Case Name: UNITED STATES v. LINE MATERIAL CO. et al.
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1948-03-08
Citations: 333 U.S. 287
Docket Number: No. 8
Parties: UNITED STATES v. LINE MATERIAL CO. et al.
Judges: Mr. Justice Jackson took no part in the consideration or decision of this case.
Reporter: United States Reports
Volume: 333
Pages: 287–363

Head Matter:
UNITED STATES v. LINE MATERIAL CO. et al.
No. 8.
Argued April 29, 1947.
Reargued November 12-13, 1947.
Decided March 8, 1948.
Assistant Attorney General Berge argued the cause on the original argument for the United States. With him on the brief were George T. Washington, then Acting Solicitor General, Charles H. Weston, Robert G. Seaks, Bartholomew A. Diggins and Leonard J. Emmerglick.
Frederick Bernays Wiener argued the cause on the re-argument for the United States. With him on the brief were Solicitor General Perlman, Assistant Attorney General Sonnett and Robert G. Beaks.
John Lord O’Brian and Albert R. Connelly argued the cause for appellees. With them on the briefs were Nester S. Foley, Gerhard A. Gesell, Louis Quarles, Maxwell H. Herriott, Clark J. A. Hazelwood, Charles F. Meroni, Needham A. Graham, Jr., W. F. Sonnekalb, Jr., Alexander C. Neave, Harry R. Puch, Jr., Wilder Lucas, Wilber Owen, John A. Dienner, Edward C. Grelle, George B. Turner and John J. O’Connell.

Opinion:
Mr. Justice Reed
delivered the opinion of the Court.
The United States sought an injunction under § 1 and 4 of the Sherman Act in the District Court against continuance of violations of that Act by an allegedly unlawful combination or conspiracy between appellees, through contracts, to restrain interstate trade in certain patented electrical devices. The restraint alleged arose from a cross-license arrangement between the patent owners, Line Material' Company and Southern States Equipment Corporation, to fix the sale price of the devices, to which arrangement the other appellees, licensees to make and vend, adhered by supplemental contracts.
The District Court, 64 F. Supp. 970, dismissed the complaint as to all defendants upon its conclusion that the rule of United States v. General Electric Co., 272 U. S. 476, was controlling. That case approved as lawful a pat-entee's license to make and vend which required the licensee in its sales of the patented devices to conform to the licensor's sale price schedule. Appeal was taken directly to this Court, 32 Stat. 823, and probable jurisdiction noted here on October 21, 1946. We have jurisdiction.
I. The Facts.
The challenged arrangements center around three product patents, which are useful in protecting an electric circuit from the dangers incident to a short circuit or other overload. Two of them are dropout fuse cutouts and the third is a housing suitable for use with any cutout. Dropout fuse cutouts may be used without any housing. The District Court found that 40.77% of all cutouts manufactured and sold by these defendants were produced under these patents. This was substantially all the dropout fuse cutouts made in the United States. There are competitive devices that perform the same functions manufactured by appellees and others under different patents than those here involved.
The dominant patent, No. 2,150,102, in the field of dropout fuse cutouts with double jointed hinge construction was issued March 7, 1939, to the Southern States Equipment Corporation, assignee, on an application of George N. Lemmon. This patent reads upon a patent No. 2,176,227, reissued December 21, 1943, Re. 22,412, issued October 17, 1939 to Line Material Company, as-signee, on an application by Schultz and Steinmayer. The housing patent No. 1,781,876, reissued March 31, 1931, as Re. 18,020, and again February 5, 1935, as Re. 19,449, was issued November 18, 1930 to Line, assignee, on an application by W. D. Kyle. The Kyle patent covers a wet-process porcelain box with great dielectric strength, which may be economically constructed and has been commercially successful. We give no weight to the presence of the Kyle patent in the licenses.
The applications for the Lemmon and Schultz patents were pending simultaneously. They were declared in interference and a contest resulted. The decision of the Patent Office awarding dominant claims to Southern and subservient claims to Line on the Lemmon and the Schultz applications made it impossible for any manufacturer to use both patents when later issued without some cross-licensing arrangement. Cf. Temco Electric Motor Co. v. Apco Mfg. Co., 275 U. S. 319, 328. Only when both patents could be lawfully used by a single maker could the public or the patentees obtain the full benefit of the efficiency and economy of the inventions. Negotiations were started by Line which eventuated in the challenged arrangements.
The first definitive document was a bilateral, royalty-free, cross-license agreement of May 23, 1938, between Southern and Line after the Patent Office award but before the patents issued. This, so far as here pertinent, was a license to Southern by Line to make and vend the prospective Schultz patented apparatus with the exclusive right to grant licenses or sublicenses to others. Line also granted Southern the right to make and vend but not to sublicense the Kyle patent. Southern licensed Line to make and vend but not to sublicense the prospective Lemmon patent for defined equipment which included the Schultz apparatus. Sublicense royalties and expenses were to be divided between Line and Southern. Although a memorandum of agreement of January 12, 1938, between the parties had no such requirement, Line agreed to sell equipment covered by the Southern patent at prices not less than those fixed by Southern. Southern made the same agreement for equipment covered solely by the Line patent. No requirement for price limitation upon sales by other manufacturers under license was included.
Six of the other manufacturers here involved were advised by Line by letter, dated June 13,1938, that Southern had authority to grant licenses under the Schultz prospective patent. On October 3, 1938, Kearney took from Southern a license to practice the Lemmon and Schultz patents. The license had a price, term and condition of sale clause, governed by Southern's prices, which bound Kearney to maintain the prices on its sales of devices covered by the patents. On October 7, 1938, the five other manufacturers mentioned above were offered by Southern the same contract as the standard licensor's agreement. The Kearney contract was discussed at Chicago in October, 1938, by all of the above manufacturers except Railway. Pacific also participated. It never was enforced. The first patent involved in this case did not issue until March, 1939. Those manufacturers who were making double jointed open and enclosed dropout cutouts wanted to and did explore cooperatively (F. F. 15) the validity of the patents. They failed to find a satisfactory basis for attack. They were faced with infringement suits. Other reasons developed for the refusal of the six manufacturers to accept the Kearney form contracts (F. F. 16 & 17) unnecessary to detail here. One reason was that the prospective sublicensees preferred Line to Southern as licensor because of the fact that Line, as owner and manufacturer, would license the Kyle patent. New arrangements were proposed for the licensees. After mutual discussion between the licensees and patentees, these new agreements were submitted. A finding to which no objection is made states:
"On October 24, 1939, General Electric, Westinghouse, Kearney, Matthews, Schweitzer and Conrad, and Railway met with Line in Chicago and jointly discussed drafts of the proposed license agreements under the Lemmon, Schultz, and Kyle patents. Thereafter, identical sets of revised licenses were sent by Line to General Electric, Westinghouse, Matthews, Schweitzer and Conrad, and the attorneys for Railway and Kearney."
A form for a proposed licensing agreement that contained the essential elements of the price provision ultimately included in the licenses had been circulated among prospective licensees by Line by letters under date of October 6,1939.
To meet the various objections of the future licensees, the agreement of May 23, 1938, between Southern and Line was revised as of January 12, 1940. Except for the substitution of Line for Southern as licensor of other manufacturers, it follows generally the form of the earlier agreement. There were royalty-free cross-licenses of the Schultz and Lemmon patents substantially as before. Line was given the exclusive right to grant sublicenses to others for Lemmon. Southern retained the privilege, royalty free, of making and vending the Kyle patent, also. Southern bound itself to maintain prices, so long as Line required other licensees to do so. Even if it be assumed that the proper interpretation of the Line-Southern agreement permitted Southern to manufacture under its own Lemmon patent without price control, the practical result is that Southern does have its price for its products fixed because the only commercially successful fabrication is under a combination of the Lemmon and Schultz patents. Findings of Fact 7 and 10.
The price maintenance feature was reflected in all the licenses to make and vend granted by Line, under the Line-Southern contract, to the other appellees. There were variations in the price provisions that are not significant for the issues of this case. A fair example appears below. The execution of these sublicenses by the other appellees, except Johnson and Royal, followed within a year. Licenses were executed by the two on June 15, 1943, and March 24, 1944, respectively. After August 1, 1940, since a number of the appellees had executed the license contracts, two consultations of the licensees and the patentees were held to classify the products of the various licensees in comparison with the licensor's devices. The trial judge found that prices were not' discussed. These were fixed by Line without discussion with or advice from any other appellee. There can be no doubt, however, that each licensee knew of the proposed price provisions in the licenses of other licensees from the circulation of proposed form of license on October 6, 1939, subsequent consultations among the licensees and an escrow agreement, fulfilled July 11, 1940. That agreement was entered into after General Electric took its license and required for fulfillment the acceptance of identical licenses by Matthews, Kearney and Railway. The licenses that were the subject of the escrow contained the price provisions of General Electric's license. This awareness by each signer of the price provisions in prior contracts is conceded by appellees' brief. A price schedule became effective January 18, 1941. Thereafter, all the appellees tried to maintain prices. Where there was accidental variation, Line wrote the licensee calling attention to the failure.
The licenses were the result of arm's length bargaining in each instance. Price limitation was actively opposed in toto or restriction of its scope sought by several of the licensees, including General Electric, the largest producer of the patented appliances. A number tried energetically to find substitutes for the devices. All the licensees, however, were forced to accept the terms or cease manufacture. By accepting they secured release from claims for past infringement through a provision to that effect in the license. The patentees through the licenses sought system in their royalty collections and pecuniary reward for their patent monopoly. Undoubtedly one purpose of the arrangements was to make possible the use by each manufacturer of the Lemmon and Schultz patents. These patents in separate hands produced a deadlock. Lem-mon by his basic patent "blocked" Schultz's improvement. Cross-licenses furnished appellees a solution.
On consideration of the agreements and the circumstances surrounding their negotiation and execution, the District Court found that the arrangements, as a whole, were made in good faith, to make possible the manufacture by all appellees of the patented devices, to gain a legiti mate return to the patentees on the inventions; and that, apart from the written agreements, there was no undertaking between the appellees or any of them to fix prices. Being convinced, as we indicated at the first of this opinion, that the General Electric case controlled and permitted such price arrangements as are disclosed in the contracts, the District Court dismissed the complaint. The Government attacks the rationale of the General Electric case and urges that it be overruled, limited and explained or differentiated.
II. The General Electric Case.
That case was decided in 1926 by a unanimous Court, Chief Justice Taft writing. It involved a bill in equity to enjoin further violations of the Sherman Act. While violations of the Act by agreements fixing the resale price of patented articles (incandescent light bulbs) sold to dealers also were alleged in the bill, so far as here material the pertinent alleged violation was an agreement between General Electric and Westinghouse Company through which Westinghouse was licensed to manufacture lamps under a number of General Electric's patents, including a patent on the use of tungsten filament in the bulb, on condition that it should sell them at prices fixed by the licensor. On considering an objection to the fixing of prices on bulbs with a tungsten filament, the price agreement was upheld as a valid exercise of patent rights by the licensor.
Speaking of the arrangement, this Court said: "If the patentee . . . licenses the selling of the articles [by a licensee to make], may he limit the selling by limiting the method of sale and the price? We think he may do so, provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the pat-entee's monopoly." P. 490. This proviso must be read as directed at agreements between a patentee and a licensee to make and vend. The original context of the words just quoted makes clear that they carry no implication of approval of all a patentee's contracts which tend to increase earnings on patents. The opinion recognizes the fixed rule that a sale of the patented article puts control of the purchaser's resale price beyond the power of the patentee. P. 489. Compare United States v. Univis Lens Co., 316 U. S. 241. Nor can anything be found in the General Electric case which will serve as a basis to argue otherwise than that the precise terms of the grant define the limits of a patentee's monopoly and the area in which the patentee is freed from competition of price, service, quality or otherwise. Compare Mercoid Corporation v. Mid-Continent Inv. Co., 320 U. S. 661, 665, 666; United States v. Masonite Corp., 316 U. S. 265, 277-78, 280; Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U. S. 502, 510.
General Electric is a case that has provoked criticism and approval. It had only bare recognition in Ethyl Gasoline Corp. v. United States, 309 U. S. 436, 456. That case emphasized the rule against the extension of the patent monopoly, p. 456, to resale prices or to avoid competition among buyers. Pages 457-58. We found it unnecessary to reconsider the rule in United States v. Masonite Corp., 316 U. S. 265, 277, although the arrangement there was for sale of patented articles at fixed prices by dealers whom the patentee claimed were del credere agents. As we concluded the patent privilege was exhausted by a transfer of the articles to certain agents who were part of the sales organization of competitors, discussion of the price-fixing limitation was not required. In Katzinger Co. v. Chicago Mfg. Co., 329 U. S. 394, 398, where a suit was brought to recover royalties on a license with price limitations, this Court refused to examine the General Electric rule because of the claimed illegality of the Katz-inger patent. If the patent were invalid, the price-fixing agreement would be unlawful. We affirmed the action of the Circuit Court of Appeals in remanding the case to the District Court to determine the validity of the patent. The General Electric case was cited with approval in Carbice Corp. v. American Patents Development Corp., 283 U. S. 27, 31. Other courts have explained or distinguished the General Electric rule. As a reason for asking this Court to reexamine the rule of the General Electric case, the Government states that price maintenance under patents through various types of agreements is involved in certain pending cases. Furthermore, the point is made that there is such a "host of difficult and unsettled questions" arising from the General Electric holding that the simplest solution is to overrule the prece dent on the power of a patentee to establish sale prices of a licensee to make and vend a patented article.
Such a liquidation of the doctrine of a patentee's power to determine a licensee's sale price of a patented article would solve problems arising from its adoption. Since 1902, however, when Bement v. National Harrow Co., 186 U. S. 70, was decided, a patentee has been able to control his licensee's sale price within the limits of the patent monopoly. Litigation that the rule has engendered proves that business arrangements have been repeatedly, even though hesitatingly, made in reliance upon the contractors' interpretation of its meaning. Ap-pellees urge that Congress has taken no steps to modify the rule. Such legislative attitude is to be weighed with the counterbalancing fact that the rule of the General Electric case grew out of a judicial determination. The writer accepts the rule of the General Electric case as interpreted by the third subdivision of this opinion. As a majority of the Court does not agree with that position, the case cannot be reaffirmed on that basis. Neither is there a majority to overrule General Electric. In these circumstances, we must proceed to determine the issues on the assumption that General Electric continues as a precedent. Furthermore, we do not think it wise to undertake to explain, further than the facts of this case require, our views as to the applicability of patent price limitation in the various situations listed by the Government. On that assumption where a conspiracy to restrain trade or an effort to monopolize is not involved, a patentee may license another to make and vend the patented device with a provision that the licensee's sale price shall be fixed by the patentee. The assumption is stated in this way so as to leave aside the many variables of the General Electric rule that may arise. For example, there may be an aggregation of patents to obtain dominance in a patent field, broad or narrow, or a patent may be used as a peg upon which to attach contracts with former or prospective competitors, touching business relations other than the making and vending of patented devices. Compare United States v. United States Gypsum Co., post, p. 364, decided today; United States v. Masonite Corp., 316 U. S. 265.
It may be helpful to specify certain points that either are not contested or are not decided in this case. The agreements, if illegal, restrain interstate commerce contrary to the Sherman Act. No issue of monopoly is involved. (F. F. 31.) Cf. American Tobacco Co. v. United States, 328 U. S. 781, 788. That is to say, the complaint charges restraint of trade under § 1 and does not charge "monopoly" under § 2 of the Sherman Act, so that we need not deal with the problems of consolidation, merger, purchase of competitors or size of business as tending toward attaining monopoly. See United States v. United Shoe Machinery Co., 247 U. S. 32, 44-55; United States v. Aluminum Co. of America, 148 F. 2d 416, 427-31; United States v. American Tobacco Co., 221 U. S. 106, 181-83; United States v. United States Steel Corp., 251 U. S. 417, 451. We are not dealing with a charge of monopoly or restraint because of the aggregation of patents, by pooling or purchase, by an owner or owners, in a single industry or field. See United States v. United Shoe Machinery Co., 247 U. S. 32. Within the limits of the patentee's rights under his patent, monopoly of the process or product by him is authorized by the patent statutes. It is stipulated by the United States that the validity of the patents is not in issue. With these points laid aside, we proceed to the issues presented by this record.
III. The Determination of the Issue.
Under the above-mentioned assumption as to General Electric, the ultimate question for our decision on this appeal may be stated, succinctly and abstractly, to be as to whether in the light of the prohibition of § 1 of the Sherman Act, note 1, supra, two or more patentees in the same patent field may legally combine their valid patent monopolies to secure mutual benefits for themselves through contractual agreements, between themselves and other licensees, for control of the sale price of the patented devices.
The appellees urge that the findings of the District Court, quoted in note 13 supra, stand as barriers to a con- elusion here that § 1 of the Sherman Act has been violated by the licenses. Since there was material evidence to support the District Court's finding of the evidentiary facts and the Court necessarily weighed the credibility of the witnesses and the probative value of their testimony to establish appellees' contentions, appellees insist that the inferences or conclusions as to violations of the Sherman Act, drawn by the District Court, must be accepted by us. As to the evidentiary facts heretofore stated, there is no dispute. From them the District Court made findings of fact Nos. 32 to 36, inclusive, here-inbefore set out in note 13. Even though we accept, as we do, these findings on preliminary facts as correct, the last sentence in findings 32 and 34 crumbles their asserted bar to an examination by us as to whether the agreements are violative of the Sherman Act. Those sentences are to the effect that there was an agreement to fix prices between all parties in the language of the contracts as set out in notes 8 and 9 supra. If the patent rights do not empower the patentees to fix sale prices for others, the agreements do violate the Act. The previous summary in this opinion of the agreements which compose these arrangements demonstrates that the agreements were intended to and did fix prices on the patented devices. Compare Interstate Circuit v. United States, 306 U. S. 208, 226. While Line's sublicenses to others than General Electric, note 9, gave to Line the power which it exercised to fix prices only for devices embodying its own Schultz patent, the sublicense agreements licensed the use of the dominant Lemmon patent. As the Schultz patent could not be practiced without the Lemmon, the result of the agreement between Southern and Line for Line's sublicensing of the Lemmon patent was to combine in Line's hands the authority to fix the prices of the commercially successful devices embodying both the Schultz and Lemmon patents. Thus, though the sublicenses in terms followed the pattern of General Electric in fixing prices only on Line's own patents, the additional right given to Line by the license agreement of January 12, 1940, between Southern and Line, to be the exclusive licensor of the dominant Lemmon patent, made its price fixing of its own Schultz devices effective over devices embodying also the necessary Lemmon patent. See note 9. By the patentees' agreement the dominant Lemmon and the subservient Schultz patents were combined to fix prices. In the absence of patent or other statutory authorization, a contract to fix or maintain prices in interstate commerce has long been recognized as illegal per se under the Sherman Act. This is true whether the fixed price is reasonable or unreasonable. It is also true whether it is a price agreement between producers for sale or between producer and distributor for resale.
It is equally well settled that the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly. By aggregating patents in one control, the holder of the patents cannot escape the prohibitions of the Sherman Act. See Standard Sanitary Mfg. Co. v. United States, 226 U. S. 20; United States v. United States Cypsum Co., post, p. 364. During its term, a valid patent excludes all except its owner from the use of the protected process or product. United States v. United Shoe Machinery Co., 247 U. S. 32, 58; Special Equipment Co. v. Coe, 324 U. S. 370, 378. This monopoly may be enjoyed exclusively by the patentee or he may assign the patent "or any interest therein" to others. Rev. Stat. § 4898, as amended 55 Stat. 634. As we have pointed out, a patentee may license others to make and vend his invention and collect a royalty therefor. Thus we have a statutory monopoly by the patent and by the Sherman Act a prohibition, not only of monopoly or attempt to monopolize, but of every agreement in restraint of trade. Public policy has condemned monopolies for centuries. The Case of Monopolies, Darcy v. Allein, 11 Co. Rep. 84-b. See United States v. Aluminum Co. of America, 148 F. 2d 416, 428-49. See Employment Act of 1946, § 2, 60 Stat. 23. Our Constitution allows patents. Art. I, § 8, cl. 8. The progress of our economy has often been said to owe much to the stimulus to invention given by the rewards allowed by patent legislation. The Sherman Act was enacted to prevent restraints of commerce but has been interpreted as recognizing that patent grants were an exception. Bement v. National Harrow Co., supra, 92, 21 Cong. Rec. 2457. Public service organizations, governmental and private, aside, our economy is built largely upon competition in quality and prices. Associated Press v. United States, 326 U. S 1, 12-14. Validation by Congress of agreements to exclude competition is unusual. Monopoly is a protean threat to fair prices. It is a tantalizing objective to any business compelled to meet the efforts of competitors to supply the market. Perhaps no single fact manifests the power and will to monopolize more than price control of the article monopolized. There can be no clearer evidence of restraint of trade. Whatever may be the evil social effect of cutthroat competition on producers and consumers through the lowering of labor standards and the quality of the produce and the obliteration of the marginal to the benefit of the surviving and low-cost producers, the advantages of competition in opening rewards to management, in encouraging initiative, in giving labor in each industry an opportunity to choose employment conditions and consumers a selection of product and price, have been considered to overbalance the disadvantages. The strength of size alone, the disappearance of small business are ever-present dangers in competition. Despite possible advantages to a stable economy from efficient cartels with firm or fixed prices for products, it is crystal clear from the legislative history and accepted judicial interpreta tions of the Sherman Act that competition on prices is the rule of congressional purpose and that, where exceptions are made, Congress should make them. The monopoly granted by the patent laws is a statutory exception to this freedom for competition and consistently has been construed as limited to the patent grant. Ethyl Gasoline Corp. v. United States, 309 U. S. 436, 452, 455; United States v. Univis Lens Co., 316 U. S. 241; Hartford-Empire Co. v. United States, 323 U. S. 386. It is not the monopoly of the patent that is invalid. It is the improper use of that monopoly.
The development of patents by separate corporations or by cooperating units of an industry through an organized research group is a well known phenomenon. However far advanced over the lone inventor's experimentation this method of seeking improvement in the practices of the arts and sciences may be, there can be no objection, on the score of illegality, either to the mere size of such a group or the thoroughness of its research. It may be true, as Carlyle said, that "Genius is an infinite capacity for taking pains." Certainly the doctrine that control of prices, outside the limits of a patent monopoly, violates the Sherman Act is as well understood by Congress as by all other interested parties.
We are thus called upon to make an adjustment between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by the Sherman Act. That adjustment has already reached the point, as the precedents now stand, that a patentee may validly license a competitor to make and vend with a price limitation under the General Electric case and that the grant of patent rights is the limit of freedom from competition under the cases first cited at note 22.
With the postulates in mind that price limitations on patented devices beyond the limits of a patent monopoly violate the Sherman Act and that patent grants are to be construed strictly, the question of the legal effect of the price limitations in these agreements may be readily answered. Nothing in the patent statute specifically gives a right to fix the price at which a licensee may vend the patented article. 35 U. S. C. § 40, 47. While the General Electric case holds that a patentee may, under certain conditions, lawfully control the price the licensee of his several patents may charge for the patented device, no case of this Court has construed the patent and anti-monopoly statutes to permit separate owners of separate patents by cross-licenses or other arrangements to fix the prices to be charged by them and their licensees for their respective products. Where two or more patentees with competitive, non-infringing patents combine them and fix prices on all devices produced under any of the patents, competition is impeded to a greater degree than-where a single patentee fixes prices for his licensees. The struggle for profit is less acute. Even when, as here, the devices are not commercially competitive because the subservient patent cannot be practiced without consent of the dominant, the statement holds good. The stimulus to seek competitive inventions is reduced by the mutually advantageous price-fixing arrangement. Compare, as to acts by a single entity and those done in combination with others, Swift & Co. v. United States, 196 U. S. 375, 396; United States v. Reading Co., 226 U. S. 324, 357; Eastern States Lumber Dealers' Assn. v. United States, 234 U. S. 600; Binderup v. Pathé Exchange, 263 U. S. 291. The merging of the benefits of price fixing under the patents restrains trade in violation of the Sherman Act in the same way as would the fixing of prices between producers of nonpatentable goods.
If the objection is made that a price agreement between a patentee and a licensee equally restrains trade, the answer is not that there is no restraint in such an arrangement but, when the validity of the General Electric case is assumed, that reasonable restraint accords with the patent monopoly granted by the patent law. Where a patentee undertakes to exploit his patent by price fixing through agreements with anyone,' he must give consideration to the limitations of the Sherman Act on such action. The patent statutes give an exclusive right to the patentee to make, use and vend and to assign any interest in this monopoly to others. The General Electric case construes that as giving a right to a patentee to license another to make and vend at a fixed price. There is no suggestion in the patent statutes of authority to combine with other patent owners to fix prices on articles covered by the respective patents. As the Sherman Act prohibits agreements to fix prices, any arrangement between patentees runs afoul of that prohibition and is outside the patent monopoly.
We turn now to the situation here presented of an agreement where one of the patentees is authorized to fix prices under the patents. The argument of respondents is that if a patentee may contract with his licensee to fix prices, it is logical to permit any number of patentees to combine their patents and authorize one patentee to fix prices for any number of licensees. In this present agreement Southern and Line have entered into an arrangement by which Line is authorized to and has fixed prices for devices produced under the Lemmon and Schultz patents. It seems to us, however, that such argument fails to take into account the cumulative effect of such multiple agreements in establishing an intention to restrain. The obvious purpose and effect of the agreement was to enable Line to fix prices for the patented devices. Even where the agreements to fix prices are limited to a small number of patentees, we are of the opinion that it crosses the barrier erected by the Sherman Act against restraint of trade though the restraint is by patentees and their licensees.
As early as 1912, in Standard Sanitary Mfg. Co. v. United States, 226 U. S. 20, this Court unanimously condemned price limitation under pooled patent licenses. As the arrangement was coupled with an agreement for limitation on jobbers' resale prices, the case may be said to be indecisive on patent license agreements for price control of a product without the jobber's resale provision. No such distinction appears in the opinion. This Court has not departed from that condemnation of price fixing. Even in Standard Oil Co. v. United States, 283 U. S. 163, where an arrangement by which the patentees pooled their oil cracking patents and divided among themselves royalties from licensees fixed by the pooling contracts was upheld, the theory was reiterated that a price limitation for the product was unlawful per se. Pp. 170, 173, 175. Of course, if a purpose or plan to monopolize or restrain trade is found, the arrangement is unlawful. P. 174. The Government's contention in that case that the limitation on royalties in itself violated the Sherman Act by fixing an element in the price was dismissed because the Court was of the view that controlled royalties were effective as price regulators only when the pat-entees dominated the industry. P. 174. This domination was thought by this Court not to have been proven.
When a plan for the patentee to fix the sale prices of patented synthetic hardboard on sales made through formerly competing manufacturers and distributors, designated as del credere agents, came before this Court on allegations that the plan was in violation of the Sherman Act, we invalidated the scheme. We said that the pat-entee could not use its competitor's sales organization as its own agents so as to control prices. The patent monopoly, under such circumstances, we said, was exhausted on disposition of the product to the distributor. We reasoned that such an arrangement was a restriction on our free economy, "a powerful inducement to abandon competition," and that it derogated "from the general law [against price limitation] beyond the necessary requirements of the patent statute." United States v. Masonite Corp., 316 U. S. 265, 281, 280.
We think that this general rule against price limitation clearly applies in the circumstances of this case. Even if a patentee has a right in the absence of a purpose to restrain or monopolize trade, to fix prices on a licensee's sale of the patented product in order to exploit properly his invention or inventions, when patentees join in an agreement as here to maintain prices on their several products, that agreement, however advantageous it may be to stimulate the broader use of patents, is unlawful per se under the Sherman Act. It is more than an exploitation of patents. There is the vice that patentees have combined to fix prices on patented products. It is not the cross-licensing to promote efficient production which is unlawful. There is nothing unlawful in the requirement that a licensee should pay a royalty to compensate the patentee for the invention and the use of the patent. The unlawful element is the use of the control that such cross-licensing gives to fix prices. The mere fact that a patentee uses his patent as whole or part consideration in a contract by which he and another or other patentees in the same patent field arrange for the practice of any patent involved in such a way that royalties or other earnings or benefits from the patent or patents are shared among the patentees, parties to the agreement, subjects that contract to the prohibitions of the Sherman Act whenever the selling price, for things produced under a patent involved, is fixed by the contract or a license authorized by the contract. Licensees under the contract who as here enter into license arrangements, with price-fixing provisions, with knowledge of the contract, are equally subject to the prohibitions.
The decree of the District Court is reversed and the case is remanded for the entry of an appropriate decree in accordance with this opinion.
Mr. Justice Jackson took no part in the consideration or decision of this case.
26 Stat. 209, as amended by 36 Stat. 1167:
"Sec. 1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. . . ."
"Sec. 4. The several district courts of the United States are invested with jurisdiction to prevent and restrain violations of this act; and it shall be the duty of the several district attorneys of the United States, in their respective districts, under the direction of the Attorney-General, to institute proceedings in equity to prevent and restrain such violations. . . ."
The names of appellees and the abbreviations hereinafter used as well as the percentage of production of the dropout fuse devices manufactured under the patents are listed below:
Appellee Abbreviated title Percent
General Electric Co. General Electric. 29.2
Line Material Co... Line. 25.4
James It. Kearney Corp. Kearney . 18.9
Southern States Equipment Corp. Southern. 7.9
Westinghouse Electric Corp. Westinghouse. 5.3
Schweitzer & Conrad, Inc. Schweitzer & Conrad. 5.1
Railway & Industrial Engineering Co.. Railway. 3.8
W. N. Matthews Corp. Matthews. 2.0
Porcelain Products Co. Porcelain. 1.5
Royal Electric Mfg. Co. Royal.5
Pacific Electric Mfg. Co. Pacific.2
T. F. Johnson. Johnson.2
100.0
All are corporations of various states except T. F. Johnson, doing business as Johnson Manufacturing Company, Atlanta, Georgia.
The case was argued April 29, 1947, and at our request reargued November 12-13, 1947. United States v. United States Gypsum, Co., decided today, post, p. 364, considers related phases of Sherman Act legislation.
". . . The Lemmon device consists essentially of an expulsion tube supported by a double jointed hinge at its lower end. As the tube moves into closed circuit position, the hinge is locked and a latch engages a terminal on top of the tube to hold the tube in place. The hinge is released by a relatively complicated and expensive solenoid mechanism when the current becomes excessive because of a short circuit or overload. Thereupon the circuit is broken in the tube and the tube drops downwardly, its upper end disengaging from the latch, which permits the tube to swing out and down. By reason of claims covering the double jointed hinge construction in cutouts, this patent dominates the manufacture of dropout fuse cutouts involved in this suit." Findings of Fact, No. 6.
". . . The Schultz patent covers a dropout fuse cutout which is an improvement on the device disclosed in the Lemmon patent, and is dominated by the Lemmon patent. In the Schultz structure an expulsion tube is supported by a double jointed hinge which is held rigid by a fuse link. On overload, the fuse melts, breaking the circuit in the tube and the hinge is released automatically, which permits the tube to drop down and then swing outwardly. This Schultz dropout fuse is much simpler, and can be manufactured at considerably less than the cost of a comparable solenoid operated cutout, and has met widespread commercial demand and use." Findings of Fact, No. 7.
Schweitzer & Conrad, General Electric, Westinghouse, Railway, Kearney, Matthews.
"The Southern Corporation grants to the Line Company a fully paid license to make, use and sell, with the exclusive right to grant sub-licenses to others to make, use and sell, expulsion tube electric circuit interrupting equipment in which the circuit interruption is caused by the thermally initiated rupturing of a current carrying element in an expulsion tube, coming under claims 3, 4 to 10, inclusive, 15 to 22 inclusive, 25, and 27 to 30 of the patent to G. N. Lemmon, No. 2,150,102, dated March 7, 1939, entitled "Circuit Breaker" and/or any division, continuation, substitute, renewal and/or reissue thereof."
"15. The licenses hereby granted or agreed to be granted are on the express condition that the prices, terms and conditions of sale of the Southern Corporation for electric fuse equipment made and sold under the licenses herein granted shall, so long as such electric fuse equipment continues to be covered by Letters Patent of the Line Company under which a license is granted by this agreement, be not more favorable to the customer than those established from time to time and followed by the Line Company in making its sales.
"It is the purpose and intent of this agreement that there shall not be directly, or indirectly, any modification of the prices set by the Line Company as they exist from time to time, as for instance, by including in the transaction other material or parts, or labor, or services, at less than the regular prices at which the party making the same is at the time selling such other material or parts or furnishing such labor or services or by making allowances for freight or terms of payment other than those employed by the Line Company.
"Prices, terms and/or conditions of sale may be changed by the Line Company from time to time through reasonable notice in writing to the Southern Corporation, but not less than ten (10) days' written notice shall be given before the change shall go into effect.
"It is agreed that if the Line Company shall grant a license to a third party under any of the patents of this agreement (but excepting from the provisions of this paragraph a license to be granted to General Electric Company of Schenectady, New York, under said Kyle reissue patent 19,449), without a provision for maintenance by said third party of prices, terms and conditions of sales as set forth in the first paragraph of this section, then Southern Corporation shall be relieved from its obligation under said section."
In the Line-General Electric license agreement of March 15, 1940, the first under the revised Line-Southern contract, the price maintenance provision was as follows:
"9. The license hereby granted by the Licensor is subject to the express limitations that
as to dropout fuse cutouts manufactured and sold by Licensee which are comparable in respect to general type and purpose, ampere and voltage rating, and rupturing capacity, to dropout fuse cutouts manufactured and sold by Licensor,
Licensee's prices, terms and conditions of sale of dropout fuse cutouts
for use in the United States made under the license herein granted to Licensee under the aforesaid Letters Patent, Lemmon No. 2,150,102, and Schultz and Steinmayer No. 2,176,227, and as long as such dropout fuse cutouts continue to be covered by such Letters Patent,
shall be no more favorable to a customer of the Licensee than those established from time to time and followed by the Licensor in its sales. The prices, terms and conditions of sale as at present established and in force are those set forth in Schedule A annexed hereto and forming a part hereof. This schedule of prices may be changed from time to time by the Licensor upon ten (10) days' notice in writing to the Licensee.
"10. The spirit and intent of this license agreement, contemplates that in no transaction shall there be any modification of Licensee's prices, either directly or indirectly, as for instance by inclusion in the transaction of other material or parts or services or labor at less than the regular prevailing prices at which the party making the sale is at the time accustomed to sell such other material or parts or furnish such services or labor, as will serve in effect to reduce Licensee's prices below those named in Schedule A as it exists from time to time."
This was repeated in the Line-General Electric revised agreement of November 17, 1941. A variable appears in the Westinghouse and other licenses. In its price provisions, the Lemmon patent is not mentioned but the Lemmon patent was included in its grant of license and the subsidiary Schultz patent could not be practiced without the right to use the dominant Lemmon.
These two produced an aggregate of less than one percent of the devices.
All appellees, except Royal, Pacific and Johnson, attended one or another of these conferences. We do not find it necessary to determine whether or not the selling prices also of the licensees were before the conference. The agreements adequately show an intention to fix prices.
The licenses contained provisions for records of sale, inspection thereof and cancellation of the license for breach.
Findings of Fact:
"32. The price limitation provisions contained in the various license agreements here in evidence were insisted upon by the patent owner and were intended and reasonably adapted to protect its own business and secure pecuniary reward for the patentee's monopoly. Each of the licenses granted to the licensee-defendants was taken and granted in good faith, the parties to the licenses believing a license under the patents to be necessary in order that the licensee could continue lawfully to manufacture and sell its dropout fuse cutouts. Apart from the written license agreements here in evidence, there was no agreement, express or implied, between the licensor and any licensee, or between any two or more licensees, with respect to the prices of licensed dropout fuse cutouts.
"33. All of the devices for which minimum prices were established by Line were comparable to, and competitive with, devices which Line manufactured and sold regularly or which it was ready to manufacture and sell to its customers on special order.
"34. The cross-license agreements between Line and Southern were limited to the commercially practicable device covered by the subservient Schultz patent, and did not create additional power for price control of the licensed cutouts over that which each had before entering into the agreements. The inflexible intention to insist upon price limitation existed independently in each of the patent owners prior to any discussions or arrangements between them. Such cross-license agreements were entered into in good faith, not for the purpose of fixing prices in the industry but to permit the manufacture and sale of the cheaper device covered by the subservient patent, to facilitate the negotiation of licenses, and to provide royalty income. There was no agreement, express or implied, between Line and Southern with respect to prices on cutouts other than the written cross-license agreements.
"35. The license agreements here in evidence did not restrain trade but promoted it by making available several sources where the patented devices could be obtained, thus increasing competition in such devices, particularly with respect to design, quality and service. Competition among the defendants for business in these devices continued to be vigorous after the making of the license agreements.
"36. There was no combination or conspiracy among the defendants, or any of them, to fix, maintain or control prices of dropout fuse cutouts or parts thereof, or to restrain trade or commerce therein."
For illustration and without implication as to this Court's position on the issues, we call attention to the following:
Barber-Colman Co. v. National Tool Co., 136 F. 2d 339. In a suit by the licensor against the licensee, injunctive relief to compel compliance with a price-fixing provision in the patent license was denied. The General Electric case was held not to permit the patentee to fix prices on unpatented hobs which were produced under a process patent by a patented machine.
Cummer-Graham Co. v. Straight Side Basket Corp., 142 F. 2d 646. Licensee was denied relief in an action against licensor for failing to require other licensees to comply with price-fixing provisions; licensor of a patent on an attachment to a basket-making machine may not fix prices on baskets produced by the machine.
United States v. Vehicular Parking, Ltd., 54 F. Supp. 828. Antitrust proceeding against patent holding company and manufacturing licensees in parking meter industry. The patent licenses fixed the prices at which parking meters could be sold and contained restrictive provisions on marketing practices. In ordering compulsory licensing at a reasonable royalty, the court distinguished the General Electric case principally on the ground that the patentee in this case did not itself manufacture the parking meters; other distinctions noted were the number and active concert of licensees, the weakness of the patents, the fixing of prices on unpatented articles, and the existence of marketing restrictions.
For example, such price arrangements under the type of agreement indicated are in litigation as follows:
United States v. Allegheny Ludlum Steel Corp., D. N. J. Civil 45-83, stainless steel company owning patents on a particular type of stain less steel allegedly issued licenses fixing prices on all types of stainless steel.
United States v. American Optical Co., S. D. N. Y. Civil 10-391, optical patents owned by patent holding company which gave exclusive licenses; exclusive licensee sublicensed to other manufacturers who agreed to maintain prices and comply with marketing restrictions.
United States v. Bausch & Lomb Optical Co., S. D. N. Y. Civil 10-394, patent holding company issued licenses to two licensees to manufacture bifocal lenses, the licenses fixing prices at which the bifocal lenses were to be sold and the selection of wholesalers and retailers for the lenses.
United States v. Catalin Corporation of America, D. N. J. Civil 7743, manufacturer of phenolic resins licensed other manufacturers under its process patents, the licensees agreeing to sell at prices established by the licensor.
United States v. General Cable Corp., S. D. N. Y. Civil 40-76, cross licenses among holders of patents on fluid filled cable, the licensees agreeing to adhere to uniform prices and to observe territorial marketing limitations.
United States v. General Electric Co., D. N. J. Civil 1364, cross-licensing agreements between manufacturers of electrical bulbs providing for price and quantitative restrictions.
United States v. General Electric Co., Fried. Krupp, S. D. N. Y. Cr. 110-412, cross-licensing of tungsten carbide patents with price and territorial restrictions.
United States v. General Instrument Corp., D. N. J. Cr. 3960-C, Civil 8586, owners of variable condenser patents assigned patents to holding company and took back licenses with price-fixing provisions; explicit price-fixing provisions subsequently removed but allegedly continued by tacit agreement.
United States v. Phillips Screw Co., N. D. Ill. Civil 47-C-147, holder of patents on cross recessed head screws granted exclusive license to leading screw manufacturer who sublicensed to other manufacturers; patent holder, exclusive licensee, and sublicensees agreed on price terms for all screws produced.
The United States lists: Uncertainty as to the nature of the patent, process or product, which justifies price control; extent of patent domination over the device; may a patent pooling corporation control all licensees' sale prices; extent of price control in an industry. U. S. Brief 65 et seq.
In earlier cases involving the National Harrow Company the lower courts held that an industry-wide combination to fix prices was illegal. National Harrow Co. v. Hench, 83 F. 36; National Harrow Co. v. Quick, 67 F. 130, affirmed on other grounds, 74 F. 236. Compare Rubber Tire Wheel Co. v. Milwaukee Rubber Works Co., 154 F. 358, and Indiana Manufacturing Co. v. J. I. Case Threshing Machine Co., 154 F. 365, upholding industry-wide price fixing, with Blount Manufacturing Co. v. Yale & Towne Manufacturing Co., 166 F. 555, holding such price fixing illegal.
Bills have been introduced which would outlaw price limitation in patent licenses: H. R. 22345, 62d Cong., 2d Sess. (1912); S. 2730, 77th Cong., 2d Sess. (1942); S. 2491, 77th Cong., 2d Sess. (1942), and Hearings thereon; H. R. 7713, 77th Cong., 2d Sess. (1942); H. R. 109, 78th Cong., 1st Sess. (1943); H. R. 1371, 78th Cong., 1st Sess. (1943); H. R. 3874, 78th Cong., 1st Sess. (1943); H. R. 97, 79th Cong., 1st Sess. (1945); H. R. 3462, 79th Cong., 1st Sess. (1945); S. 2482, 79th Cong., 2d Sess. (1946); S. 72, 80th Cong., 1st Sess. (1947).
See Final Report of Temporary National Economic Committee, Sen. Doc. No. 35, 77th Cong., 1st Sess. (1941), p. 36; Report of the National Patent Planning Commission, H. R. Doc. No. 239, 78th Cong., 1st Sess. (1943), p. 9.
Rules of Civil Procedure, Rule 52:
Findings by the Court.- — "(a) Effect. In all actions tried upon the facts without a jury, the court shall find the facts specially and state separately its conclusions of law thereon and direct the entry of the appropriate judgment; and in granting or refusing interlocutory injunctions the court shall similarly set forth the findings of fact and conclusions of law which constitute the grounds of its action. Requests for findings are not necessary for purposes of review. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses. The findings of a master, to the extent that the court adopts them, shall be considered as the findings of the court."
E. g., Miller-Tydings Act, 50 Stat. 693.
Dr. Miles Medical Co. v. Park & Sons Co., 220 U. S. 373; Boston Store v. American Graphophone Co., 246 U. S. 8; United States v. United Shoe Machinery Co., 247 U. S. 32, 58; United States v. Trenton Potteries Co., 273 U. S. 392; United States v. Socony-Vacuum Oil Co., 310 U. S. 150, 222-24; United States v. Univis Lens Co., 316 U. S. 241, 250; Sola Electric Co. v. Jefferson Electric Co., 317 U. S. 173; Katzinger Co. v. Chicago Mfg. Co., 329 U. S. 394.
Appalachian Coals v. United States, 288 U. S. 344, cannot be cited to support a contrary view. In that case, this Court held that "The plan cannot be said either to contemplate or involve the fixing of market prices." P. 373. See the Socony-Vacuum case, supra, 214 et seq. Perhaps arbitrary or monopoly prices were in mind in Appalachian. Pp. 358, 359, 365, 371.
United States v. National Lead Co., 332 U. S. 319; Hartford-Empire Co. v. United States, 323 U. S. 386, 406; Standard Oil Co. v. United States, 283 U. S. at 169 and cases cited; Standard Sanitary Mfg. Co. v. United States, 226 U. S. 20, 48-49. See Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U. S. 637, 641, 647, and cases cited.
The Interstate Commerce Act authorizes carriers to pool revenues and authorizes mergers of carriers, provided that approval of the Interstate Commerce Commission is obtained. The antitrust laws are inapplicable to such agreements. 49 U. S. C. §5(1), (2) and (11).
The words "patent pool" are not words of art. The expression is used in this opinion to convey the idea of a linking of the right to use patents issued to more than one patentee.
226 U. S. at 48:
"The agreements clearly, therefore, transcended what was necessary to protect the use of the patent or the monopoly which the law conferred upon it. They passed to the purpose and accomplished a restraint of trade condemned by the Sherman law. It had, therefore, a purpose and accomplished a result not shown in the Bement Case. There was a contention in that ease that the contract of the National Harrow Company with Bement & Sons was part of a contract and combination with many other companies and constituted a violation of the Sherman law, but the fact was not established and the case was treated as one between the particular parties, the one granting and the other receiving a right to use a patented article with conditions suitable to protect such use and secure its benefits. And there is nothing in Henry v. A. B. Dick Co., 224 U. S. 1, which contravenes the views herein expressed."
Cf. United States v. General Electric Co., supra.