Appendix — North Carolina v. Chas. Pfizer & Co.

Supreme Court brief1976

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IN THE

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Supreme Court of the United Biaies.. “8

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OCTOBER TERM 1975 |:

JUN 11 1976

MICHAEL RODAK, JR., CLERK

No 95-1801

THE STATE OF NORTH CAROLINA

Petitioner,

Vv.

CHAS. PFIZER & CO., INC., AMERICAN CYANAMID

COMPANY, BRISTOL-MYERS COMPANY, OLIN MATHIESON

CHEMICAL CORPORATION and THE UPJOHN COMPANY,

Respondents.

APPENDICES TO PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

RUFUS L. EDMISTEN

Attorney General of North Carolina

JEAN A. BENOY

Deputy Attorney General

NOEL L. ALLEN

Attorney

N. C. Department of Justice

P. O. Box 629

Raleigh, North Carolina 27602

Telephone: (919) 829-3786

Attorneys for Petitioners

APPENDICES

TABLE OF CONTENTS

Appendix A

Judgment of the Fourth Circuit..

Opinion of the Fourth Circuit...

Order granting extension of

time to file petition for

DEMOS EMBc cc cccceccecceesesoce

Order denying petition for

TTT TTTTTrTeTeTee

Order staying issuance of

0 re

Appendix B

Pertinent part of First Amended

Complaint re plea of Collat-

eral Estoppel...cccccccccccces

Bench order of E.D.N.C. re plea

of Collateral Estoppel........

Order of E.D.N.C. re plea of

Collateral Estoppel..........-.

In re Coordinated Pretrial

Proceedings in Antibiotic

Antitrust Actions (S.D.N.Y.

BOT ES ccc cocececcesoeceeeeceess

Pfizer v. Lord, 456 F. 2d 545

Eee 66 6 6866.00 0666 064068 OD6"

B-1

B-10

B-13

B-15

B-36

Appendix C

Memorandum of Decision of

Means © © & © 66 6 68 66 6606666 60d

Judgment Of E.D.N.C...ceeeeececs

Appendix D

Statutes and Rules Involved.....

Appendix E

Excerpts of Kespondents'

Briefs to the Sixth Circuit

re issue of fairness of FTC

PFOCECEMING. .. ce eeeeeeseeveees

Excerpts of Pfizer's Brief

to the Sixth Circuit re

issue of COE ses be 60 0b0660es6

Excerpts of Cyanamid's Peti-

tion for Rehearing in

Sixth Circuit re fraud........

Appendix F

Chronology of principal

events relating to the

patent aspect of the

Commission's Decision

as to Pfizer and Cyanamid.....

Appendix G

Antitrust cases in which

Walker Process was applied

but no fraud was found........

Antitrust case in which Walker

Process was applied and fraud

was PS «44466000 466466406006

35la

908a

D-1

E-1

E-13

F-1

G-1

G-3

Appendi»x H

Excerpts of Petitioner's Main

Brief to the Fourth Circuit

re questions raised on appeal

and issues presented.......... H-l

Appendix I

Excerpts of Patent Examiner

Lidoff's COSCIMOMY «ce cccccccecce I-l

Appendix J

PetitionerS Exhibit showing exchange

of price information between

TESPONGENtTS.ccocssccseseseseseseses J-1

A-1

UNITED STATES COURT OF APPEALS

For The Fourth Circuit

No. 74-2154

THE STATE OF NORTH CAROLINA,

Appellant,

versus

CHAS. PFIZER & CO., INC.,

AMERICAN CYANAMID COMPANY,

BRISTOL-MYERS COMPANY -

OLIN MATHIESON CHEMICAL CORPORATION

and THE UPJOHN COMPANY,

Appellees.

Appeal from the United States District

Court for the Eastern District of North

Carolina, at Raleigh

This cause came on to be heard on the

record from the United States District

Court for the Eastern District of North

Carolina, and was argued by counsel.

On consideration whereof, It is now

here ordered and adjudged by this Court

that the judgment of the said District

Court appealed from, in this cause, be,

and the same is hereby, affirmed.

A~2 A-3

s/s William K. Slate, II

CLERK UNITED STATES COURT OF APPEALS

For The Fourth Circuit

FILED No. 74-2154

JAN 12 1976

THE STATE OF NORTH CAROLINA,

WILLIAM K. SLATE, II Appellant,

CLERK versus

CHAS. PFIZER & CO., INC.,

AMERICAN CYANAMID COMPANY,

BRISTOL-MYERS COMPANY -

OLIN MATHIESON CHEMICAL CORPORATION

and THE UPJOHN COMPANY, .

Appellees.

Appeal from the United States District

Court for the Eastern District of North

Carolina, at Raleigh

Argued Jun 10, 1975 Decided Jan 12, 1976

Before RUSSELL, FIELD and WIDENER,

Circuit Judges.

[Names of Counsel Ommitted]

FIELD, Circuit Judge:

Alleging violations of sections 1 and 2

of the Sherman Act, the State of North

Carolina instituted this action for damages

on behalf of itself, its governmental sub-

divisions and all citizen consumers who had

purchased broad-spectrum antibiotics manu-

factured and sold by the defendants in

North Carolina during the seriod 1952 to

1966. The defendants are Chas. Pfizer & Co.,

Inc. (Pfizer), American Cyanamid Company

(Cyanamid), Bristol-Myers (Bristol), Olin-

Mathieson Chemical Corporation (Squibb), and

The Upjohn Company (Upjohn).

The thrust of the plaintiff's case is that

Pfizer, aided by Cyanamid, obtained the

Conover patent! on the antibiotic, tetracycline,

by conduct which amounted to a fraud on the

Patent Office and thereafter, in combination

with the other defendants, exploited it for

the purposes

1. Tetracycline was first identified by Dr.

Conover, a Pfizer chemist, and an application

for a patent on tetracycline and the production

process was filed by Pfizer on behalf of Dr.

Conover on Oct 23, 1975. The patent, carrying

No.2,699,054, is generally referred to as the

Conover patent.

A-5

of restraining and monopolizing trade and

commerce in the broad-spectrum antibiotic

market and particularly the tetracycline

market. + The case was tried to the

court without a jury, and after an ex-

tended trial the district judge filed an

opinion containing his —— of fact

and conclusions of law.” The court con-

cluded that the plaintiff had failed to

establish that the defendants had violated

the Sherman Act, or that Pfizer was guilty

of fraudulent procurement or misuse of the

Conover patent. Accordingly, judgment was

entered in favor of the defendants and

North Carolina has appealed.

North Carolina's appeal presents two

issues: (1) Whether the district court

erred as a matter of law when it denied

the plaintiff's motion for partial summary

judgment on the basis of collateral estoppel

that Pfizer and Cyanamid had caused the

Conover patent to be issued by defrauding

the United States Patent Office; and

(2) whether the district court's findings

of fact were clearly erroneous.

. See Walker Process Equipment, Inc. v.

2 Food Machinery & Chemical Corp., 382

U.S. 172 (1965).

Pfizer

2. State of North Carolina v. Chas.

& Co., Inc., 384 F.Supp. 265 (E.D. N.C.

1974). 3

A-6

The Conover patent has been involved,

either directly or indirectly, in extensive

litigation commencing with a proceeding

before the Federal Trade Commission (Commission)

in 1958, and the background of the present

controversy has been chronicled in a number

of decisions.° The relevant facts developed

in the district court are as follows. Prior

to 1952 three effective and patented broad-

spectrum antibiotics were produced and

marketed. They were Aureomycin which was

produced by Cyanamid and was covered by the

Duggar patent, U.S. Patent No. 2,482,055 and

the Niedercorn patent, U.S. Patent No.2,609,329;

Terramycin

3 The reported cases are as follows:

United States v. Chas. Pfizer & Co., Inc.,

et al, 245 F.Supp. 801 (S.D. N.Y. 1965).

American Cyanamid Co.v. F.T.C., 363 F.2d

757 (6 Cir. 1966).

Chas. Pfizer & Co., Inc. v. F.T.C.. 401

F.2d 574 (6 Cir. 1968), cert. den.ed,

394 U.S. 920.

United States v. Chas. Pfizer & Co., Inc.,

217 F.Supp. 199 (S.D. N.Y. 1963).

United States v. Chas. Pfizer & Co., 281

F.Supp. 837 (S.D. N.Y. 1.68).

United States v. Chas. Pfizer & Co., 426

F.2d 32 (2 Cir. 1970), reh.den., 437 F.2d

957, cert. granted,402 U.S. 548.

United States v. Chas. Pfizer Co., Inc.,

367 F.Supp. 91 (S.D. N.Y. 1973).

A-7

which was produced by Pfizer and was

covered by the Sobin patent, U.S. Patent

No. 2,516,080; and Chloromycetin which

was patented and produced by Parke-Davis.

Parke-Davis is not a party to the present

litigation. None of these three manu-

facturers granted licenses or cross-

licenses for these particular drugs. Each

of the antibiotics are prescription drugs

and their sales are largely dependent upon

the physician's opinion of their effectiveness.

Since they have a high degree of interchange-

ability, each manufacturer priced his drugs

at a level competitive with the other two

producers, thereby creating a stable and

parallel price structure, and price reductions

by one manufacturer were met by the others

during these years.

Prior to 1952, neither the molecular

structure of Terramycin nor that of Aureomycin

was known, and Dr. Conover, a Pfizer scientist,

was a member of a research team which was

seeking to determine the structure of Pfizer's

Terramycin. In the spring of 195% the Pfizer

team succeeded in ascertaining the structures

of both Terramycin and Aureomycin. Shortly

thereafter, Dr. Conover discovered that

another antibiotic, tetracycline,

A-8

could be produced by the application of

a deschlorination process to Aureomycin.

Pfizer filed the Conover application for

a product and process patent on tetra-

cycline in October of 1952, and in March

of 1953 Cyanamid filed its Boothe-Morton

application for a similar patent. In

addition to these two applications, in

September of 1953 H-yden Chemical Corp-

Oration filed its Minieri application? for

a patent on tetracycline and the fermentation

process for producing it, and in Oc’.* er,

1953, Bristol filed a similar application

under the name of Heinemann.

The competing claims of Pfizer and °*

Cyanamid resulted in the declaration of an

interference by Herbert J. Lidoff, the Patent

Examiner, in December of 1953. While Pfizer

believed that it possessed priority of

invention, it was aware that its sole method

of tetracycline production

4. Shortly after the filing of the Minieri

application, Heyden negotiated the sale of

its Antibiotic Division to Cyanamid and on

December 1, 1953, Cyanamid took over the

assets of Heyden's Antibiotic Division, in-

cluding the Minieri patent application.

Thereafter, Cyanamid abandoned the product

claims of the Minieri application but continued

to prosecute the process claims. A patent on

the Minieri process claim was issued to

Cyanamid in February, 1956.

A-9

depended upon the application of the

deschlorination process to Cyanamid's

patented Aureomycin thereby making it

wholly dependent upon Cyanamid for its

supply of bulk Aureomycin. In an attempt

to resolve the question, representatives

of the two companies worked out an agree~-

ment providing (1) that the parties would

exchange proof of priority and that the

prevailing party would grant a non-

exclusive license to the other in consid-

eration of a fixed royalty; (2) that

Cyanamid would grant Pfizer a non-exclusive

license to produce Aureomycin for use in

tetracycline production; and (3) that

Cyanamid would sell to Pfizer an initial

quantity of bulk tetracycline so that

Pfizer might immediately enter the tetra~

cycline market. After an exchange of

proofs relative to the discovery Cyanamid

conceded priority to Pfizer and, upcn

this concession, the Patent Office ter-

minated the interference.

In the meantime, Bristol continued the

prosecution of its Heinemann application,

and in March of 1954 the Examiner declared

a second interference between the

Heinemann, Conover and Cyanamid's Minieri

applications. The interference proceed-

ing continued until October 14,

A-10

1954, on which date the Examiner dissolved

the interference, primarily on the ground

that tetracycline was unpatentable over the

prior art as disclosed in Cyanamid's Duggar

and Niedercorn patents because tetracycline,

as well as Aureomycin, appeared to be co-

produced in fermentation processes disclosed

by those two prior patents. Thereafter, in

November of 1954 the Examiner issued rejections

on all of the claims in the Conover, Minieri

and Heinemann applications. Following this

dissolution of the second interference Pfizer

continued the ex parte prosecution of the

Conover application and endeavored to convince

Examiner Lidoff that he was in error. Subse-

quently, Lidoff requested Pfizer to run tests

on “Example 28: which was one of the forty-

four samples of media contained in the

Niedercorn patent. Pfizer conducted the tests

to determine whether tetracycline could be

recovered from "Example 28" using the recovery

procedures described in the Bogert-Walsh,>

Minieri and Heinemann applications.

5. The Bogert-Walsh application was filed by

Pfizer in April of 1954 and dealt with the

separation of tetracycline from chlortetra-

cycline in fermentation broths and other aqueous

solutions.

A-11

Based upon these tests Pfizer submitted

affidavits to the Examiner, reporting

that efforts to recover products clearly

identifiable as tetracycline from the

"Example 28" fermentation broths were

unsuccessful. Following the submission of

further information by Pfizer, Examiner

Lidoff withdrew his previous rejection and

allowed the Conover application. The

patent on tetracycline and the

deschlorination process was issued to

Pfizer on January ll, 1955.

-I-

As heretofore stated, the controversy

relative to the procurement: and use of the

Conover patent by Pfizer first surfaced in

a proceeding before the Federal Trade

Commission in 1958, charging the five

defendants in the present case with

violations of Section 5 of the Federal

A-12

Trade Commission Act, 15 U.S.C. §45.° the

Commission's complaint alleged, among other

things, that Pfizer had made false and mis-

leading statements to the Patent Office

for the purpose of inducing the issuance of

the Conover patent, and that Cyaiiamid and

Bristol had withheld material information

from the Patent Office in the course of the

prosecution of their patent applications.

It further charged that Pfizer, Cyanamid,

Bristol, Squibb and Upjohn had violated

the Act by maintaining arbitrary prices

through a conspiracy and combination, and by

restraining and eliminating competition in

the sale of antibiotics. The Hearing Examiner

initially found in favor of the drug companies

on all issues and dismissed the complaint.

However, the Commission reversed the Hearing

Examiner and determined that Pfizer and

Cyanamid were guilty of a fraud

6. 15 U.S.C. §45 (a) (1): "Unfai

-C. : r methods

= Fa Sema in commerce, and unfair

eceptive acts or practices i

are declared eniewlei.* pines

15 U.S.C. §45 (a) (6): "The Commission

is empowered and directed to prevent per

sons

partnerships, or corporations *** rth using.

unfair methods of competition in commerce

and unfair or deceptive acts or practices

in commerce."

A-13

on the Patent Office and that they, together

with Bristol, Squibb and Upjohn, were guilty

of price fixing. The Commission issued a

cease and desist order with respect to price

fixing and, additionally, directed Pfizer

to license its tetracycline patent to any

domestic applicant on a two and one-half

per cent royalty basis. Under identical terms

Cyanamid was directed to license its two

Aureomycin patents.

The respondent companies filed a petition

for review in the Court of Appeals of the

Sixth Circuit. ’ After a review of the pro-

ceedings in the Patent Office incident to

the prosecution of the Conover application,

the court stated that "[f]undamental to the

Commission's findings of improper conduct

on the part of Pfizer and Cyanamid is the

question as to what extent previous co-

production of tetracycline in Aureomycin

broths was material to the issuance of the

patent."® The court noted that this involved

numerous questions concerning the actions and

purposes of Examiner Lidoff as representative

of the Patent Office,

7. American Cyanamid Company v. F.T.C., 363

F.2d 757 (6 Cir. 1966).

8. Id., at 777.

, A-14

and concluded that in the absence of his

testimony the decision of the Commission on

this issue was necessarily based upon infer-

ences and speculation insufficient to

constitute substantial evidence. Accordingly,

the entire proceeding was remanded to the

Commission for a de novo hearing, with

directions that the Commission could consider

any evidence previously taken as well as any

additional evidence relevant to the issues.

Upon the remand, the proceeding was

assigned to a new Hearing Examiner and the

testimony of Examiner Lidoff and two witnesses

for Pfizer was taken. The Hearing Examiner

found that representatives of both Pfizer and

Cyanamid had made false and misleading state-

ments to the Patent Office which induced the

issuance of the Conover patent, and that such

conduct constituted an unfair method of —

competition within the meaning of the Federal

Trade Commission Act. The Commission adopted

the findings and conclusions of the Hearing

Examiner relative to the patent issue, but

dismissed the charge of price fixing by an

equally divided vote. The Commission's order

again required Pfizer and Cyanamid to grant

non-discriminatory =.

A-15

licenses under their patents for tetra-

cycline and Aureomycin.

Upon petition for review the Sixth .

Circuit held that the Commission's

findings were supported by substantial

evidence and affirmed and eaforced its

order.” The court noted the sharp

disagreement between Pfizer's witnesses

and Examiner Lidoff with respect to the

tests which had been conducted by Pfizer

on Niedercorn "Example 28". Pfizer took

the position before the Commission ( as

it did in the present litigation) that

Lidoff was interested only in “appreciable"

and “recoverable” amounts of tetracycline,

but Lidoff testified that he did not con-

sider either the proportion or the amount

to be the significant factor. Pfizer

further contended that if Lidoff was in-

terested in mere trace amounts, he failed to

convey that fact to Pfizer's representatives

and, accordingly, they were not guilty of

any misrepresentation. The court held,

however, chat there was substantial evidence

to support the conclusion of the Commission

that the Patent Office records were

sufficient to put both Cyanamid and Pfizer

9. Charles Pfizer & Co. v. F.T.C., 401 F.2d

574 (6 Cir. 1968).

A-16

on notice that Lidoff was interested in

ascertaining whether any tetracycline was

inherently produced in the Aureomycin

broths. 29

The complaint in the present case was

filed in January of 1969, and thereafter

the parties engaged in extensive discovery

proceedings which focused primarily on the

patent aspect of the litigation. In July of

1973, shortly prior to trial, the plaintiff

filed a motion for partial summary judgment

against Pfizer and Cyanamid on the issue

that the Conover patent had been granted as

a result of the false and misleading state-

ments which had been made to Patent Examiner

Lidoff. The basis for the motion was that

this precise factual issue had been pre-

viously adjudicated by the Federal Trade

Commission in the proceedings hereinabove

set forth, and that Pfizer and Cyanamid

should be collaterally estopped from relit-

igating the issue in the present case. In

pressing its motion, the plaintiff contended

that Blonder-Tongue v.

10. The review statute, 15 U.S.C. §45(e),

provides:

"The findings of the Commission as

to the facts, if supported by

evidence, shall be conclusive."

A-17

University Foundation, 402 U.S. 313 (1971),

had discarded the doctrine of mutuality of

estoppel, and that under Zdanok v. Glidden

Co., 327 F.2d 944 (2 Cir. 1964), and United

States v. United Airlines, Inc., 216 F.Supp.

709 (E.D. Wash. & Nev. 1962), aff'd as to

res judicata, sub nom., United Airlines v.

Wiener, 335 F.2d 379 (9 Cir. 1964), it was

entitled to use the Commission's decision

offensively against Pfizer and Cyanamid.

The district court, in denying the motion,

rejected plaintiff's argument that the

doctrine of collateral estoppel as recog-

nized in Blonder-Tongue should be extended

to cover its use offensively by an antitrust

plaintiff against a patentee.

The question before the Court in Blonder-

Tongue was whether the doctrine of mutuality

of estoppel which it had applied in Triplett

v. Lowell, 297 U.S. 638 (1936), was “a viable

rule where a patentee seeks to relitigate the

validity of a patent once a federal court

has declared it to be invalia.*24 Upon the

narrow issue before it the Court concluded

"that Triplett should be overruled

11. 402 U.S. 313, at 327.

A-18

to the extent it foreclosed a plea of

estoppel by one facing a charge of in-

fringement of a patent that has once been

declared invalia. "+4 Since the validity

vel non of the Conover patent was not

directly in issue in the proceedings before

the Commission??

or in the court below, the

precise holding of Blonder-Tongue is not

dispositive of the question raised by the

plaintiff's motion. This is of little

moment, however, since the plaintiff's

motion should properly be considered in the

light of the fundamental change and develop-

ment of the doctrine of collateral estoppel

in the courts which was thoroughly reviewed

and analyzed‘ by Mr. Justice White in his

opinion in Blonder-Tongue.

The landmark case is, of course, Bernard

v. Bank of America Nat. Trust & Savings Assn.,

19 Cal.2d 807,

12. Id., at 350.

13. "The Commission did not undertake to pass

upon the validity of the patent nor do we.

Tne order of the Commission treats the

patent as valid and requires compulsory

licensing. The issue here is a violation

of section 5 of the Federal Trade Commission

Act, not the validity of a patent." Chas.

Pfizer & Co. v. F.T.C., 401 F.2d 574, 586

(6 Cir. 1968).

A-19

122 P.2d 892 (1942), in which Justice Traynor

rejected the doctrine of mutuality and stated

the criteria as follows:

"In determining the validity of

a plea of res judicata three

questions are pertinent: Was the

issue decided in the prior adjudi-

cation identical with the one pre-

sented in the action in question?

Was there a final judgment on the

merits? Was the party against

whom the plea is asserted a party

or in privity with a party to the

prior adjudication?" 19 Cal. 2d,

at 813, 122 P.2d, at 895.

In the wake of Bernard, the great majority of

the courts, both state and federal, elected

to jettison the mutuality requirement,

especially where the prior judgment was in-

voked defensively. This abrogation of

mutuality engendered what Mr. Justice White

characterized as “mutations in estoppel

doctrine" which have resulted in a much more

flexible application of this once narrow and

restricted concept. Typical of this more

liberal approach is Eisel v. Columbia Packing

Company, 181 F.Supp. 298, 301 (D.Mass. 1960),

where Judge Wyzanski stated:

“where a plea of collateral estoppel

is raised against a plaintiff who

had a full trial in a prior action,

the decisive question is not wheher

there is mutuality of estoppel. Nor

is the decisive question whether

there is technical privity between

the second defendant and the first

defend-

A-20 | A-21

ant. Instead of such wooden tests, mission's conclusions. The issue before the

inquiries should be made as to C

whether plaintiff had a fair Commission was whether the sa etmnanratens in

opportunity to procedurally, sub- that proceeding were guilty of unfair methods

Soman eae ae to of competition in violation of Section 5 of

aim "

e first time. the Federal Trade Commission Act which is a

This rationale was adopted in our own circuit regu’atory statute much broader in its scope

in Graves v. Associated Transport, Inc., 344 than the Clayton and Sherman Acts under

F.2d 894, 900 (1965): . which the present litigation was instituted.

"The courts *** have willingly The Commission did not require that the

inquired into the circumstances alleged fraud on the Patent Office be

of the actual case, and time and 14

again they have allowed the plea demonstrated by clear and convincing evidence

Pe pee pe gy te having the and employed evidentiary and procedural rules

iative in e former action

whenever they have been satisfied much more lenient than those incident to a

that the party against whom the judicial trial. While we are not disposed

former judgment was invoked in to hold that an administrative proceeding

fact had a realistically full and

fair opportunity to litigate the can never be the basis for a plea of col-

issues in the former action." lateral estoppel, we do not think it would

Appraised in the light of Eisel and Graves, be appropriate to accord such effect to the

however, we think the plaintiff's motion was Commission's Section 5 proceeding in the

properly denied since, in our opinion, the present case.*>

proceeding before the Commission did not

afford Pfizer and Cyanamid a "fair opportunity

14. The parties concede that the "clear and

convincing" standard applies to this issue.

procedurally, substantively and evidentially" See Schnadig Corporation v. Gaines Manu~

to litigate the issue raised in the present a Co., Inc., 494 F.2d 383, 393 (6 Cir

case. First cf all, the case before the 15. In support of its contention that the

Commission was an administrative proceeding, adninistretive pepetsios 56 Se it

+4 , collateral esti 1 effect, the plaintiff

not a judicial trial, and while the Sixth cites United states Vv. Willard Tablet Co.,

141 F.2d 141 (7 Cir 1944), and United States

Circuit put its imprimatur upon the Commission's v. Piuma, 40 F.Supp. 119 (S.D. Cal. 1941)

. . . , . - . + 7

determination, the court, acting under the These cases are inapposite since they bee A .

i | me roc i h of whic

review eae merely found that there was roontgen Bemgpee ew 5 Doplied the provisions of

substantial evidence to support the Com- 45 U.S.C. 45(g) gqverning the finality of

- the Commission's orders.

A-22

We agree with the observation of the court

in United States v. Chas. Pfizer & Co.,

205 F.Supp. 94, 96 (S.D. N.Y. 1962):

"The legal concepts and issues are

quite different. The Federal Trade

Commission is regulatory in nature;

the Sherman Act is penal as well as

civil; the consequences flowing from

each Act are quite dissimilar. The

proceedings themselves, the rules

governing them and the legal principles

applicable to each are distinct."

Our conclusion on this point is buttressed

by the fact that by the very terms of the

Federal Trade Commission Act, proceedings

under Section 5 appear to be incompatible with

the doctrine of collateral estoppel. Section

5(e)1® of the Act reads:

"No order of the Commission or judgment

of the court to enforce the same shall

in any wise relieve or absolve any

person, partnership, or corporation,

from any liability under the antitrust

acts."

It would be strangely unfair to permit the

Government to litigate under the Sherman or

Clayton Acts an issue earlier decided against

it in a Section 5 proceeding, and at the same

time deny to a respondent the right to defend

on the same issues in a subsequent antitrust

suit brought |

16. 15 U.S@&€. §45(e).

A-23

by a plaintiff who was not even a party to

the administrative proceeding. We further

note that Section 5(a) of the Clayton Act

provides, in effect, the* a final judgment

or decree rendered in any civil or criminal

proceeding brought by or on behalf of the

United States under the antitrust laws to

the effect that a defendant has violated

such laws shall be prima facie evidence

agair< the defendant in any action or

proc» ing brought by any other party or the

United States as to all matters respecting

which such judgment or decree would be an

estoppel as between the parties thereto. To

us it would be paradoxical to accord a

Section 5 administrative proceeding the

absolute effect of collateral estoppel when

a court determination in a criminal action

that a defendant had violated the Sherman

Act is limited to only prima facie effect.

Accordingly, we conclude that the district

court acted properly in denying the plain-

tiff's summary motion.

17. 15 U.S.C. §16(a).

A-24 A-25

interviews incident to the Conover applica-

tion, and stated the basis of his testimony

as follows:

"{A]nything that I say as having re-

called something is really a recon-

should be set aside. We are persuaded struction in my mind based on what

recent review of the record I have

had, which has not been in any detail.

recall one thing or another. But I can

reconstruct what my view would have

In addition to the collateral estoppel

issue the plaintiff urges that the findings

of the trial court on the operative issues

in this case were clearly erroneous and

otherwise.

focus upon the deposition of the Patent

Examiner, Lidoff, and they are in agreement been at that time."

that his testimony was crucial on this point 28 Upon this basis Lidoff adhered to his posi-

Lidoff testified that if he had known that tion that he considered the presence of any

tetracycline was inherently co-produced along tetracycline in the experimental broths to

with Aureomycin in the practice of the . be significant on the question of patenta-

Duggar and Niedercorn patents he would have bility. This, of course, was at variance

rejected the Conover application. However, with Pfizer's contention that Lidoff was

he candidly admitted that he could not recall interested only in the presence of appre-

what was actually said in the various ciable and recoverable amounts of tetracycline.

Upon this conflict the district court

found the record supportive of Pfizer's

18. Although the district court overruled

- 7 we ~ «pan objection to the admissibility position. Among other things, an amendment

of Lido s testimony, it recognized that :

there was a serious question on this point. filed in the Patent Office on November 29,

S4i)e we States v. Morgan, 313 U.S. 409 1954, following a meeting with Lidoff stated:

(1941); W.R. Grace & Co. v. Park Manufacturing " kee j

Company, 378 F.Supp. 976 (E.D. Ill. 1974); He [Lidoff] is not concerned about trace

cf. American Cyanamid Company v. F.T.C., 363 amounts which can be separated from the

F.2d 757, 779 (6 Cir. 1966). broths by methods now recommended for re-

- covery of the new antibiotic." The district

court further noted that the

A-26

presence of some tetracycline in Aureomycin

broths was known by scientists at the time

the Conover patent was being processed, and

was disclosed by documents in patent appli-

cations which were then pending before

Examiner Lidoff, including a certificate

filed by Pfizer's Dr. Bogert. In consider-

ing the probative force of Lidoff's testi-

mony, the court also had before it the testi-

mony of four patent experts and several

patent attorneys to the effect that prior

accidental and unrecognized co-production of

trace amounts of tetracycline with Aureomycin

would not render Pfizer's claim to tetra-

cycline unpatentable. This testimony sup-

ported Pfizer's contention that neither its

patent counsel nor Lidoff considered trace

amounts of tetracycline significant. Based

upon a careful review of the evidence bear-

ing on this issue, the district judge con-

cluded that the plaintiff had failed to

establish its charge of fraud on the Patent

Office, stating that, at best, it disclosed

only a misunderstanding between Pfizer's

representatives and Lidoff.

On the charge that the defendants had en-

gaged ir a conspiracy to exclude competition

and monopolize

A-27

the tetracycline market, the plaintiff placed

considerable reliance upon the settlement of

the patent interference between Pfizer and

Cyanamid. The district court's rejection of

the plaintiff's contention that this was

convincing evidence of conspiratorial con-

duct is supported by Judge Dobie's obser-

vation in Hutzler Bros. Co. v. Sales Affili-

ates, Inc., 164 F.2d 260 (4 Cir. 1947):

"We cannot attach, as defendants

seem to suggest, any ulterior motives,

or any improper conduct, to plaintiffs

in connection with the agreed settle-

ment with Bohemen in the interference

proceedings. Had the interference

proceedings been prosecuted to final

judgment, this would have unquestion-

ably delayed the granting of the

patent in suit.”

164 F.2d at 267.

On these issues, as well as the charge of

price fixing, the district court found that

the actions of the defendants were consistent

with the lawful exercise of sound business

judgment. The court's review of the pricing

policies of the defendants and other drug

manufacturers, as well as the trend of mar-

ket prices during the years in question sup-

port its findings on these issues. "The

antitrust laws were not meant to

. oo

A-28

prohibit businessmen from adopting sound

business policies merely because competitors

had already adopted the same or similar

policy."??

Upor. this appeal "[i]t is not enough that

we might give the facts another construction,

resolve the ambiguities differently and find

a more sinister cast to actions which the

district court apparently deemed innocent.

*** We are not given those choices because

our mandate is not to set aside findings of ©

faét ‘unless clearly erroneous'.”" United

States v. Real Estate Boards, 339 U.S. 485,

495 (1950). Since we conclude that the

findings of the district judge were not

clearly erroneous, the judgment below is

affirmed.

AFFIRMED

19. Independent Iron Works, Inc., v. United

States Steel Corp., 177 F.Supp. 743,

747 (N.D. Cal. 1959), aff'd 322 F.2d

656 (9 Cir. 1963), cert. denied, 375

U.S. 922 (1963).

A-29

UNITED STATES COURT OF APPEALS

For The Fourth Circuit

No. 74-2154

THE STATE OF NORTH CAROLINA,

Appellant,

versus

CHAS. PFIZER & CO., INC.,

AMERICAN CYANAMID COMPANY,

BRISTOL~MYERS COMPANY -

OLIN MATHIESON CHEMICAL CORPORATION

and THE UPJOHN COMPANY,

Appellees.

Appeal from the United States District

Court for the Eastern District of North

Carolina, at Raleigh

Upon consideration of the appellant's

motion to extend the time to file a petition

for rehearing and suggestion for rehearing en

banc to February 26, 1976, by counsel,

IT IS ORDERED that the motion is granted.

FILED FOR THE COURT - BY

DIRECTION

JAN 27 1976

WILLIAM K. SLATE, II

CLERK s/s William K. Slate, II

A-30

UNITED STATES COURT OF APPEALS

For The Fourth Circuit

No. 74-2154

THE STATE OF NORTH CAROLINA, :

Appellant,

versus

CHAS. PFIZER & CO., INC.,

AMERICAN CYANAMID COMPANY,

BRISTOL~MYERS COMPANY -

OLIN MATHIESON CHEMICAL CORPORATION

and THE UPJOHN COMPANY,

Appellees.

Appeal from the United States District

Court for the Eastern District of North

Carolina, at Raleigh

Upon consideration of the Petition for Re-

hearing and Suggestion for Rehearing in banc

filed on February 26, 1976, by the appel-

lant, The State of North Carolina;

Now, therefore, with the concurrence and

approval of the other members of the panel

and in the absence of a request for a poll

A-31

of the entire court, as provided by Appel-

late Rule 35(b),

It is ADJUDGED and ORDERED that the

petition for rehearing is denied.

s/s John A. Field, Jr.

United States Circuit Judge

FILED

MAR 15 1976

WILLIAM K. SLATE, II

CLERK

A-32

UNITED STATES COURT OF APPEALS

For The Fourth Circuit

No. 74-2154

THE STATE OF NORTH CAROLINA,

Appellant,

versus

CHAS. PFIZER & CO., INC.,

AMERICAN CYANAMID COMPANY,

BRISTOL~MYERS COMPANY -

OLIN MATHIESON CHEMICAL CORPORATION

and THE UPJOHN COMPANY,

Appellees.

Appeal from the United States District

Court for the Eastern District of North

Carolina, at Raleigh

Upon motion of the appellant, by

counsel and for cause shown,

IT IS ORDERED that the mandate in the

above-entitled case be, and it is hereby,

stayed pending application of the appel-

lant in the Supreme Court of the United

States for a writ of certiorari to this

Court, provided the application is filed

A-33

within the time permitted by law.

For the Court - by Direction.

/s/ William kK. Slate, II

FILED

MAR 18 1976

WILLIAM K. SLATE, II

CLERK

APPENDIX B

B- =

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN CISTRICT OF NORTH CAROLINA

RALEIGH DIVISION

THE STATE OF NORTH CAROLINA,

Plaintiff

CHAS. PFIZER & CO., INC.,

AMERICAN CYANAMID COMPANY,

BRISTOL-MYERS COMPANY, OLIN

MATHIESON CHEMICAL CORPORA-

TION and THE UPJOHN COMPANY, )

)

Defendants)

e*entee_etrte#e,retrrie#tre#reetre_ee-_e#eereretkrere#®t

)

vs. ) CIVIL NO. 2287

)

PLAINTIFF'S FIRST AMENDED COMPLAINT

s*#e*# eee eeeeeeee ee eane

By leave of Court, plaintiff files its first

amended complaint as follows:

18. The foregoing monopoly, conspiracy to

monopolize, attempt to monopolize, and combination,

conspiracy, and agreement in restraint of inter-

state and foreign trade and commerce was carried on

and consummated by the following means and methods,

among others:

A. Cyanamid licensed Pfizer and Bristol to use

B- 2

its Aureomycin patent in the manufacture of

Tetracycline and refused to license all other

applicants in the United States.

B. Pfizer licensed Cyanamid and Bristol under

its Tetracycline patent and refused to license

all other applicants in the United States.

C. Cyanamid assisted and cooperated with Pfizer

in obtaining for Pfizer a patent on Tetracycline

by deliberately making false statements to, and

deliberately withholding material information

from, the Patent Office as the presence of

Tetracycline in Chlortetracycline (Aureomycin).

D. Pfizer, Cyanamid, and Bristol suppressed

litigation involving the validity o: Pfizer's

Suasemmehins patent.

E. Pfizer and Cyanamid and Bristol withheld

pertinent and material information from the

Patent Office and otherwise misled the Patent

Office prior to the issuance of Pfizer's Tetracy-

cline patent.

F. Cyanamid acquired a competing patent applica-

tion on Tetracycline and abandoned the product

claim therein.

a-. 3

G. Bristol sold bulk Tetracycline in the United

States only to Upjohn and Squibb. Pfizer, Cyanamid,

and Bristol refused to séll bulk Tetracycline to all

others in the United States except that Cyanamid

sold a large amount of bulk Tetracycline to Pfizer

in early 1954 in assisting Pfizer to make a prompt

entry into the Tetracy¢line product market .

H. Bristol entered into agreements with Upjohn

and Squibb respectively which required Upjohn and

Squibb to purchase all their United States re- |

quirements of bulk Tetracycline from Bristol.

I. Pfizer issed licenses to Upjohn and Squibb,

respectively, limited at Bristol's request, to

the sale of Tetracycline products.

J. Pfizer and Cyanamid maintained substantially

identical, non-competitive and unreasonably high

prices on Terramycin products and Aureomycin pro-

ducts, respectively.

K. Pfizer, Cyanamid, Bristol, Upjohn and Squibb

each introduced its Tetracycline products on the

market at unreasonably high prices substantially

identical with each other and with Aureomycin and

Terramycin products and maintained such unrea-

B- 4

sonably high, substantially identical and non-

competitive prices.

L. Pfizer, Cyanamid, Bristol, Upjohn and Squibb

each introduced its Tetracycline products on the

market in dosage forms and customer classifica-

tions substantially identical with the Terramycin

product and Aureomycin product dosage forms and

customer classifications in effect as of November

1953, and for somet ze thereafter contined [sic]

to use each substantially identical dosage forms

and classifications.

M. U. S. Patent Number 2,699,054 (The Conover

Patent on the product tetracycline) was in fact

procured by knowing and willful fraud practiced

by defendants Pfizer and Cyanamid on the Patent

Office by the following methods and means, among

others:

(1) Both Pfizer's and Cyanamid's duly autho-

rized representatives, acting within the course

and scope of the authority of their offices

and duties in prosecuting each of their re-

spective company's applications for a patent

on tetracycline during the period July, 1953,

through January 11, 1955, did misrepresent

B- 5

facts to, and conceal facts from the U. S.

Patent Office in that each:

(a) Affirmatively made representations of

facts regarding inherent coproduction of

tetracycline with the production of chlor-

| tetracycline, to wit: that tetracycline was

not inherently coproduced with the production

of chlortetracycline when they were aware or

should have been aware that, in truth and

fact, tetracycline was inherently coproduced

with the production of chlortetracycline.

(b) Ignoring their duty to disclose, they

withheld and concealed facts in their posses-

sion regarding the inherent coproduction of

tetracycline with the production of chlor-

tetracycline, to wits defendants positively

knew that tetracycline was inherently co-

produced with the production of chlortetra-

cycline and proof of such facts was in their

possession during the period October, 1953

through January 11, 1955.

fact that tetracycline was not present in

B- 6

chlortetracycline products which had been

sold in commerce for more than one year prior

to either of Pfizer's or Cyanamid's applica-

tions for a patent on the product tetracy~

cline, when in truth and fact each knew of

the presence of eotrecreline in chlortetracy~

cline products which had been sold in commerce

for more than a year prior to either of

Pfizer's or Cyanamid's said applications.

(a4) Ignoring their duty to disclose, they

withheld and concealed facts in their posses-

sion that tetracycline was present in chlor-

tetracycline products which had been sold in

commerce more than one year prior to either

of Pfizer's or Cyanamid's application for a

patent on tetracycline.

(2) The misrepresented facts, and those facts

which were concealed, were material to the

Patent Examiner in his consideration and deter-

mination of the patentability of the product

tetracycline.

(3) The misrepresentations of facts were made

with knowledge of their falsity or in culpable

B- 7

ignorance of the truth of the statements made;

and the acts of concealing those facts which

were not disclosed were done with knowledge of

the erroneous conclusions of fact to be drawn

by one without knowledge of such facts.

(4) The misrepresentations of the facts made,

and the concealing of those facts which were

concealed, were done with the intent that the

misrepresented facts and the absence of the

facts concealed should be relied upon by the

Patent Examiner in his consideration and deter-

mination of the patentability of the product

tetracycline.

(5) The Patent Examiner did rely upon the mis-

representations of facts and the absence of the

facts concealed by Pfizer and Cyanamid in his

consideration and determination of the paten-

tability of the product tetracycline.

(6) The reliance by the Patent Examiner upon

the misrepresented facts and the absence of

the facts concealed by Pfizer and Cyanamid was

the operative cause of the Patent Examiner to

have the U. S&S. Patent Office issue a patent on

the product tetracycline to Pfizer, which other-

B- 68

wise he would not have done.

(7) Pfizer enforced a monopoly power through

its patent number 2,699,054 to the injury of.

plaintiff and continued to assert such power

at least until the fall of 1966.

Plaintiff asserts a plea of collateral estoppel

against defendants Pfizer and Cyanamid as a bar

against their denying the foregoing allegations on

the ground the same have been previously fully,

fairly and finally adjudicated in FTC Dkt. #7211

and affirmed on appeal as reported in 401 F. 2d

574 (6th Cir. 1968), cert. denied, 394 U.S. 920

(1969).

N. Defendant Pfizer enforced the aforesaid patent

with knowledge of the fraudulent manner in which

it was acquired and through numerous legal actions

instituted under the Conover patent suppressed

competition in the production and marketing of

Tetracycline and all of the entire broad spectrum

antibiotics, thereby violating the Sherman Act as

amended by the Clayton Act.

O. Defendants Cyanamid, Bristol, Squibb, and

Upjohn accepted licenses under the Conover patent

with knowledge of the fraudulent manner in which

it was obtained and enforced the said patent and

g- 9

licenses thereby suppressing competition in the

production and marketing of Tetracycline and all

other broad spectrum antibiotics, thereby violating

the Sherman Act as amended by the Clayton Act.

e* e+ &

This the 5th day of October, 1973.

ROBERT MORGAN

Attorney General of North Carolina

{s/ Jean A. Benoy

Jean A. Benoy

Deputy Attorney General

N. C. Department of Justice

P. O. Box 629

Raleigh, North Carolina 27602

Telephone: (919) 829-3786

Dated: October 5, 1973

b- |0

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

RALEIGH DIVISION

STATE OF NORTH CAROLINA, :

Plaintiff,

Vv CIVIL NO. 2287

CHAS. PFIZER & CO., INC., ,

AMERICAN CYANAMID COMPANY, ~*

BRISTOL-MYERS COMPANY,

OLIN MATHIESON CHEMICAL

CORPORATION, and

THE UPJOHN COMPANY,

Defendants.

PRE-TRIAL CONFERENCE AND

MOTIONS HEARD BEFORE

HONORABLE FRANKLIN T. DUPREE, JR.,

U. S. DISTRICT JUDGE

AT RALEIGH

JULY 24, 1973

b= J]

zs er a

That leaves plaintiff's motion for partial

summary judgment and as to that, in the absence

of more definite authority on the offensive use

of the doctrine of collateral estoppel in the

context ‘of an FTC proceeding or of an administra-

tive agency, except where there may be some statute

or rule which would make a difference, that I should

apply it in this case. Here again, I think this

question might very well be the subject of substan-

tial difference of opinion and I would make a cer-

tification under Sec. 1292(b) with respect to this

question, too.

enreaerk

B- |2

CERTIFICATE

I, Elizabeth Overby, Official Court

Reporter, hereby certify that I reported and

transcribed the hearing held in the above-captioned

cause on July 24, 1973, at Raleigh, and that the

foregoing 192 pages are a‘true and accurate tran~

script thereof.

This July 30, 1973:

s/s Elizabeth Overby

cial Court Reporter

P.O. Box 30101

Raleigh, N. C. 27612

o~- 43

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

RALEIGH DIVISION

THE STATE OF NORTH CAROLINA,

)

Plaintiff ) CIVIL NO. 2287

)

vs. ) ORDER ON FINAL

) PRE-TRIAL CONFER-

CHAS. PFIZER & CO., INC., )

)

AMERICAN CYANAMID COMPANY, et al.,

ENCE and RULINGS

ON MOTIONS

Defendants

At the final pre-trial conference held on

July 24, 1973, action was taken and rulings were made

as follows:

e* *& & &

5. Plaintiff's motion for partial summary judg-

ment against defendants Pfizer and Cyanamid on the

question of the alleged fraud of these defendants

in the procurement of U. S. Patent No. 2,699,054

(the Conover patent on the product Tetracycline) is

denied.

6. The court is of opinion that this order

with respect to the rulings on the foregoing motions

of the defendants relating to standing and consumer

class action and the motion of the plaintiff for

partial summary judgment involve controlling ques-

B- 14

tions of le as to which there is substantial

ground for difference of opinion, and an immediate

appeal from this order may materially advance the

ultimate termination of this litigation. Unless

so ordered by the Court of Appeals or a judge

thereof, however, an application for an appeai

from this order shall not stay the trial of this

action presently scheduled to commence on July 30,

1973.

zx**eekee

F. T. DUPREE, JR.

UNITED STATES DISTRICT JUDGE

July 25, i973.

B-15 ~

In Re Coordinated Pretrial Proceedings

in Antibiotic Antitrust Actions.

U. S. District Court, Southern District

of New York. M19-93A and the following

actions: All cases. Filed August 2, 1971.

Opinion and Order Applicability of Sections

5(a) and 5(b) of the Clayton Act.

Lord, D. J.: The questions now before

the Court concern the effect of the Govern-

ment's pyior proceedings against these de-

fendants™ on the present private treble

damage actions. More specifically, the

questions are whether, pursuant to $5 (b)

of the Clayton Act, 15 U.S.C. §16(b)“ the

prior proceedings tolled the running of

the four-year statute of limitations, §4B

of the Clayton Act, 15 U.S.C. §15b, and

whether, pursuant to g5 (a) of the Clayton

Act, 15 U.S.C. §16(a)~, the judgment in one

of those proceedings is entitled to prima

facie effect in these actions.

The defendants are the American Cyanamid

Co., Bristol-Myers Co., Pfizer, Inc., Squibb

Beech-Nut, Inc. and Olin Corp., and The Up-

john Co.

2 section 5(b) states:

Whenever any civil or criminal proceed-

ing is instituted by the United States to

prevent, restrain, or punish violations of

any of the anti-trust laws, but not includ-

ing an action under section 15a of this

title, the running of the statute of limi-

tations in respect of every private right of

action arising under said laws and based in

whole or in part on any matter complained

of in said proceeding shall be suspended

~- pede:

B-16

during the pendency thereof and for one year

thereafter: Provided, however, That when-

ever the running of the statute of limita-

tions in respect of a cause of action aris-~

ing under section 15 of this title is sus-

pended hereunder any acticn to enforce such

cause of action shall be forever barred un-

less commenced either within the period or

suspension or within four years after the

cause of action accrued.

3 section 5(a) states:

A final judgment or decree heretofore or

hereafter rendered in any civil or criminal

proceeding brought by or on behalf of the

United States under the antitrust laws to

the effect that a defendant has violated

said laws shall be prima facie evidence

against such defendant in any action or pro-.

ceeding brought by any other party against

such defendant under said laws or by the

United States under section 15a of this

title, as to all matters respecting which

said judgment or decree would be an estoppel

as between the parties thereto: Provided,

That this section shall not apply to consent

judgments or decress entered before any

testimony has been taken or to judgments or

decrees entered in actions under section 5a

of this title.

B-17

The. decision of these questions requires

a familiarity with the facts of the prior

proceedings. After initial studies of one

defendant's pricing policies on a specific

product ,and of the antibiotic industry in

genera, the Federal Trade Commission issu-

ed a complaint on July 28, 1958, charging

all five of the defendants with violations

of Section 5 of the Federal Trade Commis-

sion Act, 15 U.S.C. §45, in connection with

the sale of antibiotics. The Commission's

initial decision finding all five defend-

ants to have violated §5 was reversed on

appeal. AMERICAN CYANAMID CO. v PTC

[1966 Trade Cases 471,307], 363 F 2d 757

(6th Cir. 1966). On remand, the Commis-

sion found that two of the defendants,

Pfizer and Cyanamid, had violated Sec-

tion 5 and this result was affirmed by the

Court of Appeals for the Sixth Circuit.

CHAS. PFIZER & CO. v FPC [1968 Trade Cases

472,580). 401 F. 2d 574 (6th Cir. 1968.

The Commission investigated Pfizer's

pricing policies on Terramycin from 1951 to

1955 and conducted an investigation of the

antibiotics industry which resulted in an

"Economic Report on Antibiotics Manufac-

ture", issued in June of 1958

B-18

In the meantime an indictment was return-

ed on August 17, 1961 against three of

these defendan*+s,~ naming the other two as

co-conspirators, charging violations of sec-

tions 1 and 2 of the Sherman Act, 15 U.S.C.

§§l, 2. After trial to a jury, the verdict

of guilty on all counts as to all three de-

fendants was reversed on appeal, UNITED

STATES v PFIZER [1970 Trade Cases 473,149],

426 F. 2d 32, modified [1971 Trade Cases

473,405], F. 2d (2d Cir. 1970).

Certiorari has now been granted. UNITED

STATES v CHAS. PFIZER & CO., 39 U.S.L.W.

3486 (April 26, 1971).

Tolling of the Statute

The defendants apparently concede that in

all cases byt the farm cases and the for-

eign cases,

ed on the prior Government actions, the

statute of limitations was tolled by the

American Cyanamid, Pfizer and Bristol-

Myers.

By the term "farm" cases, the Court un-

derstands the defendants to be referring to

those cases in which claims arising from

the purchase of broad spectrum antibiotics

for non-human use are asserted. These

claims are now presented within the frame-

work of three separate class actions: MID-

WEST VETERINARY SUPPLY, INC. v AMERICAN

CYANAMID CO., 69 Civ. 1558 (purchasers of

broad spectrum antibiotics for nonhuman use

which they contend are not bas~

B-19

directly from defendants or in the same form

as originally sold by defendants). By the

term "foreign cases", the Court understands

the defendants to be referring to two

actions: REPUBLIC OV VIET NAM v CHAS.

PFIZER & CO., 70 Civ. 877; STATE OR KUWAIT

v CHAS PFIZER & CO. 69 Civ. 4091. The

fact that certain other cases, such as the

actions by seven states and the competitor

cases, may assert foreign or farm claims

gives further support to the court's read-

ing of the plaintiff's Pretrial Brief,

advanced infra.

B-20

institution of the criminal action in 1961

They contend, however, that the earlier FTC

proceeding could not and did not toll the

statute in any case.

A. THE FTC PROCEEDINGS

The defendants argue that since the prior

FTC proceeding in this case was pursuant to

§ 5 of the FTC Act and since that section

is not one of the “antitrust laws" as de-

fined by § 1 of the Clayton Act, 15 U.S.C.

8 12, Nashville Milk Co. v. Carnation Co.

[1958 TRADE CASES 468,915), 355 U.S. 373,

375-76 (1958), the a does not

satisfy the requirements of 8 5(b).

Defendants' argument ignores the fact

that § 5(b), unlike § 5(a), does not re-

quire that the prior action be one “under

the antitrust laws," only that it be one

"to prevent, restrain or punish violations

of any of the antitrust laws. . ." Influ-

enced by this statutory language, two of

the three courts facing this precise

question have held the statute tolled by

FTC proceedings under § 5 of the FTC Act

where the purpose of those proceedings was

"to prevent, restrain, or punish" viola-

tions of the antitrust laws. Rader v.

Balfour [1971] TRADE CASES 473,521], 440

F. 20 469 (7th Cir. 1971); Lippa's Inc v.

Lenox, Inc. [1969 TRADE CASES 472,955],

305 F. Supp. 182 (D. Vt. 1969), contra,

Laitram Corp. v. Deepsouth Packing Co.

[1968 TRADE CASES 175-3671, 279 F. Supp.

883 (E. D. La. 1968).

It is well-established that § 5 of the

FTC Act includes within its terms a wide

B-21

variety of conduct, including conduct con-

demned by §§1 and 2 of the Sherman Act, 15

U.S.C. §§1, 2, TIMES-PICAYUNE PUB. CO. v

UNITED STATES [1953 Trade Cases 467,494],

345 U.S. 594 (1953); FTC v CEMENT INSTITUTE

[1948-1949 Trade Cases 462,237], 333 U.S. 683

(1948). And it would be as arbitrary, in

terms of the statutory policy of §5(b), to

hold that the tolling effect of a prior

Government action turned on the statute under

which it was initiated as it would be to hold

that tolling depended upon the agency which

initiated the action. MINNESOTA MINING & MFG.

CO. v NEW JERSEY WOOD FINISHING CO. [i965

Trade Cases 471,449], 381 U.S. 311, 320-22

(1965). Although the Supreme Court was not

faced with this problem in 3M since the FTC

action was pursuant to §7 of the Clayton Act,

15 U.S.C. §18, its logic in holding that FTC

proceedings, as well as action initiated by

the Justice Department, could *oll the

statute supports that result reached here.

The determinative factor in each case, then,

is the type of conduct against which the pro-

ceeding is aimed. As was stated in RADER v

BALFOUR, SUPRA. at 473, a §5 FTC Act proceed-

ing "suspends the running of the statute of

limitations if the proceeding is directed

at alleged conduct which appears to involve

an existing or incipient violation of the

antitrust laws." And the character of the

earlier proceeding must be resolved by an

examination of the FTC complaint. Turning

to the earlier complaint against these defend-

ants, a reading of its allegations clearly

establishes that the defendants were charged

with conduct violative of the antitrust laws

Paragraphs 7,8,9 and 19 of the complaint,

B-22

and that the proceeding therefore met the

requirements of §5(b).

B. The Farm and Foreign Cases

As earlier stated, the defendants argue

that the running of the statute was not

tolled in the farm and foreign cases be-

cause they are not "based in whole or in

part on any matter complained of" in the

prior proceedings.® It is settled that the

proper method for determining this question,

at least initially, see RADER v BALFOUR,

SUPRA at 473, is to compare the allegations

of the Government and private complaints.

LEH v GENERAL PETROLEUM CORP. [1965 Trade

Cases 471,593[, 382 U.S. 54, 65 (1965).

And for purposes of deciding this question,

the court will consider the "Preliminary

Pretrial Brief" submitted by the Plaintiff's

National Steering Committee as a pleading

ont. ,

‘s attached to the opinion as Appendix

A, allege the fradulent procurement of the

Conover Patent, the restraint of trade in

antibiotics and the monopolization of that

industry.

8rhe defendants have not contended, and the

Court does not understand them to contend,

that the cases other than the farm and

foreign cases are not based on the prior

proceedings.

B-23

amending the original complaints.

The defendants contend that the farm and

foreign cases involve markets and, to some

extent, products not included in the prior

proceedings. For example, both the FTC

complaint and the criminal indictment are

said to speak only of broad spectrum anti-

biotics for domestic human use. And rely-

ing on later findings and opinions in the

FTC action and the development of the

evidence at the criminal trial, the de-

fendants argue that the focus of those

proceedings was on tetracycline, a product

manufactured predominantly for human use.

Defendants also note that the sale of

B-24

these products in foreign commerce was

investigated by a separate grand jury

almost three years after the return of

the initial indictment and that nogaction

was ever taken by that grand jury.

Accepting the defendants’ character-

ization of the FTC complaint and the crim-

inal indictment, the essence of their

argument is that the Government alleged

antitrust violations only in the domes-

tic human consumption market while the

farm and foreign plaintiffs allege con-

spiracies only in the farm and foreign

markets respectively.

A reading of the Plaintiffs‘ Prelimi-

Pretrial Brief, however, indicates that

the plaintiffs' theory of liability can-

not be so neatly compartmentalized into

foreign and domestic, human and agricul-

tural markets. That brief alleges con-

spiratorial antitrust violations broader

in scope than those alleged by the Govern-

ment - violations which affected both the

farm and human markets and had both domes-

tic and international implications. In

fact, the brief alleges a necessary inter-

relationship between these different as-

pects of the alleged conspiracy. For

example, the plaintiffs allege that one

9The defendants advance the additional

argument that the original complaints in

these cases, which admittedly track the

criminal indictment, evidence a "sham"

reliance on the prior proceedings and

should be disregarded. Leh v. General

Petroleum Corp., supra at 59. Because

the Court interprets the Plaintiffs’

Preliminary Pretrial Brief as an amend-

ment to these complaints and because the

Court has concluded that the actions,

B-25

of the preconditions to the entry of

Bristol, Squibb and Upjohn into the con-

spiracy in all other markets was their

agreement to refrain from the sale of

broad spectrum antibiotics in the farm

market.

Each plaintiff, then, is alleging broad-

er violations of the antitrust laws than

did the Government and the question is

whether they may still claim to be basing

their actions on the prior proceedings.

Although a treble damage plaintiff usu-

ally chooses to incorporate only a part of

the Government case into his complaint,

see, @e.g., Leh v. General Petroleum Corp.,

supra, there is no logical reason why toll-

ing should not also follow where the plain-

tiff incorporates the entire Government

case and alleges more in addition. In both

instances the overlap between the Govern-

ment case and the private allegations sug-

gests that valuable practical benéfits may

flow to the private plaintiff from tolling

the statute. Cf. Zenith Radio Corp. v.

Hazeltine Research, Inc. (1971 Trade Cases

q 73,484), - U.S. - (Feb. 24, 1971). The

Court therefore concludes that the fa) a

and foreign cases, like all other cases

now before the Court, are based in whole

or part on the prior FTC and criminal

action.

The conclusion reached here is in no

way inconsistent with the results reached

in the two cases cited by defendants.

Peto v. Madison Square Garden Corp. (1961

Trade Cases ¥ 72,257), 384 F. 682 (2d Cir.

interpreted in this manner, are based

on the prior proceedings, it is unnecessary

to consider this argument.

B-26

1967); 2361 State Corp. v. Sealy, Inc.

(1967 Trade Cases ¥ 72,063), 263 F. Supp.

845 (N. D. Ill. 1967). In Peto the plain-

tiff alleged monopolization of the pro-

fessional hockey industry by the defend-

ants and claimed the tolling of the statute

of limitations because of a prior Govern-

ment action, United States v. Int‘l Boxing

Club of N. Y., 150 F. Supp. 396, aff'd,

358 U. S. 242 (1959). The Second Circuit

rejected this claim stating that a compari-

son of the claims asserted in the two cases

showed that different conspiracies were re-

ferred to, involving different sports and

covering different periods of time. In

the present case the Plaintiffs' Pretrial

Brief indicates that the same conspiracies

are alleged in the Government and private

cases are concerned with the world-wide

effect of the alleged conspiracy in both

human and agricultural markets.

In 2361 State Corp. v. Scaly, Inc., the

plaintiff, a mattress manufacturer who had

formerly sold to Ward on a local basis,

alleged a conspiracy between Ward and Sealy

to prevent manufacturers, other than parti-

cipants in Sealy's National Accounts Pro-

gram, from selling to Ward. The district

court, sua sponte, considered the applica-

bility of § 5(b) to the case in light of a

prior Government suit challenging certain

territorial and pricing restriction found

in licensing agreements between Sealy and

its licensors. The court noted that the

National Accounts Program assailed by

plaintiff operated "in much the same

fashion" as the license agreements attacked

by the Government. And, significantly for

the present case, the court there stated

B-27

that if plaintiff were claiming injury by

operation of that program, "Section 5(b)

would operate to suspend the statute of

limitations because there is substantial

identity in operation and effect between

the Sealy trademark licensing program

and its national accounts program." Id.

at 851-52. However, plaintiff's theory

of liability did not claim injury by this

program and it was, therefore, not

B-28

entitled to the tolling effect of § 5(b). In

the present case, plaintiffs’ theory of lia-

bility would seem to meet the test which the

plaintiff in 2361 State Corp. failed. They

allege a conspiracy Similar in na‘vre and

operation to that alleged in the earlier

Government actions but they allege that its

effect was not limited to the domestic human

consumption market but extended around the

world and into the agricultural market as

well. The Court must conclude that these pri-

vate actions, including the farm and foreign

cases, are based on the prior Government pro-

ceedings and that the statute of limitations

was, therefore, tolled by the institution of

the FTC action in 1958 and by the return of

the criminal indictment in 1961.

Prima Facie Effect of the FTC Judgment

The second major question before the Court

is whether, under § 5(a) of the Clayton Act,

15 U. S. C. § 16(a), the findings and order

of the FTC Act, 15 U. S. C. § 45, are entitled

to prima facie effect in these treble-damage

actions.10 The Court has concluded that they

are not because the FTC proceeding was not

one “under the antitrust laws," as required

by § 5 (b).

The parties have not argued and the Court

B-29

does not pass on the applicability of the

doctrine of collateral estoppel to these

cases. See, Purex Corp., Ltd. v. Proctor

& Gamble Co. [1970 TRADE CASES 73,178),

- Supp. 584, 589-90 (C. D. Cal. 1970).

In an amicus brief, counsel for certain

hospital patients seeking intervention in

the state class actions argues that § 5 (c)

of the FTC Act, 15 U. S. C. § 45(a) gives

the findings of the FTC conclusive effect

in these actions. The Court can find no

support for this assertion in the legisla-

tive history or case law and rejects it

without further discussion.

——a

B- 30

sections are “governed by different consider-

ations as well as congressional policy

objectives." Id. at 318. § 5(a) is the

more limited of the two, granting prima facie

effect in private actions to a limited cate-

gory of judgments or decrees in prior

Government actions and only to the extent

the judgment or decree would be "an estoppel

as between the parties" to the prior action.

The crucial difference between § 5(a) and

§ 5(b) in the present context is the statu-

tory language noted earlier. § 5(b) requires

only that the prioer action be one "to prevent,

restrain or punish violations of any of the

antitrust laws ..." while § 5 (a) imvoses the

stricter requirement that the judgment or

decree be rendered in a Government proceed-

ing "under the antitrust laws to the effect

that a defendant has violated said laws..."

It is this Court's conclusion that while the

FTC proceeding under § 5 of the FTC Act

relied on by plaintiffs was an action to pre-

vent, restrain or punish violations of the

antitrust laws, it cannot be characterized

as a proceeding “under the antitrust laws"

for purposes of § 5(b) of the Clayton Act.

See Nashville Milk Co. v. Carnation Co.,

Supra.

Although plaintiffs have failed to cite

them, the few cases dealing with this pre-

cise issue have also denied prima facie

effect to the results to FTC proceedings

under § 5 of the FTC Act. Y & Y Popcorn

Supply Co. v. ABC Vending Corp. [1567 TRADE

CASES 4 72,022), 203 F. ty ie — Pa.

1967); Proper v. John Bene & Sons, Inc.,

295 4 755 (ED N.Y. 1923). And the cases

B-31

on by plaintiffs are distinguishable from the

present case, In Farmington Dowel Products

Co. v. Forster Mfg. Co. [1370 TRADE CASES

{ 73,075), 321 F. 2d 61 (lst Cir. 1970), the

Court held an FTC order under §2 (a) of the

Clayton Act entitled to prima facie effect,

observing that unlike the situation in Proper

v. John Bene & Sons, Inc., supra, the FTC

proceeding in its case was ee the Clayton

Act “which is clearly an ‘antitrust law.'"

Id. at 67, n. 7. And see, Rader v. Balfour,

Supra; Purex Corp., Ltd. v. Procter & Gamble,

supra; Lippa's, Inc. v. Lenox, Inc., supra.

Appendix A

"PARAGRAPH SEVEN: Responce=nt Pfizer has

in the past and is now engaging in unfair

methods of competition and unfair acts and

practices in commerce, in connection with

the production and sale of antibiotics in

that Pfizer has done and performed the fol-

lowing acts and practices:

Ree

industry;

(d) Attempted to monopolize and has mono-

polized the tetracycline industry;

(e) Made false, misleading and incorrect

statements to the United States Patent Office

with the purpose and effect of inducing the

United States Patent Office to grant United

States Letters Patent No. 2,699,054;

B- 32

(f) Caused United States Let -rs

Patent No. 2,699,054 to be issued as

a result of misrepresentations advanced

by Pfizer on behalf of the applicant

for the patent;

x* ke

(m) Issued invalid licenses under

United States Letters Patent No.

2,699,054.

PARAGRAPH EIGHT: The acts and prac-

tices of the respondent Pfizer, as herein

alleged, have had and do have the effect

of hindering, lessening, restricting, re-

straining and eliminating competition in

the sale of antibiotics; have had and do

have a dangerous tendency to unduly hinder

competition or to create in respondent

a monopoly; have constituted an attempt

to monopolize and have foreclosed markets

and access to markets to competitors in

in the sale and distribution of anti-

biotics; are all to the prejudice of com-

petitors of respondent and to the public;

and constitute each and all unfair

methods of competition and unfair acts and

practices in commerce within the intent

and meaning of the Federal Trade Commis-

sion Act.

PARAGRAPH NINE: For many years, and

continuing to the present time, each and

all of the respondents named herein have

engaged in unfair methods of competition

and unfair acts and practices in commerce

in the manufacture, sale and distribution

of tetracycline, chlortetracycline and

oxytetracycline in that they have, through

conspiracy, combination, agreement, and

planned common courses of action, and as

a part thereof, done and performed the

B- 33

following:

(a) Fixed and maintained arbitrary,

artificial, non-competitive and rigid

prices;

(b) Tixed prices;

terms and conditions of sale;

(d) Policed and enforced the illegally

fixed prices;

(e) Established and maintained illegal

resale price maintenance agreements;

(f) Established and maintained agree-

ments to license and cross license, and

established and maintained licenses and

cross licenses under patents with the

purpose and effect of unreasonably fore-

closing and preventing competition in

the production and sale of tetracycline

and chlortetracycline;

(g) Unreasonably foreclosed access to

subsiantial markets to competitors and

potential competitors;

(h) Denied to competitors and potential

competitors a reasonable opportunity to

compete;

(i) Attempted to monopolize the anti-

biotics industry; ‘

(j) Attempted to monopolize and have

monopolized the manufacture, sale and dis-

tribution of tetracycline;

(k) Pfizer, Bristol and Cyanamid with-

held from the United States Patent Office

B- 34

material and probative information and

material in connection with the filing

and prosecution of patent applications,

as a result of which Pfizer was enabled

to procure United States Letters Patent

No. 2,699,054 on tetracycline;

x* *

(m) Cyanamid, Bristol, Olin Mathieson

and Upjohn solicited and accepted and

Pfizer issued licenses under United

States Letters Patent No. 2,699,054 with

knowledge that:

1. Material and probative information

and material were withheld from the United

States Patent Office by one or more of

the applicants for said patent prior to,

during and after interference proceedings

before the United States Patent Office.

2. Pfizer submitted false, misleading

and incorrect information to the United

States Patent Office in support of its

application for said patent.

3. There was no real invention or

novelty in the claims of said patent.

4. The claims of said patent disclosed

no patentable invention in view of the

prior state of the art at the time the

initial application therefor was filed.

5. The alleged invention was made

known or used by others in this country

before the alleged invention by the appli-

cant (Conover).

6. The alleged invention was in public

use and/or on sale in this country more

than one year prior to the filing of the

B-35

application for said patent.

7. The subject of the patent was

obvious, at the time of the filing of

the respective applications for the

patent, to anyone having ordinary skill

in the art.

PARAGRAPH TEN: The acts and practices

of the respondents, as herein alleged,

have had and do have the effect of hinder-

ing, lessening, restricting, restrain-

ing and eliminating competition in the

sale of antibiotics; have had and do have

a dangerous tendency to unduly hinder

competition or to create in respondents

a monopoly; have constituted an attempt to

monopolize; have foreclosed markets and

access to markets to competitors in the

sale and distribution of antibiotics; -e

all to the prejudice of competitors of

respondents and to the public; and con-

stitute unfair methods of competition

and unfair acts and practices in commerce

within the intent and meaning of the

Federal Trade Commission Act...."

B- 36

PFIZER INC., ET.AL, Defendants-

Petitioners,

Vv.

Honorable Miles W. LORD, United States

District Judge, Respondent,

and

State of Kansas and Named Plaintiffs in

Forty-Eight Other Cases, Plaintiffs-

Respondents.

No. 71-1581.

United States Court of Appeals,

Eighth Circuit.

Feb. 15, 1972.

x*ee*ee

[LIST OF COUNSEL OMITTED]

x eee

Before MATTHES, Chief Judge, and BRIGHT

and ROSS, Circuit Judges.

PER CURIAM.

We have for consideration a petition,

filed by defendants in these cases, seek-

ing a writ of mandamus directing the

Honorable Miles W. Lord, United States

District Judge for the District of

Minnesota, before whom these actions are

pending, to vacate and rescind Discovery

Order No. 71-15, filed October 1, 1971,

sub nom. In re Coordinated Pretrial Pro-

ceedings in Antibiotic Antitrust Actions,

4-71 Civ. 435. Pursuant to Fed. R. App.

P. 21, respondent Lord and the plaintiffs-

respondents were authorized to answer or

otherwise respond to the petition. Judge

Lord declined to file any response, but

answers were filed by or on behalf of all

B- 37

plaintiffs.

We begin with a discussion of the history

of these proceedings. This litigation has

its origins in the late 1940's and early

1950's, during which time petitioners were

involved in the discovery, patenting,

patent licensing, manufacturing, and dis-

tribution of certain broad spectrum anti-

biotic drugs, particularly tetracycline.

These activities became the subject of num-

erous official proceedings, including a

Federal Trade Commission proceeding under

Section 5 of the Federal Trade Commission

Act, 15 U.S.C. §41 et seq., a criminal

prosecution under Sections 1 and 2 of the

Sherman Antitrust Act, 15 U.S.C. §1 et seq.

and more than 150 damage actions. The

majority of the damage actions have been

disposed of by settlement. We are con-

cerned here with 49 unsettled and consoli-

dated damage actions, which presently are

proceeding through their pre-trial stage

in the district court.

Early in August, 1971, and pursuant to

agreement of the parties, the district

court appointed three attorneys as masters

to assist the court in determining the dis-

coverability of a rather large quantity of

documents which respondents sought to ob-

tain from petitioners. Petitioners claimed

that many of these documents were shielded

by the attorney-client privilege.

The masters filed on October 1, 1971,

their “opinion . ... on the application of

the attorney-client privilege to documents

1. The defendants will be referred to

hereinafter as petitioners and the plain-

tiffs as respondents.

B- 38

submitted by defendants." The opinion

concluded, in summary, as follows:

"...[A])1l1 Pfizer documents dealing

with tetracycline prepared during or

after September, 1954, are documents

involved in the furtherance of a fraud

[on the patent office] and are not

protected by the attorney-client

privilege.

"...[A]1l1 Cyanamid documents dealing

with tetracyline prepared during or

after January, 1954, are documents

involved in the furtherance of a fraud

[on the patent office] and are not

protected by the attorney-client

privilege.

"...{A]11 documents of Bristol, Squibb

and Upjohn dealing with tetracycline

prepared during or after December, 1955,

are documents involved in the further-

ance of a [violation of the Sherman

Act] or tort and are not protected by

the attorney-client privilege."

Opinion of Masters at 13, 16, 17. The

district court, in the order here at issue,

adopted the findings of the masters and

directed that documents "which in the

Masters' determination are not protected

by the attorney-client privilege, will be

produced to plaintiffs." In re Coordi-

nated Pretrial Proceedings In Antibiotic

Antitrust Actions, supra.

The order came under attack by peti-

tioners, but Judge Lord refused to issue

the certificate which is a prerequisite to

an interlocutory appeal under 28 U.S.C.

§1292(b). Petitioners thereupon insti-

tuted this proceeding to challenge the va-

lidity and scope of the discovery order.

Petitioners contend basically that even

if the masters and the district court were

B- 39

correct in finding that prima facie show-

ings of fraud and crime had been estab-

lished, their conclusions regarding dis-

coverability were erroneous because (1)

there had been no finding that petition-

ers had employed the attorney-client re-

lationship to perpetrate or further the

fraud or crime, and (2) the language in

which the conclusions were cast was

overbroad and would require the ex-

posure to respondents of privileged as

well as unprivileged documents. Peti-

tioners Bristol, Squibb, and Upjohn com-

plain also that the findings against them

lack adequate evidentiary bases.

Respondents counter first by arguing

that mandamus is not an appropriate

remedy, and next by denying that the law

of privileged communications has been

applied improperly or that the discovery

order is overbroad.

We consider first whether mandamus

is available in federal courts as a means

of reviewing interlocutory orders, and

particularly discovery orders. There ap-

pears to be some conflict in this regard

among distinguished authorities on fed-

eral court procedure. After observing

that many sta*es routinely use extraordi-

nary writs for the review of discovery

orders, the authors of one treatis state

the following:

"The traditional federal attitude has

been that ‘as extraordinary remedies

they are reserved for really extraordi-

nary cases.’ ... But there has been

a general loosening of the federal

attitude toward mandamus and the dis-

covery cases have not been unaffected.”

8 Wright and Miller, Federal Practice and

B-40

Procedure §2006, p. 32 (1971), citing

Ex parte Fahey, 332 U.S. 258, 67 S.Ct.

1558, 91 L.Ed. 2041 (1947). Another

commentator, however , devotes consid-

erable attention to the opinion of the

Supreme Court in Will v. United States,

389 U.S. 90, 88 S.Ct. 269, 19 L.Ed. 2d

305 (1967), and concludes that this

opinion “appears to rechart the area of

the availability of mandamus along quite

restrictive lines." 9 Moore and Ward,

Moore's Federal Practice §110.28, p. 308

(1970).

The Will case arose out of a criminal

proceeding in which a federal district

court judge had threatened to dismiss

indictments unless the government dis-

closed certain information to the accused.

The United States Court of Appeals for

the Seventh Circuit issued a writ of

mandamus directing that the disclosure

order be vacated, but the Supreme Court

found mandamus inappropriate and re-

versed. The office of mandamus, the

Court stated, "is not to ‘control the deci-

sion of the trial court,' but rather mere-

ly to confine the lower court to the

sphere of its discretionary poyer.* 389

U.S. at 104, 88 S.Ct. at 278.

2. The United States Court of Appeals for

the Ninth Circuit has relied upon the

Will decision twice recently in denying

mandamus relief to petitioners seeking

avoidance of grand jury subpoenas, City

of Los Angeles v. Williams, 438 F. 2d

522 (9th Cir. 1971); Lampman v. United

States District Court, 418 F. 2d 215 (9th

Cir. 1969).

B-41

[1] We do not believe that the Will

opinion requires a dqnial of mandamus

review in this case. We are persuaded,

rather, that the claim of privilege as-

serted by petitioners involves a "really

extraordinary” question, and we agree

with the following observation from the

opinion of the Seventh Circuit Court of

Appeals in Harper & Row Publishing Co.

v. Decker, 423 F. 2d 487, 492 (7th Cir.

1970):

- « « [B]ecause maintenance of the

attorney-client privilege up to its

proper limits has substantial impor-

tance to the administration of justice,

and because an appeal after disclosure

of the privileged communication is an

inadequate remedy, the extraordinary

. remedy of mandamus is appropriate.

That decision was affirmed without opin-

ion by a divided Supreme Court, 40C U.S.

348, 91 S.Ct. 479, 27 L.Ed. 2d 433

(1971). Cf. Hartley Pen Co. v. United

States District Court, 287 F. 2d 324 (9th

Cir. 1961). Due consideration of all

aspects of this discovery order, in light

3. The Will case differs from the present

case in that the former was a criminal pro-

ceeding and the policy against interlocu-

tory appeals is especially pertinent to

such proceedings. Further, the party seek-

ing mandamus relief in Will was the govern-

ment, and the Court took note of the

limited right of prosecutors to review in

criminal cases. 389 U.S. at 96, 88 S.

Ct. 269.

B-42

particularly of possible consquences

which .eview on appeal might prove in-

adequate to remedy impels us to hold that

mandamus is an appropriate vehicle for

review of the question raised by the

present petition.

Itt

This brings us to the crucial question

of whether mandamus ought to issue in

this case. Our discussion of this ques-

tion is divided to reflect consideration

of four points: (1) the applicable law

of privileged communications; (2) pro-

priety of the findings that prima facie

showings of fraudulent or criminal ac-

tivity had been made against each de-

fendant; (3) whether there were findings

that defendants abused the attorney-

client relationship in furtherance of

such improper activity; and (4) the

breadth of the discovery order.

Applicable Law

{2] It is a fundamental tenet of the

law of evidence that, generally, com-

munciations between attorney and client

are privileged and not subject to com-

pelled disclosure. Chirac v. Reinicker,

24 U.S. 278, 292, 11 Wheat. 278, 292,

6 L.Ed. 474 (1826); Hunt v. Blackburn,

128 U.S. 464, 470, 9 S.Ct. 125, 32 L.Ed.

488 (1888); Radiant Burners, Inc. v.

American Gas Ass'n. 320 F. 2d 314, 318-

322 (7th Cir. 1963); United States v.

United States Shoe Machinery Corp., 89

F. Supp. 357, 358 (D. Mass. 1959). The

general rule is subject to qualification,

however, and it is with such a qualifica-

tion that we are concerned in these cases.

B-43

The exception to the attorney-client

privilege which is involved here has been

formulated as follows:

It has been agreed from the begin-

ning that the privilege cannot avail

to protect the client in concerting

with the attorney a crime or other

evil enterprise. This is for the

logically sufficient reason that no

such enterprise falls within the just

scope of the relation between legal

advisor and client. (Emphasis in

original.)

8 Wigmore, Evidence §2298, p. 572

(McNaughton rev. 1961). The Supreme

Court recognized this exception to the

privilege in dictum in Clark v. United

States, 289 U.S. 1, 15, 53 S.Ct. 465, 77

L. Ed. 993 (1933), and the United States

Court of Appeals for the Second Circuit

decided the often cited case of United

States v. Bob, 106 F. 2d 37 (2nd Cir.

1937), cert. denied, 308 U.S. 589, 60 S.

Ct. 115, 84 L.Ed. 493 (1939), on the basis

of this exception. The masters in this

case clearly were aware of the State of

the law. They referred to the previously

mentioned passage from the Clark opinion

and proceeded to lay down a rule for the

guidance of their own deliberations:

- « »« [A])11 documents involved in the

furtherance of the crime or tort are

not protected by the attorney-client

privilege and will be produced to the

plaintiffs.

Opinion of Masters at 5-6, 8.

[3] Under present law, a party seeking

to overcome a claim of attorney-client

B-44

privilege by invoking the improper pur-

pose exception has the burden of producing

sufficient evidence to sustain a finding

that the challenged communications were

made in furtherance of a crime or tort.

Clark v. United States, supra, 289 U.S.

at 15-16, 53 S.Ct. 465; Securities &

Exchange Commission v. Harrison, 80 F.

Supp. 226, 230 (D.D.C. 1948); McCormick,

Evidence §99, p. 201 (1954); Cf. Proposed

Rules of Evidence for United States Courts

and Magistrates, Advisory Committee's

Note to Rule 503(d) (1), 51 F.R.D. 315,

365 (1971).

Masters’ findings

The masters pertinently observed in

their opinion that the attorney-client

privilege long has been recognized at

law, and, as noted above, considered the

relevant exception to the attorney-client

privilege. In attempting to bring the

subject order within the exception dis-

cussed by the Clark Court, the masters

stated:

"On the basis of all the evidence avail-

able for consideration, it is the mas-

ters' opinion that from a certain point

in time * * * a prima facie showing of

fraud on the patent office has been made

against Pfizer and Cyanamid with re-

spect to their involvement in Pfizer's

procurement of its Conover Patent on

tetracycline."

zaenaenenarenkenkerkerketkeer#etetkteeketk*kee#ekekeR rk

"With respect to Bristol, Squibb and

Upjohn, the masters concluded that

from a certain point in time * * *

B-45

a prima facie showing of violation of

the Sherman Act with respect to the

pricing and marketing of tetracycline

has been made. Defendants' conduct

may constitute a crime or tort or both."

Masters' opinion p. 8.

We consider the above findings in re-

verse order. Although the masters pur-

portedly found support for their conclu-

sion as to Bristol, Squibb and Upjohn on

the basis of "materials properly before

them . . .", it seems clear from an

anaylsis of their entire opinion and the

briefs filed in support of and in opposi-

tion to the discovery order, that the mas-

ters relied largely, if not entirely, upon

the prior Government proceedings to sup-

port their finding that the actions of

petitioners Bristol, Squibb and Upjohn

constitute a prima facie showing of a

violation of the Sherman Antitrust Act.

In our view, an objective appraisal of

the prior proceedings fails to show such

a prima facie violation.

[4] We briefly review the relevant

prior proceedings. The Federal Trade

Commission filed a complaint under Sec-

tion 5 of the Federal Trade Commission

Act (15 U.S.C. §45) against all five of

the present petitioners. The hearing ex-

aminer exonerated all of them, but the

full Commission reversed in part the

examiner's decision. On appeal, the

Sixth Circuit reversed and remanded for

further proceedings. American Cyanamid

Co. v. F. T. C., 363 F. 2d 757 (6th

Cir. 1966). The court found that Chair-

man Dixon of the Commission was dis-

qualified from participating in the hear-

ing. In so holding, the court concluded:

fe-«d

ive e -wtentional lu

blank

B-47

"Under the facts and circumstances of

this case we conclude that the par-

ticipation of Chairman Dixon in the

hearing ‘amounted .. . to a denial

of due process which invalidated the

order under review.’" (Citing cases.)

363 F. 2d at 767.

Thus, in our view, the invalidation of the

Commission's order rendered it without any

force or effect insofar as furnishing a

basis for finding a prima facie violation

of any law.

On remand, the four Commissioners who

heard the matter were divided on the

issue of price fixing. Two concluded it

was not necessary to the disposition of

the case to find the parties were guilty

of price fixing. Two Commissioners be-

lieved that the evidence substantiated

the allegations relating to price fixing.

In this posture, no finding was made and

the price fixing issue was dismissed.

There remains for consideration the

criminal proceeding instituted in the Sec-

ond Circuit. In 1961, petitioners Pfizer,

Cyanamid and Bristol were indicted for

conspiring to restrain trade in broad

spectrum antibiotics and to monopolize

such drugs. Petitioners Squibb and

Upjohn were named as co-conspirators, but

not as defendants. A jury found the three

defendants guilty. The judgment of con-

viction was reversed and the cause re-

manded because of trial irregularities.

United States v. Charles Pfizer Co. 426

F. 2d 32 \2d Cir. 1970). The Supreme

Court granted certiorari on May 3, 1971,

402 U.S. 942, 91 S.Ct. 1617, 29 L.Ed. 2d

110 and on Jan. 24, 1972 affirmed the

decision of the Second Circuit by an

B-48

equally divided Ccurt. 404 U.S. 548,

92 S.Ct. 731, 30 L.Ed. 2d 721. Respond-

ents emphasize that the Second Circuit

held in effect that the evidence was suf-

ficient to sustain the conviction because

the judgment was reversed on other

grounds. Although the argument has some

appeal, the fact is that the judgment of

conviction has been reversed. Conceivably,

on a retrial under proper instructions,

the defendants may be acquitted. See State

of West Virginia v. Chas. Pfizer & Co.,

314 F. Supp. 710 at 742.

In summary, we are constrained to be-

lieve that the masters gave too much

weight to the Federal Trade Commission

proceedings against Bristol, Squibb and

Upjohn, which as noted, have been aborted,

and to the criminal prosecution, which,

at this time at least, is not conclusive.

Therefore, we hold that the prior proceed-

ings do not provide an adequate premise

for finding that a prima facie case of

violation ef the Sherman Act has been

established against petitioners Bristol,

Squibb and Upjohn. Accordingly, we

direct the district court to vacate

Discovery Order No. 71-15 as to petitioner

Bristol-Myers Company, Squibb Corporation

and the Upjohn Company, without prejudice

to the court to enter another appropriate

discovery order which has for its founda-

tion a proper prima facie case of fraud,

criminal conduct or tort.

[5] We reach a different conclusion

as to petitioners Pfizer and Cyanamid.

The masters found on the basis of the

prior F.T.C. proceeding that a prima

facie case of fraud had been made against

these two companies. We agree. The F.T.C.

found that Pfizer and Cyanamid had com-

B-49

mitted a fraud on the Patent Office in

connection with the issuance of a patent.

The Sixth Circuit affirmed that finding.

Chas. Pfizer & Co. v. F.T.C., 401 F. 2d

574 (6th Cir. 1968), cert. denied, 394

U.S. 920, 89 S.Ct. 1195, 22 L.Ed. 2d 453

(1969). Certainly the final decision of

the Court of Appeals for the Sixth

Circuit is adequate to form a sound basis

for the finding of a prima facie case of

fraud.

Abuse of attorney-client

relationship

[6] All petitioners have contended

vigorously that the masters' reasoning

halted at the point of finding that a

prima facie showing of raud or crime

had been made, thus falling short of the

requisite finding that the attorney-client

relationship had been abused. After the

petition in this case had been filed, we

directed the masters to make a supple-

mentary report clarifying this point and

others. It is clear from the supplemen-

tary report that the masters did proceed

to make the necessary finding of abuse,

based upon the reasoning that Cyanamid

and Pfizer documents dealing with enforce-

ment of the patent, which was found ten-

tatively to have been procured through

fraud, or with production, pricing, market-

ing, distribution, or licensing of the

patented product, were prepared in an

attempt to further and perpetruate the

original fraud. Based upon the record

before us we are not persuaded to hold

that this determination is erroneous.

Breadth of order

It remains for us to consider whether

B-50

the masters' ultimate conclusions amount

to, as petitioners submit, an overbroad,

"sweeping denial of defendants' attorney-

client privilege," or whether the con-

clusions are reasonably bottomed on a re-

view calculated to shield from discovery

all communications by means of which

petitioners legitimately sought or re-

ceived legal advice.

[7] The ambiguous language in which

the masters' conclusions initially were

couched was another factor motivating our

request for a supplementary report. We

are satisfied by the supplemental report,

however, that the masters reviewed peti-

tioners' files scrutinously before re-

porting their findings, and that, despite.

the broad language of the original opin-

ion, the masters have not recommended,

nor has the district court ordered, an

indiscriminate baring to respondents of

the files of petitioners and their coun-

sel. Thus the masters in their report,

after setting forth the test which had

been applied to individual documents to

determine discoverability, stated the

following: “Documents have been marked

or segregated in accordance with these

criteria . .. The masters will of course

work with the parties in explaining the

sorting process." Supplementary Report

of Masters at 3.

It is evident that the discovery pro-

cess in these cases is far from comple-

tion. Although we decline to issue the

writ, directions for carrying out the

district court's order should be issued

as to Pfizer and Cyanamid. The district

court and masters are directed to con-

tinue to guard the attorney-client

privilege of petitioners Pfizer, Inc.

B-51

and American Cyanamid by reviewing, if

necesszery, all contested documents prior

to ruling on the discoverability of such

documents and by ordering the production

to respondents only of those documents

individually found to have been vcrepared

in perpetration or furtherarnlo ot fraudu-

lent activity. The district court i: di-

rected further to formulate such addi-

tional procedures or guidelines as may

be necessary to facilitate the prompt

production of unprivileged documents.

RECAP ITULATION

1. Judge Lord is directed to vacate

Discovery Order No. 71-15 as to peti-

tioner Bristol-Myers Company, Squibb

Corporation and Upjohn Company without

prejudice consistent with our views above

expresseca.

2. Discovery Order No. 71-15 shall re-

main in force and effect as to petitioners

Pfizer, Inc., and American Cyanamid

Company. Discovery shall be carried out

and conducted in accordance with the

general directions above set forth.

3. Each of the parties to this cause

shall bear its own cost.

APPENDIX C

[This appendix is pagi-

nated from 35la through 908a]

35la

IN THE NITED STATES DISTRICT COURT

POR THE EASTERN DISTRICT OF NORTH CAROLINA

RALEIGH DIVISION

CIVIL NO. 2287

THE STATE OF NORTH CAROLINA, Plaintiff

CHAS. PPIZER & CO., INC.,

AMERICAN CYANAMID COMPANY,

é' BRISTOL~-MYERS COMPANY

OLIN SATIITSSON CHEMICAL CORPORATION,

and

THE UPJOHN COMPANY, Defendants

MEMORANDUS OF DECISION

This is an antitrust treble damaq

action brought by the State of North

Carolina (plaintiff) on behalf of itself,

all state, county and local gover mental!

35a -2

agencies and all cit:zen consumersi who

purchased broad-spectrum antibiotic drugs

manufactured and sold by the defendants in

North Carolina during the period {953 to

1966. The defendants are Chas. Pfizer &

Co., Inc. (Pfizer), American Cyanamid Con-

pany (Cyanamid), Bristol-Myers Company

(Bristol), Olin Sathieson Cheagical

Corporation (Squibb), and The Upjohn

Company (Upjohn).

{ Footnote |. The action was allowed

to proceed as a class action pursuant to

Rule 23, F.R.C.P., the class being defined

as:

(a) The State, its

departments, agencies, hospitals,

institutions and political

subdivisions, and all counties,

cities and other governsgental

entities within the state (other

than those of the federal

governspent) including without

lirgitation hospital districts,

hospitals and other institutions

supported in whole or in part by

state, county, city or local

governmental funds which purchased

or paid for broad-spectrus

antibiotic products during the

period |954 through |966.

352a

(b) Perchasers within the

state who during the period 1954

through |966 purchased or paid for

broad-spectrum antibiotic products

tor human consumption from public

or private hospitals or from

pharmacies, drug stores or other

retail outlets including the State

on account of payments sade

therefor for the benefit of

recipients of welfare programs.

Two individuals, Bernard A. Harrell,

receiver, and Thomas J. Bolch, also joined

as parties plaintiff adopting essentially

the pleadings of the State, but by

agreement their claims were prosecuted by

the State as a part of its claim with the

understanding that the individuals would be

bound by the final judqment rendered.

The word "plaintiff" as used in this

memorandun will encompass the State of

North Carolina, the consumer class and the

two individual plaintifts. ]

The case has been tried to the court

without a jury on the issues of the alleged

violations of the antitrust laws of the

tnited States by the defendants, the issues

of the tact and measure of compensable

iniury (damages) being reserved for trial

at a Jater time in tli: event of a finding

of liability on the part of any or all of

‘S3a

t* 1>* -jpdant-s. Ta this memorandum of

i-eds 'On the court will record its findinas

rs ace ;

oO tact and conclusions ot law in

contormity with Rule 52, F.R.C.P.

f Footnote ?, This is on» of a qreat

number of Stiwilat fuits brought by

virtually il! of the states and other

plaintiffs ajyainst these defendants

apparently stemming from a proceeding by

the Federal Trade Commission instituted in

tr lat+ (950s (see 40] &.2d 574, 6th Cir.

}¥oo,cert. denied, 394 U.S. 920) and a

criminal action brought against three of

the defendants, Pfizer, Cyanamid and

Rristol, in the Southern District of New

York. The civil litigation including this

action was transferred to the District of

Sinnesota under the multi-district

litigation Statutes for consolidated pre-

trial and discovery and possible trial, but

a motion mad? in that court to sever this

action and return it to this district for

trial was allowed. . The court is informed

that a substantial portion of the civil

litigation in the Minnesota court has since

beon settled and that the cri.inal action,

following reversal of a judqment of

conviction by the Second Circuit in {970

(see 426 F.2d 32) has now been retried

betore Juige Cannella without a jury = and

has resulted in a judgment of acquittal.

lis decision apparently has not been

reported.

; The piaintift's case here has been

tried tor the most part on some 25,000

pages or testimony amassed in these prior

1 -_

| BEST COPY AVAILABLE

354a

proceedings and introduced here in

deposition form. }

JURISDICTION AND VENUE

The United States District Courts have

exclusive jurisdiction of actions for

damages for violations of the federal

antitrust laws, and the venue for this

action is properly laid in the United

States District Court for the Eastern

District of North Carolina. 15 U.S.C.

Sec. {5 and 22. Neither jurisdiction nor

venue is at issue in this case.

PLAINTIFF'S ALLEGATIONS

[ Footnote 3. This section of the

memorandum is quoted directly from

plaintiff's brief. ]

Plaintiff charjes that defendants at

varying times during the period commencing

about November, {953 through the winter of

1955 entered into contracts, combinations,

agreements, understandings and conspiracies

355a

to unreasonably restrain trade and commerce

in the broadspectrum antibiotic market

generally and the tetracycline market par-

tricularly, all in violations of Sections |

and 2 of the Sherman Act.

: {[ Footnote 4, Sections | and 2 of the

Sherman Act, 15 U.S.C. Sec.| and 2, provide

in pectinent part as follows:

Section |- Every contract,

combination in the form of trust or

otherwise, or conspiracy, in restraint

of trade or commerce among the several

states, or with foreign nations, is

hereby declared to be illegal ...

Section 2. Every person who shall

monopolize, or attempt to monopolize,

Orc combine or conspire with any other

person or persons, to monopolize any

part of the trade or commerce among the

several states . .. shall be deemed

quilty of a misdemeanor ...

The action is authorized by Section 4

of the Clayton Act, {5 U.S.C. Sec. 15,

which provides:

Section 4, That any person who

shall be injured in his business or

property by reason of anything

forbidden in the antitrust laws may sue

therefor in any district court of the

United States in the district in which

the defendant resides or is found or

has an agent, without respect to the

amount in controversy, and shall

356a

recover threefold the damages by hin

sustained, and the cost of suit,

including a reasonable attorney's fee. ]

Plaintiff aleges the gist of the

understandings reached between the

defendants, among other things, was:

A. As to Price Fixing -- Pfizer and

Cyanamid agreed that the new broad-spectrum

antibiotic, _ tetracycline, whether

patentable or not, was to be priced and

marketed by each of them in such a manner

as to maintain the then existing prices and

price structure of their BSA products,

Le @ce Aureomycin and Terramycin.

Subsequently Bristol, Squibb and Upjohn

aqreed to price and market tetracycline in

accordance with the structure established

by Pfizer and Cyanamid. It was understood

and agreed to at varying times between two

or more, but ultimately all defendants,

that sales were to be at substantially

identical prices to the same class of trade

357a

and sales were to be on substantially

identical terms in identical package sizes;

B. As_to Limitations on the Number of

Manufacturers and Conditions on Sellers; a

(1) In addition to the foregoing

understandings, initially the Pfizer and

Cyanamid understandings were that the

manufacture, distribution and sale of

tetracycline was to be limited to Pfizer

and Cyanamid.

(2) Subsequently, however, on or

about December, |955 (through the joint

efforts of Bristol, Squibb and Upjohn

resulting fron unlawful contracts,

combinations, and conspiracies entered into

between these latter defendants on or about

September, 1954), Bristol, Squibb and

Upjohn joined the continuing combination

and conspiracy of Pfizer and Cyanamid of

November, |953.

358a

(3) The gist of the

understandings reached bet ween Pfizer,

Bristol, Squibb and Upjohn during or about

the winter of 1955 was that Bristol was to

remain in the market as a third

manufacturer, distributor and seller of

tetracycline to the trade, while Squibb and

Upjohn would continue to refrain from the

manufacture of tetracycline; they would

continue to purchase their entire

requirement of tetracycline in bulk from

Bristol; they would refrain from resale of

the bulk to any other party; and they would

limit their resale of tetracycline to

finished dosage forms to the trade only. |

C. Understandings Re the Pategt:

(1) Each of the defendants

understood at all of the time in

controversy that the issuance of a patent

and its continued existence as an

enforceable instrument on the proad clains

359a

to tno chemical compound tetracycline were

essential to maintain the prices then pre-

vailing in the BSA market generally; and in

particular for the therapeutic product

tetracycline (vis-a-vis the chemical

compound).

(2) Plaintiff avers that Pfizer

and Cyanamid took concerted steps to assure

the issuance of a patent covering the broad

claims to the chegical compound

tetracycline; and toward that end, each

made material misrepresentations of fact

to, and withheld material information fron,

the Onited States Patent Office, thereby

causing the issuance of the Conover patent

covering the broad claiuws to the chemical

compound tetracycline which otherwise would

not have heen issued.

(3) Plaintiff avers that

Cyanamid, Rristol, Squibb and Upjohn knew

ot the manner in which Pfizer had caused

360a

the Conover patent to issue, and

notwithstanding such knowledge, actively

sought, acquired and enforced licenses

thereunder.

EPENSES

Rach of the defendants filed answer

denying generally the material allegations

of the complaint in which violations of the

antitrust laws were charged. Other

defenses raised included the statute of

limitations, laches, failure of the

complaint to state a clain, standing and

the propriety of maintenance ot the case as

a class action, but these defenses have all

been disposed of adversely to the

defendants leaving only for determination

the question of defendants’ liability under

the antitrust statutes.

36} a

In its brief the Plaintiff has:

correctly framed the two Principal issues

raised by the pleadings and litigated

during the trial as follows:

"A. Did defendants Pfizer and

Cyanamid, during the fall of 1953:

defendants Bristol, Squibb and

Upjohn, during the late summer and

early § fall of 1954; and all

defendants during late fall and

early winter of 14955 enter into

contracts, combinations,

agreements, understandings or

conspiracies to unreasonably

restrain trade and commerce in the

manufacture, distribution and sale

of the broad-spectrum antibiotic

tetracycline, its analogues, and

combination products containing

tetracycline or its analogues by:

362a

(1) Fixing and maintaining

the prices of tetra-

cycline, its analogues

and corbinations

products containing

tetracycline or its

analogues at the then

existing price of

Pfizer's Terramycin and

Cyanasid's Aureomycin;

and

(2) Limiting the number of

manufacturers of

tetracycline and its

analoques to Pfizer,

Cyanamid and Bristol and

the number of sellers of

tetracycline to Pfizer.

Cyanamid, Bristol,

Squibb and Upjohn,

in violation of Section | of the

Sherman Act?

"B.

Did defendants Pfizer and

Cyanamid, during the fall of 1953;

defendants Bristol, Squibb and

Upjohn, during the late suagmer and

early fall of 4954; and all

defendants during late fall and

early winter of {955 enter into

contracts, combina*ions,

363a

agreements, understandings and

conspiracies to monopolize, and

actually monopolize the

manufacture, distribution and sale

of tetracycline, its analogues,

and combination products

containing tetracycline or its

analogues in violation of Section

2 of the Sherman Act?"

{Pootnote 5. The plaintiff posed a

third issue arising from a_ belatedlyraised

further claim aqainst Pfizer alone - that

of an attempt to monopolize - stated thus

in its brief:

"In addition to the violations of

law set forth above, plaintiff alleges

that Pfizer is individually and

separately liable to plaintiff for its

violation of Section 2 of the Sherman

Act for its attempt to monopolize, and

monopolization of, the product

tetracycline through the fraudulent

procurement of its patent on

tetracycline and its subsequent

enforcement thereof with knowledge of

the manner and methods used by its

agents in causing the patent to issue."

It is questionable that plaintiff's

complaint is fairly susceptible to. such

interpretation. There was no mention ot

this claim in plaintiff's opening statement

364a

nor at any time in the trial prior to

plaintiff's final argument and only then in

response to a question from the bench.

Pfizer, claiming surprise, has protested

vigorously the assertion of the claim in

this manner, and the court is of opinion

that the objection is well taken. The

court has nevertheless treated the claims as

having been timely alleged and presented,

but has disposed of it in connection with

the treatment of the two principal issues

actually litigated. ]

HISTORICAL BACKGROUND _AND_ CHRONOLOGY

The ftirst major antibiotic discovered

and introduced was penicillin which was

used extensively during World War II and

thereafter. Subsequent to the introduction

of menicillin, additional antibiotics were

discovered and marketed. Four of these

were effective against a wider group of

disease-causing microorganisms than. was

penicillin, and they became known as

"broad-spectrum" antibiotics. The first of

these, chlortetracycline, was covered by

the Dugyar Patent which issued to Cyanamid

365a

it Septomber, 1°49. Cyanamid first

marketed this drug under the trade name

“Aureomycin" on December |, {948.

On January 25, {949, Parke, Davis &

Company introduced the second broad-

Spectrum antibiotic, chloramphenicol, under

the trade name, “Chloromycetin". It was

covered by a patent issued to Parke, Davis

in October, 4949.

The third broad-spectrum antibiotic,

oxytetracycline, was introduced in March,

1950, by Pfizer under the trade name,

"Terramycin". This drug was covered by the

Sobin Patent issued to Pfizer in July,

1950.

The fourth of the broad-spectruas,

tetracycline, was discovered by Pfizer's

Dr. Conover in June, {|952. He had

speculated that it might he possible to

develop a new and superior antibiotic by

removing the chlorine atoa from

366a

chlortetracycline (Aureomycin), and he was

finally able to accomplish this by

hydrogenating Aureomycin so as to replace

the chlorine atom with a hydrogen atom- a

process called "deschlorination". On

October 23, |952, Pfizer filed Conover's

application for a _ patent on tetracycline

and the deschlorination process.

Shortly thereafter scientists at

Cyanamid also discovered that tetracycline

could be produced by deschlorination ot

Aureomycin, and on March |6, 1953, Cyanamid

filed its Boothe-Morton application for a

patent on tetracycline and the

deschlorination process.

During {953 scientists at the Heyden

Chemical Corporation (Heyden) and at.

Bristol were conducting experiments in an

effort to produce tetracycline by direct

fermentation. On September 28, |953,

Heyden filed its Minieri application for a

367a

patent on tetracycline and the fermentation

process for producing it, and on October

19, 1953, Bristol filed a Similar

application under the name of Heinemann for

a product and direct fermentation process

patert on tetracycline.

_ [Footnote 6, Shortly after filing its

Minieri application Heyden entered iuto

negotiations with Cyanamid with the view to

selling Heyden's Antibiotic Division to

Cyanamid. An agreement of sale was entered

into on November 4, |953, and on December

le 953, Cyanamid took possession of the

assets of Heyden's Antibiotic Division

including its Minieri patent application.

Since this application for a product patent

on tetracycline was subsequent in time to

Cyanamid's pending Boothe-Morton

application, Cyanamid abandoned the product

patent claims of the Minieri application

but continued to prosecute the claimgs tor a

direct fermentation process for the

production of tetracycline. A patent on

the Minieri process claim was issued to

Cyanamid in February, 1956. ] |

On October 29, 4953, the United States

Patent Office issued notices "to Copy

claims" to both Pfizer and Cyanamid, thus

indicating an interference proceeding

{ Footnote 7. Under patient office

rules an "interference" is a proceeding

conducted for the purpose of determining

priority of invention between two or more

applicants claiming the same patentable

368a

invention (Patent Office Rule 20{ (a); 37

C.F.eRe | -20] (a))- J

on pending applications on tetracycline.

Faced with the prospect of delay, expense

and uncertainty with which a_ patent

interference is normally attended, John

McKeen, chief executive officer of Pfizer,

who had correctly surmised that Cyanamid

was to be the other party tec the

interference, initiated discussions with

Cyanamid's chief executive officer, Dr.

Wilbur Malcolm, with the view to settling

the interference. It was during the course

of two meetings which took place between

these two officers in November of {953 that

plaintiff here alleges the conspiracies and

agreements to violate the antitrust laws

were born. The details of these meetings

as disclosed by the evidence will be more

fully discussed later.

On November |6, 1|953, Cyanamid marketed

the first tetracycline under its bran?

169%a

nai

mn - :

Achromycin™, the introductory price

basco de zr ‘ ic j

‘or identical with the price of the other

three hroad-spectrum antibiotics then on

the market, Aureomycin, Terramycin and

Chloromycetin,

On November 25, {953, in accordance

with the terms of the agreements reached in

the ‘YcKeen-Malcolm meetings, Cyanamid began

shipments of bulk tetracycline to Pfizer.

These continued until March 3], 4954, and

amounted to a total of about 10,000

kiloqrams,

On January {t, 1954, following formal

declaration by the patent oftice of the

first tetracycline interference, Pfizer and

Cvanamiad executed written instruments

embodying the aqreements neqotiated hy

ScKeen and Malcolm. Thereafter Pfizer and

Cyanamid exchanged their proofs of priority

of discovery of tetracycline as a result of

which Cyanamid conceded priority to Pfizer.

370a

By January |5, 1954, Pfizer was able to

package and label the bulk tetracycline

which it was obtaining from Cyanamid and it

began marketing this under its trade name,

"Tetracyn". Its introductory published

prices followed those previously

established for tetracycline by Cyanasid

for its Achromycin and, of course, the

prices were identical with the published

prices of the other three broad-spectrum

antibiotics then on the market.

On March 2. }954, Bristol, in

prosecuting its Heinemann application, was

able to convince the patent examiner, at

least tentatively, that the salt of

tetracycline, tetracycline hydrochloride,

was patentably distinct from tetracycline

which had been the subject of tht first

interference, and as _a-° consequence the

examiner declared the second (sometiges

referred to as “"salt") interfereu re between

37 4a

Bristol*s Heinemann, Ptizer'*s Conover and

Cyanemid's Minieri applications. The

interference proceedings continued from

March to October, {954, during which tire

the Parties tiled and arqued numerous

motions in the patent office. |

Meanwhile, Pristol, undeterred by

Pfizer's threat of suit for patent

infringement when and if the Conover patent

should issue, continued to produce

tetracycline through its direct

fermentation process, and on May |, (14954,

Bristol began to market this product under

the trade nage, "Polycycline". Its

published prices followed those for the

tetracycline products of Cyanapid and

Ptizer which were already on the market.

By September, (954, Bristol had entered

into agreements with Squibb and Upjohn to

sell them bulk tetracycline, and shortly

theceafter these two companies began to

]

BEST Gory avAIUBE

372a

market tetracycline under their own trade

names, “Steclin" for Squibb and "“Pangycin"

for Upjohn. Squibb‘s introductory

published prices followed those of Pfizer,

Cyanamid and Bristol except that its

wholesale prices were slightly higher,

while Upjohn, which was last to come on the

market, followed generally the prices of

the other four companies.

On October 14, (954, the patient

examiner issued a decision dissolving the

second interfernce, primarily on the ground

that tetracycline was unpatentable over the

prior art as disclosed in Cyanasid's Duggar

and Niedercorn patents because tetracycline

as well as Aureosycin appeared to be co-

produced in fermentation processes

disclosed by these two prior patents and

emyloying the Duggar species, streptomyces

aureofaciens. Since the examiner also held

that tetracycline hydrochloriu: war not

373a

patentably distinct frop tetracycline, he

concluded that the Subject matter of the

interference was not patentable to anyone.

‘

Thereafter, in November, {954, the examiner

issued rejections on all of the

tetracycline and tetracycline hydrochloride

claims in Pfizer's Conover, Cyanarsid's

Minievi, and Bristol's Heinemann

applications on the sare grounds that he

had relied upon for dissolution of the

interference.

Pollowing the dissolution of the second

interference Pfizer continued the ex parte

prosecution of the Conover application, and

in late November and early December, 4954,

Pfizer's counsel submitted affidavits of

proof concerning the prior art co-

production question which the patent

examiner accepted as sufficient to overcore

his previous rejection of Conover's product

_ Claims. A substantial part of the battle

374a

in this action has been waged around

plaintiff's contention that in these

proceedings Pfizer made material

representations of fact to and withheld

material information from the patent

examiner; that its conduct constituted a

fraud on the patent office; and that

otherwise the Conover patent would never

have issued. It did issue on January II,

1955.

Meanwhile a suit brought by Cyanapid

against Bristol in late September, 1954 for

infringment of its Duggar patent in the

manufacture by Bristol of tetracycline

using Bristol's tetracycline fermentation

process was settled in mid-December, {|954.

The teres of the settlesent included an

aqreement that Cyanamid would grant Bristol

a non-exclusive license under Cyanagid's

- Aureomycin patent to manufacture and sell

tetracycline containing not more than six

375a

per cent Aureomycin for a royalty of five

per cent of Bristol's net sales of its

tetracycline products.

On the sarge day the Conover

tetracycline patent issued, January ti,

1955, Pfizer brought suits against Bristol,

Squibb and Upjohn in the united States

District Court in Atlanta, Georgia, for

infringement. These defendants, in turn

filed declaratory judgment suits in the

Southern District of Wew York for the

purpose of having the Conover patent

declared invalid. They were also able to

omtems the transfer of the Pfizer

infringement suits to the Southern District

of Now York.

[Footnote 8 See 43

: , F. ’ a

Por the remainder of 1955 this

litigation was prosecuted and defended

vigorously by the opposing parties, Pfizer

on the one hand and Bristol, Squibb and

376a

Npjohn on the other. Bristol, Squ.c «1

Upjohn instituted extensive discovery in an

effort to determine whether Pfizer had

qiven false or misleading information to

the patent office in the course of

obtaining the Conover patent on

tetracycline, but the evidence developed

was apparently considered inconclusive.

The litigation stood in this posture in

the late fall of 1955 when one John G.-

Broady, a private detective, was tried and

convicted in New York City on an indictsgjent

charging wiretapping of various telephone

lines including those of Bristol and

Squibb. At the trial it Case ou i1n

evidence that Broady had been retained by

Pfizer whereupon Bristol's counsel was

instructed by its chief executive otticer,

Prederick Schwartz, to informa Pfizer's

counsel that Bristol planned to bring

wiretapping into the infringe.went suit as

37 7a

an “unclean hands" defense and as

counterclaian.

{Footnote 9 "The Broad

° inc

gave to Bristol a trump card which es

not hitherto possessed and Bristol played

t LY

coo eae Se 37 (ona Bfis 1970). )

The Broady incident brought about a

radical change in Pfizer's attitude toward

the Litigation, and meetings were held on

Deceaber {4 and {5, §955, between Schwartz

of Bristol, McKeen of Pfizer and their

patent counsel, which resulted in agreement

to settle the litigation. Under the terms

of the settlement Pfizer aqreed to grant

Bristol a nonexclusive license to sake, use

and sell tetracycline, and direct licenses

to Squibb and Upjohn to use and sell

t«tracycline to the drug trade. It was

through the medium of these meetings and

the neqotiated settlement resulting

therefrom that plaintiff alleges Bristol,

Squibb and Upjohn were able to join ("force

378a

their way into") the alleged pre-existing

conspitacy between Pfizer and Cyanamid.

Plaintiff alleges the five-member

conspiracy thus formed continued until

November, | 966.

Beginning with a broad econorgic

investigation of the antibiotics industry

instituted in mid-|957 by the Federal Trade

Commission and continuing to the present

day the five defendants herein, in addition

to being subjected to investigation of the

F.T.C. and the Subcommittee on Antitrust

and Monopoly of the Judiciary Committee of

the United States Senate (the “"Kefauver

Committee"), have defended one criminal

action and countless civil suits alleging

violations of the antitrust laws of the

United States in the manufacture and sale

of broad-spectrum antibiotic drugs.

{Footnote }0. The reported cases of

which this court is aware are as follows:

379%a

Unite S >

uo thas zer &

80] (S.D.N.¥. 1965) _——

363 PF. 2d 757 (6th Cir. | 966)

Chas. Pfizer § Cow, Inc,,

EFsTeC., 4O} P.2d 574 (6th a

968 i

pyar Cert. denied, 394 U.S. 920

United States vy. Chas. Pfizer &

Co., Inc., 2)? F.Su

(S.D-N.Y. 1963) qin

Co., 28) P.Supp.837 (S.D.N.Y.| 968)

CQs.e 426 F.2d 32 (2nd Cir.

1970), modified, 437 F.2a 9

, 57

Cert. qranted, 402 U.S. 942.

aff'd., 404 U.s. 548 (1972) °

AS previously indicated in P

ootnot

Judge John 4. Cannella's judgment ’ pt

acquittal on the retrail of the criminal

caSe apparently has not been reported nor

has it been brought t¢

nn To: ght 9 the attention of

So far as the court is inforrgjed, this is

the first of the civil actions to cose to

trial and reach the decision stage.

THE EVIDENCE

The sections of this senorandua which

380a

follow will treat the principal points

advanced by plaintiff and the evidence

offered in support of its theory of

liability on the restraint of trade and

monopoly issues.

{Pootnote {j- [In arriving at its

findings and conclusions herin expressed

the court has reviewed and considered all

of the testimony and documentary evidence

of fered by the plaintiff in the case

notwithstanding any ruling excluding any

such evidence wade at the tise of its offer

and not thereafter changed. In the words

of Justice Holmes, “a concession to the

shortness of life: has precluded a summary

of all the 142,000-odd page record, the

several thousand exhibits offered and the

many hundreds of pages of briefs and legal

arguments submitted during the course of

the trial and thereafter. }

While the various topics are discussed

separately, the court has been careful to

consider all the plaintiff's evidence

collectively with due regard to the Suprere

(eurt's admonition that the antitrust

plaintiff should be given the full benefit

of his proot “vithout tightly

compartmentalizing the varivcrs factual

384a

components and’ wiping the slate clean after

ff scrutiny of each." Continental ¢

t.nion Carbide £& Carbon Corporation, 370

U.S. 690, 699 (4962).

The_McKeen-Malcols Seetings

The ‘cornerstone of plaintiff's case

ayainst Pfizer and Cyanamid is alleged to

have been laid at the time of two meetings

between the two chief executive officers of

these companies in early November, |953.

At that time both Pfizer and Cyanamid had

product and process patents pending on

tetracycline, and a notice to copy clains

having been issued by the Patent Office

presaging the declaration of an

interference to determine priority of

invention, John AicKeen, President of

Pfizer, initiated a meeting with Dr. Wilbur

Malcolm, Cyanamid's President, to discuss

settlement of the interference when and if

it shovld be declared. To understand

382a

properly the motivations and actions of

these two principals in the meetings it is

necessary to review briefly the status of

the tetracycline program in each of the

companies as it existed in the fall of

1953.

At Pfizer there was general optiaisns

that by reason of the prior publication in

a scientific journal by its scientists of

Dr. Conover's discovery of tetracycline

("The Stephens Article") it had priority of

invention and would ultimately receive the

patent. Unfortunately, it had not been

able to develop a process for the

production of tetracycline by direct

fermentation, and it was thus lisited to

its deschlorination process in aching

tetracycline from Aureosycin on which

Cyanaaid held the Duggar-SNiedercorn

patents. This created a blocking patent

Situation, but it was not Piizer's only

383a

Worry. - ="

y It hal also learned that Cyanamid

was about to come on the market with its

brand of tetracycline, and this meant that

Cyanamid would have valuable "lead time" in

the introduction and sale of this new

“wonder drug". This lead time, considered

of prime importance in the pharmaceutical

industry, would be very difficult for

renens to overcome even if it Should ulti-

mately obtain the patent and somehow manage

to avoid its then dependence upon

Aureomycin as the base product from which

to produce tetracycline.

At the same time Cyanamid was having

its probleas. Its extensive Clinical

testing of tetracycline had demonstrated

its superiority over Aureomycin, the sale

of which had been declining in the face of

the competition by Pfizer's sdeniinins

superior Terramycin, and Dr. Malcolm had

committed Cyanamid to a program to promote

Bua

tetracycline and downgrade Aureomycin which

had previously been its "bread and butter"

product. Cyanamid had sade substantial

expenditures in the development of this

program, yet it appeared that Pfizer sight

well have priority of invention by reason

of having published the Stephens article

prior to _Cyanasid's production of

tetracycline.

It was in this setting that McKeen and

Malcolm had their first meeting about

November 6, 1953. At that time they

confirmed the fact that Pfizer and Cyanasid

vere the two parties to the projected

interference, and the terms of a proposed

settlement were discussed. They agreec to

meet again about ten days later, and at the

second meeting they agreed upon the general

terms of a settlement subject, with one

exception, to the formal declaration of the

interference by the Patent Office. The

385a

exception was that Cyanamid agreed at

NcKeen's insistence to sell Pfizer 10,000

kilograms of bulk tetracycline with

shipments to beqin immediately.

to he tarde i a TO TI sy _ a

to cut down on Cyanamid's lead time, ]

The interference was declared on

December 28, (953, and two weeks later the

agreements reached in the McKeen-Malcolm

meetings were formalized in two written

documents, one a license fros Cyanamid to

Pfizer to make Aureomycin for conversion to

tetracycline by deschlorination and the

other to settle the interference. The

principal provisions of the agreements were

(}) that proofs ot priority of invention

would be exchanged, and if the parties

could not agree on priority the question

would be submitted to the Patent Office for

decision; (2) that the party found not

prior would take the necessary steps to

386a

concede priority in the Patent Office; (3)

that the losing party would receive a non-

exclusive license under the tetracycline

patent when it issued at a royalty rate of

two and one-half per cent; (4) that Pfizer

would receive a nonexclusive license under

Cyanamid's Aureomycin patent to make _ that

product in connection with the manufacture

of tetracycline and the knowhow and culture

to make that license effective; and (5)

that nothing in the settlement agreement

was to be deemed to impair the right of a

patentee to license others.

It is the plaintiff's position that in

addition to the aqreements esbodied in the

written instruments that McKeen-Malcola

meetings resulted in secret agreements not

reduced to writing under the teras of which

third parties were not in fact to be

licensed to sell tetracycline nor were they

to be sold the antibiotic in buik. And to

387a

this end, plaintiff Charges, Pfizer and

Cyanamid agreed to do whatever was

necessary to insure that one or the other

of them obtained a patent in order to

leqalize the monopoly and exclude others

from the market, There was a further

undecstanding, so plaintiff contends, as to

the price at which tetracycline would be

sold in the market,

On the contrary, the four principals

who participated in the meetings have given

consistent and convincing testimony in this

and the prior cases that no such agreements

were made,

{Footnote |3. Three of thea, John

NcKeen and John Powers of Pfizer and George

Martin of Cyanamid, all now retired,

appeared in person in this court. The

court found them intelligent, forthright

and credible. The testimony of Dr.

Malcolm, also retired from Cyanamid, came

in by way of the transcripts of forser

proceedings. His absence was explained on

the basis of a precarious health condition,

but his previous testimony was corroborated

by that ot his successor at Cyanamid, Lyman

Duncan, and Robert Fiske, Cyanamid's patent

388a

counsel, both now retired, who appeared ani

testified in this court. ]

Nor are the inferences to be drawn from the

course of conduct thereafter followed by

these parties necessarily inconsistent with

legitimate business practices. Settlement

of the patent interference is a noreal,

routine method of resolving such —

controversies and is sanctioned by the

courts. Hutzler Brothers Company _v- Sales

Affiliates , Inc.-, 164 F.2d 260, 267 (4th

Cir. |947). Nor are cross-licensing

agreements necessarily violative of the

antitrust laws. "In a case involving

blocking patents such an arrangement is the

only reasonable sethod for making the

invention available to the public."

International Manufacturing Company __vs

Landon, Inc., 336 F.2d 723, 729 (9th Cir.

1964), citing Standard Oil) Company _v-

United States, 283 U.S. 163 (1931)-

389a

[ Footnote 44 Of c

SO ° ourse i -

wi agreement iis combined TN ae 0

jceement to pool patents, the arrangement

may become unlawfu

faterial company, 333 0.8. 367 tr988) ones

no price-fixing sgeesnens 86° Shte eaeeet

The refusal to license others was no

more than a continuation of policies

previously followed by Pfizer, Cyanagmid and

Parke-Davis with respect to granting

licenses under their patents on the first

three broad-spectrum antibiotics. But even

sO, within two years after the NcKeen-

Malcolm meetings Pfizer had licensed

Bristol, Squibb and Upjohn under the

Conover patent. It did this without the

knowledge of Cyanamid, and this negates any

inference of a side agreement to exclude

competitors.

The court has therefore been unable to

tind from a preponderance of the evidence

that conspiratorial aqreements forbidden by

Sections | and 2 of the Sherman Act were in

390a

fact entered into at the McKeen-Malcols

meetings. On the contrary, the court has

concluded that the agreements reached were

fully expressed’ in the formal docusents

thereafter executed and that these

agreements were the result of arams-length

bargaining which reflected the relative

bargaining strength of each company and the

independent judgments of their chief

executive officers.

[Footnote |5. In these times when the

innermost secrets of large corporations and

indeed the government itself are routinely

publicized in the news media the court has

deemed it significant that the federal

government in the prior proceedings and the

State of North Carolina in this case have

failed to produce a single witness to give

any direct evidence of the existenc@,of a

conspiracy. Of the thousands of esployees

of these five large defendant companies

over the last twenty years it would sees

that at least one disgruntled forser

employee might have been located who would

be willing to come forward and pinpoint

some wrongdoing on the part of at least one

of the defendants. No such witness has

appeared. On the contrary several former

employees came and testified freely for

defendants and corroborated fully the

testimony of their chief executive

otficers. J

;

win

39}a

* Seg tee Mh On remand of the F. T

Be om . y e Sixth Circuit the testimony

all a ig ent Examiner, Herbert J. Lidoff

rym = . and the Coamission affirmed a

sae =F y the Hearing Examiner that the

— Practices of Pfizer and Cyanamid

re the Patent Office constituted unfair

decision was affirmed

; s sd by the Sixth c

tn Charles Pfizer € co. y P.T.C. 1"P.28

UT Baay ert Sb sag,Eedgkes 401 #2

' ): On the basis of this decision the

ote ff here just prior to the tri 1

mr. 8 + ra Partial Summary judgment on the

=e near On the ground of collateral

: ppel, asserting that the doctrine

now recognized in B e -Ton =

lon, 402 U.s. 3 3

Should be extended to cover Ag da F

collateral estoppel off

ensivel

antitrust plaintiff against ny ay

The argument was reject j

ed S

the motion was deetse’} ry wae SUS and

The plaintiff has Placed great reliance

on the charqe that Ptizer and Cyanamid

feacticed fraud on the Patent Office in

Obtaining the issuance of the Conover

Patent on tetracycline and that Bristol,

Squibb and Upjohn later accepted licenses

under the patent with knowledge of the

fraud.

And

392a

It is, of course, well settled that

"those who have applications

pending with the Patent Office or

who are parties to Patent Office

proceedings have an uncosprosising

duty to report to it all facts

concerning possible fraud or

inequitableness underlying the

applications in issue. * * *

Public interest demands that all

facts relevant to such matters be

submitted formally or informally

to the Patent Office, which can

then pass upon the sufficiency of

the evidence. Only in this way

can that agency act to safeguard

the public in the first instance

agains t fraudulent patent

monopolies." Precision Instrurgent

Nanufacturing Cogppany _v-. _Auto-

motive Saintenance Sachine

Company, 324 U.S. 806 (| 945).

in this same litigation the Sixth

Circuit has stated:

"The Patent Office, not

having testing facilities of its

own, must rely upon information

furnished by applicants and their

attorneys. Pfizer and Cyananid,

like all other applicants, stood

before the Patent Office in a

confidential relationship and owed

the obligation of frank and

truthful disclosure." Charles

Pfizer and Co., Inc., Ve F-T-Ce

393a

40] F.2d 574, 579 (6

: th Cir.

cert. denied, 394 U.s. 920 (1969).

That a finding of fraud will support a

treble damage action under the Sherman Act

if all the other elements of a cause of

action thereunder are found is equally well

settled. Walker ~Process Equipment, Inc

_— -

v. Food Machinery and Chemical Company

382 U.S. 472 ($965).

As is frequently the case, the

difficulty arises when the task of applying

these settled principles to a given fact

Situation is faced.

ethics ae concept of

esentation as a

patent infringement aul akeane

to no fixed parameters and

promulgates no specific dogma. At

best it is an abbreviated

expression of basic equitable

maxims inherent in the law of

patents; a recognition that a part

of the quid pro quo for the

acquisition of a patent monopoly

is an insistence that the

circumstances surrounding the

application for the patent be

‘free from fraud and other

inequitable conduct. '* Precision

394a

: Au osotive supra, 324

I ‘fou5)." Honsanto

J.-S. 806, ants

ap y Vv. RO )

ase esd 552, «59-8 =((3ed CFEe

1972) -

In performing this task 4 review of the

j the

events which occurred following

rejection by Patient Examiner Lidoff

1954 of all claims to the product

Noveaber,

tetracycline is therefore necessary-

when the Conover patent was returned

} hese

ex parte prosecution following t

who

rejections pfizer's patent counsel,

strongly believed the reasons assigned y

j st

the examiner to be unsound in law, also

; his

inmediately sought an interview with

i his

and endeavored to convince hin of

j his

error. However, Lidoff persisted in

j tl

position that tetracycline was inherently

the

co-produced along with Aureomycin in

practice of Cyananid's Duggar and

1 erefore

Niedercorn patents and was th

unpatentable over Aureomycin.

395a

{Pootnote {7. Four patent experts,

including one called by the plaintiff, and

Several patent attorneys testified that the

prior accidental and unrecognized co-

production of small amounts of tetracycline

with Aureomycin did not render the claia to

tetracycline unpatentable. A review of

their testimony and the applicable lavw,

e.d- Kuehmsted v. Parben- fabriken, |79 F.

70| (7th Cir. (910), cert.denied_, 220 U.S.

622 (1910), and Rarke, Davis £ Co, vy. H. K.

BMulford Co., {89 PF. 95 (C.C.S.D. N.Y.

1911). aff'd in part, reveresed in part oa

other grounds, 196 F. 496 (2nd Cir. {9{2)

(curiously cited by Lidoff in support of

his rejction), and numerous others have

served to establish to the satisfaction of

this court the proposition that "novelty is

not negatived by an prior accidental

occurrence or production, the character and

function of which was not recognized until

later than the date of the patented

invention sought to be anticipated

thereby," | Walker, patents 6th Ed., Sec.

}06, and that Lidoff was indeed wrong. j

He required that additional experiments be

conducted either to prove or disprove the

"speculated basis" of his rejection.

These experiments were conducted

forthwith and the results were reported by

Pfizer's attorneys in affidavits and a

written summary of interviews with the

Examiner. In substance they informed hin

396a

*hat if any tetracycline was present in the

Aureofiycin- producing broths, the amount was

minuscule and that in any event it was

understood by them that the Examiner was

not interested in "useless trace agounts"

of tetracycline which might be present in

the broths.

[Footnote |8. The amendment filed

following a meeting with the Examiner on

November 29, 1954, contained these

statements:

"while applicant's counsel did not

concede that there is any necessity for

such a showing [the non-existence of

tetracycline "in a clearly identifiable

form according to present-day efficient

methods for the separation thereof from

fermentation broths"], he ventured the

opinion that it could be made and

stated that he would explore the matter

in view of the great urgency of this

case. The Examiner made it clear that

he would not insist on 4 categorical

averment that the fermentation broths

prepared according to cited patents

contained no tetracycline whatsoever.

He evidently appreciates the

impossibility of proving its non-~

existence and is not concerned about

useless trace amounts which cannot be

separated from the broths by methods

now recommended for recovery cf the new

antibiotic." ]

397a

Another conterence with the Exami

Biner

Ollowed on December 8, 1954, and the next

Y a notice of allowance of the patent was

mailed,

On January jj, 1955, the patent

issued,

It is now abundantly clear that

the ’ , .

presence of at Least soae tetracycline

in the Aureomycin broths was known by

scientists, and indeed Was disclosed by

documents in patent applications then

pending before Examiner Lidoff, at the time

Pfizer's final affidavits were submitted,

but there is no evidence whatever that it

has ever been detected in the product

Aureomycin in sufficient quantitites to

impart the therapeutic qualities of

tetracycline to it, Plaintiff insists,

however, that the presence of any amount of

tetracycline, however sraall, in the

f'rmentation broths would have sufficed to

preclude allowance of the patent by

398a

Examiner Lidoff.

[ Footnote {9. The parties seersed to

aaree that if Pfizer's agents knew this was

Lidoff's view, a failure to report even 4

trace amount of tetracycline in the

fermentation broths would have constituted

a wrongful withholding of material

information notwithstanding Lidoff may have

been in error and the patent might

ultimately have issued as a result of an

appeal. See Transcript, Vol. 57, pp- 7217-

19.)

To drive home this point plaintiff has

introduced several hundred pages of

testimony given by Examiner Lidoff in the

F. T. C. proceeding following remand of

that case by the Sixth Circuit in American

Cyanamid Company v- Fs T- C2 +» 363 F.2d

757 (1966), and later by way of deposition.

Aside from the questionable

admissibility of this testimony,

{Footnote 20. The admissibility of

Lidoff's testimony was sharply contested by

defendants at the trial, primarily on the

grounds that a quasi-judicial officer may

not testify as to his mental processes in

making a decision and the speculative and

untrustworthy nature of the testimony

itself. The objections were overruled, but

the court is still concerned as to the

correctness of the ruling in the light of

399a

nj tate

TEE a Sv. Sorgan, 313 U.S. 409

Park Manufacturing

ee be {8 U. S. - 0

(F-D.I11. 1974). i se

And with characteristic and coamend

able

candor counsel for plaintiff has conceded

that Lidoff's testimony is the Sine gua non

of plaintiff's charge of f

Patent Office. ‘ ee

THE COURT: Without the testimony of

Lidoff do you agree that

reasonable minds could differ

on the interpretation of the

patent record?

MR. BENOY: Well, withont Lidoff being

there, I would have to say

reasonable minds could differ

because we have Oppos

findings. ti

+ * *

THE COURT: Next question: Does your

case on the patent issue,

the, (assuming) that

reasonable minds could differ

on the record without his

testimony depend first upon

the admissibility of the

Lidoff testimony and second

its believability?

SR. BRNOY: Well, given the assumption

that reasonable minds could

differ on the evidence it

just has to follow, yes,

Sir, that it is crucial to

400a

the case. I would not

contend otherwise. }

the court has found it lacking in that

degree of probative force necessary to

carry plaintiff's heavy burden of

establishing fraud by “clear, unequivocal

and convincing" evidence, a standard which

all parties agree applies here.

{Footnote 2}. “Fraud or unclean hands

are not to be lightly inferred.

They must be established by

‘clear, unequivocal and

convincing' evidence. Becton-

Dickinson & Co. ve. Robert P.

Scherer Corporation, |06 F.Supp.

665, 67| (E.D.Mich. 1952), aff'd,

211 F.2d 835 (6th Cir. |954). See

also Scott Paper Company v.

Ft. Howard Paper Co,, 432 F.2d

1198, 1294 (7th Cir. 1970), cert.

denied, 40} U.S. 913, YF S-Cte

882, 27 L.Ed.2d 842 (1971)-"

4Oja

SChnadiq Corporation Vv. Gaines

Manufacturing Company, Inc., 494

F.2d 383, 392 (6th Cir. 1974). ]

Lidoff testified:

"It is utterly impossible for

me to remember any statements that

[I actually made at the interview.

"AS I have prefaced all ay

remarks, everything I have said is

based on reconstruction, based

upon what [ think, what I thought

the principles of patentability

were." (Tr., Vol. 28, p. 3755)

and at another place in the record:

"So that anything that I say

as having recalled something is

really a reconstruction in my mind

based on what recent review of the

record TI have had, which has net

been in any great detail, so that

[ cannot say that I positively

recall one thing or another but I

can reconstruct what my view would

have been at that time." (Tr.,

Vol. 28, p. 3754)

Against that background the witness

went on to testify that he would have been

interested in whether any tetracycline

402a

whatever was to be found in the Aureomycin

broths. But the pivotal question is

whether or not Pfizer's attorneys

understood this to be the information the

Examiner wanted, and they have testified

unequivocally that they did not so

understand it. Their testimony is

corroborated by the summary of their

interview with Lidoff filed as an amendment

to the patent application (see Footnote

;8). A supplemental affidavit. filed by

Pfizer's Dr. Bogert should also have

alerted Lidoff to the tact that

tetracycline was present in the

fermentation broths or at least to the fact

that if he were really interested in the

presence of any amount of tetracycline

whatever, he was obviously talking about

one thing and Pfizer's representatives

another.

under

Footnote 22. Although he- was

the Mae: of reading such materials before

40 3a

acting on thom, it may well be that Lidoff

did so hurriedly in the short time which

“lapsed between the filing of the amendment

and his issuance of the notice of

allowance, It was in evidence that this

particular Examiner was an unusually

productive worker, and he admitted that he

sometiaes merely “scanned" such filings.

Additionally, it appears that he was not an

expert in fermentation chemistry and that

his rejections had in fact been written by

another Examiner, a Mrs. Wendt, with whoa

he did not enjoy a good personal rapport.

But Lidoff's prolificacy would appear to

afford no basis for his failure to read and

comprehend these statements prior to the

actual issuance of the patent on January

tt. 1955. The same is true of an affidavit

filed with him by Bristol in connection

with its patent application on January 3,

1955, stating in effect that numerous

saaples of Aureomycin products had been

found to contain two per cent to four per

cent tetracycline. ]

Nor does Lidoff dispute the testimony

of the Pfizer agents on this score as shown

by the following exchange between him and

Ptizer*'s counsel at the hearing before the

F. Te Ce 8

Q: SO you were satisfied to

issue the patent with

statements of that type in

the record without even

bothering to inquire?

4O04a

If you wish to attack sy

action on this application,

you might. It may be that

had I been as sharp as

Geniesse, I would not have

issued this patent. But,

nevertheless, I am only tell-

ing you what my impression is

of what I did. Whether

stupidly done or not,

nevertheless this is what I

did, and I took this

affidavit to mean that there

was no tetracycline present.

Based on that I issued the

patent.

* * +

And their understanding of

what you had in mind by the

words in your rejection is

what they learned from the

interview with you and put in

their amendment?

I have no control of what

they understood by my words.

Whatever they understood, my

feeling was that this patent

should not issue it the

compounds were not novel.

And this is the only thina

that I was basing my stand

on. What they understood by

my words I do not know, and

have no influence on at all.

Do you consider that Mr. Hutz

and Mc. Murphy gave you what

they understood you were

interested in?

4O%a

A: As tac as I know, I assumed

that they gave me what I had

asked for, but they qave ne

what they understood, yes.

They did not qive pe - -

well, [ retract that. I

don't know what they gave me

With relation to what T

actually wanted.

0: but they gave you what they

understood you wanted?

A: Apparently.

0: Isn't that so?

A: Apparently § so. I have no

reason to believe otherwise.

(Tr. Vol. 30, pp. 4024-4026)

That Pfizer had complete confidence in

its patent and the actions of its

representatives in ovrocuring its issuance

was further demonstrated by its action in

institutina suit for its infringement

against Bristol, Squibb and Upjohn on

January |{, 1955, the very day on which the

patent issued,

{Footnote 23. The court i

that the validity of the +s ogy

brought into question in a number of cases

stnce that time, but in only one of then

was the decision stage reached. In that

4uQ6a

Chas. Pfiz & Co. ve. Barry-Martin

oe i ” 24) FPF. Supp. I91

Pharmaceuticals InCe,

(Ss > fis. 1965) - the Conover patent was

held valid. }

That Cyanamid's experienced paten*

attorney, who immediately went to

Washington and examined the file wrapper as

soon as he heard the patent had issued, was

able to find no evidence of fraud is also

deemed significant on this point.

{Footnote 24. In a w—-- > to Pn ys

superior dated January 14%, cos §

attorney, Harvey W. Rdelblute, stated:

j i idence of

"ly fail to find any evide

deliberate concealment or Selsstsentses

of facts or the misapplication -

fallacious or legally unsoun:

arguments.

* * *

"Tt is my Opinion, therefore, par

the Conover patent No. 2,099,054 oe 7

be held valid ina anil itel ip-cossuee’”

litigation before a fair-minded ju a

who appreciates the objectives p. ‘

value of the United States we

system." (P. 3, Cyanamid Trial Exhibi

12) ]

of course this flies in the face of

plaintiff's contention that [:°1izer and

4O7Ta

Cyanagwid were in collusion on the patent

matter all alonq, but the court has been

unable to find that such collusion existed.

There are, in tact, stronq indications to

the contrary.

{Footnote 25. For instance, in his

letter of January (4, 4955 (see Footnote

24), Attorney Fdelblute also said:

“Following this office action an

interview was granted to Conover's

attorneys by the Examiner. It is, of

course, not known what was said at the

interview except what is stated by

Conover's attorneys in an amendsgent

filed on December 8, 14954." (P. te

Cyanamid's Trial Exhibat 42)

In a letter from one Cyanamid official

to another dated October 2\- 1954,

reporting the Patent Examiner's decision to

reject all product claims to tetracycline

it was stated:

"We, of course, have no knowledge

of what course Pfizer plans to follow.

However, if we pick up any information

as to their plans, we will advise you

immediately. . .

"It wouid be my guess that Pfizer

will elect to issue their patent on the

claims covering the deschlorination

process and file a divisional

application to cover the compound

tetracycline and salts thereof for the

purpose of appeal. .."

408a

And in Edelblute's letter to the same

official dated October 27, 1954, it was

stated:

"The Examiner held that

tetracycline as well as salts thereof

are not patentable over Duggar or

Niedercorn for reasons which you have

read. This action, while undoubtedly

very distressing to Pfizer, is of

considerable comfort to Mr. Watson in

his action against Bristol. Mr. Watson

feels that it will be helpful in

extending the scope of the Duggar

patent, and he feels that it was very

fortunate that we sued Bristol on our

Duggar patent before the Examiner's

decision was handed down.

" ..I have not been in touch

with Pfizer's attorneys and have been

advised by Mr. Behrens not to do so,

and accordingly, I do not know what

steps they are taking to obtain patent

protection on the product..." (Pp.

2-3 , Cyanamid Exhibit 10)

If there was in fact a deal between

Pfizer and Cyanamid that one or the other

of them should obtain a patent on

tetracycline, one wonders why the

Examiner's action was not equally

"distressing" to Cyanamid. Instead, it

appears that Cyanamid's attorneys were

taking "considerable comfort" from the

action for the very good reason that if the

rejection held up, it would enable Cyanamid

to dominate the tetracycline field through

its Duggar and Niedercorn patents. ]

409a

At best the evidence has left the court

with the impression that there was a mutual

misunderstanding between Lidoff and

Pfizer's representatives as to what Lidoff

wanted established.

{[ Footnote 26 Much of

° the contr 5

— has swirled around the cenadan an

words employed in, these affidavits and

mio mag > — time and many pages have

A” evote to argument over

— to be attached to such isle

canpeestanil Re expressions as

e","recoverable" '

identifiable". Rut, of TE aay curating

"(a] word is not a crystal, t

and unchanged, it ry the a oo

living thought and may vary greatly in

color and content according to the

circumstances and the time in which it

is used." Justice Holmes in Towne y

Eisner, 245 U.S. WIR, 425 (1918).

Ana having found that j

. the evide

eqardless of how the words’ used oe

yarties are to be interpreted, falls short

ot establishing fraud, this court declines

to enter this thicket i

el oe of semasiological

‘he court tinds itself in much the same

position as did the First Circuit in N shua

Corporation v. RCA Corporation, 43) F.2d

4jOa

220, 227 (4970), where it said:

"Our problem - and Nashua's -

lies in the fact that the only

evidence on this issue is the

cryptic and technical file wrapper

exchanges between the Fxaminer and

the applicant. These exchanges

are ambiguous as to precisely why

the Fxaminer rejected the first

two applications and what

significance the Examiner attached

to RCA'S amendment of its

copending ‘539 application and to

RCA's Rule 43) affidavit. Given

these critical ambiguities, we

cannot say that the district court

was clearly erroneous in finding

no fraud on RCA's part. (Lt is

simply not sufficiently clear to

us that RCA filed the affidavit

realizing that its effect would be

to materially misrepresent the

prior art and deliberately

intending such misrepresentation.

Foundation v. Blonder-Tongque

Laboratories, Ince, 422 F.2d 7609,

———— a aaa

776-777 (7th Cir. |970)-

"We therefore uphold the

district court's finding that the

filing of the Rule j3f atfidavit

did not constitute a fraud on the

Patent Office."

The court does not suggest that

inferences favorable to the plaintift

cannot be drawn from the conduct of

G|ja

PFize

izcr"'s representatives before the Patent

Office

tee, and one gets the impression, in

fact, that these gentlemen did not tell

Lidotf any more than was absolutely

nhec-ssary to satisfy him. put

"as long as the patent

fulfills his ‘ancoaprosising duty!

of good faith and conducts the

prosecution with utmost candor

ro py a frank and truthful

Sclosure, he is not required to

list out the full spectrum of his

knowled j

ry eg aay establish Noe bona

rare v.-_ Generix Drug Sales, Inc.,

OF.2d |096,4402-1103

1972)." Schnadig fo RS

Gaines__ Manufacturin

Inc

1 a P.2d 383, 393 (6th Cir.

And, as previously indicated, the

evidence in this case is far from "clear

unequivocal and convincing” that Pfizer's

representatives failed to fulfill their

‘uncompromising duty’.

{ Footnote 27. A

this language from sso, Sppropriate here is

| Vv.

e ee 35 e

| 379-80 (F.D.Pa. 1972), 7 oats tod

opinion, 487 F.2d 1395 (3rd Cir. 1973):

ui 2a

"Two conflicting principles tear

at an attorney practicing before the

Patent Office. One is that the

proceeding is not adversary, so “

attorney therefore owes a high duty o

candor to the Examiner. The second .

that the attorney has a duty o

advocacy to his client. One should =

forget in this context that the

Pxaminer himself is or should be °

advocate for the public interest an

should not be too easily swayed by the

applicant's attorney."

And it may not be amiss to quote the

following from the same opinion:

"The fact that this court has not

found fraud chargeable to plaintiff, or

awarded attorneys’ fees, should not =

taken as placing this court's

imprimatur on all of plaintiff .

actions. It results more from failurs<

of proof in otherwise suggestive

circumstances, or the possibly fortui-

tous absence of materiality.

Hopefully, the plaintiff and

attorneys will be more careful in t ‘

future in insuring that the

circumstances surrounding their actions

are not at all even suggestive of

impropriety." Id., p. |382.]

Finally, notwithstanding its

allegations of fraud and its agreement as

to the standard of proof necessary to

sustain the same, plaintiff seems to araue

for the adoption of the rule of strict

Gi 3a

liability based on the alleged negligent

failure of defendants to disclose pertinent

information to the Patent Office. This

theory of liability was analyzed and

rejected by Judge Mansfield as follows in

ero Orporation v sO

Company, 322 F.Supp. 963, 968-9 (S.D.N.Y.

1971):

"We believe that the

stringent standard urged by

defendants is unnecessary to

protect the public, and that an

applicant for a patent shovld be

accorded the right to exercise

good faith judgment in deciding

what matters are and are not of

sufficient relevance and

materiality to require disclosure.

Only when he is guilty of fraud,

willfulness or recklessness

indicating a disregard for his

duty of frankness should

enforcement of the patent be

barred. See Armour & Co. v.

Wilson & Co., 274 F.2d 443 (7th

Cir. (960); Ritter v. Rohm 6 Haas

Company, 271 P. Supp. 343

(S.D.N.Y. |967). Furthermore, the

authorities cited by defendants

Simply do not support their con-

tention that mere negligent

omissions of misstatements before

the Patent Office would be unclean

4\4a

they

ds. On the contrary,

poreneee that fraud or —"—.

disregard for the facts mu .

established."

This appears to be the rule in this

Hot fberger

Circuit also. Orrcison V-

Co 97 F.Supp. 689 (D.Md. 1951), afftde,

pe 5 ee

;90 F.2d 787 (4th Cir. 1951)-

The Sixth Circuit has taken the same

view in a case just published, Schnadig

Corporation v. Gaines Manufacturine

Company, Ince, Supra. See also Beckman

Instruments, INnCe, Ve Chemtronics, INCe.

we 1971)»

328 F. Supp. 1132, 1138-9 (W.D.Tex.

and cases cited.

The cases relied on by plaintiff in

i a

support of its contention that no mens rea

is required to establish fraud in a civil

izer_& Co. ve FeT-Coe

action, Charles Pf

F.2d 574 (6th Cir. 1968), Cert. denied, 39

U.S. 920 (1969), and Beckman Instruments,

i 42a F.2d 555

InCe,_ v. Chemtronics, [nc-,

(Sth Cir. |970), are distinguishable, and

4O]'

41 5a

one of them, Ham v. Hart, 58 N. Mex. 550,

273 P.2d 748 (1954), has been Overruled as

to this point in Hockett v. Winks, 82

N.Mex. 597, 485 P.2a 353.

Tn sum, the evidence establishes at

most that reasonable minds could differ as

to the construction that should be placed

on the actions of Pfizer's representatives

before the Patent Office; that the experi-

ments requested by the Patent Examiner

might have been conducted more carefully or

in a different manner; that the whole

matter resolves itself into a conflict of

Opinions of experts; and that with all

deference to the "reconstructed" opinions

of Mr. Lidoff, the evidence favorable to

the plaintiff does not rise to that level

of clear, unequivocal and convincing proof

necessary to support a finding of

deliberate fraud. Corning Glass Works v.

Anchor Hocking Glass Corporation, 253

4ij6a

F.Supp. 46 | (D.Del. 1966),

aff'd in pertinent part, 374 F.2d 473 (3rd

Cir. {|967), certs denied, 389 U.S. 826

(| 967).

The Commercial Issues

Having concluded that the evidence does

not support the charge of conspiracy based

on secret agreements growing out of the

twin nuclei of plaintiff's case, the

McKoen-Malcolm meetings and the procurement

of the Conover patent, there remains the

task of examining all other evidence in the

record to ascertain if inferences arise

thereon sufficient to sustain plaintiff's

restraint of trade and monopoly charges.

Aqain we find the inferences conflicting

and of insufficient force to carry

plaintiff's burden of persuasion.

41 7a

PRICE FIXING

As previously indicated, it is

undisputed that the introductory published

prices of tetracycline by Pfizer and

Cyanamid were identical with their

Terramycin and Aureomycin prices, and when

Bristol, Squibb and Upjohn came on the

market later with their brands

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