McCullough v. Kammerer Corporation

166 F.2d 759, 76 U.S.P.Q. (BNA) 503, 1948 U.S. App. LEXIS 3181, 1949 Trade Cas. (CCH) 62,231

• Court: Court of Appeals for the Ninth Circuit
• Decided: February 26, 1948
• Docket: 11122
• Status: Published

Opinions

DENMAN, Circuit Judge.

McCullough appeals from an interlocutory decree holding that Kammerer Corporation, hereinafter called the patentee, is entitled to damages for McCullough’s infringement of patentee’s patents for cutting pipe in oil wells and an accounting thereof, and denying McCullough’s motion to set aside a prior interlocutory order for the accounting and to dismiss the two complaints (consolidated for trial) brought against him for such infringement by the patentee and Baash-Ross Tool Company, hereinafter called the licensee, on the ground that the licensing contract between the licensor and licensee was against the public interest.¹

One of McCullough’s contentions respecting the patentee’s conduct in the exploitation of its patent is that its licensing contract with the licensee² violated the public interest. That contract not only gave the licensee an exclusive license to manufacture and use (but not to sell) the pipe cutter in the United States and its territories but prevented both the licensor and licensee from acquiring or using any other pipe cutter. The challenged provisions of the contract are

“11. The Licensee covenants and agrees during the term of this license agreement not to manufacture or use or rent any device which will be in competition with the device or devices covered by this license agreement.

“12. The Licensor covenants and agrees that during the term of this agreement, not to manufacture, sell, rent, license, use, or in any way do business with the device or devices covered by this agreement or with devices which will come or be in competition with the device or devices covered by this agreement.”

These covenánts extend the monopoly of the patent by preventing competition with the patent of any other pipe cutter, patented or unpatented, manufactured, used or sold by the licensee, theretofore engaged in making pipe cutting tools. The licensor to procure such extension of the monopoly' area of its patent also binds itself to extend the area of the monopoly by a similar restrictive agreement.

In addition it appears that the patentee is a corporation having as its general manager an inventor of pipe cutters as well as two of its officers also such inventors. Its agreement to extend the patent monopoly by eliminating competition is aided by its agreement not to avail itself of the inventive genius of its employees in creating' competitive devices which is can “manu-¹ facture, sell, rent, license, use or in any way do business with.’’ Í

It cannot be said that these are matters de minimis and not of substance. The patentee appellee describes the licensee as “a very large company” doing a world-wide business. Its operators went from state to state to operate the cutter. The evidence shows licensee’s business in the United States alone extended to the oil wells of companies in eleven states. In 1923, the year the challenged contract was made, the income from the rental of the cutter to such oil companies amounted to $212,760. At the rental agreed in the licensing contract of $190 for each cutting, this amount shows that in that year wells were so serviced over these states by 1172 such cuts. ■ The total income from such cuts in 15 years amounted to “something like about” $2,-500,000 from “the running by the Baash Tool Company of the Stone and Reilly cutter.”

The district court found at the trial on the issue of infringement that the licensee had a monopoly of the field of pipe cutting in the United States, all other cutters being supplanted by the cutter of which it had the patent monopoly.

Nothing could more discourage inventors or manufactures of better competitive cutters than to take from them the patronage of the only person then using or cutting with the only device used in cutting bjroken pipe in all the oil fields of the United States. While it is true that this exclusive occupation of cutting in all these fields arose after the making of the challenged contract, what was aimed at by the contracting parties was just such success. What they feared is shown by the challenged covenants, withdrawing both parties from the field of inventing or using competitive devices.

In this situation the contention is entirely irrelevant that neither party was harmed by the agreement. The question is, “Was the public harmed?” We think the district court erred in holding it was not and are in accord with the Third Circuit that these restrictions are against the public interest and warrant a court of equity in refusing the relief here sought. In National Lockwasher Co. v. George K. Garrett Co., 3 Cir., 137 F.2d 255, 257, that court states: in evidence. That contract contains a clause that ‘(g) Licensee agrees that, while this agreement is in force, it will make and sell no form of non-entangling Spring Washers except such as are covered by said patent, and that it will not, either directly or indirectly, make or sell Spring Washers of the kind specifically excluded from this license under the provisions of Paragraph First (a) hereof.’ There was no dispute that this provision appeared in the licensing agreements given by the plaintiff to those who sought to make spring washers utilizing the plaintiff’s patent.

“The standard form of contract used by the plaintiff in licensing agreements was

By the license to Baash, the Kammerer corporation simply agreed that its “reward” should be provided in a percentage of the rentals received by Baash for the use of the Kammerer tool. Our opinion makes an unprofitable argument on the issue raised in the case as to whether the agreement established a “joint venture” between ap-pellees. I wholly agree with appellant who states in his Reply Brief that he believes that this particular question “is irrelevant to the fundamental question” in the case. It is. Furthermore, I see nothing illegal in in this way of securing a reward to the patent owner.

“We think this is enough; enough to show that the plaintiff was using its patent to suppress competition with it by non-patented articles. To the extent that the policy was successful the supply of competing nonpatented washers would, of course, disappear.

“Said Mr. Chief Justice Stone in United States v. Univis Lens Co., Inc., 1942, 316 U.S. 241, 251, 62 S.Ct. 1088, 1094, 86 L.Ed. 1408: 'In construing and applying the patent law so as to give effect to the public policy which limits the granted monopoly strictly to the terms of the statutory grant, Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 62 S.Ct. 402, 86 L.Ed. 363, the particular form or method by which the monopoly is sought to be extended is immaterial.’ This statement of principle covers the situation here. The patentee has disentitled itself to recover at present for infringement by reason of its utilization of its patent monopoly to drive unpat-ented competing goods from the market.” ³

We agree with that circuit that there is no difference in principle between extending the monopoly of the patent by suppressing the manufacture or use of competitive devices, patented or unpatented, and the extension of the monopoly by prohibiting the use in making the patented article of unpatented articles competing with those made by the licensor’s subsidiary, held against the public interest in Morton Salt Co. v. Suppiger Co., 314 U.S. 488, 493, 62 S.Ct. 402, 86 L.Ed. 363. As stated in Mercoid Corporation v. Mid-Continent Co., 320 U.S. 661, 666, 64 S.Ct. 268, 271, 88 L. Ed. 376, “The fact that the patentee has the power to refuse a license does not enable him to enlarge the monopoly of the patent by the expedient of attaching conditions to its use. United States v. Masonite Corporation, supra, 316 U.S. at page 277, 62 S.Ct. at page 1077; 86 L.Ed. 1461. The method by which the monopoly is sought to be extended is immaterial. United States v. Univis Lens Co., supra, 316 U.S. at pages 251, 252, 62 S.Ct. at pages 1093, 1094, 86 L.Ed. 1408.” (Emphasis supplied.)

The public, in a system of free competition, is entitled to have the competition of other devices with a patented device and here it is against that public’s interest to use the patent to suppress such competition. As stated by the Supreme Court in the recent case of Transparent-Wrap Mach. Corporation v. Stokes & Smith, 329 U.S. 637, 644, 67 S.Ct. 610, 614: “Protection from competition in the sale of unpatented materials is not granted by either the patent law or the general law. He who-uses his patent to obtain protection from competition in the sale of unpatented materials extends by contract his patent monopoly to articles as respects which the law sanctions neither monopolies nor restraints of trade.”

We see no merit in the licensee’s contention that the Lockwasher case is distinguishable because in that case there were several licensees and here there is but one. As seen, the licensee was a “very large company” doing a business abroad and in the United States, with an income of rentals from the cutter of $212,700 in the year the contract was made, and which had acquired mastery of the entire field of pipe cutting. In Mercoid Corporation v. Mid-Continent Co., 320 U.S. at page 663, 64 S.Ct. at page 270, 88 L.Ed. 376, there was a sole licensee and the license denied the use of other devices with the use of the patent. There the licensee could sublicense, just as here the licensee could sublicense the use of the pipe cutter.

As well could it be said that the principle here invoked would not apply if a patent for making steel was licensed solely to the Steel Corporation and that very large company in the steel business, as the licensee here is in that of pipe cutting,, were required to agree not to manufacture, use or sell competing steel making devices,

With regard to the licensor’s agreement with the licensee to make more certain the licensee’s profit by extending the monopoly area by excluding itself from making, using, renting or licensing competitive cutters, such a patent monopoly extension by the agreement of the licensor has the same prejudice to the public as the restricting agreement of the licensee. In the recent case of Scott Paper Co. v. Marcalus, 326 U.S. 249, 257, 66 S.Ct. 101, 90 L.Ed. 47, it was held, distinguishing prior decisions, that it is against the public interest for an owner of a claimed patent to make an agreement with his licensee by which he binds himself not to contest the validity of the licensed patent. In the public interest the licensor must not bind himself not to make, use and vend articles covered by the terms of the patent and hence cannot bind himself not to defend such creation of goods on the ground that the patent he has purported to license is invalid because anticipated by a valid but expired patent.

With regard to the agreement’s compulsion on the patentee not to exercise the inventive power of its general manager and other employees in' privity with it, in creating competing devices, the purpose of the patent law is to encourage, not to hamper, invention.

There is no merit to the contention, attempted to be based on United States v. General Electric Co., 272 U.S. 476, 47 S. Ct. 192, 71 L.Ed. 362, that because the patentee may refrain from making or using competing devices, unpatented or patented, he may bind his licensee so to refrain. In Morton Salt Co. v. Suppiger, supra, the Suppiger Co. could have refrained from using any unpatented salt tablets other than its own in its patented machines for the insertion of salt tablets in the process of canning. Yet the court held against public policy the prevention of its licensee, as here, from using tablets competing with Suppiger’s. So also in United States v. Masonite Corporation, 316 U.S. 265, 280, 62 S.Ct. 1070, 86 L.Ed. 1461, where the lower court relying on the General Electric case was reversed. There the Masonite Corporation could have fixed its price on the patented hardboard it sold yet it was held against public policy and a violation of the anti-trust laws to fix the price of the persons licensed to vend the hardboard.

Such restricting conditions are not “reasonably within the reward which the patentee by the grant [or licensing] of the patent is entitled to secure” mentioned in United States v. General Electric Co., supra, 272 U.S. at page 489, 47 S.Ct. at page 196, 71 L.Ed. 362, “As stated by Mr. Justice Story in Pennock v. Dialogue, 2 Pet. 1, 19, 7 L.Ed. 327, the promotion of the progress of science and the useful arts is the ‘main object’; reward of inventors is secondary and merely a means to that end. Or, in the words of Mr. Justice Daniel in Kendall v. Winsor, 21 How. 322, 329, 16 L.Ed. 165, ‘Whilst the remuneration of genius and useful ingenuity is a duty incumbent upon the public, the rights and welfare of the community must be fairly dealt with and effectually guarded. Considerations of individual emolument can never be permitted to operate to the injury of these.’ And see Blount Mfg. Co. v. Yale & Towne Mfg. Co., C.C., 166 F. 555.” United States v. Masonite Corporation, 316 U.S. 265, 278, 62 S.Ct. 1070, 1077, 86 L.Ed. 1461.

The licensor and licensee contend that whether or not such discouragement in invention and such suppression of competition of other devices be otherwise against the public interest, they are not prohibited where, as here, the patentee’s royalty income is measured, in part, by the profits the licensee makes from its use of the patent — here by one-half the profits secured by a lien on all the licensed devices manufactured by and belonging to the licensee.

We do not agree that the evidence supports the lower court’s finding that the licensing agreement created a joint venture. The patentee here is not liable for the licensee’s losses in exploiting the products of its license. On the contrary, if the licensee become bankrupt, the patentee, with its lien on the bankrupt’s manufactured devices, may purchase them for $300 each, any unpaid royalties to apply on the purchase price. The parties were clearly dealing at arm’s length. The transaction does not become a joint venture because the amount of the royalty is measured in part by the licensee’s profits. If the lower court’s holding were correct every licensing agreement yielding a profit measured by the success of the exploitation of the patent would be such a venture.

The prior owners of the patent upon which the pipe cutters were made were one Reilly and one Stone. Reilly’s and Stone’s invention was made while they were employees of the Baash Perforator Co., which thus had a claim on the patent. One Kam-merer had a prior patent for pipe cutting, of which it was claimed the Reilly and Stone patent was an infringement, and litigation was threatened. The several parties came together and agreed it would be more profitable not to litigate. In this situation the patentee Kammerer and the patentees Reilly and Stone each could have licensed to the Baash Perforator Co. for a royalty to each and each agreed not to invent or “manufacture, sell or use” etc. any competing device and the Perforator company likewise agreed not to manufacture, sell, use, etc.

Had this been done a similar result to that in the instant case would have been accomplished with three parties acting against the public interest instead of two. That the patentees obtain their royalties as stockholders in the Kammerer -Corporation, to which they transferred their patents and of which they became the controlling officers and directors, does not change the prejudice to the public interest. In 'both methods the restrictive covenants are a convenient method of protecting each from inter-party competition but, as stated by Chief Justice Stone in B. B. Chemical Co. v. Ellis, 314 U.S. 495, 498, 62 S.Ct. 406, 408, 86 L.Ed. 367, “The patent monopoly is not enlarged by reason of the fact that it would be more convenient to the patentee to have it so, or because he cannot avail himself of its benefits within the limits of the grant.”

Even had this patent licensing contract created a joint venture, the sharing of profits and losses is no ground for protecting them by agreements against the public interest. The case of Universal Sales Corporation v. California etc. Mfg. Co., 20 Cal.2d 751, 128 P.2d 665, cited by appellees, had no agreement restricting the use of competitive materials or in any way affecting the public interest. In the case of Kinsman v. Parkhurst, 18 How. 289, 293, 15 L.Ed. 385, also cited by appellees, the Court held no more than that it was “competent for two persons, being joint owners of letters-patent, whether valid or invalid, to enter into a copartnership for the manufacture and sale of the patented machines, and to stipulate that one of them should alone conduct the business.” In that case there was no question of the licenses reaching beyond the patented articles and discouraging other patenting or forbidding the use of competitive devices. If the Court’s statement “Besides, if the contract to refrain from the manufacture could not be enforced, as being against public policy, this would afford no answer to a claim for an account of profits actually realized by prosecuting the business, there being no connection between the illegal stipulation and the profits of the business,” means that the Court will enforce such a contract, as here, affecting the public interest if there is no connection between the public injury and the profits from pipe cutting — it is overruled by many subsequent decisions such as Morton Salt Co. v. Suppiger & Co., supra, 314 U.S. at page 494, 62 S.Ct. at page 406, 86 L.Ed. 363, where it is stated, “It is the adverse effect upon the public interest of a successful infringement suit in conjunction with the patentee’s course of conduct which disqualifies him to maintain' the suit, regard-, less of whether the particular defendant' has suffered from the misuse of the patent.”

McCullough also claims the contract gives the licensee the right only to “manufacture and use” the patented device. Hence, it is contended, the device cannot be rented to others and its use solely by the licensee required the employment of skilled workmen. The license, he claims, fixes the price the licensee may charge the oil drillers it serves at $190 per use, thus controlling not the mere participation price of the value of„the tool in making the cut but, as well, the price charged the parties served for the -workmen employed.

We 'do not agree that the contract so provides. At one place it grants “the exclusive right to manufacture and use, but not sell” the cutters. However, it later provides for part of the royalty, one-half the gross earnings from “the use of said devices by the licensee” and just after that for the payment of $190 per cut for the “rental for the use?’ of the cutters. It next provides that the licensee shall keep books of account showing “the names of the parties to whom the same [cutters] were rented or upon whose property the same are used." It then provides for a monthly “statement showing the dates of the use or rental thereof and the number of cuts made and the parties for whom the device or devices were used during the preceding calendar month.”

We construe this contract to mean that where there was a rental of the use of the cutter to an oil driller,, the $190 received was part of the licensee’s gross earnings to be divided equally with the licensor. Where the licensee itself used the device on the property whose oil wells it served, the charges for the services and use were additions to the gross earnings to-be equally divided. We can see no public harm in such an agreement.

We hold that the evidence establishes that the licensing contract and the operations thereunder substantially prejudiced the public interest in that they stifled new competitive invention and suppressed competitive forces which stimulate newer and better products, and that the contract’s covenants strike at the very purpose of the statute and its constitutional basis. Neither the Kammerer Corporation nor the Baash-Ross Tool Company is entitled to damages for McCullough infringement and the interlocutory judgment for damages and an accounting is reversed and the caw-plaints are ordered dismissed.

Reversed.

1 Cf. McCullough v. Kammerer, 9 Cir., 138 F.2d 482, affirming the first interlocutory decree and id. 323 U.S. 327, 65 S. Ct. 297, 89 L.Ed. 273, and Id., 9 Cir., 148 F.2d 525, respecting the contention of unclean hands urged, but not decided, on appeal but committed to the district court for its consideration.

2 The contract was made on October 18, 1923, with the L. F. Baash Perforator Company which manufactured the pipe cutter and serviced oil well companies with it. On November 1, 1924, L. F. Baash Perforator Company assigned the licensing contract to Baash-Ross Tool Company which took over the servicing as well as the manufacture of the cutter. The Perforator Company was then merged with the Baash-Ross Tool Company, the licensee here.

3 Cf. Pope Mfg. Co. v. Gormully, 144 U. S. 224, 236, 237, 12 S.Ct. 632, 634, 36 L.Ed. 414, where, in part, the agreement held against public policy provided that the licensee during the life of the licensed patents, “agrees never to import, manufacture, or sell any machines or devices covered by certain other patenta”