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United States of America v. Studiengesellschaft Kohle, m.b.H.
Oberdorfer J. This is a civil antitrust enforcement action brought by the United States against Studiengesellschaft Kohle m.b.H. (S.K.) and its licensees. Essentially, the complaint challenged certain arrangements which granted an exclusive license to sell the product of a patented process as an unreasonable restraint of trade and an attempt to monopolize a part of trade or commerce in violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. Before trial, the district court denied defendants' motion for summary judgment, holding that the patents did not immunize the challenged arrangements from antitrust scrutiny. United States v. Studiengesellschaft Kohle, m.b.H., 426 F. Supp. 143 (D.D.C. 1976). After a trial without a jury, the district court found that the license provisions in question, stripped of any patent law protection, violated Sections 1 and 2 of the Sherman Act. The court entered a decree enjoining defendant S.K. from enforcing any agreement limiting sales of the product of its process patent, and requiring defendant to license the patented process to all applicants at a reasonable royalty. This appeal followed. For reasons stated below, we reverse the judgment of the district court and remand with instructions that it enter judgment for the defendant.
Between 1953 and 1954, Dr. Karl Ziegler, the Director of the Max Planck Institute in Mulheim, West Germany, developed a new process for the production of aluminum trialklys (ATAs), a catalytic agent and chemical reactant. For this and other related discoveries of organic-metallic catalysts and processes, Dr. Ziegler was awarded the 1963 Nobel Prize in Chemistry. He was also awarded with a number of U.S. patents on his process for producing ATAs.
Prior to Ziegler's invention, ATAs were known but had no commercial uses. Experience with the invention shows that ATAs produced by the Ziegler process cost an estimated 5% of what it cost to produce ATAs using the prior art. As the district court found, Ziegler's process "is so economical that no other process can be commercially competitive with it." Primarily as a result of these economies, the number of uses for ATAs increased dramatically. ATAs are now consumed in large quantities as a reactant in the manufacture of biodegradable household detergents and as a catalyst in the manufacture of synthetic rubber for tires. But since Ziegler did not discover the product ATAs, he was not awarded a patent on ATAs, but only on the process which he invented for their more economical manufacture.
In 1954 Dr. Ziegler concluded an agreement with Hercules Incorporated (formerly Hercules Powder Company) to exploit his process patents. 2 Hercules had followed his research for a number of years and had previously expressed interest in obtaining licenses for the exploitation of his inventions. This Ziegler/Hercules agreement, designated by the parties as the "Technical Field Contract," granted Hercules a nonexclusive license to manufacture ATAs by the Ziegler process for use in Hercules' own manufacturing operations. It also granted to Hercules "an exclusive license to sell in the United States the aluminum trialkyl produced within the scope of the Technical Field." Ziegler's agreement with Hercules permitted him to grant nonexclusive licenses to a number of other manufacturers as long as they used, but did not sell, the ATAs manufactured pursuant to the license. Accordingly, Ziegler granted licenses to Ethyl Corporation (Ethyl), Continental Oil Co. (Conoco) and others to use his process to manufacture ATAs for internal use.
In 1959 Hercules entered into a joint venture with Stauffer Chemical Co. in an effort to exploit the exclusive license to manufacture ATAs for sale. Together they formed Texas Alkyls, Inc. (Texas); Stauffer contributed capital while Hercules contributed its exclusive license. This transaction purported to give Texas the exclusive right to sell ATAs in the United States, diluted only by licenses authorizing ATA users such as Conoco and Ethyl to manufacture ATAs for internal consumption. Several nonexclusive licensees sought licenses from Ziegler to use his patented process to produce ATAs for sale in competition with Texas, but he consistently denied these applications.
Ethyl was one such disappointed licensee. In 1959 it reacted to Ziegler's denial of its application for a license to sell by filing a declaratory judgment action in the United States District Court for Delaware challenging Ziegler's right to enforce the license provisions banning ATA sales by Ethyl. Before that case came to issue, the parties agreed that, whatever the outcome, Ethyl would be permitted to sell ATAs by right if the result was in favor of Ethyl, and if otherwise, according to the terms of a special license that would require Ethyl to pay Hercules an additional 2% royalty on sales of ATAs. The Delaware Court ultimately found that the license restrictions were a valid exercise of the monopoly power inherent in Ziegler's process patent. Ethyl Corp. v. Hercules Powder Co., 232 F. Supp. 453 (D.Del. 1964). Ethyl took no appeal, but began selling ATAs, subject only to an obligation to pay the 2% royalty agreed upon in partial settlement of the Delaware litigation. Only Hercules and Ethyl have sold industrial quantities of ATAs since that time.
There was no restriction on the price or other terms under which Ethyl could sell ATAs, nor any restriction on Ethyl's use and sale of ATAs manufactured by some other process.
"... patent claim gave him the right to exclude others from marketing, using, or selling his process. He therefore never had protection under the patent laws when he sought by whatever means to extend his process claim to restrict use or distribution of the unpatented product, the ATAs.... The holder of a process patent could not ... license several companies to use the process and attempt to limit the manner in which some of those companies decided to use the ultimate product."
426 F. Supp. at 148, 149 Having denied defendants' motion for summary judgment, the court set the case for trial on the issue of whether the agreements limiting sales violated the Sherman Act.
With trial pending, defendants Hercules, Stauffer and Texas agreed to consent judgments and decrees. After a trial in which S.K. was the sole remaining defendant, the district court entered findings of fact and conclusions of law. The court found essentially four anticompetitive effects from the restrictions at issue: (1) the nonexclusive licensees, prospective sellers of ATAs, were excluded from the market, (2) the price of ATAs exceeded competitive levels, (3) the development of new uses for ATAs was retarded because of their supracompetitive price, and (4) trade in certain aluminum alkyls other than ATAs was restrained as a result of the restrictions on the Ziegler process. Without discussion of relevant authorities, the district court concluded that the agreements constituted an attempt to monopolize the sale of the ATAs in the United States in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, and were illegal restraints of trade under Section 1 of the Sherman Act, 15 U.S.C. § 1, both under a per se rule and as measured by the rule of reason. On March 15, 1979, the court entered an amended final decree that, inter alia, prohibited defendants from enforcing or granting limited licenses and mandated compulsory licensing at reasonable and nondiscriminatory rates of the Ziegler process, including the right to sell any ATAs so produced.
On appeal, the parties make a number of contentions, not all of which need be addressed in view of the conclusion we reach. Appellant renews its argument below in support of its motion for summary judgment that its conduct is protected by the patent laws because (1) it effected no greater restraint than the patent granted, and (2) it could have legally imposed a much greater restraint by granting Hercules an absolutely exclusive license to use the Ziegler process, thereby automatically vesting Hercules with the exclusive right to sell ATA's manufactured by that process. In addition, appellant argues that the restraints challenged here should be upheld as permissible quantity restrictions on the use of the process, citing Q-Tips, Inc. v. Johnson & Johnson, 109 F. Supp. 657 (D.N.J. 1951), aff'd, 207 F.2d 509 (3rd Cir. 1953), cert. denied, 347 U.S. 935, 74 S. Ct. 630, 98 L. Ed. 1086 (1954). Finally, appellant argues that the government's failure to prove a relevant market is fatal to its claim under both § 1 and § 2.
The government grounds its position to the contrary on the summary judgment ruling by the district court below, that the agreements were designed to expand a legal monopoly of the process into an impermissible monopoly of the unpatented product. Arguing that a process patentee has no authority to control the sales of the unpatented product of the process, the government maintains that such an attempt is per se illegal as well as effecting an unreasonable restraint of trade. It also disagrees with the analogy to quantity limitations which defendant asserts, arguing that the license here restrains the use of the products and not the amount of the product which the licensee may produce. Finally, the government argues that it is not required to prove a relevant market, and that in any event the district court made adequate findings that ATAs constitute a relevant market. We conclude that, even assuming arguendo that ATAs constitute a relevant market and that the agreements are not defensible as quantity restrictions, the judgment must be reversed because defendant did not expand its monopoly or impose restraints beyond the scope of the monopoly which its patent gave it.
The patent laws, authorized by the Constitution, were enacted by Congress to stimulate invention and reward innovation by granting the patentee a 17-year monopoly of the making, using, and selling of the patented invention. U.S. Const., art. I, sec. 8; 35 U.S.C. § 154. Such a grant is in inevitable tension with the general hostility against monopoly expressed in the antitrust laws, 15 U.S.C. 1 et seq. Therefore, courts normally construe patent rights narrowly in deference to the public interest in competition. Mercoid Corp. v. Mid-Continent Inv. Co., 320 U.S. 661, 665-66, 64 S. Ct. 268, 271, 88 L. Ed. 376 (1944); United States v. Masonite Corp., 316 U.S. 265, 278-80, 62 S. Ct. 1070, 1077-78, 86 L. Ed. 1461 (1942). As a result, there has been a stream of litigation down through the years flowing from the conflict between the monopoly rights created by the patent laws on one hand and the national policy favoring competition expressed in the antitrust laws on the other.
The essential rights of a patentee may be briefly summarized. A patentee has the right to exclude others from profiting from the patented invention. Zenith Radio Corp. v. Hazeltine Research Inc., 395 U.S. 100, 135, 89 S. Ct. 1562, 23 L. Ed. 2d 129 (1969); Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 424-25, 28 S. Ct. 748, 753-54, 52 L. Ed. 1122 (1908). This includes the right to suppress the invention while continuing to prevent all others from using it, Continental Paper Bag Co., supra, to license others, or to refuse to license, and to charge such royalty as the leverage of the patent monopoly permits. See Brulotte v. Thys Co., 379 U.S. 29, 33, 85 S. Ct. 176, 179, 13 L. Ed. 2d 99 (1964) (dictum); W.L. Gore & Assoc. v. Carlisle Corp., 529 F.2d 614, 622-23 (3d Cir. 1976). A patentee may grant one exclusive license or may grant many licenses. See E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 22 S. Ct. 747, 46 L. Ed. 1058 (1902); United States v. Westinghouse Elec. Co., 648 F.2d 642 (9th Cir. 1981).
A license is an agreement by the patentee, usually for a consideration, not to sue the licensee of the patent for infringement of the patent. A patentee has the right to an injunction barring use of the patented process or product without his permission and the additional right to recover damages caused by such an infringement. The license waives this right to judicial relief against what, but for the license, would be an infringement. Frequently, a patentee grants licenses on certain conditions, in addition to the requirement that the licensee pay royalties. The validity of various restrictions in licensing agreements has been the focus of much patent-antitrust litigation. See generally P. Areeda, Antitrust Analysis P 410, 411 (3d ed. 1981).
A patent may be awarded for either a product or a process. A product patent creates a monopoly over the manufacture, use, and sale of a product; a process patent creates a monopoly over the manufacture, use, and sale of a process. The essential difference between the two relates to scope. A product patent gives the patentee the right to restrict the use and sale of the product regardless of how and by whom it was manufactured. A process patentee's power extends only to those products made by the patented process. Merrill v. Yeomans, 94 U.S. 568, 24 L. Ed. 235 (e876); see pages 1133-1134, infra. A process patent thus "leaves the field open to ingenious men to invent and to employ other processes." 1 A. Walker, Patents § 23 at 140 (2d Deller ed. 1964).
A sale of a product made by a patented process does not itself infringe the patent; it is the unauthorized use of the process that infringes the patent. See, e.g., Koratron Co. v. Lion Uniform, Inc., 449 F.2d 337, 338 (9th Cir. 1971); In re Amtorg Trading Corp., 22 CCPA 558, 75 F.2d 826 (CCPA 1935), cert. denied 296 U.S. 576, 56 S. Ct. 102, 80 L. Ed. 407 (1935). Here the several licenses contained conditions restricting sales by the nonexclusive licensees of the product of the patented process. Such sales would violate the license agreement and therefore expose the seller to infringement claims by Hercules and S.K., unless the antitrust laws rendered those conditions unenforceable. See Ethyl Corp. v. Hercules Powder Co., supra. The validity of these restrictions in the nonexclusive licenses under the antitrust laws is the issue which we must resolve.
"(t)he very object of (the patent laws) is monopoly.... The fact that the conditions in the contract keep up the monopoly does not render them illegal."
Thus, as appears more fully below, we conclude that a rule of reason rather than a per se rule applies here. Under our analysis, the protection of the patent laws and the coverage of the antitrust laws are not separate issues. Rather, the conduct at issue is illegal if it threatens competition in areas other than those protected by the patent, and is otherwise legal. The patentee is entitled to exact the full value of his invention but is not entitled to endanger competition in other areas by manipulating his patent monopoly. It was thus error to consider the scope of the patent protection irrespective of any competitive effects in the first phase of the case, and then rule separately on the anticompetitive effects of the arrangement without consideration of the protection of the patent.
If the four anticompetitive effects found by the district court are examined, it is clear that all of them were restraints on what the patent lawfully protects: ATAs manufactured by the Ziegler process. The effects as stated were (1) the exclusion from the market of potential sellers of ATAs manufactured by that process, (2) supracompetitive prices, (3) retarded development of new uses for ATAs because of supracompetitive prices, and (4) restraint on certain other aluminum alkyls which resulted from restrictions on the Ziegler process. None of these restraints go beyond what the patent itself authorizes. Such an exclusion of competitors and charging of supracompetitive prices are at the core of the patentee's rights, and are legitimate rewards of the patent monopoly. Brulotte v. Thys Co., supra; Zenith Radio Corp. v. Hazeltine Research, Inc., supra. Similarly, the restraint on aluminum alkyls other than ATAs produced by the Ziegler process was a legitimate reward of the patent. All of these "anticompetitive effects" of the restriction on sales by licensees would have resulted from a conventional grant of an exclusive license to Hercules to practice the patented process. In fact, the anticompetitive effects of such an exclusive license would be even greater.
The government contends and the district court concluded that defendant's conduct in this case was an attempt to extend its monopoly of the process for making ATAs into a monopoly of the product, ATAs, which are themselves unpatented. As already noted previously, the defendant was not given a product patent on the ATAs because he did not invent them. S.K. thus has no right to prevent others from selling ATAs which are manufactured by another process. An attempt by defendant to expand its monopoly to cover such an unpatented product manufactured by another process would be an attempt to enlarge its monopoly beyond what the patent law gives it and would thus be subject to antitrust attack. For example, if S.K. had required its licensees to refrain from selling any ATAs, even if they were made by other processes, it might well be in violation of the antitrust laws. Cf. Compton v. Metal Prods., Inc., 453 F.2d 38 (4th Cir. 1971), cert. denied, 406 U.S. 968, 92 S. Ct. 2414, 32 L. Ed. 2d 667 (1972). A requirement by defendant that any licensee who discovered an alternative process grant back to S.K. a license under that process might similarly be illegal, since such a license might dampen the incentive to invent around the patent. But S.K. did neither of these things. It merely restricted the sale of ATAs which were manufactured by its process. Such a restriction does not in any way operate to limit competition between ATAs manufactured pursuant to the Ziegler process and ATAs manufactured by other processes, now or hereafter available. Nor does this restriction make it less likely that such process will be discovered.
Defendant has thus sought nothing beyond what the patent itself gave it. The patent gives it the unlimited right to exclude others from utilizing its process. This process is, in fact, so superior to other processes that a monopoly over the process gives its holder a de facto monopoly over the product. But there is no danger that defendant can, by manipulating its process patent, "convert a process patent into a product patent." 426 F. Supp. at 149. S.K. has no monopoly over ATAs not produced by the Ziegler patent. Its monopoly of the product can continue only so long as its process remains "so superior to other processes that ATAs made by those other processes could not compete commercially..." The district court's ruling that Ziegler could not restrict sales of products made by the patented process, without a showing that trade in some article other than ATAs made by that process was restrained, amounted to a rule that restraints on sales by a process patentee, though not by a product patentee, are per se unlawful.
[W]e do not foreclose the possibility that particular applications of vertical restrictions might justify per se prohibition under Northern Pac. R. Co. But we do make clear that departure from the rule-of-reason standard must be based upon demonstrable economic effects rather than - as in Schwinn - upon formalistic line drawing.
433 U.S. at 58-59, 97 S. Ct. at 2561-62.
What the district court did below and the government urges here is subject to similar criticism. The government would have us declare that any restraint on products produced by a process patent is outside the protection of the patent laws and illegal per se regardless of the effects of the restraint, on the theory that licensing of the process exhausts the patentee's rights in that process. In the ab ence of "demonstrable economic effects," however, such a conclusion would be wholly unrelated to any realistic distinction between a process patent and a product patent, and would be just the sort of "formalistic line-drawing" which the Supreme Court condemned.
"we would not expect that any market arrangements reasonably necessary to effectuate the rights that are granted would be deemed a per se violation of the Sherman Act."
441 U.S. at 19, 99 S. Ct. at 1562.
While it is possible that some restraints in a patent license, such as tying restrictions, may be illegal per se after Continental TV and Broadcasting Music, Inc., it would be necessary at least to show that the restraints involved had no purpose except restraining trade, and had unequivocally anticompetitive effects in the vast majority of cases. As we noted in Smith v. Pro Football, Inc., 193 U.S. App. D.C. 19, 27, 593 F.2d 1173, 1181 (1978), per se rules risk sweeping reasonable, procompetitive activity within a general condemnation, and a court will run this risk only where dictated on the basis of unambiguous experience. As appears below, we conclude that, far from being a "naked restraint of trade," the restraint challenged here is "reasonably necessary to effectuate the rights that are granted" by the Ziegler process patent. Cf. Broadcast Music, Inc., supra, 441 U.S. at 19, 99 S. Ct. at 1562.
Treatment of this sui generis arrangement as a per se violation is particularly inappropriate when six years before this suit was filed, the United States District Court for the District of Delaware had ruled that the very series of agreements and transactions at issue here did not constitute patent misuse, because defendant was not reaching out for any new monopoly. Ethyl Corp. v. Hercules Power Co., supra at 458. In our view these authorities, along with numerous patent licensing cases discussed below, require that the result turn on a careful analysis of whether the restriction imposed here constituted an unreasonable restraint of trade. We proceed to consideration of that question.
Defendant's reasonableness claim rests primarily on its assertion that it effected no more control over ATAs than it could have exercised if it had given Hercules an absolutely exclusive license. The law is settled that S.K. could legally have licensed Hercules alone to use the patented process. See, e.g., E. Bement & Sons v. National Harrow Co., supra; United States v. Westinghouse Elec. Co., 648 F.2d 642 (9th Cir. 1981); Rail Trailer Co. v. ACF Indus. Inc., 358 F.2d 15 (7th Cir. 1966); Benger Laboratories Ltd. v. R.K. Laros Co., 209 F. Supp. 639 (E.D. Pa. 1962), aff'd, 317 F.2d 455 (3d Cir.), cert. denied, 375 U.S. 833, 84 S. Ct. 69, 11 L. Ed. 2d 64 (1963). The actual licensing arrangement here is less restrictive than an exclusive license. Because other nonexclusive licensees are free to manufacture for their own use, demand for ATAs produced by Texas, and therefore the benefit of its exclusive license, is lessened. This lesser restraint, which has fewer anti-competitive effects than a lawful exclusive license, gives the Ziegler arrangement an important badge of reasonableness.
The government attempts to respond by pointing out that antitrust scrutiny of a patent arrangement is not foreclosed simply because the patentee had the power to license less widely than it did. Of course, it is not the case that merely because the patentee has the right to refuse to license anyone, he has the right to license upon any condition he chooses; that position was rejected as early as Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 37 S. Ct. 416, 61 L. Ed. 871 (1917). But in all of the cases which the government cites, and which are discussed below, the restriction imposed itself had competitive dangers which were not present in purely legal arrangements. The government has cited no case, and we are not aware of any, which found antitrust infirmities in a restriction that posed only the restraint on competition imposed by the patent itself or by exercise of legal rights corollary to those created by the patent.
Morton Salt v. G.S. Suppiger Co., 314 U.S. 488, 62 S. Ct. 402, 86 L. Ed. 363 (1942); Motion Picture Patents Co., supra.
"a patentee may grant a license... upon any condition the performance of which is reasonably within the reward which the patentee by the grant of the patent is entitled to secure."
Id. at 489, 47 S. Ct. at 196. The Supreme Court concluded that the patentee's reward included the right to fix prices at which products were sold and that a price restriction in a patent license was thus not illegal. While this toleration of price-fixing by the patentee has been seriously questioned, and has survived twice only by the grace of an equally divided Court, over the years the General Electric formulation has been the verbal frame of reference for testing the validity of a license restriction in many subsequent decisions. See e.g., United States v. Westinghouse Elec. Co., 648 F.2d 642 (9th Cir. 1981); Hensley Equipment Co. v. Esco Corp., 383 F.2d 252 (5th Cir. 1967); Turner Glass Corp. v. Hartford-Empire Co., 173 F.2d 49 (7th Cir.), cert. denied, 338 U.S. 830, 70 S. Ct. 57, 94 L. Ed. 505 (1949).
At the other end of the spectrum, United States v. Univis Lens Co., 316 U.S. 241, 62 S. Ct. 1088, 86 L. Ed. 1408 (1942) held invalid an attempt by a patentee of lenses to control the price of finished lenses produced by others from the lens blanks after it had sold the lens blanks it produced. The Supreme Court ruled that sale of a patented article exhausts the patentee's monopoly of that article and that the patentee could not thereafter control the use or disposition of the article to any greater extent than could a seller of an unpatented article. The Court relied on a number of earlier cases which predated the Sherman Act and which held that the patent gave its owner no power over the product once it was sold. See, e.g., Bauer & Cie v. O'Donnell, 229 U.S. 1, 33 S. Ct. 616, 57 L. Ed. 1041 (1913); Adams v. Burke, 84 U.S. (17 Wall.) 453, 21 L. Ed. 700 (1873).
This early Supreme Court case law tended to rely on per se rules and contained little analysis of possible anticompetitive effects. In Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 60 S. Ct. 618, 84 L. Ed. 852 (1940), however, there began to emerge a tendency to focus more on the economic effects of the challenged license restriction. The patentee in Ethyl owned a patent on a gasoline additive which improved performance and which was used by almost the entire gasoline industry. The patentee required all jobbers who sold gasoline with this additive to adhere to its prices and refused to license jobbers with a history of selling for less. This practice gave the patentee the power, not authorized by the patent grant, to fix prices in the retail gasoline industry. Ethyl was using its patent to obtain a reward not contemplated by the patent laws: the cartelization of the gasoline market. The Supreme Court proscribed this practice.
[I]f the del credere agency device were given broad approval, whole industries could be knit together so as to regulate prices and suppress competition. That would allow the patent holder under the guise of his patent monopoly not merely to secure a reward for his innention but to secure protection from competition which the patent law unaided by restrictive agreements does not afford.
The power of Masonite to fix the price of the product which it manufactures and which the entire group sells ... is a powerful inducement to abandon competition... Active and vigorous competition then tend to be impaired not from any preference of the public for the patented product, but from the preference of the competitors for a mutual arrangement for price-fixing.
Id. at 281, 62 S. Ct. at 1079.
The so-called "field-of-use" cases, which are perhaps most closely related to the case at bar, illustrate well the distinction between lawful use of the patent monopoly and uses which operate to extend the patent monopoly. General Talking Pictures v. Western Elec. Co., 304 U.S. 175, 58 S. Ct. 849, 82 L. Ed. 1273 aff'd on rehearing, 305 U.S. 124, 59 S. Ct. 116, 83 L. Ed. 81 (1938), involved a typical "field of use" restriction. The patentee there licensed patents relating to amplifiers which could be used both in motion picture exhibition equipment and in private radio reception equipment. The defendant was licensed only to practice the patent in equipment for noncommercial use, while others were licensed to use the patent in equipment used commercially. The Supreme Court upheld this restriction, concluding that it was well within the scope of the patentee's monopoly and therefore legal under the General Electric test.
Courts have generally followed General Talking Pictures in holding legal such field-of-use restraints as a restriction on classes of customers to which licensees could sell and a restriction on the kinds of objects on which the process could be used. But courts have occasionally distinguished General Talking Pictures and held the restraint illegal where they perceived that the field-of-use restriction was being used to extend the patent into areas not protected by the patent monopoly, such as a requirement that a patented strain gauge only be sold with the licensee's machines.
Viewed in perspective, these authorities, underscored by Continental TV, supra, expose the vice of the government's position and the decision below. The government urges and the district court essentially adopted a formalistic approach. Under the government's theory, a process patentee has only the right to restrict the use of his process. By analogy to Univis and similar cases, it suggests that the process patent's protection is exhausted once the process is used, and the patentee may not restrict disposition of the product once the process is completed. The government accepts the proposition that if Ziegler held a product patent, the license arrangement permitting nonexclusive licensees to use but not to sell ATAs would be legal. Thus, according to the government, the arrangement should be held illegal here solely because the defendant holds only a process patent instead of a product patent.
No functional difference between a process patent and a product patent supports the purely formal distinction the government urges. The government and the district court assume correctly that a process patent gives no power over products not manufactured by a patented process, such as unpatented salt, see International Salt , supra , or in this case, ATAs not manufactured by the Ziegler process. But the difference between a product patent and a process patent does not justify either the government's contention or the decision below that the process patentee has no more power over the product of his process than he does over the products not produced by that process. Ziegler did not invent ATAs, and thus he was not awarded any right to prevent others from making, using, or selling ATAs manufactured by a process other than his own. Any discoverer of an equally (or more) efficient process was and is free to compete in the market for ATAs despite S.K.'s patent. Ziegler's nonexclusive licensees are completely free to manufacture, use and sell any ATAs manufactured by a process not patented by Ziegler. Thus it is true, as the government asserts, that the sale of a product does not itself infringe a process patent, since the product may have been made by another process. This does not impair the patentee's right to impose restrictions in a license that affect products that were made by its process.
The government attempts to support its position by citing a number of decisions holding that the owner of a patent on a machine may not control the price of products made or handled by that machine. See, e.g., Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d 646 (5th Cir.), cert. denied, 323 U.S. 726, 65 S. Ct. 60, 89 L. Ed. 583 (1944); American Equipment v. Tuthill Bldg. Material Co., 69 F.2d 406 (7th Cir. 1934). However, there is an obvious difference between a patentee of a brick-handling machine seeking to control the price of ordinary bricks, see American Equipment, supra, or a patentee of an attachment to a basket-making device seeking to fix the price of baskets, see Cummer-Graham, supra, and the restriction here on the unique product, ATAs. If Ziegler were attempting to restrain a generic product primarily in the public domain, the government's position here might have some merit. But, in fact, the district court found the Ziegler process to be the only presently feasible method of manufacturing ATAs.
Only one case cited by the government draws the distinction between a process patent and a product patent which the government urges here. In Barber-Coleman Co. v. National Tool Co., 136 F.2d 339 (6th Cir. 1943), the court held that a process patentee did not have the right to fix prices on sales of the product of the process, even though under General Electric a product patentee would have that right. The decision in Barber-Coleman, is, however, probably best regarded as a transparent attempt by a court to avoid the result it would have reached by literally following General Electric , which as previously noted has been widely criticized and frequently distinguished on dubious grounds. See L. Sullivan, supra, § 185c (1977). Indeed, the General Electric case itself involved process patents as well as product patents, and the Court there did not draw any distinction between the two. As a number of commentators have noted, the difference between a process patent and a product patent makes no difference to the potential for competitive harm inherent in a given restraint. See L. Sullivan, supra; Adelman & Juenger, supra, at 273, 286, 288, 303. In addition, in Barber-Coleman, the patent was on a process for manufacturing hobs, which, like the bricks in American Equipment, and unlike ATAs, were also made by a number of other processes. Further, there is no issue presented here as to whether Ziegler could restrict the prices at which licensees sold ATAs manufactured with its process. Finally, courts have applied General Electric and similar cases numerous times without distinguishing process patents from product patents. See, e.g., Extractol Process v. Hiram Walker & Sons, 153 F.2d 264, 266 (7th Cir. 1946) (dictum); Barr Rubber Prods. Co. v. Sun Rubber Co., 277 F. Supp. 484, 506 (SD NY1967), modified on other issues, 425 F.2d 1114 (2d Cir.), cert. denied 400 U.S. 878, 91 S. Ct. 118, 27 L. Ed. 2d 115 (1970); Deering-Milliken & Co. v. Temp-Resisto Corp., 160 F. Supp. 463 (SD NY 1958), rev'd on other grounds, 274 F.2d 626 (2d Cir. 1960); Ethyl Corp. v. Hercules Powder Co., 232 F. Supp. 453 (D.Del. 1964).
The situation here is thus quite different from those obtaining where the patentee threatened to extend its monopoly beyond those rights accruing under the patent. None of the anticompetitive effects found by the district court involve this danger. Moreover, these same anticompetitive effects would be created if Ziegler had given Hercules an exclusive license. Thus, none of the effects found will support a finding that the license restraints at issue violated Section 1 of the Sherman Act under the rule of reason. Since we have rejected both a per se rule and the district court's rule-of-reason approach which, in effect, applied a per se rule, the district court's conclusion that defendant violated Section 1 must be reversed. The conclusion that the restraints violated Section 2 because they constitute an attempt to monopolize must similarly be reversed: defendant cannot be guilty of attempting to monopolize the market for ATAs manufactured by the Ziegler process. That is the very market which the patent authorizes its grantee to monopolize. See, e.g., Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986 (9th Cir. 1979), cert. denied, 444 U.S. 1025, 100 S. Ct. 688, 62 L. Ed. 2d 659 (1980); Commissioner of Patents v. Deutsche- Gold -Und-Silber- Scheideanstalt Vormals Roessler, 130 U.S. App. D.C. 95, 397 F.2d 656, 663 (1968).
The issue remains whether, having reversed the decision of the district court, we must remand for a new trial or whether we may judge the reasonableness of the restriction on sales by licensees on the basis of the findings and the record before us. We conclude, based on an examination of the restraint at issue and the findings and the record under the rule of reason, that a remand is unnecessary and inappropriate.
None of the anticompetitive effects of the challenged restriction found by the district court exceed the anticompetitive effects which the patent authorized. There is no basis in the record for a finding of other anticompetitive effects, and with one exception, which is discussed below, the government is unable to point to any other possible effect on competition. Finally, analysis of the arrangement itself demonstrates that it is no more restrictive than a legal exclusive license, and in fact has certain procompetitive effects not created by such a license.
As stated earlier, Dr. Ziegler lawfully could have licensed Hercules alone to practice the patented process. Such an exclusive license would, by definition, have given Hercules a monopoly over ATAs manufactured by his process, and would have effectively granted Hercules a monopoly over the sale of ATAs, since no other process is now commercially competitive with the Ziegler process. Exclusive licenses are tolerated because they normally threaten competition to no greater extent than is threatened by the patent itself. See L. Sullivan, supra, at 534. Equally important from the perspective of the rule of reason, many potential licensees might be unwilling to undertake the expense necessary to develop and promote a product but for assurances against attempts by later licensees to exploit the early licensee's development and promotion. See Adelm an & Juenger, supra, at 298-99; P. Areeda, Antitrust Analysis P 411, at 585-86 (3d ed. 1981). An exclusive license protects licensees against such "free rider" problems, and thereby serves the interests of both the patentee and the public by facilitating more rapid and widespread use of new inventions.
The license restriction at issue here has f any promotional or developmental efforts by Hercules, but leaves them free to utilize the patented technology in their own operations. The prohibition on sales is thus a more narrowly tailored version of the exclusive license, having most of its benefits but fewer of its liabilities. The same considerations that lead courts to validate exclusive licenses lead us to approve the restriction at issue here.
This conclusion might not follow if the restriction here caused or threatened anticompetitive effects not present in an exclusive license. Price-fixing licenses create the possibility of using the patent to mask a cartel, as was the case in Ethyl and Masonite, supra. Other impermissible market divisions by means of patent arrangements might give each competitor an economic incentive to continue the arrangement which insures its loyalty to the arrangement. For example, in Ethyl Gasoline Corp., each gasoline refiner benefited from the price-fixing arrangement which was incidental to the patent license. In Masonite, the Court found that the defendant's product would be preferred for the price-fixing capacity of the patent rather than because of the competitive merits of the product. Similarly, Barber-Coleman, American Equipment, and Cummer-Graham, supra, all involved price-fixing and the consequent danger that competitors would be attracted to the product because the patent facilitated price-fixing rather than because of the product's competitive merits. But nothing in this record or the district court findings reveals or portends such effects.
A number of scholars have also noted that some patent arrangements, such as field-of-use restrictions, have a potential for facilitating market division by giving each participant a stake in the patent in the form of an exclusive territory, or by parceling out to each competitor exclusive access to particular customers. * * * In this case by contrast, only Hercules enjoys any advantage from the limitation on sales, and the advantage it enjoys is far less than the advantage which a conventional exclusive license would give it. All other competitors, bound as they are by the prohibition on sales, have every incentive to compete or challenge the defendant's patent and thereby become entitled to sell ATAs.
"[virtue] is not attacked, let alone undone .... competition is restricted to no greater degree by the assignment than is inherent in the patent grant itself."
L. Sullivan, supra, at 534. The commercial superiority of the Ziegler process is clear. The strength of the Ziegler patent and the inherent value of the process itself give the patentee a monopoly of all ATAs. The licensing arrangement adds nothing.
A patent license might also restrict competition by undermining incentives to attack the validity of the patent or to invent around it. The government briefly contends, without support from the record, that the restriction at issue here may have undermined Hercules' incentives to challenge the Ziegler patent. However, even if this were true, it would be functionally indistinguishable from the effect of a conventional exclusive license. See Adelman & Juenger, supra, at 299. And, as we have demonstrated, all other licensees have ample incentives to attack the validity of the patent.
Indeed, it may well be that striking down the restraint at issue here would itself injure competition. There is a reasonable likelihood that had the defendant been unable to issue licenses for internal use only, it would have issued only an exclusive license to Hercules. The record tends to show that Ziegler took his contract with Hercules seriously, and considered himself bound to refuse to grant any other licenses for sale. We should hesitate before we impose a legal rule that would force a patentee to follow the more anticompetitive route of a single exclusive license.
Our conclusion is strengthened by the fact that the potential competition even arguably restrained is competition from manufacturers who are able to make and use the product solely because Ziegler invented his process and licensed them to use it. Other courts have emphasized this fact in reaching the same conclusion we reach here. A & E Plastik Pak Co. v. Monsanto Co., 396 F.2d 710 (9th Cir. 1968) upheld an agreement in which the defendant licensed its unpatented know-how to plaintiff in exchange for a promise by plaintiff not to compete with it using the licensed know-how. Here, as in A&E, the restraint "does not appear to be an agreement between competitors not to compete, for absent the licensed know-how, (the licensee) is in no position to compete." Id. at 714-15.
What the government is really proposing is this: Since all monopolies, including patent monopolies, undesirably limit competition, every patent licensing contract should, if at all possible, be viewed as a "combination in restraint of trade." Taken to its logical limits, this argument would find almost every patent licensing agreement to be illegal. For one example, an exclusive license to manufacture would be invalid as excluding competition from the unlicensed manufacturers... This is a demand calculated to alter and substantially reduce the scope of the patent monopoly. It should be addressed to Congress, not to the courts.
471 F. Supp. at 542.
The district court rested its decision that Dr. Ziegler's license arrangement was illegal on a formalistic distinction between a process patent and a product patent, without undertaking a functional comparison between the restraints on a license permissible to a process patentee and the restraints effected here. The two-step analysis conducted by the district court led it to what is tantamount to a decision that any process patentee who licenses to use, but not to sell, the product manufactured by the process has committed a per se violation of the antitrust laws. Under the district court's formulation, various considerations critical to a rule of reason, such as the fact that the patentee could have lawfully licensed no one, or licensed only Hercules to use the patented process, would be entirely irrelevant. Nor did the district court's analysis permit it to give adequate weight to the fact that Ziegler's patented process commanded the market because it was such an efficient process, and not because of some side arrangement such as price fixing which might attract ATA users interested in organizing a cartel. Furthermore, the district court's analysis did not permit adequate recognition of the critical fact that Ziegler's license affected only ATAs manufactured by his process, and did not purport to affect the use, sale, price, or any other aspect of commerce in ATAs manufactured by some other process. The profits from the Ziegler process apparently enjoyed by Hercules and S.K., as Ziegler's successor, were and are at risk from competition from anyone who invents around the Ziegler patent and develops a process to produce ATAs more economically. Those profits are strong incentives for potential competitors to do so. Nothing in the arrangements at issue here would deter such competition.
Nor did the district court confront the Supreme Court's teaching that condemnation of a practice as a per se violation is reserved for egregious violations such as price-fixing agreements and tying arrangements whose pattern is monotonously familiar nd whose anticompetitive effects are obvious and long outlawed. There was no clear authority warning Ziegler, Hercules, and their advisors that the combination of an exclusive sales license and nonexclusive-use licenses would be invalid. Indeed, a transaction involving only one exclusive license for sales and use would have been beyond question. The distinction drawn between the power of a process patentee over the product of the process and the power of a product patentee over all such products (regardless of how manufactured) has been recognized only tangentially in an isolated and questionable decision. Finally, the specific arrangement at issue here had been carefully examined and found valid by the district court in Delaware only six years before the government brought this case.
For these reasons, we are satisfied that under the principles which we have outlined, the district court would have no occasion on remand to receive further evidence or to make further findings before concluding that the Ziegler license arrangements were not unreasonable restraints of trade. Accordingly, we reverse the decision of the district court and remand with directions to enter judgment for defendant.
United States v. Glaxo Group, Ltd.
Appellees, Imperial Chemical Industries Ltd. (ICI) and Glaxo Group Ltd. (Glaxo), are British drug companies engaged in the manufacture and sale of griseofulvin. Griseofulvin is an antibiotic compound that may be cut with inert ingredients and administered orally in the form of capsules or tablets to humans or animals for the treatment of external fungus infections. There is no substitute for dosage-form griseofulvin in combating certain infections. Griseofulvin itself is unpatented and unpatentable. ICI owns various patents on the dosage form of the drug Glaxo owns various patents on a method for manufacturing the drug in bulk form, as well as a patent on the finely ground, "microsize" dosage form of the drug.
On April 26, 1960, ICI and Glaxo entered into a formal agreement pooling their griseofulvin patents. At the time of the execution of the agreement, ICI held patents on the dosage form of the drug, and Glaxo held bulk form manufacturing patents. Pursuant to the agreement, ICI acquired the right to manufacture bulk-form griseofulvin under Glaxo's patents, to sell bulk-form griseofulvin, and to sublicense under Glaxo's patents. Glaxo was authorized to manufacture dosage-form griseofulvin and to sublicense under ICI's patents. As part of the agreement, ICI undertook "not to sell and to use its best endeavors to prevent its subsidiaries and associates from selling any griseofulvin in bulk to any independent third party without Glaxo's express consent in writing."
"not to sell or to permit its Affiliates to sell any griseofulvin in bulk to any independent third party without Glaxo's express consent in writing."
On March 4, 1968, the United States filed a civil antitrust suit against ICI and Glaxo, pursuant to Sec. 4 of the Sherman Act, 15 U.S.C. 4, to restrain alleged violations of Sec. 1 of the Act, 26 Stat. 209, as amended, 15 U.S.C. 1. The Government charged that the restrictions on the sale and resale of bulk-form griseofulvin, contained in the 1960 ICI-Glaxo agreement and the various sublicensing agreements, were unreasonable restraints of trade. The Government also challenged the validity of ICI's dosage-form patent.
The District Court, citing this Court's decision in United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), held that the bulk-sales restrictions contained in the ICI-AMHO agreement were per se violations of Sec. 1 of the Sher man Act. 302 F. Supp. 1 (DC 1969). Because ICI had filed an affidavit disclaiming any desire to rely on its patent in defense of the antitrust claims, the District Court struck the claims of patent invalidity from the Government's complaint, ruling that the Government could not challenge ICI's patent when it was not relied upon as a defense to the antitrust claims. The District Court also denied the Government's motion to amend its complaint to allege the invalidity of Glaxo's patent on "microsize" griseofulvin.
Subsequently, in separate, unreported orders, the bulk sales restrictions in the Glaxo-J & J, the Glaxo-Schering, and the Glaxo-ICI agreements were found to be per se violations of Sec. 1. The court enjoined future use of the bulk-sales restrictions, but refused the Government's request to order mandatory, nondiscriminatory sales of the bulk form of the drug and reasonable-royalty licensing of the ICI and Glaxo patents as part of the relief. 328 F. Supp. 709 (DC 1971). The United States took a direct appeal under the Expediting Act and we noted probable jurisdiction. 405 U.S. 914.
The major issue before us is whether the District Court erred in ruling that the United States could challenge the validity of a patent in the course of prosecuting an antitrust action only when the patent is relied on as a defense, which was not the case here. We agree with the United States that this was an unduly narrow view of the controlling cases.
"has no proprietary or pecuniary [interest] in the setting aside of the patent; is not seeking to discharge its obligations to the public ..."
"It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly ...,"
a view most recently echoed in Lear, Inc. v. Adkins , 395 U.S. 653, 670 (1969). We think that the principle of these cases is sufficient authority for permitting the Government to raise and litigate the validity of the ICI-Glaxo patents in this antitrust case. According to the record, appellees had issued licenses under their patents that unreasonably restrained trade by prohibiting the licensees from selling or reselling bulk-form griseofulvin and had included in the pooling agreement a covenant to impose such restrictions on licensees. These charges were sustained, the court concluding that the covenant and the patent license provisions were per se restraints of trade in the griseofulvin product market.
The District Court was then faced with the Government's attack on the pertinent patents as well as its demand for mandatory sales and reasonable- royalty licensing, the latter being well-established forms of relief when necessary to an effective remedy, particularly where patents have provided the leverage for or have contributed to the antitrust violation adjudicated. See for example, Besser Mfg. Co. v. United States, 343 U.S. 444 (1952); United States v. United States Gypsum Co., 340 U.S. 76 (1950); International Salt Co. v. United States 332 U.S. 392 [, 68 S.Ct. 12, 92 L.Ed. 20, 75 U.S.P.Q. 184] (1947), Hartford-Empire Co. v. United States, 323 U.S. 386 (1945). Appellees opposed mandatory sales and compulsory licensing, asserting that the Government would "deny defendants an essential ingredient of their rights under the patent system," and that there was no warrant for "such a drastic forfeiture of their rights." In this context, where the court would necessarily be dealing with the future enforceability of the patents, we think it would have been appropriate, if it appeared that the Government's claims for further relief were substantial, for the court to have also entertained the Government's challenge to the validity of those patents.
In arriving at this conclusion, we do not recognize unlimited authority in the Government to attack a patent by basing an antitrust claim on the simple assertion that the patent is invalid. Cf. Walker Process Equipment v. Food Machinery & Chemical Corp. , 382 U.S. 172 (1965)n Nor do we invest the Attorney General with a roving commission to question the validity of any patent lurking in the background of an antitrust case. But the district courts have jurisdiction to entertain and decide antitrust suits brought by the Government and, where a violation is found, to fashion effective relief. This often involves a substantial question as to whether it is necessary to limit the rights normally vested in the owners of patents, which in itself can be a complex and difficult issue. The litigation would usually proceed on the assumption that valid patents are involved, but if this basic assumption is itself challenged, we perceive no good reason, either in terms of the patent system or of judicial administration, for refusing to hear and decide it.
The District Court, therefore, erred in striking the allegations of the Government's complaint dealing with the patent validity issue and in refusing to permit the Government to amend its complaint with respect to this issue. On remand, the District Court should consider the validity of the ICI dosage-form patent and the Glaxo microsize patent.
The question remains whether the Government's case for additional relief was sufficient to provide the appropriate predicate for a consideration of its challenge to the validity of these patents. For this purpose, as we have said, its case need not be conclusive, but only substantial enough to warrant the court's undertaking what could be a large inquiry, one which could easily obviate other questions of remedy if the patent is found invalid and which, if the patent is not invalidated, would lend substance to a defendant's claim that a valid patent should not be limited, absent the necessity to provide effective relief for an antitrust violation to which the patent has contributed. Here, we think not only that the United States presented a substantial case for additional relief, but that it was sufficiently convincing that the District Court, wholly aside from the question of patent validity, should have ruled favorably on the demand for mandatory sales and compulsory licensing.
In the first place, it is clear from the evidence that the ICI dosage-form patent, along with other ICI and Glaxo patents, gave the appellees the economic leverage with which to insist upon and enforce the bulk-sales restrictions imposed on the licensees. Glaxo apparently considered the bulk-sales restriction to be a prerequisite to the granting of a sublicense, for it rejected a draft of the ICI-AMHO agreement because, among other things, it would have permitted AMHO to sell griseofulvin in bulk form. There are indications, also, that Glaxo refused a sublicense to others than Schering and J & J because of fears that the companies would sell in bulk form or pressure Glaxo to allow such sales. The source of the patent-pooling agreement pursuant to which such licenses were permitted and which contained the bulk-sales restriction was simple: Glaxo needed the ICI dosage-form patent to assure its licensees the right to use the patent and sell in dosage form. Pooling permitted ICI to engage in bulk manufacture, and, in exchange, ICI imposed the bulk-sales restrictions upon its licensees. There can be little question that the patents involved here were intimately associated with and contributed to effectuating the conduct that the District Court held to be a per se restraint of trade in griseofulvin.
Secondly, we think that ICI and Glaxo should have been required to sell bulk-form griseofulvin on reasonable and nondiscriminatory terms and to grant patent licenses at reasonable-royalty rates to all bona fide applicants in order to "pry open to competition" the griseofulvin market that "has been closed by defendants' illegal restraints." International Salt Co. 332 U.S.
The United States griseofulvin market consists of three wholesalers, all licensees of appellees, that account for nearly 100% of United States sales totaling approximately eight million dollars. Glaxo and ICI have never sold in bulk to others than the licensees and have prohibited bulk sales and resales by the licensees. In practice, the licensees have not manufactured griseofulvin under the bulk-form patents, preferring instead to purchase in bulk form from ICI and Glaxo. The licensees sell the drug in dosage and microsize form to retail outlets at virtually identical prices. The effect of appellees' refusal to sell in bulk and prohibition of such sales by the licensees has been that bulk griseofulvin has not been available to any but appellees' three licensees and that these three are the only sources of dosage-form griseofulvin in the United States.
There is little reason to think that the appellees or their licensees, now that the bulk-sales restrictions have been declared illegal, will begin selling in bulk. It is in their economic self-interest to maintain control of the bulk form of the drug in order to keep the dosage-form, wholesale market competition- free. Bulk sales would create new competition among wholesalers, by enabling other companies to convert the bulk drug into dosage and microsize forms and sell to retail outlets, and would presumably lead to price reductions as the result of normal competitive forces. There is, in fact, substantial evidence in the record to the effect that other drug companies would not only have entered the market, had they been able to make bulk purchases, but also would have charged substantially lower wholesale prices for the dosage and microsize forms of the drug. Only by requiring the appellees to sell bulk-form griseofulvin on nondiscriminatory terms to all bona fide applicants will the dosage-form, wholesale market become competitive.
Relief in the form of compulsory sales may not, however, alone insure a competitive market. Glaxo and ICI could choose to discontinue bulk-form manufacturing or the sale of griseofulvin in bulk form. The patent licensees might then begin to practice the bulk-form manufacturing patents pursuant to the patent licenses to fill their needs for the bulk drug. The licensees, of course, are not parties to this action, and a mandatory sales order would not affect them. They would not be required to make the economically less advantageous bulk sales. The bulk form of the drug would be controlled by the licensees, and the appellees, because they would be required under the Government's proposed relief to sell to all applicants only so long as they sell to any United States purchasers, could easily avoid the mandatory-sales requirement. Unless other American firms are licensed to manufacture griseofulvin, competition in the United States market will depend entirely upon appellees' willingness to continue to supply their present licensees with the bulk form of the drug.
"are invested with large discretion to model their judgments to fit the exigencies of the particular case."
, Hartford-Empire Co. v. United States , 323 U.S. 386 (1945). The District Court should have ordered those remedies in this case. To the extent indicated in this opinion, the judgment of the District Court is reversed.
Baldwin-Lima-Hamilton Corp. v. Tatnall Measuring Systems Co.
Steel, J. Simmons, a patentee, and his licensee, Baldwin-Lima-Hamilton Corp. (hereinafter "Baldwin") have sued The Budd Co. (hereinafter "Budd") and its wholly owned subsidiary, Tatnall Measuring Systems Co. (hereinafter "Tatnall"), for infringement of Claims 1, 2, 3, 4, 5, 7, 8 and 9 of Patent No. 2,292,549 (hereinafter "Simmons patent"). The patent relates to a gage for measuring strain in materials.
Baldwin has marketed "bonded wire strain gages" under the Simmons patent since 1940. Without license from plaintiffs, Tatnall has manufactured, used and sold "foil type" strain gages and Budd has used "foil type" strain gages manufactured by Tatnall. The "foil gages", plaintiffs charge, infringe the Simmons patent.
In defense the defendants have pleaded (a) noninfringement; (b) invalidity because of (i) anticipation, (ii) lack of invention and obviousness, (iii) inadequacy of patent description, and (iv) inclusion of new matter in amendment to application; and (c) unclean hands because of (i) fraud on the Patent Office, and (ii) patent misuse.
The load or force which is applied to a body is known as "stress". It may be expressed in terms of pounds per square inch. When a body is subjected to stress, it is deformed to some extent. The deformation is known as "strain". It may be expressed in terms of inches of strain per inch of length.
In any material used for engineering purposes, the stress must be kept within safe limits to prevent failure. Well-known and determinable relationships exist between stress and strain in engineering materials. Where the strain in a material is known at a given point, the stress at that point can be ascertained.
The purpose of the Simmons gage is to measure strain. The gage employs the principle discovered by Lord Kelvin more than a century ago that the electrical resistance of materials which are electrically conductive varies with the strain thereof. If the material is stretched, its resistance will increase; if it is compressed, its resistance will decrease. This property is referred to in the Simmons patent as "electrical strain sensitivity".
Thus, Simmons says in his specification, "To determine the strain * * * I employ my improved strain sensitive electrical means consisting of a filament of very fine metallic wire". At other places in the specification the word "filament" is used in conjunction with "wire"; as for example, "wire filament" and "wire forming a filament".
The file wrapper discloses that Simmons used the words "wire filament" at least thirteen times and the word "wire" no less than thirty-eight times. Nowhere did Simmons define the word "filament" in any other way. At one point Simmons said, "* * * applicant's filament is a continuously solid metallic wire element * * *". In distinguishing the Lorig patent which the Patent Office had cited as an anticipation, Simmons pointed out that Lorig had no thought of using "a strain sensitive filament formed of a continuously solid metallic wire * * *" thereby inferentially indicating that the Simmons patent did call for a "metallic wire".
The record establishes overwhelmingly that the merit of the Simmons gage was so compelling that, once it was accepted, it virtually supplanted all types of prior art gages.
It is clear, therefore, that Tatnall has infringed the Simmons patent by making, using and selling foil gages which embody the Simmons invention, and that Budd has infringed the Simmons patent by using foil gages which it has purchased from Tatnall.
Defendants contend that a paper published by St. Lindeck in Germany in 1908 constitutes an anticipation of Simmons which renders his patent invalid. 35 U.S.C. §§ 102, 282.
The St. Lindeck article, considered in its entirety, defendants argue, teaches one skilled in the art how to make and use a bonded wire strain gage. It is to be noted, however, that the experiment, as described by St. Lindeck, does not say that the wire was bonded or adhered to the brass tube around which it was wrapped.
Defendants argue that the presumption of validity of the Simmons patent is not operative against the Lindeck publication, since St. Lindeck was not cited against Simmons in the Patent Office. Conceding that this is so, I am unable to find within the four corners of St. Lindeck that he conducted his experiment with the coils from a Wolff resistance box; and if he did not, the premise that he used a bonded wire vanishes.
Defendants likewise cite as an anticipation an article by P. H. Dike in Review of Scientific Instruments, Vol. 7, July 1936, pp. 278-287. This article relates generally to an investigation conducted on the effect of humidity on resistance elements by reason of its effect on the insulation covering the wires of such elements.
I fail to find any suggestion by Dike that strain may be measured by the use of bonded wire or otherwise. Dike's interest was in the elimination of strain which occurred in the textile wrappings by virtue of the action of humidity thereon.
Attempts to distort and magnify prior non-analogous art by way of anticipation have been condemned by the Courts. Alemite Mfg. Corp. v. Rogers Products Co., 3 Cir., 1930, 42 F.2d 648, 651. To ascertain whether two arts are analogous, heed must be given not merely to their physical differences but particularly to the differences in their problems and the means and methods of solving them. Radiator Specialty Co. v. Buhot, 3 Cir., 1930, 39 F.2d 373, 374; Wallace v. Mandel Bros., Inc., 7 Cir., 1947, 164 F.2d 861, 864.
Unquestionably Simmons' bonded strain gage was new and useful. But to render a device patentable the additional element of invention is required. Thompson v. Boisselier, 1885, 114 U.S. 1, 11, 5 S.Ct. 1042, 29 L.Ed. 76; Cuno Engineering Corp. v. Automatic Devices Corp., 1941, 314 U.S. 84, 90, 62 S.Ct. 37, 86 L.Ed. 58. Invention cannot exist unless the subject matter of the patent discloses more ingenuity and skill than that possessed by an ordinary mechanic. Hotchkiss v. Greenwood, 1850, 11 How. (52 U.S.) 248, 267, 13 L. Ed. 683; Sinclair & Carroll Co. v. Interchemical Corp., 1944, 325 U.S. 327, 330, 65 S.Ct. 1143, 89 L.Ed. 1644.
Invoking this principle, defendants assert that since the prior art disclosed a bonded carbon strain gage and an unbonded wire gage, all that Simmons did was to take the obvious step of substituting wire for carbon and his patent is therefore invalid under 35 U.S.C. § 103.
From the evidence I am satisfied that the bonding of the wire did result in a new and different function or operation for the wire as against its unbonded use by Carlson.
The gist of the "inadequacy of description" defense is that Simmons asserted in his specifications that the electrical strain sensitivity of any bonded wire is linear both above and below the elastic limit of the wire, that in point of fact this is not true as to all wires, and that because the patent fails to teach one skilled in the art which of many wires must be used to obtain linearity the specificity required by 35 U.S.C. § 112 has not been satisfied. Under this section of the patent law no patent can be validly obtained unless the specification contains a written description of the invention, and of the manner of making and using it, in such full, clear, concise and exact terms as to enable any person skilled in the art to make and use the invention.
"A still further object is to provide an improved electrical strain sensitive apparatus that has a substantial linear calibration curve * * *".
Here Simmons is declaring linearity to be an objective of his gage. This objective can be achieved by the use of Constantan wire. Defendants concede this. Simmons' preferred embodiment of his invention called for the use of Constantan.
This objective was substantially accomplished by Simmons' gage.
"A further object is to provide improved electrical strain sensitive means that has a high natural frequency whereby a uniform response is obtained to a given force, independent of the velocity of the application of the force within the limits of the working range."
Here again this objective was accomplished by the Simmons gage.
The failure of a patent to accomplish all of its stated objectives will not defeat the patent if some of its objectives are accomplished by its teaching. Scovill Mfg. Co. v. Satler, D.C. Conn. 1927, 21 F.2d 630; Kirchberger v. American Acetylene Burner Co., (ND NY 1903) 124 F. 764; aff'd, 2 Cir. 1904, 128 F. 599; Eames v. Cook, C.C. Miss. 1860, Fed.Cas.No. 4,239. This is a complete legal answer to plaintiffs' contention that the inability of all wires to give a substantial linear calibration curve, which was one of Simmons' stated objectives, renders the patent invalid.
Defendants' "inadequacy of description" argument rests upon the premise that the patent asserts that a linear strain-resistance relationship will obtain with any type of wire both below and above its elastic limit. The fact is the patent makes no such claim.
Defendants assert that the patent is invalid because "new matter" not inherent in the original application was added to the patent in violation of 35 U.S.C. § 132. The "new matter", defendants say, was the reference in an amendment to a "phenomenon" of Simmons' invention, viz., the ability of the filament to be stressed appreciably beyond its normal elastic limit and still faithfully maintain its predetermined strain sensitivity during repetitive loading. The action of the Patent Office in permitting the amendment constituted an implicit determination that no "new matter" was included in it. Defendants' arguments fail to convince me that the action of the Patent Office was clearly erroneous. Under the circumstances, I am not disposed to take a position at variance with its action. Cf. Helms Products, Inc., v. Lake Shore Mfg. Co., 7 Cir., 1955, 227 F.2d 677, 679.
This defense is based upon defendants' assertion that plaintiffs knowingly made false statements to the Patent Office which induced it to grant the Simmons patent following its earlier rejection. In essence, defendants charge that plaintiffs perpetrated a fraud on the Patent Office. If this is true, the patent is unenforceable. Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 1945, 324 U.S. 806, 65 S.Ct. 993, 89 L.Ed. 1381. There it was held that the doctrine of unclean hands barred a plaintiff from enforcing a patent against an infringer when the Patent Office had issued the patent upon the basis of perjured testimony and suppression of facts which plaintiff had reason to know about. If, however, the proof fails to establish with "any reasonable degree of certainty that there has been a deliberate misrepresentation" in the Patent Office, the defense of unclean hands cannot be successfully asserted. Helene Curtis Ind. v. Sales Affiliates, 121 F.Supp. 490 (SDNY 1954) aff'd 233 F.2d 148 (2 Cir. 1956) cert. denied 352 U.S. 879, 77 S.Ct. 101, 1 L.Ed.2d 80 (1956).
Specifically defendants contend that plaintiffs knowingly represented to the Patent Office, contrary to the fact, that any wire used in accordance with Simmons' teaching would always produce a linear relationship between variations in strain and change in resistance and that but for such representation the patent would not have issued. Plaintiffs concede that all wires do not give a linear strain-resistance response. A definition of the terminology critical to the discussion which follows is found at 169 F. Supp. 18, supra.
Defendants' argument runs thus: Neither Simmons' original application filed February 23, 1940 nor its two amendments filed on March 17, 1941 and May 24, 1941, respectively, were sufficient to cause the Patent Office to take favorable action by issuing the patent. The rejection which occurred on June 10, 1941, although based in part upon certain technical deficiencies, was fundamentally the result of the view of the Patent Office that Simmons' claimed invention was an obvious substitution of elements disclosed in the prior art and failed to reveal "the occurrence of new and unobvious results".
"* * * a phenomenon is the fact that the filament may be repeatedly stressed beyond its elastic limit and still maintain its strain sensitivity factor".
The parties are in disagreement as to the meaning of "strain sensitivity factor"; and defendants' argument hinges in part upon its resolution. According to defendants the statement that the bonded wire will maintain its "strain sensitivity factor" even though the wire is repeatedly stressed beyond its elastic limit, means that any type of wire used in the gage will provide a linear relationship between the change in strain and change in resistance. The word "factor", defendants argue, means a constant and not a variable numerical relationship. On the other hand, plaintiff assert that Simmons never intended that "strain sensitivity factor" should be limited to a linear or constant numerical relationship, but that he used the term in a broader sense to embrace either a constant or a variable numerical relationship depending upon whether or not a wire capable of a linear response was used in the gage.
At the time when Simmons made the "strain sensitivity factor" statement which defendants condemn as false, Baldwin, through its house patent attorney, Hathaway, was in control of the prosecution of the Simmons application. It was also in control of a patent application for a strain gage which Dr. Ruge had filed five months prior to the Simmons application. Baldwin was therefore in privity with both inventors at all times during the prosecution of their respective patent applications. This fact is of critical importance in determining the meaning to be accorded to "strain sensitivity factor" in the Simmons application.
In September 1936 Simmons, an electrical engineering student at Cal. Tech. suggested the combination of the patent in suit, and it was tried and proved successful. Ruge and Baldwin learned of Simmons' work and Hathaway was sent to California to prepare Simmons' patent application. This was filed on February 23, 1940. By this time apparently Simmons and Baldwin had reached an understanding which eventuated in a written contract dated March 13, 1940. Under this contract Baldwin was licensed to make, use and sell apparatus embodying the inventions covered by the Simmons application, and Baldwin was given full control of the prosecution of the application.
The phrase "strain sensitivity factor" had its origin in the Ruge application filed September 16, 1939. There it is used to encompass strain-resistance relationships which were either linear or non-linear. After referring to wires which possess linear characteristics Dr. Ruge said: "In some filament materials, such as, for example, in certain nickel wires the strain sensitivity factor is not a constant but varies with the strain."
Even so, Dr. Ruge continued, wires having characteristics of non-linearity, if employed in gages constructed in accordance with his teaching, "* * * will reproduce results accurately and upon calibration may be used for quantitative strain measurement."
So at the outset the Patent Office was told in express terms, in an application filed on behalf of Ruge by Baldwin acting through Hathaway, that "strain sensitivity factor" was not used to connote linearity only.
The original Simmons application was filed on February 23, 1940. It was amended on March 17, 1941. Neither this amendment nor the original application mentioned "strain sensitivity factor". On May 19, 1941 Hathaway sent a supplemental amendment to Simmons for execution. In his covering letter Hathaway told Simmons that the purpose of the amendment was to present to the Patent Office the "phenomenon" that when a strain gage was made in accordance with the Simmons method, the wire could be repeatedly stressed beyond its elastic limit and still maintain "its predetermined factor of strain sensitivity", and that Ruge had recognized this phenomenon in his application. Having this knowledge, Simmons on May 24, 1941 filed his supplemental amendment in which he pointed out the "phenomenon" that the bonded wire could be stretched beyond its elastic limit while retaining its "predetermined factor of strain sensitivity". Simmons said that this phenomenon was inherent in his structure "the same as it is in the structure of the copending application of Arthur G. Ruge, Serial No. 295,207, filed September 16, 1939."
This is the first reference in the Simmons file wrapper to "factor of strain sensitivity" or to "strain sensitivity factor". By Simmons' cross reference to the Ruge application, the Patent Office was told that Simmons was using "factor of strain sensitivity" to mean precisely what "strain sensitivity factor" meant in the Ruge application, i.e., wires with either linear or non-linear characteristics.
In spite of the fact that Hathaway from the time of the filing of the Ruge application in 1939 had used "strain sensitivity factor" to express broadly a strain-resistance relationship which was either linear or non-linear, and the circumstances that the Patent Office had been informed of this interpretation both by the Ruge application and by the Simmons amendment of May 24, 1941, defendants say that when "strain sensitivity factor" was used in the Simmons amendment of November 19, 1941, Simmons intended, and the Patent Office understood, that the expression should have the limited meaning of linearity only. Defendants have advanced no satisfactory reason to justify a conclusion so illogical. I therefore reject this aspect of defendants' argument.
"As a result of applicant's arrangement, he is able to stress his specimen beyond its elastic limit and repeat the stress deformations while faithfully maintaining the linear qualities of the strain sensitivity factor."
Defendants assert that this is a representation that all types of wire when bonded have linear characteristics of strain sensitivity even though stressed beyond their elastic limit. This argument presupposes that in the context of the application "specimen" means wire. Plaintiffs deny this and say that "specimen" refers to the test body. The area of dispute is narrow and precise. If defendants are right the Patent Office was supplied with inaccurate information which Baldwin knew or at least should have known to be false. For in the Ruge application filed by Baldwin reference is made to the non-linear characteristics of "some filament materials" including nickel.
Defendants argue most persuasively that unless "specimen" means wire, the statement is meaningless. On the other hand, plaintiffs point out that "specimen" is used to mean test body and not wire in the sentence immediately preceding that which defendants criticize. Moreover, plaintiffs say, the word "specimen" or "specimens" was used 87 times in the Simmons file wrapper and in no instance did the words refer to a strain sensitive wire. In view of the cogency of each of the opposing arguments I find myself in somewhat of a quandary to understand exactly what "specimen" was intended to mean when it was used in the sentence which defendants assert was false. However, as I have construed "strain sensitive factor", the use of this expression in the November 19, 1941 amendment told the Patent Office that wires with either linear or non-linear strain-resistance characteristics could be strained beyond their elastic limit without altering the predetermined strain-resistance relationship. In view of this representation, it is difficult to conclude that Simmons intended in the same amendment by his "specimen" reference to say that all wires have a linear strain-resistance relationship. Yet this is what I must conclude if I interpret "specimen" to mean wire. The irreconcilable inconsistency in the representations in the November 19, 1941 amendment which result from construing "specimen" as defendants urge, as well as the previously stated arguments advanced by plaintiffs to show that "specimen" was used to mean body under test, persuade me that "specimen" should not be construed as synonymous with wire. Hence the foundation for defendants' arguments falls.
Defendants make the contention that experiments conducted by Dr. Ruge and his associate Dr. Meier at M.I.T. in the spring of 1938 which were recorded in a notebook kept by Meier disclose that the stressing of at least one type of wire (Elinvar) beyond its elastic limit will destroy its strain sensitivity factor. Without pausing to evaluate the significance of the Meier notebook and Dr. Ruge's testimony with respect thereto, it is sufficient to point out that the relationship between Dr. Ruge and Baldwin which was entered into in 1939 was not such as to make imputable to Baldwin the Meier notebook knowledge possessed by Ruge.
Furthermore, even if the statements in the November 19, 1941 amendment which have been dealt with meant to Simmons and the Patent Office what defendants say they must have meant, defendants still must prove that the statements were material in the sense that but for them the patent would not have issued. A false statement which has been recklessly made will not serve to destroy the presumption of the validity of a patent unless the statement was "essentially material" to its issuance. Corona Cord Tire Co. v. Dovan Chemical Corp., 1928, 276 U.S. 358, 373-374, 48 S.Ct. 380, 72 L.Ed. 610. A fortiori such a statement, unless material, cannot prevent enforcement of the patent.
The argument which Simmons in the amendment of November 19, 1941 made against the Patent Office position that his invention was an obvious substitution of prior art disclosures, consumed more than two pages. Spacewise, the statements which defendants say were misrepresentation comprised only an insignificant part of the argument. The argument in its entirety was summarized by Simmons at its conclusion by referring to the "many new and unobvious results" shown by his amendment. Among other contentions which Simmons advanced was the multitudinous practical uses which had been made of the Simmons gages during the pendency of the application. The record does not show which of the arguments caused the Patent Office to take favorable action on the application. It is to be doubted whether the "strain sensitivity factor" reference in the November 19, 1941 amendment was the inducing cause of the Patent Office granting the patent. After all, in his original application Simmons had stated that linearity of calibration was an objective of his patent, and under the "Remarks" which accompanied his amendment of May 24, 1941 he had referred to the "strain sensitivity factor" substantially as he had in his amendment of November 19, 1941. Yet, in spite of these statements the Patent Office on June 10, 1941 had rejected the application as then amended. Hence, the materiality of the so-called misrepresentations contained in the November 19, 1941 amendment must rest at best upon a dubious and tenuous inference.
The law is settled that the proof of fraud must be clear, unequivocal and convincing and that a mere preponderence of evidence which leaves the issue in doubt may not properly be a basis for a finding of fraud. United States v. American Bell Telephone Co., 1897, 167 U.S. 224, 241, 17 S.Ct. 809, 42 L.Ed. 144; Fidelity & Casualty Co. of New York v. Genova, 6 Cir., 1937, 90 F.2d 874. By this standard (or indeed by the ordinary preponderance of evidence test) it is not possible for me to conclude that a fraud was perpetrated upon the Patent Office by virtue of which the patent issued.
1. Requirements Licenses. Defendants assert that Baldwin imposed a contractual obligation upon a number of its licensees which required them to purchase all or substantially all of their strain gages exclusively from Baldwin. This requirement is said to violate § 3 of the Clayton Act. If this is true the patent may not be enforced. A patentee who attempts to expand the patent monopoly in derogation of the anti-trust laws is estopped to enforce it. Mercoid Corp. v. Minneapolis-Honeywell Regulator Co., 1944, 320 U.S. 680, 684, 64 S.Ct. 278, 88 L.Ed. 396.
The agreements containing the requirements provisions were entered into by Baldwin between 1944 and 1949 with a number of aircraft companies. Each of these agreements constitutes both a license and a sales contract, although it is designated a "license". The license between Bald win and North American Aviation Co. is typical. By this license Baldwin granted to North American a non-exclusive right to manufacture for specified limited uses and disposition a wire-type strain gage embodying the invention of a number of patents, including the Simmons patent. The quantity which North American was authorized to manufacture was limited to 10% of its annual requirements; North American was required to buy the remainder of its requirements from Baldwin. North American was free to manufacture gages which were not subject to Baldwin's patents. The purchase requirement pertained to patented gages only. The license ran from yer to year and was subject to annual termination by either party upon notice.
Analyzing the requirements provision in the terms of § 3 of the Clayton Act, it appears that the contracts are "for sale of goods", Radio Corporation of America v. Lord, 3 Cir., 1928, 28 F.2d 257, 259, certiorari denied 278 U.S. 648, 49 S.Ct. 83, 73 L.Ed. 560; that the obligation to buy exclusively from Baldwin is tantamount to an agreement "not (to) use or deal in the goods * * * of a competitor or competitors * * *" of Baldwin's, Standard Oil Company of California and Standard Stations v. United States, 1949, 337 U.S. 293, 297-298, 69 S.Ct. 1051, 1054, 93 L.Ed. 1371; and that the Clayton Act by its terms applies to both patented and unpatented articles.
It is to be noted that the licenses do not prevent the licensees from buying gages of any kind, in any quantities, and from whomsoever the licensees pleased, so long as the gages do not infringe Baldwin's patents. In effect, the agreements are undertakings not to infringe the Baldwin patents.
To contravene § 3 of the Clayton Act a requirements contract must provide a potential or actual clog on substantial competition. Standard Oil Company of California and Standard Stations v. United States, supra. But the competition which the Clayton Act is designed to encourage is legitimate competition. It has no interest in fostering illicit competition. Yet, defendants' argument presupposes that the contrary is true and that an infringer is the object of the same Congressional solicitude as an honest trader. Since the patent laws subject an infringer to an action for an injunction and damages, an agreement to refrain from infringement is beyond the reach of the Clayton Act.
International Business Machines Corp. v. United States, 1936, 298 U.S. 131, 56 S.Ct. 701, 80 L.Ed. 1085 does not point to a contrary conclusion. There, the Court held that § 3 of the Clayton Act had been violated by a lease of a patented tabulating machine which provided that the lease should terminate if cards not manufactured by the lessor were used in the leased machine. It was assumed by the Court that the licensor owned patents which gave it a monopoly to manufacture and sell the cards separately and in combination with tabulating machines.
International Business Machines involved the validity of a tying clause; the requirements provisions of the Baldwin licenses do not. What the tying clause cases condemn is the extension of the monopoly of one patented product to create a monopoly or restraint of competition with respect to a second product not countenanced by the patent applicable to the first product. Automatic Radio Mfg. Co. v. Hazeltine Research, 1950, 33. U.S. 827, 832, 70 S.Ct. 894, 94 L.Ed. 1312; Times-Picayune Publishing Co. v. United States, 1953, 345 U.S. 594, 614, 73 S.Ct. 872, 97 L.Ed. 1277. Neither the rationale nor the doctrines involved in a tying clause case can be utilized to dispose of a case involving a requirements provision. Times-Picayune Pub. Co. v. United States, supra, 345 U.S. at page 614, 73 S.Ct. at page 883. This was implicitly recognized in Steiner Sales Co. v. Schwartz Sales Co., 10 Cir., 1938, 98 F.2d 999, 1010-1011, cert denied 1939, 305 U.S. 662, 59 S.Ct. 364, 83 L.Ed. 430 when the Court sustained a requirements clause pertaining to the purchase of a patented article the terms of which were substantially indistinguishable from that in the Baldwin license. In the copyright field a result comparable to that in Steiner was arrived at in Cardinal Films, Inc., v. Republic Pictures Corp., SD NY 1957, 148 F.Supp. 156.
"The only purpose or effect of the tying clause, so far as it could be effectively applied to patented articles, is either to prevent the use, by a lessee, of the product of a competitor of the lessor, where the lessor's patent, prima facie, embraces that product, and thus avoid judicial review of the patent, or else to compel its examination in every suit brought to set aside the tying clause, although the suit could usually result in no binding adjudication as to the validity of the patent, since infringement would not be in issue."
Regardless of what was said in the International Business Machines case when a tying clause was involved, later decisions make it clear that when an agreement otherwise offensive to the anti-trust laws is sought to be sustained upon the ground that its terms are consistent with the monopoly conferred by a patent to which the agreement pertains, the validity of the patent can be assailed in connection with the assault upon the agreement. Sola Elec. Co. v. Jefferson Elec. Co., 1942, 317 U.S. 173, 63 S.Ct. 172, 87 L.Ed. 165; MacGregor v. Westinghouse Elec. & Mfg. Co., 1947, 329 U.S. 402, 67 S.Ct. 421, 91 L.Ed. 380; Katzinger Co. v. Chicago Metallic Mfg. Co., 1947, 329 U.S. 394, 67 S.Ct. 416, 91 L.Ed. 374. Under these decisions, if Baldwin had sued under the requirements provision of its license to enjoin an aircraft company from purchasing an infringing gage, the aircraft company could have pleaded the invalidity of the Simmons patent and obtained an adjudication thereon.
The "licensees" of Baldwin to which defendants refer as potential competitors with Baldwin for the business of the aircraft companies, presumably included the individuals, educational institutions, and industrial organizations other than the aircraft companies, to which Baldwin had issued a wide variety of licenses. Some of these licenses, such as the so-called 'experimental and research' licenses, confined the use of the gages to the licensees personally and expressly prohibited resale. These licensees could not possibly have been potential competitors of Baldwin for the business of the aircraft companies even if Baldwin's licenses with the latter had contained no requirements clauses. Other so-called "commercial licenses" granted by Baldwin contemplated the incorporation of the Simmons gage as an integral part of equipment of various kinds which the licensees were manufacturing and selling. These licenses conferred no authority upon the licensees to sell strain gages per se. These licensees were, however, free to sell equipment embodying the Simmons gage to the aircraft companies for the requirements provisions of the aircraft companies' licenses were not applicable to equipment embodying strain gages but applied only to strain gages per se. Competition between Baldwin and its "commercial licensees" for the aircraft company business was therefore in no way restrained by the requirements provisions in the aircraft companies' licenses.
The "purchasers" of Baldwin gages which defendants cite as potential competitors of Baldwin for the aircraft company business acquired their gages from Baldwin accompanied by a notice which stated that the gages could be used only in a temporarily expendable manner for testing purposes. Plaintiffs and defendants both agree that the notice did not prevent a resale of the gage to anyone -- including the aircraft companies -- provided the gages were used within the limitations of the notice. Most of the aircraft company gage usage was within the area of use authorized by the notice. So that in theory at least purchasers under notice might have competed with Baldwin for the aircraft companies' strain gage trade had the aircraft companies not been burdened by the provision in their licenses requiring them to make all purchases of patented gages from Baldwin. The record, however, does not reveal the price which the purchasers under notice or the aircraft companies paid Baldwin for their gages. Viewed realistically, unless the purchasers under notice paid Baldwin less than the aircraft companies paid it, they could not have been potentially competitive with Baldwin. Certainly a price differential in favor of notice purchasers as against the price paid by the aircraft companies cannot be assumed, especially in view of 15 U.S.C.A. § 13 which would have made such a price distinction prima facie illegal.
2. Restrictions on Use of Gages after Sale.
Baldwin was an exclusive licensee of the Simmons patent with the right to sublicense. Nevertheless, Baldwin chose to exploit the patent primarily by manufacturing and selling the gages. The gages were subject to two general categories of use: first, in the field of structural testing or stress analysis when the gage was used in a temporary expendable manner; and second, as a part of some other machine or apparatus in which the gage performed a permanent operating, controlling or service function.
Baldwin sold the Simmons gages accompanied by notices and under "licenses". Vendees of gages sold with notices were prohibited from using the gages except in a temporary expendable way for testing or stress analysis purposes. By the notices Baldwin reserved to itself all fields in which the gages could be permanently used as an operating, controlling or service function as part of a machine, apparatus or device. Some of the reserved fields were exploited by Baldwin by the manufacture and sale of equipment and devices which utilized the Simmons gage to perform an operating, controlling or service function. Fields not so exploited by Baldwin were the subject of so-called "commercial licenses" which Baldwin granted to other manufacturing concerns. While these licenses were non-exclusive, Baldwin's policy was to issue only one of these licenses for each field of use. See 169 F. Supp. at 27, supra. Under each license Baldwin sold gages to the licensee but with a provision that the gages could be resold only as an element in apparatus manufactured by the licensee. The result was that Baldwin was able to manufacture and sell devices embodying the Simmons gage as an operating, controlling or service element without competition from others, and its commercial licensees were able to sell equipment embodying the Simmons gage as a permanent element in fields which were non-competitive with each other.
Agreements among competitors to allocate or divide marketing territories for unpatented articles are unreasonable per se and void under the Sherman Act. Addyston Pipe & Steel Co. v. United States, 1899, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136. The arrangements between Baldwin and its vendees could not survive the Sherman Act if the gages had been unpatented. Defendants say that although the Simmons gages were patented, the monopoly of the patent was exhausted by the sale of the gages, and that thereafter they had the status of unpatented articles of commerce. The validity of this argument depends upon whether under the patent laws a patentee who sells a patented article may validly restrict the use which the vendee may make of it.
"His monopoly remains so long as he retains the ownership of the patented article * * * and the patentee may not thereafter, by virtue of his patent, control the use or disposition of the article. Bloomer v. McQuewan, 14 How. 539, 549-550, 14 L.Ed. 532; Adams v. Burke, 17 Wall. 453, 21 L.Ed. 700; Hobbie v. Jennison, 149 U.S. 355, 13 S.Ct. 879, 37 L.Ed. 766."
"The first vending of any article manufactured under a patent puts the article beyond the reach of the monopoly which that patent confers."
Equally terse statements to the same effect are found in United States v. General Electric Co 1926, 272 U.S. 476, 489, 47 S.Ct. 192, 71 L.Ed. 362; United States v. Masonite Corp., 1942, 316 U.S. 265, 277-278, 62 S.Ct. 1070, 86 L.Ed. 1461; Bauer & Cie v. O'Donnell, 1913, 229 U.S. 1, 17, 33 S.Ct. 616, 57 L.Ed. 1041; and Keeler v. Standard Folding-Bed Co. 1895, 157 U.S. 659, 666, 15`S.Ct. 738, 39 L.Ed. 848.
It is true that these statements were made either in cases such as Keeler v. Standard Folding- Bed Co. supra, which involved a sale without a restraint on use, or in cases such as Bauer & Cie v. O'Donnell, supra; United States v. General Electric Co. , supra; United States v. Univis Lens Co., supra; and United States v. Masonite Corp., supra, in which patentees attempted to fix the resale price of patented articles; and that cases in each of these groups may possibly be distinguished from that at bar wherein a limitation on use is sought to be imposed in connection with an initial sale by a patentee. Nevertheless, the consistency with which the Supreme Court has asserted for over half a century that the patent laws afford no authority for a patentee to control the use to which a patented article may be put after the patentee has sold it, and the failure of the Supreme Court to qualify in any way the reach of this principle make me disinclined to write exceptions into the principle at odds with its inherent comprehensiveness.
So that what the Supreme Court has said on the subject ends the matter. The restrictions which Baldwin imposed upon its licensees and purchasers under notice find no support in the patent laws and constitute an effort by Baldwin to enlarge the patent monopoly beyond the point contemplated by the patent laws. The validity of the restraint on use to which Baldwin's vendees were subjected must be upheld, if at all, not as an incident of the patent grant, but as a matter of general contract law. So tested, the allocation of fields of use are illegal per se under the principle enunciated in Addyston Pipe & Steel Co. v. United States, supra, in construing the Sherman Act.
Furthermore, Baldwin's policy of limiting the use of its gages after their sale had a more basic vice. Baldwin realized from the beginning that profits on the sale of Simmons gages per se would be minimal and that if it was to secure a reasonable return it would have to be obtained from the sale, either by itself or by its licensees, of apparatus in which the Simmons gage was embodied as a permanent, operating, controlling, or service element. Accordingly Baldwin established a policy for the marketing of its gages which compelled anyone who desired to use a Simmons gage as an element in an apparatus of a type manufactured by Baldwin or by its licensees, to buy the apparatus from Baldwin or its licensees, regardless of whether similar apparatus could be obtained from other manufacturers. To illustrate, if anyone desired to use a Simmons gage as an element in a load cell (a device for weighing airplanes) he could do so only by purchasing both the load cell and the gage from Baldwin. Similarly, if anyone desired to use a Simmons gage as an element in a weight indicator, tong torque indicator, or drilling fluid pressure indicator for use in connection with oil field tools or equipment, he could do so only by purchasing both the indicator and the gage from Byron-Jackson, one of Baldwin's commercial licensees. Had Baldwin not restricted the use which could be made of the gages which it sold, the buyer of the gages could have purchased load cells or indicators from any supplier of his choice and used the gages in connection with them.
When Baldwin himself was the seller, as in the case of the load cells, the competitive benefit which it received in the restraint on the use of its gages is obvious. But Baldwin obtained additional rewards from the enhanced competitive position which some of its licensees obtained by virtue of the use restriction. Thus, Baldwin not only made a profit when it sold strain gages to Byron-Jackson, but when Byron-Jackson sold weight indicators embodying the gage as an element, Byron-Jackson was required to pay Baldwin a royalty on all "attachments" and "measuring and/or recording instruments" which it sold for use with the indicators.
By thus conditioning the right to use Simmons gages as a permanent element solely with equipment purchased from Baldwin or its licensees, Baldwin has used the monopoly of the Simmons patent to further the sale of apparatus with which the gages can be used. The Simmons patent was issued as a reward to Simmons for disclosing his strain gage discovery to the public. The monopoly which Simmons received from the Patent Office for this disclosure was the full recompense which the patent laws contemplated he should have. Baldwin has, however, utilized the patent so as to obtain a benefit beyond the purview of the patent statute. By its marketing policy of the gages Baldwin has been able to reduce or eliminate the competition which it and its licensees might otherwise have encountered in selling devices such as load cells and weight indicators not covered by the Simmons patent. Under the rationale of Morton Salt Co. v. G. S. Suppiger Co. , 1942, 314 U.S. 488, 62 S.Ct. 402, 86 L.Ed. 363 and International Business Mach. v. United States supra, the manner in which Baldwin has "tied" the use of the Simmons gage to the use of apparatus not covered by the Simmons patent sold by it and by its licensees, constituted a misuse of the Simmons patent. That misuse bars the enforcement of the patent against the defendant in a court of equity regardless of whether the "tying" practices resulted in a violation of the anti-trust laws. Morton Salt Co. v. G. S. Suppiger Co. , supra, 314 U.S. at page 494, 62 S.Ct. at page 406; see also Transparent Wrap Mach. Corp. v. Stokes & Smith Co. , 1947, 329 U.S. 637, 641, 67 S.Ct. 610, 91 L.Ed. 563.
The record is not clear whether all of the products to which the Simmons gages were "tied" were covered by other Baldwin patents. This, however, is not material. The monopoly which the patent law grants with respect to an article covered by one patent may not be utilized to aid the patentee to exploit another article even though it is covered by another patent. Ethyl Gasoline Corp. v. United States , 1940, 309 U.S. 436, 459, 60 S.Ct. 618, 84 L.Ed. 852. Compare United States v. Paramount Pictures, Inc. , 1948, 334 U.S. 131, 157, 68 S.Ct. 915, 92 L.Ed. 1260; Automatic Radio Manufacturing Co. Inc., v. Hazeltine Research, Inc., 1950, 339 U.S. 827, 831, 70 S.Ct. 894, 94 L.Ed. 1312.
35 U.S.C. § 271 is not inconsistent with the foregoing views.
The action must therefore be dismissed notwithstanding the fact that the Simmons patent is valid and infringed.
Let an order be submitted accordingly.
A few supplemental observations appear warranted in view of the arguments made by plaintiffs in their petition for reargument.
In contending that Baldwin has not misused the Simmons patent by tying the gage per se to the various types of strain sensitive apparatus which it and its licensees sell, plaintiffs assert that the apparatus is part of the patented combination and hence the entire structure -- apparatus and gage -- is subject to the monopoly of the patent. * * * This finding is now retracted. A closer reading of claim 5 discloses that the test body is not an element of Simmons' invention.
The distinction between a patent which merely covers a gage per se and combination patents which cover a gage per se and the apparatus with which the gage in used, is disclosed by comparing the patent in suit with other patents of Simmons' under which Baldwin grants licenses. The patent in suit states that it is "directed to my improved type of strain gage per se". Divided out of the application for this patent are patents covering the combination of a strain gage per se and specific types of apparatus with which the gage per se is used as a component. These divisional patents cover the combination of the gage per se when used in conjunction with a dynamometer (Patent 2,316,203), with an explosion pressure gage (Patent 2,327,935), and with a torque measuring apparatus (Patent 2,350,072). In each of the latter three patents the specific type of apparatus with which the gage per se is used is an element of the combination patent. In the patent in suit the "test body" with which the gage per se is used is not.
Conceding arguendo that a sale with a restriction on use is indistinguishable from a license limiting use, still 35 U.S.C. § 271(d) will not sustain Baldwin's tying policy against the charge of misuse. Section 271(d) does not define the elements of misuse. It simply states what is not misuse. It says that it is not misuse for a patent owner, otherwise entitled to relief for infringement or contributory infringement, to derive revenue either from acts or from licensing others to perform acts which, if performed without the patentee's consent, would constitute contributory infringement.
Section 271 (c) defines a contributory infringer. Under its definition one is a contributory infringer only if a combination of several factors exists. To be liable for contributory infringement under the statute (1) a person must sell a component of a patented combination, (2) the component must constitute a material part of the invention, (3) the seller must know that the component has been especially made or especially adapted for use in an infringement of the patent, and (4) the component must not be a staple article or commodity of commerce suitable for substantial non-infringing use. Assuming that in the case of an unauthorized sale of apparatus for use with the Simmons gage factors (1), (3) and (4) were proven, the seller still would not be a contributory infringer because the apparatus would not be "a material part of the invention". The divisional action in the Patent Office supports the view that the combination of the strain gage per se and specific types of strain sensitive apparatus constitute inventions distinct and independent from the invention of the strain gage per se. 35 U.S.C. § 121. Furthermore, in paragraph 54 of plaintiffs' proposed findings of fact it is stated that "the gage element manufactured and sold by Baldwin, and built by others under license, is the heart of the Simmons invention * * *". And at page 3 of plaintiffs' brief dated September 20, 1958 plaintiffs say that the "gage in all its forms, as sold, is * * * a special device constituting the heart of the patented combination". The evidence supports these statements, and forecloses a finding that the apparatus sold by Baldwin and by its licensees, even though they be deemed to be components of the patented combination, are material parts of the invention.
Since then an unauthorized sale of a strain sensitive apparatus for use with a strain gage per se would not constitute contributory infringement, § 271 (d) does not require a denial of the misuse defense.
[F]or years it has been Baldwin's policy to refuse to sell its gages per se to persons who might desire to use them with strain sensitive apparatus of a type manufactured by Baldwin or by its licensees unless the persons bought both the gages per se and the apparatus from Baldwin or its licensees. This policy was enforced regardless of whether the buyers were in a position to manufacture the apparatus themselves or to buy it from others. The enforcement of this policy constituted an illegal expansion of the monopoly conferred by the Simmons patent on the gage per se beyond that contemplated by the patent grant. This misuse is a bar to the enforcement of the patent against the defendants regardless of whether plaintiffs' activities constituted a violation of the anti-trust laws.

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