1. Agreements for interchange of licenses under patents covering
processes for the manufacture of an article sold in interstate
commerce may be illegal under the Sherman Act if part of a larger
plan to control interstate markets or if their necessary effect is
to suppress or unduly to restrict competition. They should
therefore be closely scrutinized. P.
283 U. S.
168.
2. An interchange of patent rights and a division of royalties
according to the value attributed by the parties to their
respective patent claims is frequently necessary if technical
advancement is not to be blocked by threatened litigation, and if
the available advantages are open on reasonable terms to all
manufacturers desiring to participate,
Page 283 U. S. 164
such interchange may promote, rather than restrain, competition.
P.
283 U. S.
170.
3. Unless the industry is dominated, or interstate commerce
directly restrained, the Sherman Act does not require
cross-licensing patentees to license at reasonable rates others
engaged in interstate commerce. P.
283 U. S.
172.
4. Three corporations, in the business of producing gasoline and
owning patents for "cracking" processes by which the yield of
gasoline from crude petroleum is greatly increased, joined with
another corporation owning a similar patent in agreements for
exchanges of patent rights and division of royalties which were
challenged by the government as obnoxious to the Sherman Act,
chiefly upon the ground that they enabled the corporations to
maintain existing royalties and thereby to restrain interstate
commerce.
Held:
(1) That the evidence must be examined to ascertain the
operation and effect of the agreements. P.
283 U. S.
173.
(2) Since no monopoly or restriction of competition either (a)
in the business of licensing patented cracking processes or (b) in
the production of either ordinary or cracked gasoline or (c) in the
sale of gasoline has been effected either by means of the
agreements or otherwise, it is not shown that, by agreeing upon
royalty rates, the patentees could control either the price or the
supply. Therefore, agreement upon such rates is not a ground for
injunction. P.
283 U. S.
175.
(3) To warrant an injunction which would invalidate the
contracts here in question, and require either new arrangements by
the patent owners or settlement of their conflicting claims by
litigation, there must be a definite factual showing of illegality.
P.
283 U. S.
179.
5. Failure of the government to take a cross-appeal from the
decree of the district court granting part of the relief sought in
this case makes unnecessary a review of findings adverse to the
government's contention that the patents were invalid and the
cross-licensing agreements made in bad faith. P.
283 U. S.
180.
6. In a suit for an injunction under the Sherman Act, questions
raised by the government as to validity of agreements between
defendants become moot when the agreements are cancelled by the
defendants at the request of the district court before entry of the
decree. P.
283 U. S.
181.
33 F.2d 617
reversed.
Appeal from a decree granting part of the relief sought by the
government in a bill charging an illegal combination
Page 283 U. S. 165
to monopolize and restrain interstate commerce by controlling
that part of the supply of gasoline which is produced by the
process of " cracking."
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
This suit was brought by the United States in June, 1924, in the
federal court for northern Illinois, to enjoin further violation of
§ 1 and § 2 of the Sherman Anti-Trust Trust Act July 2, 1890, c.
647, 26 Stat. 209. The violation charged is an illegal combination
to create a monopoly and to restrain interstate commerce by
controlling that part of the supply of gasoline which is produced
by the process of cracking. Control is alleged to be exerted by
Page 283 U. S. 166
means of seventy-nine contracts concerning patents relating to
the cracking art. The parties to the several contracts are named as
defendants. Four of them own patents covering their respective
cracking processes, and are called the primary defendants. Three of
these, the Standard Oil Company of Indiana, the Texas Company, and
the Standard Oil Company of New Jersey, are themselves large
producers of cracked gasoline. The fourth, Gasoline Products
Company, is merely a licensing concern. The remaining forty-six
defendants manufacture cracked gasoline under licenses from one or
more of the primary defendants. They are called secondary
defendants.
Upon the filing of the answers, which denied the violation
charged, the case was referred to a special master to take and
report the evidence to the court, together with his findings of
fact and conclusions of law. Although the Attorney General had
filed an expediting certificate [
Footnote 1] on February 24, 1925, it was not until January
20, 1930, that the district court entered its final decree. This
hearings before the master extended over nearly three years. The
evidence, including 327 exhibits, fills more than 4,300 pages of
the printed record. The master's report, which occupies 240 pages,
is devoted largely to a discussion of the seventy-three patents and
seventy-nine license contracts. The master found that the primary
defendants had not pooled their patents relating to cracking
processes, that they had not monopolized or attempted to monopolize
any part of the trade or commerce in gasoline, and that none of the
defendants had entered into any combination in restraint of trade.
He recommended that the bill be dismissed for want of equity. After
a hearing on 273 exceptions filed by the government, the district
court granted some of the relief asked.
33 F.2d
617.
Page 283 U. S. 167
The primary defendants and twenty-five of the secondary
defendants appealed to this Court. An order of severance was
entered, and the injunction was stayed.
The issues to which most of the evidence was addressed have been
eliminated. The violation of the Sherman Act now complained of
rests substantially on the making and effect of three contracts
entered into by the primary defendants. The history of these
agreements may be briefly stated. For about half a century before
1910, gasoline had been manufactured from crude oil exclusively by
distillation and condensation at atmospheric pressure. When the
demand for gasoline grew rapidly with the widespread use of the
automobile, methods for increasing the yield of gasoline from the
available crude oil were sought. It had long been known that, from
a given quantity of crude, additional oils of high volatility could
be produced by "cracking" -- that is, by applying heat and pressure
to the residuum after ordinary distillation. But a commercially
profitable cracking method and apparatus for manufacturing
additional gasoline had not yet been developed. The first such
process was perfected by the Indiana Company in 1913, and, for more
than seven years, this was the only one practiced in America.
During that period, the Indiana Company not only manufactured
cracked gasoline an large scale, but also had licensed fifteen
independent concerns to use its process, and had collected, prior
to January 1, 1921, royalties aggregating $15,057,432.46.
Meanwhile, since the phenomenon of cracking was not controlled
by any fundamental patent, other concerns had been working
independently to develop commercial processes of their own. Most
prominent among these were the three other primary defendants, the
Texas Company, the New Jersey Company, and the Gasoline Products
Company. Each of these secured numerous patents covering its
particular cracking process. Beginning in
Page 283 U. S. 168
1920, conflict developed among the four companies concerning the
validity, scope, and ownership of issued patents. One infringement
suit was begun, cross-notices of infringement, antecedent to other
suits, were given, and interferences were declared on pending
applications in the Patent Office. The primary defendants assert
that it was these difficulties which led to their executing the
three principal agreements which the United States attacks, and
that their sole object was to avoid litigation and losses incident
to conflicting patents.
The first contract was executed by the Indiana Company and the
Texas Company on August 26, 1921; the second by the Texas Company
and Gasoline Products Company on January 26, 1923; the third by the
Indiana Company, the Texas Company, and the New Jersey Company, on
September 28, 1923. The three agreements differ from one another
only slightly in scope and terms. Each primary defendant was
released thereby from liability for any past infringement of
patents of the others. Each acquired the right to use these patents
thereafter in its own process. Each was empowered to extend to
independent concerns, licensed under its process, releases from
past, and immunity from future claims of infringement of patents
controlled by the other primary defendants. And each was to share
in some fixed proportion the fees received under these multiple
licenses. The royalties to be charged were definitely fixed in the
first contract, and minimum sums per barrel, to be divided between
the Taxes and Indiana companies, were specified in the second and
third. These royalty provisions, and others, will be detailed
later.
First. The defendants contend that the agreements
assailed relate solely to the issuance of licenses under their
respective patents; that the granting of such licenses, like the
writing of insurance,
New York Life Ins. Co. v. Deer Dodge
County, 231 U. S. 495, is
not interstate commerce, and that the Sherman Act is therefore
inapplicable. This
Page 283 U. S. 169
contention is unsound. Any agreement between competitors may be
illegal if part of a larger plan to control interstate markets.
Montague & Co. v. Lowry, 193 U. S.
38;
Shawnee Compress Co. v. Anderson,
209 U. S. 423.
Such contracts must be scrutinized to ascertain whether the
restraints imposed are regulations reasonable under the
circumstances, or whether their effect is to suppress or unduly
restrict competition.
Chicago Board of Trade v. United
States, 246 U. S. 231,
246 U. S. 238;
Paramount Famous Lasky Corp. v. United States,
282 U. S. 30,
282 U. S. 43.
Moreover, while manufacture is not interstate commerce, agreements
concerning it which tend to limit the supply or to fix the price of
goods entering into interstate commerce, or which have been
executed for that purpose, are within the prohibitions of the Act.
Swift & Co. v. United States, 196 U.
S. 375,
196 U. S. 397;
Coronado Coal Co. v. United Mine Workers, 268 U.
S. 295,
268 U. S. 310;
United States v. Trenton Potteries Co., 273 U.
S. 392. And pooling arrangements may obviously result in
restricting competition.
Compare Northern Securities Co. v.
United States, 193 U. S. 197,
193 U. S. 326.
The limited monopolies granted to patent owners do not exempt them
from the prohibitions of the Sherman Act and supplementary
legislation.
Standard Sanitary Mfg. Co. v. United States,
226 U. S. 20;
Virtue v. Creamery Package Mfg. Co., 227 U. S.
8;
compare United Shoe Machinery Co. v. United
States, 258 U. S. 451;
United States v. General Electric Co., 272 U.
S. 476. [
Footnote 2]
Hence, the necessary
Page 283 U. S. 170
effect of patent interchange agreements, and the operations
under them, must be carefully examined in order to determine
whether violations of the Act result.
Standard Sanitary Mfg.
Co. v. United States, 226 U. S. 20.
[
Footnote 3]
Second. The government contends that the three
agreements constitute a pooling by the primary defendants of the
royalties from their several patents; that thereby competition
between them in the commercial exercise of their respective rights
to issue licenses is eliminated; that this tends to maintain or
increase the royalty charged secondary defendants, and hence to
increase the manufacturing cost of cracked gasoline; that thus, the
primary defendants exclude from interstate commerce gasoline which
would, under lower competitive royalty rates, be produced, and that
interstate commerce is thereby unlawfully restrained. There is no
provision in any of the agreements which restricts the freedom of
the primary defendants individually to issue licenses under their
own patents alone or under the patents of all the others, and no
contract between any of them, and no license agreement with a
secondary defendant executed pursuant thereto, now imposes any
restriction upon the quantity of gasoline to be produced, or upon
the price, terms, or conditions of sale, or upon the territory in
which sales may be made. [
Footnote
4] The only restraint thus charged is that necessarily arising
out of the making and effect of the provisions for cross-licensing
and for division of royalties.
The government concedes that it is not illegal for the primary
defendants to cross-license each other and the respective
licensees, and that adequate consideration can legally be demanded
for such grants. But it contends
Page 283 U. S. 171
that the insertion of certain additional provisions in these
agreements renders them illegal. It urges first that the mere
inclusion of the provisions for the division of royalties
constitutes an unlawful combination under the Sherman Act because
it evidences an intent to obtain a monopoly. This contention is
unsound. Such provisions for the division of royalties are not in
themselves conclusive evidence of illegality. Where there are
legitimately conflicting claims or threatened interferences, a
settlement by agreement, rather than litigation, is not precluded
by the Act.
Compare Virtue v. Creamery Package Co.,
227 U. S. 8,
227 U. S. 33. An
interchange of patent rights and a division of royalties according
to the value attributed by the parties to their respective patent
claims is frequently necessary if technical advancement is not to
be blocked by threatened litigation. [
Footnote 5] If the available advantages are open on
reasonable terms to all manufacturers desiring to participate, such
interchange may promote, rather than restrain, competition.
[
Footnote 6]
Compare
American Column & Lumber Co. v. United States,
257 U. S. 377,
257 U. S.
414-15;
Maple Flooring Manufacturers Assn. v. United
States, 268 U. S. 563,
268 U. S.
578.
Page 283 U. S. 172
Third. The government next contends that the agreements
to maintain royalties violate the Sherman Law because the fees
charged are onerous. The argument is that the competitive advantage
which the three primary defendants enjoy of manufacturing cracked
gasoline free of royalty, while licensees must pay to them a heavy
tribute in fees, enables these primary defendants to exclude from
interstate commerce cracked gasoline which would, under lower
competitive royalty rates, be produced by possible rivals. This
argument ignores the privileges incident to ownership of patents.
Unless the industry is dominated, or interstate commerce directly
restrained, the Sherman Act does not require cross-licensing
patentees to license at reasonable rates others engaged in
interstate commerce.
Compare Bement v. National Harrow
Co., 186 U. S. 70;
United States v. General Electric Co., 272 U.
S. 476,
272 U. S. 490.
The allegation that the royalties charged are onerous is, standing
alone, without legal significance, [
Footnote 7] and, as will
Page 283 U. S. 173
be shown, neither the alleged domination nor restraint of
commerce has been proved.
Fourth. The main contention of the government is that,
even if the exchange of patent rights and division of royalties are
not necessarily improper, and the royalties are not oppressive, the
three contracts are still obnoxious to the Sherman Act because
specific clauses enable the primary defendants to maintain existing
royalties, and thereby to restrain interstate commerce. The
provisions which constitute the basis for this charge are these.
The first contract specifies that the Texas Company shall get from
the Indiana Company one-fourth of all royalties thereafter
collected under the latter's existing license agreements, and that
all royalties received under licenses thereafter issued by either
company shall be equally divided. Licenses granting rights under
the patents of both are to be issued at a fixed royalty --
approximately that charged by the Indiana Company when its process
was alone in the field. By the second contract, the Texas Company
is entitled to receive one-half of the royalties thereafter
collected by the Gasoline Products Company from its existing
licensees, and a minimum sum per barrel for all oil cracked by its
future licensees. The third contract gives to the Indiana Company
one-half of all royalties thereafter paid by existing licensees of
the New Jersey Company, and a similar minimum sum for each barrel
treated by its future licensees, subject in the latter case to
reduction if the royalties charged by the Indiana and Texas
companies for their processes should be reduced. [
Footnote 8]
Page 283 U. S. 174
The alleged effect of these provisions is to enable the primary
defendants, because of their monopoly of patented cracking
processes, to maintain royalty rates at the level established
originally for the Indiana process.
The rate of royalties may, of course, be a decisive factor in
the cost of production. If combining patent owners effectively
dominate an industry, the power to fix and maintain royalties is
tantamount to the power to fix prices. [
Footnote 9]
National Harrow Co. v. Hench, 76 F.
667,
aff'd, 83 F. 36,
see also, 84 F. 226;
Blount Mfg. Co. v. Yale & Towne Mfg. Co., 166 F. 555.
Where domination exists, a pooling of competing process patents, or
an exchange of licenses for the purpose of curtailing the
manufacture and supply of an unpatented product, is beyond the
privileges conferred by the patents, and constitutes a violation of
the Sherman Act. The lawful individual monopolies granted by the
patent statutes cannot be unitedly exercised to restrain
competition.
Standard Sanitary Mfg. Co. v. United States,
226 U. S. 20;
United States v. New Departure Mfg. Co., 204 F. 107;
United States v. Motion Picture Patents Co., 225 F. 800,
appeal dismissed, 247 U.S. 524.
Compare United States
v. Kellogg Toasted Corn Flakes Co., 222 F. 725;
United
Page 283 U. S. 175
States v. Eastman Kodak Co., 226 F. 62,
appeal
dismissed, 255 U.S. 578. [
Footnote 10] But an agreement for cross-licensing and
division of royalties violates the Act only when used to effect a
monopoly, or to fix prices, or to impose otherwise an unreasonable
restraint upon interstate commerce.
Compare Bement v. National
Harrow Co., 186 U. S. 70;
Cement Manufacturers Protective Assn. v. United States,
268 U. S. 588,
268 U. S. 604;
United States v. General Electric Co., 272 U.
S. 476,
272 U. S. 490;
United States v. Trenton Potteries Co., 273 U.
S. 392,
273 U. S. 397.
In the case at bar, the primary defendants own competing patented
processes for manufacturing an unpatented product which is sold in
interstate commerce, and agreements concerning such processes are
likely to engender the evils to which the Sherman Act was directed.
Compare United States v. International Harvester Co., 214
F. 987,
appeal dismissed, 248 U.S. 587. We must therefore
examine the evidence to ascertain the operation and effect of the
challenged contracts.
Fifth. No monopoly, or restriction of competition, in
the business of licensing patented cracking processes resulted from
the execution of these agreements. Up to 1920, all cracking plants
in the United States were either owned by the Indiana Company alone
or were operated under licenses from it. In 1924 and 1925, after
the cross-licensing arrangements were in effect, the four primary
defendants owned or licensed, in the aggregate, only 55 percent of
the total cracking capacity, and the remainder was distributed
among twenty-one independently owned cracking processes. This
development and commercial expansion
Page 283 U. S. 176
of competing processes is clear evidence that the contracts did
not concentrate in the hands of the four primary defendants the
licensing of patented processes for the production of cracked
gasoline. [
Footnote 11]
Moreover, the record does not show that, after the execution of the
agreements, there was a decrease of competition among them in
licensing other refiners to use their respective processes.
[
Footnote 12]
No monopoly, or restriction of competition, in the production of
either ordinary or cracked gasoline has been proved. The output of
cracked gasoline in the years in question [
Footnote 13] was about 26% of the total gasoline
production. Ordinary or straight run gasoline is indistinguishable
from cracked gasoline, and the two are either mixed or sold
interchangeably. Under these circumstances, the primary defendants
could not effectively control the supply
Page 283 U. S. 177
or fix the price of cracked gasoline by virtue of their alleged
monopoly of the cracking processes, unless they could control,
through some means, the remainder of the total gasoline production
from all sources. [
Footnote
14] Proof of such control is lacking. Evidence of the total
gasoline production by all methods of each of the primary
defendants and their licensees is either missing or unsatisfactory
in character. [
Footnote 15]
The record does not accurately
Page 283 U. S. 178
show even the total amount of cracked gasoline produced,
[
Footnote 16] or the
production of each of the licensees, or competing refiners. Widely
variant estimates of such production figures have been submitted.
These were not accepted by the master, and there is no evidence
which would justify our doing so. [
Footnote 17]
No monopoly, or restriction of competition, in the sale of
gasoline has been proved. On the basis of testimony relating to the
marketing of both cracked and ordinary gasoline, the master found
that the defendants were in active competition among themselves and
with other refiners; that both kinds of gasoline were refined and
sold in large quantities by other companies, and that the primary
defendants and their licensees neither individually or collectively
controlled the market price or supply of any gasoline moving in
interstate commerce. There is ample evidence to support these
findings.
Page 283 U. S. 179
Thus, it appears that no monopoly of any kind, or restraint of
interstate commerce, has been effected either by means of the
contracts or in some other way. In the absence of proof that the
primary defendants had such control of the entire industry as would
make effective the alleged domination of a part, it is difficult to
see how they could, by agreeing upon royalty rates, control either
the price or the supply of gasoline or otherwise restrain
competition. By virtue of their patents, they had individually the
right to determine who should use their respective processes or
inventions and what the royalties for such use should be. To
warrant an injunction which would invalidate the contracts here in
question, and require either new arrangements or settlement of the
conflicting claims by litigation, there must be a definite factual
showing of illegality.
Chicago Board of Trade v. United
States, 246 U. S. 231,
246 U. S.
238.
Page 283 U. S. 180
Sixth. In the district court, the government undertook
to prove the violation charged by showing that the three agreements
challenged were made by the primary defendants in bad faith. The
bulk of the testimony introduced by it is directed to this issue,
and relates to the validity and scope of twenty-three jointly used
patents which were selected by it for attack. [
Footnote 18] This evidence was admitted, over
objection, for the purpose of showing that these patents were
either invalid or narrow in scope, that there was no substantial
foundation for the alleged conflicts and threatened infringement
suits, that these were a pretext, and that the patents had been
secured, and their infringement was being asserted, merely as a
means of lending color of legality to the making of the contracts
by which competition would inevitably be suppressed. [
Footnote 19] The master found, after
an elaborate review of the entire art, that the presumption of
validity attaching to the patents had not been negatived in any
way, that they merited a broad interpretation; that they had been
acquired in
Page 283 U. S. 181
good faith, and that the scope of the several groups of patents
overlapped sufficiently to justify the threats and fear of
litigation. The district court stated that the particular claims
should be interpreted narrowly, and that the respective inventions
might be practiced without infringement of adversely owned patents.
But it confirmed the finding of presumptive validity, and did not
question the finding of good faith. It held that the patents were
adequate consideration for the cross-licensing agreements, and that
the violation charged could not be predicated on patent invalidity.
Inasmuch as the government did not appeal from these findings, we
need not consider any of the issues concerning the validity or
scope of the cracking patents, and we accept the finding that they
were acquired in good faith. Neither the findings nor the evidence
on this issue supply any ground for invalidating the contracts.
[
Footnote 20]
Seventh. The remaining issues in the case have become
moot. The government objected to a number of early Indiana Company
licenses which contained certain territorial restrictions on the
production of cracked gasoline, and also to a provision in the
first contract between primary defendants, and, in licenses
thereunder by which the Indiana Company secured an option to
purchase a portion of the cracked gasoline manufactured in, or
shipped into, its sales territory. At the hearing before the
district court, it appeared that these provisions had never been
enforced. Upon the court's request, the objectionable clauses were
voluntarily cancelled some months before the entry of the decree.
Similarly, the propriety
Page 283 U. S. 182
of certain blanket acknowledgments of patent validity in the
first contract, and in a number of licenses under later contracts,
were questioned by the lower court. At its suggestion, these
provisions also were formally cancelled by the parties. As the
relief here sought is an injunction, and hence relates only to the
future,
United States v. Hamburg-Amerikanische
Packetfahrt-Actien Gesellschaft, 239 U.
S. 466,
239 U. S. 475,
the alleged validity of such provisions has become moot.
Berry
v. Davis, 242 U. S. 468;
Commercial Cable Co. v. Burleson, 250 U.
S. 360;
Alejandrino v. Quezon, 271 U.
S. 528;
United States v. Anchor Coal Co., 279
U.S. 812.
Eighth. The district court accepted the government's
estimates of cracked gasoline production, found that the primary
defendants were able to control both supply and price by virtue of
their control of the cracking patents, held that, although these
patents were valid consideration for the cross-licenses, the
agreement to maintain royalties was, in effect, a method for fixing
the price of cracked gasoline, and concluded that a monopoly
existed as a result of such agreements. This appears to be the only
basis for the relief granted. But the widely varying estimates,
relied upon to establish dominant control of the production of
cracked gasoline, were insufficient for that purpose. [
Footnote 21] And the court entirely
disregarded not only the fact that the manufacture of the cracked
is only a part of the total gasoline production, but also the
evidence showing active competition among the defendants themselves
and with
Page 283 U. S. 183
others. Its findings are without adequate support in the
evidence. The bill should have been dismissed.
The government now seeks no relief against the secondary
defendants. It concedes that fifty-three of the seventy-nine
contracts, originally set out in the petition are wholly beyond
attack, because they are licenses issued to secondary defendants
prior to the execution by their licensors of the three main
agreements challenged. As to the remaining contracts between
primary and secondary defendants, the government on this appeal
agreed that the decree should be modified to declare such contracts
voidable at the option of the licensees. This modification was
assented to at the bar by counsel for the primary defendants. But,
as we are of the opinion that the decree should be reversed and the
bill dismissed, we see no occasion for interfering with the present
license arrangements.
Reversed.
MR. JUSTICE STONE took no part in the consideration or decision
of this case.
[
Footnote 1]
Pursuant to the Act of February 11, 1903, c. 544, 32 Stat. 823,
as amended by Act of June 25, 1910, c. 428, 36 Stat. 854.
[
Footnote 2]
Historically, patent grants were only narrow exceptions to the
general public policy against monopolies which developed from the
Case of Monopolies, Moore 671, 11 Co. 84, and culminated
in the Statute of Monopolies, 21 Jac. I, c. 3, §§ V, VI.
See Price, The English Patents of Monopoly, cc. 1-3.
Compare the debates on the Sherman Act, 21 Cong., 21
Cong.Rec. Pt. III, 51st Cong., 1st Sess., pp. 2455-62. Even apart
from the limitations of the Anti-Trust laws, the monopoly granted
by the patent statute is not unrestricted in scope.
Compare
Carbice Corp. v. American Patents Development Corp., ante, p.
283 U. S. 27.
[
Footnote 3]
Similarly, agreements relating to other limited statutory
monopolies, such as copyrights, are within the Act.
Straus v.
American Publishers Assn., 231 U. S. 222.
Compare Ingersoll & Bro. v. McColl, 204 F. 147.
[
Footnote 4]
Restrictive provisions in the first contract and in certain
licenses issued pursuant thereto were eliminated before the entry
of the decree below.
See infra, p.
283 U. S.
181.
[
Footnote 5]
This is often the case where patents covering improvements of a
basic process, owned by one manufacturer, are granted to another. A
patent may be rendered quite useless, or "blocked," by another
unexpired patent which covers a vitally related feature of the
manufacturing process. Unless some agreement can be reached, the
parties are hampered and exposed to litigation. And frequently the
cost of litigation to a patentee is greater than the value of a
patent for a minor improvement.
See Interchange of Patent
Rights, National Economic Conference Board, Trade Associations --
Their Economic Significance and Legal Status (1925) c. IX; Fenning,
Interest of Trade Associations in Patents and Trade-Marks, 3
Harvard Business Rev. 81, 82.
[
Footnote 6]
Such agreements, varying in purpose, scope, and validity, are
not uncommon.
See Rep. Atty-Gen. (1924) p. 16;
Id., (1925) p. 20. Conflict of patents in the automobile
industry, and the early difficulties encountered with an alleged
basic patent (
see Electric Vehicle Co. v. Winton Motor-Carriage
Co., 104 F. 814;
Electric Vehicle Co. v. C.A. Duerr &
Co., 172 F. 923,
rev'd, 184 F. 893), led to an
agreement in 1915 by which the members of the National Automobile
Chamber of Commerce cross-licensed each other without royalty for
the use of all patent improvements. This agreement was renewed as
to existing patents in 1925.
See Epstein, The Automobile
Industry, pp. 227-239, 361. Interchange of basic aviation patents
was made during the world war at the suggestion of the National
Advisory Committee for Aeronautics, and this agreement, providing
for fixed royalties, was approved by the Attorney General.
See 31 Op.Atty.Gen. 166. In 1928, the arrangement was
modified and renewed.
See 26 Aviation (1929), pp. 728-29;
Report of Select Committee of Inquiry into Operations of the United
States Air Services, H.Rep. No. 1653, 68th Cong., 2d Sess., pp.
10-14. Various patent exchanges existing in the radio industry are
detailed in the Report of the Federal Trade Commission on the Radio
Industry (1923), c. II, Appendices.
See also Ann.Rep.
Federal Trade Comm'n 1924, pp. 19, 20; Federal Trade Comm'n v.
General Electric Co., F.T.C. Docket No. 1115, dismissed December
19, 1928. For early patent interchanges and combinations in other
industries,
see Vaughan, Economics of Our Patent System,
pp. 34-104.
[
Footnote 7]
The government introduced no evidence in support of the
allegation that the royalty rates charged are onerous, and, as will
be detailed later, the continued operations of the licensees, their
increasing production, and the absence of complaint on their part
tend to disprove the charge.
Compare Notes
11 17 infra.
[
Footnote 8]
Payments received by the Texas and Indiana companies under the
second and third contracts are divided equally by these companies
pursuant to the terms of the first. That contract further provides
that all royalties received after January 1, 1937, even from
existing licensees, are to be divided equally between the two
companies.
[
Footnote 9]
Where the royalty demanded is a fixed percentage of the gross
sales price, this relationship is clear. A combination of
patent-owning manufacturers which required royalty payments on this
basis and which appeared to dominate the automobile bumper industry
was dissolved by a consent decree entered in the District Court for
Southern New York in December, 1917.
See United States v.
Discher, unreported, noted in Federal Anti-Trust Laws and
Decisions (Department of Justice) 1928, pp. 147, 148.
See
also National Economic Conference Board,
op. cit.
supra, note 5 pp. 139-40;
United States v. Discher, 255 F. 719. Moreover, the
monopoly granted by the patent does not include the right to fix
the resale price of the patent product.
Bauer & Cie. v.
O'Donnell, 229 U. S. 1;
Straus v. Victor Talking Machine Co., 243 U.
S. 490;
Boston Store v. American Graphophone
Co., 246 U. S. 8.
[
Footnote 10]
Such agreements, though involving patent rights, have also been
held to be in violation of state antitrust laws.
Vulcan Powder
Co. v. Hercules Powder Co., 96 Cal. 510, 31 P. 581;
State
v. Creamery Package Mfg. Co., 110 Minn. 415, 435, 126 N.W.
126, 623.
Compare United Shoe Machinery Co. v. La
Chapelle, 212 Mass. 467, 479, 99 N.E. 289.
[
Footnote 11]
There is no evidence in the record showing the ratio of
defendants' processes to those of other companies after 1925.
Ratios since then are indicated in the official Bureau of Mines
surveys of cracking plants which, beginning in 1929, report the
distribution of the various cracking processes.
See
Petroleum Refining Statistics, 1928, Department of Commerce, Bureau
of Mines, Bull. 318, pp. 122-23;
id., Survey of Cracking
Plants, January 1, 1930, Information Circular No. 6305, p. 6.
[
Footnote 12]
Between the execution of the respective contracts and the
bringing of this suit, the Indiana Company issued two new licenses,
the Texas Company two, and Gasoline Products ten. Between the
filing of the bill and May, 1925, the Gasoline Products Company
appears to have issued ten additional new licenses. There is no
evidence concerning the licensing operations of the other three
primary defendants in this period.
[
Footnote 13]
The estimates of the production of cracked gasoline, and other
evidence upon which the injunction was issued in January, 1930,
cover only the period to 1925. Much of this evidence, including
statements of the production of two of the three producing primary
defendants, relates to operations no later than 1924. Although
frequently given in terms of barrels, production figures, where
used in this opinion, have been uniformly converted into
gallons.
[
Footnote 14]
In addition to straight run and cracked gasoline, which are
refined from crude oil, a third kind, known as natural gas or
casinghead gasoline, is produced from natural gas. In 1925, this
method accounted for 7.6% of the total gasoline production.
Petroleum Refining Statistics, 1926, Department of Commerce, Bureau
of Mines, Bull. No. 289, pp. 57, 58. Because of its great
volatility, natural gas gasoline is now mainly used for blending
with other types.
See American Petroleum Institute,
Petroleum Facts and Figures (2d ed., 1929) pp. 152-154. Thus, it
increases the total amount of gasoline refined, and, to this
extent, control of production of natural gas gasoline might be
necessary to secure complete domination of the gasoline refining
industry. There is, however, no evidence as to the production or
purchase of this type of gasoline by any of the primary defendants
except the New Jersey Company and its subsidiaries, which, in 1925,
manufactured about one-fifth of all the natural gas gasoline
recovered.
[
Footnote 15]
In 1924, the total gasoline production in gallons was
8,959,680,198; in 1925, it was 10,886,127,000. The New Jersey
Company and its subsidiaries, as to which complete estimates alone
are given in the record, produced by all methods 1,445,273,195
gallons, or about 16% of the total in 1924, and 1,581,314,145
gallons, or about 14.5%, in 1925. The Texas Company estimated its
total production, exclusive of its licensees, for the year 1924 at
602,918,348 gallons, or about 6.6% of the total. These are the only
estimates as to the total production of all kinds of gasoline. In
the absence of definite figures as to such total gasoline
production by all methods, domination of the refining industry by
the three primary defendants cannot be shown.
Compare
Federal Trade Commission, Prices, Profits, and Competition in the
Petroleum Industry, Sen.Doc. No. 61, 70th Cong. 1st Sess. p. 157
et seq.
[
Footnote 16]
No Bureau of Mines statistics on the production of gasoline,
distributed according to method of refining, exist for the period
prior to January, 1925.
See Petroleum Refining Statistics,
1916-25, Department of Commerce, Bureau of Mines, Bull. No. 280, p.
125. Hence, all the statistics presented as to the total amount of
cracked gasoline produced theretofore are only estimates.
[
Footnote 17]
The government estimated that, in 1924, the total production of
cracked gasoline amounted to 1,443,036,000 gallons. The New Jersey
Company estimated that the total production in that year was
1,680,000,000 gallons, and an estimate based on a Bureau of Mines
statement that cracked gasoline was 20% of the total, comes to
1,791,938,400 gallons. If the New Jersey figure is accepted as a
base, it appears that, in 1924, the Indiana Company produced
444,307,600 gallons of cracked gasoline, or 26.5% of the total; the
Texas Company, 316,552,110 gallons, or 18.8%, and the New Jersey
Company and its subsidiaries, 350,491,190 gallons, or 20.8%. Thus,
on this basis, these three primary defendants manufactured 66.1% of
the total cracked gasoline in 1924. In reliance on its own
estimated total production, which was the lowest submitted, the
government alleged that they manufactured 81.04% in the same year.
The inaccuracy of all of these estimates of total production of
cracked gasoline is aptly illustrated by the first official Bureau
of Mines figures for the next year, 1925.
See Note 16 supra. For that
year, the total cracked gasoline production is reported at
2,880,486,000 gallons -- or over a billion gallons more than the
highest estimate for 1924.
Compare Bull. 280,
loc.
cit. supra, Note 16
Moreover, to determine the total production of both primary and
secondary defendants, the government calculated the production of
each licensee by dividing its royalty payments by varying estimates
of the amount of royalty per gallon. Adding these amounts to its
estimated production of the three producing primary defendants, it
submitted that, in 1921, the primary defendants and their licensees
refined about 86% of the total cracked gasoline produced, and, in
1924, about 94%. But, in most cases, royalties were paid by the
secondary licensees on the basis of the amount of "charging stock"
or residual oil treated. To determine a licensee's production from
its royalty payments, it was thus first necessary to estimate the
rate of conversion into finished cracked gasoline. Sufficient data
for doing so accurately for each licensee was lacking. The rate of
conversion differs with the type of installation, composition of
stock treated, and plant efficiency, and the estimated conversion
rates relied upon by the government varied from 25% to 31%
[
Footnote 18]
Prior to trial, the United States propounded eighty-one
interrogatories to each of the primary defendants concerning the
use of some seventy-three patents. These interrogatories were
answered in detail with the reservation that the admissions of use
were merely opinions of counsel, but that nevertheless each
defendant believed adversely held patents to constitute a basis for
suit. The government selected twenty-three patents for attack. One
hundred and 31 of the 273 exceptions filed by it to the master's
report concern these patents. The evidence relating to them
comprises five volumes of the present record.
[
Footnote 19]
After the first hearing, the master certified the question
whether this evidence was admissible. The district court held that
it was. Nevertheless, in his final report, the master stated that
he was of the opinion that examination of the prior art could be
made only for the purpose of determining whether the patents were
useful, of adequate scope, and reasonably related to the contract.
He also ruled that it was not necessary to determine whether any of
the competing process patents actually infringed another. These
rulings were not disturbed by the court.
[
Footnote 20]
The district court also dismissed, upon the master's findings
and recommendation, a supplementary petition against two additional
defendants which charged that certain patents had been secured by
fraud and that a conspiracy had been entered into to injure the
owner of a competing cracking process. The United States did not
appeal from this order.
[
Footnote 21]
The Court apparently accepted as accurate the government's
estimates of cracked gasoline production, and stated:
"It is the actual production, rather than 'cracking capacity,'
that is significant. To ascertain whether a monopoly exists, we
must look to the production, rather than the capacity
percentages."
33 F.2d
617, 625. But the estimates of total cracked gasoline
production cannot be accepted, and there was no adequate showing of
the proportion actually manufactured by these defendants.
See Note 17
supra.