Petition — ROYAL INDUSTRIES v. ST. REGIS PAPER CO. (No. 77-279)

IN THE

Supreme Court of the United §

October Term, 1977

No. 77-279

ROYAL INDUSTRIES, and PLAS-TIES SUBSIDIARY,

Petitioners,

vs.

ST. REGis PAPER COMPANY,

Respondent.

Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit.

ROBERT M. NEWELL,

650 South Grand Avenue, Suite 500,

Los Angeles, Calif. 90017,

(213) 629-1231,

Attorney for Petitioners Royal

Industries and Plas-Ties Subsidiary.

Of Counsel:

EDWARD J. DaRin,

Pasadena, California.

Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622

Page

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ne SO a cadiietaaniicibiniialaiale 2

RET IESE MRR TS Re aN 4

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Reasons for Granting the Writ ..............................-- 6

l.

SUBJECT INDEX

Does the Lear Doctrine Render Unenforce-

able a Patent License Agreement in Which

the Parties Contract With Reference to the

Possible Invalidity of the Patent? ................

Where a License Agreement Calls for the

Payment of Royalties for the Use of Both

the Licensor’s Patent Rights and the Licen-

sor’s Know-how and the Patent Is Held to Be

Invalid, Does the District Court Have the

Power to Convert the Contract for the

Know-how From a Royalty Contract Into a

Fk FE nes

Where a Licensee to a Patent License Agree-

ment Has Been Given the Full Protection

That He Bargained for During the Term of

the License Agreement, Should the Licensee

Be Entitled to Withhold Royalty Payments

Under the Doctrine of Lear v. Adkins,

Supra, Where the Patent in Question Ex-

pired Before It Was Determined to Be In-

GE - dinrinciicipntipneaianneathgnnigniiciiiisadminipiiiciaiiniusntincmbiioe

a OLAS LD

ii.

INDEX TO EXHIBITS

Page

ER His. MIIIIIIL:. icccisiileisih Kctiidibcetiiataad pci sseaes 1

Exhibit B. Licensing Agreement ...............00......... 16

Exhibit C. Letter From J. R. Johnson, President of

Royal to Mr. Leslie L. Jacobs, Dated March 31,

EE ~ Sinsiiaassndasniipanmutinsicsbadlsmenmebsimbitidanigh eisigislandes 26

TABLE OF AUTHORITIES CITED

Cases Page

Components for Research Inc. v. Isolation Products,

we be FS el ee eee 10

Futurecraft Corporation v. Clary Corp., 205 Cal.

PS a Sea pen eee 10

Kewanee Oil Co. v. Bicron Corp. (1974) 416 US.

Ne re Ee OOD Caccdenciihtrtntnntceiintinntinensnens 10

Lear v. Adkins, 396 U.S. 652 (1969) ........00000022....

wlsbathaiedalathdibiesmaidnaabestadeataal a 56 7 & BD 23, te 3

Moraine Products v. ICI American Inc., 191 USPQ

Fe te 0) SOU a eee 12

Painton and Company v. Bournes, Inc. (April 27,

1971 2d Cir.), 442 F. 2d 216, 169 USPQ 528 .... 10

Warner-Jenkinson Co. v. Allied Chemical Corp.,

.... F. 2d ...., 193 USPQ 753 (2d Cir. April 13,

gp ER Sree ST EY 6, 11, 12

Statutes

United States Code, Title 28, Sec. 1254 000000... 2

United States Code, Title 28, Sec. 1332 .......00000000... 2

United States Code, Title 28, Sec. 1338 .......0.00000.... 2

United States Code, Title 28, Sec. 2201 ........000000.... 2

Textbook

“Unmuzzling the Patent Licensee: Chaos in the

Wake of Lear v. Adkins”, 45 George Washington

fh... St i eee &

<< tis Bid,

IN THE

Supreme Court of the United States

October Term, 1977

No. 77-279

RoyAL INDUSTRIES, and PLAS-TIES SUBSIDIARY,

Petitioners,

vs.

St. REGis PAPER COMPANY,

Respondent.

Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit.

Petitioner Royal Industries respectfully requests that

a writ of certiorari issue to review the judgment of

the United States Court of Appeals for the Ninth

Circuit entered on April 19, 1977.

Opinion Below.

The opinion of the Court of Appeals, reported at

194 USPQ 52, appears in a separate appendix to this

petition as Exhibit A.

_

Jurisdiction.

The judgment of the Court of Appeals was entered

on April 19, 1977. On July 8, 1977, Mr. Justice

Rehnquist extended the time to file this petition until

August 18, 1977. Jurisdiction of this court is invoked

under 28 U.S.C. 1254. Jurisdiction in the District Court

was based on 28 U.S.C. sections 1332, 1338 and

2201.

Statement of the Case.

This case involves a licensing agreement (Appendix,

Exhibit B) eatered into between the St. Regis Paper

Company (“St. Regis”) and Royal Industries and its

Plas-Ties Subsidiary (hereinafter collectively referred

to as “Royal”) on May 1, 1963 whereby St. Regis

obtained the right to use the so-called Bower patent

owned by Royal, and Royal’s know-how for the purpose

of manufacturing plastic tie strips for use in the bakery

industry. St. Regis agreed to pay Royal a royalty

of 10% of its net sales of the plastic tie strips. This

royalty was computed on the basis of 5% for the

patent rights and 5% for the know-how (March 31,

1963 letter from J. R. Johnson, president of Royal

to Leslie J. Jacobs of St. Regis’ Pollock division ( Ap-

pendix, Exhibit C). The parties contracted with refer-

ence to the possible invalidity of the Bower patent.

This is reflected in section 12(b)(1) of the license

agreement of May 1, 1963 which reads as follows:

“12. This agreement shall terminate upon the

expiration of United States Patent No. 2,767,113,

_

which is October 16, 1973, unless sooner termi-

nated as hereinafter provided . . .

“(b) Pollack may terminate this agreement

after the expiration of three years from the

effective date of this agreement by serving six

months written notice on Royal to that effect

in the event that:

“(1) Said Patent No. 2,767,113 is held

invalid or so restricted in scope as to substan-

tially lessen the protection of said patent

by the final judgment of a court from which

no appeal has been or can be taken; or. . .”

St. Regis paid Royal the royalties called for in

its contract in the total sum of $174,642.04 until July

19, 1967. St. Regis discontinued paying any royalties

for either its use of the Bower patent or Royal’s know-

how after that date because St. Regis claimed that

it had evidence which tended to establish that the

Bower patent was invalid.

On April 24, 1968, St. Regis brought this action

against Royal to declare the Bower patent invalid,

to rescind the license agreement and to recover the

royalties paid. Royal counterclaimed for patent infringe-

ment, for a declaration of rights under the licensing

agreement, and, in any event, for the accumulated

royalties due for St. Regis’ use of its know-how.

Although St. Regis discontinued the payment of any

royalties after July 19, 1967, it continued to manu-

facture the plastic tie strips using the method protected

by the Bower patent and also using Royal’s know-

how. St. Regis admitted that, during the time that

it withheld royalty payments from Royal until October

antipen

6, 1973, when the Bower patent expired, it would

have owed Royal royalty payments of $322,426.57.

The judgment of the District Court holding the Bower

patent invalid was rendered on July 19, 1974, more

than nine months after the license agreement had termi-

nated and the Bower patent had expired.

Proceedings Below.

The District Court ruled that the Bower patent was

invalid and that St. Regis could rescind the license

agreement of May 1, 1963, but denied either St. Regis

or Royal a money judgment against each other. The

District Court held that Royal was entitled to the

reasonable value of its know-how, but, instead of direct-

ing St. Regis to pay Royal the agreed royalty for

the know-how of 5% of the net sales of the plastic

tie strip, the Court, without any evidentiary support

in the record, valued Royal’s know-how at $53,088.90.

The Court further held that this sum has been paid

to Royal in the form of one-half of the royalties

paid by St. Regis through the second quarter of 1965

after which time the value to St. Regis of Royal’s

know-how had become de minimis.

The Court of Appeals affirmed the judgment of

the District Court in all respects.

Questions Presented.

1. Does the Lear doctrine render unenforceable

a patent license agreement in which the parties contract

with reference to the possible invalidity of the patent?

2. Where a license agreement calls for payment

of royalties for the use of both the licensor’s patent

rights and the licensor’s know-how and the patent is

_

held to be invalid, does the District Court have the

power to convert the contract for the know-how from

a royalty contract into a lump sum contract?

3. Where a licensee to a patent license agreemeni

has been given the full protection that he bargained

for during the term of the license agreement, should

the licensee be entitled to withhold royalty payments

under the doctrine of Lear v. Adkins, 396 U.S. 652

(1969) where the patent in question expired before

it was determined to be invalid?

ctl

REASONS FOR GRANTING THE WRIT.

The court below has decided important questions

of federal law which have not been but should be

settled by this court.

1. Does the Lear Doctrine Render Unenforceable a

Patent License Agreement in Which the Parties

Contract With Reference to the Possible Invalidity

of the Patent?

Lear v. Adkins, supra, dealt with the usual patent

licensing agreement in which the parties contract with

- reference to a presumptively valid patent. The licensee

bargains for the monopoly protection afforded by the

patent; the licensor warrants the validity of the patent

and agrees to hold the licensee harmless from any

infringement suits. A valid patent is the subject matter

of the contract. If the patent is invalid, there has

been a total failure of consideration. The licensee should

never have had to pay any royalties in the first place

for the use of something that was properly in the

public domain.

Lear laid to rest the doctrine of licensee estoppel.

Although it further held that the licensee could withhold

royalty payments pendente lite, later decisions hold

that, if the licensee wishes to continue to invoke the

protection of the license agreement, he should be re-

quired to continue paying royalties to the licensor pen-

dente lite. Warner-Jenkinson Co. v. Allied Chemical

+ _» eae , 193 USPQ 753 (2d Cir.

April 13, 1977).

However, an entirely different set of values comes

into play where the owner of a patent is not certain

whether or not his patent is valid and where a prospec-

tive licensee does not particularly care whether or not

_ =

the patent is valid. For reasons of his own choosing,

the prospective licensee desires the protection afforded

by the patent even though it recognizes that the patent

may ultimately be held invalid.

This was the situation that obtained in this case.

St. Regis was not particularly interested in whether

or not the Bower patent was valid. It was most anxious

to get into the new business of wrapping bakery prod-

ucts with a tie strip around one end of the package.

As stated by the Court of Appeals, “St. Regis lacked

the technical ability to manufacture tie strips. The

Bower tie strips and the machines Bower developed

were suitable for bakery packaging.” Indeed, St. Regis’

first approach to Royal was to purchase the entire

Plas-Ties operation from Royal. When Royal would

not sell, St. Regis was happy to enter into the license

agreement in question for the use of the Bower patent

and Royal’s know-how. St. Regis’ indifference to the

validity of the Bower patent is evidenced by the fact

that all it was was an option to terminate the license

agreement on six months notice should the Bower

patent be declared invalid. This is reflected in section

12(b)(1) of the license agreement quoted above.

The District Court held this clause of the agreement

unenforceable under Lear.

Royal respectfully suggests that it is an unwarranted

extension of Lear to hold that sophisticated businessmen

cannot contract with reference to the possible invalidity

of a patent. It is undoubtedly true that most often

the sine qua non of a patent licensing agreement is

the validity of a patent. However, in those instances

in which the validity of a patent is not of overruling

importance, parties should be free to contract as St.

Regis and Royal did in this case. There should be

~ we

no knee-jerk application of Lear to every single patent

license agreement. As a matter of fact, a respected

commentator has suggested that Lear requires consider-

able clarification. See “Unmuzzling the Patent Licensee:

Chaos in the Wake of Lear v. Adkins”, 45 George

Washington Law Review 429 (1977).

In a case such as this one, where the patent rights

were but one of the many things that St. Regis desired

from Royal, e.g., in the language of the Court of

Appeals “. . . knowledge of how the machinery used

to manufacture plastic tie strips was constructed, and

how this machinery operated. It included detailed infor-

mation of the process for manufacturing the patented

tie strips, a list of material suppliers, and work room

dimensions. An employee of St. Regis spent several

weeks at Royal’s plant studying the manufacturing proc-

ess” (slip opinion p. 12) and where even the validity

of the patent was not essential to the parties, a licensee

should not be permitted to use Lear as a sword to

avoid his contractual obligations, particularly where,

as here, that licensee has received everything that he

bargained for in the cortract.

2. Where a License Agreement Calls for the Payment

of Royalties for the Use of Both the Licensor’s

Patent Rights and the Licensor’s Know-how and

the Patent Is Held to Be Invalid, Does the District

Court Have the Power to Convert the Contract

for the Know-how From a Royalty Contract Into

a Lump Sum Contract?

Know-how is an important property right. Its use

may command the payment of a substantial premium

in the market place. Royal places a great value on

know-how for the manufacture of its laminated plastic

_~

tie strips. St. Regis, had it chosen to do so, could

have obtained a license from Royal to use the Bower

patent and developed its own know-how. However,

it desired to obtain the use of both Royal’s know-

how and the Bower patent; hence, it entered into

the license agreement in question. Furthermore, St.

Regis has never once complained that it failed to

get what it bargained for from Royal. It found Royal’s

know-how helpful in enabling it quickly to get into the

production of the plastic tie strips in question. The

words “patent rights” and “know-how” are used in

tandem throughout the license agreement; furthermore,

St. Regis has exploited the patent rights and the know-

how continuously since the execution of the license

agreement on May 1, 1963.

Because of this, the Court of Appeals labelled the

patent rights and know-how as “intimately intertwined”

and enunciated a new rule that, if the royalties for

the patent rights are uncollectible under Lear, the

“same rule . . . should apply with equal force to

know-how.” To follow the Ninth Circuit’s reasoning

that the patent rights and the know-how are “intimately

intertwined” places the know-how in the public domain

along with the nonpatentable subject matter and there-

after rendered nonroyalty bearing. This is contrary

to the facts and the law. St. Regis never complained

that there was practically no distinction between know-

how and the patent rights.

This is a harsh rule unwarranted by the facts. There

is no public policy in favor of the widespread dissemi-

nation of one’s know-how. Indeed, the law recognizes

the right of a citizen to keep his know-how a secret

if he so desires, even if it is patentable subject matter,

_—

and further recognizes that trade secrets of this kind

are an appropriate subject for a royalty agreement;

Kewanee Oil Co. v. Bicron Corp. (1974) 416 US.

470, 487; 181 USPQ 673, 680. Components for Re-

search Inc. v. Isolation Products, Inc., 241 Cal.App.2d

726, 729, .... P. 2d ....; Futurecraft Corporation v.

Clary Corp., 205 Cal.App.2d 270, 289-290, .... P.

2d ....; Painton and Company v. Bournes, Inc. (April

27, 1971 2d Cir.), 442 F. 2d 216, 169 USPQ 528.

There is no legitimate reason why a citizen should

be deprived of the benefits of his contract concerning

know-how just because a patent which was involved

in that contract was declared invalid. The Court of

Appeals stated: “In our view, the patent rights and

know-how here are so intertwined that it would be

unreasonable to enforce the agreement for one and

not the other” (slip opinion p. 13).

The Court of Appeals assumed that it was not

possible in this case to distinguish “between royalties

for patent rights and royalties for know-how”. However,

before such a harsh result should be visited upon

the licensor, the trier of fact should be directed to

ascertain how much of the agreed royalty was attribut-

able to the know-how. This determination would have

been a simple one in this case. The background out

of which this license agreement was negotiated clearly

establishes that the 10% royalty was based upon 5%

for the patent rights and 5% for the know-how.

However, even in those cases in which the delineation

between the amount of the royalty payments attributed

to the patent rights and the amount attributed to the

know-how is not clearly set forth, the court should

not have the power to convey a royalty contract into

=

a lump sum contract as the District Court did in this

case. Its power should be limited to determining as

a matter of fact how much of the total royalty payment

is chargeable to the know-how and direct the payment

of that percentage of the agreed royalty to the licensor.

In short, the federal judiciary does not have the

power to rewrite private contracts. This is an important

federal question. This court should grant certiorari for

the purpose of issuing an opinion to the effect that

the lower courts cannot under the guise of pronouncing

that which is “reasonable” deprive a party of his con-

tractual rights. Royal bargained for royalty payments

for the use of its know-how and it is entitled to those

payments.

The function of a District Court is to interpret

contracts, not rewrite them.

3. Where a Licensee to a Patent License Agreement

Has Been Given the Full Protection That He Bar-

gained for During the Term of the License Agree-

ment, Should the Licensee Be Entitled to Withhold

Royalty Payments Under the Doctrine of Lear v.

Adkins, Supra, Where the Patent in Question Ex-

pired Before It Was Determined to Be Invalid?

Lear and its progeny stand for the proposition

that a licensee should not have to pay royalties for

the right to use an invalid patent. In the case at

bar, St. Regis was permitted to suspend royalty pay-

ments pendente lite. In Warner-Jenkinson vy. Allied

Chemical Corp., supra, the licensee was not permitted

to suspend the royalty payments pendente lite, but

nevertheless, the court held that, should the patent

be held invalid, the licensee “. . . would become

ei SQinn

entitled to withhold future royalties and to receive

restitution of royalties paid pendente lite (with inter-

est).”

However, in the case at bar, the license agreement

terminated on October 16, 1973, the date on which

the Bower patent expired. The patent was not declared

invalid until nine months later on July 19, 1974.

During the entire period of the license agreement,

St. Regis enjoyed the full protection of the Bower

patent as if it were valid. It received the full considera-

tion that it bargained for. As stated in Moraine Products

v. ICI American Inc., 191 USPQ 65 (7th Cir. June

18, 1976) at page 77, that licensing arrangements

in the final analysis “. . . are agreements in which

the licensee is purchasing the right to be free from

infringement litigation . . .” St. Regis obtained this

protection for the full term of the license agreement.

Lear stands for the proposition that a licensee may

assert patent invalidity as a defense to a contract

action for the nonpayment of royalties. However, where

the licensee has enjoyed the full protection of the

patent for the full term of the license agreement, he

should not be able to avail himself of Lear to avoid

paying the royalties due under the license agreement.

Lear assumes a failure of consideration. There is no

failure of consideration when a patent is declared invalid

after the expiration of the agreement. This Court should

resolve the conflict between the Ninth Circuit in the

case at bar and the Second Circuit in Warner-Jenkinson

as to whether or not a licensee can withhold payments

pendente lite, by following the ruling of the Second

Circuit that, if he avails himself of the benefits of

the license agreement, the licensee must pay the royalty

payments pendente lite.

=

This Court should further declare that, if the licensee

has had the full benefits of the license agreement

during the term of the license, Lear does not permit

the licensee to have restitution of any of the royalty

payments if the patent is held to be invalid after

the license agreement has terminated.

Conclusion.

For the reasons stated above the petition should

be granted.

Respectfully submitted,

ROBERT M. NEWELL,

Attorney for Petitioners, Royal

Industries and Plas-Ties Subsidiary.

Of Counsel:

EDWARD J. DaRIn,

August 1977.

~

~

5

—

EXHIBIT A.

Opinion.

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ST. REGIS PAPER COMPANY, Plaintiff-Appellee,

vs. ROYAL INDUSTRIES, and PLAS-TIES SUBSIDI-

ARY, Defendants-Appellants. No. 74-3268.

ST. REGIS PAPER COMPANY, Plaintiff-Appellant,

vs. ROYAL INDUSTRIES, and PLAS-TIES SUBSIDI-

ARY, Defendants-Appellees. No. 74-3336.

Filed: April 19, 1977.

On Appeal from the United States District Court

for the Central District of California

Before: ELY and WALLACE, Circuit Judges, and

SOLOMON, * District Judge.

SOLOMON, District Judge:

This case involves the validity of a patent on a

plastic tie strip and a method for manufacturing the

product. It also involves a license agreement for the

patent rights and for the know-how used to manufacture

the patented tie strips. The District Court held the

patent invalid and permitted rescission of the license

agreement. The Court denied the licensor royalties after

the filing of this action, denied the licensee recovery

of royalties paid before the filing of this action, and

granted the licensor some compensation for its know-

how. Both parties appeal.

*Honorable Gus J. Solomon, Senior United states District

Judge for the District of Oregon, sitting by designation.

cinliinia

Some time before June 1950, Gerald Bower formed

a partnership to develop and market a plastic tie strip

which could be used to tie bunches of fresh vegetables.

In June 1950, the business was incorporated under

the name of Plas-Ties Corporation (Plas-Ties).

On June 2, 1952, Bower filed an application for

a patent on a plastic tie strip and method for making

the tie strip. The Patent Office rejected all of Bower’s

original claims, but he later succeeded by amendments

to the application in getting some claims allowed on

a narrower basis. A patent (U.S. Patent No. 2,767,113)

was issued to Bower on October 16, 1956 (the Bower

patent). The patented device consists of two plastic

strips reinforced by a wire between them. The wire

is embedded in one of the plastic strips and secured

with a “cementitious substance” so that the casing

cannot slide from or bunch up on the wire. The

wire permits fastening the tie by merely twisting it.

The plastic outer casing permits easy handling and

prevents the wire from cutting the stalks of the vege-

tables.

In April 1963, Bower assigned his patent to Royal

Industries (Royal), and Royal acquired 80 percent

of the outstanding stock of Plas-Ties. Bower owned

the remaining 20 per cent of the stock, and he became

president of Plas-Ties. In 1965, Royal acquired Bow-

er’s shares and Plas-Ties became a wholly owned sub-

sidiary.

St. Regis Paper Company (St. Regis) supplies wrap-

ping paper to the bakery industry through one of

its subsidiaries, Pollack Paper Company. The use of

tie strips significantly changed the packaging of bakery

products in the early 1960’s. The new method used

——

a tie strip around one end of the package instead

of having the package tightly sealed at both ends.

St. Regis lacked the technical ability to manufacture

tie strips. The Bower tie strips and the machines Bower

developed were suitable for bakery packaging.

On May 1, 1963, Royal and its subsidiary Plas-

Ties (hereinafter referred to jointly as “Royal’”’) entered

into a license agreement with St. Regis. Under this

agreement, Royal licensed St. Regis to use the Bower

patent and Royal’s know-how to manufacture and sell

the patented tie strips. St. Regis agreed to pay Royal

10 per cent of its net dollar sales as royalties and

also agreed to pay all reasonable expenses incurred

by Royal in transferring its know-how to St. Regis.

The agreement provided that it would terminate upon

the expiration of the Bower patent in 1973.

Royal did make its know-how available to St. Regis.

From 1963 to 1967, St. Regis paid Royal $174,642.04

for royalties and expenses.

Later, a dispute unrelated to this action arose be-

tween Royal and St. Regis on whether they had entered

into an oral price fixing agreement. The dispute resulted

in litigation between the parties.’ In preparing for

that litigation, St. Regis discovered evidence which

it believed showed that Bower’s patent was invalid.

St. Regis stopped paying royalties after July 19, 1967.

On April 24, 1968, St. Regis brought this action against

Royal and Plas-Ties to declare the Bower patent invalid,

to rescind the license agreement, and to recover royalties

1Royal Industries v. St. Regis Paper Co., 420 F.2d 449

(9th Cir. 1969). Royal brought the action against St. Regis

for patent infringement and unfair competition. The District

Court granted St. Regis’s motion for summary judgment, and

we affirmed on appeal.

enti

it paid. In a counterclaim, Royal sued St. Regis for

patent infringement.

The District Court held the Bower patent invalid.

It also dismissed Royal’s counterclaim. The Court held

that St. Regis was entitled to rescind the license agree-

ment, but denied St. Regis and Royal a money judgment

against the other. In other words, the Court held that

St. Regis could not recover the royalties it had paid,

and Royal could not collect additional royalties under

the license agreement. The Court awarded Royal the

reasonable value of its know-how, but found that this

amount had been fully satisfied by St. Regis.

Both parties have appealed. The appeals raise four

issues:

(1) Is the Bower patent valid?

(2) If the Bower patent is invalid, is St. Regis

entitled to recover royalties it paid to use the patent?

(3) If the Bower patent is invalid, is Royal entitled

to recover royalties for its know-how?

(4) Is St. Regis entitled to attorney fees?

I. VALIDITY OF THE PATENT

The District Court held that the Bower patent was

invalid for obviousness and because of a false oath,

which failed to disclose that the patented product had

been on sale for more than one year prior to the

filing of the patent application.

A condition of patentability under the Patent Act

of 1952 is non-obviousness. Section 103 of the Act

provides:

“A patent may not be obtained . . . if the differ-

ences between the subject matter sought to be

online

patented and the prior art are such that the subject

matter as a whole would have been obvious at

the time the invention was made to a person

having ordinary skill in the art to which said

subject matter pertains.” 35 U.S.C. § 103.

Royal contends on appeal that the District Court

failed to apply the proper standard for determining

obviousness.

The issue of obviousness is ultimately a question

of law, but the underlying analysis is one of fact.

Graham v. John Deere Co., 383 U.S. 1, 17 (1966).

The Supreme Court in Graham set forth the standard

for determining obviousness under Section 103. The

court must determine the scope and content of prior

art, the differences between the prior art and the claims

at issue, and the level of ordinary skill in the pertinent

art.

Here, the District Court determined that the prior

art consisted of two lines of teachings. One consisted

of tie strips manufactured and sold for more than

a year before Bower applied for his patent. The other

consisted of seven patents’ which teach the use of

a cementitious substance to bind wire or cord between

two sheets of paper or other material.

The Court compared the teachings of the prior art

with the claims of the Bower patent. It found that

it was undisputed that tie strips manufactured and

sold by Plas-Ties for more than a year before Bower

applied for his patent were identical to the claims

2Wisbrock patent, U.S. Patent No. 1,474,799; Schindler

patenis, U.S. Patent Nos. 1,910,510, 1,929,903, and 2,290,386;

Crosby patent, U.S. Patent No. 2,577,843; Wick et al. patent,

U.S. Patent No. 2,228,332; French patent, U.S. Patent No.

918,218.

—

of the Bower patent, except for the use of a “cementi-

tious coating” in the Bower patent to bind the wire

to the plastic strips. And the Court found that the

Wisbrock, Schindler, Crosby, Wick, and French patents

teach the use of a cementitious substance to secure

wire or cord between pieces of paper or other materials

in the same manner and for the same purpose as

the Bower patent.

Finally, the Court accepted the testimony of St.

Regis’s expert witness (Dan Fischer) on the level

of skill in the art. Fischer testified that in view of

prior teachings and the prior public use of unbonded

tie strips, the product claimed in the Bower patent

would have been obvious to a person of ordinary skill

in the art.

Royal also argues that the Court failed to give

proper weight to the presumed validity of a patent.

Any such presumption would disappear, or at least

be weakened, when it is shown that all the prior

art had not been brought to the attention of the patent

examiner. 35 U.S.C. § 282; Alcor Aviation, Inc. v.

Radair, Inc., 527 F.2d 113, 115 (9th Cir. 1975),

cert. denied, 426 U.S. 949 (1976).

Claim 1° of the Bower patent describes a product

which depends both on the position of the wire (em-

bedded in one of the plastic strips) and the use of

a “cementitious coating” to bind the wire to the plastic

strips. The District Court, based on the file wrapper,

81. A plant-tie comprising: two ribbons of polyvinyl chlo-

ride joined face to face in parallel to form a unified strip;

a wire disposed between said ribbons lengthwise thereof; one

of said ribbons being flat and the other of said ribbons having

a channel at least as deep as the diameter of said wire,

in which said wire is embedded; and a cementitious coating

on said wire for bonding said wire to said ribbons.”

=

found that the patent examiner was persuaded to allow

claim 1,* not because of the cementitious coating,

but by the argument that Bower’s positioning of the

wire was a novel solution to the problem of enabling

the plastic to get a good grip on the wire. Nevertheless,

at the trial Royal did not dispute that more than

a year before the patent application, Plas-Ties manu-

factured and sold tie strips which conformed in every

respect to the claims of the Bower patent except for

the use of a cementitious coating on the wire. These

findings at least raised an issue whether Bower mis-

represented the state of the prior art in his patent

application and weakened the presumption of validity.

See Monroe Auto Equipment Co. v. Superior Industries,

Inc., 332 F.2d 473, 482 (9th Cir.), cert. denied,

379 U.S. 901 (1964).

We hold that the Bower patent is invalid for ob-

viousness. Because we affirm the District Court’s hold-

ing of invalidity for obviousness, we need not reach

the second ground, Bower’s false oath.

Il. THE LICENSE AGREEMENT

Under the license agreement, Royal licensed St. Regis

to manufacture plastic tie strips using the Bower patent

and Royal’s know-how. In return, St. Regis agreed

to pay Royal 10 per cent of net dollar sales in royalties.

The agreement provided for the possibility that the

Bower patent might be declared invalid. Section 12(b)

(1) of the agreement stated:

“12. This agreement shall terminate upon the

expiration of United States Patent No. 2,767,113,

‘The patent examiner at first rejected claims 1-4 of Bower’s

patent application. He was later persuaded to allow claim 4,

which became claim | of the issued patent.

callie

which is October 16, 1973, unless sooner termi-

nated as hereinafter provided .. .

(b) Pollock may terminate this agreement after

the expiration of three years from the effective

date of this agreement by serving six months writ-

ten notice on Royal to that effect, in the event

that:

(1) Said Patent No. 2,767,113 is held invalid

or so restricted in scope as to substantially lessen

the protection of said patent by the final judgment

of a court from which no appeal has been or

can be taken... .”

St. Regis stopped all royalty payments on the basis

of Lear, Inc. v. Adkins, 395 U.S. 653 (1969), but

it did not comply with the procedure for terminating

the agreement set out in section 12(b)(1).

The District Court held that section 12(b)(1) of

the agreement was unenforceable under Lear, and that

St. Regis did not have to pay royalties after the filing

of this action.

The Court also held that St. Regis was entitled

to rescind the agreement because the patent was invalid

and because Bower knew the patent was invalid, which

knowledge was imputed to Royal. The Court found

that Royal was entitled to compensation for the know-

how it conveyed to St. Regis and fixed the value

of the know-how at $53,088.90. But the Court denied

Royal payment on the ground that this amount had

been fully satisfied by the royalty payments of more

than $174,000, which St. Regis had paid Royal from

1963 to 1967. The Court disallowed St. Regis’s claim

for royalties paid before this action was filed.

a

A. Refund of Royalties Paid

In Lear, Inc. v. Adkins, 395 U.S. 653 (1969),

the Supreme Court rejected the doctrine of licensee

estoppel which prohibited a licensee from challenging

the validity of his licensor’s patent in an action for

royalties under the license agreement. Under the Lear

doctrine, a licensee can avoid payment of royalties

withheld before the patent was declared invalid.

The question here is whether a licensee can recover

royalties on a patent paid before filing an action in

which the patent was found to be invalid. The Court

in Lear was not faced with this issue because the

licensee had paid no royalties after the patent was

issued.°

St. Regis contends that under California law it is

entitled to restitution of all royalties paid to Koyal

under the license agreement less the value of Royal’s

know-how. St. Regis relies on California Civil Code,

Section 1692, which it contends provides for “auto-

matic” restitution of benefits conferred when a contract

is rescinded.

Section 1692 provides:

Ҥ 1692 Relief based on rescission

. . . The aggrieved party shall be awarded com-

plete relief, including restitution of benefits, if

any, conferred by him as a result of the transaction

and any consequential damages to which he is

5In Lear, the license agreement was entered into before

a patent issued. Lear, the licensee, terminated all payment

of royalties before the issuance of the patent. The Court held

that Lear could avoid payment of royalties from the date

of the issuance of the patent. In this case the license agreement

was entered into more than six years after the patent issued.

St. Regis paid royalties after the patent had issued, from 1963

to 1967, and it seeks to recover those royalties,

=

entitled; but such relief shall not include duplicate

or inconsistent items of discovery.

If in an action or proceeding a party seeks relief

based upon rescission, the court may require the

party to whom such relief is granted to make

any compensation to the other which justice may

require and may otherwise in its judgment adjust

the equities between the parties.”

Section 1692 was designed to eliminate the confusing

and complex duality of rescission procedures which

existed in California by providing a single procedure

to be followed in all cases where rescission is sought.

Runyan v. Pacific Air Industries, Inc., 2 Cal.3d 304,

466 P.2d 682 (1970). The provision permits a court

in an action for rescission to grant any relief, including

restitution and consequential damages, to which a party

is entitled. It does not require restitution even when

rescission is ordered. Restitution is discretionary with

the court.

We believe that St. Regis is not entitled to restitution

in this case due to overriding federal patent law policies.

The Sixth Circuit considered the Lear doctrine in

light of the goals sought to be achieved and concluded

that the federal policy which permits a licensee to

assert invalidity of the underlying patent does not entitle

the licensee to a refund of all royalties paid for the

use of the invalid patent. See Troxel Mfg. Co. v.

Schwinn Bicycle Co., 465 F.2d 1253 (6th Cir. 1972)

(Troxel 1); Troxel Mfg. Co. v. Schwinn Bicycle Co.,

489 F.2d 968 (6th Cir. 1973), cert. denied, 416

U.S. 939 (1974) (Troxel II); Atlas Chemical Indus-

tries, Inc. v. Moraine Products, 509 F.2d 1 (6th Cir.

1974). See also Zenith Laboratories, Inc. v. Carter-

* —

éasiititions

Wallace, Inc., 530 F.2d 508 (3d Cir. 1976), cert.

denied, 45 U.S.L.W. 3250 (U.S. Oct. 5, 1976).

The Sixth Circuit noted that the Supreme Court

in Lear rejected the estoppel doctrine on the ground

that it effectively “muzzled” licensees who might be

the only individuals with sufficient economic incentive

to challenge the patentability of an invention. As stated

in Lear, supra, at 668, “federal law requires that all

ideas in general circulation be dedicated to the common

good unless they are protected by a valid patent.”

This policy encourages full and free competition in

the use of ideas which are in the public domain.

Lear, therefore, is an inducement to an early adjudica-

tion of invalidity; but the Sixth Circuit cautioned that

the possibility of a royalty refund might delay such

a determination. The possibility of obtaining a refund

of all royalties paid might induce a manufacturer to

accept a license based on a patent of doubtful validity,

derive the benefits of suppressed competition which the

patent affords, and challenge validity only after the

patent’s expiration. The licensee would have a chance

to regain all the royalties paid while having enjoyed

the fruits of the license agreement. Therefore, if a

refund were permitted, licensees who were only recently

unmuzzled by Lear would again be silenced by eco-

nomic self-interest rather than by state law.

We agree with the reasoning of the Sixth Circuit,

and we hold that St. Regis is not entitled to the

refund of royalties paid before it challenged the validity

of the patent.

In Troxel I, supra, at 1259, n.5, the Court noted

that it has been held without reliance on Lear that

a licensee is entitled to recover royalties paid when

= =

the licensed patent was procured fraudulently. St. Regis,

relying on that comment, asserts that it is entitled to

restitution because Bower obtained the patent by fraud.

Even if fraud is a proper basis for allowing recovery

of royalties, here the District Court found there was

no fraud. The findings of the Court on this issue

are not clearly erroneous.

B. Payment for Know-How

Royal contends that the District Court erred when

it held section 12(b)(1) unenforceable. It asserts that

the Court failed to distinguish between the payment

of royalties for the patent rights and payment for

the know-how. Royal concedes that if the patent is

invalid, it is not entitled to the payment of royalties

for the patent rights on the basis of section 12(b)(1);

but it contends that section 12(b)(1) is valid and

enforceable on royalties for know-how.°

Royal’s know-how consisted of the knowledge of how

the machinery used to manufacture plastic tie strips

was constructed, and how this machinery operated.

It included detailed information of the process for manu-

facturing the patent tie strips, a list of material suppliers,

and work room dimensions. An employee of St. Regis

*St. Regis contends that this issue was not properly raised

on appeal because Royal made a binding election of remedies

in its counterclaim when it implicitly accepted the termination

of the license agreement and sued for patent infringement rather

than for enforcement of the agreement. We do not agree.

Royal did not specifically seek to enforce the agreement

in its counterclaim, but the pretrial order lists as an issue

whether St. Regis was entitled to rescind the agreement. Royal

at the trial asserted that it had a contract with St. Regis,

that St. Regis breached the contract, and that Royal was entitled

to appropriate relief. This was sufficient to prevent Royal from

being precluded from seeking to enforce the license agreement

on appeal.

=— =

spent several weeks at Royal’s plant studying the manu-

facturing process. The District Court found that this

know-how was fully revealed to St. Regis.

The Court found that Royal’s know-how was not

essential to the manufacture of the patented plastic

tie strips, but was valuable to St. Regis because it

permitted St. Regis to enter the plastic tie market

sooner. St. Regis bargained both for the right to use

the Bower patent and for the know-how needed to

use the patent effectively. The know-how was closely

related to the patent rights. This interdependence is

reflected in the provision sought to be enforced.

Section 12(b)(1) provides that St. Regis may ter-

minate the agreement if the patent is declared invalid.

Royal’s attempt to separate the know-how from the

patent rights and to enforce the agreement for know-

how alone is inconsistent with section 12(b)(1) and,

we believe, contrary to the intent of the parties.

When, as here, the patent rights and the know-

how are so intimately intertwined, we believe that

the same rule which makes royalti, for patent rights

uncollectible if the patent is invalid should apply with

equal force to know-how. This does not mean Royal

will be deprived of compensation for know-how; it

merely means Royal is not entitled to royalties under

the license agreement, which did not distinguish be-

tween royalties for patent rights and royalties for know-

how.

Royal urges us to address the broader question wheth-

er a contract for the payment of royalties for know-

how is enforceable under Lear. But here we do not

have a naked know-how license. In our view, the patent

rights and know-how here are so intertwined that it

=—

would be unreasonable to enforce the agreement for

one and not the other.

We hold that section 12(b)(1) is unenforceable

for both the patent rights and the know-how. Never-

theless, we believe that Royal is entitled to compensa-

tion for its know-how.

The District Court valued the know-how at $53,-

088.90. Royal asserts it is worth much more.

Although the Court ordered the contract rescinded,

Royal urges us to value the know-how at one-half

of the royalty rate because the parties placed this

value on the know-how in discussions before the con-

tract was executed. The contract as executed does

not contain any such valuation. And the Court, after

ordering rescission, was not required to place this value

on the know-how even if it had been agreed to. Royal

did not offer any other evidence on value. St. Regis

suggested that the know-how be valued at $53,088.90,

which represents a $20,000 advance on royalties paid

by St. Regis before Royal permitted access to its know-

how and one-half of the royalties paid through the

second quarter of 1965, at which point the value

of the know-how to St. Regis had become de minimis.

The District Court accepted this valuation. In our

view, it is fairly generous. And in any event, it was

the only evidence on the value of the know-how before

the Court. The Court had a rational basis for this

valuation, and we affirm this holding.

Ill. ATTORNEY FEES

In exceptional patent cases, the court may award

reasonable attorney fees to the prevailing party. 35

U.S.C. § 285.

«tote a

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St. Regis contends that this is an exceptional case

and that it is entitled to attorney fees. St. Regis asserts

there are two factors which make this an exceptional

case: Bower obtained his patent by fraud or material

misrepresentation; and Royal knew or should have

known that the Bower patent was invalid long before

this litigation and yet it vigorously prosecuted this

action.

The District Court rejected St. Regis’s contentions

and found that Bower’s representations to the Patent

Office were not motivated by fraudulent intent and

that Royal had no knowledge of the infirmity of the

Bower patent before trial.

The award of attorney fees is a matter of discretion,

and a trial court may not be reversed except for

abuse of discretion. Hayes Spray Gun Co. v. E. C.

Brown Co., 291 F.2d 319, 327 (9th Cir. 1961);

Pickering v. Holman, 459 F.2d 403, 408 (9th Cir.

1972). There was no abuse here.

The judgment of the District Court is affirmed in

all respects.

=—s

EXHIBIT B.

AGREEMENT

1HIS AGREEMENT, effective as of the Ist day

of May, 1963, is made between ROYAL INDUSTRIES,

INC. and its subsidiary Plas-Ties Corporation (herein-

after called ROYAL), both corporations organized and

existing under the laws of the State of California, having

a place of business at Pasadena, California, and ST.

REGIS PAPER COMPANY, a corporation organized

and existing under the laws of the State of New York,

acting by and through its Pollock Paper Company

Division (hereinafter called POLLOCK), having a place

of business at Dallas, Texas.

RECITALS

ROYAL has designed and developed a product line

of plastic tie strips and is the owner of United States

Patent No. 2,767,113, pending patent applications, and

know-how pertaining to the design, manufacture, and

machines and equipment for making plastic tie strips

and for closing containers with said tie strips.

POLLOCK is desirous of manufacturing, using and

selling the aforesaid product line and of acquiring

a license under the patent rights and know-how owned

by ROYAL.

Accordingly, ROYAL and POLLOCK hereby enter

into the following agreement.

TERMS AND CONDITIONS

1. ROYAL grants to POLLOCK the exclusive right

and license, without the right to grant sub-licenses,

throughout the United States and its territories and

dependencies under the aforesaid patent rights and

—_— =

know-how to manufacture and sell the tie strips for

use in the bakery packaging field, subject only to

the right of ROYAL to manufacture, use and sell

in the same field.

2. ROYAL grants to POLLOCK the non-exclusive

right and license throughout the United States and

its territories and dependencies under the aforesaid

patent rights and know-how to manufacture and sell

said tie strips for use in all other fields, subject to

the right reserved by ROYAL to terminate said non-

exclusive license in any segment of said other fields

in which ROYAL during the life of this agreement,

shall grant to a third party an exclusive license, either

to the exclusion of ROYAL or subject to the right

of ROYAL to manufacture, use and sell for use in

the same field, provided that POLLOCK shall continue

to enjoy said non-exclusive license in the fields of

packaging frozen foods, paper toweling, toilet paper,

produce bags, paper napkins, and related products sold

b; vompanies selling such products. ROYAL shall have

the right to serve on POLLOCK written notice of

any such termination and POLLOCK shall have no

further rights in the field or fields designated in such

notice after the expiration of one hundred eighty (180)

days from the date of such notice. ;

3. ROYAL shall make available to POLLOCK

the know-how now owned by ROYAL relating to said

tie strips. POLLOCK shall have the right to order

machinery and equipment for the initial manufacture

of tie strips from ROYAL and ROYAL shall fill

such orders in accordance with the terms of ROYAL’s

letters of April 24, 1963 and May 1, 1963 addressed

to POLLOCK. However, POLLOCK shall have the

=

right to make or to have made by other sources such

machinery and equipment as it may determine necessary

to conduct operations under this agreement. ROYAL

shall furnish POLLOCK with the necessary drawings

and specifications to permit POLLOCK to have such

machinery and equipment made. POLLOCK shall keep

ROYAL informed with reference to any new machinery

and equipment purchased or made hereunder. Upon

termination of this agreement POLLOCK shall not

have a license to manufacture, use or sell any machinery

or equipment which is covered by unexpired patents

owned by ROYAL relating to any inventions made

by ROYAL prior to the date of this agreement, it

being understood that plastic tie strip users of POL-

LOCK shall have the right to continue to use machinery

and equipment for closing containers with plastic tie

strips in use at the date of termination of this agree-

ment.

4. POLLOCK shall reimburse ROYAL for all rea-

sonable expenses incurred by ROYAL in the event

one or more employees of ROYAL are requested by

POLLOCK to travel to POLLOCK’s plants for the

purpose of making said know-how available to POL-

LOCK and POLLOCK shall also reimburse ROYAL

for the time of any such employee’s salary plus 200%.

POLLOCK shall have the right to send authorized

personnel of POLLOCK to visit ROYAL’s plants where

said tie strips are made and ROYAL shall make no

charge to POLLOCK for such visits. The cost of

preparation of any drawings and specifications in addi-

tion to those initially supplied to POLLOCK by ROY-

AL at the request of POLLOCK shall be borne by

POLLOCK.

— =

5. POLLOCK shall pay ROYAL royalties com-

puted as follows:

Ten percent (10%) of the net dollar sales by POL-

LOCK. The net dollar sales shall be the invoice price

less any cash discounts and less any actual transporta-

tion charges paid by POLLOCK and less any credits

or allowances for returns.

If ROYAL reduces its selling prices below those

set forth in the attached Exhibit A, said 10% royalty

shall be reduced one percentage point for each 5%

reduction in the selling prices, provided however the

royalty shall not be reduced below 5%.

If ROYAL shall hereafter grant a license under

said patent, said pending patent applications (or patents

which may issue thereon), and said know-how, within

the United States, territories & dependencies in the

fields of packaging frozen foods, produce bags, paper

toweling, toilet paper, paper napkins, and related prod-

ucts made and sold by companies selling such products,

at rates of royalty lower than the corresponding rates

provided in paragraph 5 hereof, then POLLOCK shall

be entitled to the benefit of such lower royalty rate

or rates for its operations in said fields of packaging

bakery products, frozen foods, produce bags, paper

toweling, toilet paper, paper napkins and related prod-

ucts, subsequent to such grant, but only for so long

as and subject to the same conditions under which

such lower royalty rate or rates shall be available

to any such other licensee.

6. Each party shall promptly inform the other of

any improvements developed or made during the life of

this agreement in the manufacture or use of the plastic

tie strips and machinery and equipment for making

—_— =

and using the plastic tie strips, and each party shall

have the royalty-free right to use any such improve-

ments.

In the event that said improvements, made either

by one party or by both parties jointly, result in a

plastic tie strip or the method of making the same

which is outside the scope of all of the claims of

Patent No. 2,767,113, POLLOCK shall continue to

pay royalties for the remaining life of the agreement

but only at one-half the rates specified in Paragraph

5 hereof with the royalty rates being based on the

selling price of the improved tie strips by POLLOCK.

7. POLLOCK shall pay ROYAL $20,000.00 upon

execution of this agreement which shall be considered

an advance on royalties due and payable within the

first contract year from the effective date of this agree-

ment, provided however that said first contract year

shall be extended for the number of days in excess

of 90 days required by ROYAL to deliver the initial

machinery and equipment to POLLOCK in the event

POLLOCK orders such initial machinery and equip-

ment from ROYAL. If the earned royalties paid

to ROYAL during the first contract year do not amount

to said sum of $20,000.00, ROYAL shall retain the

difference. If said earned royalties exceed said sum

of $20,000.00, POLLOCK shall pay ROYAL the differ-

ence.

8. The royalties shall be payable quarterly on or

before the 30th day after the end of each quarter

calendar year. With each such royalty payment POL-

LOCK shall render to ROYAL a written report setting

forth the tie strips sold during the preceding calendar

quarter and the net dollar sales thereof.

—

9. POLLOCK shall keep true and full records of

all of the tie strips manufactured, used and sold by

it under this agreement. These records shall be open

to the inspection of a certified public accountant select-

ed by ROYAL and acceptable to POLLOCK annually

during regular business hours at the expense of

ROYAL.

10. POLLOCK shall use reasonable businesslike

efforts to promote the sale and use of the tie strips

hereunder. In the event that royalties payable by POL-

LOCK hereunder shall not amount to the minimums

specified below, ROYAL may at its option by sixty

(60) days written notice served on POLLOCK termi-

nate this agreement. Failure of ROYAL to serve such

notice within sixty (60) days after the end of any

contract year shall be deemed to be a waiver by

ROYAL of its rights to serve such notice for that

contract year. If the actual royalties computed under

Paragraph 5 hereof are less than the minimum for

any contract year, POLLOCK shall have the right

to pay the total minimum required in order to keep

this agreement in effect. POLLOCK shall have the

right to sell any said tie strips on hand on the effective

date of such termination and to fulfill any contract

obligations to customers, subject to payment of the

royalties set forth in Paragraph 5.

Minimum Royalty Schedule

For the second contract year $30,000.00

For the third contract year and

each contract year thereafter $50,000.00

All purchases by POLLOCK of plastic tie strips

from ROYAL after the effective date of this agreement

—_— =

shall be credited against the minimums above specified

at the applicable royalty rate set forth in Paragraph

5.

After POLLOCK shall have paid to ROYAL the

aggregate sum of $450,000.00 in royalties hereunder,

ROYAL agrees to waive its right to terminate this

agreement in the event the royalties paid to ROYAL

by POLLOCK hereunder shall not amount to the mini-

mum specified for any subsequent contract year.

11. POLLOCK shall use reasonable businesslike

efforts to retain in confidence all know-how disclosed

to POLLOCK by ROYAL hereunder but POLLOCK

shall be under no such obligation of confidence with

respect to know-how:

(a) Known to POLLOCK or in the public domain

prior to disclosure thereof by ROYAL;

(b) Which shall become lawfully known to the

public or become part of the public domain

during the life of this agreement or thereafter;

and

(c) Disclosed to POLLOCK by a third party.

POLLOCK will not communicate the know-how to

any third party except to enable the manufacture of

machinery and equipment for POLLOCK and to use

and sell said tie strips, and POLLOCK shall require

a statement in writing from such third party that it

will retain said know-how in confidence.

12. This agreement shall terminate upon the expira-

tion of United States Patent No. 2,767,113, which

is October 16, 1973, unless sooner terminated as herein-

after provided.

(a) In the event POLLOCK shall default in

the payment of royalties due hereunder or in the

anlliicen

rendition of quarterly reports, ROYAL shall have

the right to terminate this agreement by serving

30 days written notice on POLLOCK calling atten-

tion to such default and in the event POLLOCK

shall not have corrected any such default within

said period of 30 days, ROYAL may terminate

the agreement by serving 15 days written notice

to that effect.

(b) POLLOCK may terminate this agreement

after the expiration of three years from the effec-

tive date of this agreement by serving six months

written notice on ROYAL to that effect, in the

event that:

(1) Said Patent No. 2,767,113 is held in-

valid or so restricted in scope as to substantially

lessen the protection of said patent by the final

judgment of a court from which no appeal

has been or can be taken; or

(2) ROYAL fails or refuses to file and pros-

ecute a suit for infringement of said Patent

No. 2,767,113 during the period of one hundred

eighty days (180) after POLLOCK shall have

given written notice to ROYAL, accompanied

by evidence that said patent is being infringed

(it being understood that ROYAL shall not

be obligated to have pending more than one

such suit at any one time); or

(3) A suit shall be instituted against

ROYAL by an agency of the United States

Government alleging violation of the law by

ROYAL as a result of the grant of the rights

and license herein granted, or as a result of

manufacture and sale by ROYAL of the plastic

tie strips licensed hereunder,

_—s

13. This agreement shall inure to the benefit of

the successors and assigns of ROYAL. This agreement

shall not be transferable by POLLOCK without the

prior written consent of ROYAL except along with

the transfer of all of the business of POLLOCK to

which this agreement relates.

14. POLLOCK shall use an appropriate notice on

all spools on which the tie strips are sold that said

tie strips are licensed by Plas-Ties Corporation under

the proper patent number, and patents pending.

15. Any notice required to be given hereunder

by either party shall be given by sending the same,

postage prepaid, by registered mail to the addresses

set forth below, or to such other addresses as the

parties may designate by written notice:

Royal Industries, Inc.

202 South Lake Avenue

Pasadena, California

Pollock Paper Company

Division of St. Regis Paper Company

Post Office Box 5325

Dallas, Texas

IN WITNESS WHEREOF, the parties have executed

or caused this agreement to be executed as of the

effective date set forth at the beginning of the agree-

ment.

ROYAL INDUSTRIES, INC.

By /s/ J. R. Johnson

President

PLAS-TIES CORPORATION

By /s/ Illegible

President

antiiinn

ST. REGIS PAPER COMPANY

ACTING BY AND THROUGH ITS

POLLOCK PAPER DIVISION

By /s/ B. F. Lacy

Vice President

Pollock Paper Company

Division

ST. REGIS PAPER COMPANY

By /s/ Ilegible

President

=” =

EXHIBIT C.

[ Letterhead |

March 31, 1963

Mr. Leslie L. Jacobs

Huntington Hotel

Pasadena, California

Dear Mr. Jacobs:

In anticipation of our meeting tomorrow, I have

enclosed some material that I feel will be helpful to

you in your preparation.

I have taken the liberty to prepare a proposed agenda,

which you may wish to modify; however, I am certain

that our meeting can be speeded if we follow a planned

course. We will accept any suggested modifications

you may wish to make in the morning.

You will also find cost information on the Plas-

Ties product, which is a result of our latest detailed

cost study. We feel this cost study information to

be quite accurate. You note this cost study shows

only the prime cost factors and makes no provision

for factory burden, or selling and G&A costs. You

can readily apply your normal factors to determine

quite accurately the margin of profit you can expect

in manufacturing the Plas-Ties product. These figures

indicate a handsome gross margin.

In addition, we have enclosed cost information on

the product machinery. In this particular case, we

applied a 200% burden to arrive at the manufacturing

cost. The 200% factor is used as this is our normal

burden in our Division whose principal activity is ma-

chinery manufacturing. In the event you wish to pur-

chase a machine, our price will be negotiated on these

—_— Pa

factors. Otherwise, this information will serve as a

guide to the cost of manufacturing similar equipment.

You will also find a chart which demoustrates graph-

ically our projections regarding growth of the Plas-

Ties market in the bread wrapping industry. The chart

is based on the installations of machines by the various

machinery manufacturers and represents, in summary

form, the detailed usage of these machines in 4” lengths

of Plas-Ties. The vertical column on the left is the

detailed usage of machines; the horizontal axis shows

the approximate installation time of these machines.

We feel this information to be conservative and quite

accurate. We are in close touch with the various ma-

chine manufacturers, and our projection represents their

planning as we have received it. You note up to

April 1963 is based on “actual” installation of ma-

chines. Undoubtedly you have made a similar study.

We have taken the liberty of enclosing a write up

on Plas-Ties, prepared by Jerry Bower, and the recent

article that appeared in a local magazine. This will

give you a better understanding of the company.

We have given considerable thought to the licensing

program. Many factors affect our decision regarding

royalty rates, and the type of license agreement we

would like to work out. We will be prepared to discuss

these with you tomorrow. To aid in your preparation,

we feel very strongly that, though we will grant you

an exclusive license for the bread wrapping industry,

Plas-Ties will continue to sell to that industry. The

licensing rate that we expect will be a rate based

on 5% for our patent position, and 5% for our know-

how. This 10% total royalty rate would apply to

your sales volume of Plas-Ties. At the expiration of

—23—

the patent, which is approximately ten years, the 5%

royalty rate for knowhow would continue for an addi-

tional five years. I am sure you agree that our efforts

to date in developing this product, coupled with the

gross margin existing in the product, merit this royalty

amount.

In the event you care to discuss any of this informa-

tion this evening, I can be reached at EL 5-1563.

If I do not hear from you, I will expect to see you at

about 8:30 a.m. Incidentally our office is a short dis-

tance from the hotel, and I would be pleased to pick

you up, if you will either call me this evening or

early in the morning.

Very sincerely,

ROYAL INDUSTRIES, INC.

/s/ J. R. Johnson

J. R. Johnson

President

GF