XI Multiple firm antitrust based on combinations of non-price practices; licensing; multiple firm package licenses
A. Legitimate Settlements
(1) Conflicting Patents and Cross License: Birdsboro, supra , VIII E
(2) Ownership: 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) supra, VIII F
(3) Reasonableness in Licensing. Baker-Cammack Hosiery Mills, Inc. v. Davis Co. 181 F.2d 550, 85 U.S.P.Q. 94 (4th Cir., 1950) supra, IX G
B. Joint Ventures and Economically Efficient Cooperation
(1) Know how transfer and patent cross licensing: U.S. v. Westinghouse Elec. Corp., 648 F.2d 642; 31 Fed. R. Serv. 2d 952; 1981-1 Trade Cas. ¶ 64,112 (9th Cir., 1981) affirming 471 F. Supp. 532 (N.D.Cal.¶ 1978)
(2) Reasonableness in patent licensing: Standard Oil Co. (Indiana) v. US 283 U.S. 163, 182, 51 S.Ct. 421, 75 L.Ed. 926 (1931)
(3) Reasonableness in Copyright Licensing: Buffalo Broadcasting v. ASCAP 744 F2d 917 (2d Cir., 1984)
(4) Joint Venture & Cross License to Exploit Process; Multiple patents on multiple steps; Cutter Laboratories v. Lyophile-Cryochem Corp. 179 F.2d 80; 84 U.S.P.Q. 54 (9th Cir 1949)
C. Restraints Unreasonable; Impact on Price: Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20 (1911) \
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United States v. Westinghouse Electric Corp.
648 F.2d 642; 31 Fed. R. Serv. 2d 952;
1981-1 Trade Cas. ¶ 64,112 (9th Cir., 1981)
Duniway, J.: The United States appeals from the district court's dismissal of its civil action against Westinghouse Electric Corporation ("Westinghouse"), Mitsubishi Electric Corporation ("MELCO"), and Mitsubishi Heavy Industries, Ltd. ("MHI"), (together, "Mitsubishi") alleging violation of section 1 of the Sherman Act, 15 U.S.C. § 1. MELCO and MHI cross-appeal from the district court's imposition of monetary sanctions under F.R. Civ.P. 37 for delinquency in discovery.
I. Background -- No. 79-4109.
It is now well over ten years since the government filed this action on April 22, 1970, but it was not ready for trial until some six years later. Trial was to the court, and on June 16,1976, at the conclusion of the government's case-in-chief, the defendants moved for dismissal under F.R.C.P. 41 (b). The motion was granted and the suit dismissed October 20, 1978. U. S. v. Westinghouse Electric Corp ., N.D.Cal., 1978, 471 F. Supp. 532.
As might be expected in an antitrust action of this scope, the record and the burdens placed on the parties and the court in this litigation have been formidable. More surprising has been the tergiversations in the government's presentation of its claim for relief. It is fair to say that the government alleged one theory of antitrust violation in its complaint, relied in major part upon another theory at trial, and now appeals on the basis of its original theory. The district judge expressed his distress at the "United States' frequent shifting of position," with the lack of "diligent, effective, workmanlike prosecution," and with the government's failure to determine "just what was its cause of action." R.T. 3040.
The complaint charges that certain Technical Assistance Agreements entered into by Westinghouse with MELCO and with MHI violated § 1 of the Sherman Act. The companies or their predecessors have had agreements to share technology since 1923. This long-standing relationship, briefly interrupted by World War II, was re-established in the post-War era by new agreements between Westinghouse and MELCO in 1951 and between Westinghouse and a predecessor of MHI in 1952. These agreements were renewed in essentially the same form in 1966 and 1967, respectively.
The 1966 and 1967 Technical Assistance Agreements grant to MELCO and MHI licenses to manufacture, use, and sell certain electrical products under Westinghouse's foreign patents, except Canadian. No license is granted under Westinghouse's United States or Canadian patents. But nothing in the agreements forbids Mitsubishi's manufacturing, using,or selling the enumerated products in the United States or Canada. In return for licensing its foreign patents, Westinghouse is granted a royalty and a reciprocal license to manufacture, use,and sell products incorporating MELCO or MHI patents or knowhow.
The government's first theory, urged below and now on appeal, as to why these Technical Assistance Agreements violate § 1 of the Sherman Act, may be stated as follows. The United States market for the electrical products covered by the agreements is heavily concentrated. Although they are two of the largest manufacturers of
electrical products outside the United States, MHI and MELCO do not compete in this market. Their entrance into the United States market would substantially increase the amount of competition in that market. By 1965 MELCO and MHI wished to sell in the United States and had the technical ability to design around Westinghouse's many patents. Their failure to do so, the government contends,is a direct result of the Technical Assistance Agreements. Because MELCO and MHI are licensed by the Agreements under Westinghouse's foreign patents, and because they have had such licenses for a long period of time, they have become so committed to Westinghouse technology as to be economically incapable of developing new products that might compete in the United States without infringing upon Westinghouse's United States patents. Without licenses under Westinghouse's United States patents, MELCO and MHI are effectively barred from the United States market by dint of the patent laws and the heavy investment in Westinghouse technology that the Technical Assistance Agreements induced them to make.
The theory is novel and laced with paradox. By the act of helping MELCO and MHI to prosper and to grow into large corporations in its own image, Westinghouse is said to have insulated its home market from their competition in violation of the antitrust laws. The government urges that although the Agreements may not have resulted in an unreasonable restraint of trade when first signed in 1951 and 1952, at some point in 1965, when MELCO and MHI became capable of competing in the United States and capable of designing around Westinghouse's patents but for their investment in Westinghouse technology, the Agreements came to violate the antitrust laws. Accordingly, the government asked the district court to order an end to the Agreements and to require Westinghouse to license MELCO and MHI under its United States patents.
At trial the government put forward several other theories as to why the Agreements violated the antitrust laws. Chief among these theories, and the main theory on which the government went to trial, was the claim that MELCO and MHI had tacitly agreed with Westinghouse not to compete in the United States while Westinghouse had similarly agreed not to enter the Japanese market. In addition, the government charged that Westinghouse had been guilty of patent abuse and of imposing a tying arrangement by forcing MELCO and MHI to pay royalties on certain products not covered by Westinghouse patents, and by requiring MELCO and MHI to include products in the Agreements that they did not want.
II. The Merits
In a careful opinion, the district judge answered each of the government's theories. On this appeal the government does not challenge the bulk of the court's opinion. It does not challenge the district court's rejection of its claim of a territorial allocation conspiracy -- a central contention ap trial -- or the rejection of its claims of an illegal tying agreement and of patent abuse.
The appeal is narrow and rests on two contentions. First, the government attacks the district court's rejection of its theory that Mitsubishi has become so wedded to Westinghouse technology, because of the Agreements, as to be unable to compete in the United States market, the theory upon which the case was instituted. Second, the government argues that the district court erred in its handling of evidence that MHI and MELCO would not sell products listed in the Technical Assistance Agreements without first receiving approval from Westinghouse. We reject both arguments; the first is wholly without support in law, the second is without support in fact.
There is an obvious tension between the patent laws and antitrust laws. One body of law creates and protects monopoly power while the other seeks to proscribe it. Bement v. National Harrow Co. 186 U.S. 70, 91, 22 S.Ct. 747, 755, 46 L.Ed. 1058 (1902); Handgards, Inc. v. Ethicon, Inc. 601 F.2d 986, 992 (9th Cir. 1979).
"The patent laws which give a 17-year monopoly on 'making, using or selling the invention' are in pari materia with the antitrust laws and modify them pro tanto."
Simpson v. Union Oil Co., 1964, 377 U.S. 13, 24, 84 S.Ct. 1051, 1058, 12 L.Ed.2d 98.
Of course, a patent holder may run afoul of the antitrust laws.
"[M]onopolization knowingly practiced under the guise of a patent procured by deliberate fraud" may violate the antitrust laws. Walker, Inc. v. Food Machinery, 1965, 382 U.S. 172, 179-80, 86 S.Ct. 347,351-352, 15 L.Ed. 2d 247 (Harlan, J., concurring).So, too the use of a patent "to acquire a monopoly which is not plainly within the terms of the grant," Mercoid Corporation v. Mid Continent Investment Co ., 1944, 320 U.S. 661, 665-66, 64 S.Ct. 268, 271, 88 L.Ed. 376, as by a tying agreement, may violate the antitrust laws as may an agreement among patent holders or licensees to set prices, see, e.g., United States v. Line Material Co., 1948, 333 U.S. 287,68 S.Ct. 550, 92 L.Ed. 701, or to refuse to grant licenses except upon condition that royalties be paid on unpatented products. Zenith Radio Corp. v. Hazeltine Research Inc. 1969, 395 U.S. 100, 135, 89 S.Ct. 1562, 1583, 23 L.Ed.2d 129. Nor may a patentee attempt to monopolize an industry by acquiring all present and future patents relevant to that industry. Kobe, Inc. v. Dempsey Pump Co ., 10 Cir., 1952, 198 F.2d 416, 422-24.
In all of the above cases, and in all of the cases cited by the government, the offending patentee seeks to do more than enjoy the limited monopoly granted by the patent laws. He seeks to expand that monopoly by misuse, agreement, or accumulation. In advancing its theory, however, the government argues that an antitrust violation by be found where a patent holder does precisely that which the patent laws authorize. Westinghouse has done no more than to license some of its patents and refuse to license others.
"[T]he right to invoke the State's power to prevent others from utilizing his discovery without his consent" is the essence of the patentee's statutory monopoly. Zenith Radio Corp. , supra , 395 U.S. at 135, 89 S.Ct. at 1583, citing Continental Paper Bag Co. v. Eastern Paper Bag Co., 1908, 210 U.S. 405, 28 S.Ct. 748, 52 L.Ed. 1122; Crown Die & Tool Co. v. Nye Tool & Machine Works , 1923, 261 U.S. 24, 43 S.Ct. 254, 67 L.Ed. 516. The right to license that patent,exclusively or otherwise, or to refuse to license at all, is "the untrammeled right" of the patentee. Cataphote Corporation v. DeSoto Chemical Coatings, Inc., 9 Cir., 1971, 450 F.2d 769, 774. In short, in granting MELCO and MHI some licenses but not others, Westinghouse did no more than employ means "normally and reasonably adapted to secure pecuniary reward for the [patent] monopoly." United States v. General Electric Co., 1926, 272 U.S. 476, 490,47 S.Ct. 192, 197, 71 L.Ed. 362; Hensley Equipment Co. v. ESCO Corp ., 5 Cir. 1967, 383 F.2d 252, 260.
We are aware that the patents that Westinghouse has licensed to Mitsubishi are not United States patents, but are foreign patents. But the government does not argue that the right to license or not to license them is different from the right of the holder of United States patents to license or not to license those patents. In Dunlop Co., Ltd. v. Kelsey Hayes Co. 484 F.2d 407 (6th Cir. 1973) Dunlop owned certain foreign patents related to automobile disc brakes. It was argued that certain of its foreign licenses, which forbade exportation of its brakes from foreign countries to the United States, violated our antitrust laws. The court did not agree:
Dunlop's agreements with its licensees in Japan, Italy, Germany and Australia cannot be characterized as true horizontal agreements dividing markets. They are merely territorial licenses granted by a patentee such as are permitted by 35 U.S.C. § 261. If one who received a patent from the United States may so restrict his licenses without violating the domestic antitrust laws, it would seem clear that a patentee could do the same thing with foreign licenses without violating the antitrust laws of this country.
Moreover, the other half of the government's theory is that, because Westinghouse has, in effect, burdened Mitsubishi with its foreign patent licenses, thus tying it to Westinghouse technology, Westinghouse should now be required to license its United States patents to Mitsubishi, so that Mitsubishi can compete in the United States. Yet this part of the theory flies in the face of the rule that a holder of United States patents has a right to refuse to license them.
To find an antitrust violation because Westinghouse, having licensed its foreign patents to Mitsubishi, has thereby helped them to become potential competitors in the United States, but has not granted them licenses of its United States patents, which they need in order to compete here, would severely limit the protection extended by Congress in the laws under which Westinghouse's United States patents were granted. The antitrust laws do not grant the government a roving commission to reform the economy at will. Just as
"[n]o court has ever held that the antitrust laws require a patent holder to forfeit the exclusionary power inherent in his patent the instant his patent monopoly affords him monopoly power...,"
SCM Corp. v. Xerox Corp., 2 Cir., 1981, 645 F.2d 1195, 1204 (March 12, 1981,slip op. 1813, 1832), so, too, no court has held that a patentee must grant further licenses to potential competitors merely because he has granted them some licenses. Just as
"[t]he patent system would be seriously undermined... were the great of potential antitrust liability to attach upon the acquisition of a patent at a time prior to the existence of the relevant market and, even more disconcerting, at a time prior to the commercialization of the patented art,"
Id . slip op.at 1835, at 1206, so too would the patent system be undermined if a licensing agreement, perfectly legal when signed, might later form the basis of an antitrust violation because the licensee had flourished under the agreement.
We agree with the district court that the government's theory "[t]aken to its logical limits... would find almost every patent licensing agreement to be illegal." United States v. Westinghouse, supra , 471 F.Supp. at 542. The theory is
P> "calculated to alter and substantially reduce the established scope of the patent monopoly. It should properly be addressed to Congress, not to the courts."
Id . Thus, even if, as seems unlikely, there is any economic basis for the theory, that is, even if it is true that MHI and MELCO would have entered the United States electrical equipment market by designing new products but for their existing success with Westinghouse technology, there is no basis for the theory in law.
The government's second argument on appeal is that the district court erred in its handling of evidence that Mitsubishi would not sell products listed in the Technical Assistance Agreement in the United States without first receiving approval from Westinghouse. The court refused to draw the conclusion that requests for approval indicated a conspiracy not to compete:
[T]he significance of the requests for approval on the question of the existence of an illegal agreement not to compete in the United States depends on the state of mind of MELCO and MHI in seeking Westinghouse approval. MELCO and MHI argue that they did not act on the basis of an illegal agreement with Westinghouse but rather out of fear of infringing Westinghouse patents. United States v. Westinghouse Electric Corp., supra, 471 F. Supp. at 538.
The court concluded that the government had failed to meet its burden of proof.
The government now argues that the court erred in focusing on motivation: If the effect of the Agreements and of the requests for an denials or grants of approval was to unreasonably limit competition in the United States, then the Agreements violate the antitrust laws regardless of whether the motivation of the parties is to divide the market or to avoid patent infringement.
* * *
The desire of Mitsubishi to avoid infringing upon Westinghouse's many patents -- perhaps even as to products only arguably covered by Westinghouse's patents -- undoubtedly has an effect on competition, but this is an effect which results from the monopoly granted by the patent laws and does not establish an antitrust violation by the companies in this case.
* * *
Affirmed in part and reversed and remanded in part for further proceedings.
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Standard Oil Company (Indiana) v. United States
283 U.S. 163, 51 S. Ct. 421,75 L. Ed. 926 (1931)
Brandeis, J. This suit was brought by the United States in June, 1924, in the federal court for northern Illinois, to enjoin further violation of § 1 and § 2 of the Sherman Anti-Trust Act. The violation charged is an illegal combination to create a monopoly and to restrain interstate commerce by controlling that part of the supply of gasoline which is produced by the process of cracking. Control is alleged to be exerted by means of seventy-nine contracts concerning patents relating to the cracking art. The parties to the several contracts are named as defendants. Four of them own patents covering their respective cracking processes, and are called the primary defendants. Three of these, the Standard Oil Company of Indiana, the Texas Company, and the Standard Oil Company of New Jersey, are themselves large producers of cracked gasoline. The fourth, Gasoline Products Company, is merely a licensing concern. The remaining forty-six defendants manufacture cracked gasoline under licenses from one or more of the primary defendants. They are called secondary defendants.
Upon the filing of the answers, which denied the violation charged, the case was referred to a special master to take and report the evidence to the court, together with his findings of fact and conclusions of law. Although the Attorney General had filed an expediting certificate on February 24, 1925, it was not until January 20, 1930, that the District Court entered its final decree. The hearings before the master extended over nearly three years. The evidence, including 327 exhibits, fills more than 4300 pages of the printed record. The master's report, which occupies 240 pages, is devoted largely to a discussion of the seventy-three patents and seventy-nine license contracts. The master found that the primary defendants had not pooled their patents relating to cracking processes; that they had not monopolized or attempted to monopolize any part of the trade or commerce in gasoline; and that none of the defendants had entered into any combination in restraint of trade. He recommended that the bill be dismissed for want of equity. After a hearing, on 273 exceptions filed by the Government, the District Court granted some of the relief asked. 33 F.2d 617. The primary defendants and twenty-five of the secondary defendants appealed to this Court. An order of severance was entered, and the injunction was stayed.
The issues to which most of the evidence was addressed have been eliminated. The violation of the Sherman Act now complained of rests substantially on the making and effect of three contracts entered into by the primary defendants. The history of these agreements may be briefly stated. For about half a century before 1910, gasoline had been manufactured from crude oil exclusively by distillation and condensation at atmospheric pressure. When the demand for gasoline grew rapidly with the widespread use of the automobile, methods for increasing the yield of gasoline from the available crude oil were sought. It had long been known that, from a given quantity of crude, additional oils of high volatility could be produced by "cracking"; that is, by applying heat and pressure to the residuum after ordinary distillation. But a commercially profitable cracking method and apparatus for manufacturing additional gasoline had not yet been developed. The first such process was perfected by the Indiana Company in 1913; and for more than seven years this was the only one practiced in America. During that period the Indiana Company not only manufactured cracked gasoline on a large scale, but also had licensed fifteen independent concerns to use its process and had collected, prior to January 1, 1921, royalties aggregating $ 15,057,432. 46.
Meanwhile, since the phenomenon of cracking was not controlled by any fundamental patent, other concerns had been working independently to develop commercial processes of their own. Most prominent among these were the three other primary defendants, the Texas Company, the New Jersey Company, and the Gasoline Products Company. Each of these secured numerous patents covering its particular cracking process. Beginning in 1920, conflict developed among the four companies concerning the validity, scope, and ownership of issued patents. One infringement suit was begun; cross-notices of infringement, antecedent to other suits, were given; and interferences were declared on pending applications in the Patent Office. The primary defendants assert that it was these difficulties which led to their executing the three principal agreements which the United States attacks; and that their sole object was to avoid litigation and losses incident to conflicting patents.
The first contract was executed by the Indiana Company and the Texas Company on August 26, 1921; the second by the Texas Company and Gasoline Products Company on January 26, 1923; the third by the Indiana Company, the Texas Company, and the New Jersey Company, on September 28, 1923. The three agreements differ from one another only slightly in scope and terms. Each primary defendant was released thereby from liability for any past infringement of patents of the others. Each acquired the right to use these patents thereafter in its own process. Each was empowered to extend to independent concerns, licensed under its process, releases from past, and immunity from future claims of infringement of patents controlled by the other primary defendants. And each was to share in some fixed proportion the fees received under these multiple licenses. The royalties to be charged were definitely fixed in the first contract; and minimum sums per barrel, to be divided between the Texas and Indiana companies, were specified in the second and third. These royalty provisions, and others, will be detailed later.
First. The defendants contend that the agreements assailed relate solely to the issuance of licenses under their respective patents; that the granting of such licenses, like the writing of insurance, New York Life Ins. Co. v. Deer Lodge County, 231 U.S. 495, is not interstate commerce; and that the Sherman Act is therefore inapplicable. This contention is unsound. Any agreement between competitors may be illegal if part of a larger plan to control interstate markets. Montague & Co. v. Lowry, 193 U.S. 38; Shawnee Compress Co. v. Anderson, 209 U.S. 423. 43. Such contracts must be scrutinized to ascertain whether the restraints imposed are regulations reasonable under the circumstances, or whether their effect is to suppress or unduly restrict competition. Chicago Board of Trade v. United States, 246 U.S. 231, 238; Paramount Famous Lasky Corp. v. United States, 282 U.S. 30. Moreover, while manufacture is not interstate commerce, agreements concerning it which tend to limit the supply or to fix the price of goods entering into interstate commerce, or which have been executed for that purpose, are within the prohibitions of the Act. Swift & Co. v. United States, 196 U.S. 375, 397; Coronado Coal Co. v. United Mine Workers, 268 U.S. 295, 310; United States v. Trenton Potteries Co., 273 U.S. 392. And pooling arrangements may obviously result in restricting competition. Compare Northern Securities Co. v. United States, 193 U.S. 197, 326. The limited monopolies granted to patent owners do not exempt them from the prohibitions of the Sherman Act and supplementary legislation. Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20; Virtue v. Creamery Package Mfg. Co., 227 U.S. 8. Compare United Shoe Machinery Co. v. United States, 258 U.S. 451; United States v. General Electric Co. 272 U.S. 476. Hence the 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. Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20.
[in footnote 2 Justice Brandeis said: Historically, patent grants were only narrow exceptions to the general public policy against monopolies which developed from the Case of Monopolies, Moore 671, 11 Co. 84, and culminated in the Statute of Monopolies, 21 Jac. I, c. 3, §§ V-VI. See Price, The English Patents of Monopoly, cc. 1-3. Compare the debates on the Sherman Act, 21 Cong. Rec., Pt. III, 51st Cong., 1st Sess., pp. 2455-62. Even apart from the limitations of the Anti-Trust laws, the monopoly granted by the patent statute is not unrestricted in scope. Carbice Corp. of America v. American Patents Development Corp. ante, p. 27.]
Second. The Government contends that the three agreements constitute a pooling by the primary defendants of the royalties from their several patents; that thereby competition between them in the commercial exercise of their respective rights to issue licenses is eliminated; that this tends to maintain or increase the royalty charged secondary defendants and hence to increase the manufacturing cost of cracked gasoline; that thus the primary defendants exclude from interstate commerce gasoline which would, under lower competitive royalty rates, be produced; and that interstate commerce is thereby unlawfully restrained. There is no provision in any of the agreements which restricts the freedom of the primary defendants individually to issue licenses under their own patents alone or under the patents of all the others; and no contract between any of them, and no license agreement with a secondary defendant executed pursuant thereto, now imposes any restriction upon the quantity of gasoline to be produced, or upon the price, terms, or conditions of sale, or upon the territory in which sales may be made. The only restraint thus charged is that necessarily arising out of the making and effect of the provisions for cross-licensing and for division of royalties.
The Government concedes that it is not illegal for the primary defendants to cross-license each other and the respective licensees; and that adequate consideration can legally be demanded for such grants. But it contends that the insertion of certain additional provisions in these agreements renders them illegal. It urges, first, that the mere inclusion of the provisions for the division of royalties, constitutes an unlawful combination under the Sherman Act because it evidences an intent to obtain a monopoly. This contention is unsound. Such provisions for the division of royalties are not in themselves conclusive evidence of illegality. Where there are legitimately conflicting claims or threatened interferences, a settlement by agreement, rather than litigation, is not precluded by the Act. Compare Virtue v. Creamery Package Co., 227 U.S. 8, 33. 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. If the available advantages are open on reasonable terms to all manufacturers desiring to participate, such interchange may promote rather than restrain competition. Compare American Column & Lumber Co. v. United States, 257 U.S. 377, 414-15; Maple Flooring Manufacturers Assn. v. United States, 268 U.S. 563, 578.
Third. The Government next contends that the agreements to maintain royalties violate the Sherman Law because the fees charged are onerous. The argument is that the competitive advantage which the three primary defendants enjoy of manufacturing cracked gasoline free of royalty, while licensees must pay to them a heavy tribute in fees, enables these primary defendants to exclude from interstate commerce cracked gasoline which would, under lower competitive royalty rates, be produced by possible rivals. This argument ignores the privileges incident to ownership of patents. Unless the industry is dominated, or interstate commerce directly restrained, the Sherman Act does not require cross-licensing patentees to license at reasonable rates others engaged in interstate commerce. Compare Bement v. National Harrow Co., 186 U.S. 70; United States v. General Electric Co., 272 U.S. 476, 490. The allegation that the royalties charged are onerous is, standing alone, without legal significance; and, as will be shown, neither the alleged domination, nor restraint of commerce has been proved.
Fourth. The main contention of the Government is that even if the exchange of patent rights and division of royalties are not necessarily improper and the royalties are not oppressive, the three contracts are still obnoxious to the Sherman Act because specific clauses enable the primary defendants to maintain existing royalties and thereby to restrain interstate commerce. The provisions which constitute the basis for this charge are these. The first contract specifies that the Texas Company shall get from the Indiana Company one-fourth of all royalties thereafter collected under the latter's existing license agreements; and that all royalties received under licenses thereafter issued by either company shall be equally divided. Licenses granting rights under the patents of both are to be issued at a fixed royalty -- approximately that charged by the Indiana Company when its process was alone in the field. By the second contract, the Texas Company is entitled to receive one-half of the royalties thereafter collected by the Gasoline Products Company from its existing licensees, and a minimum sum per barrel for all oil cracked by its future licensees. The third contract gives to the Indiana Company one-half of all royalties thereafter paid by existing licensees of the New Jersey Company, and a similar minimum sum for each barrel treated by its future licensees, -- subject in the latter case to reduction if the royalties charged by the Indiana and Texas companies for their processes should be reduced. The alleged effect of these provisions is to enable the primary defendants, because of their monopoly of patented cracking processes, to maintain royalty rates at the level established originally for the Indiana process.
The rate of royalties may, of course, be a decisive factor in the cost of production. If combining patent owners effectively dominate an industry, the power to fix and maintain royalties is tantamount to the power to fix prices. National Harrow Co. v. Hench, 76 Fed. 667; affirmed, 83 Fed. 36, see also 84 Fed. 226; Blount Mfg. Co. v. Yale & Towne Mfg. Co., 166 Fed. 555. Where domination exists, a pooling of competing process patents, or an exchange of licenses for the purpose of curtailing the manufacture and supply of an unpatented product, is beyond the privileges conferred by the patents and constitutes a violation of the Sherman Act. The lawful individual monopolies granted by the patent statutes cannot be unitedly exercised to restrain competition. Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20; United States v. New Departure Mfg. Co., 204 Fed. 107; United States v. Motion Picture Patents Co., 225 Fed. 800, appeal dismissed, 247 U.S. 524. Compare United States v. Kellogg Toasted Corn Flakes Co., 222 Fed. 725; United States v. Eastman Kodak Co., 226 Fed. 62, appeal dismissed, 255 U.S. 578. But an agreement for cross-licensing and division of royalties violates the Act only when used to effect a monopoly, or to fix prices, or to impose otherwise an unreasonable restraint upon interstate commerce. Compare Bement v. National Harrow Co., 186 U.S. 70; Cement Manufacturers Protective Assn. v. United States, 268 U.S. 588, 604; United States v. General Electric Co., 272 U.S. 476, 490; United States v. Trenton Potteries Co., 273 U.S. 392, 397. In the case at bar, the primary defendants own competing patented processes for manufacturing an unpatented product which is sold in interstate commerce; and agreements concerning such processes are likely to engender the evils to which the Sherman Act was directed. Compare United States v. International Harvester Co., 214 Fed. 987, appeal dismissed, 248 U.S. 587. We must, therefore, examine the evidence to ascertain the operation and effect of the challenged contracts.
Fifth. No monopoly, or restriction of competition, in the business of licensing patented cracking processes resulted from the execution of these agreements. Up to 1920 all cracking plants in the United States were either owned by the Indiana Company alone, or were operated under licenses from it. In 1924 and 1925, after the cross-licensing arrangements were in effect, the four primary defendants owned or licensed, in the aggregate, only 55% of the total cracking capacity, and the remainder was distributed among twenty-one independently owned cracking processes. This development and commercial expansion of competing processes is clear evidence that the contracts did not concentrate in the hands of the four primary defendants the licensing of patented processes for the production of cracked gasoline. Moreover, the record does not show that after the execution of the agreements there was a decrease of competition among them in licensing other refiners to use their respective processes.
No monopoly, or restriction of competition, in the production of either ordinary or cracked gasoline has been proved. The output of cracked gasoline in the years in question was about 26% of the total gasoline production. Ordinary or straight run gasoline is indistinguishable from cracked gasoline and the two are either mixed or sold interchangeably. Under these circumstances the primary defendants could not effectively control the supply or fix the price of cracked gasoline by virtue of their alleged monopoly of the cracking processes, unless they could control, through some means, the remainder of the total gasoline production from all sources. Proof of such control is lacking. Evidence of the total gasoline production, by all methods, of each of the primary defendants and their licensees is either missing or unsatisfactory in character. The record does not accurately show even the total amount of cracked gasoline produced, or the production of each of the licensees, or competing refiners. Widely variant estimates of such production figures have been submitted. These were not accepted by the master and there is no evidence which would justify our doing so.
No monopoly, or restriction of competition, in the sale of gasoline has been proved. On the basis of testimony relating to the marketing of both cracked and ordinary gasoline, the master found that the defendants were in active competition among themselves and with other refiners; that both kinds of gasoline were refined and sold in large quantities by other companies; and that the primary defendants and their licensees neither individually nor collectively controlled the market price or supply of any gasoline moving in interstate commerce. There is ample evidence to support these findings.
Thus it appears that no monopoly of any kind, or restraint of interstate commerce, has been effected either by means of the contracts or in some other way. In the absence of proof that the primary defendants had such control of the entire industry as would make effective the alleged domination of a part, it is difficult to see how they could be agreeing upon royalty rates control either the price or the supply of gasoline, or otherwise restrain competition. By virtue of their patents they had individually the right to determine who should use their respective processes or inventions and what the royalties for such use should be. To warrant an injunction which would invalidate the contracts here in question, and require either new arrangements or settlement of the conflicting claims by litigation, there must be a definite factual showing of illegality. Chicago Board of Trade v. United States, 246 U.S. 231, 238.
Sixth. In the District Court, the Government undertook to prove the violation charged by showing that the three agreements challenged were made by the primary defendants in bad faith. The bulk of the testimony introduced by it, is directed to this issue and relates to the validity and scope of twenty-three jointly-used patents which were selected by it for attack. This evidence was admitted, over objection, for the purpose of showing that these patents were either invalid or narrow in scope; that there was no substantial foundation for the alleged conflicts and threatened infringement suits; that these were a pretext; and that the patents had been secured, and their infringement was being asserted, merely as a means of lending color of legality to the making of the contracts by which competition would inevitably be suppressed.
The master found, after an elaborate review of the entire art, that the presumption of validity attaching to the patents had not been negatived in any way; that they merited a broad interpretation; that they had been acquired in good faith; and that the scope of the several groups of patents overlapped sufficiently to justify the threats and fear of litigation. The District Court stated that the particular claims should be interpreted narrowly, and that the respective inventions might be practised without infringement of adversely owned patents. But it confirmed the finding of presumptive validity and did not question the finding of good faith. It held that the patents were adequate consideration for the cross-licensing agreements and that the violation charged could not be predicated on patent invalidity. Inasmuch as the Government did not appeal from these findings, we need not consider any of the issues concerning the validity or scope of the cracking patents; and we accept the finding that they were acquired in good faith. Neither the findings nor the evidence on this issue supply any ground for invalidating the contracts.
Seventh. The remaining issues in the case have become moot. The Government objected to a number of early Indiana Company licenses which contained certain territorial restrictions on the production of cracked gasoline; and also to a provision in the first contract between primary defendants, and in licenses thereunder, by which the Indiana Company secured an option to purchase a portion of the cracked gasoline manufactured in, or shipped into, its sales territory. At the hearing before the District Court it appeared that these provisions had never been enforced. Upon the court's request the objectionable clauses were voluntarily canceled some months before the entry of the decree. Similarly, the propriety of certain blanket acknowledgments of patent validity in the first contract, and in a number of licenses under later contracts, was questioned by the lower court. At its suggestion, these provisions also were formally canceled by the parties. As the relief here sought is an injunction, and hence relates only to the future, United States v. Hamburg-Amerikanische Packetfahrt- A.G. 239 U.S. 466, 475, the alleged validity of such provisions has become moot. Berry v. Davis, 242 U.S. 468; Commercial Cable Co. v. Burleson, 250 U.S. 360; Alejandrino v. Quezon, 271 U.S. 528; United States v. Anchor Coal Co., 279 U.S. 812.
Eighth. The District Court accepted the Government's estimates of cracked gasoline production; found that the primary defendants were able to control both supply and price by virtue of their control of the cracking patents; held that although these patents were valid consideration for the cross-licenses, the agreement to maintain royalties was in effect a method for fixing the price of cracked gasoline; and concluded that a monopoly existed as a result of such agreements. This appears to be the only basis for the relief granted. But the widely varying estimates, relied upon to establish dominant control of the production of cracked gasoline were insufficient for that purpose. And the court entirely disregarded not only the fact that the manufacture of the cracked is only a part of the total gasoline production, but also the evidence showing active competition among the defendants themselves and with others. Its findings are without adequate support in the evidence. The bill should have been dismissed.
[Later scholarly analysis of the record called to question the accuracy of the market definition. See Bowman, Patent and Antitrust Law:
In note 21 Justice Brandeis stated: "The court apparently accepted, as accurate, the Government's estimates of cracked gasoline production, and stated: "It is the actual production rather than 'cracking capacity' that is significant. To ascertain whether a monopoly exists we must look to the production rather than the capacity percentages." 33 F.2d 617, 625. But the estimates of total cracked gasoline production cannot be accepted, and there was no adequate showing of the proportion actually manufactured by these defendants. See Note 17, supra."]
The Government now seeks no relief against the secondary defendants. It concedes that fifty-three of the seventy-nine contracts, originally set out in the petition, are wholly beyond attack, because they are licenses issued to secondary defendants prior to the execution by their licensors of the three main agreements challenged. As to the remaining contracts between primary and secondary defendants, the Government on this appeal agreed that the decree should be modified to declare such contracts voidable at the option of the licensees. This modification was assented to at the bar by counsel for the primary defendants. But as we are of the opinion that the decree should be reversed and the bill dismissed, we see no occasion for interfering with the present license arrangements.
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Buffalo Broadcasting Co., Inc. v. American Society of Composers, Authors and Publishers
744 F.2d 917; 223 U.S.P.Q. 478, Copy. L. Rep. ¶ 25,710; 1984-2 Trade Cas. ¶66,204; (2d Cir, 1984)
Newman, J.: Once again we consider the lawfulness under section 1 of the Sherman Antitrust Act of the blanket license
offered by the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). The
license permits the licensee to perform publicly any musical composition in the repertory of the licensor. In this litigation the
blanket license is challenged by a class of licensees comprising all owners of "local" television stations in the United States,
i.e., stations not owned by any of the three major television networks, ABC, CBS, and NBC. After a bench trial in the
District Court for the Southern District of New York (Lee P. Gagliardi, Judge), the blanket license was held to be an
unreasonable restraint of trade. Buffalo Broadcasting Co. v. ASCAP, 546 F. Supp. 274 (SD NY 1982). ASCAP and BMI
were enjoined from licensing to local television stations non-dramatic music performing rights for any "syndicated" program.
For reasons that follow, we conclude that the evidence was insufficient as a matter of law to show that the blanket license is
an unlawful restraint of trade in the legal and factual context in which it currently exists. We therefore reverse the judgment
of the District Court.
I. The Parties
The five named plaintiffs own and operate one or more local television stations. They represent a class of all owners of local television stations in the United States who obtain music performing rights pursuant to license agreements with ASCAP and/ or BMI. The class does not include the three major television networks, ABC, CBS, and NBC, each of which owns five television stations. The class includes approximately 450 owners who, because of multiple holdings, own approximately 750 local television stations. Only one owner has opted out of the class. The class includes some relatively small corporations that own a single station with relatively modest revenue and some major corporations with significant television revenue and profits, such as Metromedia, Inc., which owns seven stations including those in the major markets of New York City (WNEW-TV) and Los Angeles (WTTV). Since 1949 most stations have been represented in negotiations with ASCAP and BMI by the All-Industry Television Station Music License Committee ("the All-Industry Committee").
Defendant ASCAP is an unincorporated membership association of composers, authors, and publishers of music, formed in 1914. It has approximately 21,000 writer and 8,000 publisher members. It holds non-exclusive licenses for the non-dramatic performing rights to more than three million musical compositions. BMI is a non-profit corporation organized in 1939 by radio broadcasters. It has approximately 38,000 writer and 22,000 publisher affiliates. Its repertory, for which it holds non-exclusive licenses for non-dramatic performing rights, includes more than one million compositions. The eleven individual defendants represent two classes of defendants that include all persons from whom ASCAP and BMI have obtained the non-exclusive right to license non-dramatic music performing rights to others.
II. Music, Rights, and Licenses
The subject matter of this litigation is music transmitted by television stations to their viewer- listeners. Television music is classified as either theme, background, or feature. Theme music is played at the start or conclusion of a program and serves to enhance the identification of the program. Background music accompanies portions of the program to heighten interest, underscore the mood, change the pace, or otherwise contribute to the overall effect of the program. Feature music is a principal focus of audience attention, such as a popular song sung on a variety show.
More particularly, we are concerned with the licensing of non-dramatic performing rights to copyrighted music, that is, the right to "perform" the music publicly by transmitting it, whether live or on film or tape, to television audiences. This performance right is created by the Copyright Act as one of the exclusive rights enjoyed by the copyright owner. 17 U.S.C. § 106 (4) (1982). Also pertinent to this litigation is the so-called synchronization right, or "synch" right, that is, the right to reproduce the music onto the soundtrack of a film or a videotape in synchronization with the action. The "synch" right is a form of the reproduction right also created by statute as one of the exclusive rights enjoyed by the copyright owner. Id. § 106 (1). The Act specifically accords the copyright owner the right to authorize others to use the various rights recognized by the Act, including the performing right and the reproduction right, id. § 106, and to convey these rights separately, id. § 201(d) (2). The Act recognizes that conveyance of the various rights protected by copyright may be accomplished by either an exclusive or a non-exclusive license. Id. § 101.
Music performed by local television stations is selected in one of three ways. It may be selected by the station itself, or by
the producer of a program that is sold to the station, or by a performer spontaneously. The stations select music for the
relatively small portion of the program day devoted to locally produced programs. The vast majority of music aired by
television stations is selected by the producers of programs supplied to the stations. In some instances these producers are
the major television networks, but this litigation is not concerned with performing rights to music on programs supplied to
the local stations by the major networks because the networks have blanket licenses from ASCAP and BMI and convey
performing rights to local stations when they supply network programs. Apart from network-produced programs, the
producers of programs for local stations are "syndicators" supplying the stations with "syndicated" programs. Most
syndicated programs are feature length movies or one-hour or half-hour films or videotapes produced especially for
television viewing by motion picture studios, their television production affiliates, or independent television program
producers. However, the definition of "syndicated program" that was stipulated to by the parties also includes live,
non-network television programs offered for sale or license to local stations. These syndicated programs are the central
focus of this litigation. The third category of selected music, songs chosen spontaneously by a performer, accounts for a
very small percentage of the music aired by the stations. These spontaneous selections of music can occur on programs
produced either locally or by the networks or by syndicators.
[The stipulation defines "syndicated program" as "a theatrical motion picture, pre-recorded television program or live television program which is offered for sale or license to a television station to be broadcast by that station as a non-network program."]
Syndicators wishing to include music in their programs may either select pre-existing music (sometimes called "outside" music) or hire a composer to compose original music (sometimes called "inside" music). Most music on syndicated programs, up to 90% by plaintiffs' estimate, is inside music commissioned through the use of composer-for-hire agreements between the producer and either the composer alone or the composer and a corporation entitled to contract for a loan of the composer's services. Composer-for-hire agreements are normally standard form contracts. The salary paid to the composer, sometimes called "up front money," varies considerably from a few hundred dollars to several thousand dollars. The producer for whom a "work made for hire" was composed is considered by the Act to be the author and (unless the producer and composer have otherwise agreed) owns "all of the rights comprised in the copyright." Id. § 201(b). However, composer-for-hire agreements for syndicated television programs typically provide that the producer assigns to the composer and to a music publishing company the performing right to the music composed pursuant to the agreement.
When the producer wishes to use outside music in a film or videotape program, it must obtain from the copyright proprietor the "synch" right in order to record the music on the soundtrack of the film or tape. "Synch" rights vary in price, usually within a range of $150 to $500. When the producer wishes to use inside music, as is normally the case, it need not obtain the "synch" right because it already owns this right by virtue of the "work made for hire" provision of the Act.
Whether the producer decides to use outside or inside music, it need not acquire the television performing right since neither the making of the program nor the selling of the program to a television station is a "performance" of the music that would require a performing right. The producer is therefore free either to sell the program without the performing right and leave it to the station to obtain that right, or to obtain the performing right from the copyright proprietor, usually the composer and a publishing company, and convey that music performing right to the station along with the performing rights to all other copyrighted components of the program. If the producer obtains the music performing right from the copyright proprietor and conveys it to the station, the transaction is known as "source licensing" or "clearance at the source." If the station obtains the music performing right directly from the copyright proprietor, the transaction is known as "direct licensing."
The typical arrangement whereby local television stations acquire music performing rights in syndicated and all other
programs is neither source licensing nor direct licensing. Instead, the stations obtain from ASCAP and BMI a blanket
license permitting television performance of all of the music in the repertories of these organizations. The license is
conveyed for a fee normally set as a percentage of the station's revenue. That fee, after deduction of administrative
expenses, is distributed to the copyright proprietors on a basis that roughly reflects the extent of use of the music and the
size of the audience for which the station "performed" the music. The royalty distribution is normally divided equally
between the composer and the music publishing company.
In addition to offering stations a blanket license, ASCAP and BMI also offer a modified form of the blanket license known as a "program" or "per program" license. The program license conveys to the station the music performing rights to all of the music in the ASCAP or BMI repertory for use on the particular program for which the license is issued. The fee for a program license is a percent of the revenue derived by the station from the particular program, i.e., the advertising dollars paid to sponsor the program.
The blanket license contains a "carve-out" provision exempting from the base on which the license fee is computed the revenue derived by the station from any program presented by motion picture or transcript for which music performing rights have been licensed at the source by the licensor, i.e., ASCAP or BMI. The program license contains a more generous version of this provision, extending the exemption to music performing rights licensed at the source either by ASCAP/ BMI or by the composer and publisher. Thus, for film and videotaped syndicated programs, a station can either obtain a blanket license for all of its music performing rights and reduce its fee for those programs licensed at the source by ASCAP/ BMI, or obtain program licenses for each of its programs that use copyrighted music and avoid the fee for those programs licensed at the source by either ASCAP/BMI or by the composer and publishers.
III. Prior Litigation
The merits of the current lawsuit cannot properly be assessed without consideration of the extensive history of litigation concerning the licensing of music performing rights. In 1941 an antitrust suit brought by the United States against ASCAP and BMI was settled by entry of consent decrees, imposing some limitations on the operation of ASCAP and BMI. Those decrees, however, permitted ASCAP and BMI to obtain exclusive licenses for music performing rights from their members and affiliates. The exclusive nature of these licenses prevented those requiring performing rights from negotiating directly with composers for rights to individual compositions. That limitation precipitated suit by operators of movie theaters, who successfully challenged the blanket license they were obliged to take from ASCAP in order to exhibit films with music from the ASCAP repertory. Alden- Rochelle, Inc. v. ASCAP, 80 F. Supp. 888 (SD NY 1948). See also M. Witmark & Sons v. Jensen, 80 F. Supp. 843 (D. Minn. 1948), appeal dismissed, 177 F.2d 515 (8th Cir. 1949).
The restraining nature of the ASCAP blanket license, as applied to movie theater operators, prompted the Government to reopen the 1941 ASCAP consent decree and secure in 1950 a significant amendment. The amended decree, known as the "Amended Final Judgment," prohibits ASCAP from acquiring exclusive music performing rights, limiting it solely to non-exclusive rights. ASCAP is also prohibited from limiting, restricting, or interfering with the right of any member to issue to any user a non-exclusive license for music performing rights.
The Amended Final Judgment requires ASCAP to grant a blanket license to anyone requesting it. The decree also requires ASCAP to offer to any television or radio broadcaster a program license. ASCAP is also required "to use its best efforts to avoid any discrimination among the respective fees fixed for the various types of licenses which would deprive the licensees or prospective licensees of a genuine choice from among such various types of licenses." Amended Final Judgment, para. VIII, 546 F. Supp. at 278 n.6. Finally, in the event license applicants believe they are being overcharged, the decree permits any applicant for a blanket or program license to apply to the District Court for the determination of a "reasonable" fee, and in such a proceeding, "the burden of proof shall be on ASCAP to establish the reasonableness of the fee requested by it." Id. para. IX(A), 546 F. Supp. at 278-79 n.6.
In 1951 local television stations instituted suit pursuant to the Amended Final Judgment to determine reasonable license fees and terms. United States v. ASCAP (Application of Voice of Alabama, Inc.), Civ. No. 13-95 (SD NY 1951). In 1954 the parties reached agreement to set the per program license rate at 9% of the revenue of programs using ASCAP music and to reduce the blanket license rate to 2.05% of total station revenue, less certain deductions. In light of this agreement the Voice of Alabama proceeding was discontinued.
In 1961 local television stations requested from ASCAP a modified blanket license that excluded syndicated programs. When ASCAP refused, the stations sued in the consent decree court to require ASCAP to issue such a license. The District Court declined to require such a license, United States v. ASCAP (Application of Shenandoah Valley Broadcasting, Inc.), 208 F. Supp. 896 (SD NY 1962), aff'd, 331 F.2d 117 (2d Cir.), cert. denied, 377 U.S. 997, 12 L. Ed. 2d 1048,, 84 S. Ct. 1917 (1964). In affirming, this Court observed that if the blanket license was serving to restrain trade unreasonably in violation of the antitrust laws, the stations' remedy was to urge the Department of Justice to seek modification of the consent decree or to initiate a private suit. 331 F.2d at 124.
Rather than press an antitrust challenge, the stations initiated another round of fee determination pursuant to the consent decree. That litigation, known as the Shenandoah proceeding, was settled upon the parties' agreement that the form of blanket and program licenses then in use "may be entered into lawfully by each party to this proceeding" and that the rate for the blanket license was reduced to 2% of 1964-65 revenue plus 1% of incremental revenue above that base. United States v. ASCAP (Application of Shenandoah Valley Broadcasting, Inc.), Civ. No. 13-95 (SD NY July 28, 1969) (final order). The All-Industry Committee reported to the stations that this rate reduction would save them approximately $53 million through 1977, an estimate that was exceeded because of the rapid growth of station revenue.
Thereafter, while the local television stations took blanket licenses from ASCAP and BMI, the legality of the license was challenged by a network licensee, CBS. Its suit, filed in 1969, was dismissed by Judge Lasker after an eight-week trial. CBS, Inc. v. ASCAP, 400 F. Supp. 737 (SD NY 1975). Judge Lasker ruled that the evidence failed to show that the blanket license restrained CBS from obtaining music performing rights to individual compositions if it chose to seek and pay for them. On appeal, this Court reversed, ruling that the blanket license was an unlawful price-fixing device, a per se violation of section 1. CBS, Inc. v. ASCAP, 562 F.2d 130 (2d Cir. 1977). That decision was reversed by the Supreme Court, which ruled that the blanket license was not a per se violation of section 1. BMI, Inc. v. CBS, Inc., 441 U.S. 1, 99 S. Ct. 1551, 60 L. Ed. 2d 1 (1979). Upon remand from the Supreme Court, we affirmed Judge Lasker's decision, agreeing that the blanket license had not been proven to be a restraint of trade. CBS, Inc. v. ASCAP, 620 F.2d 930 (2d Cir. 1980) ("CBS-remand"), cert. denied, 450 U.S. 970, 101 S. Ct. 1491, 67 L. Ed. 2d 621 (1981).
Perhaps encouraged by our 1977 ruling in favor of CBS, the local stations began this litigation in 1978. A four-week bench trial occurred in 1981 before Judge Gagliardi, resulting in the decision now on appeal. That decision holds that the blanket licensing of music performing rights to local television stations unreasonably restrains trade in violation of section 1 and enjoins ASCAP and BMI from granting to local television stations music performing rights in any syndicated programs. With respect to syndicated programs, the injunction thus bars ASCAP and BMI from offering either blanket or program licenses and also prohibits them from conveying performing rights with respect to such programs on any basis at all.
As a threshold Issue, ASCAP contends that the local stations are estopped from challenging the lawfulness of the blanket license as applied to them by reason of the position they took in settlement of the Shenandoah rate determination proceeding. Specifically, ASCAP relies on the fact that the stations settling that litigation represented to the District Court that the ASCAP blanket license "may be entered into lawfully" and that ASCAP in effect bargained for that representation by giving up at least $53 million in license fees. There is undeniable force to the contention that those who secured benefits exchanged in part for a representation to the District Court that the blanket license is lawful ought not to be heard to assert the contrary. See Chance v. Board of Examiners, 561 F.2d 1079, 1092 (2d Cir. 1977). But the argument is not necessarily a winning one for three reasons: It was not asserted in the trial court, it rests on a consent decree that applied to a term of years ending in 1977, and its force in the antitrust context is not free from doubt. Cf. Bernstein v. Universal Pictures, Inc., 517 F.2d 976, 981-82 (2d Cir. 1975) (plaintiff who has previously asserted contrary legal position still deserving of antitrust relief).We are persuaded to move past the estoppel argument, without determining its validity, and consider the merits of the lawsuit. In the first place, the argument is a matter of considerable dispute, and, if not forfeited by failure to raise it in the trial court, the argument comes to us on a record that inadequately develops the facts as to whom the estoppel binds and who it benefits. Second, even if the estoppel argument bars the claims of those local television stations for whom the All-Industry Committee spoke when negotiating the Shenandoah settlement, it is not at all clear that it would bar the claims of the approximately 200 stations that have come into existence since the 1969 settlement. Finally, there is uncertainty whether the estoppel would inure to the benefit of ASCAP's co-defendant, BMI, which was not a party to the Shenandoah proceeding. Without resolving our doubts on these points, we proceed to consider the merits of the dispute.
B. Is There a Restraint?
We think the initial and, as it turns out, dispositive issue on the merits is whether the blanket licensing of performing rights to the local television stations has been proven to be a restraint of trade. See CBS-remand, supra, 620 F.2d at 934-35. Arguably the answer is a fortiori after the Supreme Court's decision and our decision on remand in the CBS litigation. The Supreme Court noted that "the necessity for and advantages of a blanket license for [television and radio networks] may be far less obvious than is the case when the potential users are individual television or radio stations. . . ." 441 U.S. at 21. And on remand we upheld the blanket license against the claim of a network. However, for several reasons, it does not follow that the local stations lose simply because the CBS network lost. First, the Supreme Court's observation concerned the relative pro-competitive effects of the blanket license for a network compared to local stations. Even though the pro-competitive effects may be greater when the licensees are local stations, those pro-competitive effects do not necessarily outweigh the anti-competitive effects. Second, the Supreme Court's comparative statement does not determine the threshold issue of whether the blanket licensing of performing rights to local television stations is a restraint at all. The fact that CBS did not prove that blanket licensing of networks restrained competition does not necessarily mean that blanket licensing of local stations may not be shown to be a restraint. Finally, in CBS-remand we reviewed a District Judge's ruling that no restraint had been proved; here, we review a ruling that the local stations proved the existence of a restraint.
In reaching his conclusions as to the existence of a restraint, Judge Gagliardi endeavored to apply the mode of analysis we had used in CBS-remand. We there noted that trade is restrained, sometimes unreasonably, when rights to use individual copyrights or patents may be obtained only by payment for a pool of such rights, but that the opportunity to acquire a pool of rights does not restrain trade if an alternative opportunity to acquire individual rights is realistically available. 620 F.2d at 935-36. We recognized, as CBS had urged, that a plaintiff will not be held to have an alternative "available" simply because some imaginable possibility exists. We agreed that CBS's "alternative" of hiring composers to fill its need for music was not the sort of realistic alternative that prevented the blanket license from being a restraint. "An antitrust plaintiff is not obliged to pursue any imaginable alternative, regardless of cost or efficiency, before it can complain that a practice has restrained competition." Id. at 936. What we examined in CBS-remand, as Judge Lasker had done in the District Court, was whether the plaintiff has proved that it lacked a realistic opportunity to obtain performance rights from individual copyright holders.
We continue to believe that this is the appropriate inquiry, especially in light of the Supreme Court's recent decision concerning the NCAA's attempt to regulate the televising of college football games. NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 104 S. Ct. 2948, 82 L. Ed. 2d 70 (1984). Two aspects of that ruling are especially pertinent. First, the Court was there concerned, as we are here, with an agreement whereby a pool of rights was conveyed. In determining that the agreement constituted a restraint, the Court stated, "Since as a practical matter all member institutions need NCAA approval, members have no real choice but to adhere to the NCAA's television controls." Id. at 2963 (emphasis added) (footnote omitted). Thus, the restraining effect of the challenged agreement arose not by virtue of its terms alone, but because as a "practical" matter no "real" alternative existed whereby individual negotiations could occur between member schools and television broadcasters. Second, the Court had occasion to characterize the blanket license for music performing rights that it had sustained against a per se challenge in CBS and stated that under the blanket license "each individual remained free to sell his own music without restraint." Id. at 2968 (emphasis added). NCCA thus reinforces our view that the first issue is whether the local television stations have proven that they lack, as a "practical" matter, a "real" alternative to the blanket license for obtaining music performing rights.
In reaching the conclusion that plaintiffs had proven the lack of realistically available alternatives to the blanket license, Judge Gagliardi gave separate consideration to three possibilities: the program license, direct licensing, and source licensing. We consider each in turn.
Judge Gagliardi based his conclusion that a program license is not realistically available to the plaintiffs essentially on two circumstances: the cost of a program license and the reporting requirements that such a license imposes on a licensee. "The court therefore concludes that the per program license is too costly and burdensome to be a realistic alternative to the blanket license." 546 F. Supp. at 289 (footnote omitted). Without rejecting any subsidiary factual finding concerning the availability of a program license, we reject the legal conclusion that it is not a realistic alternative to the blanket license.
The only fact found in support of the conclusion that the program license is "too costly" is that the rates for such licenses are seven times higher than the rates for blanket licenses. Id. The program license rate is 9%; the blanket license rate is between 1% and 2 %.This difference in rates does not support the District Court's conclusion for several reasons. First, the rates are charged against different bases. The blanket license rate is applied to a station's total revenue; the program license rate is applied only to revenue from a particular program. Since the base for the blanket license fee includes revenue from network programs, for which the networks have already acquired performing rights by virtue of their blanket licenses, as well as some local programs that use no it is inevitable that the rate for a local station's blanket license will be less than the rate for a program license taken solely to permit use of music on a particular program.
Second, the degree of difference between the two rates is largely attributable to the stations themselves. In negotiating a revision of license rates in the Shenandoah proceeding in 1969, the All-Industry Committee elected not to press for reduction of the program license rate and instead concentrated on securing a reduction of the blanket license rate, believing, as it informed the broadcasters it represented, that "the critical matter at this time was to get the best possible blanket license." Having preferred to win a lower price for only the blanket license, the stations are in no position to point to the widened differential between rates to show that program licenses are not realistically available.
Third, the only valid test of whether the program license is "too costly" to be a realistic alternative is whether the price for such a license, in an objective sense, is higher than the value of the rights obtained. But plaintiffs presented no evidence that the price of the program license is "higher" in terms of value received. Instead, they rely, as did the District Court, on a comparison between the program license rate and the blanket license rate. That comparison, defendants contend, leads to the anomalous result that the more the blanket license is a bargain, the more it is likely to be a restraint. The anomaly is more apparent than real. Within reasonable price ranges, the program license is not an unrealistic alternative to the blanket license simply because the rate for the latter is less. The differential in rates may reflect the inherent difference in the bundle of rights being conveyed. Even if the blanket license is objectively the "better buy" for most users, the program license would be a realistic alternative so long as it was fairly priced for those who might find it preferable for reasons other than price. But if the program license were available only at a price beyond any objectively reasonable range, the "bargain" nature of the blanket license would not immunize it from characterization as a restraint. Sellers of alternatives may not set absurdly high prices at which they have no real intention of making sales and then point to the cheaper price of the package under attack to argue that it is not a restraint but the object of customer preference.
Thus, while the relative cheapness of the blanket rate does not necessarily mean that it is not a restraint, the absence of evidence that the program license has been artificially priced higher than is reasonable for value received bars any conclusion that the program license is "too costly" to be a realistic alternative. The fact that very few stations have elected to take program licenses is not evidence that they are priced beyond an objectively reasonable price range. It may simply reflect, as defendants believe, that the blanket license has virtues of convenience that make it a legitimate object of customer preference.
Fourth, even if there were evidence that showed the program license rate to be too "high," that price is always subject to downward revision by Judge Conner, who currently supervises the administration of the Amended Final Judgment. Two aspects of that judgment are especially pertinent to any claim that the price of the program license is too "high." In a proceeding to redetermine rates, the burden is on ASCAP to prove the reasonableness of the rates charged, and the judgment expressly requires ASCAP "to use its best efforts to avoid any discrimination among the respective fees fixed for the various types of licenses which would deprive the licensees or prospective licensees of a genuine choice from among such various types of licenses," Amended Final Judgment Para. VIII, 546 F. Supp. at 278 n.6 (emphasis added). The availability of a judicially enforceable requirement of a "reasonable" fee precludes any claim that the program license rate is too high, especially in the context of television stations regularly represented by a vigorous committee with the demonstrated resources, skill, and willingness to invoke the rate-adjustment process.
In addition to cost, Judge Gagliardi considered the program license not realistically available because of the burdens of required record-keeping that accompany its use. This conclusion is similarly flawed by the lack of evidence that the record-keeping requirement have been unnecessarily imposed. Since the program license permits only selective use of copyrighted music, it is inevitable that some reporting requirements would be reasonable to assure proper use. The District Court made no finding that any aspect of the record-keeping is objectively unnecessary, and plaintiffs offered no evidence to this effect. As with price, the apparent benefit of the blanket license is sparing the user record-keeping may simply reflect inherent differences in the two products. In any event, the program license has been shown only to require more record-keeping than the blanket license; it has not been shown to require burdens objectively unreasonable, such as would support a conclusion that the program license is not realistically available. Finally, though we do not decide the point, it would appear that any aspect of the record-keeping requirement that prevents the stations from having a "genuine choice" between the program and the blanket license would be subject to revision under the Amended Final Judgment.
The lack of evidence that the program license is not realistically available has a two-fold significance in determining whether the blanket license has been shown to be a restraint. First, the program license itself remains as an alternative to the blanket license for the local stations to acquire performing rights to the music on all of their syndicated programs. That consequence is not necessarily determinative since the program license is in reality a limited form of the blanket license and, like the blanket license, is subject to the objections that its use by stations would continue the present practice whereby no price competition occurs among individual songs with respect to licensing of performing rights. However, the availability of the program license has a second and more significant consequence: The program license provides local stations with a fall-back position in the event that they forgo the blanket license and then encounter difficulty in obtaining performing rights to music on some syndicated programs either by direct licensing or by source licensing. Whether those alternatives were proven to be unavailable as realistic alternatives is our next inquiry.
The District Court concluded that direct licensing is not a realistic alternative to the blanket license without any evidence that any local station ever offered any composer a sum of money in exchange for the performing rights to his music. That evidentiary gap exists despite the 21-year interval between entry of the Amended Final Judgment and the trial of this case, during which the local stations had ample opportunity to determine whether performing rights could be directly licensed.
The District Court declined to attach any significance to the absence of purchase offers from stations directly to copyright proprietors for two related reasons. Judge Gagliardi concluded, first, that direct licensing could not occur without the intervention of some agency to broker the numerous transactions that would be involved and, second, that the television stations lack the market power to induce any one to come forward and perform that brokering function. 546 F. Supp. at 290. We have no quarrel with the first proposition. Some intermediary would seem essential to negotiate performing rights licenses between thousands of copyright proprietors and hundreds of local stations, in the same manner that the Harry Fox Agency for years has brokered licenses for "synch" rights between copyright proprietors and program producers.
However, we see no evidentiary support for the District Court's second proposition -- that no one would undertake the brokering function for direct licensing of performing rights. Judge Gagliardi was led to this conclusion, not on the basis of any evidence of an expressed reluctance on anyone's part to broker direct licensing, but because of his view of the difference between the market power of CBS and that of the local television stations. In CBS Judge Lasker had found, 400 F. Supp. at 779, and we had emphasized, 620 F.2d at 938, that if CBS were to seek direct licensing, "copyright proprietors would wait at CBS' door." In this case, Judge Gagliardi found that "local television stations acting individually and severally would possess no such awesome power over copyright owners." 546 F. Supp. at 290. From this finding he concluded, "Since no lines would form at the doors of local television stations, no centralized machinery would arise to facilitate direct licensing." Id.
This reasoning escalates a characterization of the evidence in CBS into a minimum requirement for future cases. The plaintiffs in this case do not discharge their burden of proving that local stations cannot realistically obtain direct licenses by showing that they have less market power than CBS, "'the giant of the world in the use of music rights,'" CBS v. ASCAP, supra, 400 F. Supp. at 771 (quoting testimony of a former CBS vice-president). The issue is whether the local stations have been shown to lack power sufficient to give them a realistic opportunity to secure direct licenses. To conclude that they do not simply because no one of them is as powerful as CBS disregards the functioning of a market. Sellers are induced to sell by a perception of aggregate demand, existing or capable of stimulation. The automobile manufacturers who recently decided to bring back the convertible car did not await a fleet order from the nation's largest user of automobiles; they responded to the actual and anticipated consumer preferences of individual car buyers, whose individual market power is surely no greater than that of the least successful television station. Thus, it avails plaintiffs nothing to cite the testimony of Salvatore Chiantia, president of the National Music Publishers Association, that as a publisher he would not line up at the door of KID-TV in Idaho Falls to license performing rights. Brief for Appellees at 52. What is pertinent is Chiantia's point that while it would be difficult for him to have a staff that would wait at the doors of 700 television stations, "if [direct licensing] was the way I was going to get my music performed, I would have to devise a system which would make it possible for me to license." The plaintiffs have not presented evidence to show that a brokering mechanism would not handle direct licensing transactions if the stations offered to pay royalties directly to copyright proprietors.
The alleged infeasibility of direct licensing is further undermined by the acknowledged ability of the stations to secure direct licensing of music needed for their locally produced programming. Judge Gagliardi observed, "Since local television stations deal directly with the composers or copyright owners of the music contained in locally-produced programs, stations would not encounter difficulties in finding and obtaining music licenses from those composers and copyright owners." 546 F. Supp. at 289 n.37. Nevertheless, he concluded that, because local stations would be paying double for such direct licenses so long as they held a blanket license, "direct licensing would not be a realistically available alternative unless the blanket license were discarded entirely." Id. at 289-90 n.37. But if the stations can realistically obtain direct licenses for local programming by offering reasonable amounts of money, they can avoid double payment by forgoing the blanket license. Their response is that they dare not do so because they will then be unable to secure performing rights to music on syndicated programs, which constitute the bulk of their program day. But, as we have previously noted, the availability of the program license enables them to forgo the blanket license and still obtain music rights for any program for which direct licensing proves infeasible. Alternatively, they can pursue source licensing, to which we now turn.
As Judge Gagliardi noted, the "current availability and comparative efficiency of source licensing has been the focus of this lawsuit." Id. at 291. The availability of source licensing is significant to the inquiry as to whether the blanket license is a restraint because so much of the stations' programming consists of syndicated programs for which the producer could, if so inclined, convey music performing rights. Most of these syndicated programs use composer-for-hire music. As to such music, the producer starts out with the rights of the copyright, including the performing right, by operation of law, 17 U.S.C. § 201(b), unless the hiring agreement otherwise provides. Thus it becomes important to determine whether the stations can obtain from the producer the music performing right, along with all of the other rights in a syndicated program that are conveyed to the stations when the program is licensed. As to "inside" music, source licensing would mean that the producer would either retain the performing right and convey it to the stations, instead of following the current practice of assigning it to the composer and a publishing company, or reacquire the performing right from the composer and publisher for conveyance to the stations. As to "outside" music, source licensing would mean that the producer would have to acquire from the copyright proprietor the performing right, in addition to the "synch" right now acquired.
Plaintiffs sought to prove that source licensing was not a realistic alternative by presenting two types of evidence: "offers" from stations and analysis of the market. Prior to bringing this lawsuit, the stations had not sought to obtain performing rights via source licensing. Perhaps prompted by the evidentiary gap emphasized in our decision in CBS-remand or by the taunting of defendants in this litigation, plaintiffs began in mid-1980, a year and one-half after the suit was filed, to create a paper record designed to show the unavailability of source licensing. Various techniques were used. Initially, some stations simply inserted into the standard form of licensing agreement for syndicated programs a new clause specifying that the producer has obtained music performing rights and that the station need not do so. No offer of additional compensation for the purchase of the additional rights was made. Not surprisingly most producers declined to agree to the proposed clause. A vice-president of MCA Television Limited ("MCA"), one of the major syndicators, replied to KAKE-TV, "It is surprising to me that the station would attach a Rider of such magnitude without previously discussing it with us. . . . [Y]ou are apparently asking us to undertake the clearance of the music performance rights in [the "Rockford Files" TV series] without offering any additional payment. . . . [W]e are unable to accept the amendment. . . . This does not mean, of course, that a different approach is unacceptable. It does, however, mean that a change of this magnitude should be discussed well in advance so that our respective concerns can be addressed."
Another approach, evidenced by King Broadcasting Co.'s letter to MCA, attached a music performing rights rider to the standard syndication licensing agreement and added, "If [sic] an additional fee is in order, we would certainly consider favorably any such reasonable fee." Another approach, adopted by Chronicle Broadcasting Co. in letters to various syndicators, was a request for source clearance of music performing rights with the comment, "Chronicle recognizes that this contemplated change . . . may [sic] in some instances require an adjustment in the basic program license fees." Metromedia, Inc., owner of several stations, went further and asked Twentieth Century-Fox Television ("Fox"), "Since you are the 'seller', what is the price you would affix to the altered product [the syndication license including music performing rights]?" In reply Fox made the entirely valid point that since syndication licensing without music performing rights had been the industry practice for years, it was Metromedia's "responsibility to advise us in what manner you would like" to change the current arrangements. Notably absent from all of the correspondence tendered by the plaintiffs is the customary indicator of a buyer's seriousness in attempting to make a purchase -- an offer of a sum of money.
Judge Gagliardi properly declined to give any probative weight to the plaintiffs' transparent effort to assemble in the midst of litigation evidence that they had seriously tried to obtain source licensing. He found "plaintiffs' source licensing foray so darkened by the shadow of the approaching trial that it results may not be relied upon to support either side." 546 F. Supp. at 292. Nevertheless the District Court concluded that source licensing was not a realistic alternative because the syndicators "have no impetus to depart from their standard practices and request and pay for television performing rights merely in order to pass them along to local stations." Id. This conclusion does not follow from some of the Court's factual findings and rests on a view of the syndication market that is contradicted by other findings.
The District Court viewed the syndication market as one in which the balance of power rests with the syndicators and the stations have no power to "compel" a reluctant syndicator to change to source licensing. Id. Yet the Court found that there are eight major syndicators, id. at 280 & n.13, and that they distribute only 52% of all syndicated programs, id. at 281, hardly typical of a non-competitive market. Moreover, the Court characterized production of syndicated programs as a "risky business," id. at 282, a finding fully supported by the evidence. It may be that the syndicator of a highly successful program has the upper hand in negotiating for the syndication of that program and would not engage in source licensing for music in that program simply to please any one station, but it does not follow that the market for the wide range of syndicated programs would be unresponsive to aggregate demand from stations willing to pay a reasonable price for source licensing of music performing rights.
The District Court recognized that, even under its view of a syndication market weighted in favor of the syndicators, source licensing could be said to be unavailable only if stations would not offer "premium prices." Id. at 292. There is no subsidiary finding as to what prices the Court thought stations would have to offer to obtain source licensing. That is not surprising in view of the failure of the plaintiffs to present evidence to show either what such prices might be or that they would be "premium" in the sense of significantly exceeding an objectively reasonable value of the right obtained. Nor is the alleged unwillingness of the producers to undertake source licensing established by the fact that some producers own music publishing companies that receive royalties as their distributive share of the fees stations pay for the blanket license. The undisputed evidence shows that these fees are far too small to persuade syndicators to refuse to undertake source licensing in the face of reasonable offers. BMI, for example, typically distributes to a publisher between 50 cents and 85 cents for theme and background music in a half-hour episode of a syndicated program shown on a single station; by contrast, the syndication licensing fee can exceed $ 60,000 for a single episode of a popular series shown in a major television market. Though some of the major producers that own music publishing companies have received more than $1 million in annual television distributions of music royalties, those royalties are a small fraction of their syndication revenue.
Defendants vigorously assert that whatever reluctance producers may have to undertake source licensing reflects their view of the efficiency of the blanket license. They contend that the blanket license may not properly be found to be a restraint simply because producers of syndicated programs regard it as efficient. We need not determine whether defendants have correctly analyzed the motivation of those syndicators who have expressed reluctance to undertake source licensing. Our task, in determining whether plaintiffs have presented evidence sufficient to support a conclusion that the blanket license is a restraint of trade, is not to psychoanalyze the sellers but to search the record for evidence that the blanket license is functioning to restrain willing buyers and sellers from negotiating for the licensing of performing rights to individual compositions at reasonable prices. Plaintiffs have simply failed to produce such evidence.
Instead they suggest that source licensing is not a realistic alternative because the agreements producers have made with composers and publishers are a "contractual labyrinth," Brief for Appellants at 53 n.73, and because the composers have precluded price competition among songs by "splitting" performing rights from "synch" rights, id. at 2. But plaintiffs have made no legal challenge to the "composer-for-hire" contracts by which "inside" music is customarily obtained for syndicated programs, with provisions for producers to assign performing rights to composers and publishers. And composers have not "split" performing rights from "synch" rights; they have separately licensed distinct rights that were created by Congress. Moreover, the composers' grant of a performing rights license to ASCAP/ BMI is on a non-exclusive basis. That circumstance significantly distinguishes this case from Alden-Rochelle, where ASCAP's acquisition of exclusive licenses for performing rights was held to restrain unlawfully the ability of motion picture exhibitors to obtain music performing rights directly from ASCAP's members.
The Claimed Lack of Necessity.
Plaintiffs earnestly advance the argument that the blanket license, as applied to syndicated programming, should be declared unlawful for the basic reason that it is unnecessary. In their view, the blanket license is suspect because, where it is used, no price competition occurs among songs when those who need performing rights decide which songs to perform. The resulting absence of price competition, plaintiffs urge, is justifiable only in some contexts such as night clubs, live and locally produced programming of television stations, and radio stations, which make more spontaneous choices of music than do television stations.
There are two fundamental flaws in this argument. First, it has not been shown on this record that the blanket license, even as applied to syndicated television programs, is not necessary. If all the plaintiffs mean is that a judicial ban on blanket licensing for syndicated television programs would not halt performance of copyrighted music on such programs and that some arrangement for the purchase of performing rights would replace the blanket license, we can readily agree. Most likely source licensing would become prevalent, just as it did in the context of motion pictures in the aftermath of Alden-Rochelle. But a licensing system may be "necessary" in the practical sense that it is far superior to other alternatives in efficiency and thereby achieves substantial saving of resources to the likely benefit of ultimate consumers, who usually end up paying whenever efficient practices are replaced with inefficient ones.
Moreover, the evidence does not establish that barring the blanket license as to syndicated programs would add any significant price competition among songs that the blanket license allegedly prevents. When syndicators today decide what music to select for their programs, they do so in the vast majority of instances, by deciding which composer to hire to compose new music for their programs. As to that "inside" music, which plaintiffs estimate accounts for 90% of music on syndicated programs, there is ample price competition: Prices paid as "up front" money in order to hire composers vary significantly. Even when syndicators consider use of pre-existing music (for which copyright protection has not expired), there is some price competition affecting the choice of that "outside" music because prices for "synch" rights vary. With this degree of price competition for music on syndicated programs already in place, it is entirely a matter of speculation whether replacement of the blanket license with source licensing would add any significant increment to price competition at the point where the syndicators decide which music to use. And since music is such a small portion of the total cost of a syndicated program to the television stations, and would still be even if performing rights were acquired at the source and included in the total price to the station, it is also a matter of speculations whether any significant increase in price competition for music would occur when television stations decide which syndicated programs to purchase in a world of source licensing. Viewed in the context of what is known about the way music is not obtained by syndicators and the entirely speculative nature of what benefits might occur if blanket licensing were prohibited, the evidence does not show that the blanket license is unnecessary to achieve its present efficiencies.
The second flaw in the argument is more fundamental. Even if the evidence showed that most of the efficiencies of the blanket license could be achieved under source licensing, it would not follow that the blanket license thereby becomes unlawful. The blanket license is not even amenable to scrutiny under section 1 unless it is a restraint of trade. The fact that it may be in some sense "unnecessary" does not make it a restraint. This is simply a recognition of the basic proposition that the antitrust laws do not permit courts to ban all practices that some economists consider undesirable. Since the blanket license restrains no one from bargaining over the purchase and sale of music performance rights, it is not a restraint unless it were proven that there are no realistically available alternatives. As we have discussed, the plaintiffs did not present evidence to establish the absence of realistic alternatives. It is therefore irrelevant whether, as plaintiffs contend, the blanket license is not as useful or "necessary" in the context of syndicated programming on local television stations as it is in other contexts. Not having been proven to be a restraint, it cannot be a violation of section 1.
The blanket license has been challenged in a variety of context. It has been upheld for use by nightclubs and bars, BMI v. Moor-Law, Inc., 527 F. Supp. 758 (D. Del. 1981), aff'd mem., 691 F.2d 490 (3d Cir. 1982), by radio stations, K-91, Inc. v. Gershwin Publishing Corp., 372 F.2d 1 (9th Cir. 1967), cert. denied, 389 U.S. 1045, 19 L. Ed. 2d 838, 88 S. Ct. 761, 156 U.S.P.Q. 720 (1968), and by a television network, CBS-remand, supra. Without doubting that the context in which the blanket license is challenged can have a significant bearing on the outcome, we hold that the local television stations have not presented evidence in this case permitting a conclusion that the blanket license is a restraint of trade in violation of § 1.
The judgment of the District Court is therefore reversed.
Winter, J., concurring: I disagree with little stated in Judge Newman's thoughtful and comprehensive opinion. I write separately because I believe that it demonstrates that the blanket license as presently used cannot have an anti-competitive effect and hope that his analysis, used out of context, will not lead to future needless litigation over blanket licenses in the music industry.
In Broadcast Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1, 60 L. Ed. 2d 1, 99 S. Ct. 1551 (1979), the Supreme Court remanded to us to apply rule of reason analysis to ASCAP's and BMI's blanket licenses. We concluded that the blanket licenses had no anti-competitive effect with regard to the CBS network. CBS, Inc. v. ASCAP, 620 F.2d 930 (2d Cir. 1980), cert. denied, 450 U.S. 970, 101 S. Ct. 1491, 67 L. Ed. 2d 621 (1981). We have now engaged in a similar analysis with regard to the broadcasters and have reached the same conclusion.
The result of this scrutiny has been to demonstrate that so long as composers or producers have no horizontal agreement among themselves to refrain from source or direct licensing and there is no other artificial barrier, such as a statute, to their use, a non-exclusive blanket license cannot restrain competition. In those circumstances, it is simply one alternative competing on the basis of price and services with others. The lack of use of the alternatives does not signal a restraint on competition but merely reflects the competitive superiority of the blanket license. So long as resort to the alternatives is not impeded by agreement among composers or producers or by some other artificial barrier, the rights and services afforded by the blanket license must be priced at a competitive level and no injury to consumers is possible.
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The alternatives of source or direct licensing grant rights only to particular compositions and not to those with potential infringement claims. The limited number of notes on a scale creates a potential for a multitude of infringement actions, and avoiding exposure to such litigation and possible liability may be valuable indeed to users of musical compositions.
The point, however, is not that any particular efficiencies are available though blanket licensing but that such licenses will be purchased only if they are less costly than the next best alternative. Why else would producers, who generally own the musical copyrights used in their programs, choose to use ASCAP, which retains 50 percent of the revenues collected? The point is best made by comparing these blanket licenses with the arrangement struck down in NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 104 S. Ct. 2948, 82 L. Ed. 2d 70 (1984). In that case, the NCAA attempted to sell exclusive television rights to football games between member colleges. The member institutions had agreed among themselves to abide by the rules of the NCAA and to boycott collectively any institution that violated those rules. I think all would agree that, if the NCAA merely offered a non-exclusive license to all football games between member schools and the member schools were free to negotiate television rights on their own, the action would have been dismissed on the pleadings. Indeed, the NCAA license would obviously enhance rather than restrict the competitive alternatives. In my view, the non-exclusive blanket licenses at issue here are indistinguishable from the hypothetical.
With these additional observations, I concur in Judge Newman's opinion.
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Cutter Laboratories, Inc. v. Lyophile-Cryochem Corporation
179 F.2d 80; 84 U.S.P.Q. 54 (9th Cir 1949)
Orr, J. Appellees brought this action for damages for the infringement of Reichel Reissue Patent No. Re. 20,969 and Flosdorf et al., Patent No. 2,345,548. By a bill of particulars, the charge of infringement was limited to claims 6, 11, 12 and 13 of the Reichel patent, and claims 4 and 5 of the Flosdorf patent. Judgment for damages and costs was entered upon a jury verdict that each of these claims was valid and had been infringed by appellant and assessing damages at $70,922, or two per cent of the stipulated amount of net sales of appellant's allegedly infringing products.
Appellant, in addition to denying the validity and infringement of the patent claims, set up the equitable defense that appellees were attempting to use the patents to create a monopoly over unpatented products and in other ways to restrain trade contrary to the public interest, and counterclaimed, asking a declaratory judgment that all of the claims of the two patents were invalid, were not infringed, and for an injunction against further infringement suits by appellees. The District Court rendered a separate decree on the equitable defense and counterclaim, 78 F. Supp. 905, adopting the verdict of the jury as to the validity and infringement of the claims involved in the action for damages, declaring the other claims of the two patents to be valid, and that appellees had not misused the patents.
A. The Reichel Patent.
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That none of the claims in the infringement action includes the entire Reichel process is not necessarily fatal to their validity. The inventor of a multistep process may be entitled to separate patents, as well as separate claims within the same patent, for subcombinations of steps representing only part of the entire process. Such sub-combination claims may be necessary to prevent others from impairing the value of the entire invention by appropriating an essential part thereof. Special Equipment Co. v. Coe, 324 U.S. 370, 65 S.Ct. 741, 89 L.Ed. 1006. But each sub-combination claim, to be valid, must meet the requirements of a separate patentable invention. Altoona Publix Theatres v. American Tri-Ergon Corp., 294 U.S. 477, 55 S.Ct. 455, 79 L.Ed. 1005. Even though a claim does not embody the ideal whole of the invention as described in the patent specification, it must encompass a process which is operable in itself and which by itself has the qualities of invention and novelty. Rodman Chemical Co. v. Deeds Commercial Laboratories, 7 Cir., 261 F. 189; H. Schindler & Co. v. C. Saladino & Sons, Inc., 1 Cir., 81 F.2d 649.
We cannot upset the jury's findings that claims 6, 11, 12 and 13 were each valid unless "the evidence is such that without weighing the credibility of the witnesses there can be but one reasonable conclusion as to the verdict * * *." Brady v. Southern Ry., 320 U.S. 476, 479-480, 64 S.Ct. 232, 234, 88 L.Ed. 239.
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2. Infringement of Claims 11, 12 and 13.
Appellant has a commercial laboratory in which it manufactures lyophilic biological products by a process very similar to the one set forth in the Reichel patent.
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Appellant did not automatically escape infringement by keeping his processes outside the literal language of the claims. . . . Appellant has merely replaced substantially instantaneous freezing with slower methods of freezing well known in the prior art. . . . Appellant has used all the inventive elements of the claims and, in place of another element, quick freezing, used a substitute well known at the time of the invention, slower freezing. Cf. Pedersen v. Dundon, 9 Cir., 220 F. 309; Cazier v. Mackie-Lovejoy Mfg. Co., 7 Cir., 138 F. 654. It has long been established that such a substitution does not avoid infringement. Gill v. Wells, 22 Wall. 1, 89 U.S. 1, 15, 28-32, 22 L.Ed. 699.
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B. The Flosdorf Patent.
Claims 4 and 5 of Flosdorf et al., Patent No. 2,345,548 were found to be valid and infringed and the entire patent declared valid. The Flosdorf patent is an improvement in the method of getting rid of water vapor which is sublimed from the frozen material under the vacuum in the course of the process described in the Reichel patent.
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C. Equitable Defense of Alleged Misuse of Patent.
Appellant urges that appellees have used the patents in suit "to create improperly a monopoly upon and control the supply of unpatented substances and apparatus, and have used and are now using the said patents contrary to the public interest and contrary to law, * * *."
Appellant introduced in evidence a series of licensing and other agreements. Prior to the execution of these agreements, Sharp & Dohme, Inc., a corporation engaged in the manufacture and sale of drugs, owned a series of patents on processes, products, containers and machinery within the field of freeze-dried drugs, including the Reichel patent in suit. The F. J. Stokes Machine Co., which manufactures machinery and apparatus used in the manufacture of drugs, owned a similar series of patents, including the Flosdorf patent in suit. These two companies formed the appellee Lyophile- Cryochem Corporation, to which they agreed to transfer the exclusive power to issue licenses under all patents within the freeze-dried drug field which each party then owned or might in the future acquire, and they agreed to endeavor to acquire such patents from any of their employees who might be connected with new inventions within the field. They also agreed to cause the new corporation
"to grant licenses to others on such terms as, consistently with the maintenance of the strength of its patent rights and the good reputation of the products made pursuant to the patents, shall encourage maximum sales of the products and minimize sales resistance, and such licenses shall not be unreasonably withheld."
Lyophile-Cryochem then granted to Sharp & Dohme a non-exclusive, royalty-free license to make, use and sell all medical products, as distinguished from machinery or apparatus for manufacturing the same, covered by the patents. Sharp & Dohme was also licensed to use patented machinery and apparatus and to manufacture the machinery for its own use but not for sale. Stokes was given an exclusive license, subject only to rights given Sharp & Dohme, to manufacture and sell the patented machinery. Under the agreements, outsiders could obtain licenses for the use of the machinery.
Subsequently, Sharp & Dohme assigned the Reichel and other patents to the appellee Essdee Patents, Inc., its wholly owned subsidiary. Similarly Stokes assigned the Flosdorf and other patents to appellee Tabor-Olney Corporation, its wholly owned subsidiary. Both assignments were subject to the agreements with Lyophile-Cryochem Corporation.
Patent pools and cross-licensing agreements, when formed in a legitimate manner for legitimate purposes, are not illegal in themselves. Standard Oil Co. v. United States 283 U.S. 163, 51 S.Ct. 421, 75 L.Ed. 926. Nor is an agreement to assign patents on future inventions within a specified field inherently illegal. Transparent Wrap Mach. Corp. v. Stokes & Smith Co. 329 U.S. 637, 67 S.Ct. 610, 91 L.Ed. 563. 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, U. S. v. Line Material Co. 333 U.S. 287, 68 S.Ct. 550, 92 L.Ed. 701, or to suppress competition from unpatented articles, Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 62 S.Ct. 402, 86 L.Ed. 363, or to monopolize an entire industry by pooling the dominating patents and allocating fields of manufacture among companies which would otherwise be in competition. Hartford-Empire Co. v. U. S. 323 U.S. 386, 65 S.Ct. 373, 89 L.Ed. 322.
There is no evidence of restrictive practices on the part of Lyophile-Cryochem in the granting of licenses. Any would-be licensee appears to have been able to procure just the licenses he wished, and no more, at reasonable, non-discriminatory royalties without making any agreements as to pricing or as to the use or sale of unpatented articles. Nor did Stokes or Sharp & Dohme make any such agreements with Lyophile-Cryochem or between themselves. Appellant does not assert otherwise. Its contention is that the agreements on their face restrain trade and effect a monopoly, especially when coupled with the testimony of the vice president and general manager of Lyophile-Cryochem that the patents in the pool "fairly well cover the field" of freeze-drying drugs. The manner in which the agreements bring about this restraint of trade or monopoly, or both, says appellant, is by excluding Stokes from exploiting its present and future patents for freeze-dried medical products and excluding Sharp & Dohme from exploiting its present and future patents for machinery and apparatus, except to make and use such machinery for its own purposes. It makes no difference, argues appellant, that the two parties were and are not in competition with each other, for notwithstanding the lack of present competition, there is a possibility that, apart from the agreements, either one might have decided to enter the other's field.
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. Insofar as the parties agree to give Lyophile-Cryochem the exclusive power to issue licenses to outsiders, there is no extension of the patent monopoly because the licensing agent, unless it indulges in restrictive practices, not present here, is in no better bargaining position than its principals. As to the rights retained by or granted to the parties themselves under the agreements, the patents can be divided into two groups. First, there are the patents which each party owns within its own field, which each obviously would be just as free, but no more so, to exploit by making, using and selling in the absence of the agreements. It is true that Sharp & Dohme can make and use Stokes machines without royalty whereas others may not make the machines and must pay for their use, but that too is a privilege that Stokes would be free to grant within the scope of the normal patent monopoly. Thus, the objections to the agreements must be narrowed down to the cross-licensing rights granted under the second group of patents, consisting of those each party owns in the other's field. Stokes, interested in the manufacture of freeze-drying apparatus, conducts research for improvements in that apparatus. In the course of that research, it incidentally discovers improvements in freeze-drying processes and freeze-dried medical products. It is entitled to a patent monopoly on those improvements, but it cannot directly exploit those patents without going outside its normal field, which is machinery. Sharp & Dohme, on the other hand, is in a position to exploit the improvements. Moreover it is faced with the same problem, for it is in no position to exploit directly the improvements in machinery which it discovers in the course of its research. 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. Any patent owner who grants an exclusive license, reserving no right except to collect royalties, cuts himself off from practicing the art claimed in the patent until the patent has expired. As to objection that by including future patents in the pool appellees have gone beyond the normal patent-imposed restraint on trade in that they have contracted away their rights to enter into the field of the other for a period longer than the lives of the current patents, we find a similar situation in TransparentWrap Mach. Corp. v. Stokes & Smith Co. 329 U.S. 637, 67 S.Ct. 610, 91 L.Ed. 563, where the licensee, in effect, contracted away his right to practice future improvements in the invention of the licensed patent without payment of a royalty.
Appellant complains that the effect of the pooling agreements was to enable Stokes and Sharp & Dohme to dominate the field of freeze-drying. Again, this contention must be narrowed to the proposition that contributing to the pool the patents which each party owned or acquired in the other's field created an unlawful monopoly which would not have existed if each party had retained and exploited its own patents by itself. The testimony that all the patents, whether held by the parties in their own fields or not, "pretty well covered" the freeze drying industry, does not prove this proposition.
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. United States v. Griffith, 334 U.S. 100, 68 S.Ct. 941, 92 L.Ed. 1236; American Tobacco Co. v. United States, 328 U.S. 781, 809, 814, 66 S.Ct. 1125, 90 L.Ed. 1575. The District Court found no such intent. There is no evidence of any exclusionary activities or otherwise which might evidence such intent; and, indeed, the reasonableness of the agreements as a practical means of exploiting legitimate patent monopolies negatives such intent.
The judgments, insofar as they hold claims 5 and 6 of the Reichel patent valid, are reversed, and in all other respects are affirmed.
Standard Sanitary Manufacturing Co. v. United States
226 U.S. 20; 57 L. Ed. 107, 33 S. Ct. 9 (1912)
McKenna, J. Suit by the Government against appellants for a violation by them of the act of July 2, 1890, 26 Stat. 209, § 647, commonly known as the Sherman Anti-trust Act.
A decree was entered in favor of the Government, from which appellants (designated herein as defendants) have prosecuted this appeal. 191 Fed. Rep. 172.
There are sixteen corporate and thirty-four individual defendants, the latter, with the exception of Edwin L. Wayman, being the officers, presidents or secretaries, of the companies.
The corporate defendants were alleged to be the manufacturers of enameled iron ware in various places in the United States, manufacturing 85% of such ware and engaged in interstate commerce in such ware throughout the United States and with foreign countries in competition with one another and with certain other manufacturers of such ware, and that in 1909, or early in 1910, they entered into and engaged in a combination and conspiracy to restrain such trade and commerce.
The corporate defendants are manufacturers of sanitary enameled iron ware, such as bath tubs, wash bowls, drinking fountains, sinks, closets, etc. The enameling consists in applying opaque white glass to iron utensils, first in the condition of a liquid and, second, in the form of a powder. The process consists in heating the utensil to a red heat and then sifting upon it the enameling powder. The powder is fused by the high temperature and forms on the utensil a hard, impenetrable, insoluble, smooth and glossy surface.
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In August, 1909 ... it was suggested to Wayman by a person connected with one of the manufacturing companies that he (Wayman) apply for the position of secretary of the Association of Sanitary Enameled Ware Manufacturers which was about to be reorganized. The position, it was said, would give Wayman an excellent opportunity to continue his efforts to buy the Arrott patent and establish such relation with the manufacturers of enameled ware as would enable him to present in the most favorable manner his ideas in regard to the advantages of patent licenses under the Arrott patent. This association was a pure trade organization and not formed to control or regulate prices. Wayman applied for and obtained the position and commenced again negotiations for the Arrott patent and persisted, against the apparent reluctance of the Standard Company to give up the advantages of the patent. Finally he impressed the manager of the Standard factories with the greater advantages which would come to his company by the elimination of "seconds" and removing them as competitors of the better articles of the Standard, confining the competition to such articles of which the Standard produced 50%. The manager of the Standard and that company yielded to the representation of these advantages.
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The Standard Company fixed a price upon the Arrott patent and gave Wayman an option upon it. He, in the following December, secured also an option from the J. L. Mott Iron Works upon a patent called the Dithridge, and from the L. Wolff Manufacturing Company an option upon the Lindsay patent. These patents were infringements of the Arrott device. Thus equipped, Wayman proceeded to engage the manufacturers in his proposition.
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[The court noted inconsistencies in the defendant's arguments that the combination and the price provisions were necessary to protect quality and promote safety.]
[T]he scheme has other features and effects which counsel overlook or ignore. It is immediately open to the criticism that its parts have no natural or necessary relation. What relation has the fixing of a price of the ware to the production of "seconds"? If the articles were made perfect their price in compensation of them and by unfettered competition would adjust itself. To say otherwise would be in defiance of the examples of the trading and industrial world. Nor was a combination of manufacturers necessary to the perfection of manufacture and to rivalry in its quality. And it may be asked if such perfection and its protecting influence against deception and the ruinous depression of prices were so desirable and potent as it is contended that they were, why were they not extended to "baths," the most important of the articles in the trade? It is not an adequate answer to say that there was a time guarantee of them even though it was given to all of them, as it was not. The justification of defendants is based not on the responsibility of manufacturers but on the integrity of the articles assured by the use of the Arrott device.
The license agreement . . . granted to the licensee the right to use in the manufacture of enameled ware the Arrott patent, also a patent to E. Dithridge for a pneumatic sieve and a patent to William Lindsay for an "Enameling powder distributor." It released the claims for past infringement so long as the licensees operated under the license. It fixed royalties of $5.00 per day for each furnace, subject to a diminution of like amount for furnaces shut down for more than six consecutive working days. It fixed preferential discounts from the regular selling prices, confining them only to sales by the manufacturers to jobbers. And it was provided that no goods manufactured under the license should be sold unless they bore a registered label (except where otherwise specified) owned by the licensee and in addition thereto a license tag or label approved by the licensor placed in a visible position thereon.
The provision for prices was as follows:
"The Licensor agrees that he will employ a commission of six (6) persons, of which he is to be one and to act as chairman thereof, five of whom shall be designated by a majority of the parties holding licenses similar to this license, which commissions shall have supervision of all the relations and transactions between the parties hereto under this agreement, but it is understood that where a member of said commission, or his company, shall be directly interested in any question of a violation of the license to be decided by the said commission, said member shall be disqualified and a temporary member shall be appointed in his place by the remaining members of the commission.
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There was a provision for the return of 80% of the royalties paid if the agreement should be complied with. These royalties, called in the agreement "Royalty Rebates," were forfeited if the provisions of the agreement should be violated in any particular.
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There was also a jobber's license agreement that bore at the top the note that it "must be executed by the purchaser in order to purchase licensed sanitary enameled ware." It conveyed to the jobber the right to buy and sell such ware, provided for certain discounts and details as to shipments and deliveries, and that the sales were to be made
"by the purchasers at prices to be established and prevailing in the various zones into which the goods were shipped, regardless of the point of purchase."
There was a provision for the payment of the purchase price at certain rebate periods if the agreement should be complied with. The resale prices as established from time to time were required to be maintained by all jobbers and dealers, and sales could not be made from one jobber to another for any better prices than "established by the sheets," and the purchaser agreed to:
"observe and strictly maintain . . . the selling prices as they are set forth in the schedules and observe and adhere to the rules and regulations as embodied in the price sheets"
or embodied in price sheets which might be issued by or under the authority of the licensor. Articles might be added to or removed from the schedules at any time. The purchaser also agreed during the life of the contract not to purchase, sell, advertise or solicit orders for, or in any way handle or deal in, sanitary enameled iron ware of any manufacturer not licensed under the letters-patent enumerated in the agreement, except with the express written permission of the licensor. A breach of any of the conditions subjected the contract and all unfilled orders to cancellation, the forfeiture of rebates and the power to obtain the ware manufactured under the letters-patent from any of the licensed manufacturers. The purchaser further agreed not to sell any goods on hand manufactured in accordance with the patents, irrespective of by whom manufactured, except in accordance with the prices, conditions and regulations of sale established by the licensor.
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The agreements clearly, therefore, transcended what was necessary to protect the use of the patent or the monopoly which the law conferred upon it. They passed to the purpose and accomplished a restraint of trade condemned by the Sherman law. It had, therefore, a purpose and accomplished a result not shown in the Bement Case. There was a contention in that case that the contract of the National Harrow Company with Bement & Sons 186 U.S. 70 was part of a contract and combination with many other companies and constituted a violation of the Sherman law, but the fact was not established and the case was treated as one between the particular parties, the one granting and the other receiving a right to use a patented article with conditions suitable to protect such use and secure its benefits. And there is nothing in Henry v. A.B. Dick Co., 224 U.S. 1, which contravenes the views herein expressed.
The agreements in the case at bar combined the manufacturers and jobbers of enameled ware very much to the same purpose and results as the association of manufacturers and dealers in tiles combined them in Montague & Co. v. Lowry, 193 U.S. 38, which combination was condemned by this court as offending the Sherman law. The added element of the patent in the case at bar cannot confer immunity from a like condemnation, for the reasons we have stated. And this we say without entering into the consideration of the distinction of rights for which the Government contends between a patented article and a patented tool used in the manufacture of an unpatented article. Rights conferred by patents are indeed very definite and extensive, but they do not give any more than other rights an universal license against positive prohibitions. The Sherman law is a limitation of rights, rights which may be pushed to evil consequences and therefore restrained.
This court has had occasion in a number of cases to declare its principle. Two of those cases we have cited. The others it is not necessary to review or to quote from except to say that in the very latest of them the comprehensive and thorough character of the law is demonstrated and its sufficiency to prevent evasions of its policy "by resort to any disguise or subterfuge of form," or the escape of its prohibitions "by any indirection." United States v. American Tobacco Co., 221 U.S. 106, 181. Nor can they be evaded by good motives. The law is its own measure or right and wrong, of what it permits, or forbids, and the judgment of the courts cannot be set up against it in a supposed accommodation of its policy with the good intention of parties, and it may be, of some good results. United States v. Trans-Missouri Freight Asso., 166 U.S. 290; Armour Packing Co. v. United States, 209 U.S. 56, 62.
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