VIII Innovation, Restraints of Trade, Grantbacks.
A. Justice Department Guidelines
B. Grant back:TransparentWrap Mach. Corp. v. Stokes & Smith Co. 329 U.S. 637, 67 S.Ct. 610, 91 L.Ed. 563 (1947)
C. Pool with Grant back United States of America v. Associated Patents, Inc. 134 F. Supp. 74; 1955 Trade Cas. ¶ 68,092; 106 USPQ 129 (ED Mich 1955) aff'd sub nom, Mac Inv. Co. v. U.S. 350 U.S. 960, 76 S.Ct. 432, 100 L.Ed. 834 (1956)
D. Cartel and Innovation: U.S. v. National Lead Co. 332 U.S. 319, 67 S.Ct. 1634, 91 L.Ed. 2077 (1947) aff'g 63 F.Supp. 513, (SD NY, 1945)
E. Improvements Cross Licensed: United States of America v. Birdsboro Steel Foundry and Machine Co. 139 F. Supp. 244; 108 USPQ 42; 1956 Trade Cas. ¶ 68,293; (WD Pa, 1956)
F. Common Ownership via Litigation Settlement Clyde M. Noll v. O. M. Scott & Sons Co. 467 F.2d 296, 175 U.S.P.Q. 392; 1972 Trade Cas. ¶ 74,180 (6th Cir., 1972)
G. Reasonableness in Licensing. Baker-Cammack Hosiery Mills, Inc. v. Davis Co.181 F.2d 550, 85 U.S.P.Q. 94 (4th Cir., 1950)
United States of America v. Associated Patents, Inc.
134 F. Supp. 74; 1955 Trade Cas. ¶ 68,092; 106 USPQ 129 (ED Mich 1955)
Complaint was filed and action was instituted against the defendants under Section 4 of the Act of Congress of July 2, 1890, § 647, 26 Stat. 209, as amended, entitled "An act to protect trade and commerce against unlawful restraints and monopolies", commonly known as the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note, in order to prevent and restrain alleged continuing violations by the defendants of Section 1 of the Sherman Act, it being the further claim of the plaintiff that beginning in or about the year 1933,and continuing thereafter up to and including the date of the filing of this complaint, the defendants have contracted, combined and conspired to restrain unreasonably the aforesaid interstate trade and commerce in machine tools, in violation of Section 1 as aforesaid; further alleging that the defendants are continuing, and threaten to, and will continue the said offenses unless the relief prayed for in the complaint be granted. It is further alleged that the terms of the contracts, combination and conspiracy have been:
(a) That defendants organize API and pool in API their existing and future patent rights relating to machine tools;
(b) That defendants allocate among themselves the manufacture and sale of machine tools according to specified types thereof, so that each defendant has the exclusive right to manufacture and sell specified types of machine tools, and so that each defendant refrain from the manufacture and sale of types of machine tools reserved for exclusive manufacture and sale by any other defendant;
(c) That API refrain from licensing under the pooled patents others than defendants to manufacture and sell any types of machine tools reserved for exclusive manufacture and sale by any of the defendants.
The "machine tools" referred to include power-driven machines, not portable by hand, which are used to cut or shape metal, and includes machine tools of the following types: lathes, shaving machines, drilling machines, boring machines, milling machines, broaching machines, grinding machines, gear producing machines, and screw machines.
It is further alleged that the contracts, combination and conspiracy, and certain of the acts, agreement, arrangements and understandings of the defendants have had the effect, as intended by the defendants, of eliminating, suppressing and restraining competition among the defendants in the manufacture and sale of machine tools in interstate commerce; of eliminating, suppressing and restraining competition among the defendants in obtaining, utilizing and licensing patent rights relating to machine tools; of eliminating, suppressing and restraining competition by others in the manufacture and sale of machine tools, and of denying a purchaser of machine tools access to a free and competitive market therefor.
From the evidence submitted at a rather extended trial, the Court makes the following
Findings of Fact
1. Associated Patents, Inc., hereinafter referred to as "API", is a corporation organized under the laws of the State of Ohio, with its principal place of business at Cincinnati, Ohio. API has functioned solely as a patent holding and licensing company. It has never engaged in manufacturing or other activities. The capital stock of API has at all times been evenly divided between the following five companies or their predecessors in interest: Brown & Sharpe Manufacturing Company, The Carlton Machine Tool Company, DeVlieg Engineering Company, The Lodge & Shipley Company, and the Mac Investment Company.
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8. Charles B. DeVlieg, a resident of Farmington, Michigan, and owner, with other members of his family, of the controlling interest in the DeVlieg Engineering Company and the DeVlieg Machine Company, is an inventor in the machine tool field. Prior to 1933 he had developed three major inventions of general application in the machine tool field known as a backlash eliminator, an automatic power transmission mechanism, and an automatic positioning device. These inventions shall hereinafter be referred to collectively as the "subject matter inventions" and their patents as the "subject matter patents".
9. The machine tools manufactured by defendants as aforesaid are sold and shipped in interstate commerce to states other than the states of origin or where they are manufactured.
10. An essential characteristic of the manufacture of machine tools by defendants and other members of the machine tool industry is the development of improvements, securing patents thereon, the issuing of licenses and the obtaining of licenses on patents owned by other machine tool manufacturers.
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14. On November 29, 1932, Charles B. DeVlieg granted Brown & Sharpe a non-exclusive license on the subject matter inventions for the manufacture, use and sale of machine tools, without specification of particular types of machines. This agreement provided that future improvements on the subject matter inventions developed by either party were to be licensed to the other party. DeVlieg agreed not to license competitors of Brown & Sharpe on these inventions without that company's approval.
15. By an agreement dated May 18, 1933, between Charles B. DeVlieg, party of the first part, and Lodge & Shipley and Carlton, parties of the second part, DeVlieg agreed to assign the subject matter inventions to a corporation to be known as Associated Patents, Inc.
16. By a series of assignments dated June 13, 1933, Charles B. DeVlieg transferred all rights in the subject matter inventions and the patent applications thereon to API.
17. A meeting was held in Cincinnati, Ohio, shortly prior to August 3, 1933, to discuss terms and conditions under which the subject matter patents would be administered by API. * * * The meeting lasted approximately three days. Discussions at the meeting centered on the practice of the subject matter inventions in accordance with a so called "Declaration of Uses" restricting each member of API to the use of the subject matter inventions and future improvements thereon within a given field, non-competitive with any other member. Understandings reached at the meeting in this respect were reduced to a formal agreement dated August 3, 1933, referred to hereinafter as the "API agreement" (Gov. Ex. 12). The agreement was drafted by attorney George Fee, attorney of record for Lodge & Shipley in this case.
18. The principal provisions of the API agreement are as follows:
(a) The parties to the agreement were the five machine tool manufacturing companies, API, the newly organized patent holding corporation and Charles B. DeVlieg, individually as the inventor.
(b) The agreement was applicable to the three original DeVlieg inventions (the backlash eliminator, the power transmission mechanism, and the automatic positioning device) and all improvements thereon developed by the members. The term "improvements" was specifically defined in the agreement "to include all improvements or betterments of the subject matter * * * together with all inventions which supplement or extend the subject matter or improvements or the uses of either or both * * *"
(c) The agreement was to continue as long as there were outstanding any unexpired patents on the subject matter or improvements thereon.
(d) The members of API were obligated to make prompt disclosure to API of any and all improvements on the subject matter developed by them or their employees and to assign such improvements to API. The expenses incurred in connection with the obtaining of patents on improvements so assigned were to be borne by API.
(e) The "Declaration of Uses" provision of the agreement specified the particular fields within which the subject matter patents and improvements thereon were to be exclusively licensed to the respective companies. Each field of use consisted of several types of machine tools and with one exception these fields of use were mutually exclusive and non-competitive.
(f) Each of the parties to the API agreement was entitled to receive an exclusive license within the field defined in its Declaration of Use on any improvement assigned to API.
(g) Members of API were required to pay a royalty of 1/2 of 1 per cent of the net selling price of all machine tools incorporating an improvement not perfected by such party. Regardless of the number of improvements incorporated in any particular machine tool the aggregate royalty was not to exceed 1 per cent. A member was not required to pay a royalty on the use of any improvement that it had assigned to the pool.
(h) API was to undertake the defense of any action, suit or claim for infringement, brought against any of the member companies as a result of the manufacture, use, or sale of any machine tools incorporating the subject matter patents or any improvement thereon, and any damages payable by reason of such actions were to be borne by API.
(i) API was to have the sole and exclusive right to grant licenses and sublicenses on the subject matter patents and improvements thereon, provided, however, that no licenses were to be granted within the exclusive fields of use reserved to the various members without the prior consent of the member within whose field of use such prospective license was to be granted.
(j) The scope of the Declaration of Use assigned to each party could be extended only by API, but no such extension could be granted to any member which would conflict with the Declaration of Use of any other party except with the consent of that party.
(k) Licenses upon improvements were to be non-assignable and non-transferable except where the party being granted the license had assigned such improvement to API.
(l) In the event of insolvency of any member the licenses on improvements not developed by such party were to be terminated forthwith.
(m) In the event that an API member desired to dispose of its stock in the corporation API was to have 30 days within which to exercise an option to purchase such stock at its book value before it could be disposed of to an outside party.
19. The rights and obligations of the parties as provided in the API agreement created an entirely new and different arrangement for the use of the subject matter patents and future improvement patents than had existed under the original licenses from DeVlieg to the other parties separately. The more important differences between the new arrangement and that which had previously existed are as follows:
(a) Lucas became entitled to use the automatic positioning device which had not been included in its original license from DeVlieg. The original license had been limited to horizontal boring, drilling and milling machines whereas the field of use assigned to Lucas by the API agreement also included jig-boring machines.
(b) Brown & Sharpe's license from DeVlieg had not been limited to particular types of machine tools but applied to all "machine tools of their own manufacture". In the API agreement Brown & Sharpe was assigned a field of use limited to several specific types of machine tools. Also, the license from DeVlieg was to terminate, as to each of the three subject matter inventions, on the expiration date of the first patent to be issued on that invention whereas the API agreement was to continue in force as long as there were unexpired patents on either the subject matter inventions or improvements.
(c) Prior to the API agreement DeVlieg was free to utilize the subject matter inventions and his own improvements thereon in the manufacture, use and sale of any type of machine tool except as limited by the exclusive licenses to Lucas, Carlton and Lodge & Shipley. Under the API agreement DeVlieg was confined to a field consisting of milling machines and broaching machines.
(d) The original DeVlieg licenses, except for that to Lucas, included future improvement patents developed by DeVlieg but there were no agreements between any of the licensees pertaining to improvement patents. Under the API agreement each party became entitled to an exclusive license within its field of use on any improvement developed by any other member.
(e) Prior to the API agreement Carlton, Lodge & Shipley and Brown & Sharpe had been entitled to licenses on all improvement patents developed by DeVlieg without being obligated to pay royalties or the expenses connected with patent applications. Under the API agreement these companies were not only obligated to pay royalties for the use of improvement patents developed by DeVlieg but were required to assume a proportionate share of the expenses incurred by API in obtaining patents on such improvements.
(f) The API agreement imposed limitations on the transferability of the licenses to be granted to the parties whereas the original licenses from DeVlieg had not been subject to such limitations.
20. The purposes of API as evidenced by the provisions of the API agreement were:
(a) To suppress competition between the parties by confining their use of the API inventions to non-competitive fields of activity.
(b) To restrict outside parties in competing with API members by denying them access to the subject matter patents and the improvements thereon subsequently developed by API members.
21. The purpose of the parties in imposing restrictions upon the granting of licenses on improvements was not to enhance the financial returns from royalties but to insulate members from competition between themselves and from outsiders. Each member by agreeing to restrictions upon the licensing of improvements designed to protect other members from competition was, in turn, assured that licenses upon improvements developed by other members would be similarly restricted.
22. API was in substance and effect merely an agency or instrumentality utilized by the members to effect a network of exclusive cross-licenses among themselves and to control the terms and conditions of any licenses that might be granted to outsiders. The actions and policies of API were controlled entirely by the member companies who directed its activities to serve their individual purposes. Thus, API had no independent control of its own affairs.
23. From August 1933 until July 13, 1953, there was a concert of action in pursuance of a common plan among the defendants herein by which restrictions were imposed upon the manner in which licenses would be issued upon improvements developed by the API members. On July 13, 1953, one of the Courts of Common Pleas for Hamilton County, Ohio, ordered a limited dissolution of the affairs of API and, subsequent to that date, certain of the shareholders of API have filed with the Ohio court having jurisdiction of the dissolution proceedings disclaimers of all claims to assets of API, and of all rights under the API agreement.
24. Concurrent with the execution of the API agreement the members arrived at a general unwritten agreement not to compete in the manufacture of machine tools irrespective of whether or not API patents were utilized. To implement this general agreement not to compete, a number of subsidiary agreements were made from time to time when a new machine designed by one party threatened to conflict or compete with a machine being manufactured by another party, to wit:
(a) In August 1933, Carlton was designing a new drilling machine capable of both horizontal and vertical drilling. This machine threatened to conflict with the horizontal boring, drilling and milling machines being manufactured by Lucas and encroach upon the field reserved to Lucas in its declaration of use in the API agreement. The Carlton machine did not embody inventions covered by API patents. Henry M. Lucas, President of the Lucas Machine Tool Company, visited Carlton's plant and examined the blueprints of Carlton's new drilling machine. Carlton requested drawings of the Lucas machine involved in the conflict. It was subsequently agreed between Lucas and Carlton that there would be no conflict in their respective manufacture of the machines involved.
(b) In March 1934 Charles B. DeVlieg visited the Brown & Sharpe plant in Providence, Rhode Island and because of Mr. DeVlieg's status as a member of API he was shown confidential designs being developed by Brown & Sharpe for a new milling machine called their No. 12. Some time prior to this date Brown & Sharpe and DeVlieg reached an agreement designed to prevent competition between them in the manufacture and sale of milling machines whereby DeVlieg would manufacture only the larger sizes and Brown & Sharpe would manufacture only the smaller ones. This agreement was not limited to milling machines incorporating API patents. On learning that DeVlieg was designing a milling machine of a size which would compete with the Brown & Sharpe No. 12 milling machine, Brown & Sharpe protested to DeVlieg that this was a violation of their agreement. DeVlieg replied that he recognized his obligation not to produce a competing machine and would not do so unless an arrangement could be decided upon at some future date. After Brown & Sharpe's protest, and out of deference to the understanding, DeVlieg did not go ahead with his plans for manufacturing a machine of that size although such a machine had already been designed.
(c) In 1938 DeVlieg was designing a knee type milling machine which incorporated a sliding spindle. Despite the fact that DeVlieg believed that the machine he proposed to produce was entirely within the Declaration of Use allocated to him by the API agreement he nevertheless felt that the understanding among API members required him to obtain from Lucas a letter of approval before going ahead with the production of such a machine. Lucas was the API member whose machine tools would be most nearly competitive with the machine that DeVlieg proposed building.
(d) In 1941 DeVlieg was requested by the War Production Board to concentrate his activities on the production of horizontal boring, drilling and milling machines. After making preliminary drawings and designs for the production of such a machine (which later came to be known as the Jigmil), DeVlieg went to Cleveland for the purpose of consulting with Lucas. DeVlieg sought clearance from Lucas which would permit him to commence manufacturing activities within the field that was exclusively reserved to Lucas by the Declaration of Uses provision of the API agreement. On this occasion he exhibited to Lucas the preliminary drawings for the machine. Subsequently, in July of 1941 when Lucas visited DeVlieg's plant in Ferndale he inspected the work that was being done on the design and development of the Jigmil and asked for and received a set of drawings which he took back to Cleveland. Thereafter in December of 1941 while visiting DeVlieg's plant, Lucas saw the first machine in operation. During this visit the conversation turned to the possibility of competition between the Jigmil as produced by DeVlieg and the horizontal boring, drilling and milling machines manufactured by Lucas. Lucas was at this time producing a combined horizontal boring, drilling and milling machine in which the axis of the spindle was parallel to the bed. The Jigmil as designed by DeVlieg was differentiated from Lucas' product in that the axis of the spindle was at right angles to the bed. On this occasion DeVlieg and Lucas arrived at an understanding the essence of which was that each agreed not to produce the type of combined horizontal boring, drilling and milling machine being manufactured by the other.
25. In 1945 The Lucas Machine Tool Company notified DeVlieg that by incorporating devices covered by API patents into the Jigmil, he was violating Lucas' rights under the API agreement which granted to Lucas the exclusive right to use these inventions in horizontal boring, drilling and milling machines. It also charged that DeVlieg was infringing two other Lucas-owned patents which had not been assigned to API. Lucas also claimed that DeVlieg's Jigmil patent was an improvement within the meaning of the API agreement, and that, accordingly, DeVlieg was obligated to assign it to API.
26. In April, 1947, at a directors' meeting held in Atlantic City, New Jersey, the members of API voted to support The Lucas Machine Tool Company with respect to the claims it was asserting against DeVlieg. A motion was adopted at this meeting which provided that, if necessary, API would bring suit against DeVlieg to enforce these claims, or join with Lucas in such a suit. During the succeeding months various members of API made efforts to bring DeVlieg and Lucas together in order that an out-of-court settlement of the controversy might be reached. Throughout these efforts to effect a settlement both API and Lucas made it an indispensable condition that DeVlieg agree to assign the Jigmil patent to API. The insistence upon this condition caused the attempts to reach a settlement to be unsuccessful.
27. On July 16, 1947, API and The Lucas Machine Tool Company filed suit against DeVlieg in the District Court of the United States, Eastern District of Michigan, Southern Division.
* * *
31. After its formation, API became the owner of seven improvements developed by the members and assigned to it in accordance with the requirements of the API agreement.
32. The whole course of defendants' conduct with relation to the three subject matter patents indicates that they recognized the inventions as highly important, fundamental and valuable contributions to the machine tool art.
Conclusions of Law
1. The Court has jurisdiction of the subject matter hereof and of each of the defendants, and the complaint states a cause of action against the defendants under the provisions of the Act of July 2, 1890, entitled "An act to protect trade and commerce against unlawful restraints and monopolies", as amended, commonly known as the Sherman Act.
2. The API agreement of August 3, 1933, created an arrangement for the exclusive cross-licensing of the subject matter patents and future improvement patents therein through the pooling of these patents in API. The combined effect of the provisions of the API agreement was to impose the following unreasonable restraints:
(a) The parties were restricted in their manufacture of machine tools by being unable to obtain licenses permitting them to incorporate features covered by the subject matter patents or improvements thereon on machine tools not included in their respective fields of use.
(b) Outside parties were restricted in their manufacture of machine tools by being foreclosed from obtaining licenses on the subject matter patents or improvements thereon for any of the types of machine tools included within the fields of use exclusively reserved to API members.
(c) Each of the parties was restricted in the licensing of improvement patents it developed by the requirements that all improvement patents be assigned to API.
(d) Invention and technological development have been discouraged by the limitations imposed on the members' rights to use and license improvement patents developed by them.
3. By their continued adherence to the API agreement defendants have engaged in a continuing conspiracy to unreasonably restrain interstate commerce in the manufacture of machine tools in violation of Section 1 of the Sherman Act.
4. The agreement of 1933 between Brown & Sharpe and DeVlieg concerning the size of milling machines each would manufacture; the agreement of 1933 between Carlton and Lucas with respect to eliminating competition between the types of machine tools each would manufacture; the clearance sought by DeVlieg from Lucas in 1938 to build a bed type milling machine with sliding spindle; and the approval requested by DeVlieg from Lucas in 1941 in order to enable him to go ahead with the building of a Jigmil were integral parts of an over-all conspiracy between the API members by which the manufacturing activities of the member corporations have been confined to the fields of specialization delineated in the Declaration of Uses provision of the API agreement. Since August of 1933, the defendants have been engaged in a combination and conspiracy in unreasonable restraint of interstate trade and commerce in machine tools in violation of Section 1 of the Sherman Act, the purpose and effect of which has been to confine the manufacture of machine tools by each of them to fields of specialization that were not competitive with each other.
5. Plaintiff herein is entitled to relief by way of an appropriate decree of this Court declaring the API agreement to be illegal and void.
6. In view of the litigation pending in the Federal District Court at Detroit, Michigan, between Mac Investment Company and Charles B. DeVlieg, DeVlieg Engineering Company and DeVlieg Machine Company, it is apparent that the DeVlieg group has not been acting in concert with any other members of the combination since the inception of said litigation. And, in view of the disclaimers it is also apparent that certain of the shareholders of API have abandoned the combination brought into existence and continued by the creation of the API agreement. The conduct on the part of the co-conspirators, as evidenced by said litigation and by said disclaimers, lends support to a conclusion that the co-conspirators have withdrawn from the conspiracy. If such conclusion proves to be valid, the conspiracy would have terminated and the granting of an injunction to effectuate such termination would not be necessary. In view of the lack of proof at this time of any threat of future violations, the granting of an injunction against future violations is not appropriate. However, in the light of our observations in the following paragraph, we are unable to decide conclusively as of this writing that the conspiracy has, in fact, terminated.
The order of the Court of Common Pleas of Hamilton County, Ohio, dissolving API and appointing a permanent receiver, contains the following:
"It is further ordered that the Receiver shall not commence any litigation, or take any steps in connection with existing
litigation to which Associated Patents, Incorporated, is presently a party, or in connection with the assets which are the
subject of such litigation, without permission of this court."
This provision establishes that API has not been completely dissolved, and that it is awaiting the outcome of litigation that has as its subject matter an asset that could be of considerable value to API, and, in aligning itself as a party plaintiff with Mac Investment Company in this litigation, API has kept in existence at least a part of the complained-of combination. Because of this situation, the Court will retain jurisdiction of this matter until the final disposition of Civil Action 6813 pending in the District Court for the Eastern District of Michigan, and also until there is a final disposition of the dissolution proceedings presently pending in the Court of Common Pleas, Hamilton County, Ohio, at which time, upon reapplication by plaintiff, this Court will determine the request for injunctive relief.
An order in conformity with this opinion may be presented.
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United States v. National Lead Co., et al
332 U.S. 319; 67 S. Ct. 1634;
91 L. Ed. 2077; 73 USPQ 498 (1947)
Burton, J. This action was brought by The United States of America, June 24, 1944, in the District Court of the United States for the Southern District of New York, against National Lead Company (a New Jersey corporation, here called National Lead or NL), its wholly owned subsidiary, Titan Company, Inc. (a Delaware corporation, here called Titan Inc. or Tinc) and E. I. du Pont de Nemours and Company (a Delaware corporation, here called du Pont or DP). It is a proceeding in equity instituted under § 4 of the Sherman Antitrust Act, 26 Stat. 209, 36 Stat. 1167, 15 U. S. C. § 4, to prevent and restrain alleged violations of §§ 1 and 2 of that Act, 26 Stat. 209, 50 Stat. 693, 15 U. S. C. §§ 1 and 2. The trial was conducted by Judge Simon H. Rifkind of that court. It began December 4, 1944, and ended March 14, 1945. His opinion was filed July 5, 1945. His 96 findings of fact and two conclusions of law were entered October 2, 1945. After extended consideration of its terms, by the court and by counsel for all parties, the decree was entered October 11, 1945. The opinion and decree are reported in 63 F. Supp. 513-535. The findings of fact, conclusions of law and much of the detailed discussion of the decree are in the record. Separate appeals were filed in this Court, in case No. 89 by the United States, in case No. 90 by National Lead and Titan Inc. and in case No. 91 by du Pont. The three companies are sometimes referred to as "the appellant companies."
* * *
Reference is made to the opinion of the District Court for a recital of the complex facts which it had to consider in order to reach its conclusion that National Lead, Titan Inc. and du Pont each violated § 1 of the Sherman Act, although it found a marked difference between the conduct of National Lead and of its subsidiary, Titan Inc., on the one hand, and that of du Pont on the other. This Court affirms the judgment of the District Court, except as to the original effective dates of certain of its provisions, and our discussion will relate largely to the assignments of error as to the terms of the decree.
The first issue presented to the District Court was that of the participation of National Lead and Titan Inc. in a so-called "international cartel" dating back to 1920, and constituting a combination or conspiracy in restraint of trade and commerce in titanium pigments and compounds, among the several states of the United States and with foreign nations, which combination, after 1933, was alleged to include du Pont. The District Court found such participation. In their brief on appeal in No. 90, National Lead and Titan Inc. said:
"The Government's case was based on a series of closely related agreements made between 1920 and 1944. The agreements have been cancelled and continuation or renewal has been enjoined. The appeals are greatly simplified by the fact that we accept the cancellation and the injunction against continuation or renewal. We submit, however, that the court went too far in forbidding normal and usual contractual arrangements."
Accordingly, the finding of the District Court, as to the participation of National Lead and Titan Inc. in the violation of § 1 of the Sherman Act, is accepted here without further discussion.
The second issue was that of the participation of du Pont in such combination after 1933. The District Court found that du Pont "joined the conspiracy found herein to exist between, NL and its foreign associates. DP's status rights and obligations were different from those of the other members of the combination. DP did not thereafter withdraw." Finding of Fact 73. The District Court, in its opinion, also stated that --
"At least then as to territorial delimitations of the titanium pigment business, DP joined the combination. . . .
"My general summary of the evidence on this issue is that DP was a member of the combination -- true, a special member, with a status, rights and obligations, different from that of the other members, but a member nonetheless."
63 F.Supp. at 530, 531, and see the preamble to the decree at 532. This finding is contested vigorously by du Pont and is the principal subject matter of its appeal in No. 91. After careful consideration, we agree with the following conclusion of the District Court:
Id. at 532. Referring to the exchange of patents between National Lead and du Pont, the District Court added:
". . . in the context of the present case, . . . this exchange between two corporations, who between them controlled the entire market, becomes an instrument of restraint, available for use and used, to continue the mastery of the market which NL and DP achieved by means of the illegal international agreements."
Id. at 532. These facts are important not only in affirming, as we do, the finding that National Lead, Titan Inc. and du Pont each has violated § 1 of the Sherman Antitrust Act, but also in passing upon the terms of the decree entered in order to prevent future violations of that Act by them.
* * *
In our opinion, the provisions of this decree, to a large extent, are matters lying within the discretion of the District Court as a court of equity whose duty it was to make the remedy as effective as possible. The District Court was confronted with an obligation to give effect to the provisions, on the one hand, of the patent laws granting certain valuable rights in the nature of monopolies to the patentees and their licensees, and also to give effect, on the other hand, to the provisions of the Sherman Antitrust Act prohibiting any combination or conspiracy in restraint of trade among the several states or with foreign nations. We believe that the District Court has not exceeded its discretion in the provisions of this decree but has employed its discretion with commendable fairness having especial regard to the needs of this case. It has succeeded in keeping within the lines of precedent thus far established, although, in this field, such lines cannot be much more than guides. The essential consideration is that the remedy shall be as effective and fair as possible in preventing continued or future violations of the Antitrust Act in the light of the facts of the particular case.
The issues are presented by the assignments of error in the three appeals. They will be considered separately in conjunction with their supporting arguments. In each instance we sustain the present decree.
Request to omit the requirement of the granting of compulsory, nonexclusive licenses at uniform, reasonable royalties and to substitute for that requirement, either a perpetual injunction against the enforcement of the titanium patents presently owned or controlled by the respective appellant companies, or a provision for compulsory licenses to be issued under those patents, free of royalties.
This is the major legal issue in this case.
The material provisions in the present decree are as follows: <
The assignment of error originally made by the Government, in No. 89, as to this point was as follows:
* * *
On oral argument, the Government supported its second proposal but indicated that, if that proposal were not satisfactory, it would prefer its original request to the provision for uniform, reasonable royalties now in the decree.
* * *
National Lead * * * argues that "The court erred in refusing to order royalty-free licensing of all patents as defined in the judgment." Accordingly, both proposals have been considered.
While it has been contended that, because of the decision of this Court in Hartford-Empire Co. v. United States, 323 U.S. 386, the District Court was not free in the present case to require the issuance of royalty-free licenses, we feel that, without reaching the question whether royalty-free licensing or a perpetual injunction against the enforcement of a patent is permissible as a matter of law in any case, the present decree represents an exercise of sound judicial discretion.
This is a civil, not a criminal, proceeding. The purpose of the decree, therefore, is effective and fair enforcement, not punishment. An understanding of the findings of fact is essential to an appreciation of the reasons for the decree.
Pure titanium pigment and its compounds represent a product of comparatively recent development but of major commercial value. The District Court found that --
On July 30, 1920, The Titanium Pigment Company, Inc., (affiliated with National Lead) and Titan Co. A/S (representing the Jebsen interests) entered into an agreement which is still uncanceled. Its principles became the basis for more than 60 subsequent agreements and for an international cartel in titanium pigments. The essential features of this agreement are stated in Finding of Fact 44 and in the opinion of the District Court, 63 F.Supp. at 517-518.
[The Court approves the District Court's definitions of "cartels" in footnote 5:
"Cartels have been defined by two of the foremost members and advocates of such bodies. In the words of Sir Alfred Mond, organizer of Imperial Chemical Industries:
Briefly stated, it applied to a licensed field, defined as including all substances containing above 2% of titanium unless containing by weight more than 5% of a metal other than titanium in its purely metallic form. It applied to all apparatus, methods and processes useful in obtaining or manufacturing such substances both in the titanium and in the titanium compound field.
Both parties agreed to grant and accept a license, exclusive of all others including the licensor, under all "existing or future" patents of the licensing party. They divided the globe territorially. The American company was to have the North American continent. The Norwegian company was to have the rest of the world, except that reciprocal, nonexclusive rights of sale were reserved for both companies in South America.
Detailed provision was made for exchange of copies of applications for patents filed by the parties or their other licensees. Neither party was ever to question or contest the validity of any patent of the other under which it was licensed within the field described.
The American company became the exclusive agent for the Norwegian company in North America and vice versa outside of North and South America. Sales were to be at prices and on terms determined by the agent. Notwithstanding these agencies, however, importations of "finished articles" -- that is, paint, paper, rubber, glass, etc. -- containing titanium products of the principal, its licensees or sublicensees, would be permitted provided such products did not constitute such an important part of such finished articles that sales within the agent's territory would interfere substantially with the agent's sales of its own titanium products.
Each party would impart semiannually to the other information in detail as to knowledge obtained in and applicable to the "licensed field," and would permit the other to inspect and study operations in its plants (exclusive of research laboratories). The reciprocal grants of exclusive licenses would extend to December 31, 1936, and thereafter for periods of ten years each, with provision for termination by notice to be given at least five years before the end of any such period. In particular, so long as each company held an exclusive license from the other under this agreement, it would have the right to grant licenses under its own patents, and sublicenses under the other's patents, on the condition, nevertheless, that every such licensee or sublicensee would grant to the party to the 1920 agreement (other than its licensor), its patent rights in the "licensed field" identical in character, territorial scope, and duration to those given by its licensor to such other party under the 1920 agreement, and would impart technical information to such other party in the same manner and to the same extent as its licensor.
In 1929, the obligations of Titan Co. A/S under this agreement were assumed by Titan Inc. and, in 1936, the obligations of
The Titanium Pigment Company, Inc., were assumed by National Lead.
Other companies throughout the world joined in carrying out this program to restrain international commerce and to establish an international combination or conspiracy in restraint of trade. The complaint in the present case lists many of these foreign companies as co-conspirators with National Lead, Titan Inc. and du Pont, but it does not attempt to make such co-conspirators parties defendant. The District Court recognized that it did not have jurisdiction over such co-conspirators and found in that circumstance one of its difficulties in effectively restraining National Lead, Titan Inc. and du Pont from further violations of the Sherman Antitrust Act, pursuant to this international as well as domestic program. To accomplish this purpose, the District Court has adjudged these agreements to be unlawful and it has canceled them. In addition, it has enjoined all three defendants, National Lead, Titan Inc. and du Pont, from further performance of any of the provisions of such agreements and of any agreements amendatory thereof or supplemental thereto.
* * *
While this combination and conspiracy in restraint of interstate and foreign commerce thus was developing from 1920 to 1931, with National Lead and Titan Inc. at its center, du Pont was unconnected with it.
* * *
"Both NL and DP in good faith claimed that each infringed certain of the other's titanium pigment patents and both in good faith denied such infringement claiming, among other things, that the patents alleged to be infringed were of doubtful validity. NL and DP agreed in October, 1932, that the validity of the patents claimed to be infringed should not be questioned except as a last resort and that they should try to arrive at a general understanding."
* * *
After extensive negotiations, National Lead and du Pont formulated an agreement in writing, dated as of January 1, 1933, which was executed August 28, 1933. It is summarized in Finding of Fact 73 and in the opinion of the lower court, 63 F.Supp. at 520-521. By its terms, it provided for cross-licensing but did not provide for the exclusive licensing and restrictive territorial and agency agreements specified in the 1920 program. Certain foreign associates of National Lead, particularly Interessengemeinschaft Farbenindustrie Aktiengesellschaft (usually referred to as I. G. Farbenindustrie), insisted upon some such commitment from du Pont or its subsidiary. This insistence never was abandoned. After further negotiations and an exchange of letters, all as set forth in full in the opinion of the District Court, 63 F.Supp. at 528-529, some understanding was reached as to the future conduct of du Pont, or of its subsidiary.
* * *
These findings disclose the special conditions which confronted the District Court in framing its decree. They disclose a vigorous, comparatively young, but comparatively large, world-wide industry in which two great companies, National Lead and du Pont, now control approximately 90% of the domestic production in substantially equal shares. The balance of that production is in the hands of two smaller companies. Each of these is affiliated with larger organizations, not parties to this case. The findings show vigorous and apparently profitable competition on the part of each of the four producers, including an intimation that the smaller companies are gaining ground rather than losing it. Keen competition has existed both before and after the elimination, by the 1933 agreement and understanding, of certain patent advantages from among the weapons of competition. The competition between National Lead and du Pont has been carried into this Court where today National Lead supports the Government's proposal for royalty-free licenses, while du Pont argues strongly for a complete dismissal of the proceedings and contends that, in any event, if there are to be compulsory licenses they at least should require payment of uniform, reasonable royalties as provided in the present decree.
Assuming, as is justified, that violation of the Sherman Act in this case has consisted primarily of the misuse of patent rights placing restraint upon interstate and foreign commerce, that conduct is not before this Court for punishment. It is brought before this Court in order to secure an order for its immediate discontinuance and for its future prevention. That will be accomplished largely through the strict prohibition of further performance of the provisions of the unlawful agreements. Further assurance against continued illegal restraints upon interstate and foreign commerce through misuse of these patent rights is provided through the compulsory granting to any applicant therefor of licenses at uniform, reasonable royalties under any or all patents defined in the decree. Such patents include not only the patents and patent applications listed in the appendix to the decree, but also, among others, all patents which cover any titanium pigments or any process for the manufacture of such pigments issued to, or acquired by, any of the appellant companies within five years from the date of the decree. It applies also to all such patents of which any of the appellant companies shall become the exclusive licensee within such five years with power to sublicense.
On the facts before us, neither the issuance of such licenses on a royalty-free basis nor the issuance of a permanent
injunction prohibiting the patentees and licensees from enforcing those patents has been shown to be necessary in order to
enforce effectively the Antitrust Act.
* * *
In the absence of a showing to the contrary, it is obvious that some patents should entitle their owners to receive higher royalties than others. Also, it is clear that several patents, each of equal value, ordinarily should entitle their owners to a larger total return in royalties than would one of them alone. It follows that to reduce all royalties automatically to a total of zero, regardless of their nature and regardless of their number, appears, on its face, to be inequitable without special proof to support such a conclusion. On the other hand, it may well be that uniform, reasonable royalties computed on some patents will be found to be but nominal in value. Such royalties might be set at zero or at a nominal rate. The conclusion, however, would depend on the facts of each case.
* * *
For the reasons set forth, the motion of the United States to amend its assignments of error is granted and the judgment of the District Court is Affirmed.
Douglas, J. Dissenting: I cannot agree that royalties should be charged on patents whose misuse has been so flagrant as to persuade us to approve compulsory licensing of all who desire to use the inventions. Nor do I think that the failure to provide for royalty-free licensing may be sustained as an exercise of the judicial discretion of the District Court. That would be the case if the District Court had been free to frame its decree unembarrassed by the ruling in Hartford-Empire Co. v. United States, 323 U.S. 386, 324 U.S. 570. In that case this Court modified an antitrust decree so as to permit "reasonable" royalties on patents which had been ordered licensed without charge to all applicants. The language there used well might lead a court to the conclusion that royalty-free licensing is a remedy unacceptable as a matter of law. In these circumstances it is fair to assume that the action of the district judge in the present case was in deference to the Hartford-Empire rule rather than a reflection of his own judgment.
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United States of America v. Birdsboro Steel Foundry and Machine Co.
139 F. Supp. 244; 108 USPQ 428
1956 Trade Cas. ¶ 68,293; (WD Pa, 1956)
Findings of Fact
A. Parties and Subject Matter.
1. This is a civil action brought by the United States of America, charging the defendants with violation of Section 1 of the Sherman Act, 15 USCA § 1, and seeking injunctive and other relief. Commerce in "cooling beds" and in certain auxiliary apparatuses ("runin" and "runout" tables used to move material to and from cooling beds), which are devices used in steel manufacture, is alleged to have been unlawfully restrained by the defendants.
* * *
3. Birdsboro, during the period of time covered by the complaint and until on or about December 15, 1954, was engaged in the manufacture and sale of steel and alloy steel castings, rolling mills and hydraulic and special machinery of various types, including cooling beds used in conjunction with rolling mills.
* * *
7. Mesta manufactures and sells various types of rolling mills and other machinery utilized in the steel industry, and sells, and during the period of time covered by the complaint sold cooling beds used in conjunction with rolling mills. It also manufactures and during the period of time covered by the complaint manufactured cooling beds involving much larger parts than the type which are the subject of the Birdsboro-Mesta license agreements described hereinafter.
8. While both Birdsboro and Mesta are machinery builders, their facilities are of a different character in that Birdsboro is particularly well suited to manufacture equipment of small and intermediate sizes, and Mesta is especially capable of manufacturing equipment of very large sizes.
B. The Manufacture of Rolled Steel Products.
9. Steel is formed by casting, forging and rolling processes. In the making of rolled products, the molten metal is first poured into "ingot molds", where it solidifies. The resulting form, known as an ingot, is refined and shaped by successive rolling operations into various forms of semifinished or finished steel products. The first of such rolling operations is performed on either of two types of mills, known as "blooming mills" and "slabbing mills", whence the ingots emerge in reduced forms known as blooms and slabs, respectively. The blooms are subsequently rolled on "bar mills" or "billet mills" into "bars" or "billets", which are in turn rolled on "skelp mills", "seamless tube mills", "rod mills", "structural mills", "rail mills", or "merchant mills". The respective products of these latter mills are skelp (which is further rolled on tube mills), seamless tubing, rods (which may be cold-drawn into wire), structural shapes, rails and merchant bar products. Slabs are rolled on "plate mills" into plate or on "hot strip mills" into what is termed hot rolled strip. Hot rolled strip may be further processed on "cold strip mills" into a product described as cold rolled strip.
Products which are intended subsequently to be hot rolled are called "semifinished products". Products which are not intended subsequently to be hot rolled are called "finished products". Certain of the above mills are used to roll semifinished products, and certain of them are used to roll finished products.
C. Cooling Beds.
10. Except as otherwise indicated by the word "cold", all of the rolling operations recited in Finding 9 are carried on while the steel is hot and plastic. The several rolling operations are not necessarily carried on in immediate succession, or even in the same steel plant. It is frequently necessary to permit semifinished products to cool at various stages in their manufacture, for convenience in storage or handling, prior to their being reheated for further hot rolling. It is also necessary to permit finished products to cool, so that they may be conveniently stored or handled in subsequent coldworking processes. The term "cooling bed" is not a term of art. A "cooling bed" is a place where steel is set to cool. There are many types of cooling beds.
11. Hot steel products may be conveyed to a cooling bed in a variety of ways, one of which is by means of a conveyor table called a "run-in table" equipped with motor-driven rollers.
12. The cooled steel products may be removed from the cooling bed in a variety of ways, one of which is by means of a conveyor table, called a "run-out table", equipped with motor-driven rollers.
13. Neither the run-in table nor any other device for conveying the hot steel products to the cooling bed, nor the run-out table or any other device for removing the cooled steel products from the cooling bed, are parts of the cooling bed itself, as that term is used in the steel industry and as it is used herein.However, such auxiliary devices are part of the subject matter of the conspiracy alleged in the complaint.
14. A few types of steel rolled on merchant mills, when intended for a few end uses, e.g., flat bars ("spring flats") destined to be made into leaf springs, must be cooled slowly subsequent to the final rolling operation. Such slow cooling can be accomplished in various ways, one of which is to place the pieces to be cooled close together in a pack so as to reduce the effective radiating surface and restrict the amount of air which can circulate around the individual pieces. This process is known as "pack annealing". Some cooling beds for finished products contain devices for pack annealing. Cooling beds for semifinished products only do not contain devices for pack annealing.
15. The principal component parts of cooling beds are: (a) the packing mechanism (on some finished product beds), for continuous pack annealing of pieces desired to be slowly cooled, and which can be used for transfer purposes, without pack annealing, when pack annealing is not required; (b) the work-supporting bars, upon which the pieces to be cooled rest while they are cooling; and (c) the under-structure, which is a mechanism to actuate the work-supporting bars so as to cause the pieces being cooled to move across such work-supporting bars during the time of cooling.
D. History of Cooling Bed Manufacture.
16. The provision of cooling facilities for hot steel is necessarily as old as the hot rolling of steel, and cooling facilities have been a part of every installation for hot rolling.
17. Many United States patents have issued, commencing as early as 1872, disclosing various cooling beds and environmental equipment.
18. Over the past fifty years many machinery builders other than Birdsboro and Mesta have made cooling beds for steel manufacturing companies, and some steel manufacturing companies have made cooling beds for their own use.
* * *
G. Advantages of Cooling Beds Embodying Fisk and Peterson Inventions.
27. A cooling bed covered by the Fisk and Peterson patents (herein called a "Fisk-Peterson bed") is a highly versatile bed which is particularly well adapted to cool the variety of products produced by a merchant mill. It can be easily adjusted either to pack anneal or not to pack anneal, as required. The alternately available V-shaped notched and smooth-surfaced work-supporting bars permit the cooling of various shapes of product and enable them to be kept straight while being cooled. The understructure mechanism is economic to operate and permits the product to be carried across the bed at such speeds as the operator may select. The Fisk-Peterson bed thus provided a facility that was very useful to steel-makers, especially to the smaller steel plants which because of a limited demand for a single type of product might wish to roll different products at different times on the same mill.
H. The Situation as between Birdsboro and Mesta Respecting Cooling Beds.
28. Neither Birdsboro nor Mesta could, independently of the other, make cooling beds containing the advantageous features desired by the trade (Finding 27) without trespassing on patent rights owned by the other, because such cooling beds embodied inventions some of which were covered by patents owned by Birdsboro and some of which were covered by patents owned by Mesta.
In addition, neither Birdsboro nor Mesta individually could build beds embodying certain inventions because patents owned by one of them covering such inventions blocked patents owned by the other:
(a) Neither Birdsboro nor Mesta could build a bed containing the V-shaped alternately-available notched and smooth-faced work-supporting bars: Mesta could not build such a bed because Birdsboro owned the Peterson reissue patent No. Re. 18,996, covering the specific V-bar structure; Birdsboro could not build such a bed because the V-bars were dominated by the broad claims of Fisk patent No. 1,964,147, owned by Mesta.
(b) Neither Birdsboro nor Mesta could build a bed containing the overhead packing device disclosed and claimed in Peterson and Peterson patent No. 2,328,923: Mesta could not build such a bed because Birdsboro owned patent No. 2,328,923; and Birdsboro could not build such a bed because such a device was dominated by the broad claims of Fisk patents, owned by Mesta, especially Fisk patent No. 1,761,470.
(c) Birdsboro could not build a bed containing the overhead packing device disclosed and claimed in Fisk and Peterson patent No. 2,332,905, owned by Birdsboro and Mesta jointly, because such device was dominated by the broad claims of Fisk patents, owned by Mesta, especially Fisk patent No. 1,761,470.
29. Fisk-Peterson beds contain thousands of small parts, each weighing from one-half pound to a few hundred pounds. Such a bed may contain between 40,000 and 50,00 parts and weigh 900,000 pounds. The parts must be specially cast and machined. They are not interchangeable, and must be assembled at the manufacturer's plant and fitted and numbered so that when the bed is reassembled at the purchaser's site each part may be relocated in the identical place in the assembly.
30. Since at least 1930, Birdsboro's facilities have been particularly well suited to the construction of Fisk-Peterson beds. It has one foundry devoted entirely to castings ranging from one-half pound to 600 pounds in weight, a wealth of small machine tools, an extensive assembly floor, and an engineering staff which is especially competent in the cooling bed field.
31. Since at least 1930, Mesta's facilities have not been suited to the construction of Fisk-Peterson beds. `Mesta's foundry equipment is large and is adapted to the production of only large castings. Mesta cannot economically make small castings and (except in extreme emergencise) purchases from others all iron castings under 500 pounds and all steel castings under 1,000 pounds, Mesta's machine tools are extraordinarily large. Its shop is crowded, and it does not have floor space for assembling a Fisk-Peterson bed.
32. Although Mesta does not and has not manufactured cooling beds embodying features of the claims of the licensed patents, both Birdsboro and Mesta manufacture and sell, and during the period of time covered by the complaint, have manufactured and sold cooling beds for both finished and semifinished products not embodying the licensed patents.
33. Mesta, to engage in the manufacture of Fisk-Peterson beds, would be required to purchase more land, to build a new foundry, to put in new, small machine tools, and to acquire additional engineering personnel.
34. Since at least 1930, Mesta has been interested in supplying complete merchant mills. These mills involve large parts which are compatible with Mesta's facilities, but in many cases it is difficult for Mesta to obtain the order for the entire mill installation without also taking the order for some of the components containing small parts, notably the cooling bed, which Mesta could not make itself.
I. Summary of Agreements between Birdsboro and Mesta.
35. Defendants have made four agreements relating to cooling beds: (a) Agreement of July 7, 1930. (b) Supplemental agreement of February 24, 1933. (c) Agreement of February 24, 1933. (d) Agreement of August 12, 1942.
Each of the first three agreements -- (a), (b), and (c), above -- was cancelled and terminated more than thirteen years ago, by an express provision in the agreement of August 12, 1942. That agreement still subsists, Birdsboro (Delaware) haveing assumed all rights and obligations of Birdsboro thereunder.
(a) The agreement of July 7, 1930, involved Fisk patent No. 1,761,470, which issued to Mesta on June 3, 1930, and Peterson application Serial No. 389,119, filed August 29, 1929, assigned to Birdsboro, which later eventuated in patent No. 1,834.728 (subsequently reissued as Re. 18,996). The Fisk patent related to the packing mechanism in general, and the Peterson application to the understructure and the work-supporting bars. A cooling bed embodying the several inventions of Fisk and Peterson could not lawfully be made or sold by either Birdsboro or Mesta without a license from the other. The agreement, which is limited to merchant mill cooling beds covered by the Fisk patent or the Peterson application, or by both, conferred on Mesta an exclusive license under the Birdsboro application to sell, and on Birdsboro an exclusive license under the Mesta patent to make.
(b) The supplemental agreement of February 24, 1933, came about after the issuance of patent No. 1,834,728. When that patent issued, it became apparent that Peterson had claimed certain subject matter (claims 9-14 of the patent) disclosed in Fisk's co-pending application Serial No. 426,876 (subsequently patent 1,921,353). These claims related generally to the alternating plunger scheme and related mechanism mentioned in Finding 21(c). An interference, No. 65,389, was declared by the Patent Office. It was determined that Fisk was the prior inventor of the subject matter of these claims, and the interference was settled accordingly. The supplemental agreement -- agreement (b), above -- provided that the subject matter of claims 9-14 should go to Fisk and that the Fisk application should come under the terms of agreement (a), above. Agreement (b) also took claims 23-25 of patent No. 1,834,728 out of the operation of agreement (a) and made them the subject of agreement (c), above. All the other claims of patent No. 1,837,728 remained within the operation of agreement (a).
(c) The agreement of February 24, 1933, agreement (c) above, dealt primarily with the inventorship of the borad idea of having a smooth and a notched surface on the bed and of making one or the other of these selectively available. This broad subject matter was covered by claims 23-25 of Peterson patent No. 1,834,728. In Fisk's pending application Serial No. 529,076 (subsequently issued as patent No. 1,964,147), Fisk claimed the same broad idea. An interference (No. 65,090) was declared by the PAtent Office between those broad claims of the Peterson patent, owned by Birdsboro, and the Fisk application, owned by Mesta. The agreement provided that it should be determined which of Fisk or Peterson was the inventor of the subject matter of those claims. As to merchant mill cooling beds the agreement provided for licensing along the same general lines as agreement (a). In addition, as to cooling beds for installations other than merchant mills, Birdsboro was given an exclusive license to make, use and sell under the broad subject-matter claims.
It was determined that Fisk was the inventor as to the disputed subject matter, and the interference was settled accordingly. Peterson patent No. 1,834,728 was reissued as patent Re. 18,996 with the broad subject-matter claims 23-25 removed. They appear as claims 15-17 of Fisk patent No. 1,964,147.
There remained in the Peterson patent, as reissued, claims to the V-shaped form of work-supporting bars. These claims were dominated by the broad claims awarded to Fisk, with the result that the V-bars could not be constructed without rights under the Peterson reissue patent, owned by Birdsboro, and the Fisk patent No. 1,964,147, owned by Mesta. The claims to the understructure also remained in patent Re. 18,996.
36. In addition to the two interferences referred to in Finding 35, a later interference (No. 80,348) was declared by the Patent Office between Peterson and Peterson Application Serial No. 409,260 (later issued as patent No. 2,328,923) and Fisk Application Serial No. 412,802 (later issued as patent No. 2,328,635). In this third interference priority of invention was awarded to Peterson.
* * *
This is a civil action under § 4 of the Sherman Act, 15 USCA § 4, alleging violation of § 1 of the act, 15 USCA § 1. Injunctive relief, looking to the future, is sought. Therefore, the disposition of the case must ultimately turn upon consideration of the 1942 agreement between defendants and their activities pursuant thereto, that agreement being the only agreement which has existed between defendants, relating to the subject matter of this action, since 1942. See Standard Oil Co. (Indiana) v. United States, 1931, 283 US 163, 182, 51 S.Ct. 421, 75 L.Ed. 926.
As more specifically set forth in the findings, defendants' patents which are here involved were both blocking and complementary. Defendants could, of course, refrain from making any agreement concerning such patents, in which event cooling beds embodying the best features of both defendants' patents could not lawfully be made, used, or sold, competitively or otherwise. Thus, in the absence of an agreement linking the right to use both defendants' patents, neither the public nor defendants could obtain any benefit from the inventions or from the lawful monopoly of the patents during the life of the paents. Therefore, it would seem that some agreement whereby the patent rights may be combined is desirable from the viewpoint of the public interest.
Defendants could, of course, dedicate their patents to the public use, or grant free or cheap licenses to all applicants (of which, with one exception, there have been none), or agree to compete with each other in the production of the patented beds (although Mesta could not feasibly perform such an agreement), or otherwise disclaim the lawful monopoly powers conferred by the patent laws. It may be assumed that it would be of public benefit if defendants, as well as all patentees, would go on inventing and disclosing their inventions without claiming the rewards inherent in the monopoly powers conferred by the patent laws. But patentees are not required by law, nor can they reasonably be expected, to do so.
Plaintiff's position is, in effect, that defendants, with their blocking and complementary patents, must be limited to a choice of the two foregoing alternatives, although no one would benefit from the first alternative, and the second would nullify or greatly impair the value of defendants' lawful monopoly powers. All of the aspects of defendants' agreement and of their activities of which plaintiff complains serve only to show that defendants have combined their patents in such a way as to maintain the monopoly powers conferred by the patents. This, in the opinion of the court, they were entitled to do.
Agreements for exclusive limited patent licenses are not illegal per se, although they do involve a restraint of commerce. United States v. General Elec. Co., 1926, 272 US 476, 47 S.Ct. 192, 71 L.Ed. 362; Brownell v. Ketcham Wire & Mfg. Co., 9 Cir., 1954, 211 F2d 121. That is so because the restraint arises from the patent grant and its lawful transfer. As stated in Bement v. National Harrow Co., 1902, 186 US 70, 92, 22 S.Ct. 747, 756, 46 L.Ed. 1058:
"[The Sherman Act] clearly does not refer to that kind of a restraint of interstate commerce which may arise from reasonable and legal conditions imposed upon the assignee or licensee of a patent by the owner thereof, restricting the terms upon which the article may be used * * *."
The agreement in the instant case involves exclusive cross licenses, although in substance it is not far different from an exclusive licensing of all of Mesta's cooling bed patents to Birdsboro, with no license from Birdsboro to Mesta, but with a rather unusual provision for compensating Mesta for its licenses. Birdsboro was given the exclusive right to make and sell under all the patents, except that Mesta was, in effect, allowed to take a middleman's profit by having the exclusive right to sell cooling beds fo merchant mills. The method for compensating Mesta does not restrain commerce any more than a more typical agreement for the payment of specified royalties. Cf. Automatic Radio Mfg. Co. v. Hazeltine Research, Inc., 1950, 339 US 827, 70 S.Ct. 894, 94 L.Ed. 1312. In considering the reasonableness of the provision, it must be remembered that cooling beds are not mass production items; their prices, specifications, dimensions, and uses vary greatly even in the narrow field of beds covered by Fisk and Peterson patents.
Viewing the agreement, however, as one of exclusive cross licensing, it is clear that such an agreement is not illegal per se and may even be desirable. In Standard Oil Co. v. United States, supra, the Court held, 283 US at page 171, 51 S.Ct. at page 424:
"Where there are legitimately conflicting claims or threatened interferences, a settlement by agreement, rather than litigation, is not precluded by the Act. * * * An interchange of patent rights and a division of royalties according to the value attributed by the parties to their respective patent claims is frequently necessary if technical advancement is not to be blocked by threatened litigation."
In a footnote the Court stated:
"This is often the case where patents covering improvements of a basic process, owned by one manufacturer, are granted to another. An patent may be rendered quite useless, or 'blocked,' by another unexpired patent which covers a vitally related feature of the manufacturing process. Unless some agreement can be reached, the parties are hampered and exposed to litigation. And, frequently, the cost of litigation to a patentee is greater than the value of a patent for a minor improvement."
The dictum of the court in Blount Mfg. Co. v. Yale & Towne Mfg. Co., C.C., D. Mass., 1909, 166 F. 555, 557, is particularly applicable in this case:
"If, as a result of mutual licenses, there is put upon the market an article embodying the inventions of both patentees, so that as the effect of exchange of licenses a new article of commerce is developed, it is doubtful if the public is thereby unlawfully deprived of any of its rights or expectations of free competition."
Nor does any illegality inhere in the fact that the licenses granted are limited in their fields of use. See General Talking Pictures Corp. v. Western Electric Co., 1938, 305 US 124, 59 S.ct. 116, 83 L.Ed. 81; Extractol Process, Ltd. v. Hiram Walker & Sons, Inc., 7 Cir., 1946, 153 F2d 264.
This court is not unmindful of the admonition of the Standard Oil case, supra, 283 US at pages 169-170, 51 S.Ct. at page 423:
"[T]he necessary effect of patent interchange agreements, and the operations under them, must be carefully examined in order to determine whether violations of the Act result."
The agreement here involved is not an agreement between actual or potential competitors in the manufacture of beds of the types covered by the agreement. The court is well aware that cross licensing agreements have been used in some cases to fix prices, to extend patent monopolies to unpatented subject matter, to regiment an industry, or otherwise to restrain lawful competition. See Brownell v. Ketcham Wire & Mfg. Co., supra. But no such illegality appears in this case.
Plaintiff contends that defendants have, under their agreement, given extraterritorial effect to United States patents. This contention is not supported by the evidence. Of course, beds manufactured in the United States for sale elsewhere would come within the terms of the agreement because such manufacture would come within the patent monopoly grants. See Becton, Dickinson & Co. v. Eisele & Co., 6 Cir., 1936, 86 F2d 267, certiorari denied 1937, 300 US 667, 57 S.Ct. 509, 81 L.Ed. 874. There is no evidence, moreover, of any consultation between defendants with respect to a patented bed which was not made and sold in the United States.
Plaintiff particularly complains of the provision of the 1942 agreement for the automatic inclusion of future cooling bed patents under the terms of defendants' agreement. Such provisions can be abused, just as many agreements lawful in themselves can be used unlawfully to restrain commerce. But no such abuse appears here, and provision for future patents is not unlawful per se. TransparentWrap Mach. Corp. v. Stokes & Smith Co., 1947, 329 US 637, 67 S.Ct. 610, 91 L.Ed. 563; Cutter Laboratories, Inc., v. Lyophile-Cryochem Corp., 9 Cir., 1949, 179 F2d 80, 93; United States v. E. I. DuPont de Nemours & Co., D.C., D.Del., 1953, 118 F.Supp. 41, 224-225, probable jurisdiction noted, 1955, 348 US 806, 75 S.Ct. 41, 99 L.Ed. 637.
Plaintiff relies strongly upon United States v. Line Material Co., 1948, 333 US 287, 68 S.Ct. 550, 92 L.Ed. 701, and cases following it, e.g., United States v. New Wrinkle, Inc., 1952, 342 US 371, 72 S.Ct. 350, 96 L.Ed. 417. Line Material involved the problem of price fixing pursuant to patent cross licensing agreements, in the light of United States v. General Elec. Co., supra, following Bement v. National Harrow Co., supra. Of the eight justices who considered the Line Material case, the four concurring justices thought that General Electric should be overruled insofar as it related tp price fixing, the three dissenting justices thought that it and Bement should be followed, and Justice Reed, who delivered the opinion of the Court, thought that General Electric should be distinguished. None of the opinions in Line Material suggests the overruling of Standard Oil Co. v. United States, supra, which held that a cross license between mutually deadlocked complementary patents is, per se, a desirable procedure. Clearly the ratio decidendi of Line Material lay in price fixing, not in cross licensing. As stated in the opinion of the Court, 333 US 315, 68 S.Ct. 564:
"It is not the cross-licensing to promote efficient production which is unlawful. *** The unlawful element is the use of the control that such cross-licensing gives to fix prices."
There is no evidence of price fixing in this case. The only agreement regarding prices is contained in paragraph 5 of the 1942 agreement, which provides that if the prices at which Birdsboro shall sell cooling beds for merchant mills to Mesta for resale are not low enough to enable Mesta "to sell in competition with equipment offered by others", Mesta may build such beds itself or have them built by others. Such an agreement tending to suppress prices of cooling beds for merchant mills to a competitive level is clearly in furtherance of, rather than in opposition to, the purposes of the Sherman Act. Of course, in the field of cooling beds for semifinished products, Birdsboro was given all the patent rights and there was no cross licensing to Mesta.
In the opinion of the court, this case must be decided in accordance with Cutter Laboratories, Inc., v. Lyophile-Cryochem Corp., supra, in which the cross licensing arrangement which the Ninth Circuit upheld seems to have been very similar to that involved here, except that the arrangement in that case would seem to offer a greater opportunity for restraint of commerce than is evidenced here. The court held, 179 F2d at page 93:
"But conceding the patent pool did place in the hands of the parties a power to exclude competition from the industry by fixing prices or charging unreasonable royalties or other methods, that power by itself could not constitute unlawful monopolization unless accompanied by a purpose or intent to exclude competition."
In the instant case defendants have not, through their agreement, either acquired a power or evidenced an intent to exclude competition from the cooling bed industry. Cf. United States v. Associated Patents, Inc. D.C., E.D.Mich., 1955, 134 F.Supp. 74, affirmed per curiam sub nom. Mac Investment Co. v. United States, 76 S.Ct. 432. Rather, they have served to increase competition in the cooling bed industry by facilitating the production of beds which could not otherwise have been produced, in an industry of which their Fisk-Peterson beds represent a minor part of the total production. Application of the "rule of reason", cf. United States v. United States Gypsum Co., 1948, 333 US 364, 400-401, 68 S.Ct. 525, 92 L.Ed. 746, to the evidence in this case does not lead to the conclusion that competition has been unlawfully restrained.
As stated in the Cutter Laboratories case, supra, 179 F2d at pages 92-93:
"Patent pools and cross-licensing agreements, when formed in a legitimate manner for legitimate purposes, are not illegal in themselves. * * * Nor is an agreement to assign patents on future inventions within a specified field inherently illegal.* * * It is only where the agreements are used to effect a restraint of trade or a monopoly that they violate the law, as where they are used to fix prices, * * * or to suppress competition from unpatented articles, * * * or to monopolize an entire industry by pooling the dominating patents and allocating fields of manufacture among companies which would otherwise be in competition. * * *
"It must be remembered that the patent laws give the patentee a monopoly. He may make, use or sell the patented product, license others, on an exclusive or non-exclusive basis, to do so, authorize the issuance of sublicenses, or assign the patent itself for a consideration. The sole limitation is, that he must not use his legitimate patent monopoly as a means of suppressing competition or acquiring a monopoly outside of the area of monopoly which the patent grants. The legality of the agreements in this case depends, therefore, upon a comparison of the competitive situation which they create with the patent monopolies which each party would have in the absence of the agreements. *** It is consistent with the spirit, as well as the letter, of the patent laws that each of these two companies should arrange to use the other in order to reap the rewards to which it is entitled as patentee and yet which it is in no position to reap by itself."
For the foregoing reasons, and upon full consideration of all the contentions of the parties and of the evidence, this case must be adjudicated in accordance with the following:
Conclusions of Law
1. This court has jurisdiction of the parties and the subject matter of this action.
2. The defendants have not combined or conspired to restrain interstate or foreign trade as alleged in the complaint in violation of the Sherman Act.
3. The agreement between the defendants dated August 12, 1942, is, and since its date has been, the only subsisting agreement between the defendants relating to the manufacture and sale of cooling beds. Said agreement is lawful and does not violate the Sherman Act. The defendants have not used patent rights in violation of the Sherman Act.
4. The plaintiff is not entitled to any relief prayed for in its complaint. This action should be dismissed.
467 F.2d 295; 175 USPQ 392
1972 Trade Cas. ¶ 74,180
(6th Cir, 1972)
Phillips, J. This is an appeal and cross-appeal from a judgment for defendant in a patent infringement action. A brief outline of the facts is essential to an understanding of the issues presented to this court. Reference is made to the comprehensive opinion of District Judge Joseph P. Kinneary reported at 169 USPQ 336 (1971) for a more complete discussion of the facts.
The patent in suit, No. 2,678,625, was granted on May 11, 1954, to Arthur Schwerdle as assignor to Vineland Chemical Company on an application filed in July 1951. It is directed to selective post-emergent herbicides, describing and claiming a method of destroying crabgrass while doing little or no harm to desirable grasses. Schwerdle discovered the selective herbicidal qualities of disodium methyl arsonate (DSMA) in 1949. In 1950 and 1951 he offered samples of DSMA to O. M. Scott and Sons for testing and evaluation. At that time he identified the samples only as an organic arsenic compound. Scott was impressed with the samples, requested more material for further testing, and began consideration of a dry formulation of the material for commercial use.
In 1954 Schwerdle began marketing "Crab-E-Rad," a wet spray formulation of DSMA. In response to Scott's inquiry, Schwerdle disclosed the DSMA was the herbicidally active ingredient of Crab-E-Rad and was identical with the samples furnished Scott since 1950. Scott's plan to market a dry formulation of DSMA became fixed in 1955. Inquiry was made of Schwerdle as to his ability to supply Scott with substantial quantities of DSMA. Shipments to Scott commenced in April 1956 and Scott began marketing its dry formulation under the name "Clout" by early summer. Scott purchased its DSMA requirements from Schwerdle until March 1957, paying patent royalties of $0.555 per pound. Thereafter, purchases were made from others without payment of any royalties.
We digress from the above chronology to discuss related events. Schwerdle had been an officer and employee of American Research Associates (ARA) from mid-1945 through August 1949. A coworker accidentally had discovered the selective herbicidal qualities of phenyl mercuric acetate, an organic mercury compound. Schwerdle was placed in charge of a program for evaluation of organic arsenic compounds for similar activity. He procured several of such compounds and forwarded them to Rhode Island University in May 1949 for testing. One of the compounds sent was DSMA. Schwerdle left ARA in August 1949 to form a partnership with his wife under the name Vineland Chemical Company. The test results from the University were not reported to ARA until November 1949. Schwerdle, unaware of the University test results, undertook his own testing of DSMA in September 1949. The results of these tests showed the chemical's effectiveness, culminating in the patent at issue.
In November 1955 ARA asserted ownership of the patent by virtue of Schwerdle's employment. An action was brought against Schwerdle in the United States District Court for the District of New Jersey, alleging that ARA was the equitable owner of the patent and demanding assignment of the patent to it. In January 1959, a lengthy opinion was filed, disposing of the litigation, which had been extremely bitter because of personal animosity between the litigants. The court in essence found that both parties had been guilty of grossly inequitable conduct and refused to lend the aid of its equitable powers to either of them. In an unusual turn of events, the court was persuaded by counsel to withdraw and impound its opinion, permitting the parties to stipulate to dismissal without an adjudication on the merits but with prejudice, in order to enter a settlement agreement. The agreement assigned the patent to a trust, with counsel for the parties designated as trustees, and granted each of the parties nonexclusive licenses. The trustees were to license the patent to responsible formulators, accounting to the parties for royalties received on an equal basis. The trustees carried out the terms of the agreement, licensing formulators of DSMA and other organic arsenic compounds.
* * *
* * *
The statute thus requires this claim to "be construed to cover the corresponding structure, material, or acts described in the specification and equivalents thereof." The inoperative methyl arsonates set out in the test report are not embraced by claim 2 since they are not equivalents of the disclosed methyl arsonates in that they do not "do the same work in substantially the same way, and accomplish substantially the same result." See Graver II, supra, 339 U.S. at 608, 70 S.Ct. at 856.
* * *
Accordingly, the decision of the District Court as to invalidity is reversed.
* * *
The appropriate inquiries on the equivalence issue are set forth in Graver II as follows:
Id. at 609, 70 S.Ct. at 856-857.
The District Court found that the sole active ingredient in Clout was DSMA and that the other constituents performed well known functions to adapt DSMA to a dry formulation and improve herbicidal action. These findings, not clearly erroneous, must be sustained.
* * *
Scott contends that the Schwerdle patent has been misused in several respects, thereby rendering it unenforceable. It is asserted that the trust agreement was part of a concerted action between competitors to restrain competition in the sale of DSMA and exploitation of the Schwerdle invention and that the trustees extended the patent beyond its lawful scope. We note at the outset that the strong public policy underlying the misuse doctrine allows Scott to interpose this defense without allegation or proof that Scott was the victim of any misuse. See Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 494, 62 S.Ct. 402, 86 L.Ed. 363 (1942); Kolene Corp. v. Motor City Metal Treating, Inc., 440 F.2d 77, 84-85 (6th Cir. ), cert. denied, 404 U.S. 886, 92 S.Ct. 203, 30 L.Ed.2d 169 (1971).
Judge Kinneary found that both Vineland and ARA had colorable claims to ownership of the Schwerdle patent and that the settlement agreement was entered into in reasonable compromise of these claims which had been asserted in good faith. Had the title contest been a sham to cover a naked agreement between competitors to restrict the licensing of a patent owned by one of them, the agreement would be subject to rigid scrutiny. See United States v. Besser Mfg. Co., 96 F.Supp. 304 (E.D. Mich. 1951), aff'd, 343 U.S. 444, 72 S.Ct. 838, 91 L.Ed. 1063 (1952). We are unwilling on this record, however, to hold the agreement to have been a per se misuse. Scott further asserts that the agreement in terms and operation was used by Vineland and ARA to suppress competition in the manufacture and sale of DSMA. The District Court found that the agreement and form patent licenses granted thereunder contained "affirmative provisions which assure free competition," 169 USPQ at 349, and that the trust in fact was not used to restrain competition. Id. at 350. We agree with the findings of Judge Kinneary.
The second type of misuse asserted is that the trustees collected royalties for uses of DSMA other than crabgrass control and for uses of calcium propyl arsonate (CPA) and ammonium methyl arsonate (AMA), chemicals alleged to be outside the scope of the Schwerdle patent. The patent licenses granted by the trustees contained a clause establishing a presumption that DSMA sold by the licensee would be used to practice the patented method. The evidence showed that when the trust agreement was entered into and the form licenses established, the only commercial use for DSMA was in crabgrass control. Some three years later, a substantial part of the DSMA sold was used to control other weeds. Scott urges that the presumptive clause was used to collect royalties from the latter non-infringing uses. The proofs at trial clearly show otherwise. A licensee was free either to obtain a royalty refund upon certification of sale for control of other weeds or purchase DSMA ex-royalty, making royalty payments only upon sale of DSMA for crabgrass control. The record is devoid of any evidence that the trustees knowingly have collected royalties for non-infringing uses of DSMA.
With respect to CPA and AMA, Scott urges that the trustees are estopped to assert infringement of the Schwerdle patent by the use of these chemicals. Estoppel is predicated on representations made to the Patent Office by Schwerdle during prosecution of applications for patent on herbicidal uses of AMA and CPA.
AMA is a species of methyl arsonate within the scope of the generic claims of the Schwerdle patent but not specifically described in the specification thereof. In response to rejections of claims to AMA in the later filed application on the ground of unpatentability over the patent in suit, Schwerdle argued that the claimed AMA salts were markedly and unexpectedly superior to those disclosed in the patent. It is Scott's position that these representations estop the trustees to assert that AMA is within the scope of the patent in suit. It is our view that Scott has fallen far short of the mark. Misuse of this type is not made out unless it is shown that AMA is without the scope of the Schwerdle patent and that the trustees knowingly extracted royalties for the uses thereof in the face of this lack of coverage. The record shows neither.
It is clear that a specific improvement patent may be granted in the face of a basic patent which generically but not specifically describes the claimed subject matter of the later filed application where the species claimed possesses properties unexpectedly superior to the genus disclosed. See In re Petering, 301 F.2d 676, 683 (CCPA 1962); cf. In re Arkley, 455 F.2d 586 (CCPA 1972). Further, the claimed subject matter of the Schwerdle patent is not limited to the specifically disclosed embodiments thereof. Broad claims may include subject matter not so embraced. See Maxon v. Maxon Constr. Co., 395 F.2d 330, 334-335 (6th Cir. 1968); 35 USC § 112. It is thus clear that Schwerdle's representations to the Patent Office in connection with the later filed application, if true are in no way inconsistent with the trustees' assertion of the Schwerdle patent against formulators of herbicides using AMA as the active ingredient.
The same reasoning supports the conclusion that extraction of royalties for CPA was not a misuse. On the basis of Schwerdle's representations that CPA was unexpectedly effective as a pre-emergent herbicide (it destroyed crabgrass before germination and surface appearance) in addition to its known post-emergent effect, he was granted a patent on this method of using CPA. The evidence showed that due to the unpredictability and variability in the time of germination and surface appearance of crabgrass, the user will apply CPA after some of the weed has emerged, thereby practicing the method of the Schwerdle patent. Thus, although calcium arsonates are described briefly in the Schwerdle specifications, representations as to unexpected pre-emergence herbicidal activity are not inconsistent with an assertion of infringement by post-emergent application.
Since the evidence shows that the trustees had at least a colorable claim of infringement by the use of CPA and AMA, the District Court is affirmed on the issue of misuse.
181 F.2d 550; 85 U.S.P.Q. 94 (4th Cir., 1950)
Soper, J. Six United States patents, relating to elastic top self-supporting hosiery and methods for producing it, constitute the subject matter of this appeal. The Davis Company, the plaintiff in the District Court, is a corporation which was formed in 1946 to hold the patents for the beneficial owners. They are Scott and Williams Company, the largest manufacturer of circular hosiery knitting machines in the United States, Interwoven Stocking Company, the largest manufacturer of men's socks in the world, and W.B. Davis & Son, Inc., which until recently owned and operated a large hosiery mill in Alabama. The nominal defendants in the District Court were Baker-Cammack Hosiery Mills, Inc. and Baker-Mebane Hosiery Mills, Inc., located at Burlington, North Carolina; but the defense has been conducted and financed by the Hosiery Investigating Committee, an organization composed of one hundred and seventy-two hosiery mills located in North Carolina and fourteen other states, which was formed to investigate the validity of the patents and to defend suits brought to enforce them. J. E. Baker, president of both defendant corporations, is president of the Investigating Committee. Each member of the Committee has contributed financially to the defense of the suit. It was stipulated that one hundred and eighty manufacturers are involved directly or indirectly in the matters in issue. In argument it was stated that there are over five hundred hosiery mills in the United States.
There are two suits, one charging that Baker-Cammack has infringed five of the patents, and one charging that Baker-Mebane has infringed all of the patents in suit. Both companies are under the same management and control. The suits were consolidated and disposed of in one trial in the District Court, and conclusions of law and an opinion applicable to both cases were filed by the District Judge. 86 F. Supp. 180, 181. The court held in separate decrees that the patents are valid and have been infringed as alleged. The court also decreed in each case that the present firms and corporations comprising the Investigating Committee should be bound by the decrees except that all of them other than the named defendants were not adjudged guilty of the infringement and were not deprived of the separate defense of non-infringement. The named defendants were enjoined from further infringement and the cases were referred to a special master to ascertain the damages sustained by the plaintiff by reason of the infringement by the named defendants.
In addition to the defenses of invalidity and non-infringement, the defendants raised the defenses: (1) that the plaintiff holding company was estopped from suing for infringement of the patents by reason of conduct of its predecessors in title which amounted to laches and acquiescence in the use of the patents; (2) that the defendant, Baker-Cammack, had acquired an implied license to use certain machines and attachments in making stockings under five of the patents in suit by reason of the purchase of the equipment from Scott & Williams when Scott & Williams had a controlling interest in the patents; and, (3) that the actions of the owners of the patents in forming the Davis Company and seeking to impose upon the industry the provisions of proposed license agreements offered in evidence constituted such a violation of the federal anti-trust laws and such an abuse of the patent monopoly as to disentitle the Davis Company to the enforcements of its rights under the patents. The District Judge rejected all of these defenses; but he stated in his opinion that it might be necessary in assessing damages to reexamine the evidence in order to ascertain whether Scott & Williams had furnished the defendants machinery and equipment for the manufacture of infringing stockings as to confer upon the defendants an implied license to make infringing stockings on the equipment so furnished.
The great commercial importance of the products and processes described in the patents in suit is attested by the prominence of the beneficial owners of the patents in the industrial field and by the organization of a great part of the industry in a determined effort to destroy the patents and make use of the disclosures without compensation. It was found by the District Judge that the disclosures of one of the patents in suit, that is, the Davis Patent No. 2,306,246, granted to Robert E. Davis on December 22, 1942, on an application filed June 26, 1935, produced a great change in the manufacture of seamless hosiery. It had been customary for many years in knitting half hose to provide a top or calf portion of rib knitting in order to secure the desired elasticity, but to make the leg and foot of plain knit fabric in order to secure the desired fineness of texture. Hosiery fashioned in this way involved difficulties of manufacture which were avoided by Davis in a manner described in the following passage from the opinion of Judge Hayes in the District Court.
This litigation concerns patents in the knitting of seamless hosiery which formerly involved three distinct and independent operations. The top of the hose was conventionally produced in the form of rib fabric on a separate machine for that purpose. The leg and foot of the stocking were produced of plain knit fabric formed on a so-called plain knitting machine having a single set of needles known as cylinder needles. The rib fabric tops produced on the rib machine were transferred by hand to the plain knitting machine. This required the use of a so-called transfer ring on which each succeeding rib top is placed by hand, loop by loop on the pointed quills of the transfer ring. The ring carrying the rib top is then placed on the plain knitting machine with each quill point in the ring fitted over a cylinder needle and the rib top is then moved down by hand from the ring on to the needles so that they will knit the plain knit leg and foot on the rib top. This was the conventional method at the time of the inventions involved in this suit and the cost per dozen pairs of hose produced by this cumbersome method was 20¢ per dozen pairs more than the cost embodying the inventions of the patents in suit.
Various attempts were made to improve this method of production as well as to devise some ways or means by which hosiery could be produced that would have the appearance of true one by one rib top and be self-supporting and with an anti-ravel edge or selvage. Attempts were made to produce a single machine capable of performing the rib top affectings its automatic transfer and continuing the knitting of the plain knit leg and foot, but this turned out to be very expensive and commercially unsuccessful. Attempts were made to produce a complete stocking on the somewhat simple plain knitting machine having a single set of cylinder needles but none of them were successful or solved the problem until Davis through his invention embodied in patent No. 2,306,246 discovered a commercially successful automatic top stocking possessing self-supporting characteristics that has not only made it competitive with the transferred rib top stocking but which has caused the automatic self-supporting top stocking to substantially displace the transferred rib top stocking in the commercial field. Davis achieved this result through a successful incorporation of an elastic strand into a plain fabric forming the top of the stocking in such manner as to draw in the plain fabric so as to have the normal width of true rib fabric and expansibility equal to or greater than that of true rib fabric and a self- supporting characteristic far beyond that possessed by true rib fabric. To the automatic top stocking of the Davis patent 2,306,246 Getaz invented the anti-ravel, a remarkably successful anti-ravel selvage for the stocking top which obviated the necessity for a separate hemming operation as disclosed in his patent 2,344,350. One method of forming the selvage edge is the subject matter of Getaz patent 2,054,217. Since the public demand required a stocking having the true one-by-one rib appearance Getaz produced an automatic elastic top stocking which was indistinguishable from a true one-by-one rib fabric and is embodied in his patent 2,230,402 and the corresponding method patent 2,230,403.
Full fashioned hosiery is produced on flat bed knitting machines as distinguished from circular knitting machines and it was with the full fashioned hosiery that Gastrich was primarily concerned. He was endeavoring to avoid contraction rather than induce it and in Claims 1 and 4 of his patent No. 2,067,486 he discloses one form of elastic carrying selvage edge but quite different from that contributed by Getaz.
The problem which confronted the industry was to find a fabric which could be knitted automatically without transfer on a single machine and which would retain the desirable qualities of the conventional rib top that was uniformly used on men's and children's stockings. The advantages of the rib top were that it had a pleasant appearance, possessed considerable expansibility, would not curl at the edge and would not run from the top of the piece. The attempts to find the solution which preceded the inventions of Davis and Getaz included the manufacture of the whole stockings on a plain knitting machine, turning in the top and sewing it down to form a welt or turning in the top by machine, making an imitation rib top and sewing it to the stocking, and manufacturing the whole stocking on a machine which started on two sets of needles as a rib top and was then transferred automatically for the completion of the stocking on a single set of needles. The last described method produced a true one-and-one rib top and a plain knit leg but the machine was too difficult and expensive to operate. The other attempts also failed because the fabric produced was lacking looks, in expansibility and in wearing qualities, and the stocking was not as good as that made on two machines with the hand transfer. The difficulties were overcome by Davis and Getaz.
The six patents in suit, and nine others which are not here involved, were assigned by the owners to the Davis Company, the plaintiff herein, in the year 1946; and the Davis Company holds them under agreements which provide that all royalties from licenses and recoveries for infringement shall be distributed in specified proportions to Scott & Williams, Interwoven and Davis & Sons, who had acquired all the property rights in the inventions. Licenses to use the patents have been offered by the Davis Company to the industry generally in communications which stated that the inventions constitute a complete series of patents covering a plain knit elastic top hosiery. The discussion of the questions of validity and infringement of the patents in suit which follows demonstrates the close relationship between the patents and the extent to which they are adapted for use in combination in the manufacture of hosiery.
* * *
Violation of Federal Anti-Trust Statutes.
The defendants go on to contend that the beneficial owners of the patents, having lulled the industry into a sense of security in infringing the patents, joined forces in a conspiracy in violation of the federal antitrust laws to pool the patents and mulct the infringing manufacturers in damages. We have seen that there is no substantial foundation for the first position and it remains to consider whether the evidence supports the second. It is based upon the formation of the Davis Company in 1946 by W.B. Davis & Sons, Inc., Interwoven and Scott & Williams to hold the patents in a single ownership, and upon the assertion that the patents provide essentially competing methods and fabrics covering the whole field of automatic elastic top hosiery, and hence the Davis Company is the fruit of an unlawful conspiracy in violation of Sections 1 and 2 of the Sherman Act as amended, 15 U.S.C.A. §§ 1 and 2.
The Davis Company was incorporated under the laws of Maryland. As of August, 1946 it received assignments of the patents in suit and of nine other patents not here involved as follows: The Gastrich patent '486 was assigned by Scott & Williams, subject to the right of Scott & Williams to manufacture knitting machinery for hosiery covered by the patent and subject to the exclusive right of the Textile Machine Works to operate under the patent in the field of full fashioned hosiery. The four Getaz patents in suit, with two other Getaz patents not here involved, were assigned by James L. Getaz and Scott & Williams, who had effected an agreement with Getaz to accomplish the assignment, subject to a license to Interwoven to use these patents in the field of men's hosiery. The Davis patent '246, as well as two other patents of Robert E. Davis and one patent of Robert E. Davis, Jr. not here involved, were assigned by W. B. Davis & Son, Inc., subject to an exclusive license possessed by Interwoven to use the patents in the field of men's hosiery. Interwoven transferred its interest as exclusive licensee under the Davis & Getaz patents as above described, and also its interest as owner of four patents issued to Robert E. Davis, Jr. not in suit. Interwoven, however, reserved from the grant the exclusive right to make men's hosiery in which an elastic thread is incorporated in the self-supporting portion only at every fourth wale in every fourth course.
The Davis Company began to circularize the industry before the transfer to it of all the patents was perfected. Offers to license the industry under all of the fifteen patents at 2¢ per dozen pairs were made in February, 1946 and repeated in August and September, 1946, and in the last mentioned communication the beginning date for the payment of royalties was fixed at September 1, 1946. Attention was drawn to the saving of 15 to 20¢ per dozen pairs by adopting the methods and fabric of the patents. These communications led to the formation of the Investigating Committee which in turn circularized the industry and solicited the manufacturers to furnish the number of their seamless machines in operation with or without rubber attachments and requested the manufacturers to join in fighting the patents and to contribute according to the number of machines operated. A copy of these circulars came into the possession of the Davis Company which offered the Committee in a number of letters to furnish any information which the Committee desired in respect to the patents, but this offer was rejected.
The license offered by the plaintiff in 1946 contained no restrictions as to the quantity of goods to be produced, or the price to be charged, or the territory in which they might be sold by the licensee. There were no tying clauses of any character, no pyramiding of royalties, and no requirement that the inventions must be used. The license was specifically confined to the type of manufacture of plain circular knit hosiery, embodying one or more of the inventions, expressly excepting, however, the right to make the character of goods reserved to the Interwoven Company.
The defendants argue that the conditions of the license offered in 1946 tending to establish their charge that the plaintiff set up a monopoly of competing patents on three grounds, namely: (1) that the licensee agrees that he will not at any time contest the validity of any of the patents covered by the license; (2) that the licensee is required to take a license for all fifteen patents at 2¢ per dozen pairs, and may not obtain a license under a smaller number of patents at a smaller royalty; (3) that the term of the license extends to the end of the term of the last expiring patent whereby the terms of earlier patents would be extended beyond the statutory period. For example, the earliest patent, Getaz '217, expires September 15, 1953, and the latest Getaz patent '350, expires March 14, 1961. Another criticism of the license offer is that under it royalties are payable even though the manufacturer may already have an existing license; but it is not clear why such a manufacturer would need an additional license.
The first objection requires no comment since it refers to a condition which is imposed by law upon every one who takes a license under a patent. See Steiner Sales Co. v. Schwartz Sales Co., 10 Cir., 98 F.2d 999. The other objections would be worthy of more attention were it not for the fact that they were eliminated from the plaintiff's offer to license the industry in a communication which was sent out on December 24, 1948, after the pending suit was brought but before it was tried in the District Court. Three forms or types were offered by the plaintiff company in this communication: (1) a license under the Davis patent '246 and the Getaz patent '350 which would authorize the licensee to make a plain knit stocking top with elastic thread in spaced courses and wales, under the first mentioned patent, and also to include a selvage or anti-ravel edge under the second mentioned patent; (2) a license under the Getaz patents, '402 and '350 which would enable the licensee to produce a plain knit stocking having the appearance of a rib knit stocking under the first mentioned patent, and to give it the selvage under the second mentioned patent; and (3) a license under the Davis patent '246 and also under another Davis patent No. 2,183,862, not in suit, which would authorize the licensee to manufacture the top portion of the stocking with terry knit fabric so made as to substantially conceal the elastic thread.
In the proposed new license agreement offered by the Davis Company, no restriction is found on the use of the Davis patent '246 since Interwoven had previously surrendered its exclusive right to incorporate the rubber at every fourth wale in every fourth course. As a result, Interwoven is subject to the same royalty as other manufacturers.
Furthermore the Davis Company did not confine its offer to the three types or combinations of patents above described. It announced in the same offer that the company stood ready and willing to negotiate the grant of uniform licenses at reasonable royalty rates for any other type of automatic elastic top hosiery comprehended by the claims of the patents owned by it. The provision in the earlier offers that the term of the license should extend to the end of the last expiring patent was also eliminated. The Davis Company also met the other objection to its previous license offers by announcing that if any hosiery manufacturer had acquired a license either express or implied under any of the patents owned by it for all or any part of its production, and this license was established to the satisfaction of the company, it would be recognized.
The Investigating Committee promptly countered this new offer of the plaintiff by a communication to the industry advising the rejection of the offer and stating that the Committee and its counsel were prepared to resist the suit on the ground that the pooling of the patents was invalid under the anti- trust laws.
We shall discuss this aspect of the case in connection with the latest offer of the plaintiff to license hosiery manufacturers since it was conceded by plaintiff's attorney in the argument of the case that the plaintiff's claim for damages for infringement must be confined to the period subsequent to December 24, 1948, when the last offer was made, and restrictions upon the license offered in 1946 were withdrawn.
The defendants depend very largely upon their assertion that the gathering of the six patents into one ownership suppressed competition between methods and fabrics which would otherwise contest with one another in the industrial field. The facts, however, do not bear out the contention. It is true that the plaintiff in its offer spoke of the fifteen patents as a comprehensive and complete series covering the various improvements of plain knit elastic top self-supporting hosiery and there is testimony to the effect that stockings may be made either according to the Davis or the Getaz method, some mills using one and some the other. But it was held by the District Court, and the evidence supports the holding, that the patents are complementary rather than competitive. It was shown by the evidence of witnesses who were associated with certain mills which contributed to the defense that they were making stockings whose fabric embraced not only Davis' spaced courses but the Getaz selvage edge and true rib appearance as well. Moreover, certain of the stockings produced in evidence and stipulated to have been made by the defendant mills were so constructed as to violate both the Davis and the Getaz patents. Interwoven found it desirable from the beginning to incorporate and combine the several features of these patents in their goods and to this end took licenses from both Davis and Getaz. Thus the evidence clearly shows that a stocking which has the appearance of the popular rib top, the selvage edge, and the elastic in spaced courses is recognized as a superior article by the trade.
It will have been observed that we are not dealing in this case with members of an industry who have been injured by a monopoly established by strongly entrenched and powerful competitors. It is said that there are five or six hundred independent hosiery mills in this country, and nowhere in this case does it appear that free competition has been stifled or that any attempt has been made to control the producers as to prices or quantities or areas of production. Furthermore, the patent privileges have been offered freely to all manufacturers and it is to their obvious advantage to possess the right to incorporate in their output all the modern improvements in the manufacture of hosiery.
Nor can there by any reasonable complaint as to the amount of the royalty received. There is no evidence to indicate that it is excessive in amount and there is the fact that for a considerable period Interwoven, the largest manufacturer of all, paid 4¢ a dozen pairs for the right to use the Davis patent '246 alone and that at another period, the Adams-Mills Corporation paid a royalty of 2 1/2¢ per dozen pairs under the same patent. The only advantage which the owners of the Davis Company possess is the right to exact a royalty fee for the use of the patents; but this is the privilege which the statute grants to inventors and to those who acquire patents from their owners and promote them; and the combination of complementary patents in a single ownership is not illegal if the combination is not used for improper purposes. United States v. United Shoe Machinery Co., 247 U.S. 32, 38 S.Ct. 473, 62 L.Ed. 968; United States v. Winslow, 227 U.S. 202, 33 S.Ct. 253, 57 L.Ed. 481; Standard Oil Co. v. United States, 283 U.S. 163, 51 S.Ct. 421, 75 L.Ed. 926.
The defendants and their associates cannot complain of hardships heretofore imposed upon them. Not only have they paid no royalties for the use of the inventions, but they have defied the owners of the patents and are now contending that even if they are infringers, they cannot be required to pay damages since the plaintiff does not come into court with clean hands. In considering this aspect of the matter it is important to bear in mind that much of the defendants' argument relates to the original licenses offered to the trade which were materially changed in 1948. We think that the case should be decided onthe basis of the last offer, for even if the first offer was improper, the plaintiff was clearly within its rights in withdrawing and correcting it. Campbell v. Mueller, 6 Cir., 159 F.2d 803; Flexwood Co. v. Matt G. Faussner & Co., 7 Cir., 145 F.2d 528; Sylvania Industrial Corp. v. Visking Corp., 4 Cir., 132 F.2d 947, 958.
The defendants, however, contend that even the present attitude of the plaintiff is unlawful, and hence it is deprived of the right to any relief. For this position they rely chiefly upon the recent decisions of the Supreme Court in Hartford-Empire Co. v. United States, 323 U.S. 386, 65 S.Ct. 373, 89 L.Ed. 322, and United States v. Paramount Pictures, Inc., 334 U.S. 131, 68 S.Ct. 915, 92 L.Ed. 1260. An examination of these cases clearly shows their irrelevancy to the present case. In the Hartford- Empire case a combination of corporations and of patents owned by them enabled the defendants to dominate the automatic manufacture of glass in this country; and the control of the patents was used to exclude other manufacturers from an opportunity to engage in the businesses and processes encompassed by new inventions. The defendants were able to allocate certain fields in glassware manufacture, to control the amount of production therein, and to maintain prices both as to the goods covered by the patents and as to other unpatented products.
The Supreme Court summarized the findings of fact of the trial court in this case in these words, 323 U.S. at page 400, 65 S.Ct. at page 381, 89 L.Ed. 322:
It was the unlawful character of these activities, which are in strong contrast with the free and independent competition existing in the hosiery industry, that led the Supreme Court to affirm the conclusion of the District Court that the leaders of the glass industry had violated the Sherman Act. The court said, 323 U.S. at pages 406-407, 65 S.Ct. at page 384:
Rights conferred by patents are indeed very definite and extensive, but they do not give any more than other rights a universal license against positive prohibitions. The Sherman law is a limitation of rights, -- rights which may be pushed to evil consequences and therefore restrained.
The difference between legitimate use and prohibited abuse of the restrictions incident to the ownership of patents by the pooling of them is discussed in Standard Oil Co. v. United States, 283 U.S. 163, 51 S.Ct. 421, 75 L.Ed. 926. Application of the tests there announced sustains the District Court's decision. It is clear that, by cooperative arrangements and binding agreements, the appellant corporations, over a period of years, regulated and suppressed competition in the use of glassmaking machinery and employed their joint patent position to allocate fields of manufacture and to maintain prices of unpatented glassware.
The Paramount case is especially relied on by the defendants to show that not only the first but also the last offer of the plaintiff involves an illicit attempt to control the industry. In that case the Supreme Court found that certain distributors and exhibitors of motion pictures had been engaged in an unlawful restraint of trade in that they had eliminated competition both in the distribution and exhibition of feature pictures by establishing substantial uniform minimum admission prices, by maintaining a system of clearances designed to protect a particular run of film against a subsequent run, and by pooling agreements whereby joint ownership and sharing of profits from normally competitive theatres were directed. The court especially emphasized and condemned one practice whereby the opportunity to purchase the right to exhibit one picture of good quality was conditioned upon purchasing another picture of inferior rank, thus endowing the latter with an earning power beyond its true merit. In discussing this feature the court said, 334 U.S. 156-159, 68 S.Ct. 929, 92 L.Ed. 1260:
Block-booking prevents competitors from bidding for single features on their individual merits. The District Court held it illegal for that reason and for the reason that it "adds to the monopoly of a single copyrighted picture that of another copyrighted picture which must be taken and exhibited in order to secure the first." That enlargement of the monopoly of the copyright was condemned below in reliance on the principle which forbids the owner of a patent to condition its use on the purchase or use of patented or unpatented materials.
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The court enjoined defendants from performing or entering into any license in which the right to exhibit one feature is conditioned upon the licensee's taking one or more other features.
We approve that restriction. The copyright law, like the patent statutes, makes reward to the owner a secondary consideration. In Fox Film Corp. v. Doyal, 286 U.S. 123, 127, 52 S.Ct. 546, 547, 76 L.Ed. 1010, Chief Justice Hughes spoke as follows respecting the copyright monopoly granted by Congress "The sole interest of the United States and the primary object in conferring the monopoly lie in the general benefits derived by the public from the labors of authors." It is said that reward to the author or artist serves to induce release to the public of the products of his creative genius. But the reward does not serve its public purpose if it is not related to the quality of the copyrights. Where a high quality film greatly desired is licensed only if an inferior one is taken, the latter borrows quality from the former and strengthens its monopoly by drawing on the other. The practice tends to equalize rather than differentiate the reward for the individual copyrights. Even where all the films included in the package are of equal quality, the requirement that all be taken if one is desired increases the market for some. Each stands not on its own footing but in whole or in part on the appeal which another film may have. As the District Court said, the result is to add to the monopoly of the copyright in violation of the principle of the patent cases involving tying clauses.
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We do not suggest that films may not be sold in blocks or groups, when there is no requirement, express or implied, for the purchase of more than one film. All we hold to be illegal is a refusal to license one or more copyrights unless another copyrights is accepted.
The defendants in the instant case liken this compulsory block-booking of motion pictures to the offers of the Davis Company to the knitting industry in 1946 in which fifteen patents were combined, and contends that the condemnation of the Paramount case should also be applied to this practice. The case was decided in May, 1948, and the decision undoubtedly led the plaintiff to modify its first offer and to send out a new offer in this connection to the industry in December of that year. Therein it eliminated the requirement that a licensee must accept a license under all of the patents and in place thereof offered patents in suitable groups of two and left the door open to any proposal for the acquisition of patent rights by the announcement that the Davis Company stands ready and willing to negotiate for uniform licenses at reasonable rates for any other type of automatic elastic top hosiery comprehended by the plaintiff's patents. Such a general offer was held sufficient in Sbicca-Del Mac, Inc. v. Milius Shoe Co., 8 Cir., 145 F.2d 389, to disprove the charge that a prospective licensee must accept a blanket license covering a number of patents and could not obtain a license under a single patent.
The Davis Company in the new offer also eliminated the provision as to the expiration date of the license. Theretofore in order to justify its requirement that a license taken by a manufacturer should last until the expiration of the youngest patent in the group, it had relied upon the rule announced in such a case as E.R. Squibb & Sons v. Chemical Foundation, 2 Cir., 93 F.2d 475, 477, that if the contract between the parties expressly so provides, royalty may be collected after the expiration of the patent. Such a provision, however, might easily lend itself to an unreasonable restraint of trade by extending patents beyond their legal limit; but it has been eliminated in the pending case and need no longer be considered.Ed. Note: see Brulotte v. Thys Co. 379 U.S. 29, 85 S. Ct. 176, 13 L. Ed. 2d 99, 143 U.S.P.Q. 264, 1964 Trade Cas. ¶ 71,287 (1964)
We are in agreement with the conclusion of the District Judge that the proofs in this case negative the existence of any conspiracy on the part of the plaintiffs, its officers and its predecessors, to violate the anti-trust statutes of the United States, and that the patents are enforceable against the combined infringers represented by the Hosiery Investigating Committee in control of the defense of the suit. The case will be remanded for further proceedings, which will include the modification of the decree so as to eliminate the Gastrich patent, as to which no infringement has been shown, and the determination of the liabilities of the defendants for infringement of the other patents in suit.
A motion of the appellants for a stay of proceedings was filed in this court on January 6, 1950, a few days before the argument. The motion brought to our attention a suit filed by the United States on December 28, 1949, the District Court of the United States for the Southern District of New York against the Davis Company and others in which the defendants therein were accused of violating the Sherman Act by conspiring to restrain commerce in elastic top hosiery, and the plaintiff prayed that the defendants be perpetually enjoined from so conspiring and for other relief. The motion for stay of proceedings is denied.
The decree of the District Court as modified will be affirmed.