Court Opinion

ID: 9464415
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:32:17.838515+00
Date Added: 2024-06-11T17:38:36.395908
License: Public Domain

LARSON, Senior District Judge
dissenting.
I respectfully dissent.
The majority appears to acknowledge that the contract here was not conditioned on the issuance of a patent.1 Yet it attributes considerable importance to the fact that a patent application was “involved” and appears to hold that a private agreement which “involves” an abandoned patent application may not be enforced as a matter of federal policy.2 Because that holding appears to be based on a characterization of the issues with which I disagree, I deem it necessary to discuss in some detail my understanding of the legal principles governing this case.
First, the nature of the contract between Quick Point and Aronson should be clarified. In retrospect, Quick Point made a bad bargain. It agreed to pay royalties on the Aronson invention as long as it continued to make and sell the same, and the agreement, as the district court found, had no relation to whether or not the item was ever patented. Quick Point Pencil v. Aronson, No. 75-10560(1), 425 F.Supp. 600 (E.D.Mo., filed *763Dec. 29, 1976).3 The parties no doubt intended that Aronson would in good faith attempt to patent the keyholder, but Quick Point nevertheless bound itself to pay even if those efforts failed. It should be emphasized that had the contract been conditioned on the issuance of a patent, it would have terminated long ago by its own terms. Similarly, had Aronson abandoned the application in bad faith while there was a reasonable likelihood of success with the Patent Office, Quick Point might very well have had a breach of contract remedy. But there is no indication whatsoever that Ar-onson exercised bad faith and one can only assume that the parties acquiesced in the 1961 Patent Office’s determination that the invention was unpatentable or, at least, agreed that no further efforts were required.
With the nature of the contract thus identified, and hypothetical possibilities set aside, the core of this controversy becomes clear: these parties entered into a trade-secret licensing agreement4 that provided for payment of royalties for an indefinite time on an item that proved to be unpatentable and which others have now copied. One party now seeks to be released from its contractual obligation. Thus stated, this case is virtually on all fours with Warner-Lambert Pharmaceutical Co., Inc. v. John J. Reynolds, Inc., 178 F.Supp. 655 (S.D.N.Y. 1959), aff’d, 280 F.2d 197 (2d Cir. 1960). In Warner-Lambert, a manufacturer agreed to make payments to the discoverer of the formula for Listerine as long as it continued to manufacture the product. The formula eventually became public, after many years under the agreement, and Warner-Lambert sought release from the contract. The court upheld the agreement, and established the rule that “A license agreement with respect to a trade secret may last indefinitely and does not, in absence of express contrary language, terminate when the secret is disclosed.” 2 Callman, Unfair Competition and Trademarks § 57(b) (3rd ed. 1968). This court must decide whether, in light of various federal policies expressed by the Supreme Court since the Warner-Lambert decision, the result on these facts should be different than it was in the Listerine controversy.5
Before reaching the issues that seem decisive here, some of appellant’s arguments should be addressed. Appellant recognizes the parallels between this case and Warner-Lambert but contends that the fact that a patent application was “involved” distinguishes this case and invokes certain poli*764cies expressed in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969). This contention is apparently what persuaded the majority to analyze the issues as it did, but I find appellant’s arguments unpersuasive and a brief explanation may clarify my view that the “involvement” of a patent application has no bearing on the resolution of this case.
In the first part of the Lear decision the Supreme Court abolished the doctrine of patent licensee estoppel, 395 U.S. at 670-71, 89 S.Ct. 1902. In the second portion of the opinion, upon which appellant relies here, the Supreme Court considered whether Adkins could claim contractual royalties for ■the entire patent period based on the pre-is-suance disclosure of trade secrets:
The inventor does not merely argue that since Lear obtained privileged access to his ideas before 1960, the company should be required to pay royalties accruing before 1960 regardless of the validity of the patent which ultimately issued. He also argues that since Lear obtained special benefits before 1960, it should also pay royalties during the entire patent period (1960-1977), without regard to the validity of the Patent Office’s grant. We cannot accept so broad an argument. Id. at 672, 89 S.Ct. at 1912.
Quick Point contends that there is no distinction between the situation in Lear, where a patent application is licensed, a patent issues, and the patent is then declared invalid and the situation here, where a patent application is licensed, and the Patent Office then refuses to issue a patent. In neither case should royalties based on disclosure of a trade secret be enforced.
But there is a clear distinction between the two situations which becomes readily apparent upon examining the major policy underpinning the Supreme Court’s decision. The Court was wary of enforcing the claimed trade secret royalties in Lear because as a practical matter it would undercut the abolition of the licensee estoppel doctrine:
Adkins’ position would permit inventors to negotiate all important licenses during the lengthy period while their applications were still pending at the Patent Office, thereby disabling entirely all those who have the strongest incentive to show that a patent is worthless. 395 U.S. at 672, 89 S.Ct. at 1912.
In other words, if the trade secret disclosed in a licensing agreement coincided exactly with what was made public in the patent,6 and the licensee was nevertheless bound to pay on the basis of the initial disclosure, he would have no incentive to challenge the patent itself — his obligation would remain the same whatever the patent’s validity. The public would thus be deprived of an effective challenge to patentability and would go on “paying tribute to [a] would-be monopolist.” Id. at 670, 89 S.Ct. at 1911. This policy of “unmuzzling” the licensee, and even giving him a positive incentive to challenge patent validity, is not implicated in the situation where no patent issues, and where in fact the secret disclosed must be regarded as unpatentable.7 In ignoring this policy, appellant has essentially construed Lear as calling into question the validity of any trade secret agreement.8 In light of *765the Supreme Court’s subsequent decision in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), it is clear that Lear cannot be extended so far.
Kewanee was a trade secret misappropriation case in which the Supreme Court held that as a general rule state trade secret law is not incompatible with federal patent policy. More specifically, the Supreme Court implicitly approved the enforcement of trade secret licensing agreements:
Another problem that would arise if state trade secret protection were precluded is in the area of licensing others to exploit secret processes. The holder of a trade secret would not likely share his secret with a manufacturer who cannot be placed under binding legal obligation to pay a license fee or to protect the secret * * *. Instead, then, of licensing others to use his invention and making the most efficient use of existing manufacturing and marketing structures within the industry, the trade secret holder would tend either to limit his utilization of the invention, thereby depriving the public of the maximum benefit of its use, or engage in the time-consuming and economically wasteful enterprise of constructing duplicative manufacturing and marketing mechanisms for the exploitation of the invention. The detrimental misallocation of resources and economic waste that would thus take place if trade secret protection were abolished with respect to employees or licensees cannot be justified by reference to any policy that the federal patent law seeks to advance. 416 U.S. at 486-87, 94 S.Ct. at 1888 (citations omitted).
See also Painton & Co. v. Bourns, Inc., 442 F.2d 216 (2d Cir. 1971); Sinclair v. Aquarius Electronics, Inc., 184 USPQ 682 (Cal.Dist.Ct. of Appeal, 1st Dist., Div. Two, 1974). Kewanee thus limited the potentially broad implications of Lear that appellant urges and it is Kewanee rather than Lear to which this court should look for guidance in answering the question presently before it.
Appellant contends that this case is distinguishable from Kewanee because the trade secret disclosed is no longer secret. It is true that Kewanee dealt not with an express contract extending trade secret royalties beyond the duration' of secrecy, but with the more typical misappropriation case in which there are inherent limitations upon the protection the trade secret owner receives. Absent an express contract, the owner’s rights against even those who learned the secret from a confidential relationship end within a certain time after, for example, independent discovery by a third party, see 416 U.S. at 489-90, 94 S.Ct. 1879. That is not to say, however, that duration is determinative in ascertaining whether trade secret law conflicts with patent law, for trade secret protection can last significantly longer than patent protection, as in the famous example of the long-secret formula for Coca-Cola. What the Supreme Court focused on in Kewanee was whether the existence of trade secret protection would provide a significant disincentive to patent, thereby impinging upon the congressional objective of encouraging public disclosure of important inventions and keeping them in the public domain. Id. at 484, 94 S.Ct. 1879. The Court concluded that whatever disincentives trade secret protection might provide were not significant enough to require federal preemption of the states’ laws. The same type of analysis is helpful in deciding whether overriding federal policies require preemption of state contract law and a consequent refusal to enforce the Quick Point-Aronson bargain.
*766As to whether the contract here conflicts with the federal policy of leaving things in the public domain once they have become public, the answer seems obvious. Strangers to this contract have every right to copy the keyholder and they have done so. This distinguishes the situation from the problem involved by the enforcement of unfair competition laws faced in Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964); see Sinclair v. Aquarius Electronics, Inc., supra, 184 USPQ at 686. The more difficult question is whether the enforcement of contracts such as this creates a significant disincentive to patent because, by extending a right to royalties beyond the duration of secrecy, the trade secret licensor insulates himself from the effects of public disclosure. See 74 Harvard L.Rev. 409, 411 (1960). Since a patent royalty agreement cannot extend beyond the patent’s expiration date, Brulotte v. Thys, 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964), the potential availability of a much longer royalty period through private agreement might make the latter alternative much more attractive.9
It would perhaps be sufficient for the purposes of this case to point out that the “disincentive” argument has little force where an unpatentable invention is involved, for there is no great federal interest in encouraging attempts to patent unpat-entable subject matter, and only the slightest gain to be derived from increasing the number of applications on items of dubious patentability. See Kewanee Oil Co. v. Bicron Corp., supra, 416 U.S. at 484-89, 94 S.Ct. 1879. But even from a broader point of view, the disincentive argument is not particularly compelling. Although a trade secret licensor might well prefer to obtain a private agreement ensuring royalties for an extended time rather than to license a patent for 17 years, licensees are most apt to think differently. In other words, it is from the perspective of the bargaining situation that the risk of deterrence from patent application must be assessed, and in most cases the value of patent protection will be important enough to the licensee that the trade secret owner would not be able to extract a contract of indefinite duration beyond the point of secrecy, when other parties can copy the item royalty-free. Even in the instant case, where Quick Point for whatever reason agreed to such a contract, there was nevertheless every incentive for Aronson to patent. Quick Point would have paid much higher royalties for the patent period and Aronson would not have run the risk that Quick Point would cease manufacture and leave her with an unsellable idea, already copied by others. A well-known advocate of trade secret protection has expressed the distinctions between the interests sought to be served by patent law and those served by trade secret law, and has discussed the very issue present in this case:
[T]he license reward for a trade secret tends to be a function of consideration for disclosure; for a patent, consideration for use * * *. Since a prospective trade secret licensee knows that his licen-sor cannot protect him from independent developers, he weighs the value of disclosure against the risks of relying on matter which is subject to third-party royalty-free use. Whether articulated or not, such balancing is the stuff that leads to hard negotiating for royalty rate and duration.
In light of these distinctions, and the effect that they have on the bargaining between the parties, it is my view that *767the rights and duties bargained for and embodied in the trade secret license should govern. If a trade secret licensee does not elect to condition continuing royalty on continuing secrecy, we may assume that the value of immediate disclosure weighed heavily. It is no more appropriate for a court of law, after the fact, to renegotiate a trade secret license agreement when the subject matter becomes generally known than it is for a court to set aside a contract to purchase a house * * * where the purchaser could have driven a better bargain. Thus, leaving the parties where their bargain has placed them in a trade secret licensing context is not inconsistent with holding that a patent licensor may not require royalties beyond the life of the patent. Milgrim, “Sears to Lear to Pain-ton: Of Whales and Other Matters,” 46 N.Y.U.L.Rev. 17, 30, 31 (1971).
See also Milgrim, Trade Secrets, § 6.05[2][d], § 6.05[4] (1977); Sinclair v. Aquarius Electronics, Inc., supra. I find that analysis persuasive.
In summary, the contract here was negotiated at arms length. There is no evidence of misrepresentation, bad faith, or inequality of bargaining power. Quick Point had the opportunity to assess its risks and took a gamble and has called upon the court for relief because it did not like the results. I conclude that no federal patent policies bar the enforcement of the contract according to its terms. Moreover, although I do not dismiss the possibility that a trade secret license can run afoul of the Sherman Act, I find nothing in this record that establishes an unreasonable restraint of trade as a result of this agreement. Finally, appellant’s argument that it should be excused from performance because the purpose, of the contract has been frustrated is wholly without merit.
I would affirm the district court.

. See footnote 11 of the majority opinion, supra.

. See footnote 9 and text accompanying notes 12 and 13 of the majority opinion, supra.

. The majority notes that had a patent issued Quick Point would have had to pay royalties only for the patent period, in light of Brulotte v. Thys, 379 U.S. 29, 89 S.Ct. 1902, 13 L.Ed.2d 99 (1964). That is true, but in this context is relevant only to the patent misuse analogy that appellant appears to be drawing and which I have discussed at footnote 9, infra. It might also be pointed out that had a valid patent issued in 1961, when it was in fact denied, Quick Point would still be liable for royalties until 1978.

. The majority questions characterizing this agreement as a trade-secret licensing agreement, noting that the keyholder was a simple device and could be copied. The fact remains that the keyholder was secret at the time it was disclosed and it was not successfully copied until the late 1960’s, long after it had been marketed. It is precisely because disclosure and marketing may lead to copying that parties will enter into express contracts extending payment obligations beyond the duration of secrecy. The question is whether such agreements are enforceable as a matter of contract law, not whether, absent an express agreement, trade secret law would afford protection once copying has occurred.

. It should be noted that Quick Point did not argue on appeal that the contract was unenforceable under state law for being of infinite or uncertain duration. This subject was treated at length in Warner-Lambert Pharmaceutical Co., Inc. v. John J. Reynolds, Inc., 178 F.Supp. 655 (S.D.N.Y.1959), aff’d, 280 F.2d 197 (2d Cir. I960), and that court took into account Missouri law, which would probably govern the Quick Point contract. Although there is a canon of contract construction which provides that an obligor of a contract indefinite as to duration will be released from his duty after a reasonable time, see Freeport Sulphur Co. v. Aetna Life Ins. Co., 206 F.2d 5, 8 (5th Cir. 1953), it is somewhat doubtful that that canon would apply here — Quick Point had within its power the ability to terminate the contract of its own accord by ceasing manufacture; it was also permitted to terminate if it became “dissatisfied” with the volume of sales.

. The trade secrets that Adkins disclosed were precisely the same as those disclosed in the issued patent, see Brief for Respondent Adkins at 49-50. See generally, McCarthy, “ ‘Unmuz-zling’ the Patent Licensee: Chaos in the Wake of Lear v. Adkins,” 45 Geo.Wash.L.Rev. 429 (1977).

. For other cases in which the parties’ express contract was not predicated on the issuance of a patent, but a patent application was “involved” and the courts held that Lear did not govern the case, see Wrigley v. Compudyne Corp., 390 F.Supp. 478 (E.D.Pa.1975); Heltra Inc. v. Richen-Gemco, Inc., D.C., 395 F.Supp. 346 (1975), rev’d on other grounds, 191 USPQ 663 (4th Cir. 1976).

. Appellant’s reading of Lear also relies on another portion of the opinion. The Supreme Court declined to decide whether Adkins could claim royalties accruing before 1960, the date when the patent issued, since “it squarely raises the question whether, and to what extent, the states may protect owners of unpatented inventions who are willing to disclose their ideas to manufacturers only upon payment of royalties.” 395 U.S. at 674, 89 S.Ct. at 1913. It is this portion of Lear which raised many questions as to the validity of state trade secret *765law in general; some of those questions were, of course, answered by Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974). Appellant claims that this passage in Lear means states cannot protect owners of unpatented inventions in all circumstances and the Quick Point-Aronson contract is one of them. It is self-evident that that argument assumes its own conclusion; analysis of underlying policies in Kewanee and other cases is the only way to determine whether the contract conflicts with federal law. See discussion at pages 765-767 of this opinion.

. In addition to the danger that extended trade secret protection will cause a weakened incentive to patent, there may be another theory underlying this argument, namely, that freedom to contract should be circumscribed by a “trade secret misuse” doctrine just as it is circumscribed by the patent misuse doctrine expressed in Brulotte v. Thys, 379 U.S. 29, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964). I think it unnecessary to discuss this theory in much detail; the patent misuse doctrine is to prevent a party from using his extraordinary legislative grant of exclusivity as leverage to extend the benefits he has obtained. The trade secret owner has no such leverage; he cannot guarantee his licensees freedom from encroachment by others. See Milgrim, Trade Secrets, § 6.05 [2] [d] (1977).