § 2 violation will have occurred where, for example, the dominant competitor in a market acquires a patent covering a substantial share of the same market that he knows when added to his existing share will afford him monopoly power. See generally Kobe, Inc. v. Dempsey Pump Co., 198 F2d 416 (10th Cir.), cert. denied, 344 US 837, 73 S. Ct. 46, 97 L. Ed. 651 (1952); United States v. Besser Manufacturing Co., 96 F. Supp. 304, 310-11 (E.D.Mich.1951), aff'd, 343 US 444, 72 S. Ct. 838, 96 L. Ed. 1063 (1952). That the asset acquired is a patent is irrelevant; in such a case the patented invention already has been commercialized successfully, and the magnitude of the transgression of the antitrust laws' proscription against willful aggregations of market power outweighs substantially the negative effect that the elimination of that class of purchasers for commercialized patents places upon the patent system.
The patent system would be seriously undermined, however, were the threat of potential antitrust liability to attach upon the acquisition of a patent at a time prior to the existence of the relevant market and, even more disconcerting, at a time prior to the commercialization of the patented art. As SCM itself admits, the procurement of a patent by the inventor will not violate § 2 even where it is likely that the patent monopoly will evolve into an economic monopoly; yet SCM would deny the same reward to anyone but the patentee.
If the antitrust laws were interpreted to proscribe the natural evolution of a patent monopoly into an economic monopoly, then Judge Newman's concern would be well founded. If the threat of treble damage liability for refusing to license were imbedded in the minds of potential patent holders as a likely prospect incident to every successful commercial exploitation of a patented invention, the efficacy of the economic incentives afforded by our patent system might be severely diminished.
Nevertheless, it is especially clear that the economic incentives provided by the patent laws were intended to benefit only those persons who lawfully acquire the rights granted under our patent system. Cf. Walker Process Equip., Inc. v. Food Machinery & Chemical Corp., 382 US 172, 86 S. Ct. 347, 15 L. Ed. 2d 247 (1965) (patent obtained by fraud on Patent Office). Where a patent in the first instance has been lawfully acquired, a patent holder ordinarily should be allowed to exercise his patent's exclusionary power even after achieving commercial success; to allow the imposition of treble damages based on what a reviewing court might later consider, with the benefit of hindsight, to be too much success would seriously threaten the integrity of the patent system. Where, however, the acquisition itself is unlawful, the subsequent exercise of the ordinarily lawful exclusionary power inherent in the patent would be a continuing wrong, a continuing unlawful exclusion of potential competitors.
Without passing upon the validity of Judge Newman's theory to preclude antitrust damage liability in all cases where the injury is predicated upon a patent holder's refusal to license, we hold that where a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger any liability under the antitrust laws. n10 This holding, we believe, strikes an adequate balance between the patent and antitrust laws. Therefore, to determine whether Xerox incurred any antitrust damage liability to SCM in 1969, our inquiry must now shift to determining whether the acquisition of the Carlson and Battelle patents pursuant to the 1956 agreement violated either the Sherman Act or the Clayton Act. Because the essence of a patent is the monopoly or exclusionary power it confers upon the holder, analyzing the lawfulness of the acquisition of a patent necessitates that we primarily focus upon the circumstances of the acquiring party and the status of the relevant product and geographic markets at the time of acquisition.
Section 2 of the Sherman Act
Turning to the facts of this case, the patents about which we are concerned were acquired in 1956, four years prior to the production of the 914, Xerox's first automatic plain-paper copier, and at least eight years prior to the appearance of the relevant market and submarket. In 1956 Xerox had achieved success in the commercialization of xerography but not in the field of automatic plain-paper copying. There is evidence in the record, however, that Xerox in 1956 valued a non-exclusive license in xerography at $ 70 million and that key personnel at Xerox believed that they already possessed the necessary technology in 1956 to produce a plain-paper copier. Notwithstanding their optimistic forecasts, however, the confidence of the Xerox organization was still tempered by the risks of producing a new, technologically-sophisticated product line. Thus, in 1958 Xerox considered the possibility of having IBM manufacture and market the 914. But before Xerox's management made a final decision on the matter, IBM informed them that it was not interested in manufacturing or marketing the 914 or another model, the 813, having concluded that both were a bad business risk.
* * *
There appears to be little distinction, if any, between patents obtained under a contract with a research organization and patents generated internally by a company, see P. Areeda & D. Turner, Antitrust Law: An Analysis of Antitrust Principles and Their Application P 704e (1978), and ordinarily there is no limitation on a company's freedom to generate its own patents. See generally Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 US 827, 834, 70 S. Ct. 894, 898, 94 L. Ed. 1312 (1950). The jury's specific finding that by 1969 Xerox had not obtained any patents primarily for the purpose of blocking the development and marketing of competitive products laid to rest any suspicion that either Xerox's internal R & D program or its R & D work subcontracted to Battelle was driven principally by anticompetitive animus. In any event, none of Xerox's conduct other than the acquisition of the Carlson and Battelle patents under the 1956 agreement caused SCM any harm. But even more important, all of the events described occurred between eight and thirteen years prior to the appearance of the relevant product market and submarket defined by SCM.
In scrutinizing acquisitions of patents under §2 of the Sherman Act, the focus should be upon the market power that will be conferred by the patent in relation to the market position then occupied by the acquiring party. We agree with Professors Areeda and Turner that whether limitations should be imposed on the patent rights of an acquiring party should be dictated by the extent of the power already possessed by that party in the relevant market into which the products embodying the patented art enter. See Areeda & Turner, supra, at P 819. Therefore, that Xerox acquired the patents in this case four years prior to the production of the first plain-paper copier and at least eight years prior to the appearance of the relevant product market and submarket over which those patents eventually afforded it monopoly power would seem to dispose entirely of SCM's 1969 exclusion claim under § 2.
* * *
We believe that, under the circumstances presented here, to impose antitrust liability upon Xerox would severely trample upon the incentives provided by our patent laws and thus undermine the entire patent system. Therefore, irrespective of the jury's implicit finding that Xerox's commercial success was reasonably foreseeable in 1956, Xerox was lawfully entitled to purchase the patents it did pursuant to the agreement it made with Battelle that year.
With respect to Xerox's subsequent unilateral refusal to license the Carlson and Battelle patents, which we have held were lawfully acquired, that conduct was permissible under the patent laws and, therefore, did not give rise to any liability under § 2.
Section 1 of the Sherman Act
SCM contends that the jury implicitly concluded that the patent acquisitions pursuant to the 1956 agreement unreasonably restrained trade in 1956, since they had been instructed that "if it was lawful for Xerox to acquire the four basic Carlson patents in 1956 and the then existing Battelle patents in 1959, then those aspects of the 1956 agreement (could not) contribute to a section 1 violation at some later time."
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The only continuing contractual obligation under the 1956 agreement which could be reasonably challenged under § 1 as of 1964 or 1969 is the provision that obligated Battelle to continue to assign to Xerox all xerographic patents it obtained and know-how it developed. However, all of the contractual obligations between Xerox and Battelle under the 1956 agreement that are claimed by SCM to have caused it any injury were fully performed by January 2, 1959. SCM offered no evidence at trial that any of the patents Xerox obtained from Battelle after January 2, 1959 caused it any harm. Since the latter provision of the 1956 agreement does not provide a basis for SCM to recover damages, we need not decide its reasonableness under § 1 as of 1964 or 1969.
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Section 7 of the Clayton Act
Section 7 of the Clayton Act proscribes a corporation from acquiring the whole or any part of the assets of another corporation where "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly (in any line of commerce)," 15 USC. § 18 (1976). Since a patent is a form of property, see generally Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 US 637, 643, 67 S. Ct. 610, 614, 91 L. Ed. 563 (1947), and thus an asset, there seems little reason to exempt patent acquisitions from scrutiny under this provision. See United States v. Lever Brothers Co., 216 F. Supp. 887, 889 (SDNY 1963); see generally L. Sullivan, Handbook of the Law of Antitrust, § 180 (1977); 16a J. von Kalinowski, Business Organizations: Antitrust Laws and Trade Regulation § 16.05 (1980); Kessler & Stern, Competition, Contract, and Vertical Integration, 69 Yale L.J. 1, 75-78 (1959).
Section 7 principally was designed to curtail the anticompetitive consequences of corporate acquisitions in their "incipiency." Brown Shoe Co. v. United States, 370 US 294, 317, 82 S. Ct. 1502, 1519, 8 L. Ed. 2d 510 (1962). Thus, the analysis ordinarily employed in determining the lawfulness of a corporate acquisition under § 7 is prospective in nature. The jury found that the probable effect of the 1956 Xerox-Battelle agreement was substantially to lessen competition or to tend to create a monopoly in the relevant product market and submarket that appeared between eight and thirteen years later. The jury additionally found that, as of 1964 and 1969, the probable effect of Xerox's continued holding of patents acquired pursuant to the 1956 Xerox-Battelle agreement was substantially to lessen competition or to tend to create a monopoly. We conclude that neither of these findings can stand as a matter of law.
While the Supreme Court in Brown Shoe Co. v. United States, supra, 370 US at 323, 82 S. Ct. at 1522, stated that the language contained in § 7 is indicative that Congress' "concern was with probabilities, not certainties," the speculative aspect of this antitrust law was intended to allow courts to appreciate immediately the potential consequences that a particular acquisition might have upon an existing line of commerce. Thus in Brown Shoe, the Supreme Court stated:
Because § 7 of the Clayton Act prohibits any merger which may substantially lessen competition "in any line of commerce,"
370 US at 325, 82 S. Ct. at 1523. The existing market provides the framework in which the probability and extent of an adverse impact upon competition may be measured. In the case at bar it would have been impossible to examine the effects of the Xerox-Battelle agreement upon the relevant product market and submarket in 1956 because those markets did not come into being until sometime between 1964 and 1969. The jury was instructed that it should include in its considerations whether the appearance of the relevant market and submarket and Xerox's domination of those markets was reasonably foreseeable in 1956.
* * *
The restraint placed upon competition is temporarily limited by the term of the patents, and must, in deference to the patent system, be tolerated throughout the duration of the patent grants.
The MUP Claim
The jury determined that the Machine Utilization Plan implemented by Xerox in 1968 coerced some of Xerox's high-volume machine customers to take Xerox's low-volume machines and that the effect of MUP was to tend to create a monopoly or to lessen substantially competition in a relevant market or submarket. These findings supported SCM's contention that MUP constituted an illegal tying arrangement in violation of § 3 of the Clayton Act, 15 USC. § 14 (1976). The jury additionally concluded that MUP was utilized by Xerox to foreclose competition or to gain a substantial competitive advantage. This finding translated into a § 2 violation, since the jury also determined that Xerox possessed monopoly power in 1969. See generally United States v. Griffith, supra, 334 US at 107, 68 S. Ct. at 945. Judge Newman ruled, however, that notwithstanding the jury's findings concerning the substantive aspects of SCM's MUP claim, SCM had failed to demonstrate a rational, causal connection between the profits lost by SCM and MUP.
In Bigelow v. RKO Radio Pictures, Inc., 327 US 251, 264, 66 S. Ct. 574, 579, 90 L. Ed. 652 (1946), the Supreme Court set forth the standard to be satisfied to sustain an award of treble damages in a private antitrust suit:
(In) the absence of more precise proof, the jury (can) conclude as a matter of just and reasonable inference from the proof of defendants' wrongful acts and their tendency to injure plaintiffs' business, and from the evidence of the decline in prices, profits and values, not shown to be attributable to other causes, that defendants' wrongful acts had caused damage to the plaintiffs. We agree that a liberal rule of damages must be applied in antitrust cases both to encourage private enforcement of the antitrust laws and to ensure that the defendant bears "the risk of the uncertainty which his own wrong has created."
But the Bigelow Court carefully pointed out that "even where the defendant by his own wrong has prevented a more precise computation, the jury may not render a verdict based on speculation or guesswork." Bigelow v. RKO Radio Pictures, Inc., supra, 327 US at 264, 66 S. Ct. at 579. We are of the opinion that even under the liberal Bigelow rule, SCM failed to carry its burden.
* * *
While an antitrust plaintiff may, in a proper case, recover damages based upon evidence of lost profits "not shown to be attributable to other causes," Bigelow v. RKO Radio Pictures, Inc., supra, 327 US at 264, 66 S. Ct. at 579, the plaintiff must support by more than mere speculation its allegation of causality between the defendant's acts and the injury it incurred. SCM's own expert witness conceded at trial that he could not explain the fact that the cancellation rates of three out of four of Xerox's low-volume machines increased following MUP. In light of these facts we agree with Judge Newman's decision that it would be irrational to attribute the decline in the cancellation rate of the 813 to MUP.
The controlling question of law certified by Judge Newman below and accepted by this Court for interlocutory review concerning SCM's 1969 exclusion claim is answered in the negative. Based on the evidence presented we are convinced that none of Xerox's patent-related conduct contributed to any antitrust violation and that, therefore, SCM is not entitled to recover any monetary damages in connection with that claim.
With respect to SCM's MUP claim, we affirm Judge Newman's decision denying damage recovery on the ground that insufficient evidence was offered by SCM to support the jury's finding that the lost profits claimed by SCM were caused by MUP.
This action is remanded to the district court for further proceedings consistent with this opinion.
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United States of America v. Jerrold Electronics Corporation
187 F. Supp. 545 affd per curiam, 365 U.S. 567 (1961) (ED Pa, 1960)
This action was commenced with the filing of a complaint on February 15, 1957, charging Jerrold Electronics Corporation, its president, Milton Jerrold Shapp, and five of its corporate subsidiaries with being parties to a conspiracy and contracts in unreasonable restraint of trade and commerce in community television antenna equipment in violation of § 1 of the Sherman Act (15 U.S.C.A. § 1); with being parties to a conspiracy and attempting to monopolize trade and commerce in community television antenna equipment in violation of § 2 of the Sherman Act (15 U.S.C.A. § 2); and with contracting to sell and making sales upon unlawful conditions in violation of § 3 of the Clayton Act (15 U.S.C.A. § 14). The complaint was amended with approval of the court on April 2, 1959, to charge the defendants additionally with effecting a series of corporate acquisitions which were alleged to be unlawful under § 7 of the Clayton Act (15 U.S.C.A. § 18) and §§ 1 and 2 of the Sherman Act. The matter was tried before this court from November 9 to December 18, 1959. The parties then submitted their requests for findings of fact and conclusions of law, bringing this suit to its present posture.
I. Jurisdiction and Venue.
The jurisdiction and venue of this court with respect to this matter are not, and cannot be, in dispute. * * *
Jerrold Electronics Corporation (hereinafter 'Jerrold') was incorporated under the laws of Pennsylvania in March 1948 by Milton Shapp to engage in the sale of a television booster developed by one of his friends. This device was designed to improve television reception in fringe areas by amplifying the weak signals available there. At Shapp's request, his friend began working on the development of master antenna equipment. The purpose of this equipment was to enable a single antenna to serve a number of television receivers. It was inspired by the numerous antennas rapidly rising on the roofs of television set dealers' business establishments and apartment houses.
Jerrold installed the first operational master antenna system for Montgomery Ward in Baltimore during the summer of 1949. The success of this system resulted in a number of orders from other dealers. At first, this master antenna equipment was sold through the distributors who were handling Jerrold's booster. This proved unsatisfactory, however, because these distributors and their customers lacked the technical training and experience with respect to master antenna systems which was necessary to install and maintain them properly. Consequently, the Jerrold people were constantly called upon to put improperly installed, mal-functioning systems in working order. Jerrold felt compelled to render this time-consuming service in order to protect the reputation of its product. In an effort to solve this problem, it was decided in late 1949 that the master antenna equipment would only be marketed through distributors who had men specially trained in the sale, installation and maintenance of master antenna systems. Distributors who satisfied these requirements were designated 'M' distributors. Jerrold also set up its own sales organization, Mul-T-V Sales Company, in Philadelphia to handle directly all sales of Jerrold equipment in this area. This method proved more satisfactory than the independent 'M' distributors in Shapp's estimation, but financial limitations prevented its use on a larger scale.
In October 1950, Shapp was approached by a group of men from Lansford, Pennsylvania, who were interested in bringing television into their community. The people of Lansford were unable to receive any television signals through the use of conventional equipment because of the town's location. It was possible to receive a signal on a hilltop approximately a mile outside of town, however. They wanted to set up an antenna at this site and hook it up with receivers in the town. Subscribers to their service would pay a connection fee and monthly service charge. Basically, the envisioned system involved the same concept used for dealers and apartment houses of a single antenna for a number of receivers, but on a much larger scale. The difference in size was important, however. Shapp had already discovered that the equipment designed for dealers was inadequate for use in the larger apartment houses and had recently started developing new equipment for this purpose designated 'CL.' In addition, there usually was no problem with the quality of the signal at the antenna in a single building master system, since the dealers' establishments and apartment houses were generally located in strong signal areas. It was, therefore, readily apparent to Shapp that modifications would be necessary in order to install a working master antenna system in a community. It was equally apparent to him that this was a natural and promising area for Jerrold to enter, since there were many communities which, because of distance or topographical features, were in the same predicament as Lansford and had no immediate hope of obtaining television from any other source because of the freeze on the licensing of new television stations in effect at that time.
Shapp and the Lansford group finally worked out a mutually satisfactory arrangement. Jerrold was to install a system using its standard equipment, which the Lansford people would purchase. Jerrold was to use the system as an on-the-spot laboratory to work on the problems it anticipated, discover new problems, and develop the equipment necessary to eliminate them. As it was developed, the new equipment was to be exchanged for the original equipment in the system without additional cost to the Lansford group. A few days later, a similar arrangement was made with a group from Mahanoy City, Pennsylvania. Other groups interested in the same program were turned down because Shapp felt he had taken on all that he could handle in view of the expected difficulties.
The Lansford system was 'turned on' in mid-December 1950 and the Mahanoy City system went into operation in January 1951. Both systems at that time were built with Jerrold's standard equipment designed for showrooms and small apartments. The initial results were deemed successful and the systems received considerable publicity, including articles in the Wall Street Journal and Newsweek magazine, since they were the first significant operational systems of this kind. As a result of the publicity, Shapp was approached by people from hundreds of communities interested in community antenna systems, both as a means of bringing television into their homes and as a profitable investment. These people came from all walks of life. Many of them had little or no technical background or knowledge. Furthermore, the system that went into operation in Lansford in December 1950 was only connected to a few showrooms. With the extension and continual operation of the system, the anticipated problems began to arise. They were of such a magnitude that Shapp's organization was completely tied up analyzing them and designing new equipment to cope with them. Also, there were several instances in which aspiring community system operators had obtained Jerrold's standard equipment through its distributors and attempted to install systems with unsatisfactory results. Under these circumstances, it was decided that no Jerrold equipment would be sold for community purposes until gear adequate to the task had been developed.
Some acquaintance with the technical aspects of a community television antenna system is essential to a full understanding of the contentions of both parties in this matter. This seems to be the most appropriate point to digress from the narrative to describe the nature of such a system and some of the particular problems which faced Jerrold and other companies which entered this field.
There are four parts to a community television antenna system. The first is the antenna site, referred to in the trade as the 'head end.' The second is the apparatus which carries the signal from the antenna into the community, known as the 'run to town.' The third is the 'skeleton system' that is constructed through the town to carry the television signals to the extremities of the area to be covered. Finally, there is the 'tap-off' from the skeleton system which carries the signal to the home of each subscriber to the service.
In addition to the antenna itself, the head end equipment usually includes preamplifiers to increase the signal strength, filters and traps to eliminate unwanted signals, automatic gain control (AGC) to make a signal of fluctuating strength constant, converters (explained below), and amplifiers to send the processed signal on its way to town.
The run to town in most systems consists of cable. As the signal is transmitted through the cable, it diminishes in strength. Therefore, it becomes necessary to insert amplifiers at various points along the way in order to restore the signal to the required level. This feature of signal loss also dictates the use of converters at the head end. The higher the frequency of the signal, the greater the amount of signal loss sustained. This makes it desirable to convert high frequency channels to a lower frequency in order to reduce the amount of loss and, consequently, the number of amplifiers necessary in the system. Converters are also used to change the frequency of a channel when another channel received by the system is of a relatively similar frequency, since it was discovered that otherwise the two channels caused interference with each other during transmission. In later years, microwave has been used instead of cable in locations where the distance from the antenna site to the town was so great that the cost of installing and maintaining cable was prohibitive.
The skeleton system consists of a series of main cables which branch off from the run to town, feeder lines which, in turn, branch off from the main cables, electronic distribution units or non-electronic splitters at each of these junctions which draw off the signal, and such amplifiers as are necessary to keep the signal at a sufficient strength. One of the main problems which primarily concerns the skeleton system, but also affects the run to town, is that of radiation. Unless proper precautions are taken, the signal will escape from the cable. This creates both the danger of interference with the reception of individuals who are able to receive television signals without subscribing to the system's services and the danger of people picking up the escaped signal from the air without paying for the service. Radiation, therefore, imposes limitations on the type of cable that can be used and the strength at which the signal can be carried.
The tap-off consists of a 'T' inserted in the feeder line or a device which pierces it to draw off the signal, which is then delivered to the home by a cable. The television set receives the signal upon connection with a terminal unit at the end of this cable.
The installation of a successful community television antenna system involves more than simply purchasing certain items of equipment and hooking them together. Each system presents different problems giving rise to different equipment needs because of variations in the frequency, quantity and quality of the signals available at the antenna site, the length of the run to town, and the layout of the town itself. Proper planning is necessary to keep equipment costs at a minimum and, at the same time, produce a saleable picture in town. In the first place, the best antenna site must be determined considering the signals present and the distance from town. The run to town must be set up keeping in mind future maintenance problems. Similarly, the most efficient routing of the lines in town must be determined. In this connection, there arises a special problem of negotiating with the utility companies for the use of their polis. This aspect is important, both in terms of costs and acceptability to the community, since there may be an adverse reaction to the erection of additional poles and wires. Then there is the problem of selecting equipment of the proper specifications, including antennas and cable, as well as electronic gear. Finally, it is essential that the equipment be properly spaced along the line so that the input signal is at a proper level.
III. Tie-in Sales.
By the spring of 1951, the Jerrold people felt they were prepared to start selling equipment for community television antenna purposes. As a result of their work in Lansford and Mahanoy City, they had developed a new line of equipment for community antenna systems designated 'W' equipment. After consulting with his engineers and several of Jerrold's commission salesmen who dealt with the distributors, Shapp decided that the W equipment should only be sold with engineering services to insure that the system would function properly. A general policy, therefore, was established of selling electronic equipment to community antenna companies only on a full system basis and in conjunction with a service contract which provided for technical services with respect to the layout, installation and operation of the system.
The first of the service contracts employed by Jerrold in executing this policy was designated Form 103 (Exhibit 35). Under this agreement, Jerrold undertook, among other things, to supply the antenna company with engineering plans and a bill of materials indicating the equipment necessary for the system; to assign an engineer to supervise the installation, test and balance out the system, and instruct the antenna company's personnel in these matters; to repair and replace obsolete, as well as defective and worn out, equipment; and to realign or replace equipment if a change occurred in the frequency of the channels received and distributed by the system (the antenna company was to purchase a converter from Jerrold if the frequency change required one). The antenna company agreed, among other things, to pay a flat fee for the engineering plans and, if it then decided to go on with the project, to pay $ 5 for each connection when made and 25 cents a month for each receiver that remained connected to the system, with a minimum fee of $75 a month. The antenna company also agreed to have in its employ a person trained by a Jerrold engineer or at its school in Philadelphia who would be responsible for 'on the premise' maintenance and operation of the system. Paragraph 8 of Form 103 provided:
'8. That in the event Antenna Company desires to receive and distribute the signals of any television stations other than those being received and distributed at the time of the initial installation of the System, Antenna Company agrees to purchase, at the then prevailing prices, whatever additional Jerrold Equipment may be necessary to receive and distribute the desired signals throughout the System, and it is understood that a maximum of three (3) television channels can be so received and distributed in the presently designed System.'
Paragraph 12 of the contract provided:
'12. That Antenna Company agrees that it will not install, as part of the System, and Equipment or attachments which in the opinion of Jerrold will impair the operation of the System or impair the quality of television reception and signal distribution capabilities of the System, or that might cause damage to or impair the efficiency of any of the Equipment comprising the System.'
The contract was to remain in effect for five years. According to the testimony in this case, the first sales under this contract were made in late May 1951. n2 In August 1952, this contract was superseded by Form 103A (Exhibit P-47) and Form 103B (Exhibit P-48). They were basically the same as their predecessor, the principal difference being in the payment provisions. Paragraphs 8 and 12 quoted above remained unchanged. n3
In October 1953, the Form 103A and 103B service contracts were replaced by the WK-1 Form (Exhibit P-79). The new contract was generally the same as its predecessors. A few changes were made in some of the provisions relevant to the case at bar. The provision contained in paragraph 8 of the earlier contracts n4 was eliminated. Also, the language formerly appearing in paragraph 12 n5 now appeared in paragraph 8 and was revised to read as follows:
'VIII. Since the parties acknowledge that Jerrold cannot reasonably be required to perform its obligations hereunder if the System comprises electronic equipment other than that manufactured by Jerrold Electronics Corporation, Antenna Company agrees that it will not install, as a part of the System any equipment or attachments which, in the opinion of Jerrold, will impair the quality of television reception and signal distribution capabilities of the System, or which might cause damage to, or impair the efficiency of, any of the Equipment comprising the System.'
Finally, the duration of the contract was reduced from five to two and one-half years.
On March 16, 1954, Jerrold offered its customers two more service contracts designated SP-1 (Exhibit P-99) and SP-2 (Exhibit P-100). The period of their use overlapped that of the WK-1 contract. The SP-1 contract was designed to accompany the sale of new systems and was of six months' duration. The SP-2 contract was designed to make Jerrold service available to existing systems and was of one year's duration. Each of these contracts contained the following provision, similar to those in the earlier contracts:
'Since we cannot reasonably be required to perform our obligations as enumerated in this letter if the system contains electronic equipment other than that manufactured by Jerrold Electronics Corporation, you agree not to install, as part of the system, any equipment or attachments which, in our opinion, will impair the quality of television reception and signal distribution capabilities of the system, or which might cause damage to, or impair the efficiency of, any of the equipment comprising the System.' n6
The Government contends that Jerrold's policy and practice of selling on a system basis only and of making sales only in conjunction with a service contract constituted unlawful tie-ins in violation of § 1 of the Sherman Act (15 U.S.C.A. § 1) and § 3 of the Clayton Act (15 U.S.C.A. § 14). It also asserts that the provision in the 103 series contracts for the exclusive use of Jerrold equipment for the addition of extra channels to the system, and the provision in all of the contracts not to install unapproved, non-Jerrold equipment, violated these sections of the anti-trust laws.
III-A. Service Contracts.
Jerrold freely admits that it was its policy from May 1951 to March 1954 not to sell its equipment designed for community antenna systems except in conjunction with a service contract which would assure Jerrold supervision over its installation and maintenance. n7 It also acknowledges that this policy was generally followed except where sales resistance induced authorized and unauthorized deviations. The Government contends that this policy and practice constitutes an unlawful tie-in under the anti-trust laws because Jerrold is using its market power over its equipment to induce operators to buy its service. Consequently, their freedom of choice is curtailed and competition on the merits with respect to the services is restrained.
The Government concedes that § 3 of the Clayton Act does not apply to this situation because that section, by its terms, only concerns 'goods, wares, merchandise, machinery, supplies, or other commodities.' 15 U.S.C.A. § 14. It does not apply to tie-ins involving services. The Government asserts, however, that sales upon the condition that the purchaser subscribe to the services of the vendor constitute an unreasonable restraint of trade in violation of § 1 of the Sherman Act. n9 The defendants claim that this requirement was reasonable and offered evidence on this point, which was received over the objection of the Government which maintained that the contracts were unreasonable per se under the decision in Northern Pacific Railway Co. v. United States, 1958, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545.
In the Northern Pacific case, supra, the defendant sold and leased land on the condition that the grantee or lessee use its facilities for shipping all commodities produced or manufactured on the land, provided that its rates and services were equal to those of competing carriers. The Supreme Court sustained a summary judgment against the railroad on the grounds that the condition violated § 1 of the Sherman Act. It stated at page 6 of 356 U.S., at page 518 of 78 S.Ct. that:
'They (tying agreements) are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a 'not insubstantial' amount of interstate commerce is affected.'
It is clear from the amount of service rendered by Jerrold under its compulsory service contracts that a 'not insubstantial' amount of interstate commerce was affected, particularly in view of the relatively limited market. Jerrold has stated, in response to the Government's interrogatories, that it executed over 120 of these contracts from May 1951 to March 1954. It is also noted that Jerrold reported to the Small Business Administration in August 1954 that it had installed more than 250, or 80%, of the community systems in the United States. Jerrold's income from the 103 series contracts and the WK-1 contracts between the years 1952 and 1957 was approximately proximately $ 870,000. Because of Jerrold's deferred payment policy and the fact that most of these services were performed during the planning and installation stages, it is fair to assume that most of this income represents payment for services rendered between 1951 and 1954, when these contracts were being signed. Furthermore, Jerrold admittedly failed to collect all that was due under these contracts. Therefore, it is apparent that these income figures do not completely reflect the amount of commerce involved.
A more difficult question is presented by the second requirement that Jerrold be shown to have sufficient economic power with respect to its equipment to appreciably restrain free competition in the market for the services it rendered. The minimum amount of economic power required is by no means clear. Fortunately, the facts of this case obviate the necessity of ascertaining that standard. In resolving this matter, the first task is to determine the relevant market in which to measure Jerrold's power. Since in this aspect of the case we are only concerned with power which will appreciably restrain competition in the market for the services of installing, maintaining and operating community antenna systems, we are necessarily only interested in power over equipment used in community systems. Jerrold admits that, as to the sale of complete community television antenna systems, it was an undoubted leader up until mid-1954, and more than a majority of the new systems from 1950 to mid-1954 were purchased from it. Indeed, Jerrold consistently advertised throughout this period that at least 75% of the community systems in the United States were 'Jerrold systems.' Economic power over a product can be inferred from sales leadership. Northern Pacific Railway Co. v. United States, supra, 356 U.S. at page 19, 78 S.Ct. at page 525 (dissent). The Supreme Court also stated in the Northern Pacific case that the requisite economic power can be inferred from the very existence of the tying clauses where no other explanation for their use is offered. The majority of the court appears to feel that this explanation must include a showing of some benefit conferred upon the purchasers in return for their sacrifice of a free choice of alternatives, but also considered the seller's motive. This is an extremely difficult burden to meet and, in the opinion of this court, it has not been satisfied by the evidence offered by the defendants in the case at bar. Another fact from which economic power can be inferred is the desirability of the tying product to the purchaser. Northern Pacific Railway Co. v. United States, supra, 356 U.S. at page 19, 78 S.Ct. at page 525 (dissent). Mr. Shapp has stated that Jerrold's highly specialized head end equipment was the only equipment available which was designed to meet all of the varying problems arising at the antenna site. It was thus in great demand by system operators. This placed Jerrold in a strategic position and gave it the leverage necessary to persuade customers to agree to its service contracts. This leverage constitutes 'economic power' sufficient to invoke the doctrine of per se unreasonableness.
While the trial judge is of the opinion that the Government has established both of the prerequisites necessary for treating Jerrold's policy and practice of selling its community equipment only in conjunction with a service contract as unreasonable, per se, under the Northern Pacific decision, he does not believe that the inquiry must end there in view of the rather unique circumstances involved in this particular case. Any judicially, as opposed to legislatively, declared per se rule is not conclusively binding on this court as to any set of facts not basically the same as those in the cases in which the rule was applied. In laying down such a rule, a court would be, in effect, stating that in all the possible situations it can think of, it is unable to see any redeeming virtue in tying arrangements which would make them reasonable. The Supreme Court of the United States did not purport in the Northern Pacific case to anticipate all of the possible circumstances under which a tying arrangement might be used. Therefore, while the per se rule should be followed in almost all cases, the court must always be conscious of the fact that a case might arise in which the facts indicate that an injustice would be done by blindly accepting the per se rule. In this case, the court felt that the facts asserted by the defendants in their pre-trial statement and trial brief warranted hearing their testimony and argument on the issue of reasonableness. It was partly influenced in this decision by the fact that the history of the industry was brief, and the position of the defendants did not seem to require a prolonged economic investigation -- factors which the Supreme Court felt justified the per se rule.
When Jerrold was ready to place its W equipment on the market in May 1950, it was confronted with a rather unique situation. In the first place, while it was convinced that its equipment would work, Jerrold recognized that it was sensitive and unstable. Consequently, modifications were still being made. Jerrold had further misgivings because its experience was limited to two locations. New situations were bound to arise in other communities which would require further adjustments in the equipment. Secondly, as has already been noted, there were hundreds of people anxious to set up community antenna systems. Most of these people had no technical background at all. None of them had any experience with community systems since, at that time, there was only one other operating system in the country besides the Jerrold systems in Lansford and Mahanoy City. In addition, many of these people did not have solid or extensive financing to back their proposed venture. Finally, Jerrold had directed most of its resources towards the development of its community equipment. It was of utmost importance to it that its investment prove successful.
Shapp, his engineers and salesmen, envisioned widespread chaos if Jerrold simply sold its community equipment to anyone who wanted it. This fear was based on more than mere speculation. Experience with the less complicated dealer and apartment systems bolstered their view, as did the history of community systems installed by operators on their own with Jerrold's standard equipment obtained from its M distributors. A rash of systems with unsatisfactory pictures could not be tolerated. The amount of capital necessary to start a system was substantial. Interest would wane rapidly if the systems installed did not consistently produce satisfactory results. Not only Jerrold's reputation but the growth of the entire industry was at stake during the development period. In addition to its reputation, Jerrold was also dependent upon successful system operation for payment. Many operators were not in a position to pay cash for the necessary equipment and the risks were such that outside financing could not be obtained. Therefore, payment was often contingent on the success of the system. It appeared that it was cheaper and more practical to insure that a system was properly installed in the first place than to attempt to get it operating once it was strung up. Furthermore, as has already been noted, use of existing utility poles was an important cost and public relations factor. The utility companies were reluctant to have men of unknown ability working on their poles. Therefore, it was desirable that the system be installed under the supervision of men whose ability was known to the utility companies through other dealings. For these reasons, it was decided that community equipment should be sold with engineering services in order to foster the orderly growth of the industry on which the future of Jerrold depended.
The Government does not dispute the reasonableness of the contracts for services but objects to the fact that they were compulsory. The crucial question, therefore, is whether Jerrold could have accomplished the ends it sought without requiring the contracts. It has been suggested that Jerrold could have accomplished the same results by addressing the persuasive argument it made to this court to its customers and leaving use of the contracts on a voluntary basis. See United States v. International Business Machines Corp., (SD NY 1935) 13 F.Supp. 11, 19-20, aff'd 1936, 298 U.S. 131, 56 S.Ct. 701, 80 L.Ed. 1085. This argument assumes that Jerrold and the industry could survive the 'transitory disloyalties' this approach would entail. Jerrold's service was costly and many operators, because of their limited finances, preferred to do-it-themselves and save the expense. Furthermore, Jerrold's limited facilities required that they only commit themselves to a certain amount of work. If Jerrold's equipment was available without a contract, many impatient operators probably would have attempted to install their systems without assistance. Consequently, unless Jerrold instituted a policy of compulsory service, it could expect many operators to buy its equipment without a contract, despite the strong reasons for having one, and the effort spent to present them. Jerrold's supply of equipment was limited. Unrestricted sales would have resulted in much of this equipment going into systems where prospects of success were at best extremely doubtful. Jerrold's short and long-term well-being depended on the success of these first systems. It could not afford to permit some of its limited equipment to be used in such a way that it would work against its interests. A wave of system failures at the start would have greatly retarded, if not destroyed, this new industry and would have been disastrous for Jerrold, who, unlike others experimenting in this field such as R.C.A. and Philco, did not have a diversified business to fall back on but had put most of its eggs in one precarious basket in an all out effort to open up this new field. Compare the facts in Northern Pacific Railway Co. v. United States, supra, and United States v. General Motors Corporation, 7 Cir., 1941, 121 F.2d 376, certiorari denied 1941, 314 U.S. 618, 62 S.Ct. 105, 86 L.Ed. 497, relied on by the Government. For these reasons, this court concludes that Jerrold's policy and practice of selling its community equipment only in conjunction with a service contract was reasonable and not in violation of § 1 of the Sherman Act at the time of its inception. Compare General Talking Pictures Corporation v. American Telephone & Telegraph Co., (D.Del.1937) 18 F.Supp. 650.
The court's conclusion is based primarily on the fact that the tie-in was instituted in the launching of a new business with a highly uncertain future. As the industry took root and grew, the reasons for the blanket insistence on a service contract dissappeared. The development of the community antenna industry throughout the country was not uniform. It advanced and became established most rapidly in the East, particularly in Pennsylvania. Progress was slower in the Northwest and Southwest. Thus, when the reasons for this policy ceased to exist in the East, there were still good reasons for its continuance in other areas. Oral reports of successful systems 3,000 miles away are not as convincing as a number of failures nearby. Jerrold recognized this fact and abandoned its policy gradually. In March 1954, it dropped the policy as a general rule and thereafter applied it on an area-by-area and case-by-case basis. Mr. Shapp candidly admits that he can 'not make the assertion that in each stage of this evolution our timing has been exactly correct.' It seems clear that there is bound to be some lag in a situation such as this. On the present record, it would be a matter of speculation to determine when Jerrold's policy was no longer justified in various areas of the country. In view of the Northern Pacific case, it would seem that Jerrold has the burden on this point. Since it is not necessary for purposes of granting the relief requested to find more than that at some time during its use, Jerrold's tie-in of services to equipment became unreasonable, this court makes no finding as to when this occurred. It is content to say that, while Jerrold has satisfied this court that its policy was reasonable at its inception, it has failed to satisfy us that it remained reasonable throughout the period of its use, even allowing it a reasonable time to recognize and adjust its policies to changing conditions. Accordingly, the court concludes that the defendants' refusal to sell Jerrold equipment except in conjunction with a service contract violated § 1 of the Sherman Act during part of the time this policy was in effect.
III-B. Full System Sales.
Jerrold also admits that it was its policy and practice from May 1951 to March 1954 not to sell its various items of equipment designed for community antenna systems separately, but only to sell them as components of a complete system. As a result of this program, individual pieces of Jerrold equipment were unavailable for both new systems and existing non-Jerrold systems. The Government contends that this too constitutes an unlawful tie-in because Jerrold is driving competitors from the field by using its market power with respect to some of its equipment to induce the purchase of other equipment it manufactures.
Since this aspect of Jerrold's activity involves the tying of goods to goods, § 3 of the Clayton Act, as well as § 1 of the Sherman Act, is applicable. This court finds it unnecessary in this case to engage in a discussion of the differences, if any, in the burden imposed on the Government to make out its case under these section. It is sufficient for our purposes to note that the burden imposed by the Sherman Act is at least no less than that imposed by the Clayton Act. See Times Picayune Publishing Co. v. United States, 1953, 345 U.S. 594, 608-609, 73 S.Ct. 872, 97 L.Ed. 1277. The court's determination of the relevant market and finding as to Jerrold's position in that Market when considering the engineering service contract requirement are equally applicable to this aspect of the case. The record also makes it clear that a not insubstantial amount of commerce was affected.
The difficult question raised by the defendants is whether this should be treated as a case of tying the sale of one product to the sale of another product or merely as the sale of a single product. It is apparent that, as a general rule, a manufacturer cannot be forced to deal in the minimum product that could be sold or is usually sold. On the other hand, it is equally clear that one cannot circumvent the anti-trust laws simply by claiming that he is selling a single product. The facts must be examined to ascertain whether or not there are legitimate reasons for selling normally separate items in a combined form to dispel any inferences that it is really a disguised tie-in.
There are several facts presented in this record which tend to show that a community television antenna system cannot properly be characterized as a single product. Others who entered the community antenna field offered all of the equipment necessary for a complete system, but none of them sold their gear exclusively as a single package as did Jerrold. The record also establishes that the number of pieces in each system varied considerably so that hardly any two versions of the alleged product were the same. Furthermore, the customer was charged for each item of equipment and not a lump sum for the total system. Finally, while Jerrold had cable and antennas to sell which were manufactured by other concerns, it only required that the electronic equipment in the system be bought from it.
In rebuttal, it must first be noted that the attitude of other manufacturers, while relevant, is hardly conclusive. Equally significant is the fact that the record indicates that some customers were interested in contracting for an installed system and not in building their own. Secondly, it was the job the system was designed to accomplish which dictated that each system be 'custom made' in the sense that there were variations in the type and amount of equipment in each system. This, in turn, explains determining cost on a piece by piece, rather than a lump sum, basis. Finally, while the non-electronic equipment could be ordered from other sources and the system would be useless without the antenna and connecting cable, it is generally agreed that the electronic equipment is the most vital element in the system and Jerrold was still in charge of assembling all of the equipment into a functioning system.
Balancing these considerations only, the defendants' position would seem to be highly questionable. The several deviations from the normal situation one would expect to find become particularly suspect when viewed in the context of Jerrold's market leverage resulting from its highly regarded head end equipment. There is a further factor, however, which, in the court's opinion, makes Jerrold's decision to sell only full systems reasonable. There was a sound business reason for Jerrold to adopt this policy. Jerrold's decision was intimately associated with its belief that a service contract was essential. This court has already determined that, in view of the condition of Jerrold, the equipment, and the potential customers, the defendants' policy of insisting on a service contract was reasonable at its inception. Jerrold could not render the service it promised and deemed necessary if the customer could purchase any kind of equipment he desired. The limited knowledge and instability of equipment made specifications an impractical, if not impossible, alternative. Furthermore, Jerrold's policy could not have been carried out if separate items of its equipment were made available to existing systems or any other customer because the demand was so great that this equipment would find its way to a new system. Thus, the court concludes that Jerrold's policy of full system sales was a necessary adjunct to its policy of compulsory service and was reasonable regarded as a product as long as the conditions which dictated the use of the service contract continued to exist. As the circumstances changed and the need for compulsory service contracts disappeared, the economic reasons for exclusively selling complete systems were eliminated. Absent these economic reasons, the court feels that a full system was not an appropriate sales unit. The defendants have the burden not only of establishing the initial existence of the facts necessary to support their claim but also their continuing existence in view of the fact that it is not disputed that the conditions did change. The defendants have not satisfied this latter burden. It has already been noted that on the present record it would be a matter of speculation to determine how long the conditions justifying Jerrold's policy remained in effect.
The defendants also assert a further justification for its policy insofar as it applied to systems using a large quantity of non-Jerrold equipment. Jerrold spent considerable time and effort in developing its head end equipment. As a result, its equipment was considered the best available and an asset to any system, since it affected the quality of the initial signal which would be transmitted through the rest of the system. The head end equipment, while intricate, did not represent a large portion of the investment in a system because only a few items were involved. The real profit in a system came from the sale of the amplifiers, since a large number were involved. Jerrold felt that other companies who had not invested time and money into the development of satisfactory head-end equipment sought to take advantage of it by competing with it as to the amplifiers, but relying on Jerrold's head end equipment to make the system successful. Shapp resented these other companies 'picking our brains' and competing for the real source of profit. Jerrold, therefore, felt justified in recovering its substantial investment in the development of superior head end equipment by using it to preserve for itself a share of the more lucrative market for amplifiers. While the court is sympathetic with Jerrold's predicament, it does not feel that it provides sufficient justification for the use of a tying arrangement. If the demand for Jerrold's equipment was so great, it could recover its investment by raising its prices. Admittedly, the return would not be as great, but it provides sufficient protection to serve as a more reasonable and less restrictive alternative to a tying arrangement.
The court concludes that the defendants' policy of selling full systems only was lawful at its inception but constituted a violation of § 1 of the Sherman Act and § 3 of the Clayton Act during part of the time it was in effect.
III-C. The Veto Provisions.
In addition to initially selling its equipment only on a full system basis, Jerrold also imposed certain limitations on the equipment that could be added to the system in the future by means of certain provisions in its service contracts. One of these is the provision appearing in all of the contracts to the effect that the operator shall not install any unapproved, non-Jerrold equipment. The Government contends that these clauses prohibit the use of competitive equipment. It is apparent that these clauses do not absolutely require the use of Jerrold equipment as did the provisions involved in United States v. International Business Machines Corp., 1936, 298 U.S. 131, 56 S.Ct. 701, 80 L.Ed. 1085, and International Salt Co. v. United States, 1947, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20. Equipment approved by Jerrold was also permitted. As a matter of law, Jerrold's approval would have to be a genuine decision, but not necessarily a reasonable one. Restatement of Contracts, § 265. While this genuine decision rule would permit Jerrold to withhold its approval arbitrarily so that competitive equipment would be excluded, there is no indication that any of the parties to these contracts ever contemplated that Jerrold would take such a position. The courts have consistently held that non-enforcement is no defense because the existence of the restrictive language itself is sufficient to deter many from acting contrary to its command, rather than test the promisee's attitude toward the requirement. Northern Pacific Railway Co. v. United States, supra; International Salt Co. v. United States, supra; United Shoe Machinery Corporation v. United States, 1922, 258 U.S. 451, 42 S.Ct. 363, 66 L.Ed. 708; United States v. General Motors Corporation, (7 Cir., 1941) 121 F.2d 376, certiorari denied 1941, 314 U.S. 618, 62 S.Ct. 105, 86 L.Ed. 495. Jerrold argues that this is not a question of whether or not the provision was enforced but of the extent to which it was restrictive. It urges that the language is ambiguous, allowing Jerrold wide latitude of action on its face, and that no one would assume that it absolutely prohibited use of competitive equipment, even if, as a matter of contract law, Jerrold could take a position which would have that effect. Thus, the argument concludes, Jerrold's course of conduct under these provisions is relevant.
The case of Emsig Manufacturing Co. v. Rochester Button Co., D.C.SD NY1958, 163 F.Supp. 414, supports the defendants' contentions. In that case, the manufacturer of a patented button feeding machine leased these machines only on the condition that the lessee use buttons approved by the lessor. The lessor also sold buttons. The court held that whether or not this provision required the use of the lessor's buttons was a question of fact which must be determined by examining the actual practice under the lease. It is noted that this case was decided by the same court which decided the International Business Machines case, supra. The court agrees with the defendants' position on this point. An examination of the record discloses uncontradicted testimony concerning numerous systems which used non-Jerrold equipment without objection, although this fact was known to the defendants. On the other hand, no instances were brought to the court's attention in which it is clear that an operator considered himself unable to obtain non-Jerrold equipment because of the veto clause. The court finds that these provisions were not intended, and were not used, to prevent the use of competitive equipment in systems covered by a service contract.
The veto provisions were necessary to protect Jerrold in view of its maintenance obligations under the contracts and its financial interest in the success of the systems. Reasonable restraints are permissible for such purposes. International Salt Co., Inc. v. United States, supra. The restraint imposed by the requirement that Jerrold approve all equipment other than that it manufactured is reasonable in view of the meaning given to this provision as evidenced by Jerrold's conduct with respect to it. It must also be noted that, because of the instability of the equipment and rapid growth of the industry, the use of pre-determined specifications, rather than the more flexible approval approach, would probably have been more restrictive if Jerrold was to be afforded the protection to which it was entitled.
III-D. The Additional Channels Provision.
The Government also challenges the provision appearing in the 103 series contracts which requires operators to purchase from Jerrold the equipment necessary to receive any stations in addition to those received at the time of the initial installation. The defendants contend that their systems were set up to receive and distribute three channels. Often less than that number were available at the time the system was installed. In order to spare the operator the expense of this equipment, which might never be utilized, Jerrold provided for its purchase at a later date. The defendants argue that this provision was justified because 'it would be a business folly to try to fit someone else's equipment into the actual spaces provided for additional channels.' They also urge that these provisions are consistent with its policy of full system sales.
The court agrees with the Government that these provisions constitute unlawful tie-ins in violation of § 1 of the Sherman Act and § 3 of the Clayton Act, regardless of the defendants' actual motives. It can discover no reasons which justify this absolute restriction on the operator's choice of equipment which are not served by the 'veto provision.' The court has recognized Jerrold's interest in installing the system initially and the resulting requirement that the electronic equipment be exclusively Jerrold. It sees no valid reason for extending this requirement to equipment which might be added five years later. Jerrold was adequately protected in this respect by the veto provision and the merits of its 'business folly' contention when addressed to its customers.
IV. Corporate Acquisitions.
In 1955, Jerrold commenced a program of purchasing community systems throughout the country. The funds for this extension of Jerrold's activities into the operational aspect of the community television antenna industry were provided by the public issue of Jerrold stock. Jerrold has purchased ten systems as of this date and has asserted that it intends to continue this program provided the court agrees with its contention that these acquisitions are lawful. The Government asserts that these acquisitions are in violation of § 7 of the Clayton Act (15 U.S.C.A. § 18). n38 More specifically, it contends that by acquiring control of some of the consumers of community television antenna system equipment, Jerrold is securing a steady customer for its own products and depriving competitors of a potential buyer. The Government argues that the effect of these acquisitions may be substantially to lessen competition, or to tend to create a monopoly.
The defendants claim that the systems were purchased solely for investment and thus come within a specific exemption to § 7 of the Clayton Act. n39 In support of this contention, they point out that in the fiscal year ending in February 1959, 62% Of Jerrold's total profit after taxes from all operations came from its operation of these acquired systems. While this evidence indicates that a major purpose of Jerrold in acquiring these systems was as an investment, it does not establish that this was a sole purpose. Jerrold obtained 100% Control of all of these systems, except the one it later sold, and it owned 80% Of the later. One would expect a wholly-owned subsidiary to purchase its equipment needs from its parent when the latter manufactures those items. Indeed, this is not a matter of pure speculation in this case, since the record discloses that Jerrold made sales to these subsidiaries from 1956 to 1959 totalling $ 426,338.85 and that no significant purchases were made from Jerrold's competitors during this period. Under the circumstances, the court cannot say that these acquisitions were made solely for investment.
The question remains whether the effect of these acquisitions may be substantially to lessen competition, or to tend to create a monopoly in any line of commerce in any section of the country. This determination must be made on the basis of facts existing at the time the suit was brought, in this case on April 2, 1959, the date the complaint was amended, and not those existing at the time the companies were acquired. United States v. E.I. Du Pont De Nemours & Co., 1957, 353 U.S. 586, 597, 77 S.Ct. 872, 1 L.Ed.2d 1057. This is particularly important in the case at bar because of the rapid rate of growth of the industry involved which resulted in almost overnight changes in the equipment, its applications, and the available markets.
The court's first task is to determine the appropriate market or line of commerce in which to determine the effect of Jerrold's acquisitions. The defendants claim that community systems are just one application of master antenna systems and that the supply and demand throughout the United States for master antenna system equipment is the appropriate market. This would include equipment used for dealers' showrooms, apartments, hotels, hospitals, military installations and housing projects. The Government contends that, while community systems are an application of the master antenna system principle, the technical requirements and consumer preferences are such that they constitute a separate and distinct market within the master antenna system industry. Thus, the plaintiff concludes, the relevant market is the total demand by community television antenna system operators throughout the United States for community television antenna system equipment.
As has already been noted, the master antenna principle was first applied to systems for dealers' showrooms and small apartments and hotels. When its use was first extended to community systems, there was a substantial demand by operators for the equipment designed for the smaller systems, mainly because it was available and more specialized equipment was still in the process of being developed. From the outset, Jerrold and others recognized that there were technical, financial and public relations problems peculiar to community systems which distinguished them from the other existing types of master antenna systems. The most significant, distinguishing characteristics of community systems were their distance from the originating source of the signals, which necessitated equipment to process the signal before it was distributed, and the distance from the antenna to the television receivers, which required further pre-distribution processing and a series of amplifiers throughout the system. As a result, special equipment and sales technique were evolved for these systems so that they could properly be regarded as constituting a separate and distinct market. As time passed, new applications of the master antenna system principle were discovered. Some of these presented problems more similar to those found in community systems than in dealer showroom and apartment systems. Large, gardentype apartments, military installations, and housing projects increased the distance between the antenna and receivers, thus requiring a series of amplifiers and, in some instances, converters. Some of these systems were so located that they also required pre-amplifiers, filters and AGC at the antenna site in order to achieve a distributable signal. The only factor remaining to distinguish these systems from community systems is the quasi-public utility nature of the latter systems affecting the degree of public responsibility demanded of them, and even this distinction can be questioned. It would also seem that the current trend is toward equipment of more general application as a result of technological advances affecting both design and cost.
The court is of the opinion that neither of the parties' choice of market is appropriate when one directs his attention, as the law requires, to the situation existing at the time the suit was brought, namely, April 1959. At that time, it is clear that some equipment originally designed for community systems was properly being used in other systems as well. Therefore, the market is somewhat broader than that suggested by the Government. It is equally clear that there still remains a separate and distinct market within the master antenna system field of systems requiring specialized signal processing equipment and numerous amplifiers. This equipment can be called community system equipment since it is used in virtually all such systems, but it must be recognized that it is not exclusively so used. With this understanding as to the sense in which the phrase 'community system equipment' is used, the court concludes that the appropriate line of commerce with respect to the alleged violations of § 7 of the Clayton Act is the total demand for community television antenna system equipment throughout the United States.
There can be no question that the effect of Jerrold's acquisition of these systems is to foreclose part of the market for community system equipment to its competitors. None of these systems have purchased any significant amount of equipment from companies other than Jerrold since they were acquired. While it has not been shown that Jerrold arbitrarily rejected competitive gear and was not acting with the best interests of the systems in mind in using its own equipment, it is clear that Jerrold has a distinct advantage in any sales competition. The issue raised by the defendants is whether the effect of the present and planned acquisitions may be substantially to lessen competition, or to tend to create a monopoly.
The Supreme Court has stated:
'Section 7 is designed to arrest in its incipiency not only the substantial lessening of competition from the acquisition by one corporation of the whole or any part of the stock of a competing corporation, but also to arrest in their incipiency restraints or monopolies in a relevant market which, as a reasonable probability, appear at the time of suit likely to result from the acquisition by one corporation of all or any part of the stock of any other corporation. The section is violated whether or not actual restraints or monopolies, or the substantial lessening of competition, have occurred or are intended.' United States v. du Pont & Co., 1957, 353 U.S. 586, 589, 77 S.Ct. 872, 875, 1 L.Ed.2d 1057.
The defendants insist that their present acquisitions are not likely to have the effects condemned by the statute. In support of this contention, they point out that they only own nine out of more than 500 systems in the country and that, consequently, there is still a large market left for other suppliers. The Government correctly states that the share of the market affected is not accurately reflected by the number of systems acquired, since they all have different amounts of equipment. The Government's figures based on the number of connections in each system are no more accurate, however. Each connection does not require more than a tap-off and a short length of cable. The significant factor is the amount of cable between the antenna site and the last tap-off on each feeder line. This would indicate the amount of cable and amplifiers one could expect to find in the system and these are the items which account for the greatest variation in the amount of equipment in each system. While a greater number of connections in a system might mean a greater amount of cable, this would depend upon the concentration of the population. Furthermore, the Government's figures do not take into account the run to town which substantially affects the amount of equipment in each system.
Section 7 of the Clayton Act does not make every acquisition of a buyer by a seller unlawful, even though there is a reasonable probability that the acquired concern will secure its requirements from its owner in the future. There must be a reasonable probability that the acquisition will have the condemned effects of substantially lessening competition or tending to create a monopoly. United States v. E.I. Du Pont De Nemours & Co., supra. This determination is extremely difficult to make when each acquisition forecloses only a small segment of the market. The court is faced with the proposition of deciding when the defendant has gone too far where each acquisition lessens competition almost immeasurably. Yet at some point the cumulative effect of these acquisitions will reach prohibited proportions. This difficulty is compounded in the case at bar by the fact that the court does not feel that the present record contains the facts necessary to enable it to determine as accurately as possible the effect of these acquisitions on the market.
The court finds that the evidence presented in this case is not of such a quality that it can fairly say that any one of Jerrold's acquisitions to date, when combined with the ones before it, foreclosed a sufficient portion of the market so that there is a reasonable probability that the condemned effects will occur. While the Government is not bound to produce the best evidence possible under most circumstances, divestiture is a harsh and drastic remedy and the Government is obligated to produce evidence from which the court can determine, with reasonable accuracy, whether a violation has occurred. While the court does not feel that the evidence permits a determination of sufficient precision to justify divestiture, it is adequate for the court to roughly determine the percentage of the market foreclosed. This figure would be between 1.5% And 10%. n46 The defendants were in a position to be of great assistance to the court in determining the relevant data and collecting it, because of their position in the industry and familiarity with the problems involved. The court feels that they were not as cooperative in this respect as they might have been if they were sincerely interested in the court's ascertaining all the facts. Consequently, the court is entitled to draw certain inferences against them in this regard. These figures indicate that Jerrold's acquisitions are approaching, if not beyond, the point where it can be said that it is a reasonable probability that they will have the prohibited effects when they are examined in the context of Jerrold's prominent position in the industry. Therefore, the plaintiff is entitled to the injunctive relief it seeks as to any future acquisitions. This injunction will be limited to a period of three years from April 2, 1959, because of the quality of the Government's evidence and the history of rapid and dynamic changes this industry has exhibited. In the meantime, the defendants may apply to this court for an order modifying this injunction to permit any additional acquisitions which they feel they can justify.
V. Conspiracy and Attempt to Monopolize.
In addition to its specific charges that the defendants have engaged in a sales program involving unlawful tie-ins in violation of § 1 of the Sherman Act and § 3 of the Clayton Act and have made a series of corporate acquisitions in violation of § 7 of the Clayton Act, the Government charges that these and other actions of the defendants constitute a conspiracy and attempt to monopolize interstate trade and commerce in community television antenna equipment in violation of § 2 of the Sherman Act (15 U.S.C.A. § 2). n48 This section of the anti-trust laws condemns conspiracies or attempts to acquire the power to control prices in, or foreclose access to, a market. A finding of specific intent by the person or persons involved either to achieve this unlawful end or to conspire to do so is necessary to establish a violation of this section. Times-Picayune Publishing Co. v. United States, 1953, 345 U.S. 594, 626, 73 S.Ct. 872, 97 L.Ed. 1277. This intent need not be proven by direct evidence but can be inferred from practices of the defendants. Interstate Circuit, Inc. v. United States, 1939, 306 U.S. 208, 59 S.Ct. 467, 83 L.Ed. 610. The Government contends that the requisite intent in the case at bar can be inferred from the defendants' tie-in sales, corporate acquisitions and other activities.
The trial judge finds that Jerrold's policy of selling its equipment exclusively on a full system basis and in conjunction with a service contract, while not shown to be reasonable at all times in which it was in effect, was never intended by the defendants to drive competitors from the business of supplying equipment for community television antenna systems and to achieve a monopoly in this field for Jerrold. Among other things, it must be kept in mind that this policy was evolved and put into effect when Jerrold first marketed community antenna equipment. At that time, both R.C.A. and Philco were entering the business. Furthermore, the future of this brand new field was quite uncertain. It is highly unlikely that the most ambitious businessman would enter this business from the beginning with a policy intended to force such formidable competitors as these from the field and acquire the power to control prices or foreclose access to this market. The record contains numerous letters and memoranda of the defendants which, while confirming the existence of this policy, also indicate that their purposes were to promote the interests of their customers and to protect their investment in both the individual systems and the industry as a whole. The fact that this policy may have been continued beyond the time it was in fact actually necessary does not mean that the defendants were not acting in good faith in maintaining it as long as they did.
As already noted, it is impossible to say that the community systems acquired by Jerrold were purchased solely for investment purpose. The record does indicate, however, that this was a primary purpose. Absent any proof of a sustained practice of arbitrarily supplying the equipment needs of these systems with Jerrold's products, the court does not feel that it is fair to infer any monopolistic intent from acquisitions on this scale. While the practice may tend to create a monopoly, and thus be subject to an injunction, it has not reached the point where it can be said to evidence an intent to achieve such a position. [fn 50. Intent is not a necessary element of a violation of § 7 of the Clayton Act. United States v. E.I. Du Pont De Nemours & Co., 1957, 353 U.S. 586, 589, 77 S.Ct. 872, 1 L.Ed.2d 1057. ]
The Government contends, however, that the defendants have engaged in other activities from which an intent to achieve a monopoly in the field of community television equipment can be inferred. In particular, they charge that Jerrold's salesmen threatened to install competing systems with the aid of 'Eastern capital' if an operator refused to purchase Jerrold equipment and that the defendants misused certain patents in an effort to force reluctant customers to purchase their equipment.
V-A. Threats to Install Competing Systems.
The record indicates that the threats to install competing systems were made by only one person, Phil Hamlin, and occurred in only one section of the country. Hamlin was associated with a distributor of Jerrold's community antenna equipment in the northwest section of the United States and became vice-president of Jerrold's sales subsidiary, Jerrold Northwest, on May 23, 1953, when it was created.
Jerrold had entered into an agreement with J. H. Whitney & Company (hereinafter 'Whitney'), which was interested in investing money in community television antenna systems. Jerrold was to give Whitney a list of communities which met the technical requirements for a successful operation. Whitney then selected those which it felt offered the best opportunity for profit and organized a company to install and operate the system. Whitney agreed that these companies would purchase Jerrold equipment in compliance with Jerrold's full system and service contract policy.
Among the communities Jerrold recommended to Whitney as being suited for a community system from a technical standpoint were Wenatchee, Richland, Walla Walla and Aberdeen, in the State of Washington. Whitney found that the first three of these systems satisfied its requirements but rejected the fourth. In each of these locations, another community television antenna company was already conducting an antenna site survey or was in the process of construction. Two systems could not operate profitably in most communities and, consequently, Whitney generally shied away from communities with other systems. However, if a community exhibited a sufficient profit potential and the other system showed signs of technical or other weaknesses, indicating it would not be completed or, if completed, would not produce satisfactory results, Whitney would go ahead. Thus it was that Whitney entered these three cities, despite the existence of another community antenna company there, on the recommendation of Jerrold that these other systems had little prospect of success. Absent any circumstances which indicate improper purposes on the part of Jerrold, these actions are perfectly legitimate.
Phil Hamlin was the Jerrold representative in the Northwest who handled its dealings with Whitney, as well as its sales in that area. In his sales efforts, he had encountered considerable resistance to Jerrold's full system and service contract sales program. In an effort to overcome this resistance and induce operators to purchase Jerrold equipment on its terms, Hamlin told several operators that if they did not purchase Jerrold equipment they would be faced with competition. These threats did not merely indicate that, if someone else was interested in installing a Jerrold system in the same community, he would back them, but rather indicated that he would take positive steps to secure a competitive system. The system operators in Wenatchee, Richland and Walla Walla were among those threatened by Hamlin in this manner. Jerrold relied on Hamlin in making its recommendations to Whitney. It is fair to infer that Hamlin's statements to Whitney and his superiors were designed to enable him to carry out his threats and did not represent a completely disinterested opinion. The successful picture produced by the initial operator in Wenatchee supports this conclusion. Hamlin also followed up his threats in Lewiston, Idaho, with a system backed by a group from Spokane. In addition, he made similar threats, all referring to backing by Whitney or eastern capital, to operators in Chehalis and Aberdeen, Washington, and Livingston, Montana, although Whitney never expressed an interest in these locations.
Hamlin's actions described above constitute most improper conduct. His ultimatum of buy Jerrold or be faced with competition backed by substantial resources was clearly intended to promote the sale of Jerrold equipment to the exclusion of the equipment of other concerns. The natural effect of such a campaign, if successful, would be to create a monopoly for Jerrold in the Northwest. Hamlin must be found to have intended the natural consequences of his actions and his intent can be attributed to Jerrold Northwest, since he was acting in his capacity as an officer of that corporation. The court feels that this intent need not be imputed to any of the other defendants, however. While Jerrold Northwest was an agent of Jerrold and the latter was responsible for its wrongs under the doctrine of respondeat superior, the agent's intent is not imputed to its principal. There is nothing in the record to indicate that any of the other corporate defendants had knowledge of Hamlin's threats and condoned his conduct. Thus, the court concludes that Jerrold Northwest did attempt to create a monopoly in the market for community television antenna equipment in its sales territory n52 in violation of § 2 of the Sherman Act. It also concludes that the intent evident from Hamlin's conduct can only be imputed to Jerrold Northwest, Milton Shapp and Jerrold Electronics Corporation and not to any of the other defendants.
V-B. Misuse of Patents.
On April 29, 1954, Jerrold acquired the Kallman Patent (Patent No. 2,394,917) covering the master antenna principle employed in community television antenna systems. [fn 54. The validity of this patent has never been tested.] In May of that year, the managers of Jerrold affiliated companies and Jerrold's sales engineers were informed of this fact and told that Jerrold Planned to enforce its rights under the patent by requiring all new systems to be licensed. People purchasing Jerrold equipment would automatically be licensed, while those using non-Jerrold equipment would be charged a fee. They were told that the income from these licenses would be used to expand Jerrold's school program, which would be opened to personnel from all licensed systems. The information and forms necessary to implement this program were to be passed on to the sales force as soon as they were available. This plan was the subject of unfavorable comment from Jerrold's salesmen and representatives of various branches of the industry. As a result, Jerrold informed its sales force on June 8, 1954, that it had decided not to put the plan into operation.
The requisite monopolistic intent cannot be gleaned from Jerrold's decision to enforce its patent in the manner outlined. It would, of course, be possible for Jerrold to issue licenses in a way which would unfairly discriminate against the equipment of other manufacturers. The limited action taken by Jerrold under this plan before it was abandoned does not indicate that any scheme of this sort was contemplated. The record establishes that several salesmen did mention the patent in the course of their negotiations with potential customers. Except for the two instances discussed below, however, there is no indication that anything was said from which it could be inferred that Jerrold intended to use the Kallman Patent for improper purposes.
One Foscoe Hendrick testified that a Jerrold salesman tried to pressure him into buying Jerrold equipment, stating that they owned patents and if he bought non-Jerrold equipment, he might get himself in trouble. Hendrick bought the other equipment anyway. In addition, the defendants admit that Shapp told representatives of a company planning on installing a system in Victoria, Texas, that Jerrold would take whatever action was necessary to enforce its patent position, when he learned that they decided not to continue under a WK-1 contract they had signed with Jerrold after the field survey had been conducted and intended to use Entron equipment. While Shapp's remarks were ill-considered, they do not appear to have been motivated by a desire to restrain competition but by his keen disappointment at losing a system he thought he had sold. The Victoria system was particularly important to Jerrold because it would have served as a showplace system in an area where the community television antenna industry was just getting started. Furthermore, Shapp felt he had been treated discourteously by the Tele-tenna people and that Jerrold equipment had not been given fair consideration. The fact that Shapp was piqued does not excuse his improper threat, but does explain away any inference of monopolistic intent. This is particularly so in view of the fact that he was shown to have made a threat in only one instance. No continued practice along this line, such as that carried out by Phil Hamlin, was established. The court feels compelled to conclude that the two isolated and unrelated threats uncovered by the Government are an insufficient basis on which to make a finding that any or all of the defendants intended to acquire a monopoly.
VI. Right to Injunctive Relief.
The defendants state that since they have abandoned the sales policies complained of for several years and no predatory practices have been shown since 1954, the Government is not entitled to injunctive relief. While the court found that the defendants did not abandon their sales policies because of the Government suit, it cannot say that this factor did not deter them from reinstituting these policies at a later date. In all their actions, defendants have ventured close to the brink. This extreme lack of caution prevents the court from concluding that there is no reason to believe that these practices would not be resorted to again in the future. United States v. W. T. Grant Company, 1953, 345 U.S. 629, 633, 73 S.Ct. 894, 97 L.Ed. 1303; I.C.C. v. Barron Trucking Company, 3 Cir., 1960, 276 F.2d 275; United States v. Aluminum Company of America, 2 Cir., 1945, 148 F.2d 416.
* * *
The plaintiff, United States of America, having filed its complaint herein on February 15, 1957, and its amended complaint on April 2, 1959; the defendants having appeared and filed their answers to such complaint; the issues having been tried from November 9 to December 18, 1959; the court having entered its findings of fact and conclusions of law together with its opinion on July 25, 1960 (Document No. 58), which has been supplemented by the Memorandum Opinion of October 10, 1960; and it appearing to the court that there is no just reason for delay in entering a final judgment, it is hereby
Ordered, adjudged and decreed as follows:
The court has jurisdiction of the subject matter hereof and of the parties hereto. The defendants have (a) combined and conspired to insist on service contracts and to sell only full systems in order to restrain trade and commerce in community television antenna equipment in violation of Section 1 of the Sherman Act (15 U.S.C.A. § 1); (b) have contracted to sell and have made sales of equipment for community television antenna systems upon unlawful conditions in violation of Section 3 of the Clayton Act (15 U.S.C.A. § 14); and (c) defendant Jrrold has made acquisitions of community television antenna systems, the effect of which has been to foreclose competitors of the defendants from a share of the market in community television antenna system equipment and if future acquisitions are not enjoined the effect of any further acquisitions may be to substantially lessen competition and tend to create a monopoly in the sale and distribution of said equipment in various sections of the United States in violation of Section 7 of the Clayton Act (15 U.S.C.A. § 18); and (d) defendant Jerrold-Northwest, Inc., has attempted to monopolize trade and commerce in violation of Section 2 of the Sherman Act (15 U.S.C.A. § 2).
(A) 'Person' shall means a corporation, partnership, individual, association or any other legal entity;
(B) 'Community television antenna system' shall mean any system for the reception of television signals and their transmittal throughout a community;
(C) 'Equipment' shall mean any equipment designed for use as part of or in conjunction with a community television antenna system, including parts thereof, and shall include, but not be limited to, antennas, head end equipment, amplifiers, filters and traps, automatic gain control devices, converters, test equipment, and tap-off units;
(D) 'Jerrold equipment' shall mean any equipment manufactured or sold by any defendant;
(E) 'Services' shall mean engineering and technical services relating to the planning, installation, testing, maintenance, repair or enlargement of community television antenna systems;
(F) 'Jerrold services' shall mean any services furnished by any defendant;
(G) 'Defendants' shall mean the defendants Jerrold Electronics Corporation, National Jerrold Systems, Inc., Jerrold-Northwest, Inc., Jerrold-Southwest, Inc., Jerrold-Ohio, Inc., Jerrold Mid-Atlantic Corporation, and Milton Jerrold Shapp, and each of them.
The provisions of this final judgment applicable to any defendant shall apply to such defendant, its officers, directors, agents, employees, successors, and assigns and to those persons in active concert or participation with such defendant who receive actual notice of this final judgment by personal service or otherwise.
(A) Each of the defendants is ordered and directed, within 45 days from the date of entry of this final judgment, to:
(1) Terminate and cancel any and all provisions of each of their contracts with any community television antenna system operator which are or may be contrary to or inconsistent with any of the provisions of this final judgment;
(2) Mail a copy of this final judgment to each person to whom such defendant has sold equipment or with whom such defendant has a service contract.
(B) Each of the defendants is ordered and directed:
(1) Within 65 days from the date of entry of this final judgment, to file with the Clerk of this court, with a copy to the Attorney General, an affidavit setting forth the fact and manner of compliance with subsection (A) of this Section IV;
(2) For a period of three years from the date of entry of this final judgment, to furnish a copy of said judgment to any person making written request therefor.
The defendants are enjoined and restrained from, directly or indirectly:
(A) Selling or offering to sell equipment on the condition or understanding that the purchaser thereof purchase services from the defendants;
(B) Furnishing or offering to furnish services on the condition or understanding that the recipient thereof purchase any Jerrold equipment;
(C) Selling or offering to sell any item of Jerrold equipment on the condition or understanding that the purchaser thereof buy or use any other Jerrold equipment;
(D) Selling or offering to sell any equipment on the condition or understanding that the purchaser thereof will not purchase or use equipment manufactured or sold by any other person; provided, however, this subsection (D) shall not prohibit defendants from electing to sell or offer for sale Jerrold equipment upon the condition or understanding that defendants will not guarantee, warrant or, in any manner, be responsible for, the operation or efficiency of such equipment, or the system in which the same may be installed or used, if the purchaser thereof installs, as a part of such system, any equipment or attachments manufactured by any other person which, in defendants' opinion, might either (a) impair the quality of television reception or signal distribution capability of the system, or (b) cause damage to, or impair the operation or efficiency of, any of the Jerrold equipment sold or offered for sale. In the event the defendants elect to sell, or offer for sale, Jerrold equipment upon the foregoing condition or understanding, defendants shall prepare a complete list of each item of equipment manufactured by defendants and setting forth in such list, opposite each item of Jerrold equipment, the item or items of equipment equivalent thereto manufactured or sold by others and which, in the opinion of the defendants, may be used in conjunction or connection with Jerrold equipment and which will not impair the quality of television reception or signal distribution capability of the system and will not cause damage to or impair the efficiency of Jerrold equipment used in the system, And provided further that defendants shall keep such list current and up to date until such time as defendants notify the plaintiff in writing that they no longer wish to avail themselves of the election specified in this subparagraph (D).
(E) Requiring, urging, or influencing their distributors or sales representatives:
(1) To refuse to sell any item of Jerrold equipment to persons using equipment manufactured or sold by persons other than Jerrold;
(2) To require, as a condition for the sale of Jerrold equipment,
(a) that the purchaser thereof subscribe to Jerrold services, or
(b) that the purchaser thereof buy any additional Jerrold equipment.
The defendants are enjoined and restrained, until April 2, 1962, from acquiring, directly or indirectly, any shares of the stock or assets of, or any controlling, ownership or managerial interest in any community television antenna system already built at the time of the proposed acquisition, except (1) with the approval of the plaintiff or (2) after an affirmative showing to the satisfaction of this court, upon not less than 10 days' notice to the plaintiff, that the effect of such acquisition will not be substantially to lessen competition or tend to create a monopoly in the manufacture, distribution or sale of equipment.
The defendants are enjoined and restrained from coercing or forcing or attempting to coerce or force any person to buy Jerrold equipment or services by threatening to build or assist others in building a competing community television antenna system or by any other threats of economic or other reprisal.
For the purpose of securing compliance with this final judgment and for no other purpose, duly authorized representatives of the Department of Justice shall, upon written request of the Attorney General or the Assistant Attorney General in charge of the Antitrust Division, and on reasonable notice to any defendant made to its principal office, be permitted (1) access during the office hours of such defendant to those books, ledgers, accounts, correspondence, memoranda and other records and documents in the possession or under the control of the defendant which relate to any of the subject matters contained in this final judgment, and (2) subject to the reasonable convenience of the defendant and without restraint or interference from it, to interview officers or employees of said defendant, who may have counsel present.
Any defendant, upon the written request of the Attorney General or the Assistant Attorney General in charge of the Antitrust Division, made to its principal office, shall submit such written reports with respect to any of the matters contained in this final judgment applicable to such defendant as from time to time may be necessary for the enforcement of this final judgment.
No information obtained by the means provided in this Section VIII shall be divulged by any representative of the Department of Justice to any person other than a duly authorized employee of the Executive Branch of the plaintiff, except in the course of legal proceedings to which the United States of America is a party for the purpose of securing compliance with this final judgment or as otherwise required by law.
Jurisdiction is retained for the purpose of enabling any party to this final judgment to apply to this court at any time for such further orders and directions as may be necessary or appropriate for the construction or carrying out of this final judgment, for the modification of any of the provisions thereof, and for the enforcement of compliance therewith and punishment of violations thereof.
Judgment is entered against the defendants for all costs to be taxed in this proceeding.
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United States of America v. Lever Brothers Company
216 F. Supp. 887; 1963 Trade Cas. ¶ 70,770 (SDNY 1963)
This is an action for a permanent injunction brought by the plaintiff under Section 15 of the Clayton Act, 15 U.S.C. § 25, in which it was alleged, among other things, that on May 22, 1957 defendant Lever Brothers Company (hereinafter either Lever Brothers or Lever) and defendant Monsanto Chemical Company (hereinafter Monsanto) entered into an agreement, and two agreements supplemental thereto, by which, in substance, Monsanto transferred to Lever Brothers trademarks, copyrights and patents relating to a detergent named 'all' and Monsanto's inventory of 'all' and the packaging therefor; and in which the plaintiff seeks a decree directing the defendant Lever Brothers to divest itself of the trademarks, patents and other assets and rights acquired by Lever under such arrangement, as well as its inventory of the 'all' products.
Section 7 of the Clayton Act, as amended (15 U.S.C. § 18) provides in part that
'* * * No corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.'
To determine whether this section has been violated the Court must determine (1) if any assets of a corporation subject to the jurisdiction of the Federal Trade Commission have been acquired by another corporation also engaged in commerce; (2) what is the line of commerce; (3) what is the section of the country, and (4) whether the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly.
* * *
The following are the issues to be decided:
(1) Was There an Acquisition of an Asset?
The contract of the defendants, dated May 22, 1957, provided for the following: (1) the trademark for the detergent 'all' was transferred from the defendant Monsanto to the defendant Lever; (2) the patents relating to 'all' were assigned to Lever; (3) Monsanto retained the right to sell the ingredients contained in 'all' or the finished product under any other trademark; (4) Lever purchased Monsanto's inventories of the 'all' finished product and packaging materials for a consideration of $ 3,025,000; (5) Lever agreed that for five years it would purchase the 'all' finished product from Monsanto or, in the event it desired to manufacture 'all' itself, Lever agreed to purchase the ingredients from Monsanto if the latter's prices were equal to or lower than those of alternative suppliers, and (6) Lever agreed to purchase additional chemical products from Monsanto for the ensuing five years at a yearly average of $ 16 million.
The defendant Lever Brothers urges that the acquisition here was not the acquisition of an asset. It appears clear, however, that a trademark may be a very valuable asset of a company; patents may be valuable assets of a company; certainly the finished products of 'all' were assets. The Court must necessarily conclude that the contract involved the acquisition of assets by Lever Brothers from Monsanto. There is also no dispute that defendant Monsanto is engaged in interstate commerce and is subject to the jurisdiction of the Federal Trade Commission, and that Lever Brothers is engaged in commerce and is subject to the Federal Trade Commission.
(2) What is the Relevant Line of Commerce?
Since Section 7 of the Clayton Act relates to the effect of an acquisition 'in any line of commerce' it becomes necessary to determine in all of these cases what is the relevant line of commerce.
The Supreme Court in Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510 (1962) laid down the test to be employed in determining the relevant line of commerce. It said in part:
'The outer boundaries of a product market are determined by the reasonable inter- changeability of use or the cross-elasticity of demand between the product iself and substitutes for it. However, within this broad market, well-defined ubmarkets may exist which, in themselves, constitute product markets for antitrust purposes. * * *'
To constitute a proper line of commerce for the purpose of the statute, the line must include the substitutes for the immediate line which are readily interchangeable in use and for which there is a cross-elasticity of demand.
The Government, in this case, contends that the relevant line of commerce is 'heavy duty detergents.' Detergents are cleaning agents. A heavy duty detergent is that used primarily to clean the family wash. It is true, indeed, that heavy duty detergents may be a proper line of commerce. However, this in itself is a subdivision of a larger line which might be defined as 'cleaning agents.' There is certainly a cross-elasticity of demand between soaps, soap powders and detergents. Within this large category, however, there are what the Supreme Court has described as 'submarkets.' Certain cleaning products are particularly useful for one purpose and certain others for another. The variations in price, use and advertising appeal determine to a substantial extent what product will be used for what purpose.
A very distinct 'submarket' exists in this field. It is low sudsing heavy duty detergents. Low sudsing detergents are used primarily in automatic washing machines and particularly front loading washing machines for reasons which will be described later in this opinion. Whether this submarket is the one which is applicable for a determination of the relevant market for antitrust purposes depends upon a number of factors. As the Supreme Court said in Brown Shoe Co. v. United States, supra, 370 U.S. at page 325, 82 S.Ct. at page 1524:
'* * * The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. ***'
An examination of the facts discloses that low sudsing detergents were developed as specialty products designed to meet a particular need. The advent of the automatic washing machine created a need for a detergent which would provide a low volume of suds. The product was found after experimentation and research.
Chemically there are differences between high and low sudsing detergents. High sudsing detergents contain anionic salts that dissociate in water to form a charge and a high volume of suds when agitated. Low sudsing detergents are non-ionic and do not dissociate in water. The result is a lower volume of suds.
The differences in chemical formulation require different raw materials, production techniques and expertise. Manufacturing costs are higher for low sudsing detergents and this is reflected in higher retail prices. It is difficult accurately to assess the increase in cost to the consumer because rival manufacturers do not package their brands in boxes of comparable weight and do not agree as to the quantity of detergent to be used per wash. Generally the difference in cost is approximately 5 percent or about two cents per average wash.
Both high and low sudsing detergents are sold by retail grocery stores and supermarket chain stores. They are placed in the same section of the store, although the low sudsing detergents are often segregated from the high sudsing detergents within the section reserved for cleaning products.
There has necessarily been direct competition between the low sudsing detergents and the high sudsing detergents which they sought to replace. Differences in price, differences in packaging, and the inertia incident to the use of a well known product have all played a part in determining what product would be used by the particular consumer. While there is a certain cross-elasticity of demand, nevertheless the facts show that low sudsing detergents which are sold at a higher price than ordinary heavy duty detergents are sold for a particular use, i.e., for washing the family wash in automatic washing machines. Thus approximately 90 percent of low sudsing detergents sold are used in cleaning the family wash and 88 percent of that total is employed in automatic washing machines.
The Court concludes that heavy duty detergents may indeed be a relevant line of commerce but an equally relevant submarket exists in low sudsing detergents.
(3) What is the Section of the Country?
The parties agreed that the section of the country involved in this case is the entire United States.
(4) Whether the Acquisition of Such Assets May Substantially Lessen Competition
This is the primary issue in this case. To determine this issue requires a consideration of the legal meaning of the term 'substantially to lessen competition' and also a consideration of the facts, to see whether in fact competition may be substantially lessened.
The leading decision upon this point up to the present time is undoubtedly the decision of the United States Supreme Court in Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). The Court pointed out that
'* * * While providing no definite quantitative or qualitative tests by which enforcement agencies could gauge the effects of a given merger to determine whether it may 'substantially' lessen competition or tend toward monopoly, Congress indicated plainly that a merger had to be functionally viewed, in the context of its particular industry. ***'
370 U.S. 294, at pp. 321-322, 82 S.Ct. 1502, at p. 1522.
The Court also pointed out that
'* * * Taken as a whole, the legislative history illuminates congressional concern with the protection of competition, not competitors, and its desire to restrain mergers only to the extent that such combinations may tend to lessen competition.' 370 U.S. 294, at p. 320, 82 S.Ct. 1502, at p. 1521.
The Court concluded on this point:
'* * * Because § 7 of the Clayton Act prohibits any merger which may substantially lessen competition 'in any line of commerce', (emphasis supplied), it is necessary to examine the effects of a merger in each such economically significant submarket to determine if there is a reasonable probability that the merger will substantially lessen competition. If such a probability is found to exist, the merger is proscribed.' 370 U.S. 294, at p. 325, 82 S.Ct. 1502, at p. 1524.
And in a footnote at page 322 of the Supreme Court's opinion, the Court pointed out that
'* * * Both the Federal Trade Commission and the courts have, in the light of Congress' expressed intent, recognized the relevance and importance of economic data that places any given merger under consideration within an industry framework almost inevitably unique in every case. Statistics reflecting the shares of the market controlled by the industry leaders and the parties to the merger are, of course, the primary index of market power; but only a further examination of the particular market -- its structure, history and probable future -- can provide the appropriate setting for judging the probable anticompetitive effect of the merger. * * *' 370 U.S. 294, 322 n. 38, 82 S.Ct. 1502, 1522.
This Court has therefore considered the particular market -- its structure, history and probable future -- as the setting for judging the anticompetitive effect of the merger considered by it. In this connection the Court finds the following facts:
The Development of the Product Line
This case involves to a limited extent a saga of the growth of American business -- its development of new products, its development of new machines and its development of new techniques of marketing. The product involved, as has been said, is a subdivision of products generally known as detergents. Detergents are cleaning agents. Until approximately the time of World War II the cleaning agents customarily used were soaps. Soap is an organic compound made from animal or vegetable fats. Due to restrictions imposed by World War II it became necessary to develop a cleaning agent made from something other than fats. This led to the development of the synthetic detergent business. Synthetic detergents are chemical compounds produced from petroleum. They have the advantage over soaps of not combining with the salts found in hard water and also the volume of suds may be controlled to suit the needs of the particular product. The first synthetic detergent produced for cleaning purposes in substantial quantities was 'Tide', manufactured by Procter & Gamble Company (hereinafter Procter & Gamble). It was put on the market late in 1946. It was followed by various other detergents manufactured and distributed by other companies. Detergents are divided into two categories -- heavy duty and light duty. A heavy duty detergent is that used primarily to clean the family wash, while light duty detergents are used primarily to clean fine fabrics by hand.
At or prior to the time of the development of the detergent business, appliance manufacturers were experimenting with automatic washing machines, to relieve the housewife of the drudgery entailed in the previously existing methods for washing the family laundry. Prior to World War II several washing machine manufacturers, including Westinghouse Electric Company, had introduced a limited number of automatic washing machines to the public. The war, however, halted their production. Following the end of the war the business developed rapidly and the number of automatic washing machines increased at a rapid rate.
Automatic washing machines, of course, require the use of cleaning agents. Originally soap powders were used, but with the development of the detergent industry detergents rapidly became substitutes for soap powders. It was found that all soaps produced a high volume of suds and every detergent then in use also produced a high volume of suds. Studies showed that the efficiency of an automatic washing machine was reduced with high suds. They impeded the operation of the machine and sometimes resulted in suds spewing on the floor. The latter problem was particularly acute in front loading washing machines. It became desirable to develop a type of detergent which was low sudsing for use in front loading washing machines. How this need was met will be discussed later in this opinion.
It should be pointed out that coincident with the development of the detergent business and the development of the automatic washing machine there was the development of new techniques in marketing. Previous to World War II most soaps and soap powders were sold in local or corner groceries where the proprietor or his assistants waited on the customers. Following World War II came the rapid development of supermarkets, in which the merchandise was simply placed on shelves and the customer herself removed the products from the shelves and took them to a check-out counter for purchase. In the ordinary local grocery store the proprietor was a form of salesman who assisted the customer in picking the product and whose recommendations resulted in increased sales. With the development of the supermarket merchandising people found that the customer had to be pre-sold, i.e., the customer, before she entered the store, had to be sold on the particular product to be picked by her from the shelves and purchased by her. This in turn resulted in a great increase of expenditures for advertising, both in newspapers and magazines and on television and radio, to pre-sell the customer on the product to be bought when she entered a supermarket. This meant that a manufacturer must be ready to spend vast sums on advertising if it wanted to gain an appreciable share of the market.
As has been said, the manufacturers of front loading washing machines found it desirable to get a cleaning agent which was low sudsing. Westinghouse Electric Company pioneered in this field. It was the largest manufacturer of front loading washing machines. It found that the detergents then being developed were not low sudsing and were creating problems with its washing machines. In December 1943 Westinghouse approached Monsanto, which was a large manufacturer of chemicals with a considerable research department, to see if it could develop for Westinghouse a low sudsing detergent for use in front loading automatic washing machines. Monsanto undertook to try to produce such a low sudsing detergent and did produce one, which it exhibited to Westinghouse. Westinghouse was so impressed with the product that it offered to put a sample box of the product in each automatic washing machine sold by it, if Monsanto would provide for the production and distribution of such a product. Monsanto, which had no substantial retail marketing division, thereupon arranged with some independent businessmen, in 1946, to form a company known as Detergents, Inc. to package and distribute this low sudsing detergent. It named the product 'all'.
Between 1947 and 1952 'all' was manufactured by Monsanto and sold to Detergents, Inc. which packaged it and distributed it to various outlets for resale to consumers. Arrangements were made with several washing machine manufacturers, in addition to Westinghouse, to insert packages of 'all' in the machines at the factory and before the machines were sold. Detergents, Inc. sought to promote the sale of 'all' through the recommendations of appliance dealers. Prior to 1951 there was no attempt to sell 'all' through grocery stores and supermarkets because the advertising and promotion expense entailed in such distribution would, in the opinion of the officials in charge, have been excessive. However, as the number of washing machines in use increased, the demand for the product increased. Detergents, Inc. found that it became necessary to introduce 'all' to grocery stores and supermarkets in order to make it available to users of washing machines. The need for increased production and for advertising and distribution expenses required additional capital for Detergents, Inc. Monsanto, which had been providing the raw materials, found it necessary to increase the working capital of Detergents, Inc. by providing funds in return for its preferred and common stock. Even this was not sufficient to provide it with the additional capital which it needed and in January, 1953, Detergents, Inc. was dissolved as a corporate entity and became a division of Monsanto. During this period, prior to 1953, 'all' was the only low sudsing synthetic detergent available to consumers. There were other synthetic detergents being sold but each was high sudsing. Even so, the profits on the business of Detergents, Inc. had not been satisfactory.
Between 1947 and January 1953 Detergents, Inc. had the following profits and losses from the sale of 'all':
Thus, although during the period prior to 1953 'all' was the only low sudsing synthetic detergent available to consumers, nevertheless the distribution of this product during the six years prior to 1953 by Detergents, Inc. had resulted in an over-all loss to that company. Monsanto, of course, had made certain profits on the sale of the raw material to Detergents, Inc. since it provided Monsanto with an outlet for its phosphate products.
The decision of Monsanto, in January, 1953, to both manufacture and distribute 'all' represented a significant departure in its policies. At that time it sold very few products directly to the consumer. Thus in 1954 Monsanto's sale of 'all' totaled approximately $ 34 million, while its sale of all other household consumer goods totaled only $ 1,450,000. When it took over the business it engaged in an active advertising and distribution campaign. It attempted to place 'all' on grocers' shelves through independent food brokers who received a commission of 5 percent. However, with the introduction of other low sudsing detergents, which will hereinafter be discussed, Monsanto could no longer depend upon the continued recommendation of 'all' by manufacturers and distributors of automatic washing machines. Prior to 1954 Monsanto's only expense in this regard was the supplying of free samples of 'all' to be packed in and given away with each new automatic washing machine. In 1955 Monsanto spent $ 1.5 million in cooperative advertising with manufacturers of washing machines in an unsuccessful attempt to retain their recommendations. This ran into conflict with the other producers of low sudsing detergents who had come into the market and by March, 1957, no manufacturer was placing 'all' samples in its automatic washing machines.
This change in the marketing situation was occasioned by the introduction of other low sudsing products. In June, 1954, Procter & Gamble introduced a low sudsing product named 'Dash' and about six months later Colgate-Palmolive Company (hereinafter Colgate) introduced a low sudsing brand named 'Ad'. The introduction of these two brands reflected the increase in sales of automatic washing machines and the expanding market for low sudsing detergents specifically suited for the needs of these machines. By June, 1954, approximately 11 million automatic washing machines were in use, which was five times the number of machines which had been sold in 1946 when 'all' was first introduced.
With the introduction of 'Dash' and 'Ad' in 1954 and 1955, Monsanto was forced to increase its advertising and promotional budget. Nevertheless the sales of 'all' failed to keep pace with the expanding market for low sudsing synthetic detergents. The number of automatic washing machines in use rose from 11,245,000 in 1954 to 16,295,000 in 1956. Case sales of low sudsing detergents rose from 3,486,000 cases in 1954 to 7,836,000 in 1956. Nevertheless the percentage of the market of 'all' steadily declined. In 1953, when case sales of 'all' totaled 2,389,000 this constituted 100 percent of the low sudsing detergent market. By 1956 case sales of 'all' had increased to 4,331,000 cases, but this constituted only 55.3 percent of the market for low sudsing detergents. Monsanto's advertising and promotion expense for 'all' increased from over $ 5 million in 1953 to a high of over $ 12 million in 1955. In 1956 it determined to reduce its advertising expenditures, thereby attempting to increase its profits in the short run based upon the previous advertising. It dropped its advertising to under $ 9 million in 1956 and found that its percentage of the market dropped from 79.2 percent to 55.3 percent.
Monsanto's profits and losses were derived from two divisions. The first division, which was the Inorganic Division, produced the raw material. The second division, which was the Consumer Products Division, manufactured, sold and distributed the finished product. The profits and losses of these two divisions in the years 1953 through 1955 were as follows:
|Profits (Losses)||Profits (Losses)|
|Consumer Products Division (as to 'all')||Inorganic Division (as to 'all')|
|Year||(in $ 1,000)||(in $ 1,000)|
|1953||$ 3,509||$ (1,210)|
Thus on a company-wide basis Monsanto lost $ 416,000 on 'all' in 1955. In March 1956 Monsanto decided that it would either sell the 'all' trademark or acquire other consumer products to distribute with 'all'. Efforts on the part of Monsanto to develop companion products to 'all' proved unsuccessful. It decided to dispose of 'all'.
The decision to sell the trademark 'all' was based on many factors. Monsanto was a company which had long been engaged in research and manufacture of raw chemicals in bulk for distribution in final form by others. The officers of the company felt that they had no expertise in the field of developing and marketing consumer products. There was dissension within the company as to whether advertising and promotion expenses should be increased to compete more successfully with the other low sudsing detergent manufacturers, or whether such funds should be used to develop other industrial products. Monsanto was then producing between four and five hundred different products whose entire advertising and promotion budget amounted to approximately $ 5 million. Advertising and promotion for 'all' alone in 1955 was over $ 12 million. The average yearly expense for this advertising of one consumer product was approximately equal to the average yearly expense for research for the entire company. The decision to sell 'all' was based in part on the desire to reduce internal dissension in the company about the product 'all' and also an inherent distrust of an advertising and promotion expense that was equal to the company's entire research budget. Additional motivation was provided by the losses sustained by the Consumer Products Division in 1955. This was a direct result of increasing competition from 'Dash' and 'Ad'. The decision was made to dispose of 'all'. This was accompanied by a concomitant reduction in advertising and promotion expenditures. It was hoped that this would allow Monsanto to capitalize on the momentum generated by past expenditures and thereby reverse the losses of the Consumer Products Division. Losses were, in fact, reduced in 1956 and a profit earned in the first five months of 1957.
It was the desire of Monsanto to get out of a business in which it could only lose money unless it invested continually larger amounts for advertising and promotion to compete with Procter & Gamble and Colgate. At the same time Monsanto desired, of course, to have an opportunity to dispose of its raw material, 'Sterox,' which was used in the manufacture of 'all'. Monsanto therefore discussed the possible transfer of the 'all' merchandising business with three companies before approaching Lever Brothers. They were General Foods Co., Purex Co. and Armour & Co. Negotiations with General Foods were broken off by that company for reasons unknown to Monsanto. Purex was rejected by Monsanto as a possible purchaser because it lacked the capital effectively to advertise and promote 'all'. Armour & Co. was eliminated from consideration because it refused to meet prices set by Monsanto for future purchases of those raw materials.
In January, 1957, Monsanto approached Lever Brothers to inquire if it would be interested in taking over the merchandising of 'all'.
The Position of Lever Brothers
Lever Brothers is an old, established company, which has long been in the business of manufacturing soap and cleaning products. Heavy duty soap products manufactured by Lever made substantial profits in the years 1948 to 1956. It did not do as well in the detergent business. Lever Brothers introduced a heavy duty synthetic detergent named 'Surf' in 1948. By the end of 1956 'Surf' succeeded in capturing only 3 percent of the market and had lost a total of over $ 25 million. As of December 31, 1956, Lever Brothers lost over $ 36 million in an unsuccessful effort to market a line of heavy duty synthetic detergents. Only one of its products, 'Breeze', introduced in 1952, had made appreciable profits. 'Breeze' is a premium product which means that a premium, such as a towel, is packed in the box. There was, admittedly, only a limited market for such premium products.
The substantial losses in the heavy duty detergent business were not offset by the profits in the soap business. Moreover, the prospects for future profits were not bright because of the decline in sales of soap products. Profits of over $ 3 million in 1953, in the soap business, were reduced to $ 431,000 in 1956; such profits continued to decline until they were only $ 142,000 in 1960.
It became obvious to any company in this business that it was necessary to have a low sudsing synthetic detergent if one were to remain as a competitor in this field. As has been stated, both Procter & Gamble and Colgate had introduced low sudsing detergent products. Lever Brothers undertook in 1954 to introduce a low sudsing synthetic detergent. This was a product named 'Vim' which was first test-marketed in 1954. It was Lever's intention to gain valuable experience in the growing segment of the detergent industry and to achieve sales for this low sudsing detergent of at least one percent of the entire heavy duty detergent market.
Distribution of 'Vim' was accompanied by substantial advertising and mailing of discount coupons to potential customers. Sales rose to one percent in January 1955 but steadily decreased thereafter. In October 1955 sales leveled off at .6 percent. Complaints were received from consumers concerning the tendency of the powdered 'Vim' to solidify and form a block when stored on the grocer's shelf. Its sales declined; its losses increased. Losses for the years 1954 and 1955 on this product were respectively $279,000 and $ 286,000. This caused Lever Brothers, in September 1955, to cancel 'Vim's' advertising and to discontinue its distribution early in 1956.
Lever's experience in the detergent market was therefore not successful. It had completely failed in the low sudsing market. It showed losses in the entire heavy duty detergent field. In the fall of 1955 Lever decided it would no longer attempt to increase its sales of heavy duty powdered detergents. Instead it would reduce its advertising and promotion expenses, cancel any plans to introduce new products and try to maintain annual sales of approximately 12 million cases. It was hoped that such economies would result in increased profits. Results for 1956 were mixed. It introduced a liquid synthetic detergent called 'Wisk' which unexpectedly lost several million dollars. Lever's other synthetic detergents showed profits for 1956 but case sales for all its heavy duty detergents, excluding 'Wisk', slipped from over 12 million cases in 1955 to under 12 million in 1956.
Therefore on December 31, 1956, Lever Brothers had been steadily losing its position in the heavy duty detergent market. It possessed no low sudsing detergent and had abandoned any further attempt to introduce one. None of its high sudsing powdered products possessed more than 4.4 percent of the heavy duty market. Profits on soap products steadily declined and profits on heavy duty powdered detergents in 1956 were the result only of reductions in heavy advertising and promotion expenses.
At that point it was approached by Monsanto with the suggestion that it consider acquiring the product 'all'. Lever had no low sudsing detergent with which 'all' would be competitive. It needed a low sudsing detergent to round out its line of products. It had the experience, expertise and organization to advertise, promote and sell a detergent product, all of which were lacking by Monsanto. Under those circumstances it acquired the product 'all' and began to market it.
Was the Effect of This Acquisition
Substantially to Lessen Competition?
The Government's argument that the effect of this acquisition was substantially to lessen competition is predicated upon the assumption that the relevant market was the entire heavy duty detergent market, ignoring the fact that there was a vigorous and rapidly growing submarket of low sudsing detergents. The Government's position predicates that the heavy duty detergent market was largely concentrated in three firms, Procter & Gamble, Colgate and Lever. It states on page 13 of its brief:
'*** In 1956 these three firms still had 85% Of all heavy-duty detergent sales; Monsanto, as the successor to Detergents, Inc., constituted the only real new entrant to achieve national distribution in heavy duty detergents. By virtue of Lever's asset acquisition, Monsanto ceased to compete with the three leading heavy duty detergent firms; the second leading firm acquired the business of the fourth; its market share rose from 16.8% To 22.4%; and the market share of the leading firms increased from 85% To 90% As a result of this acquisition.'
These facts may be considered as true. They overlook, however, the fact, as stated by the Supreme Court in the Brown Shoe case, that each merger 'had to be functionally viewed, in the context of its particular industry.' 370 U.S. 294, at pp. 321-322, 82 S.Ct. 1502, at p. 1522. The Supreme Court very wisely pointed out that 'statistics reflecting the shares of the market controlled by the industry leaders and the parties to the merger are, of course, the primary index of market power.' But it pointed out further that 'only a further examination of the particular market -- its structure, history and probable future -- can provide the appropriate setting for judging the probable anticompetitive effect of the merger.' 370 U.S. 294, at p. 322, n. 38, 82 S.Ct. at p. 1522.
We have in this case a situation where a very real submarket had developed in low sudsing detergents. This product was chemically different from other heavy duty detergents. It was separately marketed, separately advertised and used for a distinctive purpose. There had been active competition in this submarket. The effect of the competition was that Monsanto had determined to withdraw from the distribution of 'all'. If it had simply done this the effect would have been undoubtedly to reduce competition in this important submarket. Instead, it transferred the business to Lever Brothers which had previously had a low sudsing detergent which had failed and gone out of business. Lever was in a position to promote actively the sale and distribution of this important product. If this transfer had not been made the entire market in low sudsing detergents would have been concentrated in Procter & Gamble and Colgate. By transferring the product to Lever the product remained available and remained in active competition with the products of Procter & Gamble and Colgate. At the time of the transfer of the asset there were three firms in the market of low sudsing heavy duty detergents: Procter & Gamble, Colgate and Monsanto. After the acquisition there were three firms in the market of low sudsing heavy duty detergents: Procter & Gamble, Colgate and Lever; and by virtue of Lever's experience, expertise and substantial financial position it was in a much better position to compete in this market than Monsanto had ever been.
The detergent and soap industry is a highly competitive industry. Nobody who has sat through the trial of a case such as this -- or who has been so unfortunate as to have to listen to nighttime television programs -- can fail to appreciate the intense competition which exists between the leading firms in this industry. New products are developed and marketed. New advertising programs and marketing programs are initiated. Products rise and products fall as a result of the free play of the competitive system. The very emergence of a higher priced product, such as low sudsing detergents, in this field and the capturing by this higher price product of a substantial part of the market is an indication that competition is not static.
It is to retain such active competition that Section 7 of the Clayton Act was amended in 1950. See the opinion of this Court in American Crystal Sugar Co. v. Cuban-American Sugar Co., 152 F.Supp. 387 (1957), aff'd, 2 Cir., 259 F2d 524 (1958). However, the Clayton Act cannot be made effective by a doctrinaire approach to the problem of competition. It was a realization of this fact that undoubtedly prompted the language of the Supreme Court in the Brown Shoe case. Merely carving out a large segment of an industry as being the relevant line of commerce, without taking into account the competitive realities of submarkets, and merely adding the percentage of the business done by one company to the percentage done by another company does not establish that the effect of the acquisition may be substantially to lessen competition.
We have in this case a situation where an acquisition by one company of the particular brand of another preserved the competitive business of the other company and promoted a more active competition than if the acquisition had not been made. To decide this case by the application of statistical figures, as the Government would urge the Court to do, would subordinate reality to formulae. It would make the Clayton Act a means of suppressing rather than promoting competition, for it would mean that in the future a company with a failing brand could never transfer that brand to another company ready and able to market and distribute it in true competitive fashion. The brand would die, and competition would be diminished. Certainly such was not the intention of Congress in passing the Act. Congress undoubtedly intended, as the Supreme Court indicated, that the Court should look to the reality of the situation. The reality of the situation in 1956 was that Lever, which had no low sudsing detergent, acquired a low sudsing detergent from a company which was no longer an effective competitor in that submarket. By so doing the brand remained an active brand in a competitive market. The product remained available for the housewife. The acquisition aided, rather than impeded, competition.
Nearly six years have elapsed since the transfer of the 'all' trademark to Lever Brothers. This provides the Court with an opportunity to analyze the effects of the transfer on competition within the detergent industry and to determine if substantial anticompetitive results have obtained.
Sales of 'all' by Lever Brothers have substantially increased since 1957. Case sales have increased from 4,331,000 cases in 1956 to 6,156,000 cases in 1960. In the same period 'all's' market share has increased from 5.5 percent to 6.9 percent. n6 This is a result of vigorous advertising and promotion by Lever Brothers and a chemical improvement of the basic product.
The principal medium of advertising in the detergent industry is the sponsorship of television programs. Newspaper advertisements are considerably more expensive in terms of the number of households reached per dollar of advertising expenditure. Monsanto, with only one consumer brand, could not afford the heavy costs of network television sponsorship. Lever Brothers, with many detergent products, has been able to sponsor network television programs by dividing such sponsorship among several of its brands.
Lever Brothers has also succeeded in increasing the number of retail outlets in which 'all' is available to consumers. Lever has instituted a cooperative advertising program with local grocery stores under which the stores are paid to feature 'all' in local advertisements. Similar payments are made to stores to encourage special 'sales' of 'all' at reduced prices in an effort to attract new consumers. Monsanto did not have a cooperative advertising program in May, 1957.
When Lever Brothers acquired the 'all' trademark in 1957 it was distributing six high sudsing heavy duty detergents. Subsequent to that date Lever has not withdrawn any of its existing brands from the market place and has continued actively to promote and advertise their sale. Profits realized from the sales of 'all' have enabled Lever to modify its management decision of 1955 to reduce advertising on its existing brands and to cease from introducing any new products. In 1960 Lever developed and introduced the first low sudsing liquid detergent known as 'liquid all'. The following year it introduced a low sudsing detergent in pre-measured tablet form known as 'Vim Tablets'.
There is no evidence to support the position that the acquisition of the 'all' trademark by Lever Brothers or its introduction of new products has given it a dominant place in the detergent industry. The facts are to the contrary. At the end of 1956 Lever's share of the heavy duty market was 16.5 percent. Monsanto's sales of 'all' were 5.5 percent of that market so that the combined share of the market was 22.0 percent. In 1960, excluding sales of 'all', Lever's share of the heavy duty detergent market had declined to 14.2 percent. Sales of 'all' increased to 6.9 percent of the market so that Lever's entire share has been reduced to 21.1 percent.
The decline in Lever's share of the market has resulted in a higher share of the market for the numerous small distributors of detergents. The following table shows the market shares of the three large distributors of detergents and a common grouping for small distributors for the years 1956 and 1960:
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|Procter & Gamble||0.567||0.561|
The chart indicates that the market share enjoyed by Procter & Gamble has decreased slightly. At the same time the market share of the small distributors has increased by almost 20 percent. The higher share of the market for small distributors is evidence that competition in the heavy duty detergent industry has increased in vigor since 1957 and does much to refute the contention that competition has been or may in the future be lessened substantially because of the transfer.
It must be remembered that this is not a situation in which Monsanto agreed to eliminate the manufacture of 'all'. It was a case where Monsanto simply agreed, in effect, to withdraw from the marketing of the product under that name. It still retained the right to manufacture the product and sell it to other companies for their use under some other trade name. The facts show that Monsanto has continued to produce the product and has sold it to other companies for distribution under their trademarks. These companies are Climalene Co., which distributes the product under the trademark 'Spin', Armour & Co., which distributes it under the trademark 'Triumph', and Swift & Co., which distributes it under the trademark 'Solar'. The transfer of the trademark 'all' did not eliminate the product from the market; that product is distributed by Lever Brothers and also by the other small companies which acquire the product from Monsanto and distribute it under their own trademarks.
Confining the market to low sudsing detergents, 'all's' share of that market has declined in spite of Lever's heavy expenditures for advertising and promotion. At the end of 1956 'all' accounted for 55.3 percent of the sales of low sudsing detergents. Six years later 'all's' share of the market had declined to an estimated 35.7 percent. Combining the sales of Lever's three low sudsing detergents, 'all', 'liquid all' and 'Vim Tablets', for the year 1962 shows that Lever's entire share of the market was 44.2 percent or considerably less than the 55.3 percent enjoyed by Monsanto in 1956.
Increased sales and efficient distribution have enabled Lever to distribute 'all' profitably. Earnings for the period 1957 to 1960 were $ 23.6 million. In addition, 'all' was able to absorb $ 11.5 million of general overhead expense that would have been charged to other brands in the absence of 'all'. It is these profits which have enabled Lever to increase the advertising and promotional support of its existing brands and to undertake the heavy expenditures required for the introduction of two new brands. This is to the benefit of the consumer who may choose today among more and better detergents than were available in 1957.
The determination as to whether the transfer of an asset may substantially lessen competition is something which cannot be determined merely by bare statistics. As Judge Herlands put it in United States v. Columbia Pictures Corp., 189 F.Supp. 153, 196 (SD NY1960):
'Statistics dealing with only rank and percentages do not by themselves suffice to describe whether the vigor of competition has been affected.'
The Senate Committee on Antitrust and Monopoly made the same point in these words:
'Bare statistics necessarily omit many qualitative factors which are essential to a complete understanding of the competitive structure of the entire industrial economy or of an individual industry.' Concentration in American Industry, 85th Cong., 1st Sess., p. 4 (1957).
Or, as Judge Bryan said in his recent opinion in United States v. Continental Can Co., 217 F.Supp. 761 (SD NY1963):
'* * * Mere mechanical or quantitative application of § 7 should be avoided and each case must be judged in the light of its own peculiar facts. Only within such a setting can the probable anti-competitive effects of a merger be judged.'
The Court has weighed the evidence in the record as a whole. After doing so the Court concludes that the proof submitted established a relevant market of heavy duty detergents and a relevant submarket of low sudsing heavy duty detergents.
The Court concludes that the evidence failed to establish that in either of these lines of commerce was there any reasonable probability of substantial anticompetitive effects or a tendency to monopoly as a result of the transfer of the assets herein involved. The acquisition was not shown to be of the type proscribed by Section 7 of the Clayton Act. Judgment shall be entered for the defendants dismissing the complaint.
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CVD, Incorporated v. Raytheon Company
769 F.2d 842, 1985 U.S. App. LEXIS 20974;
227 USPQ 7; 1985-2 Trade Cas. ¶ 66,717 (1st Cir 1985)
In this action, brought under the antitrust laws of the United States, defendant Raytheon Company (Raytheon) appeals from a judgment, entered pursuant to a special jury verdict, in the District Court for the District of Massachusetts. The judgment awarded plaintiff CVD, Inc. ("CVD") treble damages of $3,180, plus attorneys' fees and costs, granted plaintiffs declaratory relief, and dismissed the defendant's counterclaims.
The dispute between plaintiffs, CVD, Inc., Robert Donadio and Joseph Connolly, both former Raytheon employees, and defendant Raytheon pertains to the manufacture of zinc selenide (ZnSe) and zinc sulfide (ZnS) by a process known as chemical vapor deposition (cvd). On August 28, 1981, plaintiffs Donadio, Connolly, and CVD initiated this action, contending that defendant Raytheon attempted to monopolize the market for ZnSe and ZnS made by the cvd process, in violation of 15 U.S.C. § 2 (1982), and that a licensing agreement between the plaintiffs and Raytheon was an unreasonable restraint of interstate commerce and trade in violation of 15 U.S.C. § 1 (1982). The complaint sought damages and a declaratory judgment that the agreement between Raytheon and CVD, purporting to license the cvd process, was void and unenforceable. The defendant counterclaimed for breach of contract, misappropriation of trade secrets, breach of fiduciary duty, and violation of the Massachusetts consumer protection statute.
After a 27 day trial, in response to special interrogatories formulated by the court, the jury returned a verdict for the plaintiffs. Raytheon, who had previously moved for a directed verdict, filed motions for judgment notwithstanding the verdict, and for a new trial. These motions were denied, and judgment was entered for the plaintiffs. Defendant Raytheon thereupon filed a timely notice of appeal.
* * *
Since we find that the jury verdict was supported by sufficient evidence, and that Raytheon's contentions and other assertions of error are without merit, the judgment of the district court is affirmed.
Raytheon, a Delaware corporation with executive offices in Massachusetts, is a diversified company specializing in commercial and military electronics, materials and weapons. In 1959, plaintiff-appellee Donadio was hired as an engineer in the Advanced Materials Department at Raytheon. He was employed there until he resigned in the fall of 1979 in order to form CVD. Plaintiff-appellee Connolly was hired by Raytheon in 1972, and was employed there continuously until he also left to form CVD. Donadio and Connally had signed employment agreements promising to protect Raytheon's proprietary information. Both were involved in the manufacture of zinc selenide and zinc sulfide by chemical vapor deposition (ZnSe/cvd or ZnS/cvd). This process combines vaporized zinc solids with hydrogen sulfide or hydrogen selenide in specially modified, high-temperature (approximately 900 degrees centigrade) vacuum furnaces. The resulting solid materials are further processed into high precision optical materials which are used to make, among other things, infrared windows for lasers, high-speed aircraft, and missiles. These materials are the only suitable materials for certain demanding optical uses. Most of Raytheon's work on these materials had been done under contracts with the federal government. As part of its obligation under these contracts, Raytheon was required to provide periodic reports that detailed the technology and processes used in the production operation.
In the fall of 1979, Donadio informed his supervisor, Dr. James Pappis, the manager of the Advanced Materials Department, that he intended to leave Raytheon to start a new company to manufacture ZnS and ZnSe by the cvd process. Pappis replied that this would present legal difficulties in light of Donadio's employment agreement and Raytheon's trade secrets. The next day Pappis consulted with Leo Reynolds, a patent attorney with Raytheon, who spoke with Pappis briefly, and examined some drawings and the government reports for the purpose of determining whether the cvd process contained trade secrets.
The following day Donadio and Connolly met with Pappis, Reynolds, Joseph Pannone, the Patent Counsel for Raytheon, and another Raytheon executive. Reynolds told Donadio and Connolly that they could not manufacture ZnS and ZnSe by the cvd process without using Raytheon trade secrets. Although Donadio disputed Reynolds' assertion that trade secrets were involved, Reynolds threatened to sue if they began to manufacture ZnS/cvd or ZnSe/cvd without a license from Raytheon. Soon thereafter, Donadio and Connolly were asked to leave Raytheon.
After this meeting, Donadio retained an attorney, Jerry Cohen, who specialized in intellectual property. In discussions with Raytheon, Cohen took the position that there were no trade secrets in Raytheon's chemical vapor deposition process since the technology had been published in government reports, and, therefore, was in the public domain. Raytheon asserted, and later attempted to prove at trial, that important details were not included in the reports, and that, consequently, the reports were too vague to permit anyone to reproduce the cvd system. Cohen asked Reynolds for a list of what Raytheon claimed to be trade secrets. Reynolds refused to comply with the request on the ground he could not provide an "all-inclusive" list. At a later meeting, Reynolds read orally a list of claimed secrets but Cohen disputed all the items on the list.
In attempting to settle the dispute, Cohen proposed an agreement in which CVD would not be obligated to pay royalties if CVD could prove that no Raytheon trade secrets were used in its operations. This proposal was refused. Several other formulas for resolving the dispute were also discussed. Raytheon, however, held firm to its position that the plaintiffs could not manufacture ZnS/cvd or ZnSe/cvd without using Raytheon trade secrets, and insisted on a royalty rate based upon a flat percentage of revenue or volume for a ten-year period. Eventually, on February 15, 1980, an agreement was signed, providing for a 15% royalty on earnings for ZnSe and 8% for ZnS. No payments were ever made by CVD under the contract, however, and in 1981 plaintiffs filed the present action.
Standard of Review
The standard of review in setting aside a jury verdict is quite narrow. In order to set aside a verdict, and grant a new trial, the trial judge must find that "the verdict is against the clear weight of the evidence, or is based upon evidence which is false, or will result in a clear miscarriage of justice." Coffran v. Hitchcock Clinic, Inc., 683 F.2d 5, 6 (1st Cir.), cert. denied, 459 U.S. 1087, 74 L. Ed. 2d 933, 103 S. Ct. 571 (1982); Borras v. Sea-Land Service, Inc., 586 F.2d 881, 886-87 (1st Cir. 1978). A jury verdict that is supported by the evidence may not be set aside simply because the trial judge or the appellate court would have reached a different result.
* * *
After having heard 25 days of evidence presented at trial, the trial judge found sufficient evidence to support the verdict of the jury. It is basic that the appellate court will overturn the trial court's decision only if there has been an abuse of discretion. Coffran, supra, 683 F.2d at 6.
The standard for granting a judgment non obstante veredicto (n.o.v.) is even more burdensome and narrow. A motion for judgment n.o.v. "'is properly granted only when, as a matter of law, no conclusion but one can be drawn.'" United States v. Articles of Drug Consisting of the Following: 745 F.2d 105, 113 (1st Cir. 1984), cert. denied sub nom. 470 U.S. 1004, 105 S. Ct. 1358, 84 L. Ed. 2d 379 (1985) (quoting, Rios v. Empresas Lineas Maritimas Argentinas, 575 F.2d 986, 990 (1st Cir. 1978)).
* * *
Since we find that there is sufficient evidence in the record to support the jury's verdict, we affirm the judgment of the district court.
This case presents a difficult question pertaining to the interaction of the federal antitrust laws and state trade secrets law. Guidance in resolving these questions can be found in analogous, but not identical, issues presented in cases in which patent infringement suits have been brought in bad faith with an intent to restrain competition or monopolize. See, e.g., Walker Process Equip., Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 15 L. Ed. 2d 247, 86 S. Ct. 347 (1965); Handgards, Inc. v. Ethicon, Inc., 743 F.2d 1282 (9th Cir. 1984), cert. denied, 469 U.S. 1190, 105 S. Ct. 963, 83 L. Ed. 2d 968 (1985) (Handgards II); Kearney & Trecker Corp. v. Cincinnati Milacron Inc., 562 F.2d 365 (6th Cir. 1977); Rex Chainbelt, Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir.), cert. denied, 423 U.S. 831, 46 L. Ed. 2d 49, 96 S. Ct. 52, 187 USPQ 416 (1975).
In examining "bad faith" patent infringement claims, courts have balanced the public interest in free competition, as manifested in the antitrust laws, with the federal interest in the enforcement of the patent laws, and the first amendment interest in the free access to courts. See, e.g., Walker Process, supra, 382 U.S. at 177-78; Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986, 993-96 (9th Cir. 1979), cert. denied, 444 U.S. 1025, 100 S. Ct. 688, 62 L. Ed. 2d 659 (1980) (Handgards I); Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416, 424-25 (10th Cir.), cert. denied, 344 U.S. 837, 73 S. Ct. 46, 97 L. Ed. 651, 95 USPQ 417 (1952). In the Walker Process case, the Supreme Court held that the enforcement of a patent obtained by fraud may constitute monopolization or attempted monopolization in violation of section 2 of the Sherman Act, provided the other elements of a monopolization claim are established. 382 U.S. at 177-78. In evaluating actions brought under this theory, courts have protected the federal interests in patent law enforcement and the free access to the courts by requiring, in addition to the other necessary elements of an antitrust claim, "clear and convincing evidence" of fraud in asserting or pursuing patent infringement claims. See, e.g., Handgards I, supra, 601 F.2d at 996; Norton Co. v. Carborundum Co., 530 F.2d 435, 444 (1st Cir. 1976); Cataphote Corp. v. DeSoto Chemical Coatings, Inc., 450 F.2d 769, 772 (9th Cir. 1971), cert. denied, 408 U.S. 929, 92 S. Ct. 2497, 33 L. Ed. 2d 341 (1972).
Hence, a patentee who has a good faith belief in the validity of a patent will not be exposed to antitrust damages even if the patent proves to be invalid, or the infringement action unsuccessful. The requirement of clear and convincing evidence is intended to prevent a frustration of the patent laws. It also ensures the free access to the courts by allowing honest patentees to protect their patents without undue risk of incurring liability for asserting their rights.
There are, of course, significant differences between patent and trade secret protection. The scope of protectible trade secrets is far broader than the scope of patentable technology. See, e.g., Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 486, 40 L. Ed. 2d 315, 94 S. Ct. 1879 (1974); Atlantic Wool Combing Co. v. Norfolk Mills, Inc., 357 F.2d 866, 869 (1st Cir. 1966). Under Massachusetts law, a trade secret may consist of:
any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be . . . a process of manufacturing . . . . A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article.
Eastern Marble Products Corp. v. Roman Marble, Inc., 372 Mass. 835, 364 N.E.2d 799, 801 (1977), quoting, Restatement
of Torts § 757 comment b; J.T. Healy & Son, Inc. v. James A. Murphy & Son, Inc. 357 Mass. 728, 736, 260 N.E.2d 723,
The basis for the federal patent system is found expressly in the Constitution. See U.S. Const. art. I, § 8, cl. 8. A patent confers a legal monopoly for a limited period of time. In return for the patent, the patentee must fully disclose the patented invention or process. After the expiration of the statutory period, the patentee loses all exclusive rights to the patent. See, e.g., Kewanee Oil Co., supra, 416 U.S. at 480-81.
The cornerstone of a trade secret, however, is secrecy. Once a trade secret enters the public domain, the possessor's exclusive rights to the secret are lost. Moreover, unlike a patent, a trade secret affords no rights against the independent development of the same technology or knowledge by others. See, e.g., Kewanee Oil Co., supra, 416 U.S. at 475-76; A. & E. Plastik Pak Co. v. Monsanto Co., 396 F.2d 710, 714-15 (9th Cir. 1968).
As with patent law, the rationale behind state trade secret law is to encourage invention, and to provide innovators with protection for the fruits of their labors. See, e.g., Kewanee Oil Corp., supra, 416 U.S. at 481-85. In addition, trade secret law is intended to maintain and promote standards of commercial ethics and fair dealing. Id.
In this case, the court must resolve a dispute which brings into focus the tension between the antitrust laws and the public interest in the licensing of trade secrets. Generally, there is a significant public interest in the licensing of trade secrets. By licensing a trade secret, the licensor partially releases his monopoly position and effectively disseminates information. See Kewanee Oil Co., supra, 416 U.S. at 486; A. & E. Plastik Pak, supra, 396 F.2d at 715. The result, it is hoped, is greater competition that will enure to the benefit of the public.
Like the holders of other intellectual property rights, possessors of trade secrets are entitled to assert their rights against would-be infringers and to defend their rights in court. See Handgards I, supra, 601 F.2d at 993 (citing Eastern Railroad Presidents Conference v. Noerr Motor Freight, 365 U.S. 127, 5 L. Ed. 2d 464, 81 S. Ct. 523 (1961), and United Mine Workers v. Pennington, 381 U.S. 657, 14 L. Ed. 2d 626, 85 S. Ct. 1585 (1965)). Nevertheless, the assertion in bad faith of trade secret claims, that is, with the knowledge that no trade secrets exist, for the purpose of restraining competition does not further the policies of either the antitrust or the trade secrets laws. Cf. Handgards I, supra, 601 F.2d at 993; P. Areeda & D. Turner, 3 Antitrust Law, § 708. Thus, it seems clear that the assertion of a trade secret claim in bad faith, in an attempt to monopolize, can be a violation of the antitrust laws. See A. & E. Plastik Pak Co., supra, 396 F.2d at 715. Similarly, it is well established that an agreement which purports to license trade secrets, but in reality, is no more than a sham, or device designed to restrict competition, may violate the antitrust laws. A. & E. Plastik Pak Co., supra, 396 F.2d at 715. Cf. United States v. Imperial Chemical Industries, 100 F. Supp. 504, 592 (SD NY 1951).
We believe that the proper balance between the antitrust laws and trade secrets law is achieved by requiring an antitrust plaintiff to prove, in addition to the other elements of an antitrust violation, by clear and convincing evidence, that the defendant asserted trade secrets with the knowledge that no trade secrets existed. In order to prove a contract or combination in restraint of trade in violation of section 1 of the Sherman Act, the plaintiff must also prove that the defendant had market power in the relevant market, and the specific intent to restrain competition. To succeed in an attempted monopolization claim under section 2 of the Sherman Act, the plaintiff must prove that the defendant had the specific intent to monopolize the relevant market, and a dangerous probability of success. As other courts have noted, a specific intent to monopolize or restrain competition can often be inferred from a finding of bad faith. Handgards II, supra, 743 F.2d at 1293 (quoting Handgards I, supra, 601 F.2d at 993 n. 13).
This case differs from the Walker Process line of cases in that Raytheon did not actually initiate litigation against the plaintiffs. Instead, the evidence indicates that it used the threat of litigation to exact a licensing agreement from the plaintiffs. In this case, litigation with Raytheon would have proved ruinous to the newly formed corporation, and effectively foreclosed competition in the relevant market. Under these circumstances, we hold that the threat of unfounded trade secrets litigation in bad faith is sufficient to constitute a cause of action under the antitrust laws, provided that the other essential elements of a violation are proven.
It is undisputed that, until CVD's formation, Raytheon was the only company in the world to produce for commercial sale zinc selenide or zinc sulfide by chemical vapor deposition. One other company, II-VI, Inc., produced small quantities of zinc selenide for its own use. Because of their low porosity and high purity, ZnSe and ZnS made by the chemical vapor deposition process are the only suitable materials for certain demanding optical uses. Specifically, because of its optical properties and its durability, zinc sulfide cvd is the only suitable material for use in 8-12 micron "forward looking infrared" windows on missiles and jet aircraft. Zinc selenide is the only suitable material for windows in high energy carbon dioxide lasers.
In answer to a special interrogatory, the jury found that the defendant Raytheon had market power as to both zinc sulfide and zinc selenide. This conclusion is amply supported by the evidence.
Trade Secrets and Bad Faith
The proof as to the existence of trade secrets and the defendant's bad faith in asserting them, if they did not exist, is necessarily intertwined. As noted, in order to be protected by law, a trade secret must be kept in secret. See U.S.M. Corp. v. Marson Fastener Corp., 379 Mass. 90, 98-99, 393 N.E.2d 895, 899 (1979); J.T. Healy & Son, Inc. v. James A. Murphy & Son, Inc., 357 Mass. 728, 737, 260 N.E.2d 723, 730 (1970). Heroic measures to ensure secrecy are not essential, but reasonable precautions must be taken to protect the information. See U.S.M. Corp., supra, 397 Mass. at 97-98, 393 N.E. 2d at 900. Whether a trade secret exists depends in each case "on the conduct of the parties and the nature of the information." Eastern Marble Products Corp. v. Roman Marble, Inc., 372 Mass. 835, 364 N.E.2d 799, 802 (1977); Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840, 282 N.E. 2d 921, 925 (1972). Although the fact that a product is unique tends to prove that a trade secret exists, see Curtiss-Wright Corp. v. Edel-Brown Tool & Die Co., 381 Mass. 1, 11, 407 N.E.2d 319, 326 (1980), "uniqueness without more is not commensurate with possession of a trade secret." Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 400 N.E.2d 1274, 1286 (1980); Laughlin Filter Corp. v. Bird Machine Co., 319 Mass. 287, 290, 65 N.E.2d 545, 546-47 (1946).
It is also "well settled that an employee upon terminating his employment may carry away and use the general skill or knowledge acquired during the course of the employment." Junker v. Plummer, 320 Mass. 76, 79, 67 N.E.2d 667, 669 (1946). See Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 839, 282 N.E. 2d 921, 924 (1972); Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 400 N.E.2d 1274, 1282 (1980); see generally, 2 J. McCarthy, Trademarks and Unfair Competition § 29:16 (1973). This principle effectuates the public interest in labor mobility, promotes the employee's freedom to practice a profession, and freedom of competition. See Club Aluminum Co. v. Young, 263 Mass. 223, 225-27, 160 N.E. 804, 805-06 (1928); Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 400 N.E.2d 1274, 1282 (1980).
The existence of trade secrets in Raytheon's ZnS/cvd and ZnSe/cvd manufacturing process depends upon the degree of
public disclosure of the relevant information. It is the determination of this Court that the jury could have found sufficient
evidence that the essential information contained in the cvd technology had entered the public domain, and, therefore,
Raytheon possessed no trade secrets in this technology. Furthermore, there was sufficient evidence for the jury to find that
Raytheon knew that no trade secrets existed. Hence, it was proper for the jury to conclude that Raytheon's assertion of trade
secrets and exaction of the licensing agreement were in bad faith.
Specifically, upon the evidence presented, the jury could have found the following facts to support its conclusions. The process of chemical vapor deposition generally was well known in the scientific community. Raytheon regularly published schematics, diagrams, run conditions, and other detailed information related to the production of ZnS/cvd and ZnSe/cvd in periodic reports supplied to the government as part of Raytheon's contractual obligations. Although some of the reports were temporarily classified by the government for security purposes, all of these reports were available to the public by 1979. At trial, the plaintiffs demonstrated that nearly all the details originally claimed as trade secrets were published in the reports. There was also evidence that the details not specifically mentioned in the reports were either obvious or insignificant, or both.
In addition, Raytheon employees had published papers relating to cvd technology in scientific journals. Raytheon had also produced a film about this technology which was shown to a convention of engineers (and later to the jury). Photographs of the interior of the cvd furnace were published in various publications. Raytheon employees gave lectures and speeches on the technology to various groups, often accompanied by viewgraphs or slides of the equipment. Although access to the facility was limited, visitors were permitted to view the furnaces. Donadio testified that, based on the information disclosed to the public, a competent engineer could construct and operate a viable system for the production of zinc selenide or zinc sulfide through chemical vapor deposition. It is also noteworthy that the furnaces built by CVD were smaller than Raytheon's latest furnaces and differed in certain dimensions.
Notwithstanding the extent of this public disclosure, Raytheon argues that the information in the public domain was too vague and incomplete to enable anyone to reproduce the system without costly trial and error experimentation. Defendant presented expert testimony in support of this view. Nevertheless, the jury was not required to believe the defendant's evidence. See Ford Motor Co. v. Webster's Auto Sales, Inc., 361 F.2d 874, 885 (1st Cir. 1966). Although Donadio's testimony was consistent with his self-interest, it was nevertheless based upon his personal knowledge and expert opinion founded on over 20 years of experience in chemical vapor deposition. Moreover, on cross-examination, the defendant's experts admitted that many of the details claimed to be trade secrets would occur as logical, if not obvious, choices to a competent engineer designing a system. Under these circumstances, it is not for this Court to judge the credibility of witnesses. The jury, therefore, was entitled to, and apparently did, rely upon and give credence to the plaintiffs' evidence over that of the defendant.
Also significant, as to both the existence of trade secrets and the issue of bad faith, was Raytheon's failure to follow its own established procedures for the protection of trade secrets. For example, despite a written policy that all confidential drawings and documents were to be stamped with a restrictive legend warning of the document's confidential nature, none of the engineering drawings for the cvd furnaces was stamped or marked with any restrictive legend. Furthermore, there was no evidence that Donadio or Connolly took any engineering drawings with them when they left Raytheon. Indeed, there was evidence, albeit inconclusive, tending to suggest that Raytheon had altered drawings after the commencement of this litigation to conform to CVD drawings.
There was also sufficient evidence for the jury to conclude that Raytheon had made a policy decision not to protect at least certain aspects of the cvd process. For example, Raytheon's patent department instructed Raytheon's engineering personnel that an "invention disclosure should be submitted on every new or improved device, system, method or composition of matter . . . which is more than routine engineering." These forms were reviewed by a committee and a determination was made as to how they should be protected. The disclosures were then assigned a status code reflecting the committee's determination. Code 3 meant that the item should be protected as a trade secret. Code 2 indicated that a patent application would not be filed, and that the item was not to be protected as a trade secret. Items that were designated for protection as trade secrets were filed in a file section referred to as the "trade secrets drawer."
Evidence introduced at trial indicated that no invention disclosures relating to the manufacture of zinc selenide or zinc sulfide by the cvd process were ever designated for protection as a trade secret. Moreover, nothing related to ZnS/cvd or ZnSe/cvd was found in the "trade secrets drawer." It appears that the only invention disclosure relating to ZnSe/cvd was filed in 1973, prior to the development of Raytheon's more advanced furnaces. This disclosure was classified status code 2, i.e., "Do not protect."
Raytheon introduced evidence tending to minimize the significance of these facts. Nevertheless, the jury could properly and fairly have drawn the inference that, since Raytheon did not follow its formalized procedures in protecting ZnS/cvd and ZnSe/cvd technology, it did not have the intention to maintain the technology as a trade secret.
Other evidence that would tend to prove bad faith includes the fact that Reynolds asserted trade secrets, and threatened litigation, after only a cursory investigation without thoroughly examining the majority of the government reports or the extent of public disclosure. Reynolds also refused to give Cohen a list of claimed secrets. From this, the jury could have inferred that Reynolds could not make such a list because he knew that there were no secrets. There was also testimony that Cohen pointed out to Reynolds that all the items Reynolds claimed were trade secrets at their January 22, 1980 meeting were in fact published in the government reports.
In short, the record reveals the extensive public disclosure, Raytheon's failure to follow its own procedures for trade secret protection, its refusal to specify trade secrets in asserting its claims or in the agreement, and its insistence on a flat ten-year term at 15% and 8% royalty rates. In light of these facts, the jury could have concluded that Raytheon knew it had no trade secrets, yet nevertheless asserted them in bad faith in order to restrain competition and monopolize the ZnS/cvd and ZnSe/cvd markets.
Hot Isostatic Pressing
Raytheon included in its counterclaim a cause of action for misappropriation of
trade secrets related to the processing of zinc sulfide by hot isostatic pressing (hipping). Hot isostatic pressing involves
subjecting a material to extremely high pressures of up to 30,000 pounds per square inch at a high temperature. Under the
proper conditions, the process will improve the transparency of zinc sulfide, thereby enhancing its optical quality.
Raytheon alleges that CVD induced its hipping contractor, Industrial Materials Technology, Inc. (IMT), to reveal Raytheon's trade secrets in hipping, specifically its run conditions and its use of platinum foil to wrap the zinc sulfide. In response to a special interrogatory, the jury found that Raytheon had no trade secrets in the hipping process. Raytheon contends that it established this claim as a matter of law, and that it is therefore entitled to judgment n.o.v. or a new trial on this claim. The defendant also requested that the district court make findings pursuant to Rule 49(a) of the Federal Rules of Civil Procedure, and grant injunctive relief, which the district court refused.
Dr. Charles Willingham, a Raytheon employee, testified that Raytheon's use of platinum foil was unique and confidential. Raytheon also introduced evidence that IMT had made a common hipping run of Raytheon and CVD materials.
Donadio, however, testified that he had never requested either a common run with Ratheon or that IMT reveal Raytheon
run conditions. He also testified that, basically, he relied on Dr. Peter Price, the president of IMT, who was a leading expert
on hipping, to determine run conditions. The plaintiffs also presented evidence that, by 1979, hipping to improve
transparency was well known in the scientific community.
Although Donadio and Connolly were aware that zinc sulfide was being hipped by Raytheon, they were never informed of specific run conditions while at Raytheon. The pressure and temperature levels of the hipping run were determined by IMT's capacity and zinc sulfide's chemical properties, respectively. The use of platinum foil, Donadio testified, was Dr. Price's suggestion. Melvin Mittnick, a former IMT employee, testified that IMT had used platinum foil wrap in hipping other types of materials.
In regard to the hipping issue, we also find that there was sufficient evidence
to support the jury verdict. In response to the defendant's Rule 49(a) motion,
the district judge found that the jury determination that Raytheon had no trade secrets in the hipping process precluded him from making further findings of fact or granting Raytheon any relief on this issue. Although he noted that he would have found that the use of platinum foil constituted a trade secret of Raytheon, he properly deferred to the jury's assessment of the evidence.
Defendant Raytheon argues strenuously that reliance is a necessary element to establish a cause of action against it. Since the plaintiffs did not rely on any of Raytheon's misstatements, and entered into the agreement while represented by competent counsel, Raytheon contends that plaintiffs are precluded from relief. In an action to rescind the contract or recover damages on a theory of fraud, under Massachusetts law, this contention might have merit. See Metropolitan Life Ins. Co. v. Ditmore, 729 F.2d 1, 4 (1st Cir. 1984); Liberty Leather Corp. v. Callum, 653 F.2d 694, 699 (1st Cir. 1981); Brockton Savings Bank v. Peat, Marwick, Mitchell & Co., 577 F. Supp. 1281, 1287 (D.Mass. 1983). Nevertheless, it is clear that the policies expressed in the federal antitrust laws will override any agreement in contravention of hose policies, regardless of the agreement's legality under private contract law. See Simpson v. Union Oil Co., 377 U.S. 13, 18, 12 L. Ed. 2d 98, 84 S. Ct. 1051 (1964); Wegmann v. London, 648 F.2d 1072, 1074 (5th Cir. 1981); Cf. Lear, Inc. v. Adkins, 395 U.S. 653, 23 L. Ed. 2d 610, 89 S. Ct. 1902 (1969).
It is also well established that the federal interest in the "full and free use of ideas in the public domain" will override state
law in conflict with it. Lear, Inc. v. Adkins, 395 U.S. 653, 668, 674, 23 L. Ed. 2d 610, 89 S. Ct. 1902 (1969). Cf. Dynamics
Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 278, 400 N.E.2d 1274, 1288 (1980) (an "agreement
which seeks to restrict the employee's right to use an alleged trade secret which is not such in fact or in law is unenforceable
as against public policy").
In Lear, Inc. v. Adkins, 395 U.S. 653, 23 L. Ed. 2d 610, 89 S. Ct. 1902 (1969), the Supreme Court held that the policies underlying the federal patent laws outweighed principles of state contract law when a patent licensee wished to challenge the validity of the licensed patent. Thus, the Court held that a licensee was not estopped from challenging the validity of its patent in court, and rescinding the licensing agreement if successful.
In this case, the jury found that Raytheon had no trade secrets in its cvd process. The jury further found that Raytheon knew it had no trade secrets, yet asserted their existence in order to exact a licensing agreement from CVD and restrain competition.
Donadio and Connolly testified that, although they believed that no trade secrets existed, they agreed to sign the licensing
agreement with Raytheon because they had no alternative. Donadio testified that threatened litigation with Raytheon would
have foreclosed them from obtaining financing for their new company. Thus, the plaintiffs testified, the threat of litigation
with Raytheon would have effectively prevented them from entering into the business. Both men had been asked to resign
from Raytheon and were unemployed. However, since they did not believe that Raytheon possessed any trade secrets, there
was no evidence that they "relied" on any material misrepresentation in entering into the license. Nor do these facts establish
duress to the extent that the plaintiffs were placed "'under the influence of fear as preclude[d] [them] from exercising free
will and judgment.'" See Coveney v. President & Trustees, 388 Mass. 16, 23, 445 N.E.2d 136, 140 (1983) (quoting
Avallone v. Elizabeth Arden Sales Corp., 344 Mass. 556, 561, 183 N.E.2d 496, 499 (1962)).
Essentially, fraud under Massachusetts law is derived from the common law tort of deceit or misrepresentation. The practice at issue in this case, the assertion of claims in bad faith, is a predatory practice under the antitrust laws. As a cause of action, it descends directly from the Walker Process case and its progeny. Under the antitrust laws, plaintiffs need not necessarily be deceived. They are often simply the victims of the predatory practices of a powerful competitor who seeks to restrain competition or monopolize the market. The assertion of trade secret claims in bad faith has been identified as a predatory practice. See A. & E. Plastik Pak, supra, 396 F.2d at 715. Thus, the behavior complained of in this case is properly analyzed according to established principles of antitrust law, rather than under a common law fraud theory of action. Reliance, therefore, is not an essential element to be proven.
In Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 20 L. Ed. 2d 982, 88 S. Ct. 1981 (1968), the Supreme Court held that the defense of in pari delicto is not a defense to an antitrust complaint. In that case, the Court held that the plaintiff-franchisees were not barred by their voluntary entry into the franchise agreements from maintaining an antitrust action against the defendant franchiser. The court found that:
Although petitioners may be subject to some criticism for having taken any part in respondents' allegedly illegal scheme and for eagerly seeking more franchises and more profits, their participation was not voluntary in any meaningful sense. They sought the franchises enthusiastically but they did not actively seek each and every clause of the agreement. Rather, many of the clauses were quite clearly detrimental to their interests, and they alleged that they had continually objected to them. Petitioners apparently accepted many of these restraints solely because their acquiescence was necessary to obtain an otherwise attractive business opportunity.
Id. at 139 (emphasis added).
The defendant's conduct in this case presents a more sharply drawn example of overreaching. The plaintiffs objected strenuously to the terms of the agreement, and to the necessity for any license at all. Indeed, unlike the plaintiffs in the Perma Life case, who received substantial benefits in return for acquiescing to the agreements' allegedly anti-competitive terms, the plaintiffs here received no benefit from the agreement other than the right to use non-existent trade secrets and Raytheon's promise not to engage in bad-faith litigation.
It should be noted that in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S. Ct. 2731, 81 L. Ed. 2d 628 (1984), the Supreme Court partially overruled Perma Life to the extent that the Perma Life Court relied on an intra-enterprise conspiracy among a parent corporation and its subsidiaries as a "combination" in restraint of trade. The Court did not question its earlier rejection of the in pari delicto defense in antitrust actions, and specifically noted that the intra-enterprise conspiracy doctrine was not essential to the Perma Life decision and was "at most only an alternative holding." U.S. at , 104 S. Ct. at 2739. The Copperweld decision oes not affect the conclusion that the doctrine of in pari delicto "is not to be recognized as a defense to an antitrust action." Perma Life, supra, 392 U.S. at 140. Indeed, the Copperweld Court reiterated that an agreement between a plaintiff and a defendant clearly may serve as the basis of section 1 complaint. U.S. at & n.9, 104 S. Ct. at 2738-39 & n.9.
Several courts have held that a plaintiff's complete, voluntary, and substantially equal participation in an allegedly illegal scheme precludes recovery for antitrust violations. See, e.g., THI-Hawaii, Inc. v. First Commerce Financial Corp. 627 F.2d 991, 995 (9th Cir. 1980); Wilson P. Abraham Const. Corp. v. Texas Indus., Inc., 604 F.2d 897, 902 (5th Cir. 1979), aff'd sub nom. 451 U.S. 630, 101 S. Ct. 2061, 68 L. Ed. 2d 500 (1981); Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3, 16 (4th Cir. 1971). The complete involvement defense is premised upon the "equitable consideration of preventing a windfall gain from the plaintiff's own wrongdoing." THI-Hawaii, supra, 627 F.2d at 996.
Although, in soliciting business, CVD held itself out as a licensee of Raytheon's proprietary technology, CVD's involvement cannot be said to be equal or complete. The evidence indicates that CVD vigorously protested the imposition of the licensing agreement only to be overwhelmed by a party in a superior bargaining position. Thus, the complete involvement defense is not applicable here. Cf. Premier Elec. Constr. Co. v. Miller-Davis Co., 422 F.2d 1132, 1138 (7th Cir.), cert. denied, 400 U.S. 828, 91 S. Ct. 56, 27 L. Ed. 2d 58 (1970).
In support of its position, Raytheon cites Transitron Electronic Corp. v. Hughes Aircraft Co., 649 F.2d 871 (1st Cir. 1981). In Transitron, this court considered whether a patent licensee could recover royalties already paid to a licensor when the licensing agreement is declared invalid. We held that a licensee must establish actual fraud on the part of the licensor against the licensee in order to recover back royalties. This holding was based upon "patent law policies and on the equities between licensor and licensee." Under a less stringent standard, a licensee would have "an incentive to delay challenging the patent, enjoying the competitive advantage of the license and avoiding the necessity of defending an infringement suit, secure in the knowledge that he could recoup his royalty cost later." Id. at 875. Allowing recovery of back royalties for gross negligence or so-called "technical" fraud would inject undue uncertainty into the royalty system. An honest, though negligent, licensor could be subjected to ruinous liability after the licensee had received the benefits of the license.
The present case is clearly distinguishable from Transitron. No royalties have been paid under the agreement. More
significantly, in Transitron the district court found that the defendant had a "good faith belief" in the validity of the patent.
Id. at 878. In this case, in addition to the essential elements of an antitrust claim, the jury found that Raytheon's assertion of
trade secrets was in bad faith.
Raytheon also relies on Aronson v. Quick Point Pencil Co., 440 U.S. 257, 59 L. Ed. 2d 296, 99 S. Ct. 1096 (1979). In Aronson, the defendant had invented a new form of keyholder and applied for a patent. While the patent application was pending, the defendant entered into a licensing agreement with the plaintiff relating to her design. The agreement provided that the plaintiff-licensee would pay royalties of 5% of gross sales for use of the defendant's design. In the event that a patent was not obtained within five years, the royalty was to be reduced to 2 1/2% of gross sales. After the patent application was rejected, the plaintiff sought a declaratory judgment that the royalty agreement was unenforceable.
The Supreme Court held that the agreement was not in conflict with federal patent law and was therefore valid and enforceable. The Court reasoned that the parties anticipated the risk that the patent would not issue, and specifically provided for this risk in the agreement. As consideration, the licensee received the benefit of inventor's new design immediately upon entering into the agreement, and was able to exploit the novelty of the device. The contract, the Court found, encouraged the federal interest in full disclosure of inventions or innovations. Therefore, the Court upheld the validity of the contract.
The Aronson case is clearly inapposite to the instant case. In Aronson, the parties, in good faith, made a bargain in which they considered and specifically provided for the risk of the patent application's failure. In return for the promise to pay royalties, the licensee was entitled to exploit immediately the licensor's novel invention. In this case, the plaintiff CVD received as consideration only Raytheon's forbearance from litigation, litigation that would have been conducted in bad faith. Since the jury found that Raytheon knew it had no trade secrets and that it asserted them in bad faith, there was no valid consideration for CVD's promise to pay royalties. The fact that CVD refused to pay any royalties under the agreement does not alter this result.
As an additional defense, Raytheon argues that the plaintiffs did not suffer the type of injury that the antitrust laws were
designed to prevent. See Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459
U.S. 519, 74 L. Ed. 2d 723, 103 S. Ct. 897 (1983); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488, 50 L.
Ed. 2d 701, 97 S. Ct. 690 (1977).
In Brunswick, the Supreme Court explained that an antitrust plaintiff must prove more than injury causally related to an antitrust violation. A plaintiff must prove that its injury flowed from the anti-competitive nature of the defendant's acts:
Plaintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful. The injury should reflect the anticompetitive acts made possible by the violation. It should, in short, be "the type of loss that the claimed violations . . . would be likely to cause." Zenith Radio Corp. v. Hazeltine Research Inc., 395 U.S. at 125
429 U.S. at 489, 97 S. Ct. at 697-698 (emphasis in original) (footnote omitted). See Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d 1, 12 (1st Cir. 1979), cert. denied, 446 U.S. 983, 100 S. Ct. 2964, 64 L. Ed. 2d 839 (1980).
In effect, the evidence indicates that Raytheon gave Donadio and Connolly three choices: (1) defend a trade secrets
infringement suit against Raytheon; (2) refrain from competing with Raytheon in the manufacture of ZnS/cvd and ZnSe/cvd;
or (3) take a license from Raytheon for the use of alleged trade secrets. All of the choices would have had an adverse
economic impact on the plaintiffs, as well as an anticompetitive effect. Indeed, the first two alternatives would have been
fatal to CVD's existence as a viable concern. Since Raytheon asserted its claim in bad faith, with the intent to restrain
competition, it is the type of offense the antitrust laws are designed to prevent. The injury to CVD, legal expenses incurred
in attempting to resolve Raytheon's bad faith claims, reflects the anticompetitive effect of acts with an anticompetitive intent.
See Handgards II, supra, 743 F.2d at 1297; Kearney & Trecker Corp. v. Cincinnati Milacron, Inc., 562 F.2d 365, 374 (6th
In Handgards II, supra, an antitrust case based on the bad faith assertion of patent claims, the defendant argued that its earlier offers to license the plaintiff precluded a finding of antitrust injury. The Ninth Circuit rejected this contention finding that, while licensing offers may be considered as evidence of good faith, "any offer to license a patent that it knew was invalid cannot preclude a finding of antitrust injury as a matter of law." Id. at 1295. The court, therefore, upheld the award of legal fees expended in defending bad faith litigation as a proper element of antitrust damages.
The fact that the plaintiffs here succumbed to the defendant's pressure in order to establish themselves as a manufacturer of ZnS/cvd and ZnSe/cvd does not deprive them of standing under the antitrust laws. Thus, we find that the district court properly upheld the jury's award of $1,060 for legal expenses incurred in attempting to resolve the original dispute with Raytheon.
Instructions to the Jury
Raytheon also assigns as error the district judge's failure to instruct the jury that the inability of other firms to obtain comparable results in manufacturing ZnS/cvd and ZnSe/cvd is evidence that tends to show the existence of trade secrets in Raytheon's process and machinery. As indicated previously, the inability of competitors to reproduce a product or process tends to prove the existence of trade secrets. See, e.g., Curtiss-Wright Corp., supra, 381 Mass. at 11, 407 N.E. 2d at 326, Eastern Marble, supra, 372 Mass. at 839, 364 N.E. 2d at 802; Junker v. Plummer, 320 Mass. 76, 78, 67 N.E.2d 667, 668 (1946). Nevertheless, counsel for Raytheon did not properly object to the omission of this instruction, and, therefore, pursuant to Rule 51 of the Federal Rules of Civil Procedure, the failure to include the requested instruction cannot constitute reversible error.
Rule 51 in pertinent part provides:
No party may assign as error the giving or the failure to give an instruction unless he objects thereto before the jury retires to consider its verdict, stating distinctly the matter to which he objects and the grounds of his objection.
Fed. R. Civ. P. 51. "We have held that Rule 51 means what it says: the grounds for objection must be stated 'distinctly' after the charge to give the judge an opportunity to correct his error." Jordan v. United States Lines, Inc., 738 F.2d 48, 51 (1st Cir. 1984). See Ouimette v. E.F. Hutton & Co., Inc., 740 F.2d 72, 75-76 (1st Cir. 1984); McGrath v. Spirito, 733 F.2d 967, 968-69 (1st Cir. 1984). Reading a list of the numbers of the requested instructions is not sufficient to preserve an objection under Rule 51. See Charles A. Wright, Inc. v. F. D. Rich Co., 354 F.2d 710, 713 (1st Cir.), cert. denied, 385 U.S. 890, 17 L. Ed. 2d 122, 87 S. Ct. 14 (1966). What occurred in this case illustrates the necessity of requiring a strict interpretation and adherence to this rule.
In this case, the trial judge indicated to counsel at a conference after the close of evidence that he intended to give Raytheon's requested instruction, number 12, over the plaintiffs' objection. The next day, however, the district judge did not mention this instruction in instructing the jury. When the district judge finished instructing the jury, he asked counsel for their objections. Counsel for Raytheon objected to, among other things, the court's failure to give requested instructions "12, 16, 17, 18, 19, 20, and 21 [which] refer to the duty of an employee not to disclose, irrespective of the trade secret category . . . confidential information." It is apparent that this objection did not state "distinctly" the matter to which counsel objected or "the grounds of his objection." Indeed, it indicated a basis entirely unrelated to its present objection. Thus, it is impossible for this Court on appeal to know whether the district judge reconsidered his original decision that this instruction was proper, or simply omitted this instruction through inadvertence. By failing to state distinctly the grounds of his objection, as required by Rule 51, counsel for Raytheon deprived the district judge of the opportunity to correct his instructions before the jury retired. Therefore, any resulting error cannot be the basis for a reversal on appeal.
Resubmission to the Jury
Raytheon also attacks the jury's damage award on the grounds that the damages interrogatory was improperly resubmitted to the jury after it returned an improper verdict, and that the district judge prejudiced Raytheon by informing the jury that the court would award attorney's fees if damages were awarded.
In response to the original damages interrogatory, the jury answered "Damages equal to all legal fees and court costs incurred in connection with this suit." The court indicated that this answer was not acceptable, and that the jury must reconsider and return with a proper reply. Raytheon's counsel objected to the resubmission to the jury, contending that the original answer should be
construed as a finding of no damages. The court, however, found that the jury verdict was ambiguous in that the jury might have meant to include the $1,060 in legal fees, which related to the original trade secret claims in early 1980. The trial judge noted for the record that some jurors nodded affirmatively when he mentioned this in his resubmission instructions.
It is well-established hat the court should ask a jury to correct its verdict when the jury has failed to follow the court's instructions in returning a verdict. See, e.g., Merchant v. Ruhle, 740 F.2d 86, 91 (1st Cir. 1984); Rios v. Empresas Lineas Maritimas Argentinas, 575 F.2d 986, 990 (1st Cir. 1978). Since it was reasonable for the court to have construed the verdict as being ambiguous, it was properly resubmitted to the jury. The court's instructions upon resubmission were correct, and included the possibility of a finding of zero or no damages.
Finally, Raytheon argues that the damages award should be overturned because the jury was informed that the court would award attorneys' fees and treble damages if damages were awarded. The defendant made no objection at the trial. While it is generally not advisable to inform a jury of the treble damages or attorneys' fees provisions of the antitrust laws because of the danger that a jury may reduce a plaintiff's award to account for trebling, see Pollock & Riley, Inc. v. Pearl Brewing Co., 498 F.2d 1240, 1243 (5th Cir. 1974), cert. denied sub nom. 420 U.S. 992, 95 S. Ct. 1427, 43 L. Ed. 2d 673 (1975), any error that may have occurred was not preserved by timely objection. This court has held that the jury is presumed to have followed the instructions of the court. Kukuruza v. General Elec. Co., 510 F.2d 1208, 1218 (1st Cir. 1975). The district judge made it clear that legal fees were a matter for the court, and not within the discretion of the jury. In this case, the jury was given proper instructions and returned a proper verdict on resubmission. We, therefore, uphold the damages awarded to plaintiffs.
Our review of the record leads us to conclude that there was sufficient evidence to support the jury's findings of fact. The exaction of a licensing agreement through the bad faith assertion of trade secrets by a party in a far superior bargaining position with the intention of restraining competition and monopolizing the market is a violation of the antitrust laws. The damages awarded were a direct and foreseeable result of the anticompetitive conduct of the defendant, and, therefore, were proper.
Hence, we affirm the jury's verdict on the plaintiff's antitrust claims and the dismissal of the defendant's counterclaim. Each party shall pay its own costs on appeal. The appellees are awarded costs. The district court shall award a reasonable attorneys fee for services on appeal to the plaintiffs-appellees in accordance with 15 U.S.C. § 15.
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Foundry Services, Inc. v. Beneflux Corp
110 F. Supp. 857; 97 USPQ 36 (SDNY, 1953)
The plaintiff, a New York corporation, moves for an injunction pendente lite to restrain the defendant, a Delaware corporation, from competing with it in the United States in the sale of certain fluxes and other products used in the manufacture of metal castings. The amount in controversy is adequate for diversity jurisdiction.
The defendant is a subsidiary of Foundary Services, Ltd., an English corporation which owns 'certain secret processes, recipes and formulae relating to the manufacture' of the fluxes and other products. In 1934 the English corporation granted to the plaintiff an 'exclusive license, liberty and authority to manufacture the said fluxes and other products in accordance with the said secret processes, recipes and formulae and to sell the same within the United States of America and the Dominion of Canada only for a period of five years from the date hereof and such further period as is hereinafter provided for.' The license was granted in an agreement by which the English corporation bound itself during the life of the agreement not to sell the said fluxes and other products or any of them directly or indirectly 'in any part of the United States of America or the Dominion of Canada,' and the plaintiff bound itself not to 'export the said fluxes and other products or any of them to any country other than the United States of America and the Dominion of Canada without the previous consent in writing of the Licensor.' There was a provision for successive five-year extensions conditioned on the plaintiff's doing an annual business of specified dollar volume, on which it was to pay royalties of 10%. Pursuant to its terms the agreement was continued and it was in effect on October 5, 1951, when the plaintiff received from the English corporation written notice of termination. This was based on a single sale by the plaintiff of about $ 4 worth of one of the fluxes to a firm in Mexico in the early part of April 1951.
The circumstances of this sale and the eventual termination of the agreement by the English corporation appear from the complaint and various affidavits to be as follows. Some time in the latter part of March or the early part of April, 1951, the plaintiff received a letter from Conexiones Nacionales S.A. in Monterrey, Mexico, containing a draft for $ 5 and asking for as much of a certain flux as that amount, allowing for postage, would buy. The plaintiff, on April 6, 1951, in response to this request, forwarded five pounds of flux. On April 9, 1951, the plaintiff wrote the English corporation as follows:
'We have an inquiry from Fundidora de Aceros Tepeyac S.A., Mexico 1, D.F. for a sample quantity of Aluminum Grain Refiner No. 2. This product was recommended to them by Aluminum Company of Canada.
'As you know, we have had a number of other requests from Mexico. In fact, last week another foundry sent us a check for $ 5.00 to send them a few pounds of nO. 190 by air mail.
'I don't know whether you have concluded arrangements for Mexican representation. If not, we can ship either from here or have our Los Angeles representative ship from stock.
'Let me know promptly your views on the above as they are in urgent need.'
There was further correspondence in which the plaintiff advised the English corporation of another inquiry from a Mexican firm. The English corporation, which did not then have a representative in Mexico, requested to be advised of all such inquiries in order to make them available to representatives it was 'planning' to appoint in Mexico. It also requested, in August, 1951, 'particulars of the inquiry from the foundry who sent you a cheque for $ 5.00 for Degaser 190. Will you please advise so that we can follow up.' The plaintiff replied to this on September 4, 1951, by quoting the foregoing letter of March 7, 1951 from Conexiones Nacionales S. A. and stating that it, the plaintiff, had in response thereto 'sent them five pounds of DeGaser #190.' On October 5, 1951, a New York attorney delivered to the plaintiff a letter dated September 21, 1951 from the English corporation, in which the plaintiff was informed that its sale to Conexiones Nacionales S.A., being without consent of the English corporation, 'infringes paragraph No. 6 of our agreement of 18th June, 1934. We therefore give herewith formal notice that the above agreement is terminated under paragraph No. 16.'
The plaintiff replied by letter of October 8, 1951, stating that it believed the termination of the agreement to be unjustified under all the circumstances and that it would 'regard such agreement as continuing in full force and effect.' It seems that thereafter the English corporation considered the agreement terminated but it does not appear that it immediately began to sell its fluxes in the United States. In or about October, 1952, however, the defendant was organized in Delaware as a subsidiary of the English corporation which then sent over one of its employees, George W. Burger, who on October 24 became Vice President of the defendant. According to his affidavit, he began on November 3 to call on prospective purchasers of the fluxes and allied products produced according to the identical secret processes, recipes and formulae which are the subject of the 1934 agreement. Some of those he called on are customers of the plaintiff. The complaint in this action was filed on February 2, 1953. It seeks temporary and permanent injunctive relief and damages of half a million dollars.
Full inquiry at a trial into the prior relations of the plaintiff and the English corporation may disclose a course of conduct between them which would have justified the plaintiff in believing, as it claims it did, that it was quite permissible and indeed appropriate for it to send the sample to Mexico as an aid to the English corporation in its expected follow-up to effect substantial sales through its own efforts. From such facts as now appear, it seems most unrealistic as well as unreasonable to magnify this isolated transaction into a 'disturbing sale,' 'untimely and deliberate,' which interfered with the English corporation's reserved right to exploit the Mexican market in its own way. Indeed for all we now know, it may well have been a help. Moreover, the plaintiff's good faith is demonstrated by its prompt letter to England concerning the receipt of $ 5 for a sample of flux and its prompt communication of other inquiries from Mexican firms. It is urged that the plaintiff's letter of April 9, 1951 did not in terms inform the English corporation that a sample actually had been forwarded to Mexico. This is quite true. But it can't seriously be argued that this circumstance evidences deliberate suppression of facts by the plaintiff or that the English corporation was misled. It is only reasonable to believe that when the plaintiff promptly reported receiving the 'check for $ 5 to send them a few pounds of No. 190 by air mail' the English corporation certainly understood that the money had not been just pocketed but that the material requested had been sent.
The plaintiff during the almost twenty years the agreement had existed has built up a valuable business. It maintains an office in Manhattan and a factory in Brooklyn. Its products are sold under a registered and advertised trademark. The dollar volume of its sales during the last five years has risen from about $ 78,000 in 1948 to about $ 186,000 in 1952. There can be no doubt that this Court has discretion to stay, pending trial, the immediate forfeiture of such valuable rights when that extremely harsh result is sought to be justified by no more than a single and at worst technical transgression which a trial may show to be not even that. It is, of course, true that the trial court might find the $ 5 transaction to be a substantial breach and sufficient to justify termination of the agreement. But if so it might, and I think it clearly could, also find that such breach came 'to the knowledge of the Licensors' through the plaintiff's letter of April 9, 1951 which was obviously received some time before April 21, 1951, the date on which it was acknowledged. With such a finding, the licensors' declaration of termination in their letter dated September 21, 1951 would be ineffective to accomplish that result because it would not have been made 'within fourteen days after * * * any breach by the Licensees of the provisions and stipulations on their part herein contained shall have come to the knowledge of the Licensors * * * .' Furthermore it is an open question, on the papers before me, whether the declaration of termination was timely even if it be assumed that the alleged breach did not come 'to the knowledge of the Licensors' until they received the plaintiff's letter of September 4, 1951. The letter dated September 21 purporting to terminate the agreement states that the plaintiff's September 4 letter 'was received here' by the licensors on September 8, that is, thirteen days prior to the date of the letter purporting to declare the termination. The licensors' letter dated September 21 does not prove itself. It was not mailed to the plaintiff, and was not received by the plaintiff until October 5, when an attorney in New York personally delivered it. If the conduct on one party to an agreement is to be judged according to a strict construction of the agreement, the other party's must be also.
From all that has been said up to now it seems to me that the Court's discretion should be exercised so as to maintain until a full inquiry can be had by trial, the relationship and status which existed between the parties prior to the alleged termination of the agreement. Accordingly, the motion would be granted without more but for the defendant's vigorously pressed argument that the agreement is wholly void and unenforceable.
The defendant asserts with great earnestness that the 1934 agreement was from its inception an 'international cartel agreement' which violates our antitrust laws by dividing the world's markets between 'two competitors.' But it is to be noted that in 1934 the English corporation and the plaintiff were in no sense competitors in respect to these fluxes and never had been. Moreover, it is not even suggested that they were or ever had been competitors in any other field either. The English corporation, being then the sole owner and possessor of its 'secret processes, recipes and formulae,' had no competitor whatever as to them or as to fluxes made in accordance with them. It could make disclosures or not; sell or not; as it pleased and the public had no legal interest whatever in that choice. And we do not have here, as the defendant suggests, the creation of a 'new industry' by the development of secret formulae, as was the situation in U. S. v. General Electric Co. There separate and actually competing companies simultaneously developed and patented related processes which they then pooled and, by a mutually accommodating division of territories, seized control of the world's markets which they thereafter dominated completely, both as to supply and price; and not only in the 'hard metal compositions' made according to the processes but also in the 'products containing such compositions,' such as cutting tools. The use of the fluxes here involved certainly did not create a new industry. They are no doubt good and valuable, but it is not even suggested that they are the only ones available or in use in the manufacture of metal castings.
It is still the law that restraints to be unlawful must be unreasonable. No case cited by the defendant declares unlawful, in itself, an isolated agreement of mutual restraint as to territory only, between a single owner-licensor of a secret process and a single licensee not theretofore in competition with each other. There was no attempt to control the price of these fluxes or to control the distribution of price of products made through their use. It is not shown or even claimed that this license agreement was used either alone or in combination with related agreements to achieve a monopoly in the business of fluxes generally or in any other industry. We have here only the usual covenant by an owner-licensor of a secret process not to compete with its single licensee in the assigned area and to be free from the latter's interference elsewhere. These restraints, clearly only ancillary to a valid primøry purpose, are precisely of the kind consistently permitted at common law. In the Standard Oil case the Supreme Court pointed out 'that the statute did not forbid or restrain the power to make normal and usual contracts to further trade by resorting to all normal methods, whether by agreement or otherwise, to accomplish such purpose.' And so it held that the Sherman Act must be construed 'to prevent that act from destroying all liberty of contract and all substantial right to trade,' and to prevent that act from 'annihilating the fundamental right of freedom to trade which, on the very face of the act, it was enacted to preserve * * * .' Exclusive agreements are not per se unlawful. The exclusive license agreement of the type here attacked is probably as old, as 'normal,' as 'usual' and indeed as necessary as any type of contract 'to further trade' in use among civilized men.
The defendant argues that in a series of recent cases this district Court 'Brushing aside argument based upon old decisions involving secret processes, patents and trade marks * * * has repeatedly condemned * * * all divisions of markets between competitors.' But in those cases and the others of similar tenor, like Timken Co. v. U. S., cited by the defendant, it was found that the defendants in fact and by definition were true competitors; and that as such they combined, conspired to and actually did divide the world's markets and thereby suppressed competition among not only themselves but others as well. Accordingly, it was necessarily held that those conspiracies were unlawful; and that they were none the less so merely because of the circumstance that they were effected through license agreements. There was no holding, however, that the license agreements of themselves and apart from the combination were illegal. But we have no comparable situation here. Competition 'is a battle for something that only one can get; one competitor must necessarily lose.' And so it is quite inaccurate to say that the English corporation was in 1934, or since, a 'competitor' of the plaintiff which it merely engaged and authorized to exploit its secret processes in North America. Actually the plaintiff was no more than the English corporation's agent or representative here. And common sense and justice, as well as the 'normal' and 'usual' business custom of rational men, dictate that a principal refrain from undertaking to perform at the same time and in the same place the precise functions it has engaged a representative to perform. This is especially so and indeed imperative where, as here, the representative's compensation can come only from what it is able to earn through its own efforts as a pioneer in exploiting its principal's secret processes. A holding that, in the circumstances of this case, this agreement violates our antitrust laws would go far beyond, and as I understand the decisions, would clearly not be justified by the teaching of the cases the defendant relies on. It is argued that the tendency of recent decisions is in that direction. However that may be, I think they have not yet gone so far as to establish the extreme proposition the defendant asserts. And so, in the absence of a clear ruling to the contrary, I am constrained to hold that this license agreement, usual and normal as I think it is in these circumstances, is legal and enforceable.
The motion for an injunction pendente lite is granted. On the settlement of the order to be entered, counsel will be heard on the amount of the bond to be furnished pursuant to Rule 65(c), Fed.Rules Civ.Proc.,