because the agreement was terminated before it was possible for the alleged competition between Congoleum and Inmont to come into existence.
The defendant also contends that it was illegal per se for Congoleum to set the royalty rate for the wall covering portion of the sublicense from Inmont to W. R. Grace & Co. (Grace).
Again, Armstrong has failed to set forth any reasons why this agreement is anti-competitive in nature or effect, and the Court finds no basis to support a conclusion of patent misuse.
On April 7, 1969, Inmont was licensed to practice the inventions of the patents in suit to produce products in the field of wall covering.
The agreement provided that the licensee would pay royalties of seven cents for each pound of foamable composition mix used in the practice of the inventions. Subsequently licenses to produce products in the field of wall covering were granted to Carpenter,
These license agreements provided for a royalty of 5% of the net sales price of all products made under the patents in suit.
All licensees, including Inmont, were subject to termination if they did not develop royalties of at least $5,000 annually.
Carpenter, Borden and Grace have not reported any sales of products in the wall covering field produced under the patents in suit.
To date, Inmont has produced a small amount of coated fabric which would have generated about $1,000 in royalties, but this, of course, is much less than their minimum annual royalty.
The defendant contends that Congoleum has misused its patents by charging discriminatory royalties to competing licensees. Armstrong relies on Laitram Corp. v. King Crab, Inc., 244 F. Supp. 9, mdf'd 245 F. Supp. 1019 (D. Alaska 1965); La Peyre v. F.T.C., 366 F.2d 117 (5th Cir. 1966); Peelers Co. v. Wendt, 260 F. Supp. 193 (W.D.Wash.1966). These cases, often referred to as the Shrimp Peelers cases, held that a patentee cannot charge discriminatory rates to competing licensees.
The facts showed that the owners of a patent on a shrimp-peeling machine
had charged twice as high a royalty rate to shrimp packers in the Northwest as they had charged to packers on the Gulf Coast. The Northwest and Gulf Coast packers were in competition and the court in Laitram found "the rate fixed in the Northwest and Alaska areas was prohibitive, such that these canneries could not economically compete with shrimp processors in the Gulf area."
In the present case there is no basis for concluding that competition may be adversely effected because Armstrong has failed to introduce evidence that Inmont and any of the other licensees compete in any relevant market. The varieties of, and markets for, products produced under the patents in suit in the wall covering field are numerous. Additionally, the Court is not persuaded that the royalty rates set by Congoleum were discriminatory. The royalty actually paid under any royalty basis will depend on many factors including the nature of the substrate, thickness of the coating, price range of the finished product and the amount of scrap.
While the evidence shows that Inmont considered the rate of seven cents per pound of foamable composition used to be somewhat advantageous for its particular circumstances,
it does not necessarily follow that the rate of 5% of net sales price of products produced under the patents was discriminatory. In this case an attempt to compare these royalty rates would produce highly speculative results because no sales have been reported under the percent of net sales rate and a negligible amount of foamable composition has been used under the cost per pound of composition rate.
Armstrong also charges that the alleged discriminatory royalty was further accentuated by an agreement that Inmont was to receive a 25% "kickback" on royalties that might be paid by Carpenter and Borden. There is clearly no illegality in compensating an agent with a fair commission for his efforts in promoting inventions.
Armstrong further contends that the patents in suit were misused through discriminatory royalty rates charged in licenses to Inmont and Texon. This argument is also without merit. Inmont was charged a royalty rate of 5% on annual sales up to $500,000 and 4% on annual sales above that level.
Texon was charged a straight 5% royalty.
Again Armstrong has failed to present any evidence that Inmont and Texon compete in any relevant market. In addition, the Texon rate was not discriminatory in light of the fact that Texon only undertook to practice the invention in a limited product area, while Inmont was to practice in a much broader product area and was to sublicense others.
Violation of the "Lear v. Adkins" Doctrine
In Lear v. Adkins, 395 U.S. 653, 89 S. Ct. 1902, 23 L. Ed. 2d 610 (1969), the Supreme Court expressly overruled its decision in Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S. 827, 70 S. Ct. 894, 94 L. Ed. 1312 (1950), which declared that "The general rule is that the licensee under a patent license agreement may not challenge the validity of the licensed patent in a suit for royalties due under the contract."
The decision in Lear struck down the enforceability of contractual provisions which preclude licensees from contesting the validity of the licensed patent.
The decision also barred enforcement of royalty provisions against licensees for royalties which would otherwise be due during the time licensees are challenging validity of the licensed patents in the courts.
Several recent decisions have held that the Lear rational leads to the conclusion that an agreement to accept the validity of a patent is unenforceable regardless of whether it was included in a private settlement or a judicial decree.
Armstrong is not a licensee resisting a suit for past due royalties on the basis that the underlying patent is invalid. Armstrong is an infringer seeking to have the Court bar enforcement of the patents in suit because certain license agreements involving these patents contain provisions which were struck down as unenforceable in Lear.
The most significant contention raised by Armstrong in this category is that all of the license agreements under the patents in suit contain a provision which provides that royalties are to be paid, and retained by Congoleum, unless and until there is a final appellate adjudication holding that the patents in question are invalid.
Five of these license agreements were executed subsequent to the Lear decision.
Congoleum concedes that this provision is unenforceable against licensees challenging validity, but argues that it is enforceable against licensees who sit back and wait for someone else to challenge validity. While Congoleum's position may be correct as against non-contesting licensees,
the provision applies to contesting licensees as well.
While the Court, of course, does not stamp with approval this provision which is plainly unenforceable against a licensee challenging validity, the application of the doctrine of patent misuse to bar enforcement of Congoleum's patents would be too drastic. Armstrong has not cited legal authority which supports the proposition that the existence of such a clause in a patent license agreement amounts to misuse, and the Court is not persuaded of possible anti-competitive effects resulting from the inclusion of this provision in this case.
Armstrong also contends that Congoleum deliberately flaunted the mandate of the Supreme Court in refusing to delete a "no-contest" clause from a pre-Lear license agreement entered into between Congoleum and Mannington Mills in conjunction with the settlement of Congoleum's infringement action against Mannington.
In May 1970, Congoleum offered to conform aspects of the Mannington Mills license to a more recent license agreement in accordance with Mannington's most favored licensee clause.
At that time Mannington requested that Congoleum delete the "no-contest" clause from its agreement. Based on its view that it was entitled to the equivalent of a judgment on the validity of the patents in suit because the license was part of a litigation settlement, Congoleum refused to delete the "no-contest" clause.
In the Court's view, there is no basis for a conclusion that Congoleum's refusal to delete this clause amounts to misuse of the patents in suit. As of the date Congoleum refused to delete the clause in the Mannington settlement license no cases had extended Lear to settlement agreements or consent decrees. Even the recent cases cited by Armstrong which hold such "no-contest" clauses unenforceable
do not condemn the mere existence of the clause as patent misuse. In addition, there is no evidence in this case to support a conclusion that Congoleum has used the leverage of its legal patent monopoly to reach out for a new monopoly beyond the limits of its grant.
The third contention raised by Armstrong in this category is that the continued existence of "no-contest" clauses in certain Congoleum agreements
entered into prior to Lear amounts to misuse. This contention is without merit. See, Panther Pumps & Equipment Co., Inc. v. Hydrocraft, Inc., 468 F.2d 225 (7th Cir. 1972); Blohm & Voss A G v. Prudential-Grace Lines, Inc., 346 F. Supp. 1116 (D.Md.1972). Moreover, Armstrong's allegation that a "no-contest" clause was included in a Canadian patent license
does not relate to misuse of the United States patents in suit. See, Carter-Wallace, Inc. v. United States, 449 F.2d 1374, 196 Ct.Cl. 35 (1971).
On January 29, 1965 Congoleum licensed United States Rubber Company (U.S. Rubber) to use its know-how and the secret subject matter of its pending patent applications.
The inventions described in these applications were disclosed to the public in United States Letters Patents 3,293,094 and 3,293,108 which issued on December 20, 1966. Congoleum's legal monopoly, of course, commenced on that date.
Armstrong, citing Brulotte v. Thys Co., 379 U.S. 29, 85 S. Ct. 176, 13 L. Ed. 2d 99 (1964), contends that the license agreement with U.S. Rubber constitutes an illegal extension of the patent monopoly granted on December 20, 1966. Brulotte, in declaring that a royalty agreement which projects beyond the expiration date of the patent is unlawful per se, stated "If that device were available to patentees, the free market visualized for the post-expiration period would be subject to monopoly influences that have no proper place there." (pp. 32, 33, 85 S. Ct. p. 179). The Court further stated:
"A patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly. But to use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing the sale or use of the patented article to the sale or use of unpatented ones. . . . The exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post-expiration period when, as we have seen, the patent has entered the public domain." (p. 33, 85 S. Ct. p. 179)